What Does a Determination Letter Do?

by Investing School on November 2, 2012

A determination letter is a document provided by the IRS which evaluates whether or not a specific retirement plan meets the criteria of the Employee Retirement Income Security Act guidelines. Any deficiencies are described and the plan managers are responsible for fixing them promptly.

To get a determination letter the employer must make contact with the local IRS office. The employer then outlines the proposed retirement plan in as much detail as possible. The IRS reads through the proposed plan, evaluates all aspects and decides if the structure meets the qualifications for approval. If everything checks out then the District Director has formal documents drawn up to confirm that the plan is compliant with current law.

Any plan that fails to meet current standards is rejected, but with the understanding that the employer has the opportunity to improve upon their plan. If all the issues found with the first submission have been corrected then the plan can be approved.

Laws regarding pension plans change regularly and it is important for employers to keep up to date with such advances. Even when a plan is approved and in place, any changes should be run by the IRS before implementation. This helps to keep current plans in line with the law. When such changes are made the IRS will issue another letter confirming that the changes conform to current statutes as well.

Another form of determination letter is provided for non-profit organizations in order to validate their tax-exempt status. The document formally recognizes said organization as a tax-exempt entity.

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