When the IRS stops issuing determination letters, that’s when!
The IRS is making changes in its “determination letter” program for 401(k) and other retirement plans. While this may not be front page news, the IRS’ move is going to have important implications for employers who sponsor 401(k) plans, pension plans and other similar programs.
The IRS has historically reviewed individually designed qualified plans and issued a “favorable determination letter” to the employer sponsoring the plan. This favorable determination letter then prevents an IRS auditor from reviewing the plan’s language during an audit. An auditor can still review the plan’s operation, but the determination letter stops any questions about the plan language in their tracks.
Now, the IRS has announced that it will no longer issue determination letters with respect to certain plans and has hinted that it may stop issuing determination letters for an even larger segment of the plan market in the near future.
The IRS’ move is ostensibly due to budget cutbacks affecting its ability to maintain historical service levels, but the IRS has also made the policy decision to shift the burden to employers to maintain a qualified plan and accept the risk of the plan not being qualified.
While at this point we cannot tell exactly how this will play out, we anticipate a number of consequences for our clients.
So, unfortunately, this is one situation where less IRS is not a good thing.
Contact any member of our Employee Benefits Practice Group to help you navigate these IRS changes.
