Under the IRS’ Determination Letter Program, the sponsor of a workplace retirement plan may apply for a letter from the IRS confirming that the plan satisfies the qualification requirements under Section 401(a) of the Internal Revenue Code of 1986, as amended (the Code) and that the plan’s trust is exempt under Section 501(a) of the Code. Effective January 1, 2017, the IRS limited the Determination Letter Program for individually designed plans so that plan sponsors could apply for a determination letter only under the following circumstances: (1) initial plan qualification, (2) qualification upon plan termination and (3) other specified circumstances determined annually by the IRS.
Modifications to the Determination Letter Program
On May 1, 2019, the IRS issued Revenue Procedure 2019-20, which expands the Determination Letter Program with respect to individually designed (1) statutory hybrid plans and (2) merged plans. The revenue procedure provides that, in addition to the period of initial qualification and plan termination, the IRS will accept determination letter applications for those plans under the circumstances set forth below.
Statutory Hybrid Plans
The IRS will accept determination letter applications for statutory hybrid plans during the 12 month period beginning September 1, 2019. A statutory hybrid plan is a defined benefit plan, such as a cash balance plan, that expresses a participant’s benefit by reference to a hypothetical account balance. The review process will take into account the 2017 Required Amendments List, as well as all required amendments lists and cumulative lists issued prior to 2016.
The IRS will accept determination letter applications for plans created by the merger of two or more unrelated plans on an ongoing basis beginning September 1, 2019. The merged plan must have been created as a result of a corporate transaction involving two or more unrelated entities. To apply, the plan merger must take place no later than the end of the plan year following the plan year of the corporate transaction, and the application must be filed no later than the end of the following plan year. Thus, for example, if a corporate transaction occurs in 2019, calendar year plans must merge by December 31, 2020, and the determination letter application for the merged plan must be submitted to the IRS by December 31, 2021. The application review by the IRS will take into account all required amendments lists and cumulative lists issued through the second calendar year immediately preceding the application (i.e., 2019 for an application submitted in 2021).
There is no sunset provision for the opportunity to file with respect to merged plans, as there is in the case of statutory hybrid plans. However, there is also no exception or grandfathering with respect to plans that previously merged as a result of corporate transactions that occurred outside the timing specified above (e.g., plans that merged in connection with a corporate transaction that occurred more than two years ago).
Other Issues Addressed by the Revenue Procedure
Revenue Procedure 2019-20 also extends the remedial amendment period for determination letter applicants submitted during one of the submission periods described above and provides relief from certain sanctions that would have applied to plan document failures identified in the review process.
Considerations for Plan Sponsors
Plan sponsors that maintain a statutory hybrid plan should consider whether to file a determination letter request within the permitted 12-month period beginning September 1, 2019, and ending August 31, 2020.
Plan sponsors of merged plans should consider whether to file a determination letter request within the permitted time period after the corporate transaction. In addition, plan sponsors contemplating merging plans in connection with a corporate transaction may want to consider the timing of the plan merger to take advantage of the ability to file a request for a determination letter for the merged plan.