The IRS’ determination letter program allowed sponsors of individually designed retirement plans to receive a routine determination letter, which is a periodic official regulatory compliance seal of approval that the IRS grants to benefit plans. While the recent decision to end this program has left many plan sponsors and their advocates uneasy, the IRS may become flexible in how it oversees individually designed plans.
A New Outline for Individually Designed Plans
The IRS will approve individually designed plans only when the plans are either first established or on termination. Otherwise, plan sponsors generally must do their best to keep their plans compliant with required plan document changes prompted by new laws and regulations. Why did the IRS adopt this new policy? One reason was that it lacked the resources necessary to keep its lawyers and other technical experts engaged in the process of reviewing customized plans.
Designing “Mass Submitter” Plans
The change does not affect standardized, IRS pre-approved, and “mass submitter” plans offered to clients by professional plan providers. Those plans, however, may not meet the needs of sponsors who want customized plan provisions (i.e., sponsors who do not want to change the “legacy” nonstandard plan designs that they have been operating for many years).
Sketching Recommendations for the IRS
Anticipating objections, the IRS asked the retirement plan community to outline its concerns. The American Benefits Council (ABC) was among the many who responded. The ABC urged the IRS to lessen the impact of its decision and provided the following suggestions:
- Exercise more flexibility when penalizing plans whose written documents do not reflect the latest regulations but have consistently met prior legal requirements.
- Modify the audit closing agreement plan procedures to minimize the prospect that plans found in violation of an obscure rule will be penalized.
- Offer determination letters for “significant plan amendments,” such as a merger of two plans or a conversion from one plan type to another.
Additionally, the ABC strongly recommended that the IRS factor a plan’s size into decisions regarding the amount of imposed penalties. It is possible that the IRS will adopt one or more of these suggestions.
Tracing Potential Challenges
A variety of issues may result from the lack of routinely verified regulatory compliance. Ideally, the potential obstacles should alert plan sponsors of matters that they should be prepared to address. Such issues include:
Loan complications. Lenders often require warranties that a borrower’s benefit plans are certifiably compliant. Without recent IRS approval, borrowers might need to take additional steps to satisfy banks.
Plan investment problems. Securities laws might require that collective trusts and separate account investments receive funds only from qualified retirement plans. These entities might become nervous about accepting dollars from plans that do not have a recent IRS determination letter.
Accepting rollovers. Some plan administrators require a determination letter to accept a rollover from another plan. While all individually designed plans will face the same scenario, the ABC notes that “the risk of accepting a rollover from another plan is increased significantly; plan sponsors may decide to no longer accept rollovers.”
Audited financials. Retirement plans with at least 100 participants generally must be audited annually. Auditors must attest to the plan’s qualification status. Without a recent IRS determination letter, auditors might need to obtain an opinion from the sponsor’s counsel. This step could make the audit process more expensive. It is unclear whether law firms will be willing to issue legal opinions about a plan’s qualification because of the scope and complexity of relevant Internal Revenue Code sections. Some law firms specializing in matters related to the Employee Retirement Income Security Act (ERISA) may provide that service, adding to the costs of a plan.
Reference our DOL audit checklist to help ensure that you are prepared for your next exam.
Let CRI Help You Redraw Your Individually Designed Benefit Plan
Sponsors impacted by the end of the periodic determination letter program have until April 30, 2017 to convert individually designed plans to a preapproved format. Whether this timeline offers a practical solution will depend on individual considerations. Please contact us for help determining if you may need to modify your individually designed plan to comply with the IRS.