Another Accounting Standard Impact Benefit Plan Advisors

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: 
   1. Is the trust invested in assets that could be considered to generate unrelated business income taxes?
   2. 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:
   1. Are the securities held by the ESOP qualifying employer securities? 
   2. 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.

Comments

[Peter Gulia]

If a way to recognize in a retirement plan's financial statements a tax position that otherwise could not be recognized under FIN 48 is an assumption that an income tax that the plan trust otherwise might owe would be resolved through an EPCRS program or other "administrative practices", how much comfort does the plan administrator, as the financial-statements maker, need that the plan has invoked or would use such an administrative practice?

And on a more readily practical level, what is the least comfort that a correctly-performing independent qualified public accountant should accept?

If the problem is one that can't be fixed with self-correction alone, must the auditor have evidence that the correction submission was filed before the auditor closes its field work or releases its opinion? Or is it enough that the plan administrator states an intention to pursue IRS correction or closing?

Imagine that the IQPA insists that the plan administrator sign a representation that the plan would use EPCRS? Imagine that the plan administrator adds to the accounting firm's requested representation two words: "if prudent"? Or if the plan administrator delivers the representation without quibble, may the auditor take it at face value; or must she consider that a plan fiduciary cannot commit itself to do anything other than whatever then is in the best interests of the plan?

Should the auditor consider how likely it was at the reporting date that the plan administrator would use a correction procedure at the relevant future time? If so, what confidence level is good enough?

Must the auditor consider how likely it was that the plan administrator would cause itself and all related parties to meet all user fees, sanctions, corrections, and further conditions that the IRS procedure would impose?

These are only a few of the first-blush questions. Your thoughts, please?