What does it mean to be able to “rely” on the pre-approved document’s IRS individual determination letter or on an opinion or advisory letter and why does it matter?
Qualified retirement plans are required to comply with Internal Revenue Code Section 401(a) and related Code sections both in terms of the plan document and plan operations. Because the rules for plan documents are extremely complex, the IRS offers two types of assurances that the plan document meets these requirements: (a) an individual determination letter (which is issued to an individual plan sponsor and is similar to a private letter ruling and can be issued where a plan sponsor has modified a “pre-approved” document) or (b) an advisory opinion which is issued to a provider of a pre-approved document (which can be either “standardized” or “non-standardized”).¹ This assurance is called “reliance.”
The benefits of “reliance” are that:
in general, the IRS may not challenge the plan’s language as deficient;
for plans that apply for their own determination letter within the specified deadline, there may be an extended “remedial amendment period” in which to adopt a retroactive amendment to cure plan language defects;
for certain issues, e.g., plans that obtain a determination letter on termination, additional issues may be covered;
the employer may be eligible to self-correct certain operational errors under the Employee Plans Compliance Resolution System
if the employer is a seller in an M&A or large financing transaction, they will be able to give an affirmative representation re reliance; and
the plan may be presumed to meet the requirements of a qualified plan if challenged by a creditor of a plan participant or the sponsoring employer.²
Note, reliance is not available if:
The plan document (or restatement) is not timely adopted.
The plan sponsor makes changes to a document or to a pre-approved document other than: (a) appropriately filling in blank, (b) certain permitted changes or (c) modifications that were reviewed and approved by the IRS.
In the case of a determination letter, there was a misstatement or omission of material facts in the application, the subsequent facts are materially different or there is a change in applicable law.
Reliance is an important protection for plan sponsors, plans, and plan participants and beneficiaries. This is just a brief summary of a set of very complicated rules regarding this topic. For further information, please feel free to reach out to our attorneys.
¹ In some cases, the terminology also includes Master and Prototype Plans (both Standardized and Non-Standardized) and Volume Submitter Plans, but the IRS has recently moved away from that terminology starting with Revenue Procedure 2017-41.
² See, e.g., IRS Publication 794, Determination Letter, Revenue Procedure 2017-41 and Revenue Procedure 2020-4 and subsequent/related guidance.
© Boutwell Fay LLP 2020, All Rights Reserved. This handout is for information purposes only and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of October 2020.