Dale R. Vlasek
McDonald Hopkins LLC
P: (216) 348-5452
E: dvlasek@mcdonaldhopkins.com
* Please click here for a downloadable .pdf of this article.
Employers which adopt qualified retirement plans are frequently advised to request a determination letter from the Internal Revenue Service (“IRS”). From a legal point of view, it is not a requirement that an employer obtain a determination letter. Nonetheless, it is usually a very prudent thing to do especially where the employer is utilizing a fairly sophisticated retirement plan design.
What is a Determination Letter?
Very simplistically, a determination letter is a highly stylized private letter ruling addressed to the employer wherein the IRS has ruled that the form and language of the plan documents comply with the specific requirements of the Internal Revenue Code (“Code”) and all pertinent regulations and rulings. In addition, the IRS is ruling that based on the data provided for review, the Plan is in compliance with the various non-discrimination and coverage rules under the Code.
Procedures
The process starts by the completion and filing of a particular form with the IRS. As is typical with the IRS, there are a number of forms to be completed. Which form one uses depends on a number of factors including what the employer is asking to be reviewed and what type of plan the employer is submitting for review. The typical forms include:
Form Used By
5300 Individually Designed Plans
Collectively Bargained Plan
5307 Prototype Plans
Volume Submitter Plans
5309 Employee Stock Ownership Plans (ESOPs)
5310 Terminating Plans
Schedule Q Plans seeking to have IRS review compliance with nondiscrimination and/or coverage.
User Fees
The IRS also charges a User Fee for issuing determination letters. The fee depends on which type of Form is being used and whether the sophisticated non-discrimination testing is being reviewed.
Requests Without Sophisticated
Non-Discrimination Tests
Form / Fee
5300 / $1,000
5307 / $ 300
5310 / $1,000
Requests With Sophisticated Non-
Discrimination Tests
Form / Fee
5300 / $1,800
5307 / $1,000
5310 / $1,800
Power of Attorney
Although it is permitted, most employers do not file for determination letters on their own. Instead, employers will use the service of what is called an “authorized representative.” This is typically an employee benefits attorney or someone skilled in the handling of qualified retirement plans. Operating under a Power of Attorney, the representative will complete the forms and negotiate with the IRS as described below.
Review Process
The filing of a determination letter request is not like a “final exam” that the employer either passes or fails. Rather, it is a process. The determination letter request is assigned to a reviewer who examines the plan document and the supporting testing data, if any. The reviewer’s mission is to issue a favorable letter. As such, he or she will examine the document’s language and determine whether it contains the “correct” language as required by the Code. The reviewer will also determine whether the plan’s language will operate in compliance with the Code. In addition, the reviewer will examine the data provided to determine whether the coverage and non-discrimination rules are satisfied. Sometimes the plan is fine as initially submitted. But sometimes the reviewer will request revisions or additional data. This happens more frequently with complex plan designs. If revisions or additional data is requested, then there is a dialogue or negotiation between the employer’s representative who filed for the letter and the IRS reviewer.
Sometimes this back and forth process is relatively quick. Sometimes it can be rather lengthy. It depends in part on the nature of the plan’s design and the IRS attempts to rule consistently on similar plan designs.
But barring employer’s refusal to make changes negotiated with the IRS, the IRS will issue a favorable determination letter. If there are revisions, the determination letter will be conditioned on the employer adopting an amendment containing the revisions that were negotiated during the process.
Once the favorable letter is issued, the employer may rely on that letter to verify the qualified status of the plan. But bear in mind, that a favorable determination letter is only an approval of a “snapshot” of the plan at that point in time. A plan with a favorable determination letter must still operate in practice with the terms of the Code and the plan’s own document.
©McDonald Hopkins LLC (2009) Dale Vlasek
