THE DISAPPEARING DETERMINATION LETTER: HOW PLAN SPONSORS CAN COPE

THE IRS IS CUTTING BACK THE DETERMINATION LETTER PROGRAM: NOTICE 2016-37

By Carol I. Buckmann 2016

Carol@cohenbuckmann.com

Say it isn’t so…That was the reaction of many plan sponsors when IRS announced severe cutbacks to its determination letter program.  The details were to follow, and now we have some in IRS Notice 2016-37. 

IRS will indeed end the cyclical (5 year) cycle for individually- designed plans, providing determination letters only on plan adoption, plan termination, and on request in special situations (which aren’t spelled out in any detail in the Notice.)  The IRS indicates that it will handle “special exceptions” based on program capacity, which is not encouraging.

Moving to pre-approved plans might seem like an appealing alternative to these plan sponsors, but it really isn’t.   Individually-designed plans permit greater customization and can incorporate fiduciary best practices, an area on which the people who draft and market prototype plans don’t seem to focus. For example, I routinely see prototype documents in which the “Employer” is automatically inserted into the line identifying the Plan Administrator by employees of the providers without questions even being asked about whether the plan sponsor has already delegated those responsibilities to another “named fiduciary” such as a Plan Committee or even a fiduciary TPA.  I often see plan provisions in these plans designed more to protect the provider than the plan fiduciaries.  

The ERISA Industry Committee (ERIC) responded on June 29 with a release in which it stated that ending the determination letter cycle for individually-designed plans “will have massive rippling effects throughout the benefits world.” ERIC says that 98% of large employers currently have individually-designed plans. ERIC cited a significant increase in legal and especially audit costs for these plans, as external auditors have been relying on determination letters as proof of compliance.  At least some of the additional fees will come out of the participants’ pockets.

Benefits lawyers will have a big role to play going forward in making plan sponsors comfortable that their plans are compliant, in assisting with external annual audits, and also in mergers and acquisitions, where they can be expected to play a much larger role in due diligence of target plans.  

Plan sponsors who still have an opportunity to file for a current letter (only Cycle A filers through January 31, 2017) should take advantage of that opportunity to get an updated letter.  However, this will be a minority of plans.  Others should be preparing to do more self-audits to identify qualification problems before a real audit occurs, and to request periodic qualification opinions from their legal advisers.

IRS should consider the following changes to the program which would cushion the blow to plan sponsors:  

1.  Automatically accept applications for major plan redesigns and conversions.

2.  Make more sample language available covering more alternative provisions.

3.  Work out more lenient rules for using the Voluntary Correction Program (rather than audit cap) when problems that are not serious are discovered on audit.        

There was, however, one piece of good news buried in this Notice.  The long-criticized rule that interim amendments must be adopted by the end of the plan year has been eliminated in favor of a longer remedial amendment period.  Discretionary amendments, however, must still be adopted by the end of the year.