The IRS has a Plan to Review Your Plan

For more than 30 years, the Internal Revenue Service has permitted employers who write and market retirement plan documents to submit such documents for IRS review and approval. However, the frequency at which the IRS will review these plans is about to drastically change. Plan administrators are even more animated than usual. Historically, employers could seek IRS determination that the employer’s plans, typically referred to as “individually designed” plans, qualified for preferred tax treatment. The IRS’s rulings approving them are referred to as “determination letters,” the plan administrator’s equivalent of successfully placing a probe in Jupiter’s orbit.

The determination letter, advisory letter, and opinion letters have become the cornerstone of qualified plan compliance. There are literally hundreds of legal requirements that must be properly incorporated into a qualified plan document. If a plan has a timely letter and is operated pursuant to the plan’s terms, experts state the IRS will never challenge the qualified status of the plan.

While technically not required, it is clearly best practice to obtain a determination letter. Accounting firms request the letter as part of the annual audit; record-keepers and investment managers will generally not provide services in connection with a plan without the letter; sellers in business transactions must produce the letter as part of their due diligence process; and the receipt of a favorable determination letter is required before operational issues can be corrected, according to IRS guidance.

Known as a “remedial amendment cycle,” the IRS would confirm the plan remained compliant every five years. Announcement 2015-19 eliminated the five-year cycle. Instead, the IRS would only evaluate plans prospectively, i.e., newly adopted plans, upon termination, and “in certain other circumstances.” This guidance was set to become effective January 1, 2017. Plan administrators were less than amused.

The IRS then issued Revenue Procedure 2016-37, which developed the definition of “certain other circumstances,” which include, significant law changes, new approaches to plan design, and the inability of certain types of plans to convert to pre-approved plan documents.

The IRS was quick to warn that even these factors may not allow for interim determination letter requests, especially if the IRS’s case load and resources at the time will not permit a new submission window. Plan sponsors will need to wait patiently for Internal Revenue Bulletin to publish guidance to find out if or when they will be allowed to request determination letters for existing plans.

What is the result? The vibrant and fascinating area of plan compliance law got even more exciting due to less frequent IRS oversight. Plan administrators will have even more reason to stay up at night, contemplating potential pitfalls in this captivating legal arena.


By Michael S. Cooper, Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.