Employee Benefits Law Report

For public companies, the time to update executive compensation practices is now: Final regulations issued under IRC Section 162(m) and American Rescue Plan Act further expands class of covered employees

At long last, the Department of the Treasury and Internal Revenue Service published final regulations to explain how changes to Internal Revenue Code Section 162(m) under the Tax Cuts and Jobs Act of 2017 (TCJA) affect the deductibility (or lack thereof) of compensation in excess of $1 million paid to covered employees. We have blogged about these changes and made recommendations to public companies in the past about how to manage these changes. For the most part, the final regulations did not change any prior guidance. We will not repeat these prior summaries here. Instead, we will highlight the items that we expect will result in the biggest changes or challenges to public companies and the administration of their executive compensation plans.

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Public companies may need to amend nonqualified and incentive compensation plans by Dec. 31, 2020

Public company nonqualified plans and incentive plans may need to be amended to avoid a potential violation of Internal Revenue Code (IRC) Section 409A as a result of changes to IRC Section 162(m) under the Tax Cuts and Jobs Act. This amendment most likely is required for employers that mandated deferrals of amounts that exceeded the limit under IRC Section 162(m) but not those whose plans permitted but did not require deferrals of such amounts. Nevertheless, an employer that actually exercised such discretion with respect to non-grandfathered amounts may need to amend such arrangements as well. That is because the act eliminated the performance-based exception to the $1 million deduction limit under IRC Section 162(m) for “covered employees” of publicly traded companies, along with other related changes. Proposed regulations under IRC Section 162(m) indicate that companies may need to amend their nonqualified plans or incentive compensation plans (or potentially both) to avoid an inadvertent violation of IRC Section 409A’s anti-acceleration rules. Otherwise, payment of non-grandfathered incentive awards could subject participants to additional taxes and penalties of 20% or more. We explain further in this blog.

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New IRS guidance reminds employers about new long-term part-time employee eligibility rules for 401(k) plans

Much of the employee benefits news this year has related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, particularly with respect to the greater flexibility it provided 401(k) plan participants with respect to requesting in-service distributions and loans. That is not a surprise during this year of economic upheaval. Updating plan administrative procedures to reflect these CARES Act terms has kept employers busy, but it is important that employers remember that they will need to update their procedures to reflect the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Internal Revenue Service (IRS) recently reminded employers about these SECURE Act issues in Notice 2020-68. Foreshadowing some of the administrative complexities that employers may face, the notice states that the IRS did not intend to provide “comprehensive” guidance, but instead, simply is trying to assist employers with implementation of key SECURE Act terms.

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Process matters: IRS issues guidance on recognition of income and FICA taxes for stock-settled awards

On May 22, 2020, the IRS released an Office of Chief Counsel Memorandum that addresses (i) the date that fair market value is determined and when gross income and federal income tax withholding liability arises for stock-settled awards and (ii) the timing for remitting FICA taxes for such awards. This question comes up frequently and has not always had a clear answer, and so the memo provides important guidance for employers who sponsor equity award plans.

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Aug. 31 deadline to rollover 2020 RMDs is quickly approaching

Once a taxpayer reaches age 72 (or age 70 ½ if the taxpayer reached age 70 ½ prior to 2020), the Internal Revenue Code requires owners of most retirement accounts to withdraw minimum distributions (RMDs) from those accounts. To provide relief from the increased tax burden often associated with RMDs, the Coronavirus Aid, Relief and Economic Security (CARES) Act waived RMDs for 2020. The CARES Act, however, was not made law until March 27, 2020 and any taxpayers had already taken their RMDs for this year.

My colleagues John Costello and Elizabeth Arentz explain the issue and how the IRS is responding in this Porter Wright Law Alert.

ESOPs from the seller’s perspective

An Employee Stock Ownership Plan (ESOP) can be a great option for small business owners looking for a tax-advantaged way to sell their business. My colleague, Greg Daugherty, recently appeared on an episode of the podcast, “The ESOP Guy: The Journey to an ESOP.” Greg spoke with host Phil Hayes about the seller’s perspective and key management in evaluating the benefits and options of an ESOP. Listen to the podcast here.

Wage withholding in a remote working environment

Employers generally must withhold income taxes on behalf of employees based on where the employee works. Typically this determination is simplified by the location of the employer’s offices. The COVID-19 pandemic and corresponding stay-at-home orders have altered the working situations for most Americans. Only time will tell what things will look like moving forward. Employers must now consider the impact of employees working remotely and confirm that income tax withholding is properly executed given these unprecedented circumstances.

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CARES Act provides temporary fringe benefit for employer repayments of employee student loans

The Coronavirus Aid, Relief and Economic Security (CARES) Act has provided a wide range of programs that affect employee benefit plans, employers and employees. One benefit that has flown under the radar is a new, temporary tax-qualified student loan repayment plan. Section 2206 of the CARES Act allows employers to claim a tax deduction for repayments of employee student loans, and allows employees to exclude these payments from taxable income, in amounts up to $5,250 a year. In essence, the CARES Act treats student loan payments as an education assistance fringe benefit. Normally, such benefits may be paid only for (i) books and equipment, (ii) tuition and fees, and (iii) necessary school supplies. The CARES Act adds employer student loan repayments made on or after the effective date of the CARES Act (March 27, 2020) through Dec. 31, 2021.

Practically speaking, we have seen little interest from employers to adopt such a plan. That is probably because employers, like everyone else, are currently doing what they can to conserve cash, including suspending matching and profit sharing contributions to qualified retirement plans. Continue Reading

Stop and review COVID-19 distribution and loan forms carefully

The Coronavirus Aid, Relief and Economic Security (CARES) Act, authorizes employers to make changes to their qualified retirement plans to increase loan limits, delay loan repayments, and make distributions to plan participants experiencing certain COVID-19 related circumstances. Due to a lack of guidance from the IRS, there’s confusion among third-party administrators (TPAs) about how to administer these changes, resulting in potential issues with forms used by TPAs to approve these CARES Act loan and distribution changes.

We have reviewed several third-party administrator forms and client communications, and wanted to provide some clarity with regard to the following CARES Act changes:

  • Plans that allow loans may be required to permit participants with qualifying COVID-19 related circumstances to delay loan repayments with due dates occurring between March 27, 2020, and Dec. 31, 2020, for one year.
  • Increasing loan limits from $50,000 to $100,000 for participants with qualifying COVID-19 related circumstances is optional.
  • Allowing distributions of up to $100,000 to participants with qualifying COVID-19 related circumstances is optional.

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How to claim COVID-19 tax credits via payroll

Employers may claim the Employee Retention Tax Credit and the tax credits available under the Families First Coronavirus Response Act (FFCRA) for relief during the COVID-19 pandemic. They do this first, by reducing the employer portion of Social Security taxes, and then, by reducing the employer’s payroll deposits in an amount equal to the refundable portion of the accrued credits, instead of depositing said amount with the IRS.

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