Restating your plan document: Minus the IRS determination letter

Wendy Schmidt, ESOP Account Executive

Last June, an article was posted outlining the change to the IRS five-year determination letter application filing process for individually-designed plans, which includes ESOPs. That change was effective January 1, 2017.

So now what? Well, it’s business as usual—with a few changes.

Under IRS Revenue Procedure 2016-37, changes relate to when an individually-designed plan:

  • Must be amended for law and other guidance changes
  • May request a determination letter

Plan amendments

Mandatory amendments for law and other guidance changes will be tied to a Required Amendment List (RA List), unless legislation or other guidance states otherwise. Interim amendments will no longer be required. Generally, the RA List will include an item after guidance for the item (including any model amendment) issued.

The RA List is the annual list of all the amendments an individually-designed plan is required to make to retain its qualified status. This list will be published by the IRS after October 1 every year. Generally, these amendments must be adopted by the end of the second calendar year following the year the RA List is published. For example, amendments on the 2017 RA List generally must be adopted by December 31, 2019.

The deadline for all other discretionary amendments elected by a plan sponsor, which only affect their specific plan document, is the end of the plan year in which the plan amendment is operationally put into effect. For example, a calendar year plan adopting a discretionary plan amendment and operationally putting the amendment into effect during 2018, the deadline is December 31, 2018.

What hasn’t changed is a plan’s operational compliance standards. All plans need to be operated in compliance with any amendment, either required for law and other guidance changes or discretionary, from the effective date of the change. To assist plan sponsors with required amendments for law and other guidance changes, the IRS plans to provide an annual Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year.

Determination letter

The staggered five-year remedial amendment cycles have been eliminated. Going forward, a plan sponsor may request a determination letter only under the following circumstances:

  • The plan has never received a favorable determination letter
  • The plan is terminating
  • The IRS makes a special exception.
    • The IRS will consider additional circumstances based on program capacity and other factors. No additional circumstances apply for applications in calendar year 2017.

Limiting the individually-designed plan determination letter program to new plans and terminating plans raises the bar for plan sponsors to carefully consider the impact changing plan provisions may have on the tax-qualified status of the plan. For legally required (mandatory) plan amendments, which generally occur due to changes in the law, the IRS often provides “model amendments” that can be adopted. Timely adoption of model amendments can provide plan sponsors some comfort that the plan remains qualified. For discretionary amendments—amendments that are not required by law and which commonly occur when there is a change in the company’s strategic plan or financial condition—there is no longer periodic access to IRS review or assurance through the determination letter application process of the affect of the amendment.

A lot can change during the lifecycle of an ESOP and plan document amendments are inevitable. Continue to work with your ESOP attorney, to discuss these changes and requirements, and how they affect your organization’s ESOP.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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