The IRS does not require that a plan file for a favorable determination letter (FDL).  However, there are a couple of reasons that support the decision to file for an FDL.

First, the issuance of an FDL for your plan means that the IRS has determined that the plan terms conform to the tax-qualification requirements under the Code.  This means that if the IRS were to audit your plan, the risk that the IRS would determine that the written terms of the plan do not satisfy the applicable Code requirements is eliminated by the issuance of the FDL. 

Second, under the IRS correction program (Employee Plans Compliance Resolution System or EPCRS), certain plan qualification errors can be corrected on a voluntary basis by the plan sponsor.  In some cases, the plan must have an FDL in order to correct a plan error without filing with the IRS and paying a filing fee. 

It is important to note that, while an FDL is a determination on the form for the plan, it is not a determination on whether the plan, in operation, is in compliance. 

If you have questions about filing for a favorable determination letter, please contact a Nyhart consultant.

This article was last updated on December 29, 2011