When setting up a benefit plan such as an individually designed 401k retirement plan, many businesses prefer to get the reassurance of an IRS determination letter to ensure their plan is compliant with all applicable laws and regulations.
In a 2016 Revenue Procedure update, the IRS indicated that they were eliminating the program that allowed plan sponsors to request a determination letter for an individually designed plan.
This created significant negative push-back from plan sponsors, who found determination letters useful in a wide variety of contexts beyond interactions with the IRS.
What is an IRS Determination Letter?
The determination letter indicates that the plan meets the legal and regulatory requirements of federal law and the Internal Revenue Code and is thus qualified for special tax treatment.
This means that participant contributions can be made on a pre-tax basis and aren’t reported until distributions are made.
However, since it can be complex to structure a compliant retirement plan, getting a determination letter from the IRS means that the IRS has reviewed the plan’s governing documents and confirmed that the plan is compliant with the law.
This is useful in the event of a future dispute over the plan’s tax-exempt status, as the IRS has already reviewed plan documents; however, a determination letter isn’t required for a 401k plan.
Often, employers seek letters to provide assurance to employees and themselves that the plan is legally compliant with applicable IRS requirements.
There are other options for gaining such assurance, including adopting a pre-approved template plan approved by the IRS. However, this scenario does not take into consideration plan amendments made to a plan and the actions or processes involved in managing the plan after receiving a determination letter.
Updates and Expansions of Determination Letter Program
The Revenue Procedure issued in May includes two new, limited situations in which plan sponsors can request IRS determination letters. It is possible that the IRS may expand the determination letter program further in the future.
- Individually Designed Statutory Hybrid Plans: Sponsors of plans such as cash balance plans have a limited window of 12 months during which they can submit determination letter requests. This window will run from September 1, 2019, to August 2020. IRS verification will confirm that submitted plans comply with hybrid plan rules and will allow companies to correct any document failures during this window without being subject to sanctions from the IRS.
- Individually Designed Merged Plans: Sponsors of merged plans may submit requests for determination letters. This expansion is not limited to a specific window of time, but rather it allows for requests on an ongoing basis after a merger or consolidation of plans belonging to entities that were previously not related. These plan mergers happen as part of corporate mergers or acquisitions. To request a determination letter, the request must happen by the last day of the first plan year after the date of the corporate merger.
Anne Tyler Hall is the owner and principal attorney of Hall Benefits Law. HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.