Federal Register Notices: Stress Testing Rules, Form 5500, and Taxpayer Burden

Regulators Ease Bank Stress Tests; IRS Eyes Benefit Plans

In a register reflecting both regulatory easing and continued compliance oversight, the Office of the Comptroller of the Currency (OCC) implemented statutory relief by raising the asset threshold for bank stress tests mandated under Section 165(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Simultaneously, the IRS is renewing its request for comments on information collections related to Employee Benefit Plan reporting via Form 5500, as well as broader Taxpayer Burden Surveys. This juxtaposition highlights a landscape where regulatory burdens are being adjusted for some financial institutions, while compliance monitoring remains a priority for employee benefit plans.

The Delta: Asset Threshold Jumps to $250 Billion

Following the regulators' actions concerning bank stress tests mandated under Section 165(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the OCC has adjusted its oversight based on amendments introduced by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Section 165(i) of Dodd-Frank originally compelled certain financial companies to conduct annual stress tests. The recent changes significantly alter the landscape.

Here's a breakdown of the key changes:

• Old Rule (Pre-EGRRCPA):

  • Asset Threshold: National banks and Federal savings associations with total consolidated assets of more than $10 billion were required to conduct annual stress tests.
  • Stress Test Scenarios: Three scenarios were required, including a baseline, adverse, and severely adverse scenario.
  • Testing Frequency: Annual.

• New Rule (Post-EGRRCPA):

  • Asset Threshold: The minimum asset threshold has been raised to $250 billion in total consolidated assets.
  • Stress Test Scenarios: Only two scenarios are now required (baseline and severely adverse), eliminating the requirement for an "adverse" scenario.
  • Testing Frequency: Stress tests are now conducted "periodically," typically biennial.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), enacted in 2018, amended Section 165(i)(2) of the Dodd-Frank Act. This amendment reflects a broader effort to tailor regulations based on the size and complexity of financial institutions.

The clear winners are banks with assets between $10 billion and $250 billion. These institutions are no longer subject to the mandatory annual stress testing requirements under Section 165(i) of Dodd-Frank, potentially leading to reduced compliance costs and operational burdens. This also has implications for the deductibility of compliance costs under Section 162, which allows deductions for ordinary business expenses; as the regulatory floor has shifted, the IRS may challenge the need for some stress-testing expenses.

IRS Compliance: Form 5500 and Burden Metrics

Following the easing of stress test requirements, the IRS is actively focused on benefit plan compliance and refining its methods for assessing taxpayer burden. The IRS recently issued notices regarding information collection, focusing on Form 5500 and taxpayer burden surveys.

The first notice concerns Form 5500, "Annual Return/Report of Employee Benefit Plan." The Form 5500 series is a joint effort by the IRS, Department of Labor (DOL), and Pension Benefit Guaranty Corporation (PBGC) and is used to determine whether employee benefit plans conform with both the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA). The IRS relies on the information reported on Form 5500 to select plans for examination and ensure compliance with requirements, such as the nondiscrimination testing and coverage rules under Section 410(b). Failure to accurately or timely file Form 5500 can result in penalties under Section 6652(e), potentially costing $250 per day up to a maximum of $150,000.

The second area of focus involves taxpayer burden surveys. These surveys are critical for the IRS to gauge the compliance burden—measured in both time and financial costs—associated with various tax obligations. The IRS uses the survey data to understand the impact of changes in tax law and the effectiveness of tax preparation software. Shifting away from the Arthur D. Little (ADL) model, which focused primarily on form completion time, the IRS now utilizes the IRS Taxpayer Burden Model (ITBM). The ITBM is taxpayer-centric, focusing on activities like recordkeeping, tax planning, and software usage to provide a more comprehensive understanding of the resources required for tax compliance.