Takeaways

Individually designed cash balance plans and other “statutory hybrid” pension plans can be submitted for IRS approval during the 12-month period beginning on September 1, 2019.
Individually designed plan documents for defined benefit or defined contribution plans that are merged in connection with a corporate merger, acquisition or similar transaction can be submitted for IRS approval beginning on September 1, 2019.

Since January 2017, the IRS has significantly limited the ability of employers to submit individually designed plan documents for approval under the IRS’s determination letter program. Newly established plans can still be submitted, and existing plans that have previously received a favorable determination letter can be submitted if the plan is being terminated, but all other existing plans have been prohibited from seeking IRS approval. 

On May 1, 2019, however, the IRS announced in Revenue Procedure 2019-20 that it will allow employers to submit two types of individually designed plan documents for new determination letters, beginning on September 1, 2019:

  • Statutory hybrid plans: These are defined benefit pension plans under which the accrued benefit (or any portion thereof) is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation. This includes cash balance plans, pension equity plans, and certain variable annuity plans.
  • Merged plans: These are defined benefit or defined contribution plans that result from the merger or consolidation of two or more plans previously maintained by unaffiliated employers into a single individually designed plan. To be eligible for submission to the IRS, the plan merger must occur in connection with a corporate merger, acquisition or similar business transaction among the unaffiliated employers.

The submission deadlines and other requirements for these plans are discussed below.

Statutory hybrid plans

Statutory hybrid plans may be submitted to the IRS during the 12-month period beginning on September 1, 2019 and ending on August 31, 2020.

This is an important opportunity, as the last IRS determination letters issued for such plans did not include a review for compliance with certain final regulations for hybrid plans, including the final “market rate of return” regulation. Moreover, when reviewing hybrid plans submitted during the 12-month period, the IRS will also consider any other plan amendments (not related to the hybrid plan regulations) that have been adopted since the last determination letter.

Merged plans

Merged plans may be submitted to the IRS beginning on September 1, 2019. Unlike statutory hybrid plans, there is no 12-month restriction on submissions of merged plans. However, the employer must meet certain timing requirements in order to demonstrate that the plan merger was implemented in connection with a corporate merger, acquisition or similar transaction:

  • The effective date of the plan merger (as specified in a corporate board resolution or other written documentation signed by authorized persons, or a plan amendment) must occur no later than the last day of the first plan year that begins after the plan year in which the corporate transaction took place; and
  • The merged plan must be submitted to the IRS within the period beginning on the date of the plan merger and ending on the last day of the first plan year of the merged plan that begins after the date of the plan merger.

For example, assume Company A and Company B are unaffiliated employers with plans that operate on a calendar year basis. If Company A acquires Company B in a corporate transaction during 2019, and Company B’s plan is merged into Company A’s plan during 2020, Company A could submit the merged plan to the IRS during the period beginning on the plan merger date and ending on December 31, 2021. 

The IRS will accept submissions for merged plans even if the corporate transaction and plan merger have already occurred, as long as the timing requirements are complied with. In the above example, if Company A had acquired Company B in 2017, and the plan merger occurred during 2018, Company A could submit the merged plan to the IRS any time between September 1, 2019 and December 31, 2019.

As part of its review of the merged plan, the IRS will review all plan provisions and not just those related to the plan merger. Consequently, an employer with an existing plan that has been amended several times since its last determination letter can use the opportunity of a plan merger to obtain a full IRS review of those amendments.

Sanctions relief

Submitting a plan to the IRS presents a risk that the IRS may object to certain plan provisions. When a new plan is adopted or an existing plan is amended, the IRS provides a “remedial amendment period” during which the plan language can be adopted or corrected without penalty. The duration of the remedial amendment period varies depending on the particular plan changes involved. For plan changes that are submitted to the IRS during the remedial amendment period for those changes, the remedial amendment period is extended until 91 days after the date of the IRS determination letter.

For many statutory hybrid plans, the remedial amendment period for amendments required by the last set of regulations to be finalized, including the “market rate of return” regulation, is open until December 31, 2019. (Initial amendments were generally required to be adopted before the beginning of the 2017 plan year in order to qualify for relief from the Internal Revenue Code’s anti-cutback requirements.) However, the remedial amendment period for complying with other statutory hybrid plan regulations that were finalized at an earlier date has already passed. Similarly, merged plans may contain provisions for which the remedial amendment period has expired.

Ordinarily, if the IRS objects to plan language for which the remedial amendment period has expired, the IRS can impose penalties under its “Audit Closing Agreement Program” (Audit CAP). Recognizing that this may create a disincentive for employers to submit their eligible plans, the IRS has proposed the following relief:

  • For statutory hybrid plans, the IRS will not impose any Audit CAP sanctions for plan document language that does not fully comply with the statutory hybrid plan regulations, including those parts of the regulations for which the remedial amendment period has expired.
  • For merged plans, the IRS will not impose any Audit CAP sanctions with respect to any plan language adopted to effectuate the plan merger.
  • For plan document failures in statutory hybrid plans not related to the hybrid plan regulations, or plan document failures in merged plans not related to the plan merger, the IRS will limit any Audit CAP sanction to the user fee that would have applied if the plan sponsor had submitted the plan document failure under the IRS’s Voluntary Compliance Program (VCP). VCP fees range from $1,500 to $3,500, depending on the amount of assets held by the plan.

In order to qualify for this relief, however, the employer must have adopted the original plan amendments timely and in good faith with the intent of maintaining the qualified status of the plan. If the employer did not adopt a plan amendment that was required because of a change in qualification requirements, the employer must have reasonably and in good faith determined that no amendment was required because the qualification change did not impact provisions of the written plan document.

If the plan document failure does not qualify for sanction relief, the IRS may impose its regular Audit CAP sanction for plan document failures, which can be 150 percent or 250 percent of the otherwise applicable VCP user fee, depending on the duration of the failure.

No Change for Other Plans

Individually designed plans that are not statutory hybrid plans or merged plans will continue to be barred from the IRS determination letter program for the foreseeable future, unless those plans are newly adopted or are terminating.

Employers who adopt pre-approved “master and prototype” or “volume submitter” plans (typically by completing an “adoption agreement” with the sponsor of the pre-approved plan) do not need to submit those plans to the IRS for a determination letter in order to have comfort that the plan documentation meets the IRS qualification requirements.

Conclusion

Employers who sponsor individually designed cash balance plans and other types of statutory hybrid plans should consider taking advantage of the opportunity to submit their plans to the IRS during the 12-month period beginning on September 1, 2019. Similarly, employers who have recently merged plans into a single individually designed plan in connection with a corporate transaction, or who are considering such plan mergers, should consider submitting those merged plans to the IRS on or after September 1, 2019.

For further information, please contact the author of this alert or the Pillsbury Executive Compensation & Benefits attorney that you normally work with.