IRS Announces Changes to Determination Letter Options

By: Marc Purintun & Claire G. Pollock*

The Internal Revenue Service (“IRS”) recently issued guidance on two additional options for sponsors of qualified retirement plans to apply for and receive determination letters on the qualified status of their plans.  The IRS indicated that the new rules were in response to comments and requests from plan sponsors and employee benefit practitioners.

Expanded Determination Letter Program

Prior to 2017, the IRS maintained an ongoing cycle through which plan sponsors could request determination letters on individually designed retirement plans.  When the IRS issues a favorable determination letter, it confirms that the terms of a retirement plan comply with all statutory and regulatory requirements.  Retirement plan sponsors can rely on such determination letters as proof that the plan document is in compliance with applicable law.  By submitting a plan for a determination letter, the plan sponsor would be able to make retroactive remedial amendments to correct any deficiencies discovered by the IRS during the review process.

Effective in 2017, the IRS significantly scaled back the determination letter program.   Under the current program, the IRS only issues determination letters on the qualified status of new or terminating plans.

The IRS received numerous comments regarding the cutbacks to the program, and, in Revenue Procedure 2019-20, the IRS expands the determination program to permit plan sponsors to submit determination letter applications for certain merged plans and for “hybrid plans.”

Determination letters for merged plans

During a corporate merger, acquisition, or other similar business transaction, the two previously unrelated entities may decide to merge two or more plans.  Merging the terms of two plans, while protecting benefits as required by law, is complicated.  Beginning September 1, 2019, plan sponsors can request an IRS determination of the qualified status of the merged plan.  To be eligible, the plan merger must occur by the last day of the first plan year after the plan year that includes the corporate merger.  The application for a determination letter must generally be submitted before the end of the plan year following the date of the plan merger. 

For example:

• Corporate merger closes June 30, 2019
• The merged plan is a calendar year plan
• Plan merger must occur no later than December 31, 2020
• Determination letter application must be submitted no later than December 31, 2021

Determination letters for hybrid plans

Previously, sponsors of “hybrid plans,” such as cash balance plans or pension equity plans, were not able to request or receive determination letters based on certain hybrid plan regulations, such as the use of the market rate of return, before the IRS cut back on the determination letter program.  Now, the IRS is offering a one-year window from September 1, 2019, to August 31, 2020, during which plan sponsors can submit their hybrid plans to the IRS for a determination letter.

Determination letter process and sanctions

The expanded determination letter application procedures follow the same process as the process prior to 2017, with the same application forms, user fees, and participant notices.  Prior to applying for a determination letter, the merged plan or hybrid plan should be reviewed to determine that it conforms to the applicable IRS list of required amendments and plan qualification requirements.

Under the determination letter procedures, if certain plan document failures are discovered by the IRS during the determination letter review process, the plan sponsor would generally be required to pay a sanction that is calculated as if the plan had identified the error and submitted the plan to the IRS under the IRS Voluntary Correction Program.  However, in this most recent Revenue Procedure, the IRS announced that it will not impose sanctions if the document failure is determined to be related to the plan merger or the hybrid plan regulations.

In summary, the availability of the determination letter program for merged and hybrid plans is welcome relief for plan sponsors.  Merged and hybrid plans present complex challenges.  Plan sponsors may now receive assurance from the IRS that their merged and hybrid plan documents comply with tax qualification requirements.

For questions about these changes, please contact Marc Purintun or any member of the Williams Mullen Employee Benefits & Executive Compensation Practice.

*non-attorney professional