Changes To The Determination Letter Program
Effective 1/1/2017 Internal Revenue Service (IRS) eliminated the staggered 5-year remedial amendment cycle for individually designed plans (IDP) on which auditors relied to verify the Plan’s tax qualified status. In lieu of the letters, on October 1st of each year IRS will now publish a Required Amendment List which must be adopted by the IDP within 2 calendar years to maintain its status.
The elimination of this program may cause issues for Plan Sponsors and auditors concerning the federal income tax status of the Plan. Specifically the following assertions need to be addressed:
- Is the Trust qualified under the IRC as exempt from federal income taxes?
- Have any transaction occurred that might affect Plan’s tax status?
- Has Plan Management taken an uncertain position that more likely than not would not be sustained upon examination by taxing authorities?
- Have any claims and assessments resulting from loss of tax-exempt status been properly recorded or disclosed?
To address these questions we recommend an early discussion with the Plan’s ERISA counsel. An alternative is also offered by some law firms in form of opinion letters. Such letters may certify Plan’s tax status either solely based on plan document or more comprehensively on plan operations as well. They would be subject to attorney client privilege, but may be shared with the auditors just like the IRS letters. Before such opinion letters are used, some additional procedures and inquiries to plan management may be performed to satisfy plan’s compliance with laws and regulations:
- reviewing results of audit procedures applied in other areas in relation to tax qualification requirements, if applicable
- obtaining a representation from management that the plan is qualified, and the associated trust is tax exempt under the appropriate sections of the Internal Revenue Code.
- For detailed information on the changes of this program, refer to the IRS Notice 2016-37
Gosia Kanda is an audit supervisor within the firm’s ERISA Assurance and Compliance Service Team. Having joined McConnell & Jones in 2012, she is in charge of audits for employee benefit plans including defined contribution, defined benefit and health & welfare with asset base ranging from $1 million to $5 billion. She has knowledge of the requirements of DOL, ERISA, IRS and SEC for the 11-k filings and assists clients with regulatory updates and recommendations for administration of their plans. Gosia also trains and supervises staff on audit engagements and is part of the team that prepares and files clients’ Forms 5500. Connect with Gosia on LinkedIn or follow her on Twitter @KandaGosia.