The general elimination of periodic determination letters was “shortsighted,” the Employee Plans Subcommittee of the Advisory Committee on Tax Exempt and Government Entities says in its 2016 Report of Recommendations.
In Announcement 2015-19, issued on July 21, 2015, the IRS outlined changes to the employee plans determination letter program for qualified retirement plans. The IRS said that effective Jan. 1, 2017, it would eliminate the staggered five-year determination letter remedial amendment cycles for individually designed plans and would limit the scope of the determination letter program for individually designed plans to initial plan qualification and qualification upon plan termination. The IRS also said that, effective July 21, 2015 through Dec. 31, 2016, the IRS will not accept determination letter applications that are submitted off-cycle, except for applications for new plans, as defined in section 14.02(2) of Revenue Procedure 2007-44, and for terminating plans.
The subcommittee notes that the current cycle system has been in effect since 2006. “As one would expect, this change in the IRS longstanding policy of plan sponsors being able to receive determination letters on plan amendments has been a shock to the EP community, and has caused much concern,” says the report.
“The EP Subcommittee, like the majority of the EP [employee plans] community, was distressed by the announcement and the corresponding general elimination of periodic determination letters. It is the EP Subcommittee’s position that such a decision is shortsighted,” says the report.
The subcommittee endorses the periodic determination letters, saying that it “believes that periodic determination letters serve as an important adjunct to the audit program, and play a major role in encouraging plan sponsors to regularly review not only their plan documents, but also plan operations, in preparation for periodic IRS filings.”
In the report, the subcommittee said that it attempted to identify viable approaches that the IRS could take to minimize the impact on the EP community, “while respecting the challenges faced by Employee Plans (EP) (the part of the Tax Exempt and Government Entities Division (TE/GE) of the IRS responsible for qualified pension plans) due to budgetary shortfalls and personnel reductions.”
The subcommittee makes three recommendations.
Do not eliminate interim determination letters as the IRS has announced. The subcommittee does not mince words on this matter, saying that its members “join with the EP community in the prevailing belief that the IRS is making a mistake in eliminating most periodic determination letters. The subcommittee affirms its support of the statement in the Advisory Council on Tax Exempt and Governmental Entities’ 2014 Report of Recommendations regarding the importance of determination letters. It says that it “recognizes that the IRS is not likely to accept this recommendation, but it is a recommendation with which all members of the EP Subcommittee strongly concur.”
Adopt the IRS’ current position as a transition rule while opening and having discussions with the EP community. The subcommittee recommends proceeding as the IRS has so far, but only as a transition measure while it discusses the matter further with the EP Community. This, it says, “would address IRS’s immediate workload problem concerning a backlog of determination letter applications, while providing time for a real interactive dialogue with the EP community.”
Implement the change in the least harmful manner. The third recommendation assumes there will be no IRS change of heart. Its key points are that the IRS should:
The subcommittee has a suggestion for the IRS If it remains determined to proceed with the changes it announced to the determination letter program. The subcommittee urges the IRS to adopt its recommendation that the IRS take “a transition approach” to implementing the changes it announced “while holding further discussions with the EP community.”
The American Retirement Association was among the entities that submitted comments
In Announcement 2015-19, issued on July 21, 2015, the IRS outlined changes to the employee plans determination letter program for qualified retirement plans. The IRS said that effective Jan. 1, 2017, it would eliminate the staggered five-year determination letter remedial amendment cycles for individually designed plans and would limit the scope of the determination letter program for individually designed plans to initial plan qualification and qualification upon plan termination. The IRS also said that, effective July 21, 2015 through Dec. 31, 2016, the IRS will not accept determination letter applications that are submitted off-cycle, except for applications for new plans, as defined in section 14.02(2) of Revenue Procedure 2007-44, and for terminating plans.
The subcommittee notes that the current cycle system has been in effect since 2006. “As one would expect, this change in the IRS longstanding policy of plan sponsors being able to receive determination letters on plan amendments has been a shock to the EP community, and has caused much concern,” says the report.
“The EP Subcommittee, like the majority of the EP [employee plans] community, was distressed by the announcement and the corresponding general elimination of periodic determination letters. It is the EP Subcommittee’s position that such a decision is shortsighted,” says the report.
The subcommittee endorses the periodic determination letters, saying that it “believes that periodic determination letters serve as an important adjunct to the audit program, and play a major role in encouraging plan sponsors to regularly review not only their plan documents, but also plan operations, in preparation for periodic IRS filings.”
In the report, the subcommittee said that it attempted to identify viable approaches that the IRS could take to minimize the impact on the EP community, “while respecting the challenges faced by Employee Plans (EP) (the part of the Tax Exempt and Government Entities Division (TE/GE) of the IRS responsible for qualified pension plans) due to budgetary shortfalls and personnel reductions.”
The subcommittee makes three recommendations.
Do not eliminate interim determination letters as the IRS has announced. The subcommittee does not mince words on this matter, saying that its members “join with the EP community in the prevailing belief that the IRS is making a mistake in eliminating most periodic determination letters. The subcommittee affirms its support of the statement in the Advisory Council on Tax Exempt and Governmental Entities’ 2014 Report of Recommendations regarding the importance of determination letters. It says that it “recognizes that the IRS is not likely to accept this recommendation, but it is a recommendation with which all members of the EP Subcommittee strongly concur.”
Adopt the IRS’ current position as a transition rule while opening and having discussions with the EP community. The subcommittee recommends proceeding as the IRS has so far, but only as a transition measure while it discusses the matter further with the EP Community. This, it says, “would address IRS’s immediate workload problem concerning a backlog of determination letter applications, while providing time for a real interactive dialogue with the EP community.”
Implement the change in the least harmful manner. The third recommendation assumes there will be no IRS change of heart. Its key points are that the IRS should:
- provide certainty of the availability of determination letters to as much of the EP community as is feasible;
- look for ways to make the pre-approved program more flexible;
- reduce the user fees for document sponsors of pre-approved plans;
- modify the Employee Plans Compliance Resolution System (EPCRS) so it can be used without a plan sponsor having a current determination letter and for issues identified on audit;
- expand the plan provisions that can be incorporated by reference to the Internal Revenue Code of 1986, as amended or regulations to simplify plan documents; and
- allow leniency for "immaterial" flaws in plan document language found on IRS examination.
The subcommittee has a suggestion for the IRS If it remains determined to proceed with the changes it announced to the determination letter program. The subcommittee urges the IRS to adopt its recommendation that the IRS take “a transition approach” to implementing the changes it announced “while holding further discussions with the EP community.”
The American Retirement Association was among the entities that submitted comments
on Announcement 2015-19. The ARA has been actively involved with the IRS in discussions to improve both the determination letter and the pre-approved plan programs. It made its comments with the expectation the IRS will continue to work with the ARA to improve both of these programs.
- Log in to post comments