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Keep It Simple: FASB Issues Proposed Standard to Simplify Accounting for Private Company Stock Options

Many privately-held companies use an independent valuation expert to value their common stock for purposes of establishing the exercise price for options granted to their employees, consultants, and outside directors. If this valuation is performed in accordance with Treasury Regulation § 1.409A-1(b)(5)(iv)(B)(2), then the valuation is given a presumption of reasonableness under the Internal Revenue Code, making it easier for the granting company to prove to third parties (including the IRS) that the value used was the underlying stock’s fair market value. However, even if a company used such a valuation to establish the exercise price, the company would not be able to use that valuation for purposes of accounting for the stock option awards under Financial Accounting Standards Board (“FASB”) Accounting Topic 718. Instead, for accounting purposes, private companies would typically use an option-pricing model that required the company to provide various inputs, including the fair value of the… Continue Reading

Increased User Fees for Certain Letter Ruling and Determination Letter Requests in 2021

The IRS recently issued Announcement 2020-14 (the “Announcement”), which provides notice of increased user fees for certain letter ruling and determination letter requests. The increased user fees will be included in Rev. Proc. 2021-4 and will be effective January 4, 2021. The Announcement also includes a chart showing the current user fee amounts and the increased amounts for 2021 for various types of letter ruling and determination letter requests. The Announcement is available here.

Changes to Safe Harbor Notices for Recipients of Eligible Rollover Distributions

The IRS recently issued Notice 2020-62 (the “Notice”), which modifies the two safe harbor explanations set forth in Notice 2018-74 that plan administrators may use to satisfy the requirements under Code Section 402(f) that plans provide certain information regarding eligible rollover distributions to participants, beneficiaries, and alternate payees who are receiving distributions. The modifications to these explanations reflect recent legislative changes, including those made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and include a new exception to the 10% additional tax for qualified birth or adoption distributions and the increase in age for required minimum distributions to age 72 for employees born after June 30, 1949. The Notice also includes an updated (i) model safe harbor notice for distributions that are not from a designated Roth account and (ii) model safe harbor notice for distributions that are from a designated Roth account. Plan… Continue Reading

IRS Issues Guidance on Special Funding and Benefit Limitation Rules under the CARES Act

The IRS recently issued Notice 2020-61 (the “Notice”) containing 18 questions and answers that provide helpful guidance for sponsors of single-employer defined benefit pension plans regarding Section 3608 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Section 3608 of the CARES Act delays the due date for “minimum required contributions” otherwise due during calendar year 2020 until January 1, 2021. In addition, it allows plan sponsors to use the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020, for plan years that include calendar year 2020. The Notice addresses issues related to the deadline extension for minimum required contributions under the CARES Act, including how the contributions are to be adjusted for interest. The Notice also discusses issues related to the use of the prior year AFTAP for benefit limitations. Plan sponsors should consult with their benefits counsel… Continue Reading

Employee Payroll Tax Holiday or Looming Tax Nightmare: Unanswered Questions on the Payroll Tax Deferral Executive Order

Employee Payroll Tax Holiday or Looming Tax Nightmare: Unanswered Questions on the Payroll Tax Deferral Executive Order.

Approaching Deadline for Cash Balance Plans to Submit IRS Determination Letter Applications

Sponsors of retirement plans that use a statutory hybrid benefit formula (e.g., cash balance plans) have until August 31, 2020 to submit such plans to the IRS for a favorable determination letter. However, because “interested parties” must be notified of the filing at least ten days in advance of the submission, the decision on whether to file must be made sooner (within the next week or so). Among other things, under this special determination letter cycle for cash balance plans, the IRS will review plan provisions implementing the final cash balance plan regulations. This is true even if the plan’s cash balance formula was in place when the plan received a prior favorable determination letter. The guidance allowing for the special cycle for cash balance plans is available here.

Review Investment Policy Statements for ESG Investment Compliance

The DOL recently updated its “investment duties” regulation to provide further guidance in light of recent trends in environmental, social, and governance (“ESG”) investing, which we previously posted on our blog here. As the DOL increases its investigations and inquiries into ESG investments held by retirement plans, plan fiduciaries should review their plan investments and policies to: (i) determine if their retirement plans hold any ESG-type investments, and (ii) if they do hold such investments, (a) review their investment policy statements (“IPS”) and evaluate whether such policies comply with the current rules for ESG investments (and will comply going forward with the DOL’s guidance), and (b) confirm whether such investments remain appropriate for the plan. Plan fiduciaries may need to consult with their financial/plan advisors to determine if ESG-type investments are currently held by their plan. If a plan holds ESG investments and the IPS does not address such investments,… Continue Reading

Proceed with Caution When Modifying Equity-Based Performance Awards

Most equity-based performance awards for employees that will vest at the end of 2020 were granted well before the COVID-19 pandemic began (in fact, many were granted two years or more before the pandemic), and none of the performance metrics for these awards likely anticipated the havoc the pandemic has caused to the companies’ financial and stock performance. In many cases, the pandemic has rendered these equity-based performance awards worthless to employees because the performance metrics are not even remotely achievable. Yet, employees have been working harder than ever to meet the challenges of the pandemic. Some employers looking for ways to continue to reward and retain employees are eyeing modifications of existing equity-based performance awards to either lower the target and stretch performance goals or to eliminate the performance requirement completely, at least for awards vesting in 2020 (making the awards solely time-based). Before proceeding with any such modifications,… Continue Reading

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