is issued by the Internal Revenue Service in response to a request by a plan sponsor as to the qualified status of their retirement plan under IRC section 401(a);

expresses the Service's opinion regarding the form of the plan;

is issued based on the laws in effect at the time the application is received; and

applies only to the Employer and the plan participants on whose behalf the determination letter was issued.”

Custom Plans, also known as Individually Designed Plans, receive a “Determination Letter”

Prototype Plans receive an “Opinion Letter” and

Volume Submitter Plans receive an “Advisory Letter” instead of a determination letter.

NOTE: If an employer who has adopted either a pre-approved prototype or volume submitter plan also wants a determination by the IRS regarding the qualified status of its specific plan document, such employer must apply for and will receive their own "Determination Letter."

What is the benefit of a favorable determination letter?
The document has “reliance." This means that the document cannot be challenged in an IRS audit as to its form, i.e., the IRS has approved the wording of the document. Thus, no IRS examiner may challenge the document’s wording on a retroactive basis and apply a penalty. However, an agent may ask for amendments on a prospective basis. Thus, the plan document with an opinion, advisory or determination letter may not be disqualified with respect to its form, i.e. the way it is written. Reliance provides the employer with a plan that:

Establishes the basis on which a participant can take advantage of favorable tax treatment on distribution of plan benefits.

NOTE: No opinion, advisory or determination letter will immunize a retirement plan from disqualification if the plan is operated in a discriminatory manner.

What May Happen Without an FDL
One of the first concepts that plan document providers learn is that employers who adopt custom or pre-approved plans are not legally required to obtain a favorable determination letter (FDL)! However, there are potentially severe consequences to not obtaining an FDL. For example, without an FDL a Revenue Agent may decide that he or she does not like plan language that has been approved hundreds of times before and for which FDLs have been issued to plans that submitted. Thus, an FDL has the potential to save an employer from thousands of dollars in penalties. McKay Hochman has always believed that individually designed plans, such as our current cross-tested adoption agreements, which have no underlying Opinion or Advisory Letter to rely on, should be submitted for a determination letter. (NOTE: Cross-tested plan designs will be an available option in prototype EGTRRA documents; this was not the case under GUST.)

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Introduces an FDL Issue.
Plans with an FDL are assured of providing bankruptcy protection to their participants because the balances of participants in such plans are automatically exempt from the bankruptcy estate. Plans without an FDL must prove that neither the IRS nor a court has made a prior determination that the plan is not qualified; and that either the plan is in substantial compliance with Code Section 401(a) or if the Plan is not in substantial compliance, that the debtor is not responsible for that failure.

Announcement 2001-77. IRS encouragement not to submit prototype plans for FDLs
The IRS has encouraged non-standardized prototype plans to rely on their document provider's opinion letter and to not submit for their own FDL on order to streamline the IRS’s workload in 2001. However, to assure audit and bankruptcy protections, some practitioners continue to obtain an FDL on each non-standardized plan. The same rule applies to Volume Submitter plans.

FDL Submissions at This Time
Only employers adopting pre-approved plans may submit for a “GUST” FDL at this time. Thus, only 5307 Forms will be accepted for GUST letters. Under the provisions of Rev. Proc. 2005-66, as of February 1, 2006, the IRS will no longer issue FDLs on individually designed GUST documents using Form 5300, but will only approve EGTRRA documents that include all the elements listed in Notice 2005-101, the 2005 Cumulative List.

EPCRS
A favorable letter may be needed to make use of the self-correction program (SCP) or the Voluntary Compliance Program (VCP) program. They are not required for Prototype and Volume Submitter Plans, but are for individually designed documents.

Comment: Good-Faith Amendments — A potential fly in the ointment?
The new restatement cycle presumes that pre-approved plans will be required to adopt interim good-faith amendments to conform to law changes that occur during the restatement cycle. At the same time, the IRS has announced its intention of not providing sample amending language except under extraordinary circumstances. This presents a potential Catch-22 possibility where IRS examiners acting on their own initiative disapprove of attempted "good-faith" amendments prepared by employers or their document providers without recourse to IRS pre-approved sample language to prove reliance. We are ever hopeful that this issue will not surface.