Disregarded Entities and Employment Tax, Wellness Programs, Retirement Benefit Waivers, Stock Transfers

Focus On Employee Benefits

Payroll Tax & Fringe Benefits: Effective January 1, 2009, Disregarded Entities No Longer Disregarded for Employment Tax Purposes

Tom Cryan

On August 15, 2007, the IRS released final regulations (T.D. 9356) requiring qualified Subchapter S corporation subsidiaries, LLCs and certain other single-owner disregarded entities to pay and file employment tax returns independently from the employment tax returns of their respective owners. These new rules are effective January 1, 2009. Under prior rules, taxpayers were permitted to calculate, report, and pay all employment tax obligations for employees of a disregarded entity as if the owner were the actual employer of the disregarded entity's employees. See Notice 99-6, 1999-1 C.B. 321. If the new procedures are not timely followed, taxes paid by the owner company would be treated as overpayments (and subject to various limitations on later refunds that might be claimed as credits on future returns), while the disregarded entity would remain liable perpetually for the unpaid taxes, plus penalties and deficiency interest (the statute of limitations never runs where no return
is filed).

Owners of disregarded entities that currently handle employment tax obligations on behalf of disregarded entities must take steps before 2009 to determine the disregarded entity's potential status as an "employer" (separate from its owner). Employees of disregarded entities need to be identified, and, if a disregarded entity does not wish to be responsible for employment tax compliance (FITW and FICA taxes only), it must appoint an agent (e.g., its owner) to make such filings. Retroactive appointments are no longer permitted under the revised pay agent appointment procedures. Instead, pay agent appointment requests should be made using the new Form 2678, at least 60 days before the requested effective date. Pay agent appointments are ineffective for purposes of FUTA/SUI taxes.


Health & Welfare: DOL Views on Wellness Programs

Susan Relland

The American Bar Association, Joint Committee on Employee Benefits recently posed a number of questions to the Department of Labor (DOL), including a question regarding when a wellness program will be considered an ERISA plan. (While an agency staff opinion is non-binding, it often provides useful information as to staff interpretation.) The DOL staff noted that a wellness program is only subject to the HIPAA nondiscrimination rules for wellness programs if it is part of an ERISA health plan as defined in ERISA section 3(1). If the wellness program is an employment policy separate from the group health plan, the program will not be subject to the ERISA health plan rules, but may be subject to other laws (including the Genetic Information Nondiscrimination Act (GINA), the American's with Disabilities Act (ADA), and possibly state law). The staff also indicated that using the analytical framework provided in DOL Advisory Opinions addressing Employee Assistance Programs (EAPs) would be appropriate in determining whether a particular wellness program is an ERISA-covered group health plan.

DOL Advisory Opinions provide that for an EAP to be considered a health plan under ERISA section 3(1), the benefits provided must constitute "medical" benefits or "benefits in the event of sickness," and a program that simply refers participants to medical services will not be considered a health plan. DOL Adv. Ops. 88-04A and 91-26A. Courts have also weighed in on this issue of whether a program constitutes an ERISA plan. For example, in Donnovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982), the Eleventh Circuit parsed ERISA section 3(1) into five factors. To be considered a welfare benefit plan, a program would need to be:

1. a plan, fund, or program (which implies the existence of intended benefits, intended beneficiaries, a source of financing, and a procedure to apply for and collect benefits);

2. established or maintained (which does not require the program to be in writing, but would require some acts or events to record or implement the decision to establish a plan);

3. by an employer or an employee organization;

4. for the purpose of providing certain benefits;

5. to participants or beneficiaries (who have an employment relationship with the employer sponsoring the plan).

A wellness program that satisfies all of those factors would be considered an ERISA health plan and, therefore, would need to comply with the HIPAA nondiscrimination regulations governing wellness programs, as well as other ERISA rules that apply to health and welfare plans such as fiduciary obligations and annual reporting. DOL staff declined to express an opinion on whether certain wellness program designs would likely be considered to be ERISA plans (such as Health Risk Assessments, health coaching, or smoking cessation programs). Finally, they noted that Field Assistance Bulletin 2008-02 also provides helpful information regarding the applicability of the wellness regulations and tips for compliance.


Qualified Plans: Supreme Court to Examine QDROs as the Only Waiver to Retirement Benefits

Gary Quintiere and Veronica Rouse

Next term, the U.S. Supreme Court will decide whether there is an exception to the general ERISA rule of non-alienation that a qualified domestic relations order (QDRO) is necessary to divest a party of a retirement benefit in the divorce context. The exception would permit a plan to treat a spouse's benefit as having been divested as a result of the spouse's execution of a divorce decree waiver.

In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 497 F.3d 426 (5th Cir. 2007), the Fifth Circuit Court of Appeals held that only a QDRO may waive a spouse's right to the retirement benefits of an employee. The court based its holding on the fact that ERISA's anti-alienation rules specifically apply to pension benefits (as opposed to welfare benefits) and thus, preempt the application of state law.

In 1971, William Kennedy was an employee of DuPont when he married his wife. He designated her as sole beneficiary of his interest in the DuPont Savings and Investment Plan (the SIP) with no contingent beneficiaries. In 1994, the couple divorced and the decree stated that Kennedy's wife was divested of "all right, title, interest, and claim in and to…the proceeds therefrom, and any other rights related to any…retirement plan, pension plan, or like benefit program" by reason of Kennedy's employment. In 1997, a QDRO directed the disbursement of some of Kennedy's pension benefits, but did not apply to any of his benefits under the SIP.

Upon Kennedy's death, his estate attempted to claim his SIP benefits on the basis that the divorce decree was a valid waiver of his wife's right to the benefit. The plan denied the claim, and the estate filed suit in the U.S. District Court for the Eastern District of Texas. The district court held that the estate was entitled to the SIP benefits because, under federal common law, the divorce decree represented a waiver by the spouse of Kennedy's SIP benefits.

DuPont appealed to the Fifth Circuit where the court found in its favor stating that a waiver could only be valid if it met the requirements of a QDRO. In the court's view, the waiver did not constitute a valid QDRO.

The outcome of this case in the Supreme Court will likely resolve an issue over which many circuit courts and state supreme courts currently remain at odds, namely, whether a spouse's waiver of pension benefits in a divorce decree should have the same effect as a similar statement in a QDRO. If the Court finds that divorce decree waivers are valid without meeting the requirements of a QDRO, it may become more difficult for plan administrators to discern the true wishes of the parties and may leave fiduciaries vulnerable to litigation regarding the proper assignment of a participant's interest in a retirement plan.

Recommendation: Where benefits are contested from the outset, fiduciaries should consider withholding payment until the parties settle their differences or, barring that, interpleading the benefits and letting a court decide the issue. It is better to delay payment than to expose the plan to the possibility of having to pay benefit amounts twice.


Exec Comp: Proposed Regulations Provide New Reporting Rules for Stock Transfers Under Statutory Stock Options

Gary Quintiere and Adrian Morchower

The IRS has issued proposed regulations that describe the information that must be furnished in written statements given to employees and in returns filed with the IRS, pursuant to the information reporting requirements under section 6039 of the Internal Revenue Code (Code). These requirements apply to every corporation that transfers a share of stock pursuant to the exercise of an incentive stock option (ISO) or that records a transfer by an employee of the "first transfer" of legal title of a share of stock that was acquired by the employee under an employee stock purchase plan (ESPP), if the ESPP provides (pursuant to section 423(c) of the Code) for an exercise price equal to less than 100 percent but not less than 85 percent of the fair market value of the stock at the time the option is granted. The preamble to the proposed regulations states that in crafting the proposed rules, one principal objective was to require corporations to furnish employees with sufficient information to enable them to calculate their tax obligations upon disposition of the shares acquired under an ISO or an ESPP.

The proposed regulations would make changes to the information that is now required to be furnished to employees under existing regulations, particularly with respect to ESPP shares. For purposes of furnishing the required employee information statements for stock transfers in calendar years 2007 and 2008, corporations may rely on the reporting requirements set forth in either the existing regulations or the new proposed regulations. In addition to the required changes to employee information statements, the proposed regulations address the requirement for filing information returns with the IRS. The requirement for IRS returns was added to section 6039 effective for calendar years after 2006. Such returns were to be made in accordance with Treasury regulations, which, prior to the new proposed regulations, had not been issued. For this reason, the IRS previously waived the obligation to make information returns with the IRS for 2007 stock transfers. Under a transitional rule in the proposed regulations, the requirement that information returns be filed with the IRS is not imposed with respect to stock transfers that occur during 2007 and 2008, although employee statements are still required. Thus, while the rules set forth in the proposed regulations, when finalized, generally will apply as of January 1, 2007, it is expected that the requirement for filing returns under section 6039 with the IRS will first apply to stock transfers made in 2009 that would be reportable on or before January 31, 2010. Returns and employee information statements required with respect to stock transfers under an ISO will be made under a new Form 3921. Returns and statements with respect to transfers by an employee of stock acquired under an ESPP will be made under a new Form 3922.

For further information, please contact any of the following lawyers:

Gary Quintiere, gquintiere@milchev.com, 202-626-1491

Adrian Morchower

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