Kathleen C. Farley, Alston + Bird LLP
The IRS has established new remedial amendment periods and a determination letter program that uses staggered cycles. The cycles are assigned based on the last digit of the plan sponsor’s EIN (see chart below). The first cycle opens as of February 1, 2006. Plans in the first cycle – Cycle A -- must be submitted for determination letters between February 1, 2006 and January 31, 2007 and must correct any disqualifying provisions no later than January 31, 2007.
Remedial Amendment Periods
A tax-qualified plan must contain and follow certain qualification requirements. A “disqualifying provision” is a plan provision that causes a plan to fail to meet the qualification requirements, or a plan provision that ceases to meet the qualification requirements because the rules changed. The remedial amendment period is the period during which a qualified plan with a disqualifying provision can be amended to fix a disqualifying provision.
The new system generally extends remedial amendment periods. Plans now have until the end of their cycle to correct any disqualifying provisions. The IRS guidance also extended the EGTRRA remedial amendment period to the end of a plan sponsor’s first cycle under the new system (e.g., January 31, 2007 for Cycle A plans).
Under the new system, the IRS will publish annually a Cumulative List of Changes in Plan Qualification Requirements. Plan sponsors will be able to use the Cumulative Lists to identify, on an annual basis, all changes in the qualification requirements that were the result of changes in statutes, regulations or IRS guidance that must be reflected in the plan document.
The extended remedial amendment period also will apply in situations where a plan sponsor reasonably believed that an amendment was not required, but the IRS finds otherwise during a determination letter review. A discretionary amendment should be adopted by the end of the plan year in which the amendment is effective, provided that the amendment will not result in a cutback.
The IRS also issued guidance regarding plan restatements. A plan restatement that is generally effective as of a certain date should not be deemed to supersede previously adopted interim plan amendments that are effective after the restatement's effective date and that have not been incorporated or reflected in the restatement. Individually designed plans must be restated when they are submitted for determination letter applications.
The new program uses a staggered system of five-year cycles during which the IRS will issue determination letters to individually designed plans. The basic effect is that plans will not need to apply for a new determination letter more than once during any cycle.
During its review, the IRS will consider the changes identified in the Cumulative List issued before the February 1 for a specific cycle. For example, the IRS will review determination letter applications submitted between February 1, 2006 and January 31, 2007 based on the 2005 Cumulative List. The IRS will not consider any guidance published after the issuance of the applicable Cumulative List. Thus, the plan sponsor may not rely on the determination letter that the IRS issues for changes made after the applicable Cumulative List.
Determination letters also will include an IRS statement that the letter may not be relied on after the end of the plan's first five-year cycle that ends more than 12 months after the application was received, and will include the specific expiration date. Thus, determination letters issued for applications filed more than 12 months before the end of a five-year cycle may not be relied on after that cycle.
If an application for a determination letter is submitted “off cycle” – i.e., before the February 1 that begins the plan's cycle or after the January 31 that ends the cycle -- the application will be reviewed based on the annual list that the IRS is then using to review “on cycle” applications. This means that the determination letter issued for the plan might not take into account all of the changes in qualification requirements for which that particular plan must be amended by the end of its remedial amendment period. Thus, the plan may need to be amended later within the cycle, and another determination letter application might have to be filed within the last 12 months of the cycle if the plan sponsor wants to continue to be able to rely on a determination letter. Also, the IRS will not review the application until after all “on-cycle plans” have been reviewed and processed.
Special Rules for Determining Applicable Cycle
Special rules apply to plans maintained by more than one employer and plans maintained by multiple members of a controlled group or an affiliated service group. Controlled groups and affiliated service groups may elect to apply the same five-year cycle to all plans maintained by any member of the group. Special rules also apply for purposes of determining the applicable cycle following a merger or acquisition, change in plan sponsor, or plan spinoff.
New Submission Procedures for Individually Designed Plans – Five-Year Remedial Amendment Cycle for Individually Designed Plans Chart |
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