New Determination Letter Program Established

New Determination Letter Program Established

Over the years, most employer sponsors of qualified retirement plans have obtained determination letters for their plans from the IRS. Although technically, obtaining a letter is optional, doing so is necessary as a practical matter because a favorable letter on a plan is a sponsor's assurance (an insurance policy of sorts) from the IRS that its plan, as first written or later amended, complies with current tax law. To obtain a letter, a plan sponsor must submit a formal application on forms issued by the IRS. Unfortunately, the application process is frequently long and unpredictable and all too soon must be repeated to obtain a new letter.

Late last week the IRS finalized its new (and we think improved) determination letter program. Under the new program, plan sponsors are grouped into one of five different 5–year cycles - Cycle A, B, C, D or E - and need apply to the IRS for a new determination letter only once each cycle, during the last 12 months of the cycle. As a general rule, a sponsor's cycle is determined by the last digit of its federal employer identification number (EIN) as follows:

For example, a sponsor whose EIN is 35–1234567 is on Cycle B and should apply for its first determination letter under the new program between February 1, 2007 and January 31, 2008. Special rules apply when determining the cycles assigned to plan sponsors of multiemployer, multiple employer, governmental, merged, terminated and other plans.

Applications made on–cycle during a plan sponsor's first cycle will result in determination letters that take into account all provisions of a new plan established after December 31, 2001 and all discretionary plan amendments to an existing plan made after December 31, 2001. In addition, these letters will also cover all plan amendments for EGTRRA, the required minimum distribution regulations, deemed Code section 125 compensation and, for defined benefit plans, applicable mortality tables, provided the amendments were timely made. The determination letters received from this first on–cycle filing will expire at the end of the plan sponsor's next cycle.

Sponsors who apply for a letter off–cycle (that is, outside the last 12 months of their cycle) receive fewer assurances in their letters and must reapply for a new letter during the last 12 months of the same cycle. This will make it important for plan sponsors to determine and stick to the particular cycle applicable to their plans.

If you are a plan sponsor whose federal EIN ends in 1 or 6, you may wish to begin preparing soon for your first on-cycle determination letter filing between February 1, 2006 and January 31, 2007. You may learn more about the new determination letter program by visiting the IRS's web site.