IRS Appears Likely to Expand Determination Letter Program in 2019
All signs point to the IRS expanding access to the determination letter ("DL") program for individually designed plans in 2019. This would be a welcome move for employers and other plan sponsors, who have been unable to obtain determination letters with respect to most ongoing plans since the DL program as we knew it ended last year.
For years, determination letters served to assure plan sponsors that their plans were qualified for favorable tax treatment. In 2017 the IRS ended the cycle-based determination letter program for individually designed plans, except for newly created plans, terminating plans, and in other, as-yet-unidentified, "special circumstances." The end of the program left plan sponsors with no way to obtain a confirmation from the IRS that their plans continued to satisfy the formal requirements for qualification after multiple amendments and changes to the law.
Based on recent IRS announcements, however, it appears that individually designed plans will have restored access to the program, possibly as soon as next year.
Earlier this year, the IRS issued Notice 2018-24, requesting comments on expansion of the program beyond initial qualification and termination. The IRS requested that commenters identify specific types of plans and situations for which determination letter applications should be accepted. For example, the IRS noted that such situations could include "significant law changes, new approaches to plan design, and the inability of certain types of plans to convert to pre-approved plan documents." Commenters were given until June 4 to submit comments.
On June 7, the IRS's Advisory Committee on Tax Exempt and Government Entities issued a report recommending that the determination letter program be expanded. The Advisory Committee reviewed the comments received by the IRS and consulted with industry groups and regulators, and concluded that feedback was "universally positive" in favor of expanding the determination letter program.
The Advisory Committee's report recommended expanding the determination letter program for individually designed plans in 2019 to include:
- Limited scope review of specific discretionary and/or required amendments to plans with prior favorable determination letters;
- An expedited review process for amendments required by major transactions, such as plan sponsor mergers and acquisitions, divestitures, joint ventures, and bankruptcy proceedings, as well as for plan mergers and spin-offs;
- Review for major changes in the tax law and the provision of model language for amendments to facilitate the review process in these cases;
- Review for any plan that has had significant changes, including a major design change (such as a change to a hybrid plan) or a novel qualification issue, that the plan sponsor or plan administrator believes may represent a "material change" such that reliance on the most recent favorable determination letter is not appropriate;
- Review at the end of a stated period of time since the last favorable determination letter (for example, 10 or 15 years), or review upon the earlier of a stated period of time (for example, 10 years) or the adoption of 10 or more amendments to the plan; and
- Review for plans that cannot currently fall within the pre-approved program limitations, such as multiemployer plans, governmental plans with statutory structures, hybrid plans, and complicated employee stock ownership plans.
There is no concrete timetable for IRS action on the recommendations contained in the Advisory Committee report. But here's hoping that the benefits of the DL program will be restored, at least in part, next year.