In Revenue Procedure 2016-37, the Internal Revenue Service (“IRS”) eliminated the long-standing program under which a plan sponsor could request a determination that its individually-designed plan satisfies the tax-qualification requirements of Internal Revenue Code Section 401(a), except for initial qualifications and qualifications upon plan termination. Plan sponsors and employee benefit practitioners reacted negatively because representations that a plan is tax-qualified are required in a number of contexts, including responses to plan auditors, loans to plan sponsors, and representations in merger and acquisition transactions.
In 2018, the IRS requested comments on the potential expansion of the scope of the determination letter program for individually-designed plans. On May 1, 2019, the IRS issued Revenue Procedure 2019-20 which describes two additional limited situations in which plan sponsors may request determination letters:
First, sponsors of individually-designed statutory hybrid plans, such as cash balance plans and pension equity plans, may submit requests for determination letters during the 12-month period beginning September 1, 2019 and ending August 31, 2020. Because the IRS’s scope of review during a statutory hybrid plan’s most recent remedial amendment cycle did not include provisions related to the final hybrid plan regulations, sponsors of statutory hybrid plans now have the opportunity to request that the IRS review their plans during this one year submission window to verify their plans comply with the hybrid plan rules and to correct plan document failures related to these rules without having to pay a sanction.
Second, sponsors of individually-designed “merged plans” may, on an ongoing basis, submit requests for determination letters. A merged plan is a single plan resulting from a merger or consolidation that combines two or more plans maintained by entities that were not part of the same controlled group or affiliated service group into a single individually-designed plan, and that occurs in connection with a corporate merger, acquisition or other similar business transaction among unrelated entities that each maintained its own plan or plans prior to the plan merger. Two conditions must be satisfied to be eligible to request a determination letter: (1) the date of the plan merger must occur no later than the last day of the first plan year that includes the date of a corporate merger, and (2) the determination letter for the merged plan must be submitted no later than the last day of the first plan year of the merged plan that begins after the date of the plan merger.
The IRS will continue to consider comments regarding other situations in which the submission of a request for a determination letter would be appropriate, and it is certainly possible the IRS will expand the situations in which it will accept requests for determination letters. However, while 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.
To that end, we at The Wagner Law Group developed our own Private Determination Letter Program (“PDLP”), which provides a comprehensive review by our experienced attorneys of the current plan document and any subsequent amendments based on the plan’s most recently issued favorable determination letter and subsequent IRS guidance. A PDLP opinion letter provides plan sponsors with assurance that a plan satisfies the tax-qualification requirements, which is important to third party administrators, investment providers, plan auditors and participants receiving distributions from the Plan, as well as in the context of mergers and acquisitions that may not qualify for the expanded determination letter program. Without an opinion that a plan is tax-qualified, a plan sponsor risks losing the benefits of a tax-qualified plan if an IRS auditor or Department of Labor investigator challenges the plan language. Moreover, in the face of increasing litigation by plan participants against plan sponsors, a comprehensive review of a plan’s governing documents is considered a best practice to protect the plan sponsor against lawsuits.
In addition, plan sponsors that have any question whether their current plan documents are legally compliant should seriously consider converting their plans onto one of our pre-approved documents, which provide a great deal of flexibility with many different options. We currently maintain two plan documents that have been pre-approved by the IRS: a 403(b) plan and defined benefit pension plan; the IRS is currently reviewing our defined contribution plan document for pre-approval. Plan sponsors can rely on our attorneys’ unparalleled experience and expertise to properly maintain the legal compliance of their plans and protect their tax-qualified status.