The IRS Reopens the Determination Letter Program for Merged Plans and Cash Balance Plans
On May 1, 2019, the IRS issued Revenue Procedure 2019-20, which reopens the determination letter program in a limited manner for individually designed plans that are merged plans or statutory hybrid plans, such as cash balance plans. The new IRS guidance provides that sponsors of merged plans may request determination letters going forward, while sponsors of statutory hybrid plans may request determination letters only during a limited window of time. The effective date of the new guidance is September 1, 2019.
As background information, the IRS closed the determination letter program for individually designed plans in 2016, with the final five-year cycle ending on January 31, 2017. From that point, sponsors of individually designed plans generally could request determination letters only upon the initial adoption or termination of a plan. The 2016 change to the determination letter program increased uncertainty and risk associated with the sponsorship of individually designed plans, causing many plan sponsors to move their individually designed plans to preapproved plan documents.
Beginning September 1, 2019, and continuing on an ongoing basis, merged plans that satisfy the requirements of Rev. Proc. 2019-20 may apply for a determination letter. When applicable, sponsors of individually designed plans that are the subject of a merger, should consider a determination letter application during the post-closing benefits integration process. To qualify for the expanded determination letter program, a business transaction, such as a merger or acquisition, must occur involving two or more entities that are not in the same controlled group or affiliated service group. Following the business transaction, two or more plans must be merged into a single individually designed plan.
Rev. Proc. 2019-20 defines a merged plan as a plan that results from the merger or consolidation of two or more plans into a single individually designed plan under a plan merger that occurs no later than the last day of the first plan year that begins after the plan year that includes the date of a business transaction. Thus, the plan merger must occur during the Code Section 410(b)(6)(C) transition period for mergers and acquisitions. Plan Sponsors must submit the determination letter application to the IRS no earlier than the date of the plan merger and no later than the last day of the first plan year that begins after the date of the plan merger.
Under Rev. Proc. 2019-20, statutory hybrid plans may apply for a determination letter during the twelve-month period beginning on September 1, 2019, and ending on August 31, 2020. A statutory hybrid plan is a defined benefit plan that contains a lump sum based formula or a formula with an effect similar to a lump sum based formula. A lump sum based formula is a formula used to determine all or a part of a participant’s accumulated benefit where the formula is expressed as either the current balance of a hypothetical account maintained for the participant or the current value of the accumulated percentage of a participant’s final average compensation. Examples of statutory hybrid plans include cash balance plans and pension equity plans. Sponsors of hybrid plans must act quickly to capitalize on the limited window to obtain a determination letter.
Although the expansion of the determination letter program under Rev. Proc. 2019-20 is welcome news, it is still relatively limited in scope. Plan sponsors and practitioners would welcome additional, periodic opportunities to obtain determination letters on other individually designed plans.