In a June 4, 2018 comment letter to the IRS, the American Retirement Association (ARA) recommended that the IRS expand its determination letter program to cover specific situations, which the ARA believes “would resolve the most critical open issues that impact the qualified status of the form of the plan and would reduce burdens on the plan sponsors.”
The ARA sent the letter in response to IRS Notice 2018-24, in which the IRS requested comments on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year, beyond the provision of determination letters for initial qualification and qualification upon plan termination.
The ARA identified five areas for which it believes that an expanded determination letter program would be beneficial.
Plans with designs impacted by changes made in regulations issued after the Cumulative List for the plans’ last cycle. The ARA considers this the most important area for which the IRS should expand the determination letter program. “In particular, ARA recommends the Service permit cash balance and other hybrid plans with existing determination letters that do not include a ruling on the hybrid plan regulations,” the letter says. The hybrid plan rules, the ARA argues, “are complex and integral” to hybrid plans’ proper operation. “Therefore,” the letter says, “hybrid plans should be permitted to submit for a determination letter on the final hybrid plan rules.”
Plans designed to cover controlled groups of businesses, affiliated service groups, or both. The ARA recommends that the IRS expand the program to include determinations on whether a group of entities can participate as a single employer. “The rules regarding affiliated service groups are particularly difficult to apply,” the letter says; further, “Certain qualification rules apply differently depending on whether the plan is a single employer or multiple employer plan.” The ARA argues that “the guidance necessary to make this determination properly is generally outdated, withdrawn, or non-existent for both affiliated service group determinations as well as for controlled groups involving disregarded interests and options.” It says that a determination letter program “is critical to making a proper determination and will reduce the burdens facing employers attempting to make the single-employer or multiple-employer plan determination, and will enhance plans compliance with the qualification requirements.”
Plans that have made significant design changes since applying for the last favorable determination letter. The ARA points out in the letter that as a business needs to change, plan sponsors often need to consider significant plan design changes. Accordingly, it posits, “the ability to receive a determination on the continued qualification of the plan after a significant design change will help preserve retirement savings by eliminating risks that cause plan sponsors to terminate instead of amend plans.” The ARA further suggested that the IRS allow plans that have made the following changes since their last favorable determination letter to make a submission to the IRS for a determination letter in 2019:
- defined benefit plans that were converted to cash balance plans;
- DB plans that amend the plan benefit formula such that it no longer qualifies as a safe harbor formula for purposes of Code Section 401(a)(4);
- defined contribution plans that convert to an ESOP or add an ESOP feature;
- existing ESOPs moving from unleveraged to leveraged; and
- a plan that was restated to an individually designed plan due to provisions than are not permitted in a preapproved plan, if the plan’s most recent letter was received after filing Form 5307.
Plans that have experienced a merger of plans as a result of merger and acquisition activity by the plan sponsor since applying for the last favorable determination letter. “A merger of plans can cause significant uncertainty about the qualified status of the merged plan when the plans being merged have substantially different plan designs,” says that letter. The ARA goes on to say that it “acknowledges that allowing a new determination letter for any plan merger may be burdensome” for the IRS, and therefore recommends that the IRS expand the determination letter program for mergers that involve mergers of:
- DB plans where the plans include multiple formulas and/or grandfathered benefits;
- a safe harbor 401(k) plan (either under Code Section 401(k)(12) or (13)) and a non-safe harbor 401(k) plan mid-year; and
- a pre-approved plan that relies on an opinion letter into an individually designed plan where the pre-approved plan has been in existence for more than two 6-year cycles.
Individually designed Section 403(b) plans. The ARA said that while it is thankful to the IRS for the preapproved program for 403(b) plans, it also recognizes that 403(b) plans “often have unique contribution formulas and distribution options, which are complicated by multiple legacy platform providers and investment contracts that cannot be easily altered and often make the plan incompatible with the pre-approved program.” Further, it says, “although the pre-approved program is available to non-electing church plans, pre-approved plans are not yet readily available for these plan sponsors.” Accordingly, the ARA recommends that the IRS expand the types of plans it permits to receive a determination letter to include 403(b) plans that contain provisions that are not permitted in the 403(b) preapproved program.