Publication 794

(Rev. July 2001)

Catalog Number 20630M

Favorable

Determination

Letter

Department

of the

Treasury

Internal

Revenue

Service

Introduction

This publication explains the significance of 

your favorable determination letter, points 

out some features that may affect the 

qualified status of your employee retirement 

plan and nullify your determination letter 

without specific notice from us, and 

provides general information on the 

reporting requirements for your plan.

Significance of a Favorable

Determination Letter

An employee retirement plan qualified 

under Internal Revenue Code (IRC) section 

401(a) (qualified plan) is entitled to favorable tax treatment. For example,

contributions made in accordance with the 

plan document are generally currently 

deductible. However, participants will not 

include these contributions into income until 

the time they receive a distribution from the 

plan, at which time special income 

averaging rates for lump sum distributions 

may serve to reduce the tax liability. In 

some cases, taxation may be further 

deferred by rollover to another qualified 

plan or individual retirement arrangement. 

(See Publication 575, Pension and Annuity 

Income, for further details.) Finally, plan 

earnings may accumulate free of tax. 

Employee retirement plans that fail to 

satisfy the requirements under IRC section 

401(a) are not entitled to favorable tax 

treatment. Therefore, many employers 

desire advance assurance that the terms of 

their plans satisfy the qualification 

requirements.

The Internal Revenue Service provides 

such advance assurance by means of the 

determination letter program. A favorable 

determination letter indicates that, in the 

opinion of the Service, the terms of the plan 

conform to the requirements of IRC section 

401(a). A favorable determination letter 

expresses the Service's opinion regarding 

the form of the plan document. However, to 

be a qualified plan under IRC section 

401(a) entitled to favorable tax treatment, a 

plan must satisfy, in both form and 

operation, the requirements of IRC section 

401(a), including nondiscrimination and 

coverage requirements. A favorable 

determination letter may also provide 

assurance, on the basis of information and

demonstrations provided in your

application, that the plan satisfies certain of 

these nondiscrimination and coverage 

requirements in form or operation. 

See the following topic, Limitations and 

Scope of a Favorable Determination Letter, 

for more details.
Limitations and Scope of a 

Favorable Determination

Letter

A favorable determination letter is limited 

in scope. A determination letter generally 

applies to qualification requirements 

regarding the form of the plan. A 

determination letter may also apply to 

certain operational (non-form) 

requirements

Generally, a favorable determination 

letter does not consider, and may not be

relied on with regard to:

ï certain requirements under IRC section

401(a)(4), including the requirement that 

the plan be nondiscriminatory in the 

amounts of contributions or benefits for 

highly compensated and nonhighly

compensated employees;

ï the coverage requirements under

IRC sections 410(b) and 401(a)(26); and 

ï the definition of compensation under 

IRC section 414(s).

However, if you requested one or more 

of the optional nondiscrimination and 

coverage determinations offered on the 

determination letter application forms 

(Form 5300, Form 5307, Schedule Q), 

your favorable determination letter 

considers, and may be relied on, with 

regard to the specific determination(s) 

you requested, provided you satisfy the 

following requirement: you must retain 

copies of the application forms, any 

required demonstrations, and all 

correspondence with the Internal

Revenue Service related to the

application for a favorable determination 

letter. A favorable determination letter

cannot be relied on with regard to any

optional determination request unless 

all of the required information is 

retained.

In addition, the following apply generally 

to all determination letters:

ï If you maintain two or more retirement 

plans, some of which were either not

submitted to the Service for

determination or not disclosed on each 

application, certain limitations and 

requirements will not have been 

considered on an aggregate basis. 

Therefore, you may not rely on the 

determination letter regarding the plans 

when considered as a total package.

ï A determination letter for a defined 

benefit plan may be relied on regarding

the requirements of IRC section 

401(a)(26) if the application requested a 

determination regarding section 410(b)).

ï A determination letter does not consider 

the special requirements relating to: (a) 

affiliated service groups, (b) leased 

employees, or (c) plan assets or liabilities 

involved in a merger, consolidation, spinoff or transfer of assets with another plan 

unless the letter includes a statement 

that the requirements of IRC section 

414(m) (affiliated service groups), or 

414(n) (leased employees) or 414(l) 

(mergers, consolidations, spin-offs, or 

transfers) have been considered.

ï No determination letter may be relied 

on with respect to the effective availability 

of benefits, rights, or features under the 

plan. (See section 1.401(a)(4)-4(c) of the 

Income Tax Regulations.) Reliance on 

whether benefits, rights, or features are 

currently available to a nondiscriminatory group of employees is 

provided to the extent requested in the 

application.

ï A determination letter does not consider 

whether actuarial assumptions are 

reasonable for funding or deduction 

purposes or whether a specific 

contribution is deductible.

ï A determination letter does not 

consider, and may not be relied on with 

respect to, certain other matters 

described in section 5.07 of Rev. Proc. 

2001-6, 2001-1 I.R.B. 194 (i.e., whether a 

plan amendment is part of a pattern of 

amendments that significantly

discriminates in favor of highly

compensated employees; the use of the 

substantiation guidelines contained in 

Rev. Proc. 93-42, 1993-31 I.R.B. 32; and 

certain qualified separate lines of 

business requirements of IRC section 

414(r)).

ï The determination letter applies only to 

the employer and its participants on 

whose behalf the determination letter 

was issued.

ï A determination letter does not express 

an opinion whether disability benefits or 

medical care benefits are acceptable as

accident or health plan benefits

deductible under IRC section 105 or 106.

ï A determination letter may not be relied 

on with respect to whether a plan's 

exclusion classifications, if any, violate 

the minimum age or service requirements

of IRC section 410 by indirectly imposing 

an impermissible age or service 

requirement.

You should become familiar with the 

terms of the determination letter. Please 

call the contact person listed on the 

determination letter if you do not 

understand any terms in your 

determination letter.

Retention of Information. Whether a 

plan meets the qualification requirements 

is determined from the information in the 

written plan document, the application 

form and the supporting information 

submitted by the employer. Therefore, 

you must retain copies of any 

demonstrations or other information 

submitted with your application. Such 

demonstrations determine the extent 

of reliance provided by your 

determination letter. Failure to retain 

such information may limit the scope 

of reliance on issues for which 

demonstrations were provided.

Other Conditions for Reliance. We 

have not verified the information 

submitted with your application. The 

determination letter will not provide 

reliance if:

(1) there has been a misstatement or 

 omission of material facts, (for 

 example, the application indicated 

 that the plan was a governmental 

 plan and it was not a governmental

 plan);

(2) the facts subsequently developed are

 materially different than the facts on 

 which the determination was made; or

(3) there is a change in applicable law.

Law changes affecting the plan. In 

general, a determination letter is issued 

based on the law in effect at the time the 

application is received. For terminating 

plans, a determination letter is based on 

the law in effect at the time of the plan's 

termination. However, your letter may 

include a statement indicating an 

exception to this rule.

Amendments to the plan. A favorable 

determination letter may no longer apply

if there is a change in a statute,

regulation, or revenue ruling applicable 

to the qualification of the plan. However, 

the determination letter will continue to 

apply for years before the effective date 

of the statute, regulation, or revenue 

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ruling. If the letter no longer applies to the 

plan, the plan must be amended to comply 

with the new requirements to maintain its 

qualified status. Generally, if a regulation 

changes, the amendment must be 

adopted by the end of the first plan year 

beginning after the adoption date of the 

regulation. Generally, if a revenue ruling 

changes, the amendment must be 

adopted by the end of the first plan year 

beginning after the publication date of the 

revenue ruling. Generally, these 

amendments must be effective not later 

than the first day of such plan year.

Plan Must Qualify in

Operation

Generally, a plan qualifies in operation if it 

continues to satisfy the coverage and 

non-discrimination requirements and is 

maintained according to the terms on 

which the favorable determination letter 

was issued. Changes in facts and other 

bases on which the determination letter 

was issued may mean that the 

determination letter may no longer be 

relied upon.

Some examples of the effect of a plan's 

operation on a favorable determination 

are:

Not meeting nondiscrimination in

amount requirement. If the

determination letter application requested 

a determination that the plan satisfies the 

nondiscrimination in amount 

requirement of section 1.401(a)(4)-

1(b)(2) of the regulations on the basis of 

a design-based safe harbor, the plan will 

generally continue to satisfy this 

requirement in operation if the plan is 

maintained according to its terms. If the 

determination letter application requested 

a determination that the plan satisfies the 

nondiscrimination in amount requirement 

on the basis of a nondesign-based safe 

harbor or a general test, and the plan 

subsequently fails to meet this 

requirement in operation, the favorable 

determination letter may no longer be 

relied upon with respect to this 

requirement.

Not meeting minimum coverage 

requirements. If the determination letter 

application includes a request for a 

determination regarding the ratio 

percentage test of IRC section 410(b)

and the plan subsequently fails to satisfy 

the ratio-percentage test in operation, the 

letter may no longer be relied upon with 

respect to the coverage requirements. 

Likewise, if the determination letter 

application requests a determination 

regarding the average benefit test, the 

letter may no longer be relied on with 

respect to the coverage requirements 

once the plan fails to satisfy the average 

benefit test in operation.

Changes in testing methods. If the 

determination letter is based in part on a 

demonstration that a coverage or 

nondiscrimination requirement is 

satisfied, and, in the operation of the 

plan, the method used to test that this 

requirement continues to be satisfied is 

changed (or is required to be changed 

because the facts have changed) from

the method employed in the

demonstration, the letter may no longer 

be relied upon with respect to this 

requirement.

Contributions or benefits in excess of 

the limitations under IRC section 415. 

A retirement plan may not provide 

retirement benefits or, in the case of a 

defined contribution plan, contributions 

and other additions, that exceed the 

limitations specified in IRC section 415. 

Your plan contains provisions designed 

to provide benefits within these 

limitations. Please become familiar with 

these limitations, for your plan will be 

disqualified if these limitations are 

exceeded.

Top heavy minimums. If this plan 

primarily benefits employees who are 

highly compensated, it may be a top 

heavy plan and must provide certain 

minimum benefits and vesting for lower 

compensated employees. If your plan 

provides the accelerated benefits and 

vesting only for years during which the 

plan is top heavy, failure to identify such 

years and to provide the accelerated 

vesting and benefits will disqualify the 

plan.

Actual deferral percentage or 

contribution percentage tests. If this 

plan provides for cash or deferred 

arrangements, employer matching 

contributions, or employee contributions, 

the determination letter does not consider 

whether special discrimination tests 

described in IRC section 401(k)(3) or 

401(m)(2) have been satisfied in

operation. However, the letter considers 

whether the terms of the plan satisfy the 

section 401(k)(3) or 401(m)(2) 

requirements specified in IRC section 

401(k)(3) or 401(m)(2).

Reporting Requirements

Most plan administrators or employers 

who maintain an employee benefit plan 

must file an annual return/report. The 

following is a general discussion of the 

forms to be used for this purpose. See 

the instructions to each form for specific 

information:

Form 5500-EZ, Annual Return of OneParticipant (Owners and their 

Spouses) Pension Benefit Plans -

generally for a "One-participant Plan", 

which is a plan that covers only: 

(1) an individual, or an individual and his 

or her spouse who wholly own a 

business, whether incorporated or not; or 

(2) partner(s) in a partnership or the 

partner(s) and the partner's spouse.

If Form 5500-EZ cannot be used, the 

one-participant plan should use Form 

5500, Annual Return/Report of Employee 

Benefit Plan.

Note. A "one-participant" plan that has 

no more than $100,000 in assets at the 

end of the plan year is not required to file 

a return. However, Form 5500-EZ must 

be filed for any subsequent year in which 

plan assets exceed $100,000. (This 

amount may have increased after 

publication of this document.) If two or 

more one-participant plans have more 

than $100,000 in assets, a separate 

Form 5500-EZ must be filed for each 

plan.

A "Final" Form 5500-EZ must be filed if 

the plan is terminated or if assets drop 

below $100,000 and you wish to stop 

filing Form 5500-EZ.

Form 5500, Annual Return/Report of 

Employee Benefit Plan - for a pension 

benefit plan that is not eligible to file 

Form 5500-EZ.
Note. Keogh (H.R. 10) plans having over 

$100,000 in assets are required to file an 

annual return even if the only participants 

are owner-employees. The term "owneremployee" includes a partner who owns 

more than 10% interest in either the 

capital or profits of the partnership. This 

applies to both defined contribution and 

defined benefit plans.

Form 5330 for prohibited transactions 

Transactions between a plan and 

someone having a relationship to the 

plan (disqualified person) are prohibited, 

unless specifically exempted from this 

requirement. A few examples are loans, 

sales and exchanges of property, leasing 

of property, furnishing goods or services, 

and use of plan assets by the disqualified 

person. Disqualified persons who 

engage in a prohibited transaction for 

which there is no exception must file 

Form 5330 by the last day of the seventh 

month after the end of the tax year of the 

disqualified person.

Form 5330 for tax on nondeductible 

employer contributions to qualified 

plans - If contributions are made to this 

plan in excess of the amount deductible, 

a tax may be imposed upon the excess 

contribution. Form 5330 must be filed by 

the last day of the seventh month after 

the end of the employer's tax year.

Form 5330 for tax on excess 

contributions to cash or deferred 

arrangements or excess employee 

contributions or employer matching 

contributions - If a plan includes a cash 

or deferred arrangement (IRC section 

401(k)) or provides for employee 

contributions or employer matching 

contributions (IRC section 401(m)), then 

excess contributions that would cause 

the plan to fail the actual deferral 

percentage or the actual contribution 

percentage test are subject to a tax 

unless the excess is eliminated within 

21⁄2 months after the end of the plan 

year. Form 5330 must be filed by the due 

date of the employer's tax return for the 

plan year in which the tax was incurred.

Form 5330 for tax on reversions of 

plan assets - Under IRC section 4980, a 

tax is payable on the amount of almost 

any employer reversion of plan assets. 

Form 5330 must be filed by the last day 

of the month following the month in 

which the reversion occurred.

Form 5310-A for certain transactions - 

Under IRC section 6058(b), an actuarial 

statement is required at least 30 days 

before a merger, consolidation, or 

transfer (including spin-off) of assets to 

another plan. This statement is required 

for all plans. However, penalties for nonfiling will not apply to defined contribution 

plans for which:

(1) The sum of the account balances in 

each plan equals the fair market value of

all plan assets,

(2) The assets of each plan are 

combined to form the assets of the plan

as merged,

(3) Immediately after a merger, the 

account balance of each participant is 

equal to the sum of the account balances 

of the participant immediately before the

merger, and

(4) The plans must not have an 

unamortized waiver or unallocated 

suspense account.

Penalties will also not apply if the assets 

transferred are less than three percent of 

the assets of the plan involved in the 

transfer (spinoff), and the transaction is 

not one of a series of two or more 

transfers (spinoff transactions) that are, 

in substance, one transaction.

The purpose of the above discussions is 

to illustrate some of the principal filing 

requirements that apply to pension 

plans. This is not an exclusive listing of 

all returns and schedules that must be 

filed.

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