Employers need to apply to Internal Revenue Service (IRS) of the US government for the determination letter in order to check that whether their pension or retirement plans are in compliance under IRC Section 401(a). It basically checks that the plan should be in full compliance under Employee Retirement Income Security Act (ERISA).
Generally employers sponsoring retirement plans need not apply to IRS for determination letters. However, if apply for favorable determination letter, then they can be assured that their plan is in full compliance with IRC Section 401(a) and the trust of the plan can claim exemption under IRC Section 501(a). A favorable determination letter also helps the employer to obtain the view of IRS on the form of the plan. Employers who follow pre-approved plans generally do not apply to the IRS for determination letter. However if the employer makes any changes to these pre-approved plans then it becomes individual designed plan and then the employer needs to apply for a separate favorable determination letter to the IRS. However, an application for individually designed plan needs to be submitted once in every five years’ time based upon Remedial Amendment Cycle (RAC) of the plan.
The following are the benefits for obtaining a favorable determination letter:
• Contributions that are being made to the plan can be deducted by the employer upto certain permissible limits
• Participants of the plan will be eligible for income tax deductions for the amount paid for this plan
• Contributions will be able to grow on tax-deferred basis until the amount is separated from the plan
However, an employer cannot rely on favorable determination letter under following conditions:
• There is a misstatement or omission of material facts
• The facts that are being developed subsequently are different from the ones being stated to obtain favorable letter