The Internal Revenue Service (IRS) has expanded the determination letter program for individually designed plans. Under Revenue Procedure 2019-20, the IRS will now accept determination letter applications for statutory hybrid plans (e.g., cash balance plans) during the 12-month period beginning September 1, 2019, and ending August 31, 2020. In addition, the IRS will now accept such applications for certain merged plans on an ongoing basis. The Revenue Procedure also provides for a limited extension of the remedial amendment period (generally, the period of time during which a plan sponsor can make retroactive amendments to eliminate qualification defects) and for special sanction structures that apply to plan document failures discovered by the IRS during the review of a plan.

Background

In Revenue Procedure 2016-37, the IRS significantly limited the circumstances under which a plan could be submitted for a determination letter. It eliminated the prior procedure under which determination letters were regularly issued in cycles. Generally, the sponsor of an individually designed plan may only submit a determination letter application for initial plan qualification (i.e. when the plan is first established) and for qualification upon plan termination. Revenue Procedure 2019-20 expands the circumstances under which a plan can be submitted for a determination to include statutory hybrid plans and merged plans.

Statutory Hybrid Plans

Generally, statutory hybrid plans will fail to meet requirements under the Internal Revenue Code (Code) regarding benefit accruals unless the terms of the plan provides that any interest credit (or an equivalent amount) for any plan year will be at a rate that is not greater than a market rate of return. The IRS issued final regulations on statutory hybrid retirement plans and transitional amendments to satisfy the market rate of return rules in 2010. These regulations appeared on the 2017 Required Amendments List issued by the IRS, and these plans generally needed to be amended for the regulations by the first day of the first plan year that began on or after January 1, 2017. For determination letter applications submitted during the permitted period (September 1, 2019, through August 31, 2020), the IRS will review the plan for items on the 2017 Required Amendments List, but it will also take into account all Required Amendments Lists and Cumulative Lists issued prior to 2016.

In the new Revenue Procedure, the Treasury Department and the IRS recognize that the IRS’s scope of review during the last cycle submission did not include all the provisions related to the final hybrid plan regulations. As a result, plan sponsors did not have the opportunity to have their plans reviewed for such regulations. Accordingly, the IRS has agreed not impose a sanction for any plan document failure with respect to a plan provision required to meet the regulations that is discovered by the IRS in its review of the plan. However, if there is a plan document failure unrelated to the final regulations, the IRS will impose a sanction equal to the applicable Employee Plans Voluntary Compliance Resolution System (EPCRS) Voluntary Correction Program (VCP) user fee that would have applied had the plan sponsor identified the failure and submitted the plan for consideration under the VCP. Currently, the user fee ranges from $1,500 to $3,500 depending on the amount of plan assets. If the plan document failure is unrelated to the final regulations and does not meet certain requirements, the sanction will be 150% or 250% (depending on the duration of the failure) of the applicable user fee under VCP.

Merged Plans

A “merged plan” is one that results from the merger or consolidation of two or more plans into a single individually designed plan pursuant to a plan merger. A “plan merger” is a merger or consolidation that combines two or more plans maintained by previously “unrelated entities” into a single individually designed plan and that occurs in connection with a corporate merger, acquisition, or other similar business transaction among unrelated entities that each maintained its own plan or plans prior to the plan merger. “Unrelated entities” are generally those that are not in the same controlled group or affiliated service group.

Beginning September 1, 2019, the IRS will accept determination letter applications for merged plans that satisfy the following requirements:

• The date of the plan merger occurs no later than the last day of the first plan year that begins after the plan year that includes the date of a corporate merger, acquisition, or other similar business transaction between unrelated entities, and
• A determination letter application for a merged plan is submitted within a period beginning on the date of the plan merger and ending on the last day of the first plan year of the merged plan that begins after the date of the plan merger.

For example, Company A acquired Company B (an unrelated entity) on December 31, 2017. Company A has a calendar year plan, and Company A merges Company B’s plan into Company A’s plan on December 31, 2018. Company A files its determination letter application on September 1, 2019. This transaction would meet the requirements because the plan merger occurred no later than the last day of the first plan year that began after the plan year that included the date of the corporate merger (that is, by December 31, 2018), and the determination letter application will be submitted within the period beginning on the date of the plan merger (December 31, 2018) and ending on the last day of the first plan year of the merged plan that begins after the date of the plan merger (that is, by December 31, 2019).

A plan sponsor that has applied for a determination letter with respect to a merged plan that has a plan document failure must generally amend the plan to comply with applicable qualification requirements, pay a sanction, and enter into a closing agreement with the IRS. The IRS will not impose a sanction for a plan document failure with respect to a plan provision included to effectuate the plan merger. However, it will impose a sanction regarding other plan provisions; the amount of the sanction is equal to the applicable VCP user fee that would have applied had the plan sponsor identified the failure and submitted the plan for consideration under VCP. If the plan document failure is other than a failure with respect to the plan provision to effectuate the merger and does not satisfy certain requirements, the amount of the sanction is 150% or 250% (depending on the duration of the failure) of the applicable user fee that would apply to the plan had it been submitted under VCP.