By Cindy Sandomenico
Approved in June 2016, IRS Revenue Protocol 2016-37 alters the way individually designed retirement plans must file amendments and submit determination letters to the IRS. This will be effective Jan. 1, 2017.
Previously, retirement plans were subject to a five-year cycle involving remedial and formal adoption of amendments, and submission of determination letters every five years, regardless of whether the plan was amended. This process was time-consuming for both plan sponsors and the IRS, which had to allocate additional personnel and resources to oversee the system.
Provisions outlined in Rev. Proc. 2016-37 are designed to streamline the amendment system by reducing the amount of time it takes to approve the amendments that are necessary for retirement plans to maintain their tax-exempt status. Here are some ways the new provisions could affect your plan.
Elimination of the RAC system
The five-year submission cycle for determination letters was the result of the remedial amendment cycle, or RAC. Under this system, plans could only adopt interim amendments on an annual basis; permanent amendments could then be adopted at the end of the five-year RAC cycle.
New rules under Rev. Proc. 2016-37 will eliminate the five-year RAC and replace it with a new system.
Institution of a two-year system
Instead of a five-year RAC system, the amendment cycle will be governed by a required amendment list, or RA List, system. Plan sponsors must submit proposed amendments before the IRS publishes the annual RA List on Oct. 1, 2016. These will include all amendments that a plan must adopt to retain its qualified tax-exempt status.
From that point, the amendments have two calendar years for plans to formally adopt them. As an example, an amendment published on the 2017 RA List must be adopted no later than Dec. 31, 2019.
New rules for determination letters
Rev. Proc. 2016-37 provides for specific conditions under which a retirement plan must submit for a new determination letter to the IRS.
- Initial plan qualification, or if the plan has never submitted a letter previously
- Termination of the plan
- Special exceptions as allowed by the IRS. These could be related to the enactment of new laws, new approaches to plan design and the resources available to process determination letters.
The new rules eliminate the need to submit determination letters for every amendment to a plan, as well as a letter every five years regardless of whether changes were made.
Because the changes will affect different retirement plans in different ways, consult with your plan’s advisor before the new rules take effect.
Cindy Sandomenico is a Manager and member of the firm's Employee Benefit Plan Leadership Team, which oversees the Employee Benefit Plan Group at Wiss & Company, LLP. She has over ten years of experience in public accounting. She has provided audit, accounting, tax and business advisory services to both publicly and privately-held businesses in industries such as manufacturing, wholesaling/distributing, public sector and professional service firms.