If we request a plan termination determination letter from the IRS now, does it create a risk that the IRS might audit our plan?
There have been times when the IRS has selected terminating plans for formal audits. This kind of targeted audit by the IRS can happen whether you have us submit your plan termination for a determination letter, or not. With a favorable determination letter in hand on your plan termination, we anticipate we would actually be able to negotiate with the IRS to have them perform a “limited scope audit,” instead of covering issues that were already part of the determination letter review process. This would simply mean that the IRS would review mostly the paperwork and Forms 1099-R for the participants who received plan termination distributions.
Overall, the IRS involvement in determination letters or formal audits is just a process and we have experience in successfully handling these matters for our employer clients.
On the other hand, those individually designed plans like Cash Balance Plans are a different matter. Based on current IRS behavior, they seem to be ok with determination letters for new plan installations and for all terminating plans, but they hope to cut out any individually designed plan determination letters in between the initial plan and plan termination. But the plan sponsor should get execute an 8905 Form (which extends the period for obtaining an IRS approval letter) signed along with the adoption of the new plan. The plan sponsor should consider if they wanted the firm to pursue one determination letter now and another one when the IRS opens up the window period for pre-approved cash balance plans to conform to the Pension Protection Act of 2006, or are they comfortable with just waiting until the IRS opens up the window period for the pre-approved cash balance plans to be submitted?