For many years, plan sponsors could regularly get a determination letter from the IRS to ensure that their individually-designed qualified retirement plan met all of the requirements for favorable tax treatment. However, in 2017 the IRS ended that practice. Since that time, plan sponsors have had no mechanism by which to confirm that their plans continued to satisfy all of the qualification requirements. Recent publications from the IRS and its Advisory Committee, however, suggest that the program might come back in some form.

Issues for Employers without the Determination Letter Program

Without the determination letter program, employers are required to be more vigilant that their individually-designed plans are regularly reviewed by benefits counsel. For decades, determination letters served as a “backstop” for employers to ensure compliance with the Internal Revenue Code, which helps guarantee the current deductibility of employer contributions and tax-free growth of plan investments held in trust.

Qualification is also important to third parties. Auditors and investment managers would typically examine favorable determination letters. Companies involved in mergers and acquisitions would typically present a favorable determination letter to demonstrate qualification requirement compliance. Since the program has not been in place, it has been more difficult to obtain assurance that a plan meets the qualification requirements.

Signs of Change

Early in 2018, the IRS published Notice 2018-24, which requested comments on possibly re-opening the program for individually-designed plans. The IRS queried whether plans should be eligible to submit requests as a result of “significant law changes, new approaches to plan design, and the inability of certain types of plans to convert to pre-approved plan documents.”

On June 7, 2018, the IRS’ Advisory Committee on Tax Exempt and Government entities actually published a report recommending that the determination letter program for individually designed plans be reopened. The Advisory Committee made some specific recommendations for a new program, including suggestions that the IRS:

  • Institute a new procedure to allow limited scope determination letter review where a plan sponsor could ask the IRS to review specified changes since the issuance of a prior favorable determination letter.
  • Allow submission of determination letter application for plan amendments required by major business transactions, such as mergers and acquisitions, divestitures, joint ventures and bankruptcy proceedings, as well as plan mergers and spin-offs.
  • Allow submission of determination letter applications for plan amendments adopted to comply with the requirements published annually by the IRS as a required amendment list.
  • Allow submission of determination letters in the event of a major law change.
  • Allow submission of a determination letter application upon the expiration of a stated period of time after the last favorable determination letter (e.g., 10 years or 15 years).

Conclusion

While there is no conclusive evidence that the determination letter program for individually designed plans is going to imminently return, these developments are favorable for employers. Plan sponsors should carefully watch for additional guidance from the IRS. In the meantime, employers should ensure that their individually designed-plans are regularly reviewed by counsel to ensure documentary compliance.