When the IRS announced that it would virtually eliminate the determination letter program for individually designed retirement plans, many practitioners moved through the classic Kübler-Ross five stages of grief (see the picture at the right). Some have yet to finish. In Announcement 2016-32, the IRS requested comments on how these plans can maintain compliance going forward since determination letters are no longer available.
As a general rule, the IRS used to deny plans the ability to incorporate tax code provisions by reference (rather than reciting them wholesale in the plan), except for a very short list available here. The IRS is asking if there are additional provisions that would also be appropriate to incorporate by reference. This would avoid the need to reproduce these provisions wholesale and run the risk of a minor foot fault if the language did not line up. It would also help avoid the need to update plans for law changes, in some cases.
Additionally, much to the anger of many practitioners, the IRS has historically sometimes required a plan to include provisions that were not applicable to the plan. For example, there are special diversification requirements for plans that hold publicly-traded employer stock, yet the IRS has required them even for private companies. One wonders if the IRS actually observed numerous situations where privately held corporations became public companies and then failed to amend those of their plans that held employer stock. What a scourge on the individually designed plan world this must have been! The IRS would like to know if there are other provisions that could possibly be avoided and the likelihood that the plan sponsor will actually amend the plan when the provision becomes applicable. While there may be a few of these provisions out there, there likely aren’t enough to make a significant difference in the length of individual designed plans or to stem the tide of faulty individually designed plans.
For those employers who still want the comfort of an IRS letter of some kind, they could bargain with a company that offers a pre-approved plan. However, there are challenges to switching to a pre-approved prototype or volume submitter plan, and the IRS wants to know about them. For example, employers with unique plan designs or multiple different benefit formulas may not be able to fit under a particular pre-approved form. Under the rules applicable to those plans, too much variation from the pre-approved form destroys the ability to rely on the letter and turns the plan into an individually designed plan (which can’t then get a determination letter).
What might depress practitioners most is that the above areas are the only ones the IRS came up with as possibilities. For example, it would make sense to let plans apply for a determination letter when there is a plan merger. The IRS has historically requested the documents of plans that were merged into a plan under determination letter review. Without allowing this, the IRS will end up not reviewing a plan until it is terminated. At that time, the Service may be asking for plans that were merged from 20 or more years ago. That level of recordkeeping would be prohibitive for some plan sponsors. Additionally, if the IRS found an error at that time, it could be extremely difficult to fix. Therefore, allowing a complete review of the plan when it is a party to a plan merger would be highly valuable. Additionally, since plans will be permitted to obtain a determination letter on initial adoption, a limited determination approval process might be available to review amendments to the already approved plan rather than the entire plan again.
The Service will accept comments in writing on or before December 15. Service employees responsible to draft the rules may also read this post, so feel free to leave your comments below.