By Jane Meacham, Contributing Editor
The Internal Revenue Service (IRS) has released guidance on its advice provided by determination letters and private letter rulings reflecting several changes that took effect January 1.
IRS Revenue Procedure 2017-4 also explains how the agency provides taxpayer advice, how it should be requested, and the user fees required when such advice is sought.
As reported, the procedures for seeking IRS determination letters were adjusted after the 5-year remedial amendment cycle was eliminated by the IRS in a bid to streamline administration. The IRS reduced to three the instances in which an individually designed plan may request a determination letter.
The three conditions under which an individually designed plan may now seek a determination letter are:
An initial application;
Plan termination; or
Some special circumstances the IRS says it will define later.
What’s a Determination Letter?
In a determination letter, the IRS rules on a retirement plan’s qualification after reviewing the employer’s plan and other documents and information. A favorable ruling indicates that the plan meets the tax qualification requirements under Code Section 401(a) and the underlying trust document meets the requirements of Code Section 501(a).
Although a plan sponsor is not legally required to obtain one, a favorable determination letter ensures that a plan meets the federal tax Code’s requirements and thereby qualifies for tax benefits. All of the IRS changes to make determination letter reviews more efficient are seen adding to the risks employers face if their unreviewed plans are found to be noncompliant.
Changes to Cycle System
The changes to the staggered cycle system for individually designed plans were described in IRS Rev. Proc. 2016-37 issued in late June 2016. The IRS has cited personnel shortages as one reason for its decision to cut back review of a large number of determination letter submissions. Many in the retirement plan community see the changes as encouraging standardized and simpler preapproved plans.
The deadline for employers to establish or adopt a new defined contribution preapproved plan after January 1, 2016, and apply for a determination letter was extended early last year to April 30, 2017. The IRS said the extension would facilitate plan sponsors’ ability to convert an existing individually designed plan into a defined contribution preapproved one.
Rev. Proc. 2017-4 also consolidates procedures related to IRS Employee Plans rulings and agreements advice contained several earlier revenue procedures, including Rev. Procs. 2016-4, 2016-6, and 2016-8.
The guidance on Rev. Proc. 2017-4 said it would be updated annually, with possible additional modifications or clarifications more frequently than that.
Among several specific changes, the new Rev. Proc. altered the following aspects of requesting a determination letter:
If employers that maintain individually designed plans still want to request a determination letter under the third Cycle A, the procedures described in sections 6 and 7 of Rev. Proc. 2016–6 continue to apply;
Employers may request determination letters on whether covered employees are leased employees only to the extent the employer is otherwise eligible to apply for a determination letter under Rev. Proc. 2016–37;
Employers that maintain individually designed plans may no longer request determination letters on whether a plan sponsor is part of an affiliated service group;
Procedures for requesting a minimum funding waiver, as described in Rev. Proc. 2004-15, have been modified to eliminate the alternative of requesting a determination letter in conjunction with a minimum funding waiver request. Requests for minimum funding waivers may still be submitted to the Office of Associate Chief Counsel (Tax Exempt and Government Entities) as requests for private letter rulings; and
Determination letters on partial terminations issued to individually designed plans will be limited in scope to whether a partial termination has occurred, unless the employer is otherwise eligible to apply for a determination letter under Rev. Proc. 2016-37.
Jane Meacham is the editor of BLR's retirement plan compliance publications. She has nearly 30 years' experience as a writer/editor of financial services news.