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When Can an Individually Designed 401(k) Plan Be Submitted for a Determination Letter?

EBIA  

EBIA  

QUESTION: I have been asked to make sure that our 401(k) plan is ready for a possible sale of the company. I understand that buyers typically ask for a determination letter to help assure that a plan is qualified, so I’m thinking we should get one. But I’ve heard that determination letters aren’t always available. When can a 401(k) plan be submitted for a determination letter? Our plan is individually designed and covers only employees of our company (i.e., it is a single-employer plan).

ANSWER: The rules governing determination letter requests for individually designed plans have changed considerably over the years. At one time, requests could be made whenever a plan was restated or materially amended. Then, to limit submissions, the IRS adopted a cyclical remedial amendment system under which plans were typically submitted for a determination letter every five years. In 2017, the IRS further narrowed the circumstances in which individually designed plans can request determination letters, providing that individually designed 401(k) plans may be submitted for a determination letter only in one of the following circumstances—

  • the plan has not been submitted previously;
  • the plan is being terminated;
  • a limited determination is requested regarding whether a partial termination has occurred; or
  • the plan has recently merged with the plan of a previously unrelated entity.

To obtain a letter regarding a merged plan (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. (Submissions by terminating plans also have a deadline, but that isn’t relevant to submissions by ongoing plans like yours.)

If your plan is individually designed, has received a favorable determination letter in the past, and has not recently merged with another plan, then you may be unable to request the kind of determination letter you want. You might be able to request a determination as to whether a partial termination occurred, but that limited basis for seeking a determination letter would not allow you to get a determination regarding your plan document.

Keep in mind that determination letters only affirm that the form of the plan satisfies the Code’s applicable qualification requirements. Because the IRS reviews only the plan document and not the administration of the plan, the determination letter would not offer a buyer any assurance regarding the operation of the plan. If a sale of your company is proposed, you should anticipate having to demonstrate to the buyer that your plan’s operation satisfies the qualification rules and adheres to the plan document’s provisions (e.g., by providing results of nondiscrimination testing).

Special determination letter submission procedures apply for individually designed multiple employer plans. And different determination letter submission standards apply to plans that use a pre-approved plan document (to be addressed in next week’s Question of the Week). For more information, see EBIA’s 401(k) Plans manual at Section XXVII.I (“Individually Designed Plans: Limited Determination Letter Program”).

Contributing Editors: EBIA Staff.

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