United States: Limited Ability To Submit Your Individually Designed Plan For A Determination Letter

Betsy L. Luxenberg is an Associate in Holland & Knight's Tysons office

Claudia L. Hinsch is a Partner in Holland & Knight's Tysons office

HIGHLIGHTS:

  • Effective Sept. 1, 2019, the sponsors of certain retirement plans may submit their plans to the Internal Revenue Service (IRS) for review of a determination letter application.
  • Revenue Procedure 2019-20 expands the IRS Determination Letter Program, provides for a limited extension of the remedial amendment period and includes a special sanction structure for certain plan failures discovered on review.

The Internal Revenue Service (IRS) published Revenue Procedure 2019-20 on May 1, 2019, providing for a limited expansion of the determination letter program with respect to certain individually designed plans. The IRS will now accept determination letter applications for 1) individually designed statutory hybrid plans during a 12-month period beginning Sept. 1, 2019, and ending Aug. 31, 2020, and 2) individually designed merged plans on an ongoing basis.

This expansion notes a departure from Rev. Proc. 2016-37, which limited a plan sponsor of an individually designed plan to submitting a determination letter application only for initial plan qualification and for qualification upon plan termination. We note that this limited expansion under Rev. Proc. 2019-20 has no impact on a plan sponsor's ability to apply for a determination letter at those otherwise approved times.

Eligibility

In order to qualify for the expanded determination letter program, the retirement plan must be an individually designed "Hybrid Plan" or "Merged Plan." A Hybrid Plan is a defined benefit plan that contains a statutory hybrid benefit formula, such as pension equity plans, cash balance plans or certain variable annuity plans. A Merged Plan means a plan that results from the merger or consolidation of two or more plans maintained by previously unrelated entities into a single individually designed plan, and that occurs in connection with a corporate merger, acquisition or other similar business transaction among unrelated entities. In order for a Merged Plan to be eligible to apply for a determination letter under Rev. Prov. 2019-20, 1) the Plan Merger must have taken place no later than the last day of the first plan year that begins after the plan year that included the corporate merger, acquisition or other similar business transaction, and 2) the Merged Plan must submit a determination letter application within a period beginning on the date of the Plan Merger and ending on the last day of the first plan year of the Merged Plan that begins after the date of the Plan Merger.

Extension of the Remedial Amendment Period

Ordinarily, the submission of a determination letter application extends the period for which a plan sponsor may adopt a retroactive amendment to correct a disqualifying provision identified during the determination letter application review process until the expiration of 91 days after the date. As a result of the expansion of the program, the IRS has extended the remedial amendment period until 91 days after a Hybrid Plan or Merged Plan receives its determination letter in connection with Rev. Proc. 2019-20.

Special Sanction Structures

No Penalties

The IRS recognizes that certain provisions related to the final hybrid plan regulations were not finalized prior to the end of the most recent remedial amendment cycle, meaning that plan sponsors were not able to have the IRS review their plans for compliance with the new regulations. As a result, the IRS will not impose any penalties for plan document failures that specifically relate to implementation of the final statutory hybrid plan regulations that are discovered during the application review process. The IRS will also not impose any penalties for a Merged Plan's document failures with respect to a plan amendment merging the relevant plans that are discovered during the application review process.

Modified Penalties

For any failures unrelated to the final statutory hybrid plan regulations or for failures unrelated to effectuating a Plan Merger, the IRS will impose a special sanction equal to the applicable Employee Plans Voluntary Compliance Resolution System (EPCRS) Voluntary Correction Program user fee that would have applied had the plan sponsor identified the failure and submitted the plan for consideration under the Voluntary Correction Program (the EPCRS Sanction). In order to take advantage of the EPCRS Sanction, the amendment that created the plan document failure 1) must have been adopted timely and in good faith, and 2) in the case of an amendment required because of a change in qualification requirements, the plan sponsor must have reasonably and in good faith determined that no amendment was required because the qualification change did not impact provisions of the written plan document (the "Special Sanction Conditions"). If the plan does not meet the Special Sanction Conditions, the IRS has set forth another special sanction that is equal to 150 percent or 250 percent of the applicable user fee that would apply to the plan had it been submitted under the EPCRS Voluntary Correction Program.

Action Items

To take advantage of the expanded determination letter program, administrators and plan sponsors of hybrid defined benefit plans or individually designed merged plans should take the following steps:

  1. Review Plan Documents. Plan sponsors of individually designed plans should consider whether their retirement plans are now eligible for the determination letter application program.
  2. Have Key Discussions. Reach out to counsel regarding your plan's eligibility and to understand all of the steps required by the determination letter application process.
  3. Gather Materials Ahead of Schedule. The IRS will accept applications for Hybrid Plans and Merged Plans starting on Sept. 1, 2019 (and only through Aug. 31, 2020, for Hybrid Plans), so it is well advised to gather all plan documents, amendments and corresponding materials sooner rather than later to take advantage of this new application opportunity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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