When the Internal Revenue Service (IRS) in January 2017 significantly scaled back its determination letter program, which allowed retirement plan sponsors to directly petition the IRS for an opinion on their plan’s tax-qualified status, it caused substantial industry consternation.
Under the restricted program created by Revenue Procedure 2016-37, a plan can now request a determination letter only if any of these apply: It has never received a letter before; the plan is terminating; or the IRS makes a special exception. IRS said it would make exceptions based on program capacity to work on additional applications, and on the need for rulings in certain areas. The agency, at the time, said it would measure need in a variety of ways, including annual input from the Employee Plans (EP) community.
Among other concerns voiced by retirement plan fiduciaries and employers is the fact that most large retirement plans do not use prototype plan documents—and that for other employers, prototypes would not fit in certain situations, such as for plan sponsors that have multiple plans or plans with specific provisions for certain groups following a merger or acquisition.
After hearing these concerns throughout 2017, the IRS earlier this year published Notice 2018-24, in which it requests comment “on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year, beyond provision of determination letters for initial qualification and qualification upon plan termination.”
Responding to this new call for commentary, Groom Law Group has put forward an analysis highlighting the fact that, to date, the Treasury and IRS have not identified any other circumstances beyond initial qualification and termination which allow a plan to seek a new determination letter.
“This is despite the fact that IRS said it would consider them each year,” the Groom attorneys write.
In its formal comment letters to the IRS, Groom recommends consideration of the following plans as appropriate applicants for updated determination letters: “Plans with a cash balance or similar benefit formula whose last determination letter was before the effective date of the final IRS hybrid plan regulations; plans that address income replacement and inflationary pressures through adoption of a variable annuity feature; and traditional pension plans that convert to a cash balance-type formula.”
Other suggested categories of plans that should be able to seek determination letters include plans that “undergo major changes that otherwise make certain compliance testing unnecessary,” such as safe harbor 401(k) plans. The attorneys also point to the situation wherein “plan changes are accompanying significant workforce adjustments, such as downsizings or corporate separations.”
Finally, the attorneys recommend IRS offer determination letters in the case that corrective plan amendments are submitted as part of an EPCRS submission, or in the case that a governmental plan has undergone “a significant change in the governing state or local law.”
The Groom attorneys say they are optimistic that IRS make take up some or even all of these suggestions, but it will take time. As they explain, in a June 7 report, the Advisory Committee on Tax-Exempt and Government Entities made nearly a dozen recommendations in this area, “including several also identified in the Groom letter.”
“Among other additions, the Advisory Committee recommended allowing submissions after a plan has gone a long time, such as 10 to 15 years, without any updated letter, as well as for multiemployer plans and ‘complicated’ ESOPs,” the attorneys conclude. “Needless to say, we don’t expect the IRS to adopt many of these recommendations all at once—or even over an extended period of time. IRS officials have repeatedly noted that its staff and budget resources are still severely limited. However, it is hoped that the IRS will respond as soon as it can to allow some filings for updated letters.”
The attorneys add that employers who want or need ongoing assurance that their plans remain tax-qualified can participate in Groom’s Document Compliance Service (DCS) program under which the firm provides a legal opinion based on the particular plan documents reviewed.
The full Groom letters to IRS are available for download here: