Determination Letter Program Changes

a) Delay the Start of New Five-Year Remedial Amendment Cycles

Under the current determination letter process, individually-designed plans generally must be submitted once every five years in order to maintain a current determination letter,²² and the year in which a plan must be submitted (to keep the remedial

amendment period open and maintain reliance) is generally based on the last number of the plan sponsor’s EIN.²³ In contrast, pre-approved plans are subject to a six-year cycle,²⁴ during which the document providers must submit the documents for an advisory or opinion letter (depending on the type of pre-approved plan involved) and adopting employers must thereafter adopt the approved plan documents within the required timeframe.

Given the continuing contraction of IRS funding and resources, the EP Subcommittee submits that it would be reasonable and appropriate for the IRS to delay the start of each five-year cycle subsequent to the PPA five-year cycle -- something that the IRS would appear to have the authority to do under Rev. Proc. 2007-44.²⁵ This would give the IRS additional time to catch up on the inventory backlog without unnecessary disruption or constriction of the determination letter process.

A delay would also mean that when the submission is made it will be made using a more up-to-date cumulative list and there will be a shorter time in which the submission

“sits” with the IRS. This should be welcomed by both practitioners and the IRS because

22 See Rev. Proc. 2007-44 at § 9.

23 See id. at § 9.03. However, there are a number of special rules and exceptions. See §§ 10 & 11. For example, all multiemployer, multiemployer and government plans must be submitted with a designated annual cycle within the 5-year process. See §§ 10.02-10.04.

24 See id. at § 15.

25 See §13.03, which gives the IRS the authority extend the expiration date of outstanding determination letters for one or more cycle years through published guidance.

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there will be fewer plan amendments being drafted between the time of submission and the time the determination letter is issued.

While the EP Subcommittee recommends that the per-cycle extension generally be one year, we also recommend that the IRS reserve the discretion to provide for a longer period should the current inventory backlog require additional time. In making this recommendation, the EP Subcommittee is not suggesting that any fundamental

changes be made to the structure and processes of the five -year cycle and we are not recommending that critical off-cycle submissions (e.g., for terminations) be subject to the moratorium. Instead, we would envision the cycle moratorium as a period during which no new on-cycle applications would generally be permitted and during which the IRS’ determination letter group could devote full time and attention to the existing backlog.

The EP Subcommittee does not believe such a moratorium would create undue

hardship or burden for individually designed plan sponsors and their service providers.

By providing ample advance notice and guidance, the adverse impact of any extension should be minimal. Moreover, we believe that the extension would generally be

welcomed by the benefits community as a sensible, responsible step to alleviating the substantial backlog and providing a shorter, more predictable turnaround of

determination letter applications, and based on more current cumulative lists.

If it is determined that a complete moratorium is unnecessary because it is only the higher-graded cases causing the major backlog, the IRS may want to consider applying the moratorium only to plans that tend to have a greater percentage of higher- graded cases, such as defined benefit plans and ESOPs. This in essence would create two separate sub-cycles for individually designed plans that do not coincide – one cycle for defined benefit plans and ESOPs and another cycle for other defined contribution plans.

While this would add some complexity to the cycle structure, the EP Subcommittee does not believe that this would ultimately create a burden if the revenue procedure

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made this clear (e.g., non-ESOP defined contribution plans continue using Cycles A – E, and defined benefit plans and ESOPs use new Cycles V-Z).

b) Narrower Availability of “Off-Cycle” Filings

Revenue Procedure 2007-44 currently permits a determination letter application to be filed for individually designed plans outside of the plan’s on-cycle year, called an “off-cycle” filing.²⁶ Except for terminating plans (which are reviewed under the Cumulative List in effect on the termination date), these filings are reviewed under the Cumulative List in effect for the year in which the filing is submitted.²⁷ Because an off-cycle filing is not treated as an “on-cycle” filing, a second, separate on-cycle determination letter application is needed to preserve the extended remedial amendment period and continued reliance from cycle to cycle.²⁸

In general, the Revenue Procedure provides that off-cycle filings will not be reviewed until all on-cycle filings have been reviewed.²⁹ Exceptions are provided for –

 Terminating plans;³⁰

 A newly adopted plan (where the on-cycle filing period is at least two years away);³¹

 An off-cycle filing that is made in accordance with IRS guidance requiring a determination letter application filing;³² and

 A filing for which there is an “urgent business need,” which the Revenue Procedure makes clear will occur “only in limited cases where exceptional circumstances exist.”³³

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Off-cycle applications must go through the same intake, screening and review process as on-cycle filings and, therefore, generally require the same time and effort as other application filings. The EP Subcommittee understands that because of the significant application backlog, the IRS has been unable to review off-cycle filings that are not eligible for priority processing. As a result, these applications are typically closed and returned to the plan sponsor without review during the plan’s subsequent on-cycle year.

Despite the on-going backlog for non-priority eligible off-cycle filings, we understand that the determination letter staff is continually surprised by the number of applications the IRS receives each year. These applications must still go through initial processing and tracking, which ultimately involve (in our view) an unnecessary expenditure of the IRS’

limited resources and staffing. Therefore, the EP Subcommittee recommends that off-cycle filings only be permitted in circumstances under which priority review is allowed (as outlined above), with the exception of newly adopted plans. As set forth in Revenue Procedure 2007-44, while an off-cycle application filing for such a plan is eligible for priority status, it is not needed to preserve reliance, as the plan’s remedial amendment period is automatically extended to the end of the new plan’s otherwise applicable first on-cycle year. ³⁴ In these circumstances, providing off-cycle filing priority for new plans no longer makes sense with the continued attrition of staff and resources. Therefore, we believe that eliminating this priority would be a fair and appropriate cutback to the current determination letter program.

c) Limit Multiple Employer Plan (MEP) Review Submissions by Participating Employers

Under current IRS procedures, a determination letter application may be submitted by the entity controlling the MEP and, if desired, by each separate participating employer in

33 See id. at § 14.03.

34 See §14.04.

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that plan.³⁵ Where participating employers opt to file separate determination letter applications, those applications must be filed in one submission with the lead application of the controlling entity (and a higher user fee is required).³⁶ However, regardless whether a participating employer files a separate determination letter

application, the participating employer can rely on the principal participating employer’s determination letter, except for certain qualification requirements (specifically, §§

401(a)(4), 401(a)(26), 401(l), 410(b), 414(s) and, if the employer maintains or has ever maintained another plan, §§ 415 and 416).³⁷

In the past, the primary advantage to obtaining a separate determination letter for a participating employer of a MEP was separate reliance as to compliance with the nondiscrimination rules under §§ 401(a)(4), 401(a)(26) and 410(b) for any special plan features applicable to that employer. However, now that determination letters

addressing such nondiscrimination compliance are generally no longer available,³⁸ the value of separate letters for participating employers is greatly diminished.

In these circumstances, the EP Subcommittee believes that the elimination of separate determination letters for MEP participating employers would be a fair and appropriate cutback to the current program to conserve resources. In general, this would put participating employers in much the same position reliance-wise, as an employer that has adopted a non-standardized M&P or VS plan.³⁹ However, to put MEP participating employers on closer footing to such pre-approved plan adopters, the EP Subcommittee recommends that the IRS also allow for additional reliance for such employers along the lines permitted under Sections 19.02(2), (3) and (4) of Revenue Procedure 2011-49,⁴⁰

40These Sections generally allow for additional reliance in the following circumstances:

(1) For §§410(b) and 401(a)(26), when 100 percent of all nonexcludable employees are covered under a nonstandardized plan (Section 19.02(2));

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as applicable, because these are issues that would ordinarily be considered and ruled on in reviewing the controlling entity’s determination letter application. We believe that this can be accomplished without unduly complicating the MEP determination letter process or undermining IRS compliance and enforcement efforts in this context.

We recommend that the IRS include language in its determination letters for MEPs that states that an employer maintaining a MEP can rely on a determination letter issued for the plan except with respect to the requirements of §§401(a)(4), 401(a)(26), 401(l), 410(b) and 414(s), and whether the employer maintains or has ever maintained another plan, §§415 and 416. Such language may lead more participating employers to feel that they do not need a separate letter if the IRS decides it cannot eliminate all such letters.

Additional outreach efforts by the IRS to practitioners, plan auditors and plan sponsors would also help clarify the misperception concerning the benefits of a participating employer’s determination letter request and thereby reduce unnecessary determination letter applications.

d) User Fee Changes

Under Code Section 7528(a), the Secretary of Treasury has the authority to require the payment of user fees for individual letters and rulings. These fees can vary by

categories (or subcategories) established by the Secretary and are to be determined taking into account the average time for complying with the request and its difficulty.⁴¹

(2) For §401(a)(4) amounts testing, when a safe harbor allocation/benefit formula and

compensation definition is used under a nonstandardized plan (Sections 19.02(3) & (4));

(3) For §§401(k)(3) and 401(m)(2) (in form), when a compensation definition is used under a nonstandardized M&P plan (Sections 19.02(3)); and

(4) For §§401(k)(11) and 401(m)(12), for an adopted safe harbor plan unless safe harbor contributions are provided in another plan (Sections 19.02(3)).

41 See §§7528(b)(1)(A) & (B) of the Code.

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In addition, the Secretary has the discretion to provide for reduced fees in appropriate circumstances.⁴²

Indeed, Code Section 7528 can be read as giving the Secretary the flexibility in the determination letter application context, to charge higher or lower fees by application or plan type (or any reasonable subcategory thereof). Based on this, we submit that in this era of constricting resources and staffing, it would be reasonable and appropriate for the IRS to implement user fee changes that could discourage unnecessary or duplicative determination letter filings in circumstances where the plan sponsor is already entitled to reliance. For example, implementing a higher per participating employer fee for MEP applications may discourage unnecessary usage where reliance on the controlling entity’s letter would suffice. Similarly, a higher fee for Form 5307 filings could

discourage adopting employers who make only minor, inconsequential changes to a volume submitter plan from automatically submitting an application without considering the necessity for doing so. In addition, instituting higher user fees for plans that could be maintained on a pre-approved plan document might encourage more employers sponsoring individually-designed plans to migrate to a pre-approved document.

In sum, the EP Subcommittee recommends that the IRS study whether there are appropriate circumstances in which the determination letter application user fee structure could be changed in a fair and meaningful way to encourage usage of pre-approved plans and reduce unnecessary determination letter application filings.