DEFINITION of 'Determination Letter'

A determination letter is a formal document that the Internal Revenue Service or IRS issues. It decrees whether or not the retirement plan of the addressee is within the Employee Retirement Income Security Act (ERISA) guidelines. If the plan is determined to be lacking in some respect, the determination letter will list these shortcomings, along with the necessary action steps to take to comply. If the plan meets all of the requirements that ERISA sets forth, then the plan becomes certified as a qualified plan and is eligible for all resulting tax benefits.

BREAKING DOWN 'Determination Letter'

Determination letters must be requested from the local IRS district office of the employer. If a plan is found to be deficient, then after corrections are made, the IRS will issue a second letter. This process can repeat itself until the IRS finds the plan compliant with ERISA guidelines. Determination letters can also be issued pursuant to proposed changes in an existing plan if needed.

Plans that qualify with ERISA guidelines are called qualified retirement plans or QRPs. Two main categories of QRPs exist: defined benefit (DB) and defined contribution (DC) plans. In addition there is also a hybrid of the two called a cash balance plan.

Defined benefit plans give employees a guaranteed payout and place the risk on the employer to save and invest properly to meet plan liabilities. A traditional annuity-type pension is an example of a defined benefit plan. Under defined contribution plans, the amount employees receive in retirement depends on how well they save and invest on their own behalf during their working years. A 401(k) is the most popular example of a defined contribution plan. Other examples of qualified plans include:

  • Profit-sharing plans
  • 403(b) plans
  • 457 plans
  • Money purchase plans
  • Target benefit plans
  • Employee stock ownership (ESOP) plans
  • Keogh (HR-10)
  • Simplified Employee Pension (SEP)
  • Savings Incentive Match Plan for Employees (SIMPLE)

The Internal Revenue Service (IRS) provides a comprehensive guide to common qualified plan requirements.

Determination Letter and ERISA

ERISA, the Employee Retirement Income Security Act of 1974, was designed to protects Americans' retirement assets. It implements rules that qualified plans must follow to ensure plan fiduciaries do not misuse plan assets. Under ERISA, plans must provide participants with thorough information about plan features and funding, and regularly furnish information free of charge.

ERISA also sets minimum standards for participation, vesting, benefit accrual and funding. While ERISA covers many major retirement plans, it does not cover those set up and maintained by government entities, churches, or plans outside of the United States for its nonresident alien employees.

RELATED TERMS
  1. Bank Trust Custodial Account

    A bank trust custodial account is a type of retirement account ...
  2. Summary Plan Description

    The summary plan description is a document that employers are ...
  3. Corporate Pension Plan

    A formal arrangement between a company and its employees - or ...
  4. Letter Of Credit

    A letter of credit is a letter from a bank guaranteeing that ...
  5. Synthetic Letter of Credit

    A synthetic letter of credit is a letter of credit that a bank ...
  6. Bank Confirmation Letter - BCL

    A bank confirmation letter is a letter confirming that a line ...
Related Articles
  1. Retirement

    New Rule Opens Door for State-Run Retirement Savings Plans

    The Department of Labor is enticing state governments to set up state-run retirement plans for private-sector workers, but some aren't happy with how.
  2. Financial Advisor

    How Do Pension Funds Work?

    Traditional private pension funds are well regulated by the government through ERISA and the PBGC. Alternative investments are aiding portfolio returns.
  3. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  4. Financial Advisor

    How to Follow Investment Committee Best Practices

    More plan sponsors are forming investment committees to fortify their fiduciary standards. These are best practices for investment committees to follow.
  5. Retirement

    Six Options for Moving Retirement Money - Part I

    If you leave your current job and have a 401(k), there are many things you can do with it.
  6. Small Business

    Protecting Your Employees' Benefits as a Fiduciary

    Employers who provide benefits to their employees have a fiduciary duty to protect those benefits.
  7. Retirement

    Is Your 401(k) Administrator Competent?

    The more that employees know about their employee 401(k) plans, the better. But what doesn't your administrator know?
  8. Retirement

    Do You Have a Crummy 401(k)?

    High-cost, outdated plans can keep your retirement portfolio from thriving. Here's what to do – and the 2015 Supreme Court case that could help.
  9. Financial Advisor

    Tough Times: Should You Dip Into Your Qualified Plan?

    401(k)s, pensions and profit-sharing plans can be a source of cash, but there are consequences to this option.
  10. Managing Wealth

    Which Retirement Funds Are Protected from Creditors?

    While many employer-sponsored retirement accounts – including most 401(k)s – are protected against creditors, that’s not always the case.
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center