On August 9, 2016, the IRS issued Notice 2016-49, which provides interim guidance on certain requirements for entities seeking certification as certified professional employer organizations (CPEOs) under the Tax Increase Prevention Act of 2014 (TIPA) (see Legal Update, Tax Relief Extension Includes Provisions on Multiemployer Pension Plans, Transportation Benefits and PEOs and Standard Document, PEO Client Service Agreement). The guidance, issued in response to commenters' concerns regarding the IRS's CPEO-related regulations and other guidance issued earlier this year (including Revenue Procedure 2016-33), relaxes certain requirements involving obtaining and maintaining CPEO status. (Regarding the earlier CPEO guidance, see Legal Updates, Certified PEO Applications To Be Accepted Beginning July 1, 2016 and IRS PEO Guidance Addresses Certification Procedures.)

Among other changes, Notice 2016-49:

According to the IRS, the Notice 2016-49 changes will be reflected in yet-to-be issued final regulations addressing CPEO certification. For the time being, Notice 2016-49 may be relied on until the final regulations (and a related, updated revenue procedure) are published.

Existing guidance required CPEO applicants and CPEOs to provide the IRS, along with annual audited financial statements, an independent CPA's opinion stating that:

Additional rules apply for CPEO applicants that are members of a controlled group with other CPEO applicants or CPEOs (see Practice Note, Controlled Group and Affiliated Service Group Rules).

However, commenters on the government's earlier CPEO guidance observed that CPAs may be prevented from including statements on working capital and the accrual method of accounting in their opinions due to American Institute for Certified Public Accountants (AICPA) restrictions on what can be included in a CPA opinion.

In response to the commenters' concerns, the existing guidance will be revised to provide that audited financial statements covered by a CPA's opinion include a "Note to the Financial Statements" stating either that the:

Additional "Note to the Financial Statements" rules apply for controlled group situations.

Also, because generally accepted accounting principles (GAAP) require the use of an accrual method of accounting and a CPA's opinion must state that a CPEO applicant's or CPEO's audited financials are presented consistent with GAAP, Notice 2016-49 eliminates the statement regarding the accrual accounting method.

A CPEO application generally must include a copy of the applicant's audited financial statements and accompanying CPA opinion for the most recently completed fiscal year. However, an exception applies if a CPEO applicant applies for certification within six months of its most recently completed fiscal year and the audited financial statements for that year therefore have not been completed. In this situation, the CPEO applicant must:

Regarding CPEO applicants applying for certification in the first year of the program, commenters noted that these requirements:

In response, Notice 2016-49 provides transition relief for any CPEO applicant required to submit its annual audited financial statements and CPA opinion for a fiscal year ending before September 30, 2016. Specifically, applicants will meet the requirements if they submit:

A CPEO applicant has six months after its fiscal year ends to submit the annual audited financial statements, accompanying CPA opinion, and signed separate statement of positive working capital (if applicable) for that year, regardless of its fiscal year end date.

Additional rules apply for controlled group situations.

Generally, the effective date of certification as a CPEO is the first day of the first calendar quarter following the date of the notice of certification. However, for applications submitted before September 1, 2016, the effective date of certification will be January 1, 2017 (even if the date of a CPEO applicant's notice of certification is after January 1, 2017).

Notice 2016-49 extends the period in which a person must apply in order to be eligible for a January 1, 2017 effective date. Under this guidance, applicants must submit a complete and accurate application for certification on or before September 30, 2016, to be eligible for an effective date of January 1, 2017, even if the date of the notice of certification is after January 1, 2017.

Notice 2016-49 also makes certain other modifications, which include:

This latest IRS guidance appears intended to remove, or at least minimize, some of the practical barriers that may have stood in the way of entities seeking to obtain CPEO status – possibly in an effort to increase utilization of the CPEO credential. In a related attempt to broaden the availability of CPEO status, the IRS has indicated that its final regulations will allow sole proprietorships to apply for certification as a CPEO.

In addition to its CPEO final regulations, the government also plans additional CPEO guidance to address: