Focus On Employee Benefits
Information Reporting: Sweeping New Reporting Requirements Become Effective in 2011
Tom Cryan and Michael Lloyd
Code section 6050W, which was enacted as part of the Housing Assistance Tax Act of 2008, requires each merchant acquiring entity (the bank or other organization that has the contractual obligation to make payments to participating payees in settlement of credit card, debit card, and other payment card transactions) and each third party settlement organization (the central organization that has the contractual obligation to make payment to participating payees of third party network transactions) to file an information return and furnish a payee statement with respect to each payee who accepts a payment card or payment from a third party settlement organization in settlement of a transaction. Required information with respect to each participating payee includes the gross amount of the aggregate reportable payment for the calendar year and for each month of the calendar year. The first information returns and payee statements required under section 6050W must be filed on or before February 28th, 2012 (March 31st if filed electronically) for transactions in calendar year 2011.
Some transactions covered by section 6050W would also be covered by the provisions of Code sections 6041 and 6041A(a) relating to the filing requirements imposed on certain persons engaged in a trade or business making certain payments of $600 or more. In order to avoid such duplicate reporting, the regulations provide that transactions that otherwise are subject to reporting under both sections 6041 or 6041A and 6050W are reported only under section 6050W and not section 6041 or 6041A(a). Thus, payors, otherwise subject to the information reporting requirements under section 6041 or 6041A(a), are exempted from reporting in the case of any payment card or third party network transaction.
The regulations define the term "payment card transaction" for purposes of section 6050W and provide rules and examples that illustrate the types of transactions that fall within the scope of that definition. A transaction will be a payment card transaction if a card, including a gift card or other card with a prepaid value, is accepted as payment through an arrangement or agreement that provides for (i) an issuer of the card, (ii) a network of persons unrelated to each other, and to the issuer, who agree to accept such card as payment, and (iii) standards and mechanisms for settling the transaction between the merchant acquiring entity and the participating payees. For example, a transaction paid with a card that is accepted as payment only at a store that is one of a commonly owned chain of stores (private label card), is not a payment card transaction subject to section 6050W because the card is accepted as payment only within a network of persons who are related to each other. On the other hand, a transaction paid with a card that is issued by a shopping mall pursuant to an arrangement where the card is accepted as payment by various unrelated merchants located within the mall is a payment card transaction because the card is accepted as payment by a network of persons who are unrelated to the issuer of the card and to each other.
The term "third party network transaction" is defined as a transaction that is settled through any agreement or arrangement (other than through the issuance of payment cards) that (i) involves the establishment of accounts with a central organization by a substantial number of providers of goods or services who are unrelated to the organization and who have agreed to settle transactions for the provision of the goods or services to purchasers according to the terms of the agreement or arrangement, (ii) provides standards and mechanisms for settling the transactions, and (iii) guarantees payment to the persons providing goods or services in settlement of transactions with purchasers pursuant to the agreement or arrangement. For example, an Internet payment provider has accounts with a substantial number of unrelated merchants selling goods or services over the Internet. All have agreed to settle transactions for the sale of goods or services to customers according to the terms of their contracts with the payment provider. A customer purchases goods from the merchant and makes payment to the payment provider. The payment provider, in turn, makes payment to the merchant in settlement of the transaction. This illustrated transaction meets the definition of a third party network transaction. The payment provider must file the annual information return to report the payment made to the merchant, provided that the exception from the information reporting requirements for de minimis payments does not apply. The de minimis exception would not apply if the amount that would otherwise be reported by the payment provider with respect to third party transactions of the merchant exceeds $20,000 and the aggregate number of such transactions exceeds 200. This de minimis exception does not apply to the reporting requirements applicable to payment card transactions.
The regulations provide rules for special situations such as where reportable payment transactions of more than one participating payee are settled through an intermediary, where an electronic payment facilitator makes payments on behalf of a merchant acquiring bank or other payment settlement entity, and where payments are made in a foreign currency. In addition the penalty provisions generally applicable to failures to comply with certain information reporting requirements are made applicable to failures under section 6050W. Amounts reportable under section 6050W are subject to backup withholding requirements, effective for amounts paid after December 31, 2011.
Qualified Retirement Plans: 2010 Year-End Amendments
In what has become an annual event, the end of 2010 marks the deadline for plan sponsors to amend their tax-qualified plans to comply with certain changes in the tax qualification requirements and to reflect so-called discretionary plan design changes. These year-end deadlines are important because the failure to timely and properly adopt these amendments will likely result in the imposition of monetary "non-amender" sanctions on the plan sponsor. To help put these deadlines in context, the following provides a brief overview of the timing requirements for qualified plan amendments.
General Plan Amendment Deadlines. In Rev. Proc. 2007-44, the IRS provides comprehensive guidance regarding the deadlines for adopting most plan amendments. In general, a five-year remedial amendment period, during which an individually-designed plan can be retroactively amended to correct qualification provisions, will be available to plan sponsors that timely adopt "interim" amendments. The deadline depends on whether the interim amendment reflects a tax-qualification change or a discretionary change.
Plan amendments that reflect tax-qualification changes must be generally adopted by the end of the plan year in which they are effective, or if later, the due date of the plan sponsor's tax return (including extensions). However, Congress and the IRS typically provide extended deadlines with respect to such changes, allowing plans to be amended on a retroactive basis. Thus, for example, plans generally need to be amended by the end of the 2010 plan year to reflect the following tax-qualification changes:
Pension Protection Act of 2006. In Notice 2009-97, the IRS extended the deadline by which plans must be amended to reflect the following provisions of the Pension Protection Act until the end of the 2010 plan year:
- § 436 funding-based limits on benefits and benefit accruals (applicable to all single-employer defined benefit pension plans);
- § 411(a)(13) and § 411(b)(5) vesting and other age discrimination prohibitions (applicable to all cash balance and other hybrid defined benefit pension plans); and
- § 401(a)(35) diversification requirements (applicable to defined contribution plans that invest in company stock).
HEART Act of 2008. Section 104(d)(2) of the Heroes Earnings Assistance and Tax Relief Act of 2008 gave plan sponsors until the end of the 2010 plan year to amend their plans for the following:
- § 401(a)(37) death benefits for participants who die on or after 1/1/2007 while performing qualified military service (applicable to all defined benefit and defined contribution plans);
- § 414(u)(9) benefit accrual provisions for participants who die or become disabled on or after 1/1/2007 while performing military service (applicable to all defined benefit and defined contributions plans);
- § 414(u)(12) inclusion, for certain purposes, of differential wage payments after 12/31/2008 in compensation for plan purposes (applicable to all defined benefit and defined contribution plans);
- § 414(u)(12) provisions allowing plans to offer distributions of elective deferrals to individuals in active duty for more than 30 days (applicable to § 401(k), § 403(b), and § 457 plans);
- § 72(t)(2)(G) provisions excluding distributions of elective deferrals, to reservists called to duty for more than 179 days at any time after 9/11/2001, from the 10% early distribution penalty (applicable to § 401(k) and § 403(b) plans).
Earlier this year, the IRS issued Notice 2010-15, which provides guidance regarding these provisions.
The Small Business Jobs and Credit Act of 2010 contains provisions that, among other things, allow 401(k) plans with designated Roth accounts to allow "in-plan" Roth conversions. There are many unanswered questions about what action would need to be taken by year-end to implement in-plan Roth conversions in 2010. A Treasury official, noting that many questions remain unanswered, has suggested that plan sponsors wait for guidance before drafting any plan amendments, but did not indicate whether any participant elections or operational changes must nonetheless be made this year.
Interim plan amendments that reflect discretionary changes must be adopted no later than the end of the plan year in which they become effective. As always, certain types of amendments, such as the reduction of future benefit accruals, must be adopted in advance pursuant to specific statutory and regulatory requirements.
There is no one-size-fits-all checklist that identifies each interim plan amendment that must be adopted -- required amendments depend in large part on the provisions in a particular plan document -- but there is guidance. IRS Notice 2009-98 provides the IRS's most recent cumulative list of statutory and regulatory changes that may require plan amendments. An updated list is expected later this month or in early December.
Extended Remedial Plan Amendment Period. Under the IRS determination letter program (set forth in Rev. Proc. 2007-44), an individually-designed plan must apply for a determination letter by the end of its five-year cycle in order to qualify for an extended remedial amendment period. During the extended remedial amendment period, the plan document can be retroactively amended to correct qualification provisions. The current five-year cycle, Cycle E, ends on January 31, 2011 and applies to plans sponsored by companies with tax identification numbers ending in 5 or 0. IRS Notice 2009-98 sets forth a cumulative list of provisions that the IRS will review in connection with Cycle E submissions. Note: Corrective plan amendments are generally limited to provisions for which interim amendments were timely adopted. Plan sponsors should evaluate whether any interim amendments have not been timely adopted before the plan is submitted for a determination letter. Non-amender sanctions are significantly lower under the IRS's VCP program than when the IRS discovers the failure during the determination letter process (see Revenue Procedure 2008-50).
One final note: The IRS has been demonstrating an ever-increasing focus on the plan amendment process itself. That is, in addition to determining whether an amendment complies with relevant guidance and plan operations, the IRS will also demand evidence that the amendment was timely adopted and that the adoption procedures were consistent with those set forth in the plan. The IRS is likely to take issue, for example, with a board resolution that generally approves certain compliance amendments if there is no evidence that the updated plan language was approved by the board, or adopted by an authorized person in a signed and dated plan amendment, by the applicable amendment deadline. Plan sponsors should be aware that more and more, "getting the plan language right" is only one requirement for IRS approval of the plan.
Executive Compensation: Year-end Compliance Matters
A number of matters affecting executive compensation arrangements may require attention at this time in order to comply with statutory deadlines or to take advantage of expiring beneficial treatment.
Code Section 6039 Reporting. An employer who issues incentive stock options (ISOs) or sponsors an employee stock purchase plan (ESPP) should be prepared to file an information return and payee statement on Form 3921 (for ISOs) or Form 3922 (for ESPPs) if the employer transferred stock in 2010 pursuant to the exercise of an ISO or under an ESPP. This new reporting requirement is effective for stock transfers that occur after calendar year 2009. The due date for filing with the IRS is February 28 (March 31 if filed electronically), 2011. The due date for filing payee statements is January 31, 2011. In July of this year, the IRS issued drafts of the Forms and is expected to issue final Forms 3921 and 3922 in the near future.
Code Section 409A Document Correction Program. IRS Notice 2010-6 provides guidance for taxpayers to voluntarily correct document failures within nonqualified deferred compensation plans to comply with Code Sec. 409A. Special transition relief for 2010 provides for a more favorable outcome if document corrections are made on or before December 31, 2010. For example, for corrections after 2010, if an incorrect definition of change in control is corrected and a transaction occurs within a year that is a change in control under the uncorrected definition (but not under the corrected definition), 25 percent of all deferred compensation under the plan for each service provider in the plan must be include in income and subjected to the 20% percent penalty tax under Code section 409A. However, if the document correction is made in 2010, the plan is treated as having been corrected as of January 1, 2009, and the 25% income inclusion in the example would not apply, provided there has been no change of control in 2009. Employers should consider whether they have any section 409A document corrections that should be made in 2010 in order to benefit from the more favorable rules in Notice 2010-6 for corrections in 2010.
Code Section 457A Reporting. Section 457A, relating to nonqualified deferred compensation from certain tax indifferent parties, is now in effect. This provision requires affected employees to include deferred compensation in income at vesting, rather than at actual or constructive receipt. The IRS has not issued guidance on employer reporting requirements regarding such income inclusions, but employers may want to consider whether they might have a reporting obligation with respect to 2010.
2010 Tax Planning for Increases in Income Tax Rates. Some company executives who are anticipating potential increases in income tax rates beginning in 2011 are requesting that compensation otherwise payable after 2010 be paid before January 1, 2011. Opportunities for accelerating income may be limited due to provisions of Code sections 409A and 162(m). Grandfathered deferred compensation and short-term deferrals are a potential source for acceleration, although section 162(m) may still be implicated.
Health and Welfare: Plan Compliance
In General. The Patient Protection and Affordable Care Act (PPACA) includes a number of new insurance market reforms that are effective for the first plan year beginning on or after September 23, 2010. Thus, for plans on calendar years, the reforms are effective on January 1, 2011. The new market reforms can be separated into two categories: market reforms for "non-grandfathered" plans; and market reforms for all plans whether "grandfathered" or "non-grandfathered." In addition, PPACA includes other new requirements effective on the date of enactment and effective January 1, 2011.
Market Reforms for All Plans. Both "grandfathered" and "non-grandfathered" plans are subject to the following new requirements that require a plan amendment:
- Cover "adult child" up to age 26;
- No pre-existing exclusion for children under 19;
- No rescissions;
- No lifetime limits; and
- Restrict annual dollar limits
Market Reforms for "Non-Grandfathered" Plans. If you lose "grandfather" status, the plan:
- Cannot require cost-sharing for preventive services;
- Must have internal and external appeals processes;
- Must allow choice of primary care physician/pediatrician; and
- Must provide direct access to emergency services
Other PPACA Requirements--OTC Drugs. All Health FSAs, HRAs, HSAs, and MSAs must be amended to exclude reimbursements for over-the-counter (OTC) drugs (other than insulin) purchased without a prescription. The deadline for a plan amendment is June 30, 2011, but plan sponsors are being advised to include this amendment in with the market reform amendments.
Other PPACA Requirements--Auto-Enrollment. It appears the DOL's position is that the auto-enrollment provision is effective as of the date of enactment--March 23, 2010. However, because there is no guidance, DOL has informally indicated that it will not enforce the new requirement in the absence of regulations. Regulations are expected some time next year.
For additional information, please contact any of the following attorneys in our ERISA/ Employee Benefits practice:
Michael Lloyd, firstname.lastname@example.org, 202-626-1589
Elizabeth Drake, email@example.com, 202-626-5838