Qualified Retirement Plans: 2011 Year-End Amendments; Treasury and IRS Priority Guidance Plan

Focus On Employee Benefits

Qualified Retirement Plans: 2011 Year-End Amendments

Eva McComas

It is time again for plan sponsors of tax-qualified retirement plans with calendar plan years to review their plans in order to determine whether any year-end amendments are necessary to comply with certain changes in the tax qualification requirements and to reflect so-called discretionary plan design changes. There is no one-size-fits-all checklist of required amendments. However, the IRS has provided helpful guidance. IRS Notice 2010-90 is a cumulative list of statutory and regulatory changes that will be considered during the determination letter process for individually-designed plans in Cycle A. The remedial amendment period for these Cycle A plans ends on January 31, 2012. The second remedial amendment period for Cycle B plans begins on February 1, 2012. The IRS is expected to provide an updated list for Cycle B individually-designed plans this month or early December.

The following is a brief overview of the timing deadlines for certain plan amendments.

Pension Protection Act of 2006

In Notice 2010-77, the IRS extended the deadline for adopting the following defined benefit plan amendment to the last day of the first plan year beginning on or after January 1, 2011 (i.e., December 31, 2011, for a calendar plan year): Section 436 funding-based limits on accelerated benefit payments and benefit accruals (applicable to all single-employer defined benefit pension plans). As discussed in this alert, it is not known whether this amendment deadline will be extended.

In Notice 2011-85, the IRS extended the deadline for adopting the following interim and discretionary amendments to cash balance and hybrid defined benefit pension plans: Section 411(b)(5) interest crediting and market rate of return, and Section 411(a)(13) (other than Section 411(a)(13)(A)) requirements. The extended deadline is the last day of the first plan year before the plan year the proposed market rate hybrid plan regulations, when finalized, become effective, which will not be earlier than January 1, 2013. The extended amendment deadline does not apply to the "whipsaw" amendment under Section 411(a)(13)(A).

Worker, Retiree, and Employer Recovery Act of 2008

WRERA provides a suspension of the required minimum distribution rules for 2009 by defined contribution plans. The amendment deadline is the last day of the 2011 plan year.

Small Business Jobs Act of 2010

The SBJA of 2010 added Section 402A(c)(4), which permits rollovers from a plan account (other than a designated Roth account) to the plan's designated Roth account. In Notice 2010-84, the IRS indicated that a non-safe harbor 401(k) plan must adopt a Roth amendment by the later of the last day of the plan year in which the amendment is effective or December 31, 2011, provided that the amendment is effective as of the date the plan first operates in accordance with the amendment.

In addition, plan amendments that reflect discretionary changes (i.e., changes not required by statute or regulation) must be adopted no later than the end of the plan year in which they become effective. It is important to remember, however, that certain types of discretionary amendments must be adopted in advance pursuant to specific statutory and regulatory requirements, such as adding a qualified cash or deferred arrangement to a profit sharing plan.


Treasury and IRS Priority Guidance Plan: Items of Potential Interest

On September 2, 2011, the Department of the Treasury ("Treasury") and the Internal Revenue Service ("IRS") released their 2011-2012 Priority Guidance Plan ("Plan"). Each year, the Plan is used to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The current Plan contains 317 projects (some of which were identified in prior Plans) that are guidance priorities during the period July 2011 through June 2012. On October 31, 2011, the Plan was updated to include three additional projects. Set forth below are a number of projects in the employee benefits area, along with our comments and observations, that may be of particular interest to employers.

Fringe Benefits:

Tom Cryan

1. Revenue ruling under Code section 62(c) on wage recharacterization. In Chief Counsel Advice to an IRS attorney (CCA201120021, 5/20/2011), it was concluded that a reimbursement or other expense allowance arrangement that pays an amount regardless of whether an expense is paid or incurred or reasonably expected to be paid or incurred by the employee in performing services for the employer violates the business connection's reimbursement requirement under Treas. Reg. sec. 1.62-2(d)(3)(i). Accordingly, payments under the arrangement are treated as made under a nonaccountable plan, must be included in the employee's gross income for the taxable year, are subject to withholding and payment of employment taxes, and must be reported as wages or other compensation on the employee's W-2. If a revenue ruling were published that followed the conclusion in the Chief Counsel Advice, it would present additional compliance issues for employers who maintain a reimbursement or other expense allowance arrangement that pays an amount regardless of whether an expense is paid or incurred or reasonably expected to be paid or incurred by the employee. This issue is of particular importance for companies that employ mobile workers (e.g., temporary nurse staffing entities). These companies often pay a wage rate that is less than the prevailing amount paid to non-travel workers and then pay a nontaxable per diem.

2. Guidance under Code section 132(f) on the use of smart cards, debit cards and credit cards in providing qualified transportation fringe benefits. In Rev. Rul. 2006-57 the IRS provided guidance to employers on the use of smartcards and debit and credit cards to provide qualified transportation fringes under Code section 132(f). The effective date of Rev. Rul. 2006-57 has been delayed several times, most recently until 1/1/2012. The stated reason for the delay is that certain transit systems need additional time to complete the process of adapting their technology to achieve compatibility with the requirements for vouchers. Employers with systems that have already achieved compatibility and their employees may rely on Rev. Rul. 2006-57 with respect to transactions occurring prior to January 1, 2012. See Notice 2010-94.

3. Regulations under Code sections 162 and 262 regarding the deductibility of expenses for lodging not incurred in traveling away from home. Treas. Reg. sec. 1.262-1(b)(5) presently provides that the costs of the taxpayer's lodging not incurred in traveling away from home are personal expenses and are not deductible unless they qualify as deductible expenses under section 217 (moving expenses). However, in Notice 2007-47, the IRS stated that pending amendments to the regulation, it would not apply section 1.262-1(b)(5) to expenses for lodging of any employee not incurred while in traveling away from home that an employer provides to the employee, or requires the employee to obtain, under certain specified conditions (e.g., attendance at a company conference at a hotel that is within the vicinity of the employee's tax home).

4. Final Regulations under Code section 274 regarding the entertainment use of company aircraft. Proposed regulations were published on June 15, 2007. Prior to the proposed regulations, IRS guidance was provided by Notice 2005-45, 2005-1 CB 1228. For taxable years beginning before the promulgation of final regulations, taxpayers my rely on either the proposed regulations or Notice 2005-45 to the extent that both provide rules for the same issue, but may not rely on the absence of a rule in Notice 2005-45 to apply a rule contrary to the proposed regulations.

5. Regulations under Code section 274(n) regarding reimbursement and other expense allowance arrangements, including employee leasing arrangements. The application of the 50 percent limitation on deductions for meals and incidental expenses ("M & IE") imposed by Code section 274(n) on the employer or other service recipient has been a contested issue in the context of leased employees (i.e., whether the leasing company or the service-recipient bears the expense of the M & IE). See, Transport Labor Contract/Leasing Inc. & Subs. V. Commissioner, 461 F.3d 1030 (8th Cir. 2006); Rev. Rul. 2008-23, 2008-18 IRB 852, 04/14/2008.

6. Notice on the applicability of Code sections 132(d) and (e) to employer-provided cell phones following enactment of section 2043 of the Small Business Jobs Act of 2010. Guidance has been provided by Notice 2011-72, 2011-38 IRB 407, 09/14/2011.

Employment Taxes and Information Reporting:

Michael Lloyd

1. Regulations under Code section 6045 to address basis reporting for options and debt instruments. Treasury Decision 9504, October 12, 2010, contains final regulations on broker reporting of sales of securities and on the basis of securities. These regulations apply to shares of stock, since, as noted in the Supplementary Information, the reporting requirements before the year 2013 do not apply to other "specified securities" such as an evidence of indebtedness, any commodity, or any other financial instrument designated by the Secretary. Regulations under Code section 6045 relating to such other specified securities are now included in the Plan.

2. Final regulations on the application of Code section 3402(t) to contracts existing as of January 1, 2013. Proposed regulations were published on May 9, 2011. The original effective date of the rules under Code section 3402(t) relating to the 3% withholding from and reporting of certain payments made by government agencies for payments made after 12/31/2010 has been delayed to apply to payments made after 12/31/2012, subject to an existing contract exception. On October 27, 2011, the House of Representatives overwhelmingly passed H.R. 674, which repeals Code section 3402(t). On November 1, 2011, Senate Majority Leader Harry Reid announced that he would not block legislation considering the repeal of Code section 3402(t), but rather would amend the language to apply its provisions to apply only to government contractors delinquent on their taxes.

3. Notice under Code section 6050P regarding information reporting pertaining to cancellation of debt. Final regulations were issued under TD 9461, September 17, 2009. In the Supplementary Information, the IRS referred to the sole commenter on the proposed regulations who requested additional guidance on several areas addressed in the regulations. It was stated that the concerns raised in theses comments will be considered in determining whether to issue additional guidance under Code section 6050P.

4. Guidance under Code section 6050W, as added by section 3091 of the Housing Assistance Act of 2008, regarding information reporting on payment card and third-party payment transactions. As noted in the Plan, this guidance was published as Notice 2011-71, 08/19/2011. Under the Notice, a U. S. payment settlement entity ("PSE") would only be required to document payment made outside the U. S. to an offshore account if either certain indicia of U.S. status are present or if the payee submits Form W-8 or other substitute document establishing payee's non-U.S. status and the PSE doesn't know that the payee is a U.S. person. Other impending changes to the regulations under 6050W were described in the Notice. PSEs are entitled to rely on the guidance in the Notice until regulations are changed. The IRS has issued a total of five notices to date in 2011 regarding section 6050W: Notice 2011-42, Notice 2011-71, Notice 2011-78, Notice 2011-88, and Notice 2011-89. Recently, the IRS delayed implementation of the backup withholding requirements associated with section 6050W until January 1, 2013, and announced that it will not impose penalties for those reporting organizations that make a good faith effort to comply by filing Forms 1099-K but make form errors. This penalty relief is specifically not provided to those reporting organizations that erroneously fail to file.

Qualified Plans:

Elizabeth Drake

1. Issues relating to lifetime income from retirement plans. The focus of the Administration's lifetime income initiative is to help ensure that participants in 401(k) and other defined contribution plans do not outlive their retirement savings. Although various agencies are involved, the IRS is looking at obstacles in the tax-qualification rules that might prevent employers from providing annuities or other forms of lifetime income to participants in these plans, such as qualified joint and survivor annuity rules under § 417, required minimum distribution rules under § 401(a)(9), and rules regarding rollovers from defined contribution to defined benefit plans. Since a number of new items on this year's Plan relate to qualified plan distributions, we expect this to be an area to watch in the upcoming year.

2. Guidance related to defined benefit plan funding-based restrictions. The section 436 funding-based limits on certain accelerated benefit payments (such as lump sums) and benefit accruals for under-funded defined benefit plans were enacted as part of the Pension Protection Act of 2006. In response to section 436, the IRS issued final regulations at the end of 2009 and extended the deadline for plans to adopt conforming amendments until the end of the 2011 plan year. This year's Plan indicates that the IRS plans to issue additional regulations, a sample plan amendment, and guidance regarding the related notice requirements under ERISA § 101(j). Whether these items will result in another extension of the plan amendment deadline remains to be seen.

3. Updates to determination letter process. Several years ago, the IRS implemented a new determination letter process under which individually-designed plans would generally need to apply for determination letters every five years. The first five-year cycle ended January 31, 2011, and the IRS is evaluating ways in which it might make the process more efficient. Although this year's Plan refers generally to updated procedures, we understand that the IRS is considering the following: changes to the rules regarding the adoption of interim amendments (year-end amendments reflecting tax-qualification changes), the elimination of the review plan demonstrations showing compliance with nondiscrimination requirements, and possible guidelines regarding a uniform structure for plan documents.

Executive Compensation:

Anthony Provenzano

1. Guidance regarding Code section 162(m) and dividends or dividend equivalents. This guidance will likely discuss whether the grant of dividends or dividend equivalents with respect to stock options will impact the option's status as performance-based compensation.

2. Revenue Ruling under Code section 280G on concerning generally the definition of when a corporation undergoes a change in ownership or control. Employers may want to review their own change in control agreements following this guidance to see if any corresponding changes are necessary.

3. Guidance regarding Code section 402(b) to participants in foreign nonqualified plans. Currently there is very little guidance regarding how the tax consequences of such participation should be measured.

4. Guidance regarding the proper year for deductions of nonqualified deferred compensation under Code section 404(a). It is likely that this guidance will address whether deductions for payments of nonqualified deferred compensation are deductible for the tax year in which or with which ends the employee's tax year in which such compensation was includible or the employer's tax year when paid.

5. Final regulations under Code section 409A regarding calculation of amounts includible in income due to failures under Code section 409A. These regulations will also be relevant for purposes of reporting deferrals.

6. Guidance regarding Code section 409A(b) regarding restrictions against funding or setting aside assets for executive deferred compensation during any period in which the employer's pension plan is underfunded. Hopefully, such guidance will address the type of funding structures prohibited by the statute. For example, will the rules restrict transferring assets to separate accounts, revocable trusts, or other arrangements where the employer has ready access to the funds?

For more information, please contact:

Michael Lloyd, mlloyd@milchev.com, 202-626-1589

Elizabeth Drake, edrake@milchev.com, 202-626-5838

Anthony Provenzano, aprovenzano@milchev.com, 202-626-1463

Eva McComas

Tom Cryan

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