401(k) CURRENT EVENTS: IRS EXPANDS DETERMINATION LETTER PROCESS FOR CERTAIN INDIVIDUALLY DESIGNED 401(K) PLANS

On November 7, 2022, the IRS released Revenue Procedure (Rev. Proc.) 2022-40 which generally updates the determination letter submission process for qualified retirement plans, including 401(k) plans. In particular, among other changes, the program expands the eligibility for requesting determination letters for certain individually designed plans (see our Compliance Task entitled “Individually Designed Plan Document” for details), extends the “remedial amendment period” (see below) for certain new plans, and revises the scope of IRS review generally applicable to the determination letter process.

The IRS has released a corresponding fact sheet intended to help explain the major changes made by Rev. Proc. 2022-40.

COMMENT: In addition to the changes affecting 401(k) plans, a major focus of Rev. Proc. 2022-40 is the extension of the determination letter process to Internal Revenue Code Section 403(b) plans, which are most often used by public schools, churches and charities. Beginning in June 2023, these plans will be able to use the same individually designed retirement plan determination letter program currently used by qualified retirement plans. The legal requirements for 403(b) plans differ in important respects from those applicable to 401(k) plans, and the extension of the determination letter program to these plans is not addressed in this article.

The major changes applicable to 401(k) plans are as follows:

• Expanded Eligibility for Requesting Determination Letters. Plan sponsors who were previously issued a determination letter as a result of filing a Form 5307 (Application for Determination for Adopters of Modified Volume Submitter Plans) no longer are barred from subsequently submitting that plan for an initial, individual determination letter under the general program for individually designed plans (i.e., by filing a Form 5300 (Application for Determination for Employee Benefit Plan). In other words, counter to the previous rule, just because the plan was considered a modified “volume submitter plan” in the past does not mean the plan cannot be considered to be an individually designed plan for individual determination letter purposes at a future time.

See our reference article entitled “Plan Document Review” for a general overview on the differences between pre-approved plans (such as volume submitter plans) and individually designed plans.

• Extended Remedial Amendment Period. The Rev. Proc. extends the expiration of the “remedial amendment period” for new individually designed plans so that it more closely lines up with the remedial amendment period applicable to existing, ongoing plans. The remedial amendment period for new plans now extends until the last day of the second calendar year after the calendar year in which the plan becomes effective. Very generally stated, the “remedial amendment period” is the length of time designated by the IRS during which plan sponsors may timely amend their plan documents to comply with various changes in the law applicable to such plans.
• Scope of IRS Review. When reviewing determination letter requests, the IRS will now generally only consider changes in the law affecting 401(k) plans that are in effect, or have been included on a “required amendments list,” on or before the last day of the second calendar year preceding the year in which the determination letter application is submitted. See our prior blogs on (i) the 2021 IRS Required Amendments List; and on (ii) the latest revamping of the plan document approval process (CAUTION: to the extent inconsistent with Rev. Proc. 2022-40, some of the material in this blog regarding eligibility for initial determination letters is now superseded) for more details on “required amendment lists.”

Hint of Things to Come.

The IRS states that a new, as yet unreleased Rev. Proc.  2023-4 is currently in development, and will contain additional changes to the procedural requirements for plan determination letter submissions, including the phasing-in of mandatory electronic submission of determination letter requests. IRS Forms 5300 and 5310, which are used in conjunction with determination letter submissions, will also be updated to reflect these changes.

OBSERVATION: Few plan administrators or in-house administrative personnel are responsible for the actual “hands-on” preparation of determination letter requests, instead relying on their ERISA attorneys or other professional advisors to prepare the actual filings. Nevertheless, it is important to possess a general knowledge of the process and the reasoning behind obtaining determination letters for individually designed plans, if applicable. The IRS has published a general overview of this process on its website.

DISCLAIMER: This article is intended only as a brief overview of Rev. Proc. 2022-40 with respect to individually designed 401(k) plans. It is not intended to address those provisions of Rev. Proc. 2022-40 addressing 403(b) plans. Further, this article does not address the details of the determination letter process for qualified retirement plans, 401(k) plan qualification generally, other legal requirements for 401(k) plans, or similar topics. As always, please consult your own ERISA attorney or advisor for individualized advice concerning your own 401(k) plan.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.