IRS Eliminates Determination Letters for Pre-approved Plans Without Modifications

12/19/2011

Effective May 1, 2012 the IRS will no longer accept form 5307 Determination Letter applications for prototype plans per IRS Announcement 2011-82. Volume Submitter plans can continue to use form 5307 Determination Letter applications but only for plans that contain a minor modification to the pre-approved document language. In addition, the IRS announced it will eliminate coverage and nondiscrimination demonstrations (generally filed on Schedule Q). This is a significant change to IRS's approach to pre-approved plans that should reduce filings with the IRS. It is not currently clear whether the reduced filing burden on sponsors will result in a greater burden in other situations.

Currently, sponsors of pre-approved plans face a dilemma of whether to file for determination letters even in cases where the sponsor is using a pre-approved plan with no modifications to the pre-approval language. As we discussed in our recent Journal of Pension Benefits Article, there are currently practical advantages to seeking a determination letter for sponsors even though in theory there should be no different treatment of a pre-approved plan without modifications with or without an determination letter. These practical advantages include:

During plan document audits, IRS reviewers/auditors will frequently only request amendments and documents since the plan's last determination letter. This can greatly simplify an audit and provides certainty for plan sponsors.
The Bankruptcy Code provides certain protections from creditors for funds held in a qualified plan. However for the protection to apply, section 522 of the Bankruptcy Code requires that the qualified plan must have "received a favorable determination under section 7805 of the Internal Revenue Code of 1986, and that determination is in effect as of the date of the filing of the petition in a case."

Since Announcement 2011-82 removes the option to file for a determination letter (for pre-approved plans with no modifications), this quandary will no longer exist for plan sponsors. We hope this new approach will be reflected in plan audits and at bankruptcy courts but that, of course, remains to be seen.

If a modification is made to a pre-approved document, it can still file for a determination letter. Volume submitters with minor modifications can continue to use Form 5307 and prototype plans with any type of modification must continue to use Form 5300 for individually designed plans. As has always been the case, any change to a prototype document will make the document individually designed while volume submitter plans can accommodate minor modifications with a lower filing fee.

In addition to the change in approach for pre-approved plans, the IRS is eliminating determinations of coverage and nondiscrimination requirements. As is stated in the Announcement, these determinations are generally of relatively insignificant value since the determinations will only cover the exact factual scenario that is submitted to the IRS and cannot be relied upon in any future testing year. The effective date of this change will depend upon the plan type. Individually designed plans that want a determination letter for coverage and nondiscrimination must apply to the IRS prior to February 1, 2012 whereas preapproved plans have until prior to May 1, 2012.

The IRS provides a chart at their website detailing the effective date of the changes and the specifics for specific line numbers of existing forms.

The IRS indicates it will publish Revenue Procedure 2012-6, on January 3, 2012 to further detail these changes. We expect changes to forms may take place after the changes are effective. ftwilliam.com IRS forms software will be updated to reflect these changes in a timely manner.