Operation of Retirement Plan Key in Wake of Determination Letter Program Changes


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Recent changes to the Internal Revenue Service’s determination letter program make it more important than ever that a retirement plan operates in accordance with tax code qualification rules, a panel of employee benefits attorneys said.

The Jan. 26 forum sponsored by the Worldwide Employee Benefits Network focused on next steps for plan sponsors after the determination letter program changes that took effect in 2017.

Under the new determination letter program, “the risk of being wrong now shifts from the IRS to the taxpayer,” to show compliance with tax qualification requirements, said Dominic DeMatties, a panelist and partner with Alston & Bird in Washington.

Program Changes

The changes to the program effective Jan. 1, 2017, include ending the staggered five-year determination letter program for individually designed plans. Going forward, the IRS will issue determination letters only on initial qualification, plan termination or certain other circumstances to be specified in future agency guidance.

“These other circumstances are likely limited to major changes in law or when new plan designs become prevalent,” said S. Fahad Saghir, an attorney with Alston & Bird in Washington, who was also on the panel.

The cumulative list of changes in tax law that were the plan’s reference point for amending the plan also has been eliminated, replaced by a required amendment list, Saghir said. Plan sponsors will have until the end of the second calendar year that begins after the list is published to adopt any amendments that appear on the list, he said.

Thus, any changes required under the 2016 list, which the IRS issued in December, will need to be adopted not later than Dec. 31, 2018, he said.

‘Get Out of Jail Free’

The five-year remedial amendment cycle effectively provided a “get out of jail free” card for plan sponsors and their advisors with respect to sanctions associated with omitting a required amendment during the current cycle that were discovered on audit or during a determination letter filing, DeMatties said. A trade off was that sponsors sometimes had to wait years to have their determination letter requests approved.

Even with that wait, the IRS asserted that it did not have sufficient resources to allow its agents to spend the time that would be necessary to properly review determination letter applications, he said.  Thus, from the IRS perspective, the risk was really on the IRS under the prior determination letter program that it might mistakenly issue a determination letter for a plan that did not meet the qualification rules, he said.

An important question is how to best balance placement of risk, given the policy underlying the tax incentives associated with the voluntary employer-based retirement system, DeMatties said.  Given the shift, he said that another question is “whether plan sponsors will shy away from complexity or innovation that may be crucial to achieving significant policy objectives such as defined contribution designs that facilitate lifetime income options for participants in retirement and defined benefit designs that share risk between employers and participants.”

Operational Compliance List

The IRS also plans to issue an Operational Compliance List that would identify changes in qualification requirements that are effective during that year and necessitate a modification of the plan’s operations as of the effective date of the change, Saghir said.

“Even if an amendment is not yet required, and thus a requirement is not yet reflected in the required amendments list, plans must be operated in compliance with all applicable qualification requirements from the effective date of the requirement,” DeMatties said.  “My understanding is that the IRS is endeavoring to publish the operational compliance list as a tool intended to assist plan sponsors in achieving operational compliance as frequently as it believes necessary, but not necessarily at a regular time or interval.”

The IRS has made “a soft promise” that no change in qualification requirements will appear in the required amendments list until guidance is issued, DeMatties said.

DeMatties, a former attorney-advisor in the Office of the Benefits Tax Counsel at the Treasury Department, said he had heard informally that the IRS may be prepared to publish the first operational compliance list on its website within the next several months, perhaps as early as March.

Plan Provisions

How plan sponsors will approach the writing of their plan provisions in the wake of the changes to the determination letter program remains to be seen, DeMatties said.  Other requirements, such as those applicable under Title I of the Employee Retirement Income Security Act, need to be considered.

Having internal controls and policies and procedures in place and documenting the steps taken to ensure compliance with applicable qualification requirements might help keep the plan sponsor on the good side of the IRS auditor, he said. Good faith efforts, even concluding that no amendment to the plan is needed with respect to a particular change in qualification requirements, might redound to the plan sponsor’s benefit during the audit, he said.  Either way, he emphasized, taking these steps should help avoid many of the types of errors that could otherwise be discovered on audit.

IRS auditors might be persuaded to waive off or minimize sanctions associated with minor violations when internal controls are in place and are followed and good faith efforts have been made, he said.

Plan Restatements

Under the new determination letter program, plan sponsors aren’t required to restate their plans every five years, as they were required to do under the old program.  Instead, they will have an opportunity to review their plan provisions, amend them as necessary and restate plans at their convenience, said Steven C. Mindy, an attorney at Alston & Bird in Washington, who also was on the panel.

They should be aware at the same time, however, that IRS auditors may also be using this opportunity to help reviewers firm up their understanding of required plan provisions so they can conduct audits related to the form of the document as well as plan operations.

Even though it’s not required, plan sponsors might consider restating the plan every five years, and either way should establish processes intended to ensure that the plan document is consistent with applicable law and that plan operations are consistent with the plan document to increase the chances of a favorable outcome during the audit, he said.

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