Determination letters are documents that are issued by the Internal Revenue Service in the United States. Essentially, the determination letter is an official decision on whether or not a retirement or pension plan put in place by an employer meets all the criteria established by the IRS for the structure and function of retirement plans. Generally, a determination letter is issued to either confirm the full compliance of the retirement plan or to advise the employer that the plan is not in compliance and that more work is needed before the plan can be officially sanctioned.
Obtaining a determination letter usually requires making contact with the district office of the IRS that covers the geographical location of the employer’s headquarters. The proposed pension or retirement plan is provided in full detail to the IRS. In turn, the IRS evaluates each aspect of the proposed plan and determines if the structure meets the current qualifications for approval. If everything is in order, the District Director issues a formal document that confirms the plan is in full compliance. Periodic reviews of the plan are conducted to make sure any changes to the basic structure are also in compliance with current criteria.
Should the proposed plan not meet the current qualifications laid out by the IRS, the determination letter usually cites what areas of the plan are not in compliance. This makes it possible for the employer to go back and refine the current plan. Once the revised plan is ready, it is submitted to the IRS a second time. If all the open issues with the plan are addressed to the satisfaction of the IRS, a determination letter granting official approval of the plan is returned to the employer.
While the IRS may periodically review pension plans currently approved by a determination letter, it is usually wise for the employer to stay abreast of any changes in regulations that could impact the status of the plan. At the same time, it is also a good idea to consult the IRS about any proposed changes to the plan before implementing them. Doing so helps to ensure the plan operates well within the established qualifications.
Along with the official recognition of a retirement plan, the IRS also issues a determination letter to non-profit organizations to confirm their tax-exempt status. The text of the letter cites the section of the Internal Revenue Code applicable to the organization and serves as the official confirmation that the entity is recognized as a tax-exempt organization.
