The Internal Revenue Service (IRS) recently provided additional guidance on the previously established five-year filing cycle and process for determination letters for tax-qualified retirement plans. Like the initial guidance, the new guidance again specifies special rules for plans sponsored by governmental or tax-exempt entities, master and prototype plans, volume submitter plans, pre-approved plans, mass submitter plans, new and terminating plans, and plans sponsored by a joint board of trustees consisting of representative from a single employer and a union. The IRS guidance covers a range of topics, but highlights include the clarification of requirements for plan amendments and determination filings that relate to the Pension Protection Act of 2006 (PPA) and the modification and expansion of rules for determination applications for controlled groups, for new and terminating plans, and for plans involved in mergers, acquisitions, spin-offs, or other plan sponsorship or controlled group changes.
Clarification of Rules Regarding PPA Amendments
Special rules apply to the IRS’ review of plan amendments required or allowed by the PPA (PPA amendments). Although plan sponsors may submit a determination letter application for a tax-qualified retirement plan that includes PPA amendments during any cycle, the IRS generally will not review PPA amendments as part of determination letter filings until cycles that begin on or after February 1, 2009, unless the plan is terminated. In essence, plans submitting applications that include PPA amendments during pre-February 1, 2009 cycles cannot rely on any determination letter received as an indication that the IRS has approved PPA amendments. In addition, if a plan is submitted with any PPA amendments, the application specifically must indicate in a cover letter or attachment which PPA amendments are included and where the PPA provisions are contained in the plan. The IRS also clarified that a plan can adopt both required and optional PPA amendments until the last day of the first plan year that begins on or after January 1, 2009.
Modifications and Expansions of Controlled Group Rules
Members of a parent-subsidiary controlled group with multiple tax-qualified retirement plans may elect to file determination letter applications for all plans using the parent’s applicable cycle, determined by reference to the parent’s Employer Identification Number (EIN). Only the parent can elect to apply its filing cycle for all controlled group members. The parent’s election also must meet the following four requirements:
- it must be made by all controlled group members that sponsor a tax-qualified retirement plan,
- it must list all group members that sponsor a plan,
- it must list the EIN of each member that sponsors a plan, and
- it must list all plans sponsored by each group member.
In addition, the parent’s election must be made by the end of the earliest cycle in which a determination letter application would have been required absent the election. For example, if the parent’s EIN results in a filing cycle of Cycle C, and a subsidiary’s EIN results in a filing cycle of Cycle A, the election to file all plans maintained by the controlled group during the parent’s cycle must be made by the end of Cycle A.
The parent’s election can include a statement that the parent’s cycle will apply to all tax-qualified retirement plans of subsidiaries acquired by the controlled group in the future and will not apply to any plans of subsidiaries who subsequently leave the controlled group. By including this statement in a parent’s election, the parent eliminates the requirement of a new cycle election each time a subsidiary enters or leaves the controlled group. If the parent’s election includes this statement, the parent still must update its election with complete controlled group and plan information, and the updated list and information must be included with the documentation of the parent’s election filed with each determination letter application.
If the ultimate parent in a parent-subsidiary group is a foreign entity that does not have an EIN, the highest level U.S. entity that has an EIN can be substituted for purposes of determining the parent’s filing cycle. In this case, the U.S. entity is treated as the parent eligible to make the parent-subsidiary election. However, IRS guidance is unclear as to whether U.S. brother-sister entities that share the same foreign parent are included in the deemed U.S. parent’s election and filing cycle and whether the brother or sister entity should be considered the deemed U.S. parent for election purposes.
Cycle Change Events, Including Mergers, Acquisitions, Dispositions and Spin-Offs
Generally, if a plan changes its EIN as a result of a merger, acquisition, spin-off or change in plan sponsorship (collectively a cycle-change event), the IRS requires that the EIN of the employer maintaining the tax-qualified retirement plan after the cycle-change event be used to determine the resulting plan’s applicable filing cycle. Recent guidance, however, adds several new rules and exceptions for determination applications following cycle-change events.
- If both a plan’s old filing cycle and new filing cycle have expired, the IRS requires the resulting plan to utilize the new cycle going forward.
- If the plan’s new filing cycle has expired, the IRS mandates that the resulting plan retain its old filing cycle.
- If there is less than 12 months left in the plan’s new cycle, the IRS allows the resulting plan to extend its new cycle date by 12 months and to correspondingly shorten its next filing cycle to only four years.
- If the plan’s new filing cycle ends later than its old filing cycle, the IRS permits the resulting plan to elect to utilize its old cycle, regardless of whether the old cycle is open or expired.
For all plans involved in cycle-change events, the IRS requires that determination letter applications include a cover letter or attachment that describes the cycle-change event and details the reason for the change. The plan sponsor also must include documentation directly related to the cycle-change event with the affected plan’s application, such as corporate resolutions related to a spin-off or merger.
Off-Cycle Filings for New and Terminating Plans
The new guidance provides important details about the treatment of off-cycle filings for new and terminating plans. In general, the IRS reviews off-cycle filings after all on-cycle filings. However, if a plan sponsor files a determination application off-cycle for a terminated plan, or if a plan sponsor files a determination application off-cycle for a new individually designed plan which has an on-cycle submission period that ends at least two years after the cycle in which the new plan was adopted, then the same priority review applies for these off-cycle filings as for other on-cycle filings.
Implications for Employers
If a parent in a parent-subsidiary controlled group previously made an election to utilize its filing cycle for all determination applications in its controlled group, the parent should consider updating its election in accordance with this new guidance to allow new subsidiaries to automatically share the parent’s filing cycle. In addition, the filing rules for determination applications following cycle-change events are complex, and employers that frequently undergo such events should develop a filing cycle strategy that takes into account these new rules and requirements.