Under Revenue Procedure 2019-20, sponsors of individually designed statutory hybrid plans, including cash balance plans, have a short window of opportunity to file determination letter applications with the IRS by August 31, 2020. In addition, sponsors of merged plans have an ongoing opportunity to file determination letter applications within certain periods of time after the corporate transaction and plan merger. Plan sponsors should strongly consider taking advantage of these opportunities, since other opportunities for filing determination letter applications are limited. This post discusses key highlights of the expansion of the determination letter application program under this Revenue Procedure.

Plans eligible to apply for a determination letter under Revenue Procedure 2019-20

As background, the IRS closed the determination letter application program to ongoing individually designed plans, effective in 2017. Generally, sponsors of individually designed plans may now submit determination letter applications only for initial plan qualification and upon plan termination. Revenue Procedure 2019-20 reopens the determination letter program to ongoing individually designed statutory hybrid plans and merged plans.

1. Statutory Hybrid Plans

Statutory hybrid plans generally are defined benefit plans that express a participant’s benefit as the current balance of a hypothetical account or as the current value of an accumulated percentage of the participant’s final average compensation. Cash balance and pension equity plans (PEPs) are typical examples of statutory hybrid plans.

2. Merged Plans

The Revenue Procedure defines merged plans as plans of unrelated entities that are merged into a single individually designed plan in connection with a corporate merger, acquisition, or other similar business transaction.

Timing Requirements

1. Statutory Hybrid Plans

Plan sponsors can file determination letter applications for individually designed statutory hybrid plans only from September 1, 2019 until August 31, 2020.

2. Merged Plans

Plan sponsors of merged plans can file determination letter applications on an ongoing basis. To satisfy the timing requirements, the effective date of the plan merger must be during the first plan year after the plan year during which the corporate transaction became effective. In addition, the determination letter application must be filed during the first plan year after the plan year of the merged plan in which the plan merger became effective.

Effect of the Determination Letter

1. Extension of the remedial amendment period, but no additional anti-cutback relief

For plans that apply for a determination letter, the remedial amendment period is extended until 91 days after the determination letter is issued. This extension means that a plan sponsor receiving a determination letter that requires adoption of an amendment will have the opportunity to amend the plan following receipt of the determination letter.

Treasury regulations previously provided anti-cutback relief by permitting statutory hybrid plans with noncompliant interest crediting rates to be amended with respect to amounts already accrued if the plan amendment were adopted before the deadline, which was generally the first day of the plan year beginning on or after January 1, 2017. Revenue Procedure 2019-20 does not extend this previously expired deadline or provide any other relief from anti-cutback requirements for statutory hybrid plans with respect to the modification of a plan’s interest crediting rate.

2. Sanctions

By submitting a determination letter application under Revenue Procedure 2019-20, the sponsor of a statutory hybrid plan or merged plan may be able to take advantage of certain sanction exemptions and a special sanction structure:

  • Sanction Exemptions. The Revenue Procedure exempts the sponsor of a statutory hybrid plan that applies for a determination letter from sanctions for plan document failures related to the final hybrid plan regulations. The Treasury Department and the IRS are granting this relief because plan sponsors did not have a chance to have the IRS review compliance with these regulations in the most recent remedial amendment cycle. For a sponsor of a merged plan that applies for a determination letter, no sanction applies for plan document failures with respect to plan provisions effectuating the plan merger.
  • Special Sanction Structure. For any other plan document failures the IRS identifies in its review of a determination letter application for either a statutory hybrid plan or a merged plan, a special sanction structure is available. The special sanction structure applies if the plan document was amended (or not amended) reasonably and in good faith, with the intent of maintaining the qualified status of the plan. The amount of the special sanction is equal to the Employee Plans Voluntary Compliance Resolution System (EPCRS) Voluntary Correction Program (VCP) user fee that would have applied if the plan sponsor had identified the failure and submitted a VCP application. If the plan sponsor does not meet the requirements for the special sanction, a sanction of 150% to 250% of the VCP user fee will apply.

Next Steps for Plan Sponsors

Sponsors of cash balance, PEP, and other statutory hybrid plans, as well as sponsors of merged plans, should consider taking advantage of the extended remedial amendment period and special sanction structures available under Revenue Procedure 2019-20. Plan sponsors of statutory hybrid plans should also begin planning to submit a determination letter application before the August 31 deadline. Sponsors of all types of individually designed plans should be aware that the Treasury Department and the IRS continue to consider comments regarding additional situations for which the IRS should accept determination letter applications. All plan sponsors should keep a lookout for more news to come on the IRS’s determination letter program.