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Comp and Benefits Brief

May 10, 2019

IRS Opens Determination Letter Program to Cash Balance Plans and Merged Plans

In an expansion of the IRS’ qualified retirement plan determination letter program, employers will now be able to seek an IRS favorable determination letter for individually-designed merged plans and, for a limited time, individually-designed statutory hybrid plans (e.g., cash balance plans). In Revenue Procedure 2019-20 (May 1, 2019) the IRS announced that it is expanding its determination letter program which has been limited in recent years to initial qualification of individually designed plans and qualification upon plan termination. During the one-year period beginning September 1, 2019 and ending August 31, 2020, submission of a request for a favorable determination letter can be made for defined benefit plans that include a statutory hybrid benefit formula (e.g., cash balance plans). Starting September 1, 2019, certain “merged plans” may also be submitted.

The submission window for statutory hybrid formula plans includes plans with a lump-sum-based formula or a formula with a similar effect, such as a cash balance plan or a pension equity plan.  Plans that contain both a statutory hybrid formula along with a “traditional” formula (e.g., using final average pay and credited years of service to determine the accrued benefit) will also be able to make a submission for a new determination letter, even if the hybrid formula was established at the time of any prior determination letter issued for the plan. The carrot offered by the IRS under this limited program is enticing. The IRS will not impose any sanctions on a plan for a document failure relating to implementation of the final hybrid plan regulations that are discovered during the determination letter application review process. Any other document failures discovered during the review process will get the benefit of a limited penalty equal to the maximum user fee ($3,500) that applies to a large plan sponsor self-reporting a document failure under the EPCRS’ VCP program. Any “qualifying amendments” requested by the IRS will still need to be adopted within 90 days of the issuance of a new determination letter.

Employers who have merged separate plans (e.g., merging the target corporation’s 401(k) plan into the acquiring company’s 401(k) plan) following a corporate merger or acquisition or similar transaction may also want to take advantage of the expanded program.   For a merged plan to be eligible to make a submission to the IRS, (i) the application must be submitted by no later than the last day of the first plan year that begins after the effective date of the plan merger, and (ii) the plan merger must have been completed within the Code Section 410(b)(6)(c) transition period (generally, the end of the calendar year following the calendar year of the closing of the transaction).  Qualified plan mergers that took place in 2018 are still eligible for submission prior to December 31, 2019 (assuming a calendar year plan). No sanctions will be imposed related to the merger amendment.  For other document failures, the same rules apply as for hybrid plans.

While employers who sponsor a retirement plan generally are not required to apply for a determination letter from the IRS,  plan sponsors traditionally sought such letters as “proof” that a plan does in fact have tax-qualified status. This assurance can be valuable in the event of plan audit, change in providers, sale of the business, plan mergers, and other events where the plan sponsor may need to represent that its plan is tax-qualified on an ongoing basis.