WASHINGTON -- The IRS is contemplating discarding the seal of approval it bestows upon pension and retirement plans that assure employers they can claim tax deductions for their contributions.
But the Internal Revenue Service's plans to consider eliminating determination letters is causing anxiety among groups representing large and small employers. That's because plan sponsors rely on the piece of paper they get from the IRS confirming the tax-favored status of their plans.
Although employers are not required to obtain determination letters from the IRS, most large plan sponsors do because it ensures the regulator won't later question the tax-favored status of their pension and retirement plans. Having a determination letter also gives employers the opportunity to fix any problems that later crop up without worrying about losing the tax-favored status. The IRS' imprimatur does not, however, safeguard employers against lawsuits from plan participants.
"Despite its potential hiccups ... the determination letter process serves a certain purpose, and employers would be concerned about any change that would impair their ability to get that certainty," said James M. Delaplane Jr., vice president of retirement policy at the American Benefits Council, a Washington-based trade association that represents large employers.
Hopes for better way
Meanwhile, Janice M. Gregory, vice president at the ERISA Industry Committee, said she welcomes the IRS' examination of the current process so long as it results in a better way for employers to be sure about the tax-favored status of their plans. "Large plans require certainty. They need to know what they are doing is within the intent of what the government thinks," she said.
Actuaries and lawyers who advise plan sponsors also have come out strongly against an IRS attempt to eliminate determination letters.
Brian H. Graff, executive director of the American Society of Pension Actuaries in Arlington, Va., said he would strongly oppose any attempts by the IRS to get rid of determination letters.
And David F. Gordon, a partner in the Los Angeles office of the law firm of O'Melveny & Myers, said, "Eliminating the determination letter request entirely just doesn't make any sense ... and it doesn't serve any purpose."
The IRS is just at the beginning of its review of the determination letter process, which is not expected to result in any changes for at least five years, said Paul T. Shultz, director of employee plan rulings and agreements in the IRS division regulating pension plans. And because federal pension law regulates the issuance of determination letters, any major changes proposed by the IRS might require changes in the law.
Mr. Shultz, who recently presented the IRS' plans of a review to lawyers at an American Bar Association meeting in Scottsdale, Ariz., said the process has become unworkable because of the many changes in the law over the years. Under the current process, employers must get a determination letter each time they change their plans to comply with new laws.
Expects more applications
The IRS received 53,000 applications in 1990, but expects to receive more than 100,000 applications this year, and 250,000 applications next year, because of changes in tax laws in recent years.
"I would hope that, at the very least, we would be able to find some innovative ways to improve and simplify our current process and make it less cumbersome," said Bruce Settell, manager of determination letters for pension plans in the IRS' Cincinnati office.
To make the process more manageable, the IRS also is considering offering its stamp of approval only on cookie-cutter plans. Mr. Graff thinks employers, especially smaller employers, would be tempted to set up off-the-shelf plans if the IRS expanded the features and options such plans can offer.
Also on the table is an idea that would permit employers to let "certified" outside advisers -- such as actuaries and lawyers -- sign off on their plans. "It's intriguing," Mr. Gordon said, questioning whether this would mean employers could get an enhanced review, but would have to pay more for it.
Also under consideration is giving determination letters a fixed life, such as eight years, so that one-eighth of all employers would seek an IRS review of their plans each year. "It's an idea worth exploring," said Mr. Graff, noting that it would help ensure the IRS has an even work flow.
The IRS also is debating whether to let all employers "register" their plans annually, perhaps on an attachment to the annual statements they submit to regulators.
Finally, the IRS is looking at requiring all plans to maintain an operating manual that would ensure sponsors are up-to-date with changes in rules and regulations.