United States: IRS Updates Determination Letter Request Forms

In December of 2013, the IRS released new final versions of the Form 5300 and the Form 5310, forms which are used by individually designed retirement plans to request a determination as to the plan's tax qualification status.  Form 5300 is used for ongoing plans. Form 5310 is used when a plan is being terminated and the plan sponsor wants to get a determination as to the plan's tax qualified status upon such termination. The new Forms require disclosure of more information than the prior versions of the Forms. The prior Form 5500 was issued in April 2011 and the prior Form 5310 was issued in April 2006.  The new Forms may be used now (the IRS has indicated that it prefers that these new forms be used now) and must be used for determination letter filings that are filed after June 30, 2014. Since there are many more ongoing filings, the rest of this article will focus primarily on the revised Form 5300.

Purpose of ongoing determination letter filings

The IRS determination letter program is a voluntary program under which employers can submit a plan for review by the IRS.  The goal at the end of the review of a Form 5300 is that the IRS issues a letter indicating that it has determined that, in form, the plan document complies with the applicable requirements of the Internal Revenue Code.  In general, so long as a plan that has received a current favorable determination letter is operated in compliance with its terms and applicable law, then the employer should be able to deduct its contributions to the plan, and such employer contributions as well as employee pre-tax contributions should not currently be includible in the employee's gross income.  Further, the earnings on the plan's assets should not be subject to tax each year that those earnings are in the plan and most lump sum distributions should be eligible for a tax-free rollover to another plan or an IRA.

Remedial amendment period

One of the important aspects of the determination letter process and why most individually designed plans file for a determination under the voluntary program has to do with the concept of a remedial amendment period. If a plan is timely filed and has met certain other requirements, the sponsor may be allowed to retroactively fix an issue if the IRS finds a problem with the plan's language during the determination letter review. If the requirements are met, the plan should be able to retroactively make a change to the language to bring it into compliance. The "remedial amendment period" is the time during which a plan may make retroactive amendments to avoid disqualification. Generally, for any given year, the remedial amendment period for required amendments ends on the extended due date for the sponsors tax return filing. However, in certain circumstances the remedial amendment period can be extended if a timely determination letter application is filed. The period is extended to a point beyond the date the IRS issues the determination letter and the determination letter is contingent on any amendments required by the IRS as part of the review being timely adopted. Since it is hard to know exactly what the IRS wants to see in a plan's language, it becomes very important to take advantage of the remedial amendment period.

Procedure for ongoing determination letter filings

Prior to 2007, the deadline for filing a determination letter was based off of IRS guidance that generally gave the same deadline for all individually designed plans to be filed with the IRS to preserve the remedial amendment period for issues found on review. The result was a tremendous volume of letters being filed at or around the last day filing was required. To alleviate some of this tremendous burden, the IRS developed a new process for remedial amendment periods under Revenue Procedure 2005-66. This Revenue Procedure, which has been updated through additional guidance, set forth a five year staggered cycle for remedial amendment periods for individually designed plans that, subject to certain specific exceptions, is based on the last digit of the employer's EIN.  The current five year general rule cycle schedule is:

The exceptions to the last digit of the EIN general rule include special filing cycles for multiemployer and multiple employer plans, controlled group plans and governmental plans.

The new form

The revised Form 5300 appears to be a bit more complex than the prior version.  Among the changes that are new or expanded on the form include requests for additional information about pre-approved plans that may be required to file as individually designed plans, and requests for additional information about a plans prior determination letter. The new Form requests the date the letter was issued, the year of the cumulative list considered as part of the prior determination letter and the expiration date of the determination letter. Currently, a filer just needs to state the date of the letter and attach a copy. As well, the 2013 Form requires filers to determine if any new amendments since the date of the last letter are interim or discretionary amendments and it provides a table on which a filer must give each amendment an identifying name or number (such as Amendment 1), the effective date of the amendment (if there are multiple dates, the earliest one is used), the adoption date of the amendment, information about whether the amendment is an interim amendment, a discretionary amendment or both, whether the plan sponsor had the authority to adopt the amendment on behalf of the adopting employer and, in the case of interim amendments, the due date of the employer's tax return, including extensions, if applicable. Such date is not required to be provided for discretionary amendments.

The form also requires the specific tax return that the employer uses to file its return to be listed. The form also requests information about whether a safe-harbor definition of compensation is being satisfied, whether a cash or deferred arrangement is a safe harbor and if so, what type of safe harbor is being used. For defined benefit plans there is a question on the accrual rule under the plan. For ESOPs, there are questions about the plan sponsor's corporate status and diversification. Finally, the Procedural Requirements Checklist is much longer and has potentially more attachments than was required in the past.

Given all of these changes, plan advisors would be well served to start gathering filing information earlier than in the past.

Conclusion

In sum, the IRS has provided new determination letter application forms that are more complex and request more information than the forms previously required.  If a filing is to occur after June 30, 2014 use of the more complex form is required.  For Cycle D filers whose filing deadline is January 1, 2015, it would be prudent to start to gathering the required information and putting the filing together sooner rather than later.

Reprinted with permission from Employee Benefit Review - June 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.