June 3, 2019
Recently the Internal Revenue Service (“IRS”) opened the door to expanding its determination letter program for certain individually designed plans for the first time since dismantling the remedial amendment cycle program. Under Revenue Procedure 2019-20 (“Rev. Proc.”), effective as of September 1, 2019, the IRS will begin accepting voluntary determination letter applications from individually designed “statutory hybrid” and “merged” plans. The IRS also modified sanctions for plan document failures that are discovered in connection with a determination letter application by such hybrid or merged plans in accordance with the Rev. Proc.
As background, effective as of January 31, 2017, the IRS advised that it would no longer accept applications for determination letters from individually designed plans except upon a plan’s initial qualification or termination. The IRS, however, reserved the right to consider whether to accept determination letter applications in certain circumstances (such as to address statutory changes required by law) and, to this end, solicited comments last year from stakeholders on the potential expansion of this program. Upon review of those comments and recognizing that significant statutory amendments and regulations governing hybrid benefit plans had been issued since the end of the remedial amendment cycle program, the IRS issued the Rev. Proc. in order to expand its determination letter program to cover individually designed statutory hybrid and merged plans.
Under the Rev. Proc., statutory hybrid plans—defined benefits plans (such as cash balance or pension equity plans) that typically express a participant’s accumulated benefit as the current balance of a hypothetical account maintained for the participant or the current value of an accumulated percentage of the participant’s final average compensation—are permitted to submit an application for a determination letter during the 12-month period beginning September 1, 2019 and ending August 31, 2020. The IRS’s review will be based on the 2017 Required Amendments List, including the final hybrid plan regulations that became effective in 2017 (requiring the use of a market rate of return for calculating interest credits).
The Rev. Proc. clarifies that, although the remedial amendment period for adopting an amendment to comply with the hybrid plan regulations is extended, it does not extend the relief granted in those regulations to such plans required to reduce their interest crediting rate, which otherwise would violate the anti-cutback requirements of Code Section 411(d)(6). (In order to qualify for the cutback relief, amendments generally were required to be adopted by the start of the 2017 plan year.)
IRS also will begin accepting determination letter applications from merged plans beginning September 1, 2019. Submissions from merged plans will be accepted on an ongoing basis during an eligibility window based on the date of the merger. Specifically, in order to satisfy this eligibility window, the date of the plan merger must be within the plan year following the plan year that includes the date of the transaction leading to the plan merger, and the application must be submitted by the end of the first full plan year after the plan merger date. For this purpose, a merged plan means a plan that results from the merger or consolidation of two or more plans into a single individually designed plan pursuant to a corporate merger, acquisition, or other similar business transaction between unrelated entities (i.e., not part of the same controlled group or an affiliated service group). It is unclear whether the definition of “other similar business transaction” is broad enough to include, for example, a plan formed from the merger of two multiemployer plans without being connected to a formal corporate merger/acquisition transaction.
With respect to both statutory hybrid and merged plans, the Rev. Proc. provides for a modified schedule of sanctions for plan document errors identified in connection with a determination letter submission. The IRS will not impose a sanction for a failure contained in a plan amendment adopted to comply with the hybrid plan regulations or an amendment adopted to effectuate the plan merger. In cases where the defective amendment was adopted timely and in good faith with the intent of maintaining the plan’s qualified status, or where the plan sponsor reasonably determined in good faith that no amendment was necessary, the sanction for a failure is the applicable user fee that the plan sponsor would have paid if it had corrected the failure through the IRS Voluntary Correction Program—currently, a maximum of $3,500. For failures that do not meet the requirements for a reduced sanction, the applicable penalty is 150% to 250% of the applicable VCP user fee, depending on the duration of the failure.
Although the IRS has indicated that it will continue to periodically request comments and consider other additional circumstances for expanding its determination letter program, it remains unclear if and when the IRS will do so. As such, many individually designed plans will continue to be unable to utilize the determination letter program until the IRS issues further guidance. In the meantime, plan sponsors of ineligible individually designed defined benefit plans (especially those with complex or multiple or multi-tiered benefit provisions) may want to consider submitting comments to the IRS for other proposed circumstances that warrant consideration for expanding this program.
Please contact Slevin & Hart for more information on how the expansion of the IRS determination letter program may affect your plan, including whether your plan is eligible for and should take advantage of this program, and whether to consider submitting comments for consideration by the IRS. We look forward to discussing this issue with you further.
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