New Withholding Tables for Pension Plans, Update on Section 457A, and the Effect of the Americans with Disabilities Act Amendments Act on Benefit Plans
Focus On Employee Benefits
Qualified Plans & Payroll Tax and Fringe Benefits: New Withholding Tables Present Issues for Pension Plan
Thomas Cryan, Elizabeth Drake, and Garrett Fenton
The IRS recently issued new withholding tables that became effective April 1, 2009. The implementation of these new tables may adversely affect retirees and pensioners, however.
The new withholding tables are intended to incorporate the “Making Work Pay Credit” (from the American Recovery and Reinvestment Act of 2009) via reduced withholdings throughout the remainder of 2009 and 2010. Despite the fact that many retirees and pensioners may not be entitled to the credit, because they do not have any “earned income,” the IRS is specifically requiring that the new withholding tables apply to pensions. As a result, many individuals will see reduced withholdings from their pension payments, due to the implementation of a credit to which they may not be entitled.
Treasury officials have recently indicated that additional guidance on this issue may be forthcoming. For now, however, unless these pensioners complete new Forms W-4P, they run the risk of having their pension payments underwithheld. Thus, while the amount of their payments may increase starting April 1, 2009, they could end up owing a substantial tax liability at the end of the year.
The IRS has posted the following alert and Q&A on its website, along with a general discussion of the Making Work Pay tax credit:
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Attention Pensioners: Pensioners do not qualify for the Making Work Pay credit, unless they receive earned income. However, the new withholding tables apply to all taxpayers, including pensioners. The IRS has a withholding calculator pensioners and others can use to make sure enough tax is being withheld from their pay. Adjustments to withholding can be made by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.
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Q4. Can private pensioners (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?
A. Private pension recipients are not eligible for the Making Work Pay credit unless they have earned income. However, because the new withholding tables reduce the taxes withheld from all taxpayers, pension recipients may not have enough tax withheld from their pension benefits to cover their tax liability on those payments. The IRS recommends that pension recipients evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding on Form W-4P, Withholding Certificate for Pension or Annuity Payments.
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Employers should find out what information, if any, has been provided to retirees and pensioners about the impact of the new withholding tables. If they have not been alerted to this issue, employers may want to consider providing notice as soon as possible.
Fred Oliphant and Anne Batter
Section 457A continues to cause headaches for multinational companies with U.S. expatriates as they try to determine the scope of this provision. Generally section 457A treats U.S. taxpayers performing services for “nonqualified entities” as if they were on the accrual method of accounting with respect to deferred compensation, so that they will pay tax on such amounts as soon as the right to the payment vests, potentially well in advance of the actual payment.
One of the biggest sources of trouble for multinational companies under section 457A is determining whether their foreign affiliates are “nonqualified entities.” As mentioned, only workers who are U.S. taxpayers working for a “nonqualified entity” are subject to section 457A. In this regard, section 457A has different rules for foreign corporations and for partnerships. For foreign corporations, the entity will be treated as a nonqualified entity unless substantially all of its income is either effectively connected income or subject to a comprehensive foreign income tax.
Recently, Government officials speaking informally at a DC Bar tax section lunch meeting provided further insights into their thinking about some of the open issues under section 457A. For example, the determination of whether or not a foreign corporation in a non-treaty country is a nonqualified entity for section 457A purposes is a difficult call in many cases because there is presently no guidance on how one demonstrates that the country of residence has a comprehensive foreign income tax. Representatives from the Treasury Department indicated that, in thinking about a standard for what was “comprehensive” in such case, generally everything was on the table -- e.g., looking at both the type of income taxed and the rate of tax -- but they also suggested that it was unlikely that their current consideration would result in an “angel list” of approved countries.
Additional issues under consideration include the application of the rules to instances in which the tested entity has branch income from a third country that is not subject to tax in the tested entity’s country of residence. Government officials informally indicated that they hoped to provide guidance on this issue in the future. A related issue is when the tested entity has lower tier subsidiaries in other countries that are hybrid entities that are disregarded under U.S. tax law.
It was also pointed out that section 457A requires tested entities to be categorized by reference to their status under U.S. tax law as a corporation or partnership. Consequently, a tested entity that is a reverse hybrid, i.e., a corporation under U.S. tax law, but a pass-through entity under foreign law, will be treated as a nonqualified entity based on the entity’s status under U.S. law, i.e., based on whether the entity, itself, pays taxes on the income (which the entity clearly will not do, because it is a pass-through for foreign tax purposes), regardless of whether the entity’s owners pay tax on the income.
In light of these and other difficulties in determining whether a tested entity is a nonqualified entity, Government officials were asked whether there was any possibility of looking to the controlled group as a whole in determining whether the members of the group are subject to a comprehensive foreign income tax -- for example, if substantially all of the group’s income was subject to a comprehensive income tax, all members should be deemed to be qualified entities. The Government officials appeared to react negatively to this proposal.
On a different issue, Government officials avoided responding to a question requesting confirmation that there was no withholding requirement with respect to income inclusion under section 457A. While this point was not discussed at the luncheon, there have been rumors that the Government might issue further guidance on this subject and that this guidance could be negative.
Finally, the Government representatives pointed out that the Notice issued in January (2009-8) did not provide any deadline for comments but they stressed that they are very interested in receiving comments on the guidance. The Government representatives indicated that they expect to be turning to the drafting of the section 457A regulations in the next few months. If companies are to have any hope of seeing proposed regulations that contain generous safe harbors and/or simplification of the section 457A regime, they will need to send in comments making helpful recommendations as to how the Government can do that.
Susan Relland and Gary Quintiere
The Americans with Disabilities Act (“ADA”) Amendments Act (“ADAAA”) took effect January 1, 2009. The law redefines the standards that “materially restrict” a major life activity and would allow for a greater number of physical and mental impairments to be covered under ADA. Many are questioning the extent to which the amendments will affect employer-sponsored benefit plans.
Under ADA, an individual who (1) has a physical or mental impairment that substantially limits one or more major life activities, (2) has a record of such an impairment, or (3) is regarded as having such an impairment, is “disabled” for purposes of qualifying for the protections of ADA. Since the enactment of ADA in 1990, a number of Supreme Court decisions interpreted the definition very narrowly. In response, Congress enacted ADAAA which effectively broadens the meaning of “disabled” by expanding the scope of the underlying terms.
One of the key changes made by ADAAA was to provide a non-exhaustive list of tasks that qualify as major life activities, including caring for one’s self, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating, and working. In addition, there had previously been some question as to whether a medical condition that affected only internal bodily functions would rise to the level of a disability.
Congress answered that question definitively by including the following non-exhaustive list of major bodily functions in the definition of major life activities: functions of the immune system, normal cell growth, digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions. In addition, an impairment that substantially limits one major life activity need not limit any other major life activity in order to be considered a disability. As a result of these changes, individuals who have asthma, cancer, gastrointestinal conditions, sleep apnea, heart disease, smoking addiction, allergies, attention deficient hyperactive disorder, or reproductive issues may all be considered disabled.
Application to Employee Benefits
As a general rule, neither ADA nor ERISA requires an employer to provide specific benefits. However, the broad language of ADA does prohibit “disability-based” discrimination in employee benefits. A distinction based on disability is prohibited, but a distinction that applies equally to all employees is not. Questions about the “disability-based distinction” often arise for both health plans and disability plans. The issue created by ADAAA is whether an employer that provides health or disability benefits has discriminated against an employee if it does not provide benefits, and therefore denies a claim, for a condition that now qualifies as a disability under ADA.
Prior to ADAAA, for example, a disability plan could provide a cap on a benefit claim arising from a mental health condition that was more restrictive than a cap on a claim arising from a physical condition. However, under ADAAA, a mental health condition is now, in and of itself, a disability. Therefore, the more restrictive cap would now likely be considered an impermissible disability-based distinction.
Many disability plans currently pay benefits for someone who is “permanently and totally disabled” and the plan documents will define that term. However, under ADAAA, the plan may have an issue if its definition specifically excludes benefits for conditions that are now covered by ADA.
Similarly, as a general rule, a health plan is currently allowed to exclude coverage for certain prescription drugs or medical services. For example, a plan may exclude coverage for, or limit the coverage of, fertility treatments or the prescription drug Viagra. Under ADAAA, however, such exclusions or limitations may need to change inasmuch as ADA now includes “reproductive functions” as part of the definition of disability.
Regulatory Guidance and Action Steps
An open question is how either the EEOC or the courts will apply ADAAA to employee benefit plans. The EEOC has the authority to issue regulations, but is not required to do so by the Act. As for the courts, Congress was clear in enacting ADAAA that it intended for the courts to broadly interpret the definition of disability. Therefore, it is possible, perhaps even probable, that courts will also broadly interpret how the expanded definition will affect the benefit limitations or exclusions that are often included in health and disability plans.
Many employers have been asking whether ADAAA requires them to take any immediate action with regard to their benefit programs. There is no specific reference to employee benefit plans in the legislation. However, employers may want to review, and possibly amend, their health and disability plans in light of these amendments. At the very least, employers should identify which provisions in their plans may rise to the level of “disability- based distinctions” after taking into account the greatly expanded definition of disability created by ADAAA.
For further information, please contact any of the following lawyers:
Fred Oliphant, email@example.com, 202-626-5834
Gary Quintiere, firstname.lastname@example.org, 202-626-1491
*Former Miller & Chevalier attorney
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