The Employee Plans Subcommittee (EP Subcommittee) of the Advisory Committee on Tax Exempt and Government Entities (ACT) has made some recommendations regarding the determination letter program – though it doesn’t seem to hold out much hope for change.
A determination letter is, of course, a formal document issued by the IRS that decrees whether or not a retirement plan is within Employee Retirement Income Security Act (ERISA) guidelines. Determination letters are not generally required, but having a favorable determination letter provides the employer with reliance that the plan is qualified under IRC Section 401(a), and that the plan’s trust is exempt under IRC Section 501(a).
Recommendations
So, what are the recommended changes? The EP Subcommittee says it has attempted to identify viable approaches that the IRS could take to minimize the impact on the employee plans community (EP Community), while respecting the challenges faced by Employee Plans (EP).
The EP Subcommittee makes three recommendations:
1. Not to generally eliminate periodic determination letters under the Determination Letter Program. Though the EP Subcommittee recognizes that the IRS is not likely to accept this recommendation, it is a recommendation with which all members of the EP Subcommittee strongly concur.
2. Proceed as the IRS has so far, but only as a transition measure while it discusses the matter further with the EP Community. The report says this would address IRS’s immediate workload problem concerning a backlog of determination letter applications, while providing time for what it called “a real interactive dialogue with the EP community.”
3. The third recommendation, which consists of 10 points (see below), assumes there will be no IRS change of heart. The points made are based on the EP Subcommittee’s review of the public comments, the Survey results, discussions with the EP Community and the members’ own experiences and analyses. “The EP Subcommittee recognizes that many of the points require difficult choices as to how best to allocate limited resources and that is why the EP Subcommittee would recommend the transitional approach set forth in the second recommendation.”
The key points of the third recommendation are as follows:
- The IRS should provide certainty of the availability of determination letters to as much of the EP Community as is feasible.
- The IRS should look for ways to make the pre-approved program more flexible.
- The IRS should reduce the user fees for document sponsors of pre-approved plans.
- The IRS should modify EPCRS so it can be used without a plan sponsor having a current determination letter and for issues identified on audit.
- The IRS should expand the plan provisions that can be incorporated by reference to the Internal Revenue Code of 1986, as amended (the Code) or regulations to simplify plan documents.
- The IRS should allow leniency for “immaterial” flaws in plan document language found on IRS examination.
- The IRS should immediately confirm that protection under Code Section 7805(b) continues for any plan document language that remains unchanged from issuance of a prior determination letter and further consider the feasibility of accepting an independent private review as "good faith" compliance extending Code Section 7805(b) protection.
- The IRS should provide sponsors with a safe harbor approach for converting an individually designed plan into a pre-approved plan or establish a program to review and approve such conversions.
- The IRS should publish model amendments along with the Cumulative Lists and List of Required Modifications (LRMs).
- The IRS should provide adequate time to adopt all interim amendments.
- The IRS should ask Congress to increase and dedicate user fees for the Determination Letter Program and dedicate such amounts for use by, and on behalf of, the Determination Letter Program.
Will these matter? Time will tell.
