The Mid-Atlantic Pension Liaison Group met yesterday in Philadelphia. In attendance were practitioners from the Mid-Atlantic region as well as Vicki Surguy (Area II Determinations Manager from Cincinnati), Cathy Jones (the Employee Plans (“EP”) Mid-Atlantic Area Manager), George Brim (Area Coordinator), Michael Sanders (Supervisor and Internal Revenue Agent), as well as other agents and officials.

I. EP Determinations Update: Vicki Surguy provided the following updates:

(1) She confirmed that Paul Schultz will be leaving the IRS in March.

(2) As many of you know, Dick Wickersham left the IRS last year. His replacement will be Marty Pippins.

(3) Another draft of the White Paper on the Future of the Employee Plans Determinations Program is expected soon. (You can access the first White Paper here and the second White Paper here.) Ms. Surguy indicated that the approach being favored now is referred to as the “Bifurcated Approach” and would involve staggered “remedial amendment periods” for individually designed plans, based on the employer identification numbers (“EINs”) of the plan sponsor, as well as staggered submission of specimen plans (Volume Submitter and Master/Prototype). (If you want to see my rough notes as to what the schedule might look like, I have posted it in the “Continue Reading” section below.) The bottom line in this is that the “Status Quo” approach (i.e. keeping things as they are) is no longer favored by the IRS (as was reported at the last meeting) due to the staffing issues for IRS that ensue from having Determination Letter (“DL”) applications come in all at once.

(4) The Master & Prototype and Volume Submitter programs will likely be combined into one program. The combined program will probably include ESOPs and cross-tested plans, and be administered out of Cincinnati, Ohio. There will be a Revenue Procedure coming out soon on this.

(5) The IRS is working to close some of the “old” determination letter application cases that were submitted in 2002 and 2003 and are still open.

(6) The IRS is still working on quality assurance in the issuance of determination letters. As you may recall, at a previous meeting in October, Gary Runge, Quality Assurance Staff Manager, told the group that 24% of all DLs issued have errors in them, e.g. dates that are wrong, etc. If errors are discovered after a case is closed, the specialist fixing the error will have to retrieve the file from the Federal Records Center in Dayton, Ohio, in order to get the DL fixed. Ms. Surguy also informed us that EP records are retained for 10 years at the Federal Records Center, and then destroyed after that, but that Exempt Organization records are never destroyed.

(7) Ms. Surguy also gave a briefing on the status of the Tax Exempt Determination System (TEDS), the IRS’s new system which will allow for the electronic submission of DL applications and payment of user fees. It will also give plan sponsors the ability to track the status of their applications and even to access and change certain information in the system. As Ms. Surguy described the current “hard copy” system–of how the files are constantly being placed in boxes, shipped to other locations, unloaded, and then reboxed, reshipped to other locations, and unloaded again, and how agents reviewing these documents often work from their homes–it seems almost a “miracle” that our plans ever receive the DL’s that are applied for, due to the opportunity for error along the way. TEDS will apparently be phased in over the next few years, and will eliminate much of the paper handling burdens associated with the current system.

II. Local Determinations and Examinations Update: Cathy Jones and Michael Sanders gave the following update:

(1) The Employee Plans Team Audit Program (“EPTA”) seems to be getting into full swing with six different groups being sent out from the six different areas of EP Examination. In the Mid-Atlantic Area, the EPTA agents will be located in Philadelphia, Washington, D.C., Baltimore, Trenton, Pittsburgh, and Charlotte. The Group Manager, Elsie Garcia, is located in Trenton, New Jersey. EPTA agents will be examining large employers, including 403(b) plans, multi-employer plans, and many other types of plans as well. Audits will be targeting the following 5 market segments: (1) DB/health care, (2) DB/construction, (3) Profit-Sharing/manufacturing, (4) 401(k)/Finance and Insurance, and (5)Profit Sharing and Money Purchase/Other Services.

(2) The IRS is also implementing what are called “Focus Audits” which are audits limited to only 4 issues (in addition to “form” compliance). Michael Sanders will be heading the initiative in the Mid-Atlantic Area. There will be 4 groups of agents, working out of Texas (Dallas and Austin), Tennessee (Nashville, Knoxville, and Oklahoma City), Connecticut, and Philadelphia (Philadelphia, Scranton, Cherry Hill, and Trenton.) These agents will also work from the 5 market segments listed above. The program is a pilot and will start with 1,000 returns, with 200 coming out of each targeted market segment.

If agents begin a Focus Audit, and find that the plan is noncompliant in the identified areas, the audit may be expanded into additional issues or a Full Scope audit. Audits will be limited at first to the year under examination, but could extend to all years that the plan was noncompliant, according to Mr. Sanders.

Focus Audits will involve “Internal Control Interviews” and the IRS has prepared “Internal Control Checklists” for use in the audits. According to Cathy Jones, plans that are targeted should be prepared to discuss their “internal controls” with agents upon review.

As an example of what they will be targeting, in the DB/health care arena, agents will focus on Internal Revenue Code section 404 (deduction) and 412 (minimum funding) issues, as well as lump sum issues.

(3) All examinations–whether Full Scope or Focus Audits–will involve a review of plan documents to determine if they are up-to-date and compliant.

(4) The IRS will continue to do examinations based on referrals it receives from the Department of Labor as well as the general public.

(5) Cathy Jones stated that they are starting a new pilot program which will involve the examination of section 412(i) plans. The IRS will audit 10 to 50 of these plans, starting with the “springing cash value” plans first, and then focusing on returns with Schedule A’s.

(6) The IRS is also developing an Employee Plans Examination Process Guide which will detail the different stages of an Employee Plans Audit. The Guide will be available to the public at some time in the future.

(7) There was an article in the Winter 2004 edition of the IRS’s Employee Plan News entitled “Conducting Audits at a Taxpayer’s Place of Business” in which Preston Butcher, Director, EP Examinations, states:

Our efforts are focused on conducting effective and efficient high quality audits. In this regard, we have discussed with our agents the need for audits to generally be conducted at the taxpayer’s place of business, unless facts and circumstances dictate otherwise.

Apparently, the IRS will be providing a revision to this policy in an upcoming newsletter. The policy will not be as rigid as expected. According to officials at the meeting, there will be exceptions made on a case by case basis. The Service expects that 90% of the examinations will be conducted at the plan sponsor’s venue.

(8) Cathy Jones indicated that they will begin auditing SIMPLE Plans, starting in the 3rd quarter of this year. She noted that they just completed a program of auditing SEP Plans and found a great deal of noncompliance. The IRS is looking into an outreach program to educate the public regarding SEP compliance.

UPDATE: I would like to post notes from other Pension Liaison Group Meetings in other regions of the country for readers. If you are a member of another group and would like to provide this information, please email me by clicking here.

Here are my “rough” notes regarding the proposed DL Program (“Bifurcated Approach”) discussed above:

• Year 1: Defined Contribution (DC) Specimen Documents would be submitted to the IRS, as well as all individually designed plans (both DC and Defined Benefit (DB) plans) where the EINs of the plan sponsor end in 1 or 6.
• Year 2: Individually designed plans with plan sponsor EINs ending in 2 or 7 would come in for a DL.
• Year 3: Individually designed plans with plan sponsor EINs ending in 3 or 8 would come in for a DL, and DC Specimen Document letters would be issued by EP.
• Year 4: DB specimen documents would come in for a DL, as well as individually designed plans with plan sponsor EINs ending in 4 or 9 would come in as well.
• Year 5: Individually designed plans with plan sponsor EINs ending in 5 or 0 would come in for a DL.
• Year 6: DB specimen document letters would be issued, and the individually designed plan cycle would begin again (i.e. EINs ending in 1 or 6.)