IRS Announces Limited Expansion of the Determination Letter Program for Individually Designed Plans
Since the end of the IRS’s cyclical determination letter program for individually designed retirement plans in 2017, plan sponsors have been able to request favorable determination letters for individually designed plans only with respect to initial plan qualification, qualification upon a plan termination, and “other circumstances identified by the IRS.” Many plan sponsors have been hopeful that the IRS would enumerate the “other circumstances” that would justify the reopening of the determination letter program, a hope that grew when the IRS released Notice 2018-24 requesting comments on the potential expansion of the scope of the determination letter program for individually designed plans.
Earlier this month, the IRS issued Revenue Procedure 2019-20 (the “Rev. Proc.”), which opens up the determination letter program to allow plan sponsors to request determination letters for two types of individually designed plans on a limited basis: (1) individually designed statutory hybrid plans, and (2) individually designed merged plans. The window to request a determination letter for a statutory hybrid plan opens on September 1, 2019 and continues for twelve months until August 31, 2020. The option to request a determination letter for a merged plan is available beginning September 1, 2019 and does not have a specified end date; however, determination letter requests for merged plans must be submitted within a certain period of time after the plan merger occurs, as discussed in more detail below. The Rev. Proc. does not affect a plan sponsor’s option to request a determination letter upon initial plan qualification or plan termination.
Hybrid Plans – Limited Window to Request a Favorable Determination Letter
The Rev. Proc. establishes a window for plan sponsors to submit determination letter requests on behalf of statutory hybrid plans, which are defined benefit plans that calculate benefits using either a lump sum-based benefit formula or a benefit formula that has an effect similar to a lump sum-based formula.
The IRS will accept determination letter applications for statutory hybrid plans during the 12-month period beginning September 1, 2019 and ending on August 31, 2020. The IRS’s review for statutory hybrid plan determination letter applications will be based on the 2017 Required Amendments list (IRS Notice 2017-72), which included final regulations governing statutory hybrid plans (published in 2014 and 2015). All other prior Required Amendments Lists and Cumulative Lists issued prior to 2016 also will be taken into account by IRS reviewing agents.
Merged Plans – Ongoing Option to Request a Favorable Determination Letter
The Rev. Proc. also creates an option for plan sponsors that merge or consolidate one or more retirement plans to request a determination letter with respect to the surviving, individually designed, merged plan. This option is available if the following requirements are met:
- The merged plan is an individually designed plan.
- The merged plan results from the combination of two or more plans that were maintained by entities that were unrelated (i.e., not members of the same controlled group, the same affiliated service group, or under common control) prior to a corporate merger, acquisition, or similar business transaction.
- The effective date of the plan merger (as evidenced by a board resolution or plan amendment) is not later than the last day of the first plan year after the plan year in which the corporate merger occurred (the effective date of the corporate transaction).
The deadline for submitting a determination letter application for a merged plan is the last day of the merged plan’s first plan year that begins after the effective date of the plan merger.
The IRS will accept determination letter applications for merged plans beginning September 1, 2019. The IRS’s review for merged plan determination letter applications will be based on the Required Amendments List that was issued during the second full calendar year preceding the year in which the application is submitted. All other prior Required Amendments Lists and Cumulative Lists issued prior to 2016 also will be taken into account by IRS reviewing agents.
Hospital A and Clinic B (two unrelated entities) enter into a merger agreement with a merger effective date of September 1, 2018. Hospital A maintains the Hospital 401(k) Plan, and Clinic B maintains the Clinic 401(k) Plan. The entities decide to merge the Clinic 401(k) Plan into the Hospital 401(k) Plan, and each entity approves the plan merger via board resolution, indicating that the plan merger will occur on December 1, 2019. The Hospital 401(k) Plan is an individually designed plan that uses a calendar year plan year.
The last day of the Hospital 401(k) Plan’s first plan year after the corporate merger is December 31, 2019. Because the plan merger occurs before this date, Hospital A may submit to the IRS a determination letter application on behalf of the merged Hospital 401(k) Plan. The application must be submitted by December 31, 2020. The IRS’s review of the merged Hospital 401(k) Plan’s compliance with qualification requirements will be based on the Required Amendments List for 2018 (IRS Notice 2018-91), as well as prior Required Amendments Lists and Cumulative Lists.
Reduced Sanctions for Certain Plan Document Failures Discovered During the Determination Letter Review Process
The Rev. Proc. also provides for reduced sanctions for plan document failures discovered during the IRS’s review of a statutory hybrid plan or a merged plan submitted pursuant to the determination letter programs established by the Rev. Proc.
Sanctions Waived if Plan Document Failures Are Limited to the Purpose for the Determination Letter Application:
Sanctions will be waived for plan document failures discovered by the IRS during the course of a determination letter review if the failures relate only to the plan provisions that are the basis for the plan sponsor’s determination letter application:
- For statutory hybrid plan submissions, the IRS will not impose sanctions for a plan document failure with respect to any plan provision required to satisfy the requirements of the final hybrid plan regulations under Treas. Reg. 1.411(a)(13)-1 and 1.411(b)(5)-1.
- For merged plan submissions, the IRS will not impose sanctions for a plan document failure with respect to a plan provision intended to effectuate the plan merger.
Sanctions Reduced for Plan Document Failures that are Unrelated to the Purpose for the Determination Letter Application, if Certain Requirements are Met:
Sanctions will be reduced for plan document failures that are unrelated to the final hybrid plan regulations or to plan provisions effectuating a plan merger (as applicable), if such failures are discovered by the IRS during the course of a determination letter review and either:
- A plan amendment created the plan document failure, but the amendment was adopted timely and in good faith, with the intent that the amendment would maintain the qualified status of the plan; or
- The plan document failure is due to a failure to adopt an amendment to reflect a change in the plan qualification requirements but the plan sponsor reasonably and in good faith determined that the amendment was not necessary because the change in the qualification requirements did not impact the plan’s terms.
In such a case, the amount of the sanction will be equal to the user fee that would have applied under the IRS’s Voluntary Correction Program (“VCP”) if the plan sponsor had identified the plan document failure and corrected the failure through VCP before the plan’s determination letter application was submitted to the IRS.
If the conditions for waived or reduced sanctions do not apply, the applicable sanctions for a plan document failure discovered during the IRS’s review of a determination letter application will be determined under Section 14.04 of IRS Revenue Procedure 2019-19.
Considerations for Plan Sponsors
- Sponsors of statutory hybrid plans should consult with their benefits counsel to further discuss the impact of the Rev. Proc. and the pros and cons of submitting a determination letter application for a statutory hybrid plan during the limited window.
- Entities that have recently completed a corporate transaction, or that are in the process of completing a corporate transaction, should review with their benefits counsel whether there will be an opportunity to request a determination letter on behalf of any merged plan.
- A plan sponsor that decides to submit a determination letter application for a statutory hybrid plan may want to consider submitting the application at the beginning of the 12-month window, as doing so may reduce the wait time for the IRS to complete its review.
- The Rev. Proc. states that the IRS is still considering comments received in response to Notice 2018-24, regarding ways to expand the determination letter program for individually designed plans. Plan sponsors should consult with their benefits counsel periodically for updates on whether the IRS has further expanded the scope of the determination letter program.