Determination letters after 2001-77

[k man]

Does anyone have an opinion as to whether or not sponsors should be submitting prototype plans for determination letters in light of IRS Announcement 2001-77. Typically we deal with clients that sponsor either garden variety non-standardized 401(k) and/or profit sharing plans as well as some cross tested plans which we will be restating under the volume submitter program.

As 2001-77 gives extended reliance that the plan satsfies the form requirements, is there any meaningful reason to submit these days?

[Bob R]

For whatever it's worth, here's my opinion.

I can't think of any compelling reason to submit. The Announcement gives reliance as to the "form" of the plan if all of the conditions in the Announcement are satisfied. In addition, in some cases you have reliance as to the operational coverage and nondiscrimination issues.

In those situations where you don't have reliance as to coverage or nondiscrimination (e.g., w/cross-tested plans), some people will submit. But, those are the same ones who were submitting for a full scope determination letter before the Announcement -- and a growing number of people really don't think a ruling on the average benefits test or a general nondiscrim test is worth obtaining. There are also some people (primarily attorneys) who just like to have a determination letter, even if it's really not necessary. Also, some are concerned about potential bankruptcy issues, especially in jurisdictions that hold an ERISA qualified plan is a tax qualified plan. And, some people want a determination letter before plans are merged, such as when there has been a business acquisition.

Again, I don't think any of these are compelling reasons to submit. Sure, there are limited situations where a determination letter should be obtained. But I think those are the exception, not the general rule.

Two final points --

(1) It's not clear what impact EGTRRA will have. For certain small employers w/new plans, there are no user fees. The only cost is for preparing the submission package, which could still be expensive. But, w/out user fees some practitioners may recommend that a determination letter be obtained.

(2) Will standardized prototypes become less popular? The only advantage of a standardized prototype is that if 2 paired standardized plans are maintained, you have reliance as to the coordinating language for 415 and 416. If the plans are not paired (which is the case with nonstandardized plans), then you still have reliance as to the form of the plan other than the 415 and 416 coordinating language. With the nonstandardized you could still have reliance as to the coverage and nondiscrimination requirements if you select safe harbor options (e.g., you only exlcude union ees and nonresident aliens).