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Governmental Plan Determination Letters

Sponsors of qualified governmental plans (Internal Revenue Code Section 401(a) governmental plans) who want the IRS to review their plan document to ensure it meets the applicable tax qualification requirements may apply for a determination letter during either the second:

  1. Cycle C (February 1, 2013 - January 31, 2014), or
  2. Cycle E (February 1, 2015, - January 31, 2016)

See Revenue Procedure 2007-44 for an explanation of remedial amendment cycles.  

Why file for a determination letter?

Although submitting a request for a determination letter is voluntary, there are compelling reasons to apply for one. For example, a favorable letter allows the plan to:

  • minimize the risk that the IRS will disqualify the plan on audit because the plan document doesn't satisfy the applicable tax-qualification requirements, and
  • use certain IRS correction programs to correct plan errors

Minimize the risk of plan disqualification on audit

A favorable determination letter expresses the IRS' opinion that the plan's terms (as stated in the plan document) meet the Internal Revenue Code's tax-qualification requirements. The letter provides the plan sponsor with protection from the risk that the IRS will determine, upon audit of the plan, that the plan's written terms for the period covered by the determination letter don't satisfy the applicable tax qualification requirements. Without the benefit of the favorable determination letter:

  • The IRS could retroactively disqualify the plan back to the date of any defective amendments and the plan could lose the benefits of being tax-qualification for all affected years; or
  • The plan sponsor would have to enter into a special closing agreement with the IRS and agree to pay relatively expensive sanctions to preserve the plan's tax-qualified status.

A favorable determination letter does not cover operational issues, however. To be a qualified plan under IRC Section 401(a), a plan must satisfy the qualification requirements in both form and operation. For additional information, see Publication 794, Favorable Determination Letter.

Use plan correction programs

The plan correction programs under the Employee Plans Compliance Resolution System (EPCRS) permit plan sponsors to voluntarily correct certain compliance failures that might otherwise result in plan disqualification or other sanctions. Self-correction requires no fees or sanctions; the voluntary correction program (VCP) may require relatively modest fees. However, a favorable determination letter may be a prerequisite to using certain correction programs under EPCRS (for example, to self-correct a significant operational failure under the Self-Correction Program (SCP)).

What's the scope of a favorable letter?

A determination letter expresses an opinion on the form, not the operation, of the plan. The letter covers plan amendments made to reflect law changes listed on the Cumulative List of Changes in Plan Qualification Requirements (Cumulative List) in effect for the submission period in which the determination letter application is filed (Cycle C or Cycle E). You should ensure that your plan document reflects all of the relevant items from the applicable Cumulative List prior to filing your determination letter application.

A plan sponsor may not rely on a determination letter for any plan qualification changes (published guidance or statutes enacted) first included on a Cumulative List after the Cumulative List used to review the plan's application.

Also, a plan sponsor may not rely on a determination letter for assurance on certain specified issues or plan features. Publication 794 identifies some of those items most relevant to IRC Section 401(a) governmental plans, including:

  • Whether an entity is eligible to sponsor a governmental plan
    An IRC Section 401(a) governmental plan may only be established and maintained by a governmental entity. A favorable determination letter does not address whether an employer is eligible to sponsor a governmental plan. Rather, the plan sponsor must represent in its application for a determination letter that it is a governmental entity eligible to sponsor a governmental plan. If the IRS subsequently determines that there is a misstatement or omission of material facts in the application for a determination letter (for example, if the application indicates that the plan is a governmental plan, and it is not, or that the plan sponsor is a governmental entity, and it is not), the plan sponsor cannot rely on the determination letter.
  • Employer pick-up contributions
    If certain requirements are met, IRC Section 414(h)(2) permits governmental plan sponsors to pick up contributions that would otherwise be employee contributions under the plan. Such pick-up contributions are treated as employer contributions for federal income tax purposes. A favorable determination letter does not express an opinion on whether a pick-up arrangement satisfies the requirements of IRC Section 414(h)(2). A plan sponsor that would like a ruling on this issue may request a private letter ruling (PLR) under Revenue Procedure 2013-4 (or any successor procedure). 
  • Excess benefit arrangements
    If certain requirements are met, IRC Section 415(m) states that benefits provided under a qualified excess benefit arrangement are not taken into account in determining whether a governmental plan satisfies IRC Section 415 limitations on contributions and benefits. An excess benefit arrangement is generally a program maintained by a governmental employer in order to provide benefits for certain employees in excess of the IRC Section 415 limitations. A favorable determination letter does not express an opinion on whether an excess benefit arrangement meets the requirements of IRC Section 415(m). A plan sponsor that would like a ruling on this issue may request a PLR under Revenue Procedure 2013-4 (or any successor procedure).

See also Determination Letters for Governmental Plans Don’t Address Pick-Up Contributions and Excess Benefit Arrangements.

Common Governmental Plan Issues

More than 2,800 governmental plan sponsors submitted their plans for a determination letter during the first remedial amendment cycles C and E. The IRS has processed over 2,400 of these submissions and issued determination letters. In processing these applications, the IRS has identified certain common issues, including:

1. Timely updating for prior laws

As with any plan, a governmental plan must timely update for recent law changes as well as changes identified on the cumulative lists.  Sponsors who have not timely amended their plans by the required deadlines should use the Voluntary Correction Program.  Voluntary Correction Program fees are generally lower than the fees a sponsor must pay if the error is discovered by a Determination specialist and corrected through a closing agreement.

2. Vesting

A governmental plan is required to satisfy the vesting requirements that result from the application of IRC Sections 401(a)(4) and 401(a)(7) as in effect on September 1,1974 (“the pre-1974 vesting requirements”) (IRC Section 411(e)(2)). To satisfy the pre-1974 vesting requirements, the plan must provide that an employee who has reached the normal retirement age (in case of a pension or annuity plan) or the stated age or other specified event has transpired (in the case of a profit-sharing or stock bonus plan) and has satisfied any reasonable and uniformly applicable requirements as to length of service or participation, is vested in the contributions made or benefits payable under the plan (Part 5(c)(2) of Publication 778, Guides for Qualification of Pension, Profit-Sharing, and Stock Bonus Plans [obsoleted 04/01/1988]).

Whether a governmental plan satisfies the vesting requirements depends on both the form and operation of the plan. The following are three safe harbor vesting schedules that satisfy the pre-1974 vesting requirements:

  • 15-year cliff vesting
  • 20-year graded vesting (based on a graded vesting schedule of 5 to 20 years)
  • 20-year cliff vesting schedule for qualified public safety employees (available only with respect to the vesting schedule applicable to a group in which substantially all of the participants are qualified public safety employees (within the meaning of section 72(t)(10)(B))

For each of these schedules, years may be based on years of employment, participation, or other creditable service. Vesting provisions that are more favorable to participants than these three schedules (such as full and immediate vesting, 10-year cliff vesting, and 15-year graded vesting) also satisfy the pre-1974 vesting requirements.

The preceding discussion pertains to vesting of employer contributions only. A governmental plan must provide for full and immediate vesting of any employee contributions under the plan as well as full vesting of employer-derived benefits upon termination of the plan.

3. Plans with multiple benefit structures

The key elements of how benefits are determined must be definitely determinable under the written terms of the plan (IRC Section 401(a)). Key elements include:

  • contribution rates,
  • allocation formulas
  • benefit formulas
  • actuarial assumptions

A plan provision that simply provides that a board of trustees or other person will from time to time determine such key elements violates the definitely determinable requirement of IRC Section 401(a).

A governmental plan sponsor whose plan provides for multiple benefit structures that are subject to change due to legislative or administrative developments might consider one of the following strategies:

  • Attach an appendix to the plan document specifying any information that varies from one group of participants to another. The information stated in the appendix should be adopted prospectively, and not be subject to the discretion of a board of trustees or other person. The appropriate section of the plan document should reference the appendix. The plan sponsor may timely amend the appendix as circumstances require.
  • The relevant plan provisions must be timely amended and maintained in a manner that satisfies the definitely determinable requirement. For this purpose, the plan document may incorporate collective bargaining agreements or other relevant documents by reference, but should attach the applicable portions of such documents to the plan document.
  • Each contributing employer might separately adopt a plan document that satisfies the definitely determinable requirement.

4. Plans that provide for refunds of employer contributions

Generally, a qualified plan may not permit reversions or refunds of employer contributions. An IRC Section 401(a) governmental plan must have a provision stating that it's impossible, at any time before satisfying all liabilities owed to employees and their beneficiaries, for any part of the plan assets or income to be used for, or diverted to, purposes other than the exclusive benefit of employees and their beneficiaries. However, there are a few exceptions: 

  • A defined benefit plan may allow an employer to reserve the right to recover at termination of the plan any balance remaining in the trust that is due to erroneous actuarial computations
  • Refunds of employer contributions are permitted under very limited circumstances relating to mistakes of fact, initial qualification of the plan and disallowed deductions (Revenue Ruling 91-4, 1991-1 CB 57).

An IRC Section 401(a) governmental plan must explicitly permit a reversion or refund of employer contributions in order for any such reversion or refund to be permitted.

5. Cross-referencing plan sections

Some plan document provisions satisfy statutory or regulatory requirements by cross-referencing other plan provisions. When a plan sponsor restates a plan document, the numbering of plan provisions may change such that the cross-referencing in the document is no longer accurate. When the plan sponsor submits the plan for a determination letter, any cross-referencing inaccuracies may unnecessarily slow down the processing of the application. A plan sponsor’s careful review of the entire plan document before submission will reduce the number of these errors and accelerate the application's processing.

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Page Last Reviewed or Updated: 28-Aug-2014