Based on a posting I made to the ASEA Google Group concerning IRS determination letters (DL), a suggestion was received to write an article reviewing some of the history and current reasons one may apply for a DL today.
When I began my pension career in 1970 at Penn Mutual Life Insurance Company in the Group Pension Department, our world was much simpler. While one of the IRS requirements for a pension plan was to have a written document, by today’s standards that document was “bare bones” in nature. There was only basic IRS guidance—some revenue rulings—but SOA Pension Study notes and pension textbooks were still years away. In 1973, after attaining my ASA, I moved to the consulting world and never looked back.
Our world changed when President Gerald Ford signed the Employment Retirement Income Security Act (ERISA) into law on Labor Day 1974. There was now pension law, with regulations to follow, for drafting plan documents.
While a few larger clients engaged pension counsel, since my client base was mostly under 500 lives, the preparation of documents was part of our service. Also, plans that were previously informal, such as those provided by non-for-profit organizations to long service employees, needed to comply.
The Treasurer of a well-known New England private school became a client of ours and he never forgot to remind me that Washington should never have interfered since the endowment was clearly able to handle these modest expenses for their long service employees. Yes, there were discussions that our activity may have bordered on the illegal practice of law, but we survived.
Rewriting all of our clients’ pension plans to conform to ERISA was a major undertaking. I probably had about 60 clients on my case list at that time. These were all typed by our secretaries on the IBM Selectric typewriter; word processing was not an option until the next decade. I do remember the proofreading days. These were all “individually designed plans” although that label did not exist at the time. Prototype and volume submitter plans were still years away. Therefore, applying for a DL did provide a degree of comfort to all that our plans met IRS requirements.
Filing an application for a DL was initially a letter following the IRS list of what requirements to include. That process became more formalized with Form 5300, which was first issued in 1975. Three pages of “check the box” and a plan section reference for each. Plans also could apply for a DL for amendments after an initial qualification. Initially, you could submit a document for review and if the IRS deemed certain language did not meet their standard you could prepare corrective amendments without incurring financial penalties.
With mandated plan re-writes in 1985 and with the enactment of the Tax Reform Act of 1986, we continued to apply for DLs. There were no fees associated with the IRS review as we have today. From this background, I continued to apply for DLs for each mandated re-write for plans that continued to be updates to their original documents simply adding newly required sections. In the 1980s, prototype plans and later volume submitter documents replaced many of the individually designed documents and eliminated the need to apply for a DL.
During the 1990s, GUST and EGTRRA were enacted, again adding provisions and requiring plan re-writes.
As we moved into the 21st century, cash balance plans gained popularity in the pension world. While some large clients, who pioneered the change, were challenged in the courts, the IRS did not set forth any prohibitions to the concept. We began favoring cash balance plans over defined benefit plans for most prospects early on. While volume submitter documents cover DB plans, that was applicable only to plans with traditional benefit formulas. Therefore, we needed to modify our documents to incorporate hypothetical account balance, principal credits, and interest credits. Since the volume submitter letters no longer applied, we filed these documents for DL letters.
By this time, the IRS was getting much stickier on allowable language and many discussions went back and forth until a conclusion was reached. Some even went as far as needing assistance from the attorneys at the volume submitter document firms since we were being challenged on language that had already been approved and an advisory letter issued by the IRS. We welcomed the IRS expansion to allow Volume submitter documents for cash balance plans.
Form 5310 was instituted to file for a DL upon plan termination. While our approach may be conservative, having a DL can save much time and aggravation should a terminated plan be selected for an audit. Yes, the cost to obtain a DL on a terminating plan has escalated over the years.
Also, the contributions many clients have been able to make to these plans have also escalated and there are three open years the IRS may challenge pension deductions. When advising a client on whether to apply for a DL, I weigh the open tax years against the cost. I have had clients with open tax year deductions exceeding one million dollars. Generally, they agree that the expenditure for a DL is reasonable when considering a possible challenge to their tax deductions.
My career has been rewarding in many ways, but time has come to retire. No 2023 renewal of my Enrolled Actuary number. I considered one more cycle for 50 years—but family, travel and the golf course won out.
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