IRS Expands Determination Letter Program to Merged Plans and Statutory Hybrid Plans

The IRS has issued Rev. Proc. 2019-20, expanding its determination letter program to allow submissions by individually designed statutory hybrid plans and merged plans. Previously, the determination letter program was limited to applications for initial plan qualification and upon plan termination only. The IRS has indicated it will annually reconsider whether determination letters should be issued in other specified circumstances.

“Statutory hybrid plans” are defined benefit plans that use a hypothetical account balance (for example, a cash-balance plan) or an accumulated percentage of the participant’s final average compensation (for example, a pension equity plan) to establish a participant’s accrued benefit.

“Merged plans” are tax-qualified retirement plans resulting from the merger or consolidation of two or more plans of previously unrelated entities to form a single individually designed plan.

Applications by these plans will be permitted as follows:

Statutory Hybrid Plans. The determination letter program will be opened to statutory hybrid plans only for the 12-month period beginning September 1, 2019, and ending August 31, 2020. These plans will be reviewed for compliance with the 2017 Required Amendments List, and all previous lists.

Merged Plans. The determination letter program will be opened to merged plans on an ongoing basis, beginning September 1, 2019. To obtain a determination letter:

  • the plan merger must occur by the end of the first plan year beginning after the plan year in which the corporate merger, acquisition, or similar business transaction occurred; and
  • the application must be submitted during the period beginning on the date of the plan merger and ending on the last day of the first plan year beginning after the plan merger.

Merged plans will be reviewed based on the Required Amendments List issued during the second full calendar year before the submission, and all previous lists (including Cumulative Lists).

Any remedial amendment period that is open at the start of one of the submission periods described above will stay open until the end of the submission period. Plans will also get the benefit of the usual rule extending the remedial amendment period for a submitted plan until 91 days after a determination letter is issued.

Comment and Implications

For plan sponsors involved in corporate mergers, the provisions in Rev. Proc. 2019-20 will be particularly helpful. Determination letters protect against IRS challenges to plan provisions disclosed in a determination letter application. That protection can be especially important when an employer merges its own plan (which the employer may be reasonably confident meets the qualification requirements) with the plan of a previously unrelated employer. The 2016 changes to the determination letter program left many employers unable to request letters in that situation, increasing the risk of plan mergers. This concern can now be addressed through a determination letter application.

Sponsors of already-merged plans should also determine whether they can still submit a determination letter application. The September 1, 2019, opening date does not appear to preclude submissions of plan mergers that occurred before that date, as long as the applicable criteria are met.

Author: Erwin

Erwin Kratz practices exclusively in the areas of ERISA and employee benefits law, focusing on tax and regulatory matters relating to qualified and nonqualified deferred compensation and welfare benefits.