Recently, the Internal Revenue Service (IRS) issued guidance expanding the determination letter program for individually designed cash balance plans and plans merged following an acquisition transaction. In previous guidance, the old five-year cycle for obtaining updated determination letters for individually designed plans was eliminated, and plans could only receive a favorable determination letter in two narrow instances: upon initial adoption and at the plan’s termination. Rev. Proc. 2019-20 continues to allow plans to receive a favorable determination letter at adoption and termination, while also opening up the determination letter program for two specific types of plans: (1) hybrid plans (e.g., cash balance plans) and (2) merged plans.

Hybrid Plans

Under the prior determination letter regime, statutory hybrid plans were generally not reviewed by the IRS for compliance with certain parts of the final hybrid plan regulations. Rev. Proc. 2019-20 permits hybrid plan sponsors to submit determination letter applications during the 12-month period beginning Sept. 1, 2019 and ending Aug. 31, 2020. This will allow hybrid plans to receive a favorable determination letter that covers the final hybrid plan regulations.

For plans submitted during this period, the IRS has provided reduced sanctions for certain document failures. Specifically, the IRS will not impose any sanctions for plan document failures related to the final hybrid plan regulations, even if the failure is discovered by the IRS during the determination letter application review process. In addition, the IRS will cap the sanction amount for failures caused by certain other good-faith amendment failures at the user fee that would have applied under the IRS’s Voluntary Compliance Program.

Merged Plans

Under the new guidance, a “merged plan” is the surviving plan after two or more plans sponsored by unrelated entities are merged into a single individually designed plan in connection with a corporate transaction (i.e., a merger, acquisition or similar business transaction). To be eligible for a determination letter under this rule, the merged plan must meet two specific timing requirements: (1) the plan merger must occur no later than the end of the plan year after the corporate transaction and (2) the determination letter application for the merged plan must be submitted after the date of the plan merger, and no later than the end of the plan year after the plan merger. Plan sponsors who have recently undergone a merger, acquisition or similar business transaction or who expect to do so in the future should consider taking advantage of this opportunity to obtain a new IRS determination letter and should be cognizant of the timing requirements. The IRS will begin accepting determination letter applications for Merged Plans on Sept. 1, 2019.

For merged plans, the IRS has provided reduced sanctions for certain failures. The IRS will not impose any sanctions for plan document failures caused by plan provisions “intended to effectuate the merger.” In addition, the IRS will cap the sanction amount for failures caused by certain good-faith amendments at the user fee that would have applied under the IRS’s Voluntary Compliance Program.

Rev. Proc. 2019-20 is very good news for employers who maintain individually designed plans. The plan sponsor community has been asking for an expanded determination letter program since the IRS announced the end of the five-year cycles in 2016. With this newly expanded program, plan sponsors can rest assured that hybrid plans and merged plans meet the IRS’s document requirements for plan qualification, and the potential for reduced sanctions provides a valuable incentive for plan sponsors to take advantage of the expanded program.

Attorneys in Taft’s Employee Benefits & Executive Compensation group are available to assist plan sponsors with evaluating whether their qualified retirement plans should be submitted to the IRS for a favorable determination letter and to discuss any other requirements that apply to qualified retirement plans.