Benefit Plan Issues under FIN 48
We started this discussion in explaining that FIN 48 related to uncertainties in income taxes. So the obvious question is: Why worry about a tax-exempt benefit plan?
Well, the good news is, at least in my opinion; you generally will not need to worry about issues that would cause the plan to lose its exempt status. FIN 48 includes a provision for recognized administrative systems that would permit the client’s tax position, even though it might otherwise appear uncertain. In my opinion (as far as it has developed to date), EPCRS should constitute such an administrative scheme. There is a recognized system to allow a plan to retain its exempt status in spite of potentially questionable practices, so it the majority of plans there should not need to be any estimate of a tax liability based upon qualification violations.
That doesn’t get benefit plans totally off the hook from analysis under this standard, however. Consider:
1. Funded welfare benefit plans: Are the assumptions made about any reserve for incurred by not reported medical claims or post-retirement benefits reasonable or is an unrelated business income tax due?
2. Any funded benefit plan:
a. Is the trust invested in assets that could be considered to generate unrelated business income taxes?
b. If the trust is invested in assets that trigger unrelated business income taxes, are there any material uncertain tax positions taken by such pass-through entities such as partnerships or trusts?
3. ESOPs of S corporations:
a. Are the securities held by the ESOP qualifying employer securities?
b. Are the assumptions used in measuring synthetic equity for purposes of the broadly held test of IRC Section 409(p) reasonable?
Remember, if a plan has more than 100 (120) eligible participants, it is subject to audit. Those plans are going to have to deal with this new standard, just like the plan sponsor. But, the measurement of materiality is generally lower for the benefit plan audit, than it is for the sponsor’s audit. Thus, though these issues may be less frequently encountered in plans, when encountered they will likely be more significant.
Tomorrow we will talk about what this stuff really means to the client.
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