Guest Article

(From the December 27, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Determination Letter Program Will Change in 2012

The IRS determination letter program will undergo two key changes in 2012. Schedule Q — and the ability to request a determination based on coverage and nondiscrimination demonstrations — will be eliminated. Also, Form 5307 will no longer be accepted from adopters of master and prototype plans, or adopters of volume submitter plans that have not made changes to the pre-approved specimen plan. As a result of the modifications, the IRS expects that many employers will no longer apply for determination letters. The changes are outlined in Announcement 2011-82, and will be reflected in Revenue Procedure 2012-6, which is scheduled to be published on January 3, 2012.

Schedule Q Elective Determinations Are Eliminated

The IRS concluded that a determination is of limited utility if it is based on a demonstration showing that the plan complies with a coverage or nondiscrimination requirement. Reliance is limited to the facts presented in the demonstration, the IRS explained, and subsequent testing is typically required. As a result, the IRS has decided not to issue determinations as to whether a plan satisfies the Code § 401(a)(4) nondiscrimination, § 401(a)(26) minimum participation, or § 410(b) minimum coverage requirements. It will, however, determine whether the benefit or contribution formula satisfies the requirements of a designed-based safe harbor under Code § 401(a)(4), and whether the plan's terms satisfy the Code § 401(k) and § 401(m) requirements.

This change is effective for determination applications filed on or after February 1, 2012 for ongoing individually-designed plans — and on or after May 1, 2012 for terminating plans and pre-approved plans.

After those dates, Schedule Q and the accompanying demonstrations should not be submitted with any determination letter application (including a Form 5310 for a terminating plan) according to the announcement. Also, certain related items of the current Forms 5300, 5307 and 5310 should not be completed. Those particular items request information on coverage data and nondiscrimination, and are identified in the announcement. The IRS will be revising the Forms in the future.

Form 5307 Is Restricted to VS Plans with Modifications

Determination applications filed on Form 5307 on or after May 1, 2012 will be accepted only from adopters of volume submitter plans that have modified the terms of the specimen plan (and only if the modifications are not so extensive as to cause the plan to be treated as individually designed). Form 5307 applications will not be accepted from adopters of volume submitter (VS) plans that have not made any changes to the specimen plan or from adopters of master and prototype (M&P) plans. Those adopters may rely on the advisory or opinion letter issued for the VS or M&P plan, the announcement explains.

More Pre-Approved Plans Are Required to Use Form 5300

Currently, an application for determination for a VS or M&P plan must be filed on Form 5300 if: (1) a determination is being requested on an affiliated service group, leased employee status, or a partial termination; (2) the plan is a multiple employer plan; or (3) the determination is required by the IRS (e.g., in connection with a request for funding waiver). Effective May 1, 2012, two more circumstances will apply to require a Form 5300 be used:

Special instructions apply in the case of these applications, as described in the announcement. (For example, the use of the Form 5300 does not mean the plan will have to be restated for the changes in the Cumulative List in effect when the application is filed. Rather, the plan will be reviewed against the Cumulative List that was considered by the IRS in issuing the advisory or opinion letter for the plan.)

Before the May 1, 2012 effective date, applications for determination may continue to be filed on Form 5307 under these two circumstances. The announcement cautions, though, that not all applications filed by VS and M&P plans on Form 5307 before May 1, 2012 will be considered "on cycle." Pre-approved defined benefit plans have an on-cycle submission period that runs through April 30, 2012. A "new" pre-approved defined contribution plan (i.e., whose initial remedial amendment period ends after April 30, 2010) that is filed before May 1, 2012 will also be treated as on cycle. Any other defined contribution plan that is filed on Form 5307 before May 1, 2012 will be treated as off-cycle and may not be reviewed before the next two-year filing window for pre-approved plans.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.