IRS Makes Determination Letters Available to Hybrid and Merged Plans

The IRS has expanded its determination letter program to allow submissions by individually designed statutory hybrid plans and merged plans. Previously, the program permitted applications only for initial plan qualification and upon plan termination, but the IRS committed to annually reconsidering whether determination letters should be issued in other specified circumstances (see our Checkpoint article). Last year, the IRS requested comments on ways to expand the program (see our Checkpoint article), and the 2019 version of the IRS’s annual revenue procedures governing determination letters recognized a new “other circumstances” submission category without indicating what those other circumstances might be (see our Checkpoint article). Revenue Procedure 2019-20 solves that mystery.

“Statutory hybrid plans” are defined benefit plans that use a hypothetical account balance (e.g., a cash-balance plan) or an accumulated percentage of the participant’s final average compensation (e.g., a pension equity plan) to establish a participant’s accrued benefit. “Merged plans” are tax-qualified retirement plans (regardless of benefit formula) resulting from the merger or consolidation of two or more plans of previously unrelated entities to form a single individually designed plan. Applications by these plans will be permitted as follows:

• Statutory Hybrid Plans. The determination letter program will be opened to statutory hybrid plans only for the 12-month period beginning September 1, 2019, and ending August 31, 2020. These plans will be reviewed for compliance with the 2017 Required Amendments List (see our Checkpoint article), and all previous lists (including Cumulative Lists issued prior to 2016 (see our Checkpoint article)).
• Merged Plans. The determination letter program will be opened to merged plans on an ongoing basis, beginning September 1, 2019. To obtain a letter (a) the plan merger must occur by the end of the first plan year beginning after the plan year in which the corporate merger, acquisition, or similar business transaction occurred; and (b) the application must be submitted during the period beginning on the date of the plan merger and ending on the last day of the first plan year beginning after the plan merger. Merged plans will be reviewed based on the Required Amendments List issued during the second full calendar year before the submission, and all previous lists (including Cumulative Lists).

Any remedial amendment period that is open at the start of one of the submission periods described above will stay open until the end of the submission period. Plans will also get the benefit of the usual rule extending the remedial amendment period for a submitted plan until 91 days after a determination letter is issued. Plans submitting under this guidance will not get additional relief from the Code’s anti-cutback rules, other than an interest-crediting-rate exception for statutory hybrid plans. The guidance does, however, limit sanctions for plan document failures discovered in submitted plans.

EBIA Comment: Employers and advisors interested only in 401(k) or other defined contribution plans can skip the hybrid plan portion of this guidance. But the merged plan provisions address a major concern for employers involved in mergers and acquisitions, regardless of plan type. Determination letters protect against IRS challenges to plan provisions disclosed in a determination letter application. That protection can be especially important when an employer merges its own plan (which the employer may be reasonably confident meets the qualification requirements) with the plan of a previously unrelated employer. The 2016 changes to the determination letter program left many employers unable to request letters in that situation, increasing the risk of plan mergers. Sponsors of already-merged plans should determine whether they can still submit; the September 1, 2019, opening date does not appear to preclude submissions of plan mergers that occurred before that date, so long as the applicable criteria have been met. For more information, see EBIA’s 401(k) Plans manual at Sections III.C.4 (“IRS Rulings and Other Guidance”), XXVII.F (“Disqualifying Provisions and Remedial Amendments”), and XXVII.I (“Individually Designed Plan: Limited Determination Letter Program”).

Contributing Editors: EBIA Staff.