I was fortunate to attend the IRS phone forum on ESOP determination letters last Friday. The webinar was very good. The IRS addressed a number of outstanding issues, and provided some handy tips.
First, the IRS acknowledged that there is currently a lag between when the IRS receives an ESOP/KSOP determination letter application and when that application is reviewed by an agent. Despite their best efforts, the IRS is currently reviewing ESOP determination letter applications received in 2008 during Cycle C. According to the Form 5500 information posted on the DOL’s website, there are approximately 1,300 ESOP/KSOP plans required to be submitted to the IRS for a determination letter during each Rev. Proc. 2007-44 cycle, so unless something drastically changes, the backlog will continue to grow. Like a soldier in an old World War II movie peeling potatoes from a stack of potatoes that only continues to grow, each and every Jan. 31st adds another 1,300 applications to the already existing stack of determination letter applications waiting to be reviewed.
One option the IRS is currently exploring is opening an opinion/advisory letter program for ESOPs/KSOPs in 2018 (the beginning of the next restatement cycle). This would reduce the overall number of ESOP/KSOP determination letter submissions the IRS receives because some plans would have reliance on an opinion/advisory letter and would not be required to file for a determination letter.
Before you ask “why 2018″, think about the steps the IRS has to undertake to accomplish this under the current system stated in Rev. Proc. 2007-44. First, ESOPs/KSOPs are classified as a type of defined contribution plan. Under Rev. Proc. 2007-44, the deadline to submit DC plans for opinion/advisory letters is Jan. 31, 2012. This means that by Jan. 31, 2012, the IRS would need to amend Rev. Proc. 2011-49 to include ESOPs/KSOPs as plans which are eligible for opinion/advisory letters, issue LRMs for ESOPs/KSOPs (LRMs contain suggested language for writing plan documents), and update the opinion/advisory forms to include provisions unique to ESOP/KSOP plans, such as 1042 provisions and exempt loan language. Realistically, this means that the next 6-year cycle for DC opinion/advisory letters, starting in 2018, is the target date for adding ESOPs/KSOPs to the pre-approved plan program.
Imagine how quickly the stack of determination letter applications waiting to be reviewed would shrink if the IRS received approx. 325 applications each cycle instead of approx. 1,300 applications. This would require moving 75% of the existing ESOP/KSOPs on to pre-approved prototype or volume submitter plan documents, which is possible if the IRS commits to making two simple changes in the opinion/advisory program. First, the IRS returns the filing fee to the EGTRRA level of $4,500 per opinion/advisory letter (the current fee is $21,000+ per opinion/advisory letter). Second, the IRS reinstates the National Sponsor category or reduces the number of word-for-word adopters to 10 (the current number of word-for-word adopters required for an opinion/advisory letter is 30).
In the meantime, the IRS has created a webpage showing which plans they are currently reviewing. For example, if you mailed a Cycle D ESOP to the IRS for a determination letter in January of 2010, the odds are pretty good that the submission is sitting on a shelf somewhere waiting for an agent to be assigned to review the application. I’m finding this website to be a handy tool to set expectations with plan sponsors on how long the ESOP/KSOP determination letter process may take.
The good news is that once the plan is assigned to an agent for review, the IRS has created a group of highly trained agents within Employee Plans who only review ESOP/KSOP determination letter applications, so once the review process begins, it should proceed quickly and efficiently. The IRS recognized during the webinar that writing plan documents is a niche among ERISA attorneys, and within that niche, there is a smaller niche of ERISA attorneys that write ESOP/KSOP plan documents. Connecting the small group of ERISA attorneys who actually write ESOP/KSOP plan documents with the group of agents within Employee Plans who are devoted to reviewing those plan documents should speed the entire process up. And, as one of the ERISA attorneys who write ESOP/KSOP plan documents, I hope not only will it make the current process faster and more efficient, but will start a dialogue between the groups which will continue over the next six years and result in a smooth transition between the current process and an ESOP/KSOP opinion/advisory program in 2018.
Other handy tips are included in the handout material, including making sure to check that the determination letter application includes plan documents and amendments that are signed AND dated.