Qualified Plans & Exec Comp: June 30 FBAR Reporting Deadline Nears; New Guidance Provides Temporary Relief

Lee Spence and Fred Oliphant

June 30 is the deadline for “United States persons” to report a financial interest in, or signature authority over, bank and other financial accounts in foreign countries in 2008 if those accounts in the aggregate exceeded $10,000 at any time in that year. Because of changes to the instructions to the applicable reporting form and also IRS website postings, there has been a great deal of confusion whether this reporting obligation might apply, not only to the company itself and officers with signatory authority over its accounts, but also to its pension trust, and even to foreign executives and directors with respect to their personal foreign bank accounts if they can be viewed as conducting business in the U.S. on a more than “sporadic” basis.

Guidance issued by the IRS last Friday (IRS Announcement 2009-51) has temporarily reduced the filing burden for foreign executives and directors by narrowing the scope of who may be regarded as a “United States person” for purposes of the FBAR report due June 30, 2009. But companies may nonetheless want to consider whether the FBAR reporting requirement may reach their pension trusts.

The FBAR requirement is not an income tax return even though the IRS is involved in its administration. While the FBAR reporting requirement is not new, the Government has increased its enforcement activity in this area, and the IRS instructions to the 2008 revised reporting form (TD F 90-22.1), together with IRS website information and recently released “FAQs” (frequently asked questions), had expanded the scope of “United States persons” potentially subject to these reporting requirements. The Announcement issued last Friday represents a temporary one-year limit on reporting requirements for nonresident alien individuals who might have otherwise been covered by the expanded definition. It promises additional guidance as to the definition of “United States persons” with respect to FBARs due in subsequent years.

The instructions to the 2008 form, the IRS website guidance, and the FAQs stated that a United States person” required to report for 2008 included a citizen or resident of the U.S. or a person “in and doing business in the United States.” Under instructions to the prior forms, only U.S. citizens and residents had to report their foreign bank accounts. The IRS guidance on the 2008 form stated that whether a person is considered for FBAR purposes to be “in and doing business in” the U.S. was determined by an analysis of the facts and circumstances of each case, and that generally, a person would not be considered to be “in and doing business in” the U.S. unless that person was conducting business on a regular and continuous basis.

Unfortunately, the application of this standard to a company’s foreign executives and directors who travel to the U.S. on business from time to time was not clear in all instances.

The Announcement issued last Friday acknowledged that the Service had received questions and comments concerning the new filing requirement and, in order to reduce the burden on the public with regard to the FBARs due June 30, 2009, the Announcement states that persons may rely on the definition of “United States person” found in the prior instructions for the prior FBAR form. That definition specifically covers only (1) a citizen or resident of the U.S., (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust, and thus does not include nonresident aliens. The Announcement states that in other respects all other requirements of the current 2008 reporting form and instructions will continue to apply. Thus, for the FBAR due June 30, 2009, foreign directors and executives are subject to FBAR reporting only if they are a resident of the U.S. (and have more than $10,000 in foreign bank accounts).

Even as modified by last Friday’s Announcement, a “United States person” potentially subject to the reporting requirement may be a U.S. trust with foreign accounts, and there is no exception in this definition for tax-exempt trusts. Therefore, the scope of a covered “person” could potentially encompass U.S. pension trusts that have foreign accounts or pension trust fiduciaries with signatory authority over those accounts. In this regard, the FAQs include a U.S. fiduciary of an IRA having a foreign account as an example of a person that is required to file an FBAR. Accordingly, companies may want to inquire into whether their pension trusts may potentially be subject to these reporting requirements.

The increased enforcement activity by the Government in this area makes it important not to ignore these reporting requirements where they might apply. Failure to file an FBAR potentially exposes the filer to civil penalties, criminal penalties, or both. Furthermore, there is no extension of the June 30, 2009 due date for FBAR reporting for 2008. The FAQs note that if a person learns that the person was required to file FBARs in prior years, the person should file delinquent FBAR reports and attach a statement explaining why the reports were filed late, and that no penalty will be asserted if the IRS determines that the late filings were due to reasonable cause.

ERISA Litigation: Issue Exhaustion for ERISA Plans

Susan Relland, Gary Quintiere, and Anthony Shelley

ERISA plan sponsors are advised to ensure SPDs and/or Explanations of Benefits (EOBs) require plan participants to exhaust all issues through the administrative claims review process before filing suit in court. In Vaught v Scottsdale HealthCare Corp. Health Plan, 546 F.3d 620 (9th Cir. 2008), the Ninth Circuit Court of Appeals held that Vaught could challenge the plan’s denial of benefits in district court based on a theory that he had not previously raised in his requests for internal review.

Raymond Vaught crashed his motorcycle into a parked automobile while driving under the influence of alcohol. He was a participant in the medical plan (the “Plan”) sponsored by his wife’s employer, Scottsdale Health Care Corporation. The Plan excludes coverage for expenses incurred related to driving under the influence of alcohol or drugs. While an issue in the case is whether or not Vaught exhausted his administrative remedies, the Ninth Circuit ultimately found that Vaught had raised and exhausted a number of procedural issues. Vaught raised his first substantive challenge when he filed his complaint in the U.S. District Court for the District of Arizona, namely that his injuries were not caused by alcohol, but rather by the collision.

ERISA itself does not require a participant or beneficiary to exhaust administrative remedies in order to bring action under Section 502 of ERISA. However, the courts have long held that they have the authority to enforce an exhaustion requirement, and that as a matter of sound policy they usually do so. In looking at the Plan’s EOB language regarding filing an appeal, the majority interpreted the instruction to “clearly explain . . . the reason why you think the Claims Administrator should reconsider your claim” as an instruction to identify any reason (procedural or substantive) for the participant’s challenge. The majority acknowledged that while courts have historically required remedy exhaustion, they have not consistently required issue-exhaustion (i.e., a requirement for the plan participant to raise all reasons for challenging a denial of benefits during the administrative process). The majority found that neither ERISA nor the Scottsdale Plan materials (e.g., the SPD or EOB) precluded a court from hearing objections not previously raised to the Plan.

This holding is important for ERISA plans because it means that a participant needs only raise one issue on appeal, and once all administrative levels of appeal have been exhausted on that single issue, the participant may file suit in federal court and raise an unlimited number of new reasons why benefits should be paid. As the dissent notes, such a policy frustrates a primary purpose of the exhaustion requirement: to give an ERISA fiduciary the first opportunity to interpret its plan and fully consider its determination before a claimant seeks court intervention. Nonetheless, it is likely that other courts will adopt the Ninth Circuit’s views regarding issue-exhaustion. Plan sponsors are advised to amend their SPDs and denial of benefits notices to state that no lawsuit may be brought with respect to plan benefits until all administrative procedures have been exhausted for every issue deemed relevant by the participant.

Payroll Tax & Fringe Benefits: IRS Issues New Withholding Tables for Pension Plans

Tom Cryan and Garrett Fenton

On May 14, the IRS issued Notice 1036-P, which describes an additional withholding procedure that may be used with respect to pension distributions. The optional procedure is designed to offset potential underwithholding that may result from a pension plan’s implementation of the mandatory withholding tables contained in IRS Publication 15-T (effective April 1, 2009 through December 31, 2010).

The IRS developed the mandatory withholding tables in February, with the intent of incorporating the Making Work Pay Credit (MWPC) from the American Recovery and Reinvestment Act of 2009 (ARRA). The MWPC generally provides a tax credit for individuals in 2009 and 2010 equal to the lesser of (1) $400 ($800 for joint returns) or (2) 6.2% of earned income. The mandatory withholding tables expressly apply to pension plans but fail to account for the fact that pension payments are not considered “earned income,” meaning many pensioners are not actually eligible for the MWPC. Implementation of the mandatory withholding tables, alone, could therefore result in the underwithholding on distribution to some pension payees, who may receive the benefit of a tax credit to which they are not entitled. Thus, upon filing their income tax returns for 2009 and/or 2010, these individuals may discover that they unexpectedly owe additional taxes. See our April 30, 2009 Focus On Employee Benefits newsletter.

Pension plans must still use the mandatory withholding tables issued in IRS Publication 15-T. 1036-P contains additional tables that may be utilized in conjunction with the mandatory withholding tables. If a pension payor chooses to adopt the new optional tables, it should do so as soon as possible. The payor should also contact any pensioners that may have already adjusted their withholdings in response to the mandatory withholding tables, and provide them with an opportunity to submit a new Form W-4P.

Health & Welfare: Chart of 2009 Compliance Deadlines

Susan Relland

Congress and the federal agencies with jurisdiction over health and welfare plan issues have recently adopted a number of new laws, with more expected throughout the year. Health and welfare plan sponsors and administrators have a significant number of compliance activities that will need to be performed in 2009, many of which will also require ongoing compliance. The following are some of the key compliance activities employers need to plan to complete this year, including effective dates:

Americans with Disabilities Act Amendments Act 

• Effective beginning January 1, 2009;
• requires review and possible amendment of health and disability plans
• For more information, see our April 30, 2009 Focus On Employee Benefits newsletter

COBRA Subsidy

• Subsidy was available the first period of COBRA coverage beginning after February 17, 2009
• By April 18, 2009, employers needed to send notice of special election rights to all individuals who had qualifying events since September 1, 2009 (among others)
• For qualifying events occurring through December 31, 2009, employers need to send COBRA notices that include information about the subsidy
• For more information, see our April 30, 2009 Employee Benefits Alert: Issues for Employers Implementing the New COBRA Subsidy

The Children's Health

• New enrollment requirements and a premium Insurance Program assistance program took effect April 1, 2009 (and Reauthorization Act most cafeteria and health/wrap plan documents of 2009 needed to be amended by this date); the timeline for additional administrative requirements will be driven by the states that adopt a premium assistance program
• Notice requirement is effective the first plan year after DOL issues its model notice (required by February 4, 2010)
• Disclosure requirement is effective the first plan year after DOL and HHS issue the disclosure model (expected in 2010)
• For more information, see our March 16, 2009 Employee Benefits Alert: CHIP Requires All Health Plans to be Amended by April 1, 2009

Medicare Secondary Payer Mandatory Reporting 

• Effective for group health plans beginning January 1, 2009
• Employers that self-insure non-group health plans (e.g., liability, personal injury, automobile coverage, and workers compensation) must register by September 30, 2009; system testing must be completed by March 30, 2010; mandatory reporting begins April 1, 2010

Changes to the HIPAA Privacy and Security Rules

• Generally effective February 17, 2010 (business associates have to undertake a number of compliance requirements; employers need to review all business associate agreements)
• Changes to the enforcement provisions are effective for violations occurring after February 17, 2009
• Changes in the security provisions are generally effective 30 days after applicable regulations are issued (regulations regarding breaches of security are required by August 16, 2009)
• For more information, see our February 27, 2009 Focus On Employee Benefits newsletter

Genetic Information

• Effective for plan years beginning after May 21, 2009 (regulations expected this month); will require employers to review their health plans and health risk assessment programs
• For more information, see our January 23, 2009 Focus On Employee Benefits - 2009 Forecast Alert

Mental Health Parity Act

• Changes are effective for plan years beginning after October 3, 2009 (with special effective date rules for collectively bargained plans); most health plan documents will need to be amended (regulations expected by October, 2009)
• For more information, see our October 23, 2008 Employee Benefits Alert: Recent Legislation Alters Executive/Deferred Compensation and Mental Health Parity Rules

Michelle's Law

• Effective for plan years beginning after October 9, 2009; plan documents and certain notices will need to be amended
• For more information, see our January 23, 2009 Focus On Employee Benefits - 2009 Forecast Alert

Form 5500 Fee Disclosures

• Effective for the 2009 filing year (filed in 2010)

Cafeteria Plan Regulations

• If final regulations are published by June 30, 2009, the rules will take effect for plan years beginning on or after January 1, 2010
• If final regulations are published later this year, the rules will take effect for plan years beginning on or after January 1, 2011
• For more information, see our August 6, 2007 Employee Benefits Alert: IRS Issues New Proposed Cafeteria Plan Regulations

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

Anthony Shelley, ashelley@milchev.com, 202-626-5924

Frederick Oliphant*

Gary Quintiere*

Lee Spence*

*Former Miller & Chevalier attorney

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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