IRS Opens the Door to Determination Letter Applications for Merged and Cash Balance Individually Designed Plans
Revenue Procedure 2019-20 announces the expansion of the Internal Revenue Service’s determination letter program to certain individually designed plans including statutory hybrid plans (e.g., cash balance plans) and merged plans. Under the revenue procedure, individually designed statutory hybrid plans will have a 12-month period commencing September 1, 2019 to submit applications. The program is opened for merged plans beginning September 1, 2019, but the time for making an application is not limited to a specific submission period.
Revenue Procedure 2016-37 limited the circumstances under which a plan sponsor of an individually designed plan may submit a determination letter application to initial plan qualification or upon plan termination, but permitted Treasury and the IRS to open the program in other situations. In 2018, they requested comments on the expansion of the program and with the issuance of Rev. Proc. 2019-20, they have chosen to exercise their discretion with respect to hybrid and merged plans. At a recent meeting of the Tax Section of the American Bar Association, representatives of Treasury stated that they are considering the possibility of opening the program further to multi employer plans, government plans, and church plans.
In order to be eligible to make a determination letter application for a “merged plan,” the plan must have resulted from the merger of two or more plans maintained by previously unrelated entities into a single plan, and that plan merger must have occurred “in connection with a corporate merger, acquisition or other similar business transaction” when each of the unrelated entities maintained its own plan or plans prior to the merger.“Unrelated” for this purpose means that the entities are not in the same controlled group under Code Section 414(b), under common control under Section 414(c), or part of the same affiliated service group under Section 414(m). There are two additional requirements: first, the plan merger must take place no later than the end of the first plan year that begins after the plan year in which the corporate merger, acquisition, or other business transaction occurs; and second, the determination letter application must be submitted no later than the end of the first plan year of the merged plan that begins after the plan merger.
In the case of hybrid plans, the IRS’s review of the plan will include the 2017 Required Amendment List and all Required Amendment Lists and Cumulative Lists issued prior to 2016.
In the case of a merged plan, the IRS’s review will include the Required Amendments List issued during the second full calendar year preceding the submission of the determination letter application and all previously issued Required Amendments List and Cumulative Lists.
For hybrid and merged plans that qualify to make a determination letter application, the remedial amendment period will open with the beginning of the applicable submission period and will extend to the end of that submission period. In addition, Treasury Regulations Section 1.401(b)-(e)(3), which extends the remedial amendment period until 91 days after the issuance of the determination letter, continues to apply.
Revenue Procedure 2019-20 describes the sanctions that will apply to a hybrid plan that has made a determination letter application in the event the plan has a plan document failure that is discovered as part of the IRS review process. For a plan document failure that results from a failure to meet the final hybrid plan regulations, the employer will not be required to pay a sanction. There is a special sanction structure for other plan document failures. If certain requirements are met (for example, the amendment causing the failure was adopted timely and in good faith), the sanction is equal to the Voluntary Correction Program (VCP) user fee that would have applied had the sponsor submitted the failure under VCP. If the requirements are not met, the sanction is equal to 150% or 250% of the VCP user fee.
For merged plans, the sanctions that apply also depend upon the type of plan document failure and whether the plan qualifies for the special sanction structure. For a plan document failure that results from a plan provision included to effectuate the plan merger, there is no sanction. For any other plan document failure, the VCP user fee sanction applies if the special sanction structure requirements are met. Otherwise, the sanction is 150% or 250% of the VCP user fee.
The expansion of the determination letter program can be helpful for a plan engaged in a plan merger under the circumstances where the plan document is a pre-approved document that cannot accommodate the provisions required by the plan merger. If the plan is amended to take into account the plan merger, and as a result, becomes an individually designed plan, it may be possible to obtain a determination letter if the merged plan can satisfy the requirements of the revenue procedure.
If you are interested in taking advantage of the expansion of the determination letter program, you may speak with a Boutwell Fay attorney for assistance.
©Boutwell Fay LLP 2019, 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 May 31, 2019.