As of July 1, 2019, employers applying to the IRS for a favorable determination for a terminating plan will have to pay an increased Form 5310 filing fee of $3,000, up from $2,300. Filing Form 5310 is optional and may not be necessary for all terminating plans, but employers should carefully assess their plans and risk tolerance and consult with legal counsel before deciding whether or not to file.
Since the IRS has limited its determination letter program, plan termination is now one of the few events on which the IRS will issue determinations. The main advantage of getting a favorable determination letter upon plan termination is reliance that your plan document meets the qualification requirements of the Internal Revenue Code. If the plan is operated in accordance with its terms and the plan is approved by the IRS, then the plan will be entitled to favorable tax treatment(e.g., tax-free rollover for eligible distributions). This can provide peace of mind to employers and participants, especially when terminating very large plans for which potential adverse tax consequences outweigh the costs of the application. In the current age of pre-approved plan documents, though, many employers already have reliance on the qualification of their plan documents, so a termination determination letter may not be as attractive, especially when the plan stays within the pre-approved document’s options.
A favorable determination letter does not, however, make a ruling regarding the plan’s operations,so it does not provide complete audit protection. There has been some talk in the past that not filing a Form 5310 upon plan termination increases audit risk, but that is not necessarily the case. There is the potential for additional inquiry from the IRS during the determination letter application process, though, and the Form 5310 review process is akin to a “mini-audit” of the plan.Employers should be sure that they have all plan documents and a clean operational history before filing Form 5310. If a terminating plan has document or operational issues but the employer wants to file a Form 5310, it is a good idea to correct those issues using the Employee Plans Compliance Resolution System (EPCRS) before filing. If the IRS discovers qualification failures during its review of the Form 5310 application, then the plan may be transferred to the Audit CAP program and the employer could face sanctions on top of any costs of correction. Non-amender failures discovered during the determination letter application process are particularly costly. The IRS now evaluates voluntary correction program (VCP) applications separately from determination letter filings, and has indicated in Rev. Proc. 2018-52 that it will hold its consideration of a Form 5310 filing until the VCP submission is closed.
For defined benefit plans subject to PBGC standard termination procedures, filing Form 5310 extends the deadline for completing distributions, provided it is filed before or concurrently with Form 500 (which notifies the PBGC of the termination). For all types of plans, employers are not required to wait until receiving the determination letter to distribute benefits, but many do wait so that they have assurance that the distributions will be tax-favored.
The Form 5310 application is extensive and can require substantial administrative work, as well as input from service providers, to complete. The cost of preparing the application –plus the filing fee –is often a deterrent to employers, especially those with small plans and limited plan assets. However, sometimes filing is required as part of a merger or acquisition or bankruptcy proceeding. Employers filing Form 5310 should be prepared for a long wait –the IRS can take months to process Form 5310 applications, and if the employer waits until receiving the determination letter to make distributions, additional Forms 5500(and audits for large plans)will be required for each year until distributions are complete.
If you have any questions about this article, please contact a Boutwell Fay attorney.
© Boutwell Fay LLP 2019, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of March 29, 2019.