Friday, July 31, 2015

Is it Manpower Shortage, Intrusiveness – or Both – Behind New Form 5500-SUP?

Beyond the divisiveness and unwillingness to compromise that seem to have infected many of our lawmakers in Washington, D.C., there is also a growing distrust of some government agencies.  Actually, this distrust is encountered from Pennsylvania Avenue to Main Street, USA, and includes agencies and personnel responsible for implementing our laws and the regulations that spring from them. 

While the U.S. Department of Labor has recently been targeted for its proposed fiduciary regulations, the most consistently criticized and attacked government agency has undoubtedly been the Internal Revenue Service.  Some of the animosity comes from lawmakers’ dislike for the complex Internal Revenue Code, which – they may be forgetting – is a creature of the Congress itself. 

Being the police force tasked with enforcing this Code has made the IRS an available and visible target, including for grandstanding politicians wanting to score points with their constituents.  It seems that in every Congressional biennium some lawmaker proposes legislation to eliminate the IRS altogether.  While such proposals are rarely taken seriously, and there are functions performed by the IRS that are vital, the proposals are an indication of how disliked the IRS is.

The IRS didn’t do itself any public relations favors when some of its staffers allegedly targeted for special scrutiny a number of conservative groups seeking nonprofit status, a controversy that is still being played out.  However limited, or extensive, such practices might actually have been, given the hostility some politicians have for the IRS it was like pouring gasoline on a fire. 

Realistically, politicians’ attitudes do matter, because one way they can attack the IRS is by cutting the agency’s funding.  One can argue endlessly over whether the IRS or other federal agencies spend their taxpayer-funded annual budgets wisely.  But stagnating IRS funding has led to the loss of about 8,000 of its employees since 2010, this at a time when responding to landmark court decisions and complicated legislation – like the Affordable Care Act – is placing even greater demands on the agency.

Cuts in IRS funding have left fewer field staff available to perform audits of individual taxpayers, businesses, and retirement plans.  It has been estimated that there is now less than a 1% probability that an employer-sponsored retirement plan will be examined.  Another indication of IRS staff resource scarcity is the elimination of most plan determination letter reviews, except in the year of plan establishing and year of termination. 

To make its auditing resources more efficient, the IRS is focusing on plans it believes have the greatest probability of compliance problems.  Such information has come to the IRS in surveys it has conducted, the most high-profile occurring with some 1,200 401(k) plans in 2010.  The IRS sought information on plan design, contributions, nondiscrimination testing, employer demographics, loans, and more.  With a gun to employers’ heads warning of potential audits for non-response, the IRS got the data it wanted.

There is also information contained in Form 5500 filings that identifies plans with 401(k) features, plans with automatic enrollment, with participant-directed accounts, that use a default investment option, etc.  While most Form 5500 filings go to the Department of Labor, it is generally understood that some information is shared between the two enforcement agencies.

The IRS has proposed a way to collect detailed plan-specific compliance data on a regular basis, via new Form 5500-SUP, Annual Return of Employee Benefit Plan Supplemental Information.  A draft of the form was released in March, and the IRS envisions its use for 2015 plan years.   

Many, if not most, feel that the process of plans and service providers gearing up to report this information for the first time could take significantly longer than the 2015 plan year Form 5500 filing deadline, which – for calendar year plans – would be July 31, 2016.  In many cases the information sought is not maintained in a place or format that is readily obtained, especially not capturable or transferable by electronic means.  Given the fact that many plans are presently in the throes of restatement for the Pension Protection Act of 2006 (PPA), the timing for a 2015 Form 5500-SUP is very problematic, at best. 

Some feel that a plan that provides data on its methodology for conducting coverage and nondiscrimination testing, its amending history, opinion or advisory letter information, etc., is making itself an all too convenient target for an IRS audit.  The flip side of the argument  is that the IRS is attempting to do its compliance oversight job with diminishing personnel and budget resources, and that in its design of Form 5500-SUP the Service has taken a logical step in trying to take a more “rifle” – rather than shotgun – approach to monitoring plan compliance.  Reasonable minds may differ!

Ambiguity, however, is not reasonable.  For example, a plan is asked to declare whether it passed 410(b) coverage testing by the ratio percentage test or by the average benefits test.  Eligibility need not be determined by just one or the other across the board; some plans use both.  Another question asks for the date of the most recent “plan amendment/restatement for the required tax law changes.”  Is this question limited to full restatement events only?  Is it intended to capture dates associated with interim amendments?  If interim amendments, the IRS should be providing plans with a list of interim amendments appropriate to the particular year’s Form 5500 filing. 

There are questions on Form 5500-SUP the answers to which will come from other providers, which the preparer may be in no position to authenticate or verify.  Is the preparer potentially on the hook for the work of others over whom it truly had no control?  Mandating that the preparer of the Form 5500-SUP be identified will result in a public record disclosure of the client/preparer relationship; something not required of preparers of Form 5500 itself.   Is this really necessary?  As a matter of public record, I don't believe it is. 


We should probably expect that some level of compliance self-reporting is in all retirement plans’ future.  We are also aware that new procedures have growing pains.  But this initial attempt could and should be improved greatly, both in terms of content and in terms of timing.