Employee Benefits Alert
Pension Reform: House Passes Pension Reform Bill, But Future Far From Certain
On Friday, the House passed what Majority Leader John Boehner calls “the most sweeping changes to America’s pension laws in more than 30 years.” If the Senate approves the Pension Protection Act of 2006 and President Bush signs the bill, plan sponsors especially those with defined benefit plans will find themselves in a radically new environment. More than one-third of the 900-plus pages of legislation is devoted to reformation of the funding rules for single employer and multiemployer plans. But, the remainder of the bill also makes significant changes to the tax-qualified retirement plan landscape and includes provisions such as the following:
- EGTRRA retirement plan provisions would be made permanent.
- 401(k) plans could provide for automatic enrollment and state wage-deduction laws would be preempted by ERISA.
- The Department of Labor would be required to issue regulations regarding default investment options for plans with participant-directed investments.
- Employer non-elective contributions to defined contribution plans would be subject to accelerated vesting schedules.
- Plans that offer employer stock as an investment option would be required, with some exceptions, to provide participants with diversification rights.
- Non-spouse beneficiaries would be able to have plan distributions paid in the form of direct rollovers.
- Pension plans would be required to offer either a 50% or 75% “optional” survivor annuity in addition to a qualified joint and survivor annuity.
- Distribution notices could be provided as early as 180 days before the annuity starting date.
- Hardship safe harbors under 401(k), 403(b), 409A, and 457 would include hardships incurred by the participant’s spouse or dependent beneficiary.
- Income exclusion of death benefits under COLI policies would be subject to certain conditions such as notice and consent requirements.
- Funding of nonqualified deferred compensation for Code section 162(m) employees and Section 16 officers would be restricted if the employer or a controlled group member is in bankruptcy or has a plan that is “at-risk” or terminating with insufficient assets.
- Hybrid plans (.e.g., cash balance and pension equity plans) would be legitimized prospectively, but subject to special rules relating to conversion benefits, “whipsaw” issues, plan termination payments, interest credits, and vesting.
- The PBGC missing participant program would be extended by terminating multiemployer and defined contribution plans.
There is no certainty that the Senate will vote to pass the bill before it adjourns for the summer, which is expected to happen at the end of the week. This uncertainty will increase if the Senate does not get sufficient votes to pass the separate bill containing the tax extenders, estate tax, and minimum wage provisions.
409A Update: Still Waiting for Final Regulations
IRS officials have informally stated that employers can expect the final regulations under Code section 409A in the Fall of 2006. Although many expect the IRS to extend the document compliance date (the date that all arrangements must reflect Code section 409A) past December 31, 2006, the IRS is not commenting on the possibility of an extension.
IRS officials also expect to release this fall proposed regulations governing the reporting requirements under Code section 409A. There is no word yet on whether the IRS will grant reporting relief for 2006 or if employers will need to report an employee’s 2006 deferrals on h is or her 2006 Form W-2.
Welfare Plans: IRS Guidance on Use of Card Programs With Reimbursement Plans
The IRS recently issued Notice 2006-09, which provides additional guidance on the use of debit, stored-value, and credit cards in connection with medical reimbursement and dependent care assistance plans.
The Notice provides two substantiation methods in addition to those set forth in Rev. Rul. 2003-43 for card transactions in medical reimbursement plans: a copayment match method and an inventory information approval system method. The copayment match substantiation method may only be used by merchants and service providers that have health care related merchant category codes. The substantiation requirements will be satisfied if the transaction amount equals an exact multiple of the copayment (or combination of multiple copayments) for the specific service and is not more than give times the dollar amount of the maximum copayment for that service. The inventory information approval system substantiation method can be used by merchants and service providers whether or not they have health care related merchant category codes. The substantial requirements will be satisfied under this method if the payment processing system uses inventory control information to limit use of the card to expenses that are covered by the reimbursement plan. However, the IRS cautions that the employer is ultimately responsible for complying with the substantiation requirements of Notice 2006-69 and corresponding record retention requirements.
In addition to providing the two new substantiation methods, the Notice clarifies that the IRS will treat a claim as fully substantiated if the employer receives an explanation of benefits or other information from an independent third-party indicating the date of the service and the employee’s payment responsibility for that service. In contrast, “self-substantiation” or “self-certification” of an expense by an employer does not satisfy the substantiation requirements.
Finally, the Notice addresses the use of card programs to provide benefits under dependent care assisted plans. Dependent care expenses may not be reimbursed until the services are provided. However, the Notice provides a method under which dependent care expenses can be substantiated on a rolling basis and thus use with a card program.
Fringe Benefits / Employment Taxes: IRS Guidance on Disaster Leave-Sharing Plans
The IRS recently issued guidance regarding the Federal tax treatment of treatment of employee leave donations under disaster leave-sharing plans. Notice 2006-59 follows Rev. Rul. 90-29, regarding the treatment of employer leave-sharing plans for employees suffering medical emergencies.
The Notice explains that the IRS will not assert that an employee realizes income or has wages (or other compensation) when donating leave to an employer-sponsored leave bank under a major disaster leave-sharing plan provided that the plan treats employer payments to leave recipients as wages for Federal employment tax purposes. The Notice provides that a leave donor may not claim an expense, charitable contribution, or loss deduction for the deposit of leave or its use by a leave recipient.
The Notice defines several key terms, including “major disaster” and “leave recipient,” and also describes what constitutes a major-disaster leave sharing plan. Such a plan allows donors to deposit accrued leave in an employer-sponsored leave bank for use by other employees adversely affected by a major disaster. Employees are considered adversely affected by a major disaster if the disaster causes severe hardship to the employee or a family member such that the employee must be absent from work.
The IRS also requires that such plans adopt a reasonable limit on the time period following a major disaster during which leave may be donated and used. If donated leave is not used within this time period, the leave must be returned to the leave donors.
While an employee may donate all leave normally accruing to the employer during the year, leave donors may not transfer leave to a specific leave recipient. Despite this restriction, the IRS requires that leave deposited on account for one major disaster be used only for employees affected by that major disaster, with a minor exception for leave amounts so small as to make accounting for it unreasonable or administratively impracticable.
Payroll / Tax Reporting: Final Regulations on Reporting Gross Proceeds Payments to Attorneys
At long last, Treasury and the IRS have issued final regulations to be effective for payments starting in 2007 governing the reporting of gross proceeds payments to attorneys under Code section 6045(f).
Many companies understandably have had difficulties with the gross proceeds reporting requirements, principally due to confusion over dual-reporting overlaps. The final regulations confirm that due to the different purposes served by income reporting and payment reporting, dual reporting may be required for the same payment.
Specifically, information reporting may be required for amounts paid to an attorney even though the payor may also be required to report these amounts to the attorney’s client under section 6041. The preamble to the final regulations explains that the exception under section 6045(f)(2)(B) applies only where the payment would otherwise be reportable under section 6041 with respect to the same payee. Since the attorney and the attorney’s client are not the same payee, dual reporting is required in this situation. Other differences between section 6041 reporting and section 6045(f) reporting include different definitions of “payor” and that the exception under section 6041 for reporting payments to corporations does not apply to reporting gross proceeds payments to attorneys under section 6045(f).
In general, the final regulations give a broad reading of the section 6045(f) reporting requirement. Some of the more significant changes made by the final regulations, as compared with the 2002 proposed regulations are:
- The exception for payments to attorneys who conduct real estate settlements has been expanded to also cover real estate refinancing and mortgage transactions.
- An exception has been created for payments to attorneys acting in their capacity as bankruptcy trustees, although there is no blanket exception for payments to attorneys acting in other fiduciary (e.g., trustee) or administrative capacities. Note that information reporting is not required under section 6045(f) if the attorney is not the named payee (e.g., the payment is made to the estate or fund rather than to the fiduciary/administrator attorney).
- The final regulations clarify that a check made out to the attorney’s client but “in care of” the attorney is not reportable, as in a check payment in any other manner that does not give the attorney the right to negotiate the check. By contrast, the attorney is considered the payee of a check written to the attorney’s trust account.
Finalization of these regulations should give parties settling litigation more clarity on their reporting responsibilities.
For additional information, please contact any of the following lawyers:
Elizabeth F. Drake, firstname.lastname@example.org, 202-626-5838
Michael M. Lloyd, email@example.com, 202-626-1589
Anthony G. Provenzano, firstname.lastname@example.org, 202-626-1463
Lee H. Spence, email@example.com, 202-626-5965