IRS Exempts Some SMBs from User Fee for Determination Letter Applications

By Jane Meacham, Contributing Editor
Effective January 1, 2017, the Internal Revenue Service (IRS) is providing an exemption from a user fee for some small-employer benefit plans seeking a determination letter about their qualified status.

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In Notice 2017-1, the agency in late December 2016 said that to simplify eligibility for user-fee exemptions, an application for a determination letter related to a pension, profit-sharing, stock bonus, annuity, or employee stock ownership plan (ESOP) maintained by a small employer will be treated as being filed within a qualifying open remedial amendment period if the plan didn’t exist before January 1 of the 10th calendar year before the year in which the application is filed. This provision is known as “the ten-year rule.”

Small-employer plans are defined by the IRS in the notice as having no more than 100 employees.

In the past, the Code’s user-fee exemption did not apply if the letter request was made after the last day of the fifth plan year of the plan’s existence, or after the end of any qualifying open remedial amendment period.

Reflects End to Remedial Cycle

The new notice reflects a series of changes made recently through Revenue Procedure 2016-37 to the remedial amendment period for individually designed employer plans being submitted for review on a revolving a 5-year cycle.

If a plan’s application for a determination letter does not meet the 10-year rule provision, it still may be filed without paying a user fee, but the application must include a statement explaining how the application satisfies the fee exemption. The IRS notice said the agency will ask applicants to submit required user fees if they do not to meet the requirements described in Notice 2017-1.

The federal tax Code allows the U.S. Treasury Department to reduce or exempt user fees tied to determination letter requests as it sees fit. Notice 2017-1 amplifies elements of Notice 2002-1 and makes Notice 2011-86 obsolete, the IRS said in the notice.

The IRS has said it will still issue determination letters after review under some circumstances, such as for newly established plans, terminating plans, and those seeking to confirm compliance with new laws.

Significant Changes

In 2015, the IRS announced that significant changes to its determination letter would be implemented starting January 1, 2017. Several types of applications the agency handled for decades, for plans seeking to confirm their qualified status between formal review cycles, have now been eliminated. The IRS attributed the cutback to resource shortages at the agency.

The agency has used complex guidelines for staggered, 5-year filing cycles based on the employer identification number (EIN) of the plan sponsors submitting their plans for review, but this spacing of filings has led to plans more frequently seeking updated determination letters whenever new laws or procedures created a need for a new review. The 5-year filing cycles induced plans to file interim amendments between formal reviews and to seek determination letters to cover such changes.

In 2016, the IRS published changes to its Employee Plans Compliance Resolution System (EPCRS) program to address making needed plan corrections in the absence of determination letters. ERISA attorneys and others in the employer-sponsored retirement plan community have predicted that the changes in the determination letter system will lead more plan sponsors to adopt simpler pre-approved plans, which are more standardized than individual plans.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.

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Author: Guest Columnist