The Internal Revenue Service ("IRS") announced earlier this year that it was considering making a number of changes to its determination letter program for tax-qualified retirement plans. Some of the proposals would change current application procedures. Other proposals would fundamentally revamp or even eliminate the determination letter program as it presently exists.

The IRS has now announced a number of technical revisions to the determination letter program. The revisions are designed to simplify the application procedures for determination letters, clarify the reliance that plan sponsors can place on determination letters and expand the reliance that employers can place on the advisory and opinion letters that are issued for specimen M&P and volume submitter plans.

Changes to Application Procedures and Forms

Under current application procedures, applicants are required to file a Schedule Q that provides information concerning how the plan passes applicable nondiscrimination tests. Under the new procedures, plan sponsors are no longer required to file Schedule Q. Instead, they may elect to have a plan reviewed solely for whether it complies with tax qualification requirements in form, or for both form requirements and those coverage and nondiscrimination testing requirements that the sponsor elects to have considered.

In addition, the IRS plans to discontinue the practice of placing separate caveats in determination letters for the coverage and nondiscrimination requirements. This change will not affect the extent to which an employer may rely on a favorable letter. Rather, the letter will effectively cover all of the information and demonstrations contained in the letter if the employer has retained copies of the application. However, the change will create a heightened need for employers to keep copies of their determination letter applications, even after receiving a favorable determination letter.

A number of changes are being made to the forms used to request determination letters. First, the IRS is eliminating Form 5303, Application for Determination for Collectively Bargained Plan. Applications previously submitted using Form 5303 will now be submitted using Form 5300.

Second, the IRS plans to revise virtually all of the other forms used to request determination letters. Except for Schedule Q to Form 5300, the changes are not expected to affect the content of these forms. However, the IRS may decide that substantive corrections are appropriate. The IRS expects to post draft on its website (http://www.irs.gov/ep) in August.

The procedures that plan sponsors must follow, and the forms they must use, in submitting applications will differ depending upon when the application is submitted. For example, determination letter applications filed before July 23, 2001 must be submitted in accordance with the procedures in Revenue Procedure 2001-6 and using the current determination letter application forms.

For applications submitted between July 23, 2001 and December 31, 2001, applicants requesting determination letters on Form 5300 or 5307 may choose to take either one of the following approaches:

• submit the revised Form 5300 or 5307 either including or omitting the revised Schedule Q, once the forms are finalized;
• submit the current Form 5300 or 5307 with the current Schedule Q, following the procedures in Revenue Procedure 2001-6;
• submit the current Form 5300 or 5307 omitting Schedule Q; or
• submit the current Form 5300 or 5307 with the current Schedule Q, completing only Part I of the Schedule Q and those line items relating to the specific coverage and nondiscrimination requirements for which the applicant requests a determination.

If the plan sponsor chooses either of the last two options, it must also include a cover letter indicating that the determination requested is only on the form of the plan or on both the form of the plan and those issues selected on Schedule Q. If this information is not included in the cover letter, the IRS will not make any further inquiries of the applicant.

Finally, determination letter applications filed after December 31, 2001 must be submitted on the revised forms.

Changes Relating to Master and Prototype and Volume Submitter Plans

Under current rules, an employer that adopts a nonstandardized M&P or a volume submitter plan must request a determination letter to have reliance that the plan, as adopted by the employer, is qualified. In addition, an employer that adopts a standardized M&P plan must request a determination letter if the employer also maintains another plan.

The IRS has announced a new set of procedures that will allow employers who adopt such plans to rely on the favorable opinion or advisory letter issued to the M & P sponsor or volume submitter practitioner. As a result, employers may now avoid having to file their own separate determination letter requests.

This special reliance is permitted if the employer adopts a plan that is identical to the approved M&P or specimen volume submitter plan, and the employer chooses only options permitted under the approved plan. The reliance will be limited to the plan's qualification in form, and will not cover coverage or non-discrimination testing issues unless 100% of all "non-excludable" employees participate in the plan. There are a number of additional conditions on the employer's reliance. Employers that adopt M&P and volume submitter plans should carefully consider these conditions in light of their own particular plans.

Changes To Application Procedures for Multiple Employer Plans

Under current rules, a determination letter application for a multiple employer plan must include separate Form 5300 applications for each employer that has adopted the plan. Applicants may now request either a letter for the plan, or a letter for the plan and a letter for each employer maintaining the plan. There are certain limitations and conditions to an employer's reliance upon a favorable determination letter that should be considered in light of particular plans.

GUST Amendments for M&P/Volume Submitter Plans

The IRS will provide a list of all the M&P and volume submitter plans submitted to the IRS for GUST opinion or advisory letters by December 31, 2000. This list will include the name of the M&P sponsor or volume submitter practitioner, the name of each plan submitted by the sponsor or practitioner, and the file folder or other number assigned to each plan. The IRS will post the list as early as possible in the second half of 2001 and will update the list to reflect the date on which plans are approved. The list is intended to help employers determine when the remedial amendment period will end for each model plan.

Final Cross-Testing Regulations

The final cross-testing regulations applicable to defined contribution plans, and defined contribution and defined benefit plans that are tested together, were released on June 29, 2001. The regulations are effective for plan years beginning on or after January 1, 2002.

The IRS will review amendments to specimen M&P and volume submitter plans that incorporate the final cross-testing regulations as long as the amendments are submitted to the IRS for review by October 22, 2001. Employers who file determination letter applications on or after August 22, 2001 may request that the IRS consider the final cross-testing regulations in issuing a determination letter. Cross-testing demonstrations relating to the 2002 or a later plan year must address the requirements of the final regulations and may use estimated data for the 2002 plan year.

Possible Additional Changes to the Determination Letter Program.

The IRS is also considering certain long-term changes to its determination letter program. High ranking IRS officials have publicly discussed a number of alternatives for overhauling the determination letter process. These alternatives reflect IRS concerns with whether it has sufficient resources to maintain the current program. Some of the alternatives apparently being considered are:

• Elimination of determination letters altogether;
• Elimination of the need for individually designed plans to obtain determination letters;
• Licensing practitioners outside the IRS to provide determination letter opinion letters to plan sponsors;
• Having plan sponsors self-certify the qualification of their plans, stating (under penalty of perjury) that they followed all qualification guidelines and that the plan meets those requirements;
• Instituting a self-certification program, under which a registration form would need to be attached to the plan's annual return each year;
• Keep the current program, but stagger the period over which new letters would need to be obtained for changes in applicable tax-qualification requirements;
• Have plan sponsors wait to receive new determination letters following a significant change in qualification requirements;
• Require plans to obtain only two determination letters during their existence - one at plan establishment and one at plan termination;
• Keep the current system intact.

The new tax-qualification provisions that were enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 tax act will undoubtedly affect the IRS' deliberation on these issues. The new tax act may accelerate the IRS' consideration of these proposals and may result in some additional changes in the determination letter program in the near term.