FICA’s special timing rule for account balance plans is oft-misunderstood – and misapplied – which can lead to unfavorable consequences for employers and employees alike.  Partner Debbie Hoffman and senior associate Stephanie Vasconcellos recently revisited the rule, conducting an in-depth analysis for Bloomberg BNA’s Tax Management Compensation Planning Journal.  Access the full article at www.bna.com or by clicking here.

Reproduced with permission from Tax Management Compensation Planning Journal, Vol. 46, 8, p. 135, 08/03/2018.  Copyright © 2018 by The Bureau of National Affairs, Inc. (800-372-1033), www.bna.com.

In welcome news, the IRS reversed its course on the maximum annual health savings account contribution for a family with high deductible health coverage. As you may recall, the IRSHSA Increase initially set the maximum 2018 HSA contribution for family coverage at $6,900. In March 2018, the IRS lowered that maximum to $6,850. Via Rev. Proc. 2018-27, the IRS announced its decision that—notwithstanding its March guidance—it would allow taxpayers to treat $6,900 (not $6,850) as the maximum family HSA contribution for 2018.

The IRS also provided relief for those taxpayers who had already contributed between $6,850 and $6,900 to an HSA for 2018, and then received a distribution of that excess amount plus earnings based on the IRS’s March guidance. Forms of relief include timely repaying the distribution to the HSA, retaining the distribution as an excess contribution, or, if attributable to employer contributions, using it to pay qualified medical expenses.

We have updated our previous limitations post to reflect these changes, and will continue to do so should further changes arise for 2018.

HSA

On March 5, 2018, the IRS announced adjustments – effective immediately – to various annual limitations already in place for 2018.  One such adjustment is to the maximum annual health savings account contribution for a family with high deductible health coverage.  Previously set at $6,900 for 2018, the IRS has lowered the limit to $6,850, based on a change to the calculation of cost-of-living adjustments under the Tax Cuts and Jobs Act.  (The maximum annual health savings account contribution limit for single coverage was not affected.)  Employers sponsoring high deductible health plans will want to consider how to communicate this late-breaking change, and its impact, to their health plan participants.  For example, individuals making contributions to their health savings accounts each payroll period may want to adjust their elections so as not to exceed the limit for 2018.  Those who have already contributed the full $6,900 should consider seeking a distribution of the excess $50 contribution prior to the end of 2018 in order to avoid adverse tax consequences.

In the same guidance, the IRS also lowered the maximum per child adoption assistance credit for 2018 from $13,840 to $13,810.  We have updated our previous limitations post to reflect these changes, and will continue to do so should further changes arise for 2018.

The Tax Cuts and Jobs Act (Tax Act) did not directly modify the rules governing hardship withdrawals from 401(k) plans. However, one change enacted by the Tax Act does necessitate a careful review of 401(k) plan hardship withdrawal language and could impact the administration of hardship withdrawal requests. Further, the Bipartisan Budget Act of 2018, enacted on February 9, 2018 (Spending Act), makes certain changes to the statutory rules governing hardship withdrawals and requires that the IRS make certain additional changes to applicable regulations. It will be important for 401(k) plan sponsors to understand these recent changes, monitor related IRS guidance, and assess whether changes in administration of hardship withdrawal requests and/or plan amendments are required.

Among the many changes made by the Tax Act is a narrowing of the circumstances under which taxpayers may be eligible for a deduction under Section 165 of the Internal Revenue Code (Code) with respect to a casualty loss. For tax years beginning before January 1, 2018, a taxpayer could potentially take a casualty loss deduction pursuant to Section 165 for uncompensated damage to the taxpayer’s home resulting from any fire, storm, flood or other isolated incidents. Under the new law, however, in order to be deductible under Section 165 for a tax year beginning on or after January 1, 2018 and before January 1, 2026, the loss must result from a Federally-declared disaster. The change to Section 165 of the Code may indirectly impact whether a hardship withdrawal is permitted under many 401(k) plans.

Often 401(k) plans that allow hardship withdrawals rely on “safe harbors” set forth in IRS regulations for determining whether a request satisfies the regulations’ requirements. One of the safe harbor reasons for determining whether the request relates to an immediate and heavy financial need (a requirement for hardship withdrawals) is to cover expenses for the repair of damage to the participant’s principal residence that would qualify for the casualty deduction under Section 165 of the Code (determined without regard to a minimum threshold that applies to the casualty loss deduction). When a plan document specifically cross references deductibility under Section 165, permitting a withdrawal for expenses that result from an isolated incident could now be contrary to the plan’s terms. For example, the Tax Act’s changes to Section 165 may prevent a hardship withdrawal by a participant who incurs expenses to repair damage to his or her principal residence resulting from an isolated incident, such as a fire or thunderstorm.

It isn’t clear whether Congress intended to narrow the circumstances in which a hardship withdrawal may be taken when enacting the change to Section 165, and it’s possible that the IRS will publish guidance obviating the need to impose the Federally-declared disaster requirement in the hardship context. In the meantime, however, it’s important for a 401(k) plan sponsor to be sure that its tax-qualified plan is administered in accordance with the plan’s terms. Therefore, the Section 165 changes should be taken into account if necessary in light of plan language, or plan administrators should forego use of the IRS safe harbor and plan documents should be amended if necessary to align with administration.

While reviewing plan documents and administration in light of the foregoing Tax Act change, plan sponsors should also consider future changes to hardship withdrawal administration to take advantage of additional flexibility enacted by the Spending Act, which apply to plan years beginning after December 31, 2018.

The Spending Act directly expands availability of hardship withdrawals to qualified nonelective contributions, qualified matching contributions, and earnings, which amounts are not eligible for distribution due to hardship under current rules. Further, the Spending Act modifies current rules that require a participant, in some circumstances, to have exhausted any available plan loans before taking a hardship withdrawal.

Finally, in addition to the safe harbor described above, under current IRS regulations, a hardship withdrawal will be deemed necessary to satisfy an immediate and heavy financial need (also a requirement for hardship withdrawals) if certain requirements are met, including that the participant is restricted from contributing to the plan and all other plans maintained by the employer for at least six months after taking the withdrawal. The Spending Act directs the IRS to modify the regulations so that the six-month suspension is not required to rely on the safe harbor.

 

As a follow up to our previous post, the Department of Labor announced earlier this month that its revised disability claims procedure regulations will indeed take effect on April 1, 2018.  The DOL stated that it received few substantive comments with quantitative data on the burdens imposed by the regulations.  Moreover, the DOL found that none of the comments established that the final rule imposed an unnecessary burden or significantly impaired worker access to disability benefits.

With a looming April 1 deadline, employers and their third party administrators and insurers should review all materials for ERISA plans that provide disability benefits, including plan documents and summary plan descriptions.  Particular attention should be given to reviewing and revising processes and communications used for claims and appeals, as the regulations impact the manner of claims processing and expand the disclosures that must be included in benefit denial notices.

Although retirement plans and schemes are generally jurisdiction specific creatures, the governance of the retirement plans and schemes of multinational companies is very much a global issue.  Retirement funds, whether defined contribution plans or defined benefit plans, are essentially large pots of money (frequently in the billions of dollars) located in jurisdictions around the world.  These arrangements tend to be heavily regulated and pose numerous risks to the sponsor, including legal and regulatory compliance gaps, participant lawsuits, government investigations, and embezzlement of trust funds.  Of further concern are plan funding obligations and material risk to the corporate balance sheet (e.g., the effect of unfunded defined benefit plan liabilities on financial statements and the management of plan assets and liability for possible losses.)  At the same time, the arrangements may be tied to various corporate/HR goals, with tensions between a company’s desire to harmonize global benefits and/or achieve cost control objectives and the reality of local labor markets and legal requirements.

Global and multinational employers may have a local committee or officer in each country responsible for that country’s retirement arrangements, but the degree to which such local personnel operate independently, and the amount of reporting to, and oversight by, a committee at the parent level varies.  Not infrequently, the allocation of responsibility between parent and subsidiary committees does not fully align with the goals and risk management objectives of the company as a whole.

We are finding that many employers are in the process of assessing (or reassessing) their governance and risk management structures for their retirement programs on a global basis.  Mayer Brown’s Global Guide to Retirement Plans & Schemes provides a brief overview of the laws relating to the regulation of retirement plans and schemes in 50 key countries.  The guide was launched in 2017 with the hope that it will be a valuable starting point for multinational and global employers that are developing or updating governance and risk management structures for their retirement programs.  While the guide is not a comprehensive discussion of the laws governing retirement programs in each applicable country, it summarizes the general contours of the country’s social security system and employer-sponsored broad-based plans/schemes, with an emphasis on those aspects of the regulatory structure that pose potentially significant liability/risk management issues for empl0yers.  We hope that our clients and friends will find the guide useful.

After working to reconcile differences between the two Tax Cuts and Jobs Act bills, the Senate and House Conference Committee reached a tentative agreement on Wednesday, December 13. Although there is not yet a published version of the Conference Committee’s bill, both the Senate and House had proposed adding a new Section 4960 to the Internal Revenue Code (Code) which would, effective for taxable years beginning after December 31, 2017, impose an excise tax of 20% on certain compensation paid to a covered employee by a tax-exempt organization in excess of $1,000,000 and for certain excess parachute payments. The excise tax would be payable by the tax-exempt organization.  This post summarizes key provisions of the proposed excise tax provision.

General Rule:  Tax-exempt organizations will be required to pay a 20% excise tax equal to 20% of the sum of (i) remuneration paid in excess of $1,000,000 during a taxable year to a covered employee and (ii) any excess parachute payment paid to the employee by such organization during such year.  The proposed statutory text notes, though, in relevant part that any such amounts shall be considered “paid” for this purpose when there is no substantial risk of forfeiture. Continue Reading The Tax Cuts and Jobs Act-Understanding the Proposed Excise Tax On Tax-Exempt Organizations

This post has been updated to reflect subsequent changes made by the IRS, as further described in this post.

The Internal Revenue Service has released its annual cost-of-living adjustments applicable to employee benefit plans. A year-to-year comparison of limitations applicable to plan sponsors can be found here: Mayer Brown 2018 Annual Limitations Chart 2018 (updated to reflect changes described in this post).

Reflecting a slight uptick in inflation in the past year, several benefit plan limitation amounts will increase for 2018. Noteworthy changes for retirement plan participants include an increase in the elective deferral limitation for defined contribution plans from $18,000 to $18,500, which is the first such increase since 2015. The limit on compensation taken into account under qualified plans will rise from $270,000 to $275,000.

Health and welfare plan participants will also see some increases in the amounts contributable to health care flexible spending accounts and health savings accounts (although the latter increase comes at a price, namely, an increased minimum deductible for HSA-eligible high-deductible health plans). Small employers taking advantage of the fairly recent opportunity to provide Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to eligible employees in 2018 can provide increased reimbursements of up to $10,250, up from $10,050, for family coverage. (QSEHRA maximums for self-only coverage will increase from $4,950 to $5,050.)

 

With all of the press about the new tax reform legislation and the proposed changes to the corporate tax rates, many companies might be considering strategies for accelerating deductions into earlier years to take advantage of those deductions in a year when the tax rates may be higher than in future years.  One strategy to consider is whether it is possible to accelerate from 2018 to 2017 deductions for bonus payments (even though, at this stage, it is not entirely clear when or whether tax rate changes will actually go into effect).  This strategy may work for other types of incentive compensation as well.

Generally, deductions must be taken in the year that is “proper” based on the taxpayer’s accounting method.  Most corporations are accrual basis taxpayers and deductions by accrual basis taxpayers generally are to be taken when the liability is incurred—that is when all events establishing liability have occurred (commonly known as the “all events test”).  In order for the all events test to be met, three things have to happen:  (1) all events have occurred that establish the fact of liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred.

The first prong of the all events test is met when the event fixing liability occurs or the payment is unconditionally due.  In the case of bonus compensation, that might mean that the employee remains employed through a specified date (e.g., the end of the bonus year or the bonus payment date).  Sometimes that means that performance targets have to be satisfied at certain levels.  In any case, the relevant “event” is not likely to occur earlier than the end of the year and possibly later into the next year.  Revenue Ruling 2011-29, however, provides that the first prong of the all events test can be met if, at the end of the year in which the services are performed, the company is obligated to pay a minimum bonus amount.  This is usually accomplished by the company’s board, compensation committee or other committee or person with the requisite authority adopting resolutions obligating the company to pay the minimum amounts.  The adopting resolutions do not have to be a minimum amount PER INDIVIDUAL but rather an aggregate amount.  If this can be established, then the first prong would be met in year one (and eligible for deduction in year one if the other prongs of the all events test are met for year one).

It is possible that your board (or applicable committee) would have sufficient information to determine at least a minimum aggregate amount that would be paid in bonuses and could establish that prior to year end.  Assuming other requirements are met, this could accelerate the deduction for the group of employees covered by the minimum, at least as to the extent of the minimum amount.  That minimum would actually have to be paid though—in other words, you could not decide to pay less for whatever reason.

The foregoing approach would most likely not work for covered employees within the meaning of section 162(m) of the Internal Revenue Code (assuming 162(m) remains in effect after tax reform) because it is highly unlikely that the company would have the requisite information to certify the performance targets prior to year end so as to establish the minimum amount.  In addition, if the company did indicate that the covered employees would get a minimum amount (or any bonus amount) without regard to certification of the targets, the 162(m) treatment would be blown.   Accordingly, in drafting resolutions establishing the minimum bonus amount, the company may wish to expressly exclude its 162(m) covered employees.

The Revenue Ruling also indicates that if the foregoing approach is taken, it will be treated as a change in accounting method and the appropriate rules for such change would need to be observed and taken into account going forward.

If this approach is of interest to your company, talk to your internal and external tax advisors to determine whether establishing the facts early can help you.