In Revenue Procedure 2019-20, the Internal Revenue Service (IRS) provides for a limited expansion of the determination letter program for certain limited categories of individually designed retirement plans – certain “statutory hybrid plans” and “merged plans” as described in more detail below.
As background, the IRS in 2016 formally limited the availability of the determination letter program for individually designed retirement plans to the plan’s initial qualification and then upon its termination. The IRS’s decision was a blow to sponsors of individually designed plans that had come to rely on the determination letter program for purposes of confirming periodically that a plan’s written form satisfied the applicable tax-qualification requirements of the Internal Revenue Code. The decision was particularly difficult for sponsors of older and larger defined benefit pension plans (many of which included complicated benefit formulae and/or legacy provisions from previously merged plans); such plans are ill-suited for being maintained on a third-party provider’s prototype or volume submitter document.
Although the IRS’s decision greatly narrowed the scope of the determination letter program for individually designed plans, the IRS indicated in 2016 that it would continue to consider whether to accept determination letter applications in other instances. Subsequently, in 2018, the IRS formally requested comments from interested parties regarding the scope of the determination letter program. Based on the numerous comments received, the IRS has decided to expand the program to accept determination letter applications in certain additional circumstances. Specifically, the IRS has announced that it will accept determination letter applications for:
- Individually designed “statutory hybrid plans” (such as cash-balance and pension equity plans) that are submitted during the 12-month period beginning September 1, 2019, and ending August 31, 2020. In establishing this exception, the IRS is offering sponsors of statutory hybrid plans a limited opportunity to submit their plans to the IRS to ensure that any plan amendments stemming from required regulatory changes that impact statutory hybrid plans satisfy the applicable requirements. Notably, any defective or missing amendments related to the final hybrid plan regulations under Sections 1.411(a)(13)-1 and 1.411(b)(5)-1 that are identified during the IRS’s review will be exempt from any sanction, subject to the good faith and timing considerations described below. This is a significant concession since defective and missing amendments found by the IRS in the prior (pre-2016) determination letter program potentially were subject to a costly “Audit CAP sanction.” In addition, the opportunity applies to any “statutory hybrid plan” as described in Section 1.411(a)(13)-1(d)(5). That regulation defines a “statutory hybrid plan” as one that “contains” a statutory hybrid benefit formula. Thus, the opportunity to file appears to extend to any plan that merely “contains” such a formula, even if it also (or mostly) contains a “traditional” (for example, final average pay) formula. The IRS will review the entire plan, taking into account all “Required Amendments Lists” and “Cumulative Lists” issued prior to 2018. This may effectively allow a broad range of plans that contain a statutory hybrid formula to obtain an updated determination letter.
- Beginning September 1, 2019, individually designed “merged plans,” which result from the merger or consolidation of two or more plans sponsored by unrelated entities into a single individually designed plan. Any application for a determination letter must be submitted within a specific period after the plan merger occurs, but this opportunity to file is ongoing (that is, there is no specific date-limited submission window as there is with statutory hybrid plans). In establishing this exception, the IRS is addressing concerns that plan mergers often result in the creation of complicated individually designed plans that cannot be maintained on a prototype or volume submitter platform.
For plans submitted for a determination letter pursuant to these exceptions, the IRS also extended the remedial amendment period (the time period for adopting amendments to comply with certain tax-qualification requirements) to coincide with the applicable submission period. In addition, the IRS established favorable rules for imposing fines or sanctions for certain plan document errors or defects identified by the IRS during the determination letter review. For example, in addition to the waiver of sanction described above for statutory hybrid plans, the IRS noted that a significantly reduced rate of sanctions would be imposed for defective and missing required amendments discovered by the IRS after their applicable remedial amendment period so long as the amendment was adopted timely and in good faith with the intent of maintaining the plan’s qualified status (in the case of defective amendments), or was not adopted because the sponsor reasonably concluded no amendment was needed (in the case of missing amendments).
While the IRS’s limited expansion of the determination letter program may not go as far as some had hoped, it offers a welcome opportunity to some plan sponsors to submit their plans for an updated determination letter. Plan sponsors interested in considering such a submission should contact the authors or the Morgan Lewis benefits lawyer with whom they regularly work.