New Year Brings New, (Sometimes) Lower VCP User Fees

Effective January 2, 2018, the IRS has materially lowered the user fees required to be paid in order to participate in the Voluntary Compliance Program (VCP) under the Employee Plans Compliance Resolution System or EPCRS.  VCP is a way for sponsors of qualified retirement plans to get IRS approval of voluntary correction of operational errors and other plan errors that jeopardize the plan’s tax-qualified status.  Under old user fees, which were based on the number of plan participants as of the last day of a plan year, most applicants fell within the 100 – 1,000 participant range, which in 2017 carried a fee of $5,000.  The new fees, set forth in Appendix A to IRS Revenue Procedure 2018-1, are based on plan assets as of the last day of the plan year and are as follows:

User Fee               Plan Assets

$1,500                   $500,000 or less

$3,000                   Over $500,000 to $10,000,000

$3,500                   Over $10,000,000

As many if not most plan sponsors will fall in the over $500,000 to $10,000,000 range, this will result in a $2,000 reduction in the applicable user fee.

Lowering the price barrier to participation in VCP is a positive for plan sponsors.  Obtaining a compliance statement from IRS through the program is the equivalent of insurance against penalties and interest that would be assessed if the plan problems were discovered on audit.  The VCP compliance statement is also crucial in the event the plan sponsor sells its business or merges with another entity, as plan problems must be disclosed in the pre-deal due diligence stage, and unresolved plan problems can slow down or even derail a sale or merger transaction.  Speaking of insurance, some fiduciary liability insurance carriers will cover, and provide reimbursement for, the VCP user fee and professional services used in preparing the application (although generally amounts that are owed to the plan are not covered).

There is a downside to this new fee schedule, namely in the loss of reduced fees (as low as $300) for submissions that were limited to participant loan errors, failures to make required minimum distributions, and SEP and SIMPLE plan submissions.

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Filed under 401(k) Plans, 403(b) Plans, EPCRS, ERISA, Profit Sharing Plan, VCP

IRS Gifts Large Employers an ACA Reporting Extension

Under the ACA, Applicable Large Employers (ALEs) must comply with annual reporting and disclosure duties under Section 6056 of the Internal Revenue Code (“Code”). These include filing, with the IRS, a Form 1094-C transmittal form, together with copies of Form 1095-C individual statements that must also be furnished to full-time employees (and to part-time employees who enroll in self-insured group health plans).

In a holiday-time gift to ALEs, the IRS just extended the deadline to furnish Form 1095-Cs to employees by 30 days, from January 31, 2018, to March 2, 2018. ALEs must still file Form 1095-C employee statements with the IRS by the normal deadline of February 28, 2018 (paper) or April 2, 2018 (e-file). However, due to the across-the-board extension to March 2, 2018, the IRS will not be granting any permissive 30-day extensions to furnish Form 1095-C to employees. And, while granting the extension, the IRS still encourages ALEs to furnish the 2017 employee statements as soon as they are able, and also to file or furnish late rather than not file or furnish at all, where applicable. ALEs may still obtain an automatic extension on the filing deadlines by filing Form 8809, and may obtain an additional, permissive 30-day filing extension upon a showing of good cause. In summary, the deadlines for 2017 ACA reporting are as follows:

File 2017 Form 1094-C with IRS:           February 28, 2018 (paper); April 2, 2018, (e-file)

File 2017 Form 1095-Cs w/IRS:               February 28, 2018 (paper); April 2, 2018 (e-file)

Furnish 2017 Form 1095-Cs to Employees:       March 2, 2018

Additionally, the IRS extended, for another year, the transition relief that has been in place since ACA reporting duties first arose in 2015. Under the transition relief, the IRS will not impose penalties on employers who file Forms 1094-C or 1095-C for 2017 that have missing or inaccurate information (such as SSNs and dates of birth), so long as the employer can show that it made a good faith effort to fulfill information reporting duties. There is no relief granted for ALEs who fail to meet the deadlines (as extended) for filing or furnishing the ACA forms, or who fail to report altogether.

This news is be welcome given that all U.S. employers will be grappling with new income tax withholding tables early in 2018 given the passage of the Tax Cuts and Jobs Act of 2017, which President Trump signed in to law on December 22, 2018. We’ll be providing more information on the Act’s impact on employment benefits after the Christmas holiday.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Health Care Reform, Minimum Essential Coverage Reporting, Payroll Issues, Post-Election ACA, PPACA, Tax Cuts and Jobs Act

IRS Rolls Out Collection Process for ACA Large Employer Penalty Tax

The IRS is rolling out enforcement of the large employer “pay or play” penalty tax for 2015, with preliminary penalty calculation letters anticipated to begin to be issued between now and the end of 2017.   This will potentially impact employers who, over 2014, averaged 100 or more full-time employees, plus full-time equivalents, and who in 2015 either did not offer group health coverage to at least 70% of its full-time employees, or offered coverage that was “unaffordable,” as defined under the ACA, and for whom at least one full-time employee qualified for premium tax credits on a health exchange.

The sample penalty summary table the IRS has just circulated leaves space for a six-figure annual penalty amount, so substantial amounts of business revenue could be at stake in the collection process. Below is a timeline beginning with receipt of a notice from the IRS of a preliminary penalty calculation (Letter 226J), which includes the penalty summary table; the timeline is based on recently-updated IRS FAQs on the penalty collection process.   Employers must respond by the date set forth in the Letter 226J, which generally will be 30 days from the date of the letter. However due to habitually slow IRS internal processing, employers may have less than two weeks from date of actual receipt, to prepare a response.  ACA reporting vendors may not be equipped to assist with responses to preliminary penalty assessments, so employers who receive a Letter 226J identifying a preliminary penalty amount should look to ERISA or other tax counsel, or an accountant with knowledge of the ACA, in order to best protect their interests.  Not all IRS communication forms referenced below had been released as of the date of this post but it will be updated as the forms become available.

  1. The start point is an employer who is an ALE for 2015 (based on 2014 headcount) and who has one or more FT employees who obtain premium tax credits for at least one month in 2015, as reflected in ACA reporting (and an affordability safe harbor or other relief was not available).
  2. The ALE receives Letter 226J with enclosures, including the penalty summary table, Form 14764 Employer Shared Responsibility Payment (ESRP) Response, and Form 14765 Premium Tax Credit (PTC) List, identifying employees who potentially trigger ACA penalties.
  3. The ALE has until the response date set forth on Letter 226J to submit Form 14764 ESRP Response and backup documentation. The deadline will generally be no more than 30 days from date of Letter 226J but internal IRS processing may cut in to that time budget.
  4. The IRS will acknowledge the ALE’s response, via one of five different versions of Letter 227.
  5. The ALE either takes the action outlined in Letter 227 (e.g., makes original or revised ESRP payment), or
  6. the ALE requests a pre-assessment conference with IRS Office of Appeals, in writing, within 30 days from the date of Letter 227, following instructions set forth in Letter 227 and in IRS Publication 5, Your Appeal Rights.
  7. If ALE fails to respond to Letter 226J or Letter 227, the IRS will assess the proposed ESRP payment amount and issue Notice CP 220J, notice and demand for payment.
  8. Notice CP 220J will include a summary of the ESR payment amount and reflect payments made, credits applied, and balance due, if any; it will instruct ALE how to make payment. Installment agreements may be reached per IRS Publication 594.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Health Care Reform, Minimum Essential Coverage Reporting, Post-Election ACA, PPACA, Premium Tax Credits

Proposed Tax Reform Targets Executive Deferred Compensation

Buried deep within the 429 pages of the tax reform proposal, titled the “Tax Cuts and Jobs Act,” is a provision that would significantly change the landscape for executive deferred compensation plans. Specifically, Section 3801 of the Act, titled “Nonqualified Deferred Compensation,” would move the point of taxation of most forms of deferred compensation from the time of actual payout to the executive, which is generally the case under the current rules, to the point at which the executive need no longer perform substantial services in order to receive the compensation; e.g., the point at which the funds “vest.”  Other changes are proposed, but this single timing issue would remove much of the appeal of deferred compensation plans. The changes, if they become law, would affect not just deferrals of cash compensation, but also equity forms of compensation such as stock options and stock appreciation rights.

The Act would also repeal the current compliance regime for nonqualified deferred compensation, known as the “Enron rules” (because they were inspired by manipulation of deferred compensation by certain Enron executives), and codified at Code Section 409A, which have been in place since 2005.  The new rules, if passed into law, will be set forth under Section 409B of the Code.

This is not the first time that Congress has proposed these changes to deferred compensation; a version of them appeared in the Tax Reform Act of 2014, also under Section 3801 of that bill.  An excellent and detailed overview of the those earlier proposed changes appeared in the Summer 2014 issue of the Benefits Law Journal.  The article deserves re-reading now that deferred compensation reform is back on the table under the Tax Cut and Jobs Act.

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Filed under Deferred Compensation, Section 409A, Section 409B, Tax Cuts and Jobs Act, Top-Hat Exemption

IRS Announces New Benefit Limits for 2018

olga-delawrence-386839On October 19, 2017 the IRS announced 2018 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   Salary deferral limits to 401(k) and 403(b) plans increased $500 to $18,500, but other dollar limits remained unchanged, including the compensation threshold for highly compensated employee status. Specifically, an employee will be a highly compensated employee (HCE) in 2018 on the basis of compensation if he or she earned more than $120,000 in 2017.  Citations below are to the Internal Revenue Code.

In a separate announcement, the Social Security Taxable Wage Base for 2018 increased to $128,400 from $127,200.

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Filed under 401(k) Plans, 403(b) Plans, COLA Increases, ERISA, IRA Issues, Nondiscrimination Testing for Qualified Retirement Plans, Profit Sharing Plan, Section 457(b) Plans

You Just Formed a New Business Entity. What Could Possibly Go Wrong?

What if a somewhat arcane area of tax law had potentially serious ramifications for attorneys and other tax advisors across a broad range of practices, but was not consistently identified and planned for in actual practice? That is an accurate description of the rules surrounding “controlled group” status between two or more businesses, which I have seen arise in business formation/transactions, estate planning, employment and family law settings.  The purpose of this overview is to briefly survey controlled group rules for non-ERISA practitioners, so that they can become aware of the potential complications that controlled group rules can create.

  1. Why Do Controlled Groups Matter?

The main reason they matter is because the IRS treats separate businesses within a controlled group as a single employer for almost all retirement and health benefit plan purposes. In fact, annual reporting for retirement plans (and for health and welfare plans with 100 or more participants) requires a statement under penalty of perjury as to whether the employer is part of a controlled group.  Therefore controlled groups are most frequently a concern where business entities have employees and particularly when they sponsor benefit plans, whether retirement/401(k), or health and welfare plans.  Note, however, that creation of a business entity that has no employees can still create a controlled group issue when it acts as a conduit to link ownership of two or more other entities that do have employees.

Being part of a controlled group does not always mean that all employees of the member companies have to participate in the same benefit plan (although it can sometimes mean that). However it generally means that separately maintained retirement plans have to perform nondiscrimination testing as if they were combined, which not infrequently means that one or more of the plans will fail nondiscrimination testing.  This is an event that usually requires the employer sponsoring the plan to add more money to the plan on behalf of some of the additional counted employees, or to pay penalty taxes in relation to same.  Similar complications can arise in Section 125 cafeteria or “flexible benefit plans,” and for self-insured group health plans, which are subject to nondiscrimination requirements under Code § 105(h).  Nondiscrimination rules are meant to apply to insured group health plans under the Affordable Care Act (“ACA”), so additional complications could arise in that context when and if the rules are enforced by the IRS, following publication of regulatory guidance.

Controlled group status can also mean that several small employers together comprise an “applicable large employer” subject to the ACA “pay or play rules,” and related annual IRS reporting duties. Small employer exceptions under other laws, including COBRA and the Medicare Secondary Payer Act, reference controlled group status when determining eligibility for the exception.

  1. How Do I Identify a Controlled Group?

 Determining controlled group status requires synthesizing regulations and other guidance across multiple Internal Revenue Code (“Code”) provisions and therefore is a task for a specialized ERISA or tax practitioner.  What follows are very simplified definitions aimed at helping advisors outside that specialized area flag potential controlled group issues for further analysis.

Strictly speaking, the term “controlled group” refers to shared ownership of two or more corporations, but this article uses the term generically as it is the more familiar term.  “Ownership” in this context means possession of the voting power or value of corporate stock (or a combination thereof).  Shared ownership among other types of business entities is described as “a group of trades or businesses under ‘common control.’”  Ownership in this context refers to ownership of a capital or profits interest in a partnership or LLC taxed as a partnership.   Controlled groups can also arise in relation to tax-exempt entities, for instance if they own 80% or more of a for-profit entity, or even between two tax-exempt entities where there is substantial overlap of board membership or board control.

Complex interest exclusion rules mean that not all ownership interests are counted towards common control; exclusion may turn on the nature of the interest held (e.g., treasury or non-voting preferred stock) or on the party holding the ownership interest (e.g, the trust of a tax-qualified retirement plan).

The two main sub-types of controlled group are: parent-subsidiary, and “brother-sister,” although a combination of the two may also exist.  A parent-subsidiary controlled group exists when one business owns 80% or more of another business, or where there is a chain of such ownership relationships. As that is a fairly straightforward test, I will focus on the lesser known, but more prevalent, brother-sister type of controlled group.

A brother-sister controlled group exists when the same five or fewer individuals, trusts, or estates (the “brother-sister” group) have a “controlling interest” in, and “effective control” of, two or more businesses.

  • A controlling interest exists when the brother-sister group members own, or are deemed to own under rules of attribution, at least 80% of each of the businesses in question.
  • Effective control exists when the brother-sister group owns or is deemed to own greater than 50% of the businesses in question, looking only at each member’s “lowest common denominator” ownership interest. (So, a group member that owed 20% of one business and 40% of another business would be credited only with 20% in the effective control test.)
  • In order to pass the 80% test, you must use the interests of the same five or fewer persons (or trusts or estates) used for purposes of the greater than 50% test.  See US v. Vogel Fertilizer, 455 US 16 (1982). Put otherwise, the two tests consider only owners with a greater-than-zero interest in each of the businesses under consideration. If, under this rule, you disregard shares adding up to more than 20% of a business, the 80% test won’t be met and that business generally won’t form part of the controlled group. (Although the remaining businesses may do so.)

The controlled group attribution rules are quite complex and can only be touched on here. Very generally speaking, an ownership interest may be attributed from a business entity to the entity’s owner, from trusts to trust beneficiaries (and to grantors of “grantor” trusts as defined under Code § 671-678), and among family members. Stock options can also create attributed ownership under some circumstances.  The attribution rules can have surprising consequences. For instance, a couple, each with his or her wholly-owned corporation, will be a controlled group if they have a child under age 21 together, regardless of their marital status, because the minor child is attributed with 100% of each parent’s interests under Code §1563(e)(6)(A).  Community property rights may also give rise to controlled group status. Careful pre-marital planning may be necessary to prevent unintended controlled group status among businesses owned separately by the partners to the marriage.

This is the first part of a two-part discussion that was first published as an article in the Santa Barbara Lawyer Magazine for October 2017.  The second half will address a variation of these rules that are specific to businesses formed by doctors, dentists, accountants, and other service providers.

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Filed under 401(k) Plans, ADP and ACP Testing, Affordable Care Act, Benefit Plan Design, Cafeteria Plans, COBRA, Common Control Issues, Employer Shared Responsibility, ERISA, Health Care Reform, Nondiscrimination Rules for Insured Health Plans, Nondiscrimination Testing for Qualified Retirement Plans, Plan Reporting and Disclosure Duties

ACA Cheat Sheet for 2017 & 2018

On Tuesday, September 26, 2017, Senate majority leader Mitch McConnell (R-Ky.) announced that Republicans would abandon efforts to pass ACA repeal and replace legislation, namely the much-amended American Health Care Act of 2017, and on September 30, 2017 their chance to pass any other version of repeal and replace this year as a budget reconciliation measure, requiring only 51 votes, also expires.  For the remainder of 2017, then, applicable large employers and their brokers and advisers should refresh their familiarity with employer shared responsibility rules under the ACA.  Below is a cheat sheet with affordability safe harbor thresholds, applicable large employer penalty tax amounts, and out-of-pocket maximums for 2017 and for fast-approaching 2018.  Sources are Revenue Procedures 2016-24 and 2017-36, and the Final Rule on Benefit and Payment Parameters for 2017 and 2018.

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Filed under Affordable Care Act, American Health Care Act, Employer Shared Responsibility, Health Care Reform, Post-Election ACA, PPACA