The Benefits News You Need in 60 Minutes or Less Tuesday, October - - PDF document

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“The Benefits News You Need in 60 Minutes or Less” Tuesday, October 21, 2008 12:00 p.m. – 1:00 p.m. CST

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Introductions

Moderator for today’s Broadcast.

Leigh C. Riley

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Today’s Topics

• Headline News: Year End Deadline Fast Approaching For 409A

Compliance

• Mark Your Calendars: Upcoming Deadlines and Recent

Developments that Require Attention

• In The Spotlight: FICA Tax on Nonqualified Deferred

Compensation

• Cram Session: Using EPCRS To Correct Retirement Plan Errors
• Fiduciary Fundamentals: Receipt of Gifts and Entertainment

Presents New Perils

• Vexing Verdicts: Scrivener’s Error - Young v. Verizon’s Bell

Atlantic Cash Balance Plan - N.D. Illinois, August 28, 2008

Year End Deadline Fast Approaching For 409A Compliance

Michael H. Woolever

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409A

• Most employers have at least one and in

some cases many deferred compensation arrangements subject to 409A.

• Full documentary compliance with 409A is

required by December 31, 2008.

– Extension of the deadline not likely.

• Most arrangement will not comply without

formal, written amendments.

409A

• Failure to amend 409A arrangements prior to

year end will cause existing deferrals to be ineffective.

• Employees will be subject to immediate tax on

the deferred amounts.

• Employees will also have to pay an additional

tax of 20% of the amount deferred and an interest penalty from the date of deferral.

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409A

• 409A imposes reporting obligations (W-2 and

1099 Misc.) on employers.

– Must report all deferrals; – Must report all violations which cause deferrals to become taxable; – Must withhold when deferrals become taxable.

• Employers will need to identify all 409A

arrangements for reporting purposes.

409A

• 409A adds objective statutory requirements to

the prior rules governing non-qualified deferred compensation arrangements.

– These requirements must be incorporated into the documents governing the arrangement.

• 409A’s definition of non-qualified deferred

compensation arrangements is very broad

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409A

• 409A Covers most arrangements where payment for

services is delayed to a future tax year, including

– Employment agreements, change in control agreements, and other agreements providing post-employment payments or benefits; – Non-qualified supplemental retirement benefits, including 401(k) wrap plans and defined benefit SERPS; – Short-term and long-term incentive compensation plans; – Golden parachute payments; – Elective deferral arrangements.

409A

• 409A applies to

– HCEs; – Non-HCEs; – Directors; and – Some independent contractors.

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409A

• 409A requires that all covered arrangements:

– Be in writing; – Include all required provisions and not contain any non-compliant provision; – Require timely deferral elections; – Specify the time and form of payment; – Limit when payments may be accelerated; – Limit how and when payments may be deferred beyond the original payment date.

409A

• 409A prohibits several common practices.

– Employer or employee discretion to change time and form of payment; – “hair cut” provisions; – Payment triggered by declining financial condition; – Off-shore rabbi trusts.

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409A

• Key next steps:

– Identify all arrangements potentially subject to 409A; – Evaluate availability of pre-year end changes allowed under IRS transition rules; – Draft and get formal approval of required amendments prior to January 1, 2009. – Set up procedures for complying with 409A reporting requirements.

409A

• What if you miss the deadline?

– Ultimately, there likely will be some form of IRS correction program, but it is not clear when it will be issued and how helpful it will be.

• May be limited to non-HCEs
• Will involve some economic cost

– Employers will face difficult decisions on reporting and withholding during 2009. – Employers will face significant HR issues with employees faced with accelerated taxes and additional taxes and penalties.

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409A

• More information on 409A:

– There are links on my Foley webpage to several articles I have written on 409A; – From the website, you can also listen to a two hour presentation on 409A I gave for clients in May of this year; – Finally, I have written an article on year end compliance issues that will be published in Corporate Board Magazine in November. Contact me by email if you would like a copy of the article. Upcoming Deadlines and Recent Developments that Require Attention Sarah B. Krause

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• Qualified Retirement Plans

– Defined Benefit Pension Plans – 401(k) Plans

• 403(b) Plans
• Executive and Equity Compensation Plans
• Health and Welfare Plans

Topics

• Cycle C for IRS determination letter applications ends

January 31, 2009 (applies to employers whose EIN ends in “3” or “8”).

• Plan amendments for final Code Section 415 regulations

– The final regulations became effective on the first day of the plan year beginning on or after July 1, 2007. – A plan must be amended by the due date (including extensions) for filing the income tax return for the sponsoring employer’s taxable year that includes the date the amendment is effective.

• Plan amendments for discretionary changes must be adopted

before the end of the plan year in which the amendment is effective.

Qualified Retirement Plans

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• Most PPA changes became effective in 2006, 2007,

and 2008. This means you had to comply with the changes in operation of a plan.

– Exception: PPA changes may become effective in 2009 for plans maintained pursuant to a collective bargaining agreement.

• All PPA amendments must be formally adopted by

the last day of the plan year beginning on or after January 1, 2009.

Qualified Retirement Plans: What about Amendments for the Pension Protection Act?

• Some changes became effective in 2007 (retroactively):

– A plan must provide that if a participant dies while performing military service, his/her survivors are entitled to any additional benefits that would have been provided had the participant resumed employment and then terminated on account of death. – A plan may provide that a participant who leaves for military service and cannot resume employment due to death or disability will be treated as if he/she resumed employment on the day before the death or disability for benefit accrual purposes.

• Changes that become effective January 1, 2009:

– Differential wage payments are treated as wages for federal income tax withholding purposes. – Individuals receiving differential wage payments are treated as employed by the employer and the differential wage payments must be treated as compensation under a plan. – Participants on active duty for at least 30 days are treated as having terminated employment for purposes of receiving a distribution of pre-tax contributions. A participant cannot resume pre-tax contributions until 6 months after the distribution.

• Amendments must be formally adopted by the last day of the plan year beginning on or

after January 1, 2010.

Qualified Retirement Plans: The Heroes Earnings Assistance and Relief Tax Act of 2008

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• Defined Benefit Pension Plan Annual Funding Notice

– Created by the PPA and replaces the Summary Annual Report (SAR) – Includes information regarding the plan’s funding status, including the plan’s funding target attainment percentage, total assets and liabilities, number of participants, funding policy, and amendments that increased or decreased benefits (if any) – Effective for plan years beginning on or after January 1, 2008 – Deadline = 120 days after the end of the plan year

• 401(k) Plan:

– Qualified Default Investment Alternative (“QDIA”) Notice

• For plans that allow participants to direct the investment of their account, this notice is

necessary to obtain ERISA 404(c) protection with respect to a default investment of a participant’s account.

• Deadline = 30 days before each plan year

– Safe Harbor Notice

• Only applicable to safe harbor plans.
• Deadline = 30 days before each plan year

– Automatic Enrollment Notice

• Only applicable to plans that use an automatic enrollment arrangement.
• Deadline = a reasonable time before each plan year

Qualified Retirement Plans: Notices, Notices, and More Notices

• Final Code Section 403(b) regulations will become

effective January 1, 2009.

– The regulations require that all Section 403(b) contracts and custodial accounts be maintained pursuant to a written plan (although it does not have to be a single document). – If you already have a written plan, it should be amended to bring it into compliance with the final regulations. – Information Sharing Agreements must be in place by January 1, 2009 for plans that allow participants to exchange contracts for a contract issued by a vendor that is not a payroll slot vendor since September 24, 2007.

• Heroes Act changes also apply to 403(b) plans.

403(b) Plans

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• Current Requirement: Annual information returns to employees

concerning exercise of incentive stock options and transfer of stock purchased under employee stock purchase plans

• New Requirement: Annual information returns must also be

provided to the IRS and some additional information must be included

• IRS will issue new forms—Forms 3921 & 3922—for this purpose
• Deadline = No later than January 31 following the year to which

the information relates

– The requirement has been waived for 2008! This means the first return will relate to 2009 and will be due January 31, 2010.

• You will need a tracking system in place to record information

regarding exercises and transfers employees make in 2009 in

• rder to complete the return.

Executive and Equity Compensation Plans: Incentive Stock Options and Employee Stock Purchase Plans

• Cafeteria/Section 125 Plans:

– IRS issued proposed regulations in August 2007 and were expected to be finalized to be effective January 1, 2009 – IRS has not yet published final regulations

• Medicare Part D Obligations:

– Creditable coverage notice to participants is due November 15 – Creditable coverage disclosure to CMS is due 60 days after the beginning of a plan year

• State and Local Health Care Reform Obligations:

– Massachusetts – annual Fair Share Contribution/ Employer HIRD filing is due November 15 – San Francisco – annual reporting form for 2008 should arrive in December

• Heroes Act allows a health FSA plan to provide for cashouts for

reservists called to active duty (effective June 17, 2008).

Health and Welfare Plans

14 FICA Tax on Nonqualified Deferred Compensation

Timothy L. Voigtman

FICA Tax on Nonqualified Deferred Compensation

• General rule: Taxed as wages at time of

actual or constructive receipt

• NQDC taxed as wages at time no substantial

risk of forfeiture

• See Treas. Reg. 31.3121(v)(2)-1(a)(2)

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Nonduplication Rule

• Once deferred amount is "taken into account" as

wages, then amount and any earnings will not be treated as wages thereafter

• See Treas. Reg. 31.3121(v)(2)-1(a)(2)(iii)
• Amount is not "taken into account" as wages if

taxes are not actually paid by the end of the statute of limitations

• See Treas. Reg. 31.3121(v)(2)-1(d)(1)(i) and (ii)
• All amounts are instead taxed as wages at time
• f actual or constructive receipt

Example of Timely Payment

• Executive timely defers $50,000 bonus but

receives $450,000 in salary in 2008.

• FICA tax applies to entire $500,000 because

none of the amount is subject to substantial risk of forfeiture

• $725 of Medicare applies to deferred bonus

(@1.45%) because over 2008 wage cap

• Deferred bonus (plus any earnings) paid in

2010 is not subject to FICA tax

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Example of Late Payment (same facts)

• Company inadvertently excludes bonus from

wages and does not collect or pay FICA tax ($725 savings)

• FICA tax applies to bonus when paid

(including any earnings)

• If executive is under wage cap, then tax is

$3,800 (@7.65%) plus tax on any earnings

Potential Alternatives

• Pay tax plus interest and penalties for 2008

(at 2008 rates and wage cap)

• Only works if statute of limitations still open (3

years)

• If statute closed, then can only pay tax in

year of payment on entire amount

17 Using EPCRS To Correct Retirement Plan Errors

Belinda S. Morgan

• Allows Employers to Correct Certain Types of

Plan Failures

– Maintain Tax Benefits for Employer and Employees

• IRS Revenue Procedure 2008-50

Employee Plans Compliance Resolution System (EPCRS)

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• Qualified Plans (§401(a))
• Tax-Sheltered Annuities (§403(b))
• SEPs, SIMPLE IRA Plans
• Governmental §457(b) Plans (On a Provisional

Basis Outside EPCRS)

Plans Covered

• Plan Document Failure
• Operational Failure
• Demographic Failure
• Employer Eligibility Failure

Types of Errors

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• Self-Correction Program (SCP)
• Voluntary Correction Program (VCP)
• Audit Closing Agreement Program (Audit CAP)

3 Components of EPCRS

• Correct Without IRS Oversight – No Fee
• Only Operational Failures

– Significant/Insignificant

• Need Established Practices/Procedures
• Cannot Correct Egregious Failures or Abusive

Tax Avoidance Transactions Using SCP

SCP

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• IRS Approves Correction Method
• Payment of Limited Fee
• Operational, Plan Document, Demographic

Employer Eligibility Failures

• “Streamlined” Correction Methods (New)
• Can Correct Anonymously

VCP

• Correct Failures While Under Audit
• Operational, Plan Document, Demographic

Employer Eligibility Failures

• Payment of Negotiated Sanction for Failure

Audit CAP

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• Save Money
• Maintain Plan’s Tax-Favored Status
• Ensure Employees Receive Promised Benefits

Why Use EPCRS?

Receipt of Gifts and Entertainment Presents New Perils

Lloyd J. Dickinson

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• Chapter 48 - Fiduciary Investigations

Program

http://www.dol.gov/ebsa/oemanual/cha48.html

DOL Enforcement Manual

• Paragraph 12 Fiduciary Violations

Involving Gifts and Gratuities

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• New initiative aimed at service providers’

influence on fiduciaries through gifts and entertainment

• Seek violations of ERISA §406(b)(3)

– Fiduciary’s receipt of consideration

• For own personal account
• From a party dealing with the plan
• In connection with a transaction
• Involving plan assets
• $250 annual de minimis per fiduciary

(including relatives)

• So long as receipt does not violate plan

policies or provisions

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• The $250 applies to

– Gifts – Gratuities – Meals – Entertainment – Other consideration (not cash or cash equivalents) – Reimbursement of expenses associated with educational conferences

• Receipt of expenses in connection with an

educational conference o.k. if advance determination plan's payment:

– Would be prudent – Consistent with written plan policy – Conference had a reasonable relationship to individual's duties – Expenses were reasonable in light of benefit to plan and unlikely to compromise representative's duties

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• DOL has recently investigated fiduciary

receipt of entertainment and other gratuities

– Primarily Taft-Hartley (union) trust funds, but also others – Chicago regional office has pilot program

• Establish a written policy on gifts;

entertainment; etc. by service providers

– Appropriateness – Disclosure

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Scrivener’s Error - Young v. Verizon’s Bell Atlantic Cash Balance Plan N.D. Illinois, August 28, 2008 Leigh C. Riley

• In 1995, the plan was converted from a traditional pension

plan to a cash balance plan

• To determine opening account balances, plan stated “multiply

transition factor times lump-sum value of accrued benefit times transition factor”

• The second multiplier was not intended – it was an error
• The intent was that the plaintiff’s opening account balance be

$240,000

• Applying the literal language would result in an opening

account balance of $640,000 for this plaintiff

• Total cost to the company if the language was correct - $2.4

billion

Facts

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• Plaintiff filed appeal in 2006
• Plan administrator said the language was

ambiguous and so reviewed various other documents

• All benefit statements and SPDs referred to only

a single transition factor

• Plan administrator concluded that the transition

factor should be applied only once

Facts (continued)

• Because the plan language was not ambiguous, the Plan

administrator should not have looked at external evidence

• Plan administrator did not have authority to “reform” the

plan language

• Rather, the Plan administrator should have sought

equitable relief in court to “reform” the plan

• Reformation would require clear and convincing

evidence of mistake

• Court did not decide whether reformation was

appropriate in this instance

Courts Opinion

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• Read plan documents, including prototype plans
• If you find a mistake, there is a way to fix it IF

you can prove the mistake

Lessons

Questions and Answers

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Contact Information

• Michael H. Woolever

312.832.4594 mwoolever@foley.com

• Sarah B. Krause

414.319.7340 skrause@foley.com

• Timothy L. Voigtman

414.297.5677 tvoigtman@foley.com

• Belinda S. Morgan

312-832-4562 bmorgan@foley.com

• Lloyd J. Dickinson

414.297.5821 ljdickinson@foley.com

• Leigh C. Riley

414.297.5846 lriley@foley.com

Mark Your Calendar

• Foley will be hosting a new session of the

Employee Benefits Broadcast at the beginning of each quarter

– January 20, 2009 – April 21, 2009 – July 21, 2009 – October 20, 2009

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Thank You

• A copy of the PowerPoint presentation and a

multimedia recording will be available on Foley’s website within 24 to 48 hours:

http://www.foley.com/news/event_detail.aspx?eventid=2435

• We welcome your feedback. Please take a few

moments before you leave the web conference today to provide us with your feedback:

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