| If an employee retirement plan is qualified under the Internal Revenue Code, it is entitled to favorable tax treatment. Benefits include the employer's deduction of contributions made in accordance with the plan document and the accumulation of tax-free earnings. In addition, participants in the plan are not required to include their contributions into income until they receive a plan distribution. Because of these tax advantages, many employers look for advance assurance that the terms of their plans satisfy the statutory qualification requirements.
Advance Assurance
The Internal Revenue Service is authorized to provide an employer with advance assurance through the determination letter program. However, an employer who sponsors a retirement plan is not required to apply for a determination letter. By issuing a favorable determination letter, the IRS is giving an opinion that the form of the retirement plan conforms to the requirements of the law. This is a limited IRS determination based on the form of the plan, not on its operation. The letter is issued based only on the laws in effect at the time the application was received, and it applies only to an employer and the plan participants on whose behalf the determination letter was issued.
In order to be entitled to favorable tax treatment, a plan must satisfy the statutory requirements in both form and operation, including nondiscrimination and coverage requirements. Therefore, an employer may also request one or more of the optional nondiscrimination and coverage determinations offered by the IRS. A favorable determination letter granted pursuant to that application gives assurance that, based on information and demonstrations provided in the employer's application, the plan does satisfy certain nondiscrimination and coverage requirements in form and operation. However, the IRS stresses that a favorable determination letter on any optional determination request cannot be relied on unless the employer retains all of the required information.
Scope of Determination Letter
A determination letter does not consider whether any actuarial assumptions are reasonable for funding or deduction purposes or whether a specific contribution is deductible. It also does not express an opinion on whether disability benefits or medical care benefits are acceptable as deductible accident or health plan benefits. In addition, a determination letter provides no assurance if there was a misstatement or omission of material fact, if facts subsequently developed are materially different from the facts on which the determination was based, or there is a change in applicable law.
Most submitted applications result in the issuance of a favorable determination letter. However, if certain requirements are not met, the IRS may propose an adverse or unfavorable letter. If this occurs and the employer and the IRS cannot resolve the outstanding issues, the employer has a choice of options. He or she may request to proceed through the appeals process, to obtain technical advice for guidance, or to withdraw the application.
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