401(k)s and M&As: Requesting a Determination Letter

When one business is sold to another, the buyer often asks for a determination letter to help assure that the seller’s 401(k) plan is qualified. The seller must then request such a letter from the IRS, but availability is restricted under certain rules. Assuming the 401(k) in question is an individually designed, single-employer plan, here’s some background on requesting a determination letter.

Evolving rules

The rules governing determination letter requests for individually designed plans have changed considerably over the years. At one time, requests could be made whenever a plan was restated or materially amended. Then, to limit submissions, the IRS adopted a cyclical remedial amendment system under which plans were typically submitted for a determination letter every five years.

In 2017, the IRS further narrowed the circumstances in which individually designed plans can request determination letters. The rules now allow individually designed 401(k) plans to be submitted for a determination letter only in one of the following circumstances:

• The plan hasn’t been submitted previously,
• The plan is being terminated,
• A limited determination is requested regarding whether a partial termination has occurred, or
• The plan has recently merged with the plan of a previously unrelated entity.

Keep in mind that additional rules may apply.

Limits to the letters

If a seller’s individually designed plan has received a favorable determination letter in the past, and it hasn’t recently merged with another plan, the seller could be unable to request the kind of determination letter the buyer wants. The seller might be able to request a determination as to whether a partial termination occurred, but that limited basis for seeking a determination letter wouldn’t allow the seller to provide the buyer with a determination regarding the current plan document.

In addition, determination letters affirm only that the form of the plan satisfies the applicable qualification requirements. Because the IRS reviews only the plan document, not plan administration, the determination letter wouldn’t offer a buyer any assurance regarding operation of the plan.

So, even if a seller is able to obtain a determination letter, it should anticipate having to demonstrate to the buyer that the plan’s operation satisfies the qualification rules and adheres to the plan document’s provisions. One example is by providing results of nondiscrimination testing.

Many details to consider

Special determination letter submission procedures apply for individually designed multiple employer plans. And different determination letter submission standards apply to plans that use a pre-approved plan document.

As you can see, there are many details to consider. We can answer questions and provide further information about the IRS rules for qualified retirement plans such as 401(k)s. 

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