Summary

Companies that sponsor individually-designed cash balance plans or other “statutory hybrid plans” now have the opportunity to submit their plan to the Internal Revenue Service (the “IRS”) for an updated determination letter regarding their plan’s continuing tax-qualified status. The IRS will accept submissions for updated determination letters until August 31, 2020. Determination letters obtained under this temporary program will for the first time take into account all plan provisions related to the final hybrid plan regulations issued in 2014 and 2015.

Background

Prior to January 1, 2017, employers periodically submitted their individually-designed retirement plans to the IRS for updated determinations confirming that their plans continued to meet applicable requirements under the Internal Revenue Code (the “Code”). The updated letters, which took into account any changes made to the design of the plan, as well as amendments to reflect changes in applicable requirements under the Code, provided plan sponsors comfort that their retirement plans, in form, complied with the IRS requirements for a tax-qualified plan.

The IRS closed that determination letter program as of January 1, 2017. In its place, the IRS implemented a limited program under which plan sponsors generally could obtain favorable determination letters for their individually-designed plans only upon their establishment and termination.

Temporary Expansion of IRS Determination Letter Program

In 2014 and 2015, the IRS issued the hybrid plan regulations which made significant changes to the rules governing statutory hybrid plans. Statutory hybrid plans are defined benefit plans under which all or a portion of the accrued benefit is calculated as the balance of a hypothetical account maintained for the participant, an accumulated percentage of the participant’s final average compensation or a formula with a similar effect, such as cash balance plans and pension equity plans.

As a result of the change to the IRS’s determination letter program, employers who had amended their statutory hybrid plans to comply with the final hybrid plan regulations were not able to obtain determinations that their amended plans continued to meet the IRS requirements for a tax-qualified plan.

However, earlier this year, the IRS announced a temporary expansion of its determination letter program under which sponsors of individually-designed statutory hybrid plans can submit their plans to the IRS from September 1, 2019 through August 31, 2020 and obtain updated determination letters for their plans. A favorable determination issued by the IRS under the temporary determination letter program will cover a statutory hybrid plan’s compliance, in form, with the final hybrid plan regulations. This will be the first time the IRS will review all plan provisions related to the final hybrid plan regulations.

What Employers Should Do Now

Sponsors of cash-balance or other statutory hybrid plans should consult with their legal advisors to confirm that their plans were timely amended to comply with the final hybrid plan regulations and determine whether to submit their plans under the temporary IRS favorable determination letter program, which will close on August 31, 2020.