Must a Form 5500 preparer tell her client that the plan is tax-disqualified?

[Peter Gulia]

I’d like to know what the BenefitsLink mavens think about this hypothetical:

A corporation (100% owned by one shareholder) engages a practitioner to prepare a small retirement plan’s Form 5500. The plan has never had an audit or any level of CPA service concerning the plan’s financial statements. For every previous Form 5500, the financial reporting was on the cash-receipts-and-disbursements method of accounting. The practitioner’s engagement letter says that she may rely on information furnished by the employer or any financial institution unless she has actual knowledge that the information is false.

Although the practitioner didn’t ask for it, the corporation furnishes to the practitioner a copy of the plan’s document. Against good business judgment, the practitioner doesn’t send it back with a letter saying that she didn’t look at the document. Rather, she does glance at it, and immediately notices that the document hasn’t been amended for several law changes that were required to be in the plan’s document before the year to be reported.

Based on the plan’s financial information and consistently using the cash method of accounting, it’s possible to answer truthfully every required item of Form 5500 without ever mentioning that the plan isn’t tax-qualified.

The practitioner would prefer not to say to her client that the plan is tax-disqualified. Why? She believes that mentioning the point would lead to unbillable telephone time with the client’s owner.

Leaving aside the wisdom of the practitioner’s reluctance even to mention what she noticed, is there any Treasury department rule or other Federal law that makes it improper for her to prepare the Form 5500 without mentioning the tax-qualification defect?

[rcline46]

I think the preparer has a DUTY to mention, in writing, the perceived issues with the plan. I don't think there is a LEGAL requirement. The reluctance tells me the preparer is not acting in a professional manner.

[Peter Gulia]

rcline46, thank you for helping me think about a business-conduct problem.

When you refer to a duty even if law doesn't impose a requirement, do you mean a moral duty or something else?

Does it matter that this practitioner might not be an actuary, lawyer, or certified public accountant, and might not have any license or credential?

Would it affect your view if the engagement letter had stated explicitly that the practitioner would not do anything beyond what's absolutely necessary to prepare the Form 5500?

Please understand that I also think that the practioner must mention the defect, but I seek to understand more about why we feel that way.

[david rigby]

Peter,

IMHO, the practioner has a responsibility to act professionally, which (to my mind) means to draw attention to any perceived problems. Stating "tax-disqualified" is a conclusion that may not yet be warranted. Yes, it's possible, but there may be facts not yet in evidence. [As an Enrolled Actuary, even if all the facts are known, I would try to avoid stating "disqualified" in all cases, believing that is the prerogative of the attorney and/or the CPA.]

If the practioner has any ERISA "qualifications" (Enrolled Actuary, atty, CPA, Enrolled Agent, ERPA), then I suggest replacing "responsibility" with "duty". If the practioner has any actuarial credentials, the actuary must also ensure compliance with Actuarial Standards of Practice (ASOPs) as well as the Actuarial Code of Conduct.

[jpod]

1. Why does the status as tax-qualified or not have anything to do with the preparation and filing of a Form 5500?

2. What's the big deal here? After preparing the 5500 and collecting her fee, she should tell the client in writing that she feels plan may have qualification issues based on document she has seen, but she has not reviewed it in depth and in any event is not permitted to practice law, and recommend the client consult with an attorney. Send the letter or memo in an envelope marked confidential. Can't get sued for sending a letter.

[jpod]

I didn't finish my thoughts.

3. A duty? I don't know and I don't care. The first duty is to protect yourself, and this is the USA and anyone can sue anyone for anything, and the client probably would have no hesitation over suing her if his plan is picked up for audit and disqualified and she hadn't warned him.

[K2retire]

At this point can she be certain that the document provided is the most recent one and includes all amendments? With that possiblity in mind (and perhaps even in writing) I agree with jpod's point # 2.

[PensionPro]

I think it depends on the nature of the engagement. If the engagement was to be a "Form 5500 preparer," the provider is under no obligation or position to make observations regarding the plan's qualification status. If on the other hand the provider is engaged to provide full-service compliance services the provider should provide in writing an opinion or disclaimer regarding the plan's qualification status.

In any event there is insufficient information here to determine the plan's qualification status. We have encountered situations where the document was restated every year, i.e. every time there was a service provider change. We even had a client who had two documents with conflicting provisions effective for one plan for the same period. In these instances, the plan sponsor did not know or remember what document was in effect.

[rcline46]

I think the others detailed my position. But let us start with - I really don't think someone with no training or experience should EVER touch a 5500, and that includes plan sponsors. Ok, should ever be responsible for completing the 5500. Anyone can gather data and attempt to fill out the form, but the form is full of traps for the unwary. Even thought the Plan Administrator and Plan Sponsor are responsible for signing it under penalty of perjury, they can sue the Paid Preparer for malpractice.

Now ASSUMING your preparer is competent/practiced enough to complete the form (credentials are not necessary) then I think there is an underlying need to review the documents governing the plan. Otherwise one cannot complete the participation question correctly - in, out, why out, counts and the like. (No fair saying information was provided, and this does not constitute an audit, just routine care in completing the form.) This same care extends to the asset reconciliation and answering the wonderful list of yes/no/amount questions. For example, there is a loan - does document provide for loans, was it in default, was it to a disqualified person?

Of course the old document (maybe) does not even say the plan was a qualified plan (which I think we assumed). Just because a plan is covered under Title I of ERISA dos NOT mean it is a qualified plan.

Ok, back to the question. If the Paid Preparer puts herself forth as a professional, she should act as a professional and disclose any questions she has about the circumstances surrounding the engagement. THat is the definition of a professional. Furthermore, should she have any designations in this industry, I believe this rises to a DUTY to inform - or to resign.

[Peter Gulia]

Thank you everyone for a nice collection of useful ideas.

[rcline46]

I add this with a sly grin - are you prosecuting or defending in this case?

[Peter Gulia]

I based the hypothetical on a real situation, but with some facts varied to further protect my client’s (and her prospective client’s) confidences and to sharpen the tensions involved in similar situations. (As some of my friends know, a significant part of my law practice is advising a lawyer, actuary, or certified public accountant about his or her professional conduct.) In the real situation, the practitioner had not yet accepted the Form 5500 engagement, but through her procedures for vetting prospective clients already had knowledge of the plan-document defects. I posted the hypothetical after I had advised my client, hoping to learn whether my advice was or wasn't consistent with community norms. Moreover, I believe that the problem illustrated by the hypothetical is frequently recurring, at least for those who work with small-business employers.

What did I advise? Although my client asked about using her engagement letter to limit sharply the scope of the representation, I advised that the expense, delay, and difficulty of getting the prospective client’s informed consent to such a scope limit would be disproportionate to the nature and normal fee of the proposed Form 5500 engagement. (Although this client has no professional credentials, my general advice to her is to follow conduct principles and 31 C.F.R. Part 10 as though she belonged to a recognized profession.) After my client told me that she was certain that the business owner would refuse to correct the plan documents, I suggested that she politely decline to accept the proposed engagement.

[Peanut Butter Man]

I’d like to know what the BenefitsLink mavens think about this hypothetical:

A corporation (100% owned by one shareholder) engages a practitioner to prepare a small retirement plan’s Form 5500. The plan has never had an audit or any level of CPA service concerning the plan’s financial statements. For every previous Form 5500, the financial reporting was on the cash-receipts-and-disbursements method of accounting. The practitioner’s engagement letter says that she may rely on information furnished by the employer or any financial institution unless she has actual knowledge that the information is false.

Although the practitioner didn’t ask for it, the corporation furnishes to the practitioner a copy of the plan’s document. Against good business judgment, the practitioner doesn’t send it back with a letter saying that she didn’t look at the document. Rather, she does glance at it, and immediately notices that the document hasn’t been amended for several law changes that were required to be in the plan’s document before the year to be reported.

Based on the plan’s financial information and consistently using the cash method of accounting, it’s possible to answer truthfully every required item of Form 5500 without ever mentioning that the plan isn’t tax-qualified.

The practitioner would prefer not to say to her client that the plan is tax-disqualified. Why? She believes that mentioning the point would lead to unbillable telephone time with the client’s owner.

Leaving aside the wisdom of the practitioner’s reluctance even to mention what she noticed, is there any Treasury department rule or other Federal law that makes it improper for her to prepare the Form 5500 without mentioning the tax-qualification defect?

I think this is full of Circular 230 problems. I don't understand how her engagement letter says that she may rely on information furnished by the employer or any financial institution unless she has actual knowledge that the information is false because this is contrary to Circular 230. Section 10.34(d) of Circular 230 states:

“(d) Relying on information furnished by clients. A practitioner advising a client to take a position on a tax return, document, affidavit or other paper submitted to the IRS, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or other factual assumption, or incomplete.”

As far as not letting her client know that the plan is tax-disqualified, Section 10.21 of Circular 230 seems to be right on point. It states:

“A practitioner who, having been retained by the client with respect to a matter administered by the IRS, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided in the Code and regulations of such noncompliance, error, or omission.”

As for the practice of preparing Form 5500s without looking at the plan document, I don't know how the practitioner could comply with the Circular 230 requirement of diligence as to accuracy in preparing the Form 5500s without checking the plan document to see what it says about eligibility, entry dates, distribution dates, contributions and allocations.

[Peter Gulia]

Peanut Butter Man, thank you for adding some further thoughts (with rule text to support them).

Now that we've uncovered that BenefitsLink readers think that a practitioner must provide a client advice about defects even if the client didn't ask for (and might not welcome) that advice, let's ask ourselves a follow-on question: must a client pay for the advice it didn't ask for?

What if a practitioner adds to her engagement letter the following:

Despite our agreement generally that I’ll provide only the advice you ask for, I may render the advice that any applicable law requires me to render, and you must pay for that advice (despite the fact that you didn't ask for it, and even if the advice is useless to you). You're obliged to pay for this required advice at the rate of $nnn per hour.

Leaving aside the practical problem that a client might be unlikely to pay no matter what the written agreement says, is such a clause is fair? BenefitsLink mavens, what do you think?

[rcline46]

In any engagement there is a necessity to review relevant materials, whether implicity or explicitly stated. Documenting items of concern is a routine part of any review. I don't see where providing those concerns in a formal way would cost extra.

This is not providing advice. Upon presenting the concerns I see no problem in offering to provide advice on how to address those concerns for additional cost.

[Ron Snyder]

You have raised and discussed some important concepts. I have a problem with rendering an opinion with respect to the plan's being qualified or not. That cannot be expressed by a professional advisor without having to comply with Circular 230. And no non-professional advisor should be giving opinions at all.

Second, an attorney has a duty to protect his client. Other professionals should tread carefully for a similar reason.

Since communications related to the 5500 filing with DOL are discoverable and not privileged, I would never put an opinion such as "your plan may not be qualified" into any written communication.

I would contact this client by telephone to express my concerns about failure to adopt required amendments, and refer him/her to an appropriate attorney familiar with correction programs.

A fairly serious problem arises, however, if the valuation software attempts to impose rules which were enacted subsequent to the most recent amendment. The administrator should abide by current rules and likely has a duty to inform the client of the rules applied in preparing the valuation. There is no requirement to point out that some of the rules are inconsistent with the latest draft of the plan document, which would have been done orally at time of delivery.