Plan Termination - Determination Letter

[ndj2377]

We are assisting a client with terminating their plan. The plan is small (just over 100 participants). They are trying to decide whether or not to seek a determination letter with the termination. They are confident their plan document and administration of the plan is in order -- the last determination letter received was 2012.

Does anyone have experience with clients that do not seek a determination letter and if so, does this increase the likelihood of a PBGC or IRS audit? Most clients we work with go through the process of obtaining a Determination Letter.

They are under 300 participants, so the PBGC audit would not be automatically triggered.

Any details of similar terminations would be appreciated. Thanks.

[John Feldt ERPA CPC QPA]

I can't speak as to whether or not it increases the likelihood of an audit, but I am not much of a gambler. More often I've seen PBGC audits of terminated plans rather than IRS audits of terminated plans.

If it is a cash balance plan, I highly recommend either restating to the pre-approved document prior to termination, or submit to the IRS under form 5310. For example, I have seen a few agents question the definition of accrued benefit in a cash balance plan as they do not find the existing definition to be written exactly as their manual describes.

[figure 8]

I don't know if it increases the chance of audit. I know I've done quite a few small PBGC terminations with no determination letter, and plenty of them have not been audited. Actually, I think all or almost all of the audits I've experienced were cases where  there was some other red flag.

I would doubt it increases the chance of an IRS audit. Would the IRS even get information about PBGC plans that terminate without a determination letter? Maybe they do, but I'd be surprised if that's something they seek out.

I am assuming that the plan hasn't had any material changes (besides freeze/termination) since the last determination letter and that the document is in compliance. Given that assumption, think of the 2 likely worst case scenarios: 1. Worst case scenario if no determination letter is done - the plan possibly has a higher chance of audit. 2. Worst case scenario if determination letter is done - the plan has to deal with the cost and time involved with the determination letter process. Which one is worse for this particular client?

Personally, if nothing really has changed since the last determination letter and the plan document is in compliance, I don't see much need for a determination letter. But I don't know all of the details about how the plan has been administered and how the document has been maintained since 2012. Obviously if my assumption is wrong, and the plan has had material changes or the document is not in compliance, that could change the story.

At the end of the day, I would lay out the pros and cons and risks and leave the decision to the client. Getting the determination letter is probably always (or almost always) the safest route, but sometimes the other route is fairly safe as well.

[K2retire]

17 hours ago, figure 8 said:

At the end of the day, I would lay out the pros and cons and risks and leave the decision to the client. 

There's the correct answer!

[david rigby]

Use of the pronoun "we" in the OP may be ambiguous, since readers don't really know the relationship to the plan or the sponsor (TPA, accountant, atty, actuary, etc).  As an actuary, I have always recommended seeking a DL, but I also recommend getting advice from a qualified ERISA atty.  I've seen several terminations (some small, some not) where the atty made a different recommendation, and made a very good case for it. 

Analysis/recommendation from ERISA counsel is the correct approach, more so than from any other advisor.  As stated above, it is a decision of the PA.

[ratherbereading]

I've done several plan terminations and had 1 client decide to get a  DL.  If it's a plan with no issues and the document is in order, I don't see a reason for a DL, but as someone said, it's up to the client.

[Larry Starr]

We've had 100's of DL on terminations over the years.  Most times we go for them; sometimes we don't.  We ALWAYS get the approval when we go for them; it's a pro forma thing,but generally a pain because we always have to educate the IRS reviewer or provide multiple copies of stuff because they can't find things that we have already submitted..  

The most important reason for going for the DL is to make sure the IRA rollovers are secure.  While I am almost 100% sure we would never had a problem with IRS finding a problem in a terminated plan that did NOT go for a DL, that approved termination letter is simply an insurance policy that guarantees that the IRS will never be able to attack the IRA rollover as from a non-qualified plan and all the problems that would arise from such a finding. And the rollover we are concerned about it the BIG ONE that's coming from our business owner client, not the little ones of the rank in file employees.

So, if it was a really small plan asset wise (say, under $100k maybe), we probably would talk the client about forgoing a DL request.  Other than that, we pretty much make it automatic and don't even talk about it being a choice.

But NOT getting a DL does not increase the risk of audit.  The IRS systems for selection for audit does not look for a DL filing on a terminated plan.  But we do like that insurance policy! FWIW.

[Bob the Swimmer]

I agree with figure 8 and Larry Starr---it's a cost-benefit and risk analysis----in a 42-year career I've even had the IRS accidentally send us a client's file by mistake---when we sent it back, they accelerated the approval to two weeks.

[Patricia Neal Jensen]

Good advice for the client to decide.  With 401(k) and 403(b), our smaller clients (under 100 P's) generally do not go for the determination letter.

[Linda Wilkins]

On Larry Starr's comment about making it automatic in most cases, just disagree and think it should always be pointed out that it is not required.  I once got a new public company client solely because the HR director was steamed that legal counsel had not pointed out that it was optional.

[Larry Starr]

We deal in a different world;  our clients don't have "HR Directors"; they are lucky if they have a competent bookkeeper.  Our clients are the owners of small businesses and our job is to keep them safe. I said "we pretty much make it automatic" but that means that we are highly recommending this particular termination process and we don't make a big deal of NOT going for the DL, except when we think it really doesn't provide any added value.

[ESOP Guy]

I agree with Larry on this one.  DL are cheap insurance in my mind.