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Significant Changes for Retirement Plan Sponsors


2/27/17
 
Synopsis
 
Beginning in 2017, sponsors of tax-qualified retirement plans face new procedures and opportunities in connection with the provisions of their plan documents and the impact on the qualified status of their plans. This includes plans of both for-profit and not-for-profit entities intended to qualify under IRC Section 401(a) as well as plans of not-for-profit entities intended to qualify under IRC Section 403(b).
 
Except in limited circumstances (generally, upon initial plan adoption or plan termination only), the sponsor of a Section 401(a) plan is no longer required or able to routinely apply for an IRS Determination Letter for its plan, either in response to new legislation or on a periodic basis. Additionally, the sponsor of a Section 403(b) plan may soon, for the first time, be able to utilize an IRS pre-approved Section 403(b) plan document.
 
Key Changes 
 
This update discusses the transitions and related compliance requirements/ opportunities that are already in effect or that will become effective in the near future.
 
Section 401(a) Plans
 
Background
 
For a retirement plan to be tax-qualified, its plan document must contain, and not contain, certain provisions. These requirements change, and are supplemented from time to time, as necessary for the plan to be in technical compliance with new legislation as it is enacted. 
 
Before 2005, the sponsor of an individually-designed retirement plan (as contrasted with certain “prototype” and preapproved plans which utilize the same underlying plan document for many different adopting employers) seeking qualified plan status for its plan under Section 401(a) could file a request for a determination by the IRS that the plan met the applicable tax qualification requirements in effect. The IRS would review the plan document and indicate whether additional provisions were needed, or other changes required, for the plan to receive a favorable IRS “Determination Letter”. The primary purpose of filing for a Determination Letter was to protect the sponsor and the plan from the IRS later taking the position (e.g., on audit) that the provisions of the plan document were insufficient, and then retroactively disqualifying the plan.
 
Determination Letters
 
A related impact was that lenders to, and potential acquirers of/investors in, an entity maintaining a tax-qualified retirement plan would routinely ask for a copy of the plan’s latest Determination Letter to confirm that the plan’s tax-qualified status was intact. Note: As a practical matter, a plan’s tax-qualified status has always been a function of both its documentary and operational compliance. The existence of a Determination Letter provided a certain level of comfort compared to a plan with no Determination Letter or with a Determination Letter dated well in the past. 
 
The Determination Letter was never a true panacea, as its existence still left open the possibility that deficiencies relating to the plan’s operation could result in its not being tax-qualified even if its plan document was compliant. Under IRC Section 401(b), a “remedial amendment period” is provided. This serves as a deadline for a plan to be retroactively amended, as necessary, to comply with the then applicable tax-qualified plan requirements. 
 
Beginning in 2005, Determination Letter filings were generally permitted only once every five years with an applicable five-year remedial amendment period. (For this purpose, the specific five-year cycles were determined by the last digit of the plan sponsor’s Employer Identification Number.) 
 
Effective for 2017, and with an exception for the final five-year cycle for which certain plan sponsors could still file by January 31, 2017, the staggered five-year remedial amendment periods have been eliminated. Consequently, the IRS will no longer accept Determination Letter filings based on the former five-year cycle approach. Further, the Determination Letters under the five-year cycles expired by their terms at the end of each applicable cycle.
 
New Rules
 
Under the new rules, effective January 1, 2017, the sponsor of an individually-designed plan may only file for a Determination Letter for a new plan or for a terminating plan (for a terminating plan, the filing is generally required within 12 months of the plan’s termination), although the IRS has advised that it will consider exceptions in certain limited circumstances, such as substantial changes in the law or plan design changes.  Another significant difference is that, unlike Determination Letters issued under the five-year cycles, the new Determination Letters will have no expiration date. 
 
The IRS will publish an annual list of required amendments language for tax-qualified plan documents. The annual list will also specify the expiration date for the remedial amendment period applicable to the changes on the list.
 
What Does CohnReznick Think?
 
The IRS’s annual publication of a list of required plan document language changes is a welcome enhancement. This should ease documentary compliance and provide plan sponsors and their advisors with greater assurance of ongoing compliance. Lingering questions remain, however, as to how the lack of a current Determination Letter may impact financing and M&A transactions involving an entity which sponsors a tax-qualified retirement plan, but is unable to provide a requested current Determination Letter. Either these past industry norms will be relaxed over time, or alternatively, plan sponsors will need to incur the expense of obtaining third party expert opinions for these purposes. An offshoot of this could lead to the demise of the use of individually-designed plans by smaller employers.
 
Section 403(b) Plans
 
Background
 
Since 2009, a retirement plan of an “eligible employer” (generally, public schools and not-for-profit entities such as charitable and religious organizations and certain ministers and their employers) intended to comply with the requirements of Section 403(b) has been required to maintain the plan under a compliant written plan document. Section 403(b) plans are often referred to as tax-sheltered annuity plans. Rather than the contributions being made to a tax-exempt trust, as is the case for a plan qualified under Section 401(a), the plan contributions are made to a custodial account or under an annuity contract issued by an insurance company.
 
Unlike tax-qualified plans under Section 401(a), the IRS has never maintained a Determination Letter program for individually-designed Section 403(b) plans. However, in 2013, the IRS announced that, for the first time, it would establish a Determination Letter program exclusively for Section 403(b) plans that use an IRS pre-approved plan document. The 2013 guidance also described a remedial amendment period to be applicable to Section 403(b) plans for which the written plan document requirement was met by January 1, 2010 (or if later, the effective date of a plan newly-adopted after 2009). This would permit retroactive correction of documentary defects. The 2013 guidance did not specify the timing of the remedial amendment period.
 
The 2013 guidance also established procedures for IRS approval of Section 403(b) plan documents to be used on a prototype basis. The adoption by an eligible employer of an IRS pre-approved prototype or volume submitter plan document would automatically satisfy the Section 403(b) documentary requirements.
The IRS is still in the process of approving the plan documents submitted by vendors to be used for this purpose. In essence, the  availability of IRS pre-approved Section 403(b) plan documents will bring parity to the availability of pre-approved plan documents under Sections 401(a) and 403(b).
 
New Rules
 
Earlier this year, the IRS announced that the anticipated remedial amendment period will be a three-year period expiring on March 31, 2020. Consequently, an otherwise non-compliant Section 403(b) plan document will be considered as compliant, effective back to January 1, 2010 (or later plan effective date) if the plan is retroactively amended for compliance purposes to that date, by no later than March 31, 2020. 
 
Once the IRS pre-approved Section 403(b) plan documents become available following IRS authorization, which is expected to be very soon, Section 403(b) plan sponsors will have until March 31, 2020 to adopt such a plan document as an amendment and restatement of their plan. The updated plan document must include and identify all of the provisions of any plan amendments made to their previous plan documents going back to 2010. Any Section 403(b) plan sponsor timely adopting an IRS pre-approved Section 403(b) plan document will be protected against compliance errors in its plan document.
 
What Does CohnReznick Think?
 
Eligible employers adopting an IRS pre-approved Section 403(b) plan document for the first time can take comfort that the provisions of their Section 403(b) plan will be treated by the IRS as compliant with the documentary requirements of Section 403(b). Consequently, the IRS’s audit of a Section 403(b) plan, which uses a pre-approved plan document, should be less daunting – at least as to the compliance of the plan document provisions. 
 
Existing Section 403(b) plan sponsors will generally have until March 31, 2020 to avail themselves of this protection on a retroactive basis to the latter of 2010 or the effective date of their Section 403(b) plan.
 
Contact
 
For more information, or for assistance in regard to other employee benefits or executive compensation inquiries, please contact:
 
Dana Fried, CohnReznick National Tax Managing Director
 
Jennifer R. Lange, Partner
 
Dan Fox, Partner
 
 
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 
 
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