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.
