By: Jeff Chang
The IRS has just announced major changes to its program for reviewing and approving the qualified status of certain retirement plan documents (see, Announcement 2015-19). Essentially, the Service is doing away with its program for issuing determination letters as to the qualified status of so-called “individually-designed plans,” except upon initial qualification and plan termination. Because practically every “governmental plan” intended to be a section 401(a) tax-qualified plan is an individually-designed plan, this means that most sponsors of such plans have a limited opportunity to seek one more IRS review and “blessing” for their plans. Most public agencies with a tax-qualified plan that does not have a current determination letter will have until January 31, 2016 by which to review, update and submit the plan.
Virtually all benefits practitioners recommend that clients with individually-designed plans obtain a current determination letter with respect to their plan. Having a current determination letter provides legal and tax assurance (as well as peace of mind) that your plan document complies with numerous Internal Revenue Code requirements that apply at the time. Failure of a governmental plan to meet the qualification requirements could at a minimum result in:
- Immediate taxation of participants’ vested benefits
- Loss of favorable tax-free rollover treatment
- Withholding and payroll tax problems
- Required financial audit disclosures and explanations
Although having a current determination letter does not prevent a plan from jeopardizing its tax-qualified status due to an operational failure, it certainly helps a plan sponsor (and the plan’s administrator) by providing them with an IRS-approved document to work with.
As mentioned earlier, almost all governmental qualified plans are also individually-designed plans, even if they have been prepared or provided by a nationally recognized plan servicer such as Lincoln, Great-West or VALIC. If you are a governmental qualified plan sponsor, you should immediately determine whether your plan is individually-designed and whether it is eligible to be submitted to the IRS for approval “one last time.”
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.