On May 1, 2019, the Internal Revenue Service (IRS) issued Rev. Proc. 2019-20, which provides for an expansion of the determination letter program, for some individually designed retirement plans. Specifically, statutory hybrid plans can request an IRS determination letter during the statutory hybrid plan submission period (beginning September 1, 2019 and ending on August 31, 2020). Beginning September 1, 2019, merged plans can request an IRS determination letter on an ongoing basis, but only during a limited period following the date of the merger and plan merger.
Rev. Proc. 2019-20 also:
- Extends, on a limited basis, the remedial amendment period under Section 401(b) of the Internal Revenue Code (Code) (26 U.S.C. § 401(b)) and Rev. Proc. 2016-37 under specified circumstances, and
- Provides special sanction structures that apply to certain plan document failures discovered by the IRS during the review of a statutory hybrid plan or a merged plan submitted for a determination letter.
In Rev. Proc. 2016-37, the IRS changed the IRS determination letter program for qualified retirement plans by eliminating the staggered five-year remedial amendment cycle system for individually designed retirement plans provided in IRS Rev. Proc. 2007-44. The IRS limited the determination letter application rules for individually designed plans by providing that a plan sponsor of an individually designed plan would be permitted to submit a determination letter application only for 1) initial plan qualification, 2) qualification upon termination of the plan or 3) other special circumstances announced in other published guidance.
Limited expansion of the determination letter program
Rev. Proc. 2019-20 provides for limited expansion of the determination leter program with respect to individually designed plans. It modifies the determination letter process for statutory hybrid defined benefit plans and certain merged retirement plans.
A statutory hybrid plan is a defined benefit plan, such as a cash balance or pension equity plan (PEP) that combines features of both a defined contribution and defined benefit plan. A participant's benefit under a hybrid plan is defined as 1) the balance of a hypothetical account maintained for the participant (ie, cash balance) or 2) the value of an accumulated percentage of the participant's final average compensation (ie, pension equity plan PEP).
The IRS will accept hybrid plan determination letter applications beginning September 1, 2019 through August 31, 2020. The IRS's scope of plan review will be based on the 2017 Required Amendments list (Notice 2017-72) and prior required amendments and cumulative lists.
A merged plan is defined as a plan that combines two or more plans into a single individually designed plan that resulted from the merger or consolidation in connection with a corporate merger, acquisition or other similar business transaction of previously unrelated entities (not part of an affiliated service group or controlled group) that maintained its own plan(s) prior to the plan merger.
The IRS will accept merged plan determination letter application if:
- The date of the plan merger occurs no later than the last day of the first plan year that begins after the plan year that includes the date of a corporate merger, acquisition, or other similar business transaction between unrelated entities, and
- The determination letter application for the merged plan is submitted within a period beginning on the date of the plan merger (as determined according to Rev. Proc. 2019-20) and ending on the last day of the first plan year of the merged plan that begins after the date of the plan merger.For example, if a company has a 2018 corporate merger date and the calendar year plan(s) merged in 2019, the plan has until December 31, 2020 to submit the determination letter application to the IRS.
The IRS's scope of plan review will be based on the required amendments list that was issued during the second full calendar year preceding the submission of the application and all prior required amendments and cumulative lists.
If a plan has a document failure (failure to adopt an amendment to correct a disqualifying provision within the applicable remedial amendment period) the plan must be amended or risk being charged applicable sanctions.
- Statutory hybrid plan document failure for a plan provision that is needed to meet the requirements of Treasury Regulation Sections 1.411(a)(13)-1 (26 C.F.R. § 1.411(a)(13)-1) (the rules for statutory hybrid plans) and 1.411(b)(5)-1 (26 C.F.R. § 1.411(b)(5)-1) (the rules for determining whether a reduction occurs in the rate of benefit accrual under a defined benefit plan because of the attainment of any age for purposes of Code Section 411(b)(1)(H)(i) (26 U.S.C. § 411(b)(1)(H)(i))).
- Merged plan document failure for a plan provision needed to effectuate the plan merger.
If the application is filed and the IRS identifies a document failure in a hybrid plan not related to the hybrid plan regulations, or if it identifies plan document failures in merged plans not related to the plan merger, the IRS will then impose a special sanction equal to the applicable Employee Plans Voluntary Compliance Resolution System (EPCRS) Voluntary Correction Program (VCP) user fee that would have applied had the plan sponsor identified the failure and submitted the plan for consideration under the VCP, if either of the following conditions apply:
- The plan amendment that creates the failure, whether or not that amendment was required to be adopted, was adopted timely and in good faith with the intent of maintaining the qualified status of the plan.
- In the case of a plan amendment required because of a change in tax qualification requirements, the plan sponsor reasonably and in good faith determined that no amendment was required because the qualification change did not impact provisions of the written plan document.
Keep in mind that the IRS will determine if a plan amendment was adopted in good faith with the intent of maintaining the qualified status of the plan, or whether a plan sponsor reasonably and in good faith determined that no amendment was required.
Also, if the plan document failure does not qualify for the above sanction relief, the IRS may impose a sanction that is equal to 150 percent or 250 percent (depending on the duration of the failure) of the applicable user fee that would apply had the plan submitted under EPCRS VCP.
The IRS will continue to consider and will periodically request comments on expansion of its determination letter program.
Action items for employers
- Determine if a hybrid or merged plan is eligible for submission under the program and consider filing a determination letter application.
- If considering a future merger, contemplate whether the plan merger will qualify for submission under the program.
- If considering a change to convert a defined benefit plan to a hybrid design, also contemplate whether the redesigned plan will qualify for submission under the program.
For more information or assistance in preparing and submitting a determination letter application, please contact any of the members of our Employee Benefits and Executive Compensation group.
*Sherry Klenk is a consultant with DLA Piper’s Employee Benefits and Executive Compensation group, based in Chicago.