Should an individually-designed plan omit getting a determination in this last cycle?

[Peter Gulia]

For an employee stock ownership plan (with employer securities that never traded and never will), the employer has stated the plan as an individually-designed plan. The employer is a Cycle A employer. In 2011, it applied for the IRS’s determination, which the IRS furnished in 2014. The 2014 determination states it was based on the 2010 Cumulative List.

As I read the 2015 Cumulative List, I see nothing that would call for adding, deleting, or changing any provision of this plan. Likewise, as I think about recent years’ changes in tax law, I can’t think of any that necessitates a change in this plan’s text.

Notice 2016–03 states: “Rev. Proc. 2007–44 will be modified to provide that expiration dates included in determination letters issued prior to January 4, 2016, are no longer operative. Future guidance will clarify the extent to which an employer may rely on a determination letter after a subsequent change in law or plan amendment.”

I am wondering whether it now makes sense to apply for a determination.

If (i) the determination the plan already holds does not expire, (ii) there has been no tax-law change that matters to this plan, and (iii) there has been no amendment of the plan since the most recent determination, what value (if any) could be obtained by seeking a determination now?

For whatever expense one might incur to obtain another determination, what value is provided?

(I’m not presuming a conclusion; I really want to know what BenefitsLink mavens think.)

[jpod]

Someone who has an interest in the ESOP's tax-qualified status may give the plan sponsor a hard time without a current DL, e.g., the trustee, a lender, a potential acquirer, etc. Also, isn't it necessary for certain EPCRS purposes if you should ever need EPCRS?

[Peter Gulia]

jpod, thank you for your helpful observations.

Even if having a determination remains an entry condition for an IRS correction program, wouldn't such a condition be met by having a determination that, according to the IRS, has not expired?

Likewise, if a distributee asks a bank to accept a rollover into an IRA, would such a custodian be willing to rely on a determination that the IRS states has not expired?

[Peter Gulia]

If the circumstances are that the employer will not incur any expense to obtain an IRS determination and the plan's administrator is evaluating whether it is prudent for the plan to incur such an expense, how should a plan fiduciary evaluate the idea that, while all participants share in an expense, some (perhaps many) participants are unlikely to benefit from this expense?

(The plan's administrator anticipates that many future distributees will not face a third person's request for "proof" that the plan's document stated provisions that met IRC 401 tax-qualification conditions.)

[jpod]

Is this a final exam or bar exam question, or is this a real issue a client is paying you to think about?

[GMK]

For some of us, this will be less of a concern when the prototype and VS ESOP plan docs are available in 2018 or '19. Until then, I think the D/L's we have will probably not go stale.

[Peter Gulia]

This is a real situation currently faced by a paying client that asked for my advice. (As happens more often than one might like, ERISA lawyers sometimes get called to a sad or even dire situation after the bad stuff was done.)

While the usual mode for many practitioners is to assume it's worthwhile to get a determination (or reliance on a preapproved document), I'm thinking about what reasons I could explain to a plan fiduciary who is trying sincerely to meet her responsibility of incurring only those plan-administration expenses that are reasonable and for the exclusive purpose of providing retirement benefits to the plan's participants and their beneficiaries.

In this plan's circumstances, the expense of getting an IRS determination would lower participants' account balances and would weaken the cash flow needed to pay for investment-management and other services.

[Peter Gulia]

GMK, thank you for the information about when preapproved documents for an ESOP might become available.

[GMK]

It's just a schedule that is suggested in things I've read ... no guarantees.

[Griswold]

There have been rumblings that more FDL guidance is in the works. See Tax Notes May 15, 2016 p. 856. Might be good to get one last one before they change everything, and be grandfathered in, as it were.

[Belgarath]

I've talked with several practitioners who are concerned that whatever pre-approved documents ultimately become available won't have sufficient flexibility to allow some of the customization that is often necessary. Of course, that's all speculation, as no one knows.

And to echo previous comments, it is entirely possible that this DL situation will be modified again in some form.

Since ESOP's seem to be subject to greater scrutiny than most other plan types, both from the IRS and the DOL, I would say that getting a DL is unlikely to be successfully challenged as an imprudent use of plan funds, and entirely consistent with the fiduciary duty to act in the interests of plan participants and beneficiaries. Preserving the tax-qualified status of the plan should certainly be considered of value, as long as your fees are reasonable.

[Peter Gulia]

Belgarath, thank you for the further perspective.

By the way, it would not be me or my firm doing the restatement/determination work.

[GMK]

For an employee stock ownership plan (with employer securities that never traded and never will),

If (i) the determination the plan already holds does not expire, (ii) there has been no tax-law change that matters to this plan, and (iii) there has been no amendment of the plan since the most recent determination, what value (if any) could be obtained by seeking a determination now?

If these factors applied to our ESOP, I would not take money out of the Participants' accounts to buy a new D/L. If the employer wants some CYA protection, then the employer can pay for it. In our case, we as plan sponsor might pay those costs, but not before checking with our ERISA attorney about the possible pitfalls of not getting the D/L. (2015-19 permits, does not require, Cycle A's to apply for a D/L.)

The review for a new D/L could identify required changes in the wording in the Plan Doc in the form of writing in 3 pages of regs that are currently incorporated by reference. But that's cosmetics that reviewers like to see; it clearly doesn't change the plan terms one iota (in our case, it was a section that had no applicability to our plan). But I digress ...

One possibility is that down the road they will require a D/L from the most recent cycle as a condition for adopting a prototype or VS document when they come out. Who knows? If that's the reason the plan needs a new D/L, then I think the plan sponsor, the employer, is on the hook for the cost of the D/L.

Looks like someone decided that Cycle A people should be left to twist slowly, slowly in the wind.

[Peter Gulia]

GMK, thank you for the further ideas.

BenefitsLink mavens all:

Do IRA custodians ask an IRA applicant to furnish the distributing plan's IRS determination letter?

Or does an IRA custodian accept the applicant's written representation that the source of the rollover contribution is an eligible retirement plan?