Publication 1488 (2-1991) FAVORABLE NOTIFICATION LETTER

This publication is issued in conjunction with a favorable notification letter. It explains the significance of your letter, points out some features that may affect the qualified status of the plan, and provides information on the reporting requirements for the plan.

An employee retirement plan qualified under Internal Revenue Code section 401(a) or 403(a) (qualified plan) is entitled to favorable tax treatment. For example, contributions made in accordance with the plan document are generally currently deductible. 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 (Including Simplified General Rule), for further details. Finally, plan earnings may accumulate free of tax.

Employee retirement plans that fail to satisfy the requirements under section 401(a) or 403(a) are not entitled to this favorable tax treatment. Therefore, many employers desire advance assurance that the terms of their plans satisfy the qualification requirements. The Service provides such advance assurance for regional prototype plans by issuing favorable notification letters. However, in some cases, a determination letter is also required for reliance.

Significance of a Favorable Notification Letter

Notification letters are issued by the Service to sponsors of regional prototype plans. Plan sponsors then make the plan available to employers who may adopt the plans for the benefit of their employees.

The significance of a favorable notification letter differs for standardized plans and nonstandardized plans. A standardized plan can be identified by the number 2, 5, or 7 appearing in the second position of the letter serial number (the number following the alpha character which appears in the upper right portion of the letter). A nonstandardized plan may be identified by the number 3, 6, or 8 appearing in the second position.

Standardized Plans. A standardized plan is designed to be automatically acceptable under any fact pattern, except as indicated below. Therefore, there is no need to request a determination letter for such plans, provided the employer does not amend the plan and chooses only those options in the adoption agreement that were approved by the Service. Although a determination letter is not requested, the employer must still inform interested parties of the establishment or amendment of the plan. However, a determination letter is required for advance assurance that the provisions of the plan satisfy the qualification requirements if the employer maintains or has maintained another qualified plan. The employer is not considered to have maintained another plan merely because the plan was previously not a standardized plan. Under certain circumstances, employers who have adopted standardized defined benefit plans may wish to request a determination letter than their plans' prior benefit structure satisfies the requirements of Internal Revenue Code section 401(a)(26).

Paired plans are standardized plans that are designed to work together. A paired plan may be recognized by the phrase "other than a specified paired plan" appearing in the fifth or sixth paragraph of the notification letter. If the employer maintains and has maintained only paired plans, a determination letter is not needed.

Nonstandardized Plans. It is possible that the unique fact patterns applicable to a specific employer may cause a nonstandardized plan to fail qualification. Therefore, to obtain advance assurance that the plan is qualified, the plan must be submitted for a determination letter. A determination letter is similar to an insurance policy that will, in many cases, protect the employer and plan beneficiaries from adverse tax consequences if the plan is later found to be nonqualified in the absence of a change in law, provided the plan is being operated in good faith in accordance with plan provisions. This advance assurance is a service provided by the Internal Revenue Service, and is not required for qualification. Form 5307, Application for Determination for Adopters of Master or Prototype Regional Prototype or Volume Submitter Plans, is used to request a determination letter, along with Form 5302, Employee Census, Form 8717 (explained later), a copy of the adoption agreement, a copy of the notification letter, a certification from the plan sponsor that the plan has not been withdrawn and is still in effect, and a copy of any separate trust or custodial account document.

User Fee. There is a charge for requesting a determination letter, but the charge is significantly reduced for regional prototype plans. Please complete and attach Form 8717, User Fee for Employee Plan Determination Letter Request, to Form 5307 when requesting a deter-letter.

Law Changes Affecting the Plan. Plans must be amended to retain their qualified status if any plan provision fails qualification requirements because of changes in the law becoming effective subsequent to the issuance of the notification letter. If the plan is not amended, the plan will become nonqualified without specific notice from the Service. This will occur even if the employer has received a favorable determination letter in addition to the notification letter. The employer and plan participants may be subject to adverse tax consequences if the plan is nonqualified.

The first character of the serial number assigned to the plan indicates the latest law change for which the plan had been amended. For example, the letter "D" indicates the plan was amended for the Tax Reform Act of 1986, which generally became effective for plan years after the 1988 plan year.

A notification letter will not be applicable after a change in qualification requirements unless the plan sponsor requests a new notification letter within 12 months after the change. The plan sponsor must provide those employers for whom the employer is continuing to sponsor the plan with a copy of the amendments and the new notification letter within 60 days of the receipt of the new letter. If a change requires modification of the adoption agreement, employers must execute the new agreement by the later of 6 months after issuance of the new notification letter, or the end of the period specified in Internal Revenue Code section 401(b).

If the application for a notification letter was submitted to the Service within certain time frames, the plan generally need not be amended again unless required to do so by legislation. The application was submitted to the Service within these time frames, if the following paragraph appears in the notification letter: "For purposes of sections 15.02 and 15.03 of Rev. Proc. 89-13, 1989-1 C.B. 801, your application was received timely".

Required Notifications to Adopting Employers. The plan sponsor must provide adopting employers with annual notifications indicating whether the sponsor intends to continue to sponsor the plan, and whether amendments have been made to the plan. The plan sponsor must also notify employers within 60 days if the plan sponsor discontinues its sponsoring of the plan.

Required Notifications to the Internal Revenue Service. On each anniversary of the date of issuance of the notification letter, the plan sponsor must advise the Service whether the sponsor has made any changes to the plan, and whether the plan is still being made available for adoption by employers. The plan sponsor must also provide a listing of adopting employers, and a statement that the plan sponsor has provided employers with the notification described in the above paragraph.

Reporting Requirements. Most plan administrators or employers who maintain an employee benefit plan must file an annual return/report with the Internal Revenue Service. The following forms should be used for this purpose:

Form 5500EZ -generally for a "One-Participant Plan," which is a plan that covers only: (1) an individual, or an individual or 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 their spouse(s). If Form 5500EZ cannot be used, the one-participant plan should use 5500-C or 5500-R, whichever applies. Note: Keogh (H.R. 10) plans are required to file an annual return even if the only participants are owner-employees. The term "owner-employee" includes a partner who owns more than 10% interest in either the capital or the profits of the partnership. This applies to both defined contribution and defined benefit plans.

Filing Exception for Plans that have no more than $100,000 in Assets. An annual return is not required to be filed for one participant plans having $100,000 or less in assets that otherwise qualify for filing Form 5500EZ.

Form 5500 - for a pension benefit plan with 100 or more participants at the beginning of the plan year.

Form 5500-C - for a pension benefit plan with more than one but fewer than 100 participants at the beginning of the plan year.

Form 5500-R - for a pension benefit plan with more than one but fewer than 100 participants at the start of the plan year for which 5500-C is not filed. Note: For 1989 and subsequent years Form 5500-R is part of the Form 5500C/R package. Filing only the first two pages of the Form 5500C/R package constitutes the filing of a Form 5500-R.

When to file. Forms 5500 and 5500EZ must be filed annually. Form 5500-C must be filed for (i) the initial plan year, (ii) the year a final return/report would be filed, and (iii) at three-year intervals. Form 5500-R must be filed in the years when Form 5500-C is not filed (See Note above). However, 5500-C will be accepted in place of 5500-R.

Disclosure. The Internal Revenue Service will process the returns and provide the Department of Labor and the Pension Benefit Guarantee Corporation with the necessary information and copies of the returns on microfilm for disclosure purposes.