Employers who sponsor 401(k) plans and other defined contribution plans in which participants may direct the investments of their accounts now have a deadline to provide lifetime income illustrations in those plans’ benefit statements. The Department of Labor (DOL) recently published guidance addressing these requirements. While helpful, the guidance is still subject to change in a potential final regulation. As such, employers should work closely with their plan administrators and legal counsel to navigate the contours of the evolving lifetime income rules. Continue Reading
The Internal Revenue Service (IRS) recently updated its Nonqualified Deferred Compensation Audit Techniques Guide (NQDC). It released Publication 5528 (NQDC guide) on June 1, 2021. The IRS last updated the NQDC Guide in 2015. Interestingly, the 2015 NQDC Guide was published shortly after the IRS sent information document requests to publicly traded companies to determine how well companies were complying with Internal Revenue Code (IRC) Section 409A. This latest update to the NQDC guide contains much more detailed guidance than the prior version. That is noteworthy because President Joe Biden and many members of Congress have been proposing to increase the IRS’s budget in order to provide more resources for audit initiatives. Could a new executive compensation enforcement initiative be on its way?
The U.S. Department of Labor (DOL) recently announced new guidance for plan sponsors, fiduciaries, record keepers and participants on best practices for maintaining cyber security. This is the first time the DOL has issued such guidance, and it comes in response to a recent General Accounting Office (GAO) report responding to increased cybersecurity risks to retirement plan participant data and plan assets. If there is one central message to the guidance, it is this: The DOL now considers cybersecurity to be an ERISA fiduciary function. Stated another way, part of the fiduciary decision of the selection and monitoring of service providers requires an evaluation of the service providers’ cybersecurity program.
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.
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.
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.
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.
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.
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.
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.