The IRS is changing its determination letter program to eliminate the five-year remedial amendment cycle. One problem that hasn’t been addressed is how accountants will handle employee benefit plan audits without a determination letter showing the plan complies with recent changes in the law.
The IRS will be eliminating the amendment cycles for determination letters beginning on Jan. 1, 2017, the agency said in Announcement 2015-19. After this date, sponsors of individually designed plans will only be permitted to apply for determination letters for initial plan qualification and upon the plan's termination, and in certain other circumstances that will be decided by the Treasury Department and IRS. Determination letters will still be issued for volume submitter plans or other types of pre-approved plans. See related story, Plans Look for Assurances Amid Determination Letter Changes.
Determination letters are issued by the IRS in response to a request from a plan sponsor as to whether a pension, profit-sharing, or stock bonus plan complies with the tax code's qualification requirements. Until the change, sponsors could request determination letters at the beginning or end of a plan, and also every five years to approve plan amendments made to comply with changes in the law.
The IRS additionally issued guidance that favorable determination letters issued before Jan. 4, 2016, no longer expire, and future favorable determination letters will no longer expire.
"It is anticipated that the changes to the IRS determination letter program will result in increased burdens on plan sponsors and their service providers,” Susan E. Bernstein, special counsel at Schulte Roth & Zabel LLP and vice-chair elect of the IRS Advisory Committee on Tax Exempt and Government Entities (ACT), told Bloomberg BNA May 5. "Without the staggered system to "check-in" with the IRS every five years for a review of plan document compliance, the burden shifts to the plan sponsor. As a result, service providers to qualified plans, especially plan auditors, will have to help plan sponsors ensure that they have adopted all required interim amendments and are maintaining the form of the plan document for compliance with the tax qualification requirements." Regarding the issue of plan audits, Bernstein said “this is an important issue without answers that will need to be looked at further.”
Becky Miller, senior director at RSM US LLP, Minneapolis, told Bloomberg BNA May 5 that the American Institute of CPAs Employee Benefit Plans Audit Guide in its audit procedures places “pretty heavy reliance on the determination or opinion letters.” When a determination letter is not available, the Guide says, “For individually designed plans or other plans in which there have been substantial departures from the approved language, if a determination letter has not been received or a request for a determination letter has not been made, and an opinion letter from the plan’s tax counsel is not available, [review] those aspects of the plan document relevant to the determination of its tax-exempt status.”
Although the auditor is required to otherwise investigate the document status, it has historically rarely been an issue as the majority of plans that are subject to audit do obtain determination letters or use pre-approved plans, Miller said. There is currently no additional exposition of what procedures are required with respect to the statement reviewing “those aspects of the plan document relevant to the determination of its tax-exempt status,” she said. Although earlier reference is made to “an opinion letter from the plan’s tax counsel,” she said, “in my experience, counsel has rarely wanted to write such letters, but they may have to start writing them because once the current batch of determination letters get out of date due to changes in the law, regulations, plan operations, discretionary changes in plan terms, etc., the auditors are going to be seeking evidence to support management’s assertion that the plan has retained its tax-exempt status. Exactly what kind of evidence is needed or what procedures need to be performed with respect to that `review’ of those aspects relevant to tax status is not yet defined. But, it is likely to be developed over the next several years.”
As a result of the changes, it is possible that audit fees could go up. For example, plan sponsors might pay their legal counsel to draft an opinion on the plan. The auditor would then need to apply audit procedures to the reliability of that opinion, although those procedures are usually less burdensome than work that needs to be done by the audit firm where the auditor has to use their own specialist to do the work. If the audit firm ends up having to use their own specialist to evaluate the plan, it could delay the completion of the audit in the first year and again whenever there are major changes in the plan terms.
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