IRS Reduces the Scope of its Retirement Plan Determination Letter Program

During the next three months, until May 21, 2012, the IRS will phase in changes to its determination letter program which eliminate testing for participation, coverage and nondiscrimination and make the process unavailable to certain master and prototype plans and volume submitter plans. The IRS has indicated that the changes, effective Feb. 1, 2012 (May 1, 2012, for terminating and preapproved plans) are intended to eliminate certain burdensome features of the determination letter program which are of limited utility to plan sponsors. The IRS predicts that these changes will reduce the time the IRS spends processing determination letter applications.

The determination letter program enables a plan sponsor to submit its retirement plan for review by the IRS at regular intervals and request an official determination regarding the plan’s qualified status under Section 401(a) of the Internal Revenue Code. If a favorable determination letter is issued, the plan sponsor may rely on this letter to establish that the plan, at least in form, meets the technical requirements for tax qualified status as of the date of the IRS’s favorable determination.

Revenue Procedure 2012-6 includes several changes to the determination letter program, and we believe two are key. First, the IRS eliminates a plan sponsor’s option to request a determination relating to minimum participation, coverage, and nondiscrimination requirements of the Internal Revenue Code (Schedule Q to Form 5300). Second, effective May 1, 2012, the IRS will no longer accept determination letter applications that are filed on Form 5307 (a simplified form of the application) for master or prototype plans and it will no longer accept applications on this form for volume submitter plans unless the modifications are relatively minor (i.e. the modifications are not significant enough to cause the plan to be considered an individually designed plan). If you have questions as to the effect of the new IRS program on any of your organization’s retirement plans, feel free to contact Patrick McGovern, Esq. or Gina Schneider, Esq. in our Labor Law Group.