IRS monitoring shrinks, increasing compliance risk for plan sponsors

Hoping to get a green light from the IRS on a creative new plan design you are planning to implement – or even just get reassurance that amendment you have made to your plan in response to new legislation are correct? Don’t hold your breath.

According to Groom Law Group, “it now appears that, after the current Cycle E filing season, the 2016-17 Cycle A slot may be the last one to follow the pattern set in the mid-2000’s.”

In a recent memo to clients, Groom predicted the IRS will come up with a “greatly pared down DL [determination letter] program that is likely to increase the risks employers face if their plans are found to be non-compliant.” The firm also anticipates “congruent changes” in the IRS’ private letter ruling process, the EPCRS correction program and audit procedures.

See also: IRS clarifies ACA reporting for large employers

DLs provide the IRS’ seal of approval for plans assuring that their qualified status remains intact following amendments to the plan document, including those mandated by changes in the law.

Qualified status, of course, means employer contributions to plans are deductible, growth of retirement assets held in trust or through an annuity contract is not taxed, and employees can defer taxation of their income invested in a defined contribution plan.

“Hardened” position?

According to Groom, Sunita Lough, who runs the IRS’ Tax Exempt and Government Entities Division, has told “various professional groups” that the DL program will undergo a transformation in 2017. While the IRS is obliged to seek public input on any changes before they are implemented, “the IRS position seems to have hardened in recent weeks,” the law firm reports, indicating that it is not likely to be deterred by any critical public input on planned changes to the DL plan.

The reason, Groom asserts, is that in an environment of constrained budgets caused by “anti-IRS forces in Congress,” the tax collection agency has little choice but to cut back on certain labor-intensive programs. By Groom’s estimates, the IRS budget, in real dollars, is lower today than it was two decades ago, even as Congress has enacted laws like the Affordable Care Act delegate massive regulatory compliance duties on IRS employees.

An internal review of the DL program reportedly concluded that it was producing “questionable legal results” due to insufficient manpower.

Announcement expected soon

The IRS is expected to reveal its plans for the future DL program this summer. Groom believes the IRS “is likely to allow individual DLs for newly established plans and terminating plans.” It also predicts “some mechanism for plans with unusual designs--or impacted by major events – to be reviewed.” But the IRS is hoping employers will back away from customizing their plans and instead stick with pre-approved IRS plan templates.

See also: IRS tax form 1095: How will you comply?

Groom doesn’t think many large plan sponsors and multiemployer plans will be content to go that route. If they don’t, however, they probably will have to learn to live with greater regulatory risk.

Plans will still be subject to audit. As a consequence, “company and plan auditors – as well as investment managers who rely on SEC exemptions for Section 401(a) plans, are likely to require opinions from management, and possibly counsel, that their plans are up to date and in compliance,” Groom predicts.

Richard Stolz is a freelance writer based in Rockville, Maryland.