The Internal Revenue Service is opening new determination letter programs for hybrid cash-balance defined benefit plans and 401(k) plans that merged as a result of company acquisitions.
Hybrid defined benefit plans that use a cash balance formula or a pension equity formula to determine retirement benefits will have a one-year window, beginning on September 1, 2019, to apply for a determination letter that provides IRS validation of a plan’s documentation.
Historically, determination letters have been regarded as valuable documents by retirement plan sponsors, explained Damian Myers, an attorney and senior counsel in Proskauer’s Employee Benefits and Executive Compensation Group.
“If determination letter programs were open to everyone, the vast majority of plans would file for them,” he said. “They’re often required by plan auditors, and they’re good to have to assure a plan is in compliance.” They also come in handy if a plan is subjected to an IRS audit, said Myers.
But not all retirement plans have access to updating determination letters. In 2017, the IRS ended a program that allowed plans to re-file for determination letters every five years. Treasury limited the program to new plans and terminating plans.
It’s been speculated that Treasury did not have the personnel bandwidth to handle the volume of requested determination letters.
But Myers also said a lack of substantial legal and regulatory changes made it unnecessary for existing plans that have been issued a determination letter to re-file for new letters.
Cash balance plans, however, have been subject to substantial regulatory changes, specifically with respect to regulations that limit the maximum interest crediting rate hybrid plans use to determine retirement benefits.
“The IRS wants to make sure those plans have been amended for the regulations,” said Myers.
For merged plans that result from company acquisitions, the IRS will be accepting determination letter applications on an ongoing basis.
Sponsors will have one year to merge plans after an acquisition, and one year after the retirement plans have been combined to file for a determination letter.
The regularity of merger and acquisition activity, and resulting merging of retirement plans, makes the IRS’s new program necessary, said Myers.
“Some companies make upwards of five or six acquisitions a year. In a case like that the program becomes a little more burdensome,” he said. Sponsors often seek legal counsel to review plan documents to assure they are compliant before filing for a determination letter.
Attorneys won’t issue an opinion on a plan’s qualified status—that’s the IRS’s job, explained Myers. But outside counsel can flag potential issues before a filing is made, which is to a sponsor’s clear benefit.
While the dates are set for the new letter programs, the IRS said it is still accepting comments for potential clarification, which would be welcomed, according to Myers.
On hybrid plans, it’s not clear if the program is open to retirement plans that have a hybrid plan as one component of a larger plan with other defined contribution aspects.
For merged plans, it’s not clear if they are required to submit a new determination letter request.
“The technical answer to that is ‘no’,” said Myers. “But the implications of not getting an updated determination letter could be relatively severe. Previous determination letters won’t help a merged plan.”
The IRS is also outlining more forgiving sanctions for documentation failures found during the agency’s review of determination letter requests.
Document failures not related to actual operational failures will be treated as if the sponsors reported the errors through the IRS’s Voluntary Correction Program.
They are saying, ‘look, if you messed up, we’re not going to penalize you,” said Myers of the new letter programs for hybrid and merged plans. “They are trying to incentivize employers to make sure their plans are in compliance.”