IRS Expands Determination Letter Program to Hybrid and Merged Plans
The IRS has issued guidance (Rev. Proc. 2019-20) expanding the determination letter program for certain individually designed plans. The IRS had previously announced in 2017 that the determination letter program for individually designed plans would be limited to initial plan qualification and qualification on plan termination. Since that time, the IRS received many comments asking for an expansion of the determination letter program. The new guidance provides that beginning September 1, 2019, merged plans previously maintained by unrelated employers may request a determination on an ongoing basis. In addition, hybrid plans (cash balance and certain other similar plans) will have a limited period (September 1, 2019 through August 31, 2020) to apply for a determination.
The ongoing program for merged plans will be helpful to large employers, which are more likely to have individually designed plans and to be involved in acquisitions regularly. The program is available if the plan merger occurs by the end of the plan year following the plan year in which the related business transaction occurred, and the application is filed by the end of the plan year that follows the plan year of the plan merger. For example, if the transaction occurs in 2019, the plan merger (assuming a calendar year plan) must occur in 2020 and the determination letter application must be filed by December 31, 2021.
The window for hybrid plans provides an opportunity for plan sponsors of these plans to obtain a review of all provisions related to the final hybrid plan regulations, which were not fully addressed in the most recent remedial amendment cycle.
Note that the scope of the IRS review of a merged plan will not be limited to the merger-related amendment, and the review of a hybrid plan will not be limited to review of the plan provisions impacted by the final hybrid plan regulations. The merged plan program will take into account the Required Amendments List from the second calendar year preceding the year of the application, and all prior Requirement Amendments and Cumulative Lists. The hybrid plan program will take into account the 2017 Required Amendments List and all prior Required Amendments and Cumulative Lists.
If, in reviewing a plan submitted for a determination letter, the IRS identifies a disqualifying amendment or failure to amend that does not fall within the remedial amendment period, and the IRS determines that amendment was timely adopted in good faith or the failure to amend was based on a good faith belief that no amendment was required, a special sanction structure will apply that is more favorable than the sanctions generally applicable in that situation under the IRS Employee Plans Voluntary Compliance Resolution System (EPCRS). This special sanction is limited to the EPCRS user fee applicable when the plan sponsor identifies the disqualifying provision.