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Employee Benefits Law Report Reporting on recent trends and developments affecting employee benefits

Tag Archives: IRS

IRS issues 409A guidance—need to correct before the year of vesting

Posted in Tax Issues

The Office of Chief Counsel of the Internal Revenue Service (the “IRS”) recently confirmed that violations of Section 409A of the Internal Revenue Code (the “Code”) could be corrected without penalty in any taxable year before the taxable year in which an arrangement became vested. However, the IRS went on to clarify that the Code would require immediate recognition of taxable income of the amounts deferred and the assessment of an additional 20% tax if taxpayers waited until the taxable year of vesting to correct an error.

In Chief Counsel Advice 201518013 (the “CCA”),the IRS clarified what some perceived to …

Employee Benefit Plan Limits – Reference Chart for 2015 and Prior Cost-of-Living Adjustments

Posted in Retirement Plans

The Internal Revenue Code sets forth various dollar limitations on benefits, contributions, compensation under employee benefit plans. The IRS has announced limits for 2015 tax years. For your reference, the IRS Cost-of-Living Adjustments summarizes these dollar limitations, as modified by the IRS for cost-of-living adjustments (COLAs), for 2015 and prior years.…

New wrinkle for the Delinquent Filer Voluntary Compliance Program—trap for the unwary

Posted in ERISA Fiduciary Compliance, ERISA Litigation, Retirement Plans, Tax Issues

Plan administrators who fail to timely file Form 5500 annual returns/reports are subject to penalties under both Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code (the “Code”). The Department of Labor (the “DOL”) has the authority to assess civil penalties of up to $1,100 per day against plan administrators that fail to file complete and timely returns/reports. In addition, the Internal Revenue Service (the “IRS”) may impose further penalties of $25 per day up to a maximum of $15,000 per return against administrators that fail to file complete and timely returns/reports.…

Substantial risk of forfeiture guidance clarifies when Section 16 short-swing profit liability can defer taxation of equity compensation awards

Posted in Tax Issues

Legend had it at my law school that one day, a lost student walked into a torts class and asked the professor if this class was wills, trusts, and estates. The torts professor replied, “We haven’t gotten that far yet.” A dry sense of humor on the professor’s part? Perhaps. His point, however, was that the law can be a seamless web, with one area of law often having an impact on another. This point often is true with respect to the tax and securities laws.

We blogged previously that the IRS and Treasury issued final regulations under Code Section …

IRS Finalizes Rules for Reduction or Suspension of Safe Harbor Contributions

Posted in Retirement Plans

During the most recent recession (some might say a mini depression), many employers requested greater flexibility to reduce or suspend safe harbor non-elective contributions to their 401(k) plans. They felt that a temporary reduction or suspension of contributions would be a better alternative than outright terminating their plans. Although the applicable regulations contained procedures for reducing or suspending safe harbor matching contributions, it wasn’t until Treasury issued proposed regulations on May 18, 2009, that a procedure was available to reduce or suspend safe harbor non-elective contributions. Recently, Treasury issued final regulations that revise the requirements for permitted mid-year reductions or …

IRS Limits Ability to Deduct Annual Bonus Payments in the Year of Accrual, Rather Than the Year Paid

Posted in Fringe Benefits

Are you able to accrue and deduct annual bonuses for a 2013 calendar year performance period in 2013, so long as you pay the bonuses to your employees by March 15, 2014?  If this question sounds familiar, it is because we have blogged about past efforts of the IRS to address this issue.  Historically, most employers believed that the answer was they could deduct the bonuses in the year accrued rather than the year paid, but during the past few years, the IRS has chipped away at that belief.  In a recent Chief Counsel Advice Memorandum, the IRS issued its …

403(b) Plan Sponsors Can Mitigate Risk By Taking Proactive Steps Under New EPCRS Guidance

Posted in Retirement Plans

Legendary UCLA Men’s Basketball Coach John Wooden once asked, “If you don’t have time to do it right, when will you have time to do it over?” If you sponsor a 403(b) plan, the IRS may have helped answer this question for you. In our prior blog, we highlighted the new Employee Plans Compliance Resolution System (“EPCRS”) guidance set forth in Revenue Procedure 2013-12 (the “Procedure”). This procedure also provides new guidance for 403(b) plan sponsors. Most critically, plan sponsors who did not adopt a written plan document by December 31, 2009 may submit a written plan document to …

Plan Sponsors Have Greater Opportunities to Correct Errors Under New EPCRS

Posted in Retirement Plans

Do you sponsor a qualified retirement plan? If you’re a tax-exempt or governmental employer, do you sponsor a 403(b) plan? If you answered yes to either of these questions, you know that despite having the best administrative procedures in place, it is easy to make mistakes with respect to the plan. If the IRS were to catch these mistakes on audit, it has the potential to disqualify the plan. Fortunately, the IRS has the Employee Plans Compliance Resolution System (“EPCRS”) in which plan sponsors may correct errors voluntarily—sometimes with an IRS filing and reduced penalties, and sometimes with no filing …

Code Section 162(m) Guidance Issued Regarding Deductibility of Dividends and Dividend Equivalents in Equity Awards

Posted in Executive Compensation, Fringe Benefits

The IRS recently issued an important ruling on whether dividends and dividend equivalents related to restricted stock and restricted stock units (“RSUs”) can be treated as performance-based compensation for purposes of Code Section 162(m). In Rev. Rul. 2012-19, 2012-28 IRB, the IRS held that such dividends and dividend equivalents would qualify as performance-based compensation, provided that each of them separately satisfy Code Section 162(m)’s performance-based compensation requirements. In contrast, if dividends and dividend equivalents were paid to employees at the same time as dividends on common stock were paid to shareholders, regardless of whether the underlying awards were vested, …

$2,500 FSA Limits: Employers with Non-Calendar Year Plans Can Breathe a Sigh of Relief

Posted in Fringe Benefits, Health and Welfare Plans

In a recent blog, we discussed the need for employers with non-calendar year health FSAs to act now to implement the new $2,500 FSA limits imposed under health care reform.  Thankfully, recent IRS guidance eliminates these concerns. 

The Patient Protection and Affordable Care Act requires plan sponsors to limit pre-tax health FSA contributions to no more than $2,500 for “taxable years” beginning after December 31, 2012.  This author, and many others, mistakenly (but I would argue rationally) believed that “taxable year” referred to the participant’s taxable year, which is generally the calendar year.  If that were the case, the …

Implementing $2,500 FSA Limits for Non-Calendar Year Plans – Start Now

Posted in Fringe Benefits, Health and Welfare Plans, Health Care Reform

Beginning January 1, 2013, the Patient Protection and Affordable Care Act (“PPACA”) requires plan sponsors to limit pre-tax health flexible spending account (“FSA”) contributions to no more than $2,500 per calendar year. There are currently no limits on health FSA contributions. Thus, many employers have plan-imposed contribution limits in excess of the new $2,500 limit.  This change is anticipated to be a revenue-raiser.  Because the new limit is lower than most existing plan-imposed pre-tax FSA contribution limits, affected employees will pay taxes on more of their salary.

Given the January 1, 2013 effective date, many employers think they can wait …

Lifetime Income Choices: It’s All About Pension Risk Management and Allocation of Risk

Posted in Retirement Plans

The Treasury has announced proposed regulations and rulings regarding lifetime income choices. This guidance presumes that employers want to adopt more pension risk by providing more annuity options in their defined contribution and defined benefit retirement plans.  (For links related to this new guidance, see bottom of this post.)

In its fact sheet, the Treasury discusses the financial risks of retirees and explains that the Treasury and Labor Department have undertaken an initiative to provide “more options for putting the ‘pension’ back in our private pension system.” Through this guidance, the Treasury is “removing regulatory barriers” to allow employers and …

Health care compliance Form 8928 excise tax self-reporting requirements: Have you done your due diligence for 2011 and determined the due date for your return, if required?

Posted in Health Care Reform

While conducting a health care reform webinar recently, we received questions that suggested the need to remind employers sponsoring group health care plans about their self-reporting obligations, and significant potential exposure to excise taxes. We are referring to excise taxes that are effective right now, not the new excise taxes that are slated for 2014 and 2018.

Sections 4980B, 4980D, 4908E, and 4980G of the Internal Revenue Code impose excise taxes for various failures of health care coverage requirements. For example, Section 4980B excise taxes apply to COBRA failures, and Section 4980D excise taxes apply for failure to comply with …

New Procedures for Filing Determination Letter Applications—Less Work Now, but More Problems Later?

Posted in Retirement Plans

Several important changes will take effect in the determination letter program beginning in 2012. The IRS has stated that these changes are intended to (1) reduce the burden on employers for filing determination letter applications (and in some cases, eliminate the need to file an application) and (2) reduce the time it takes for the IRS to process determination letter applications. The IRS first announced these changes in Announcement 2011-82 and later published them in Revenue Procedure 2012-6. We encourage employers maintaining qualified retirement plans to consider how these determination letter application program changes will impact them, and whether …

Annual Bonuses for 2011 Paid in 2012: Tax Planning Opportunities for Employers

Posted in Fringe Benefits

Are you able to accrue and deduct annual bonuses for a 2011 performance period in 2011, despite the fact that an employee is required to be employed through the payment date in 2012 in order to receive the bonus? A few years ago, the IRS issued guidance that strongly suggested the answer was no, the deduction could not be taken in 2011. CCA 200949040 (the “2009 Memorandum“).  The 2009 Memorandum caught some employers by surprise because they assumed that under Code Section 461, if they paid bonuses within two and a half months after the end of 2011 …

Health Care Shared Responsibility’s Missing Link – Reconciliation With The Employer

Posted in Health and Welfare Plans, Health Care Reform

The Patient Protection and Affordable Care Act (PPACA) shared responsibility provisions require speculation about whether health care coverage will be affordable for an individual. Whether affordable coverage was available, whether an individual was eligible for a premium credit, and whether an employer was subject to penalties, cannot be determined until after the individual files a personal tax return. PPACA shared responsibility provisions address reconciliation of the speculation between the individual and federal agencies. Proposed regulations regarding premium tax credits and Notices 2011-36 and 2011-73 regarding shared responsibility for employers spotlight a missing linking: reconciliation with the employer.

PPACA Penalty for

IRS Announces Cost of Living Adjustments for Retirement Plans

Posted in ESOPs, Retirement Plans

The Internal Revenue Service (“IRS”) recently announced cost of living adjustments affecting retirement plans. These new limitations are effective for tax year 2012. Many, but not all, applicable dollar limitations will increase. For this purpose, the IRS uses an adjustment process that is similar to the process used to adjust Social Security benefits (which also will increase effective in 2012).

Some of the more important increases relevant to retirement plans are as follows:

  • the elective deferral limit applicable to 401(k), 403(b) and certain 457 plans will be increased from $16,500 to $17,000;
  • the dollar limitation on the maximum annual benefit

IRS Rings Up Cell Phone Tax Guidance

Posted in Fringe Benefits

In an attempt up clear up confusion about the tax treatment of employer–provided cell phones, the Internal Revenue Service (the “IRS”) has issued Notice 2011‐72. The Notice was issued on September 14, 2011, and the tax exclusion rules described below are effective for all cell phone usage after December 31, 2009. This new guidance likely will be appreciated both for the resulting clarity (or at least increased clarity) and for the position taken by the IRS. Note that the guidance in the Notice is limited expressly to cell phones.

Under the Notice, the value of the business use of …

Resolving Employee Benefit Plan Audit Problems and Late or Amended Forms 5500

Posted in Audits and Correction, ERISA Fiduciary Compliance

This time of year, many employers are struggling to satisfy the independent auditors of their employee benefit plans so that they can obtain opinions and file their Forms 5500 on time. For a calendar year plan that filed a Form 5558 extension, the deadline is generally October 15 (but is October 17 this year, given that the 15th is a Saturday). As the deadline nears, employers may also encounter problems with electronic filing (now in its second year) and with getting answers to their questions regarding the filing. The potential penalties for failure to timely file a Form 5500 are …

Public Companies Need to Review Equity Compensation Arrangements ASAP

Posted in Executive Compensation

In our recent blog about public equity compensation arrangements, we noted inconsistencies regarding the effective date of new guidance. The IRS and Treasury subsequently corrected the 162(m) guidance, and based upon this correction, we reaffirm that public companies need to review their equity compensation arrangements as soon as possible to minimize potential negative tax ramifications.

Public Companies Granting Stock Options and SARs to Covered Employees

Under existing Treasury regulations, certain equity compensation arrangements are exempt from the $1 million compensation deduction limit under Code Section 162(m), provided that a limit on the awards is stated. It appears that when the …

Tapping Your Retirement Funds Early? Uncle Sam Gets a Piece of the Pie

Posted in Retirement Plans

 Are you considering taking an early distribution from your retirement plan?  If so, now is a good time to brush up on the early distribution rules.  In Tax Tip 2011-42 (available  here), the IRS reminds you of the tax impact of taking a withdrawal from your retirement plan before you reach age 59 ½.

Early distributions are usually subject to an additional 10% tax.  You must report this 10% tax on the appropriate line of Form 1040 and may also be required to file Form 5329 “Additional Taxes on Qualified Plans (Including IRAs) and other Tax-Favored Accounts” (available here

Public Companies May Need to Amend Stock Option Plans Soon to Qualify for Exception to $1 Million Compensation Deduction Limit

Posted in Executive Compensation

Publicly traded companies may need to act quickly to review, and, if necessary, amend their stock option and stock appreciation right (“SAR”) plans in order to preserve tax deductions for compensation in excess of $1 million paid to certain executives. The reason for this review is that the Internal Revenue Service (the “IRS”) and the United States Treasury Department recently issued proposed regulations that clarify a few items with respect to the application of Section 162(m) of the Internal Revenue Code (the “Code”) to such plans. One item relates to requirements that stock options and SARs must meet to qualify …