What do individually designed retirement plans sponsored by employers with EINs ending in 0 or 5, and governmental plans, have in common?
Determination Letters—Protection Against Some Compliance Woes
Since time began, or so it seems, the IRS has had a program for reviewing qualified plan documents and providing sponsors with confirmation that their plan, in form, meets all the “qualification” rules.
In the early days, determination letters were requested whenever the plan was amended — sometimes every year in light of the rapid pace of legislated changes. Obtaining a determination letter is important because it generally bars the IRS from finding that old flaws trip up the plan’s qualified status based on documents they have already reviewed. If a flaw is later discovered in a plan document provision that IRS reviewed, prospective correction may be all they require. A determination letter doesn’t save the plan from ERISA lawsuits that can trigger additional retroactive liabilities, but IRS won’t say that trust income is taxable, employer deductions were not available, or that employees had taxable income before receiving payments.
In 2005, the IRS introduced a revised process for spreading out their work and allowing plan sponsors some breathing room from the frequent filing requirements. Under this process, individually designed plans have filing periods every five years. Prototype and volume submitter plans have six-year rolling periods, with separate deadlines for defined benefit and defined contribution plans that leapfrog each other. Governmental plans and multiemployer plans were assigned to specific periods and a number of specialized rules for controlled groups and the like were invented. The specific periods were dubbed “Cycles.”
We are now in Cycle E for individually designed plans. Cycle E is used for plans of sponsors whose employer identification number ends in “0” or “5” and by governmental plans that have elected to file in Cycle E rather than Cycle C. Cycle E runs from February 1, 2015 through January 31, 2016.
There’s a List
Every year, the IRS publishes a list of all the changes in plan qualification requirements that are required to be adopted during the remedial amendment Cycle. Many of the changes on the list will have already been addressed on an interim basis. Preparations for filing “on Cycle” will allow your advisors to confirm compliance and determine if any gaps need to be addressed (can you spell EPCRS?). They will also take a look to see if any further recommendations are appropriate to address recent developments.
The list for Cycle E is in Notice 2014-77. It’s been out since December — so it’s time to get started! There are many steps required to complete a Cycle E submission, including a restatement of the plan document and its timely adoption. Starting early gives you time for thoughtful consideration of what is relevant and useful for your plan operations.
Ensuring that plan documents are up-to-date and have the IRS stamp of approval may provide assurance that the IRS will not retroactively create havoc for your plan if some flaw is uncovered at a later date. However, IRS budget cuts and reconsideration of how to best deploy available resources may result in a decision to curtail the existing determination letter program for individually designed plans by 2017.
So for individually designed Cycle E plans, this could be the last opportunity to obtain a determination letter. It remains to be seen what will change with the new paradigm — for example, a Voluntary Correction Program (VCP) submission to gain approval of a proposed correction won’t require a current determination letter. But will the IRS want you to produce one for the last offered Cycle available to the plan?
Should you get yours now?
Marjorie Martin, FSPA, EA, MAAA Principal, Knowledge Resource Center