What is a favorable determination letter?
A favorable determination letter:
- is issued by the IRS in response to a request by a plan sponsor as to the qualified status of their retirement plan under IRC Section 401(a);
- expresses the IRS’s opinion regarding the form of the plan;
- is issued based on the applicable Cumulative List at the time the application is received; and
- applies only to the employer and the plan participants on whose behalf the determination letter was issued.
Do I need to file a determination letter application for my retirement plan?
Employers who sponsor retirement plans are generally not required to apply for a determination letter from the IRS. (Some Voluntary Correction Program submissions may require one.) However, having a favorable determination letter provides the employer with reliance that:
- the plan is qualified under IRC Section 401(a); and
- the plan’s trust is exempt under IRC Section 501(a).
Pre-approved plan adopting employers
Employers who adopt pre-approved plans (either Master and Prototype or Volume Submitter) generally don’t apply to the IRS for determination letters. An adopting employer can rely on the opinion or advisory letter issued to the M&P or VS plan sponsor.
Before May 2012, adopters of pre-approved plans could apply for a determination letter using Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans, to ask the IRS to review whether their elections in the plan's adoption agreement met IRC Section 401(a) requirements. Now, only employers who have made limited changes to their volume submitter plans may use Form 5307. See FAQs regarding Changes to the Employee Plans Determination Letter Program.
Benefits of a favorable letter
Generally, if the employer operates the plan according to the terms of a plan document with a favorable determination, opinion or advisory letter, the plan will satisfy the law in operation.
The benefits of having a qualified retirement plan and operating the plan according to its terms as approved by the IRS are:
- the employer can deduct contributions made to the plan up to the applicable limits;
- the plan participants can defer income taxes on the amounts contributed to the plan (other than Roth contributions); and
- contributions grow tax-deferred until distributed from the plan.
Scope of a favorable letter
Generally, employers may not rely on a favorable letter for any plan qualification changes that become effective, any guidance published, or any changes in the law, after the applicable Cumulative List of Changes in Plan Qualification Requirements. Employers or pre-approved plan sponsors are still required to timely amend the plan to comply with future law changes.
See Publication 794, Favorable Determination Letter, for additional information on the limitation and scope of a favorable letter.
Reliance on a favorable letter
Individually designed plans
An employer can rely on an individually designed plan’s favorable determination letter until its expiration date. This reliance is conditioned upon the timely adoption of any necessary interim amendments as required by section 5.04 of Revenue Procedure 2007-44.
If an adopting employer makes changes to a pre-approved plan document or adoption agreement other than choices in the adoption agreement or other IRS-sanctioned changes (see Revenue Procedure 2011-49, sections 5 and 14), the plan may become an individually designed plan. If the plan becomes an individually designed plan, an adopting employer can no longer rely on the pre-approved plan sponsor’s opinion or advisory letter and will need to apply for its own determination letter for the changed plan document.
An employer can’t rely on a favorable letter if:
- the application contained a misstatement or omission of material facts (for example, the application incorrectly indicated that the plan was a governmental plan);
- the facts subsequently developed are materially different than the facts on which the determination was made; or
- there is a change in applicable law.