The IRS Reduces Its Program for Requesting Tax Status Determination Letters

By Adam J. Peters

On January 3, 2012, the Internal Revenue Service (IRS) issued Revenue Procedure 2012‑6, which formally changes and eliminates certain features of it s determination letter program for qualified retirement plans.  According to an earlier announcement of these changes (in IRS Announcement 2011-82), the IRS concluded that the features being eliminated are “of limited utility to plan sponsors in comparison with the burdens they impose.”  However, the changes will significantly restrict the determination letter service on which plan sponsors could previously rely for establishing plan qualification.

The determination letter program is a service the IRS provides to plan sponsors whereby the IRS reviews and either approves or disapproves the form of a retirement plan for tax-qualification status.  If the IRS issues a determination letter approving the plan’s form, that determination has the legal effect of estopping the IRS from later claiming that the plan’s form, as submitted, fails to meet the technical requirements for plan qualification. 

Revenue Procedure 2012‑6 significantly reduces the scope of the determination letter program in several ways.  These changes particularly affect sponsors of pre-approved master and prototype (M&P) or volume submitter plans.  Sponsors of such plans may still generally rely on “opinion” or “advisory” letters (as the IRS describes in Revenue Procedure 2011‑49), however, the IRS has largely eliminated the option of applying for an individual, supplemental determination letter on the abbreviated Form 5307.  Instead, M&P plan sponsors  may only file a full Form 5300 application for the determination of their plan as an individually designed plan.  Likewise, the IRS has limited Form 5307 usage for volume submitter plans as well.  Although sponsors of volume submitter plans may continue to seek determination letters under Form 5307, they may only do so with respect to certain minor modifications from the pre-approved document language.

Other changes to the determination letter process include the elimination of IRS determinations as to whether a plan is either a governmental or church plan (and thereby largely exempt from the requirements of ERISA).  Additionally, the IRS will no longer review plans for demonstrations of necessary coverage and non-discrimination.  For future determination letters, the IRS will also require documentation of any operation compliance corrections a plan has submitted through the Employee Plans Compliance Resolution System (EPCRS) process.  Depending on the type of plan, these changes take effect either February 1 or May 1, 2012.

What remains unclear for plan sponsors is whether the reduced filing burden for determination letters will result in greater headaches for plans down the road with respect to proving tax-qualification status in other circumstances.