IRS releases Priority Guidance Plan

Kirk Sherman on 09/14/2011
Last week the IRS released its 2011–2012 Pri­or­ity Guid­ance Plan, detail­ing the areas it will focus on in its work year that began July 1. There aren’t any sur­prises or new items of sig­nif­i­cance to key employee com­pen­sa­tion. It is nice to see that final reg­u­la­tions on §125 cafe­te­ria plans and §457(f) deferred com­pen­sa­tion reg­u­la­tions remain on the list. Maybe five years will be suf­fi­cient to fin­ish the §457(f) regulations.
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IRS Walks Back September Date

Kirk Sherman on 06/16/2011

Recent chat­ter about the new 457(f) reg­u­la­tions being pub­lished in Sep­tem­ber may have been pre­ma­ture. Cheryl Press, the senior IRS attor­ney who was quoted as tar­get­ing the Sep­tem­ber date, on June 15 stated that her pro­jec­tion might be “wish­ful think­ing.” She noted that health­care reg­u­la­tions con­tinue to demand a lot of time.

She con­tin­ued, “We’re very slim staffed and our higher-ups are at an even slim­mer level. And once we clear [the pro­posed reg­u­la­tions] through our build­ing and work through every­thing, we have to get it through Trea­sury, and they’re pretty slimly staffed too.”

Regard­ing the sub­stance of the new reg­u­la­tions, Press reit­er­ated that the reg­u­la­tions will be “sim­i­lar” to the 409A rules (e.g., dis­al­low pre-tax vol­un­tary defer­rals and the use of non­com­pete restric­tions to defer taxes), but that the IRS is not “going to worry about hav­ing every­thing being exactly the same as 409A.”

For those keep­ing track, August 2011 will be the fourth anniver­sary of the orig­i­nal IRS announce­ment that it would pub­lish the new reg­u­la­tions. Only time will tell how much longer we must wait.

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DFVC Procedures for Multiple Top-Hat Plans

James Patterson on 04/29/2011

A client recently dis­cov­ered that they failed to file the Depart­ment of Labor (“DOL”) top-hat fil­ings for two sep­a­rate plans. As we pre­pared the reme­dial fil­ing under the Delin­quent Filer Vol­un­tary Com­pli­ance (“DFVC”) Pro­gram, we received con­flict­ing infor­ma­tion from the DOL web­site and staff on the required $750 late fil­ing fee. If you are faced with this sit­u­a­tion, we hope to give you a leg up.

The Pay­ment Data Col­lec­tion page used to file DFVC mate­ri­als elec­tron­i­cally pro­vides under State­ment 2 that “I under­stand that I am only sub­mit­ting, and receiv­ing relief for, the fil­ings for the plan and the plan years that are listed above.” As “plan” is sin­gu­lar, and as we could find no way to list mul­ti­ple plans, we con­tacted the DOL. Our con­cern was each fil­ing required a sep­a­rate fee, so if we could not list mul­ti­ple plans, the client would have to pay mul­ti­ple fees. This treat­ment was the oppo­site of how we had under­stood the fee in the past. Pre­vi­ously, we under­stood that there was only one $750 fee no mat­ter the num­ber of plans covered.

We talked to two dif­fer­ent peo­ple at the DOL, in the office that han­dles DFVC fil­ings, and we were told the fee was $750 per plan. We told them we had never inter­preted the rules that way, nor had we under­stood the DOL to have inter­preted them that way in the past.

After reex­am­in­ing the reg­u­la­tions, we con­tacted the DOL to make our case one last time. We explained our dilemma and cited the lan­guage in the DFVC Reg­u­la­tions (60 Fed. Reg. 20876 (1995) and 67 Fed. Reg. 15060 (2002)), which expressly pro­vides that there is one penalty amount with­out regard to the num­ber of plans or num­ber of par­tic­i­pants cov­ered under such plans. This time the DOL agreed that only one fee would be required. Our con­tact explained how we should make such filings.

The pro­ce­dure is to put all of the plan names, sep­a­rated by slashes, into the “Plan Name” box on the online DVFC fil­ing. Then, as in the past, list all plans in need of cor­rec­tion on the hard copy of the top-hat fil­ing with their effec­tive dates and num­ber of par­tic­i­pants, and sub­mit it by mail.

Per­haps the DOL does not get many ques­tions on the DFVC Pro­gram for top-hat plans, and staff mem­bers deal more often with other DFVC fil­ing issues. In any case, we are glad that we persisted.

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Interview re: Proposed Incentive Compensation Rules for Credit Unions

Kirk Sherman on 04/12/2011

Aaron Stein­berg from the Safety & Sound­ness Report turned to Kirk Sher­man of Sher­man & Pat­ter­son for a dis­cus­sion about new pro­posed rules regard­ing incen­tive com­pen­sa­tion in credit unions. The arti­cle reviews key pro­vi­sions of the pro­posed rules and out­lines their poten­tial impact. Kirk says of the new rules:

“They actu­ally give credit unions more free­dom to use incen­tive com­pen­sa­tion if they do it in a con­struc­tive way.”

A PDF of the arti­cle, made avail­able with per­mis­sion, can be found here.

The Safety & Sound­ness Report is located at http://www.cusafety.com.

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NCUA Regulation §701.4

James Patterson on 03/18/2011

New NCUA Reg­u­la­tion §701.4 has some fed­eral credit unions scram­bling to make sure their direc­tors have “at least a work­ing famil­iar­ity with basic finance and account­ing prac­tices.” Many are on their way to assur­ing their direc­tors have the train­ing they need. The NCUA has given direc­tors with­out such finan­cial skills, whether new or cur­rently serv­ing, six months to receive the train­ing. Given the effec­tive date of Jan­u­ary 27, 2011 for Rule 701.4, direc­tors who were at FCUs on such date and who need the train­ing have just over four months to get it completed.

The NCUA explained this stan­dard in more depth in Let­ter No. 11-FCU-02. It explained that “[a]t a min­i­mum, a direc­tor should be able to exam­ine the credit union’s bal­ance sheet, income state­ment and be able to answer the fol­low­ing questions”:

  • What does this line item mean?
  • Why is it important?
  • Is the item’s value chang­ing over time? Why?
  • Is the change important?

The NCUA stated in the let­ter that direc­tion and con­trol of the credit union lie with the board, and that boards set the com­pen­sa­tion of their exec­u­tives. Given this height­ened atten­tion to board man­age­ment issues, and the impor­tance of the board’s role in set­ting com­pen­sa­tion, we set out below 10 best prac­tices of com­pen­sa­tion oversight.

  1. Develop a writ­ten com­pen­sa­tion philosophy
  2. Spec­ify cov­ered positions
  3. Seek com­pa­ra­bil­ity data
  4. Annu­ally review compensation
  5. Con­sider mul­ti­plier effect (e.g., salary increases may increase Defined Ben­e­fit SERP benefits)
  6. Engage peri­odic con­sul­tant review
  7. Con­sul­tants report to the board (NCUA is con­cerned about CEOs “screen­ing” or “fil­ter­ing” information)
  8. Inspect plan modifications
  9. Ensure plan doc­u­men­ta­tion is com­pli­ant; and
  10. Asso­ciate with pro­fes­sion­als to mon­i­tor legal devel­op­ments (e.g., expected reg­u­la­tions under IRC §457(f))

Boards of fed­eral credit unions that are already doing these things should make sure that they are doc­u­ment­ing their process, so they can demon­strate com­pli­ance if requested by a reg­u­la­tor. Although these rules do not apply to state-chartered credit unions, they pro­vide help­ful stan­dards for those boards to fol­low as well.

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Section 457(f) Regulations — Getting Closer to Publication?

Kirk Sherman on 03/11/2011

After nearly a year’s silence, Cheryl Press, an IRS Senior Attor­ney work­ing on the reg­u­la­tions, addressed the reg­u­la­tions on March 10, 2011. Speak­ing at a con­fer­ence, she did not address when the reg­u­la­tions might be issued, but instead described a cou­ple of pro­vi­sions that had not pre­vi­ously been dis­cussed. In addi­tion to address­ing sub­stan­tial risks of for­fei­ture (pre­sum­ably mov­ing to the Sec­tion 409A non-elective, cliff vest­ing only model), Ms. Press said that the reg­u­la­tions will also cover ill­ness and vaca­tion leave, and what they require to be deemed “bona fide” arrange­ments that are exempt from the sub­stan­tial risk of for­fei­ture requirement.

Regard­ing the ill­ness and vaca­tion leave, she expressed con­cern that these arrange­ments are being used to increase 403(b) defer­rals (pre­sum­ably the abil­ity to con­vert ill­ness and vaca­tion leave accru­als to 403(b) con­tri­bu­tions at the time of ter­mi­na­tion), or to be a type of “sav­ings account” where the par­tic­i­pant can take funds out and put them back in.

The last word we had from Ms. Press regard­ing the tim­ing of the reg­u­la­tions was in April 2010, when she said the reg­u­la­tions were “sub­stan­tially done.” The new com­ments may sig­nal they are not so far away from being pub­lished. But then again …

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IRS announcement on impact of Health Reform Act

Kirk Sherman on 12/23/2010

As antic­i­pated, yes­ter­day the IRS announced that com­pli­ance with the new rules will not be required until the IRS is able to issue guidance/regulations with more details about what the rules mean and how to com­ply. Like most of the health reform act, in the absence of good leg­isla­tive his­tory and clear statu­tory lan­guage, the reg­u­la­tors are hav­ing to make things up as they go.

The IRS has allowed for a com­ment period that extends to March 11, 2011. That means that the new reg­u­la­tions likely will not be out until sum­mer at the ear­li­est. Even then, they may have a deferred effec­tive date.

Regard­ing the sub­stance of the new rules, many ques­tions remain to be answered as to how they apply to post-termination con­tin­u­a­tion of health ben­e­fits. The biggest ques­tion is whether the rules even apply at all to post-termination continuation.

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Group Health Plan Discrimination Rules

Kirk Sherman on 11/19/2010

In our post of 10/29, we out­line the new dis­crim­i­na­tion penal­ties imposed on dis­crim­i­na­tory group health plans. These rules impact PRM plans for select employ­ees. Grand­fa­ther­ing is impor­tant and is gen­er­ally for plans in effect prior to March 23, 2010. Unlike other grand­fa­ther­ing pro­vi­sions, the reg­u­la­tions list a series of actions that will cause the grand­fa­ther­ing to be for­feited. The first of those was chang­ing car­ri­ers. How­ever, the reg­u­la­tions have been amended to elim­i­nate that con­di­tion. There­fore, employ­ers can change car­ri­ers and not lose grand­fa­ther­ing so long as the terms of the cov­er­age do not change in a pro­hib­ited way (see ear­lier notes). This change was made given the num­ber of car­ri­ers that are ceas­ing to pro­vide cur­rent plans.

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HRA impact on post-retirement medical plans

Kirk Sherman on 10/29/2010

The new health­care leg­is­la­tion imposes penal­ties on employ­ers that have group health plans that dis­crim­i­nate in favor of the highly com­pen­sated (e.g., any of the 25% most highly-compensated employ­ees) in eli­gi­bil­ity for ben­e­fits or in the amount of ben­e­fits. The penalty is $100 per day for each employee dis­crim­i­nated against, up to $500,000 per year. The leg­is­la­tion and first set of reg­u­la­tions leave many ques­tions unan­swered. As we con­tinue our research, we have deter­mined as follows:

  1. Grand­fa­ther­ing. Plans in effect prior to March 23, 2010 are grand­fa­thered. Grand­fa­thered plans can adjust for increas­ing pre­mi­ums with­out los­ing grand­fa­ther­ing, but other pro­vi­sions should not be changed with­out care­ful review. In the case of a PRM pro­vi­sion con­tained in an employ­ment agree­ment, the agree­ment could be updated, but the word­ing of the PRM pro­vi­sion should expressly not be changed.
  2. Sin­gle Par­tic­i­pant Plans. Group health plan does not include any arrange­ment “that has fewer than two par­tic­i­pants who are cur­rent employ­ees.” This lan­guage would exempt an arrange­ment only for a sin­gle cur­rent employee, such as the CEO. The lan­guage may also exempt arrange­ments for a broader group if “par­tic­i­pa­tion” means actu­ally receiv­ing cov­er­age, ver­sus being under the promise of receiv­ing such cov­er­age in the future. Future clar­i­fi­ca­tion will be needed to deter­mine if PRM for more than a sin­gle exec­u­tive is exempted under this provision.
  3. Group Health Plan. PRM may also be excluded from the basic con­cept of a group health plan. The par­tic­i­pant is often tasked with find­ing his or her own cov­er­age, and the employer’s only involve­ment is to pay the pre­mium to the car­rier or to reim­burse the participant’s pre­mium pay­ments. There is no group under­writ­ing in such cases. These dis­tinc­tions may be a basis for exclud­ing PRM for broader groups, but addi­tional guid­ance is required to con­firm that result.
  4. Long-Term Care. LTC is not sub­ject to these new rules so long as the LTC is pro­vided under a sep­a­rate con­tract from the employer’s group health plan and there is no coor­di­na­tion of ben­e­fits between the two. This is a sig­nif­i­cant relief as LTC is treated as health cov­er­age for tax pur­poses gen­er­ally. The health­care reg­u­la­tions con­tain a spe­cific exemp­tion for LTC pro­vided under a sep­a­rate con­tract. There­fore, employ­ers can con­tinue to offer LTC to a select group of employees.
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IRS announces pension plan limits

Kirk Sherman on 10/28/2010

The Inter­nal Rev­enue Ser­vice today announced cost of liv­ing adjust­ments affect­ing dol­lar lim­i­ta­tions for pen­sion plans and other retirement-related items for tax year 2011. In gen­eral, these lim­its will either remain unchanged, or the infla­tion adjust­ments for 2011 will be small. High­lights include:

  • The elec­tive defer­ral (con­tri­bu­tion) limit for employ­ees who par­tic­i­pate in sec­tion 401(k), 403(b), or 457(b) plans, and the fed­eral government’s Thrift Sav­ings Plan remains unchanged at $16,500.
  • The catch-up con­tri­bu­tion limit under those plans for those aged 50 and over remains unchanged at $5,500.
  • The deduc­tion for tax­pay­ers mak­ing con­tri­bu­tions to a tra­di­tional IRA is phased out for sin­gles and heads of house­hold who are active par­tic­i­pants in an employer-sponsored retire­ment plan and have mod­i­fied adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For mar­ried cou­ples fil­ing jointly, in which the spouse who makes the IRA con­tri­bu­tion is an active par­tic­i­pant in an employer-sponsored retire­ment plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA con­trib­u­tor who is not an active par­tic­i­pant in an employer-sponsored retire­ment plan and is mar­ried to some­one who is an active par­tic­i­pant, the deduc­tion is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
  • The AGI phase-out range for tax­pay­ers mak­ing con­tri­bu­tions to a Roth IRA is $169,000 to 179,000 for mar­ried cou­ples fil­ing jointly, up from $167,000 to $177,000 in 2010. For sin­gles and heads of house­hold, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a mar­ried indi­vid­ual fil­ing a sep­a­rate return who is an active par­tic­i­pant in an employer-sponsored retire­ment plan, the phase-out range remains $0 to $10,000.
  • The AGI limit for the saver’s credit (also known as the retire­ment sav­ings con­tri­bu­tions credit) for low-and moderate-income work­ers is $56,500 for mar­ried cou­ples fil­ing jointly, up from $55,500 in 2010; $42,375 for heads of house­hold, up from $41,625; and $28,250 for mar­ried indi­vid­u­als fil­ing sep­a­rately and for sin­gles, up from $27,750.

Source

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