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Determination letters for pension plans.

Between 1986 and 1993, Congress passed seven tax bills. The passage of each was accompanied by changes to the Internal Revenue Code. One area affected tremendously has been pensions, with many changes governing the treatment and coverage of participants in pension, profit-sharing, stock bonus and annuity plans, particularly in the area of nondiscrimination. With all these changes, it has been very difficult for plans to keep up; plan sponsors may not be sure that the plans continue to qualify under the many requirements imposed by the Code.

In response to these legislative changes, the Treasury Department issued regulations explaining how to implement them. Following the publication of the final set of nondiscrimination regulations in September 1993, all these changes now are in place. Accordingly, the Internal Revenue Service has released a procedure under which pension plans can in one ruling determine whether they qualify in light of all these many changes.


Under the IRS procedure, plan sponsors may apply for determination letters. Applications will be reviewed, both for compliance with all "form" requirements (that is, plan language) and for certain "nonform" requirements (for example, minimum coverage or minimum participation requirements). Determination letter applications need not necessarily cover all requirements; applicants may modify the scope of a determination letter and the review accorded their plans. Obviously, if a determination letter is issued for a plan and it does not review certain requirements, it may not be relied on with respect to those requirements.


As noted, the basic requirement that a plan must meet is that it not be discriminatory. In that respect, a plan must satisfy certain general requirements. One deals with employer-provided benefits or contributions; the plan must be nondiscriminatory as to the amount of such benefits or contributions. In addition, any benefits, rights and features provided under the plan must be made currently available in a nondiscriminatory manner. Also, the plan must satisfy minimum coverage requirements.


Plan sponsors should include with their determination letter applications "demonstrations" that relate to the various requirements and areas that will be examined by the IRS. The Service has provided instructions and guidelines that describe the information that should be included in the demonstrations to explain how the requirements have been satisfied.

These are some of the requirements that generally must be addressed in such demonstrations:

* The plan must meet certain minimum participation requirements; in general, it must benefit at least the lesser of 50 employees or 40% of the employer's employees.

* There must be nondiscriminatory current availability of any benefit, right or feature; any eligibility conditions, timing or election rights (as well as the group of employees to whom such benefits are available) must be identified and explained.

* The plan may need to pass an average benefits test. If so, the average benefit percentage should be broken down for both highly compensated employees and non-highly-compensated employees. In addition, the method used for determining employee benefit percentages (including testing periods, testing groups, definition of compensation and method of determining compensation for purposes of these calculations) should be identified and described.

* The plan must pass minimum coverage tests. It should indicate whether it is being tested on a contributions or benefits basis, the plan year tested, the method of minimum coverage used, the actuarial methods used, the definition of compensation and the testing age of employees.

* Compensation must be nondiscriminatory. The test that forms the basis of this determination should be identified and explained, including the compensation being tested and the period used for the compensation data.

For a discussion of the IRS's determination letter procedure, see "Current Developments in Employee Benefits (Part I)," by Elizabeth A. Kundin and Deborah Walker, in the November 1994 issue of The Tax Adviser.
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Author:Fiore, Nicholas
Publication:Journal of Accountancy
Date:Nov 1, 1994
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