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News from, February 22, 2012
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IRS Changes Determination Letter Program

Reprinted with permission from 401(k) Advisor

The IRS determination letter program gives a plan sponsor the opportunity to have the IRS review the plan document and determine whether its terms satisfy the Code’s applicable qualification rules. These applications have been available to both individually drafted and pre-approved documents (e.g., master/prototype and volume submitter documents). For years, the IRS has had difficulty with processing several hundred thousand of these determination requests every five years. That is all about to change under guidance in Announcement 2011-82.

Budget concerns and the cost reductions have led to changes in the determination letter process that will lighten the IRS’ workload for the next round of plan restatements, the restatement cycle applicable to pre-approved defined contribution documents (master/prototype and volume submitter documents). Announcement 2011-82 eliminates certain features of the determination letter that the IRS claims to be of "limited utility” to plan sponsors. This guidance announcing the new restrictions on who may file for a determination letter will be included in Rev. Proc. 2012-6, to be published on January 3, 2012. This is the annual update describing all updates and modifications to the determination letter process.

The guidance’s most significant change affects sponsors that use pre-approved volume submitter (VS) documents. Effective for applications filed on or after May 1, 2012, the IRS will only accept an application regarding a VS plan using Form 5307 where the plan sponsor has modified the terms of the pre-approved VS specimen document, but not so much as to require submission on a Form 5300. A determination letter request will be available using Form 5300 only if those modifications are so extensive that the plan would be treated as an individually designed plan. The IRS will not accept an application from a VS plan sponsor that has made no "changes to the terms of the pre-approved VS specimen plan.” A number of employers wanting to assure bankruptcy protection for participants for the retirement plan assets asked for a determination letter even if they only selected the pre-approved options in the specimen document. That is no longer an option. In addition, the IRS will no longer accept an application from any adopter of a master/prototype (M&P) plan with minor exceptions. These new rules are effective as of May 1, 2012.

Effective May 1, 2012, an employer will obtain a determination letter as an adopter of a pre-approved plan by filing Form 5300 under any of the following circumstances: (1) the application also requests a determination regarding affiliated service group or leased employee status or partial plan termination; (2) the plan is a multiple employer plan; (3) a determination letter is required by the Service (for example, in connection with a request for a funding waiver); (4) the employer has added language to an M&P plan to satisfy the requirements of sections 415 and 416 because of the required aggregation of plans; or (5) the plan is a pension plan with a normal retirement age earlier than age 62. In each of these circumstances, the plan need not be restated for changes in qualification requirements included in the Cumulative List. Rather, the plan will instead be reviewed on the basis of the Cumulative List that was considered in issuing the opinion or advisory letter for the plan. In any of these cases, the employer must indicate in the cover letter the reason for using Form 5300 and must include with the application a copy of the opinion or advisory letter issued with respect to the M&P or VS plan.

Finally, the IRS will no longer issue a determination letter based on a demonstration using Schedule Q of compliance with a coverage or nondiscrimination requirement. The Announcement notes that the issuance of such a letter does not obviate the need for subsequent testing of the plan and is limited to the facts presented in the demonstration. This change is effective for applications filed on or after February 1, 2012 and on May 1, 2012 in the case of terminating plans and plans under a 6-year remedial amendment cycle.

The changes discussed in IRS Announcement 2011-82 will eliminate the majority of plan sponsors from obtaining an individual determination letter unless they use a VS plan and make some minor changes, or make major changes and submit as an individually designed plan. While most employers go though the process to obtain an individual determination letter from the IRS to obtain comfort that their plan document complies with all requirements, there are other important reasons for such a filing. Among the other reasons for requesting a determination letter include:

  • An employer that has obtained a determination letter may be required to file fewer documents at the time future amendments are required. The IRS reviewer typically only requests documentation dating back to the prior determination letter request.
  • An individual determination letter provides a higher level of bankruptcy protection from creditors for individual participants’ retirement plan accounts. A plan that has not received an individual determination letter must demonstrate that it is in compliance to assure creditor protection for participant accounts. It is not clear that bankruptcy courts would treat a preapproved plan that has a favorable opinion on its form (i.e., it is a pre-approved master/prototype or volume submitter plan) as a determination letter for this purpose.
  • Certain financial institutions require that a plan have an individual determination letter to open an account.
  • A purchaser of a business that elects to continue a plan of the seller may insist on a current determination letter, even when the plan is on a pre-approved document.
  • During plan document audits or investigations, IRS and Labor Department examiners will frequently only request amendments and documents after the plan's last determination letter. The existence of a recent determination letter will reduce the scope of that investigation.
Reprinted with permission from 401(k) Advisor

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