The Internal Revenue Service (IRS) starting September 1 will accept determination letter applications for a few more categories of individually designed plans, it announced in Revenue Procedure (Rev. Proc.) 2019-20, released May 1.
Once the change is effective, determination letter requests can be made for “merged plans,” which have had other plans incorporated into them as a result of business transactions, as well as some types of defined benefit (DB) hybrid plans—namely, cash balance or pension equity plans.
The new IRS procedure also addresses penalties for plan document failures found as part of the expanded determination letter review program. But attorneys at several employee benefits law firms had questions about the coming adjustments.
As reported, the procedures for seeking IRS determination letters were adjusted in January 2017 after the IRS eliminated the 5-year remedial amendment cycle in a bid to streamline administration. An individually designed plan now could request a determination letter, the IRS indicated, only in the following three situations:
- An initial application;
- Plan termination; or
- Some special circumstances the IRS said it would define later.
Changes to the staggered cycle system for individually designed plans were described in IRS Rev. Proc. 2016-37 issued in late June 2016. Many in the retirement plan community have seen the changes as encouraging standardized and simpler preapproved plans.
In the changes to come this September, determination letter applications for merged plans will be accepted on an ongoing basis, provided that:
- the plan merger was completed by the end of the first full plan year following the business transaction; and
- the application is submitted by the end of the first full plan year after the plan merger.
In the case of DB hybrid plans, applications must be filed between September 1, 2019, and August 31, 2020.
Result of Practitioner Comments
In 2018, the IRS sought comments about the need for expanding the revised determination letter program, and how. In response to what it heard, the IRS has now expanded the program to cover the two areas mentioned. Key aspects of the new revenue procedure, including the deadlines and eligibility rules, are summarized here.
On September 1, the IRS will accept determination letter applications from merged plans, which are defined as a single individually designed plan resulting from the consolidation of two or more plans maintained by unrelated entities due to a corporate merger, acquisition, or other similar transaction between unrelated entities.
At first glance, the merged plan review procedure appears relatively straightforward, said law firm Proskauer LLC in a May 3 client bulletin. “However, the guidance gives rise to a number of important issues,” it said, such as:
- Whether sponsors are required to submit merged plans for review;
- Dealing with merging pre-approved plans into individually designed plans;
- Handing plan document failures from acquired plans;
- Whether pre-2017 plan merger transactions are eligible for review; and
- Compliance when a company undergoes multiple plan mergers in a short time.
Hybrid DB Plans
Separately, the IRS reserves the right to open limited review periods to ensure required plan amendments are adopted on time, but there already have been some made for the DB hybrid benefits plans that were not covered by previous IRS determinations. With the new guidance, the IRS is opening a limited review period to examine these changes.
“Although it is not entirely clear, it would appear that the one-year review period would be open to any defined benefit plan that has a hybrid benefit formula, even if the plan’s hybrid formula applies only to a subset of the plan’s participants,” the Proskauer bulletin said.
Penalties for Document Failures
In addition, the new Rev. Proc. outlined special sanctions for plan document failures found during the expanded determination letter review program. The IRS will not impose sanctions for any document failure related to a plan provision required to meet the statutory hybrid plan regulations, or to a provision intended to activate a plan merger (provided application timing requirements are met).
For plan document failures unrelated to these areas, the IRS will impose a reduced sanction, as if the plan sponsor flagged the error through the IRS’s Voluntary Correction Program (VCP), the Rev. Proc. said.
“[W]hile this new guidance is an encouraging sign, only a limited number of plans will be able to avail themselves of this regulatory expansion, and in the interim there will be circumstances in which a plan will require an opinion of counsel as to a plan’s continued tax-qualified status,” said another employee benefits-focused law firm, the Wagner Law Group, in a May 2 client bulletin.