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 its retirement plan under IRC Section 401(a)
expresses the IRS’s opinion regarding the form of the plan
- is issued based on the submission period’s applicable Cumulative List or Required Amendments List
- .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. Pre-approved plan adopting employers
Employers who adopt pre-approved plans (either Master and Prototype or Volume Submitter) typically don’t apply to the IRS for determination letters. An adopting employer can generally rely on the opinion or advisory letter issued to the M&P or VS plan sponsor. Only employers who have made non-extensive modifications to their volume submitter plans may apply for a separate letter on Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans. See the Pre-approved Retirement Plan Adopting Employer FAQs.
Benefits of a favorable letter
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).
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
Scope of a determination letter review
For individually designed plan applications submitted between February 1, 2016, and December 31, 2017, the IRS review will be based on the 2015 Cumulative List. The review will also take into account all previously issued Cumulative Lists that have not been ruled on in a prior favorable determination letter.
For individually designed plan applications submitted beginning on or after January 1, 2018, the IRS review will be based on the applicable Required Amendments List and will also take into account prior law compliance including prior Cumulative Lists and Required Amendments Lists.
Terminating plans will be reviewed for all amendments required to be adopted to reflect qualification requirements that apply as of the date of termination, regardless of whether such requirements were included on the 2015 Cumulative List or applicable Required Amendments List.
For an adopter of a pre-approved plan, the review will take into account the Cumulative List that was used to review the underlying pre-approved plan.
Reliance on a favorable letter
Individually designed plans
Generally, employers may not rely on a favorable letter with respect to a plan provision that is subsequently amended or that is subsequently affected by a change in law.
Expiration dates on determination letters issued to individually designed plans prior to January 4, 2016, are no longer operative. Letters issued after that date do not contain an expiration date (see Revenue Procedure 2016-37, Section 13).
Employers or pre-approved plan sponsors are still required to timely amend the plan to comply with future law changes.
If an adopting employer makes changes to a pre-approved plan document or adoption agreement other than choosing options permitted under the plan or other IRS-sanctioned changes (see Revenue Procedure 2015-36, 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 could decide to apply, if eligible, for its own determination letter for the changed plan document.
See Publication 794, Favorable Determination Letter, for additional information on the limitation and scope of a favorable letter..
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.
- Publication 794, Favorable Determination Letter
- Determination, Opinion and Advisory Letters home page
- Employee Plans Determination Letter Program Changes In 2017 - Video: (Aug 11, 2016)
- FAQs for determination letters, pre-approved plans, adopting employers and plan amendments