IRS Rev. Proc. 2019-20 Expands Determination Letter Program

Practical Law Legal Update w-020-2278 (Approx. 9 pages)

IRS Rev. Proc. 2019-20 Expands Determination Letter Program

by Practical Law Employee Benefits & Executive Compensation

Background

In Rev. Proc. 2016-37, the IRS significantly changed the IRS determination letter program for qualified retirement plans. This subregulatory document:

Eliminated the staggered five-year remedial amendment cycle system for individually designed retirement plans provided in IRS Rev. Proc. 2007-44.
Limited the determination letter application rules for individually designed plans by providing that a sponsor of an individually designed plan will be permitted to submit a determination letter application only for:
- initial plan qualification (that is, if it has never received a determination letter before);
- qualification upon termination of the plan; or
- other special circumstances, which the IRS will announce in published guidance in the Internal Revenue Bulletin.

(See Legal Update, IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37. To learn more about the determination letter process for individually designed retirement plans, see Retirement Plan Determination Letters Toolkit.)

In IRS Notice 2018-24, the IRS requested comments on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year. According to Rev. Proc. 2019-20, the IRS received numerous comments in response to Notice 2018-24.

Rev. Proc. 2019-20

Rev. Proc. 2019-20 amplifies and modifies Rev. Proc. 2016-37 in regard to the determination letter process for statutory hybrid defined benefit plans and merged retirement plans.

Hybrid Plans

Hybrid defined benefit plans, such as cash balance plans or pension equity plans (PEPs), combine features of both defined contribution and defined benefit plans (see Practice Note, Cash Balance Plans). In a hybrid plan, the participant's accumulated benefit is usually expressed as:

The current balance of a hypothetical account maintained for the participant.
The current value of an accumulated percentage of the participant's final average compensation.

(See Practice Note, Requirements for Qualified Retirement Plans: Hybrid Plans.)

The Pension Protection Act of 2006 (PPA) imposed an age discrimination safe harbor requiring that interest crediting rates cannot be greater than a market rate of return (see Practice Note, Cash Balance Plans: Post-PPA: Age Discrimination Safe Harbor).

In 2010 and 2014, the IRS issued two sets of final regulations on hybrid plans (the final hybrid plan regulations) that implemented the requirements of the PPA (for more information on those regulations, see Legal Updates, IRS Issues Final Regulations Providing Guidance on Hybrid Retirement Plans and Proposed Regulations Providing Anti-Cutback Relief and IRS Issues Final Regulations Providing Anti-Cutback Relief and Guidance for Hybrid Retirement Plans).

The Treasury Regulations define a statutory hybrid plan as a defined benefit plan that contains a statutory hybrid benefit formula (26 C.F.R. § 1.411(a)(13)-1(d)(5)).

Under Rev. Proc. 2019-20, the IRS will accept determination letter applications for individually designed statutory hybrid plans during the 12-month period beginning September 1, 2019, and ending August 31, 2020 (referred to as the statutory hybrid plan submission period).

The IRS will review individually designed statutory hybrid plans that are submitted for determination letters according to:

The procedures relating to determination letter applications for individually designed plans set forth in Rev. Proc. 2019-4 and its annual successors and Rev. Proc. 2016-37 (except as provided in Rev. Proc. 2019-20) (see Legal Update, IRS Rev. Proc. 2019-4 Updates the Determination Letter Program and VCP Fees).
The 2017 Required Amendments List (Notice 2017-72) (see Legal Update, IRS Notice 2017-72 Includes 2017 Required Amendments List), and prior Required Amendments Lists and Cumulative Lists. The annual Required Amendments List is issued by the IRS under Rev. Proc. 2016-37, and it includes the statutory and administrative changes in qualification requirements that require a plan amendment. The annual Cumulative List sets out the changes to employee benefit plan requirements that the IRS will review when it determines if a plan has been properly updated.

Merged Plans

Merged plans are defined by Rev. Proc. 2019-20 as plans that result from the merger or consolidation of two or more plans into a single individually designed plan following a plan merger under Treasury Regulation Section 1.414(l)-1(b)(2) (26 C.F.R. § 1.414(l)-1(b)(2)) in connection with a corporate merger or acquisition between unrelated entities, as those terms are defined in Rev. Proc. 2019-20.

Rev. Proc. 2019-20 provides that beginning September 1, 2019, the IRS will accept determination letter applications for merged plans if:

The date of the plan merger occurs no later than the last day of the first plan year that begins after the plan year that includes the date of a corporate merger, acquisition, or other similar business transaction between unrelated entities.
The applications for the merged plans are submitted within a period beginning on the date of the plan merger (as determined according to Rev. Proc. 2019-20) and ending on the last day of the first plan year of the merged plan that begins after the date of the plan merger.

Determination letter applications submitted for merged plans will be accepted on an ongoing basis and are not limited to a specific submission period.

The IRS will review individually designed statutory hybrid plans that are submitted for determination letters according to:

The procedures relating to determination letter applications for individually designed plans set forth in Rev. Proc. 2019-4 and its annual successors and Rev. Proc. 2016-37, except as provided in Rev. Proc. 2019-20.
The Required Amendments List that was issued during the second full calendar year preceding the submission of the determination letter application, and all prior Required Amendments Lists and Cumulative Lists.

Extension of Remedial Amendment Period

For plans that seek a determination letter under Rev. Proc. 2019-20, the remedial amendment period (which is the period used to correct disqualifying plan provisions) that is open as of the beginning of the determination letter submission period is extended to the end of that submission period, according to the definition of submission period in Sections 4.01(1) and 5.02(2)(b) of Rev. Proc. 2019-20.

The extension provided in Treasury Regulation Section 1.401(b)-1(e)(3) (26 C.F.R. § 1.401(b)-1(e)(3)), which provides that the submission of a determination letter application extends the remedial amendment period until the expiration of 91 days after the date a determination letter is issued, will continue to apply.

Rev. Proc. 2019-20 does not provide additional relief from the anti-cutback requirements of Code Section 411(d)(6) (26 U.S.C. § 411(d)(6)) to statutory hybrid plans that seek determination letters, other than the extension of the remedial amendment period.

Sanctions

Rev. Proc. 2019-20 explains how the IRS will apply sanctions to statutory hybrid plans and merged plans that seek determination letters and have plan document failures.

Plan sponsors that apply for a determination letter under Rev. Proc. 2019-20 for a statutory hybrid plan or a merged plan that has a plan document failure, as defined in Section 5.01(2) of Rev. Proc. 2019-19, must:

Amend the plan to comply with the applicable qualification requirements.
Pay the applicable sanction according to the rules of Rev. Proc. 2019-20 and enter into a closing agreement with the IRS.

Sanction Exemption

The IRS will not impose sanctions for any:

Statutory hybrid plan document failure for a plan provision that is needed to meet the requirements of Treasury Regulation Sections 1.411(a)(13)-1 (26 C.F.R. § 1.411(a)(13)-1) (the rules for statutory hybrid plans) and 1.411(b)(5)-1 (26 C.F.R. § 1.411(b)(5)-1) (the rules for determining whether a reduction occurs in the rate of benefit accrual under a defined benefit plan because of the attainment of any age for purposes of Code Section 411(b)(1)(H)(i) (26 U.S.C. § 411(b)(1)(H)(i))).
Merged plan document failure for a plan provision needed to effectuate the plan merger.

Special Sanction Structure

Rev. Proc. 2019-20 provides a special sanction structure for statutory hybrid plans and merged plans with a plan document failure other than one relating to a plan provision:

Required under Treasury Regulation Sections 1.411(a)(13)-1 and 1.411(b)(5)-1 (for statutory hybrid plans).
Included to effectuate the merger (for merged plans).

The special sanction will be equal to the applicable Employee Plans Voluntary Compliance Resolution System (EPCRS) Voluntary Correction Program (VCP) user fee that would have applied had the plan sponsor identified the failure and submitted the plan for consideration under the VCP (see Practice Note, Correcting Qualified Plan Errors Under EPCRS: Voluntary Correction with Service Approval Program: VCP), if either of the following conditions apply:

The plan amendment that creates the failure, regardless of whether that amendment was required to be adopted, was adopted timely and in good faith with the intent of maintaining the qualified status of the plan.
In the case of a plan amendment required because of a change in tax qualification requirements, the plan sponsor reasonably and in good faith determined that no amendment was required because the qualification change does not impact provisions of the written plan document.

Rev. Proc. 2019-20 further provides that the IRS will make the final determination in all cases as to whether a plan amendment was adopted in good faith with the intent of maintaining the qualified status of the plan, or whether a plan sponsor reasonably and in good faith determined that no amendment was required.

General Sanction Structure

Rev. Proc. 2019-20 also provides a general sanction structure for statutory hybrid plans and merged plans with a plan document failure other than a failure relating to a plan provision that does not satisfy either of the conditions for the special sanction and is either:

Required under Treasury Regulation Sections 1.411(a)(13)-1 and 1.411(b)(5)-1 for a statutory hybrid plan (26 C.F.R. §§ 1.411(a)(13)-1, 1.411(b)(5)-1).
Included to effectuate a plan merger.

The sanction will be equal to the sanction amount set forth in Rev. Proc. 2019-19, Section 14.04, which provides for a sanction for certain plan document failures that are discovered by the IRS during the determination letter process that is equal to 150% or 250%, depending on the duration of the failure, of the applicable user fee that would apply to the plan under the EPCRS VCP (see Legal Update, IRS Updates EPCRS and Expands Self-Correction Program in Rev. Proc. 2019-19). Appendix A of IRS Rev. Proc. 2019-4 and its annual successors provides the applicable VCP fee (see Legal Update, IRS Rev. Proc. 2019-4 Updates the Determination Letter Program and VCP Fees).

Practical Implications

Individually designed retirement plan sponsors and administrators, especially those that sponsor or administer statutory hybrid defined benefit plans and merged retirement plans, should be aware that they can now apply for determination letters under Rev. Proc. 2019-20, effective on September 1, 2019.

Sponsors and administrators should know that the IRS may expand the availability of determination letters in the near future. Rev. Proc. 2019-20 indicates that the Treasury Department and the IRS will continue to consider and periodically request public comments regarding the expansion of the determination letter program.

IRS Rev. Proc. 2019-20 Expands Determination Letter Program | Practical Law