Recent IRS Snapshot Regarding Deemed Distributions for Participant Loans Reminds Employers of Risk of Plan Loan Errors
The IRS recently released an Issue Snapshot (the “Snapshot”) focusing on participant loans from retirement plans and when certain compliance errors could trigger deemed distributions with respect to such loans. Specifically, the Snapshot lists the following requirements, which if not satisfied, will cause a participant loan to be treated as a deemed distribution: Enforceable agreement requirement, which generally requires a participant loan to be a legally enforceable agreement (which may include more than one document) and the terms of the agreement demonstrate compliance with the applicable requirements of the Code. Maximum loan amount limit requirement, which generally limits the maximum amount of a participant loan to the amount specified under the Code. The Snapshot also noted the CARES Act allowed modifications to the loan limit for certain loans to “qualified individuals.” Repayment period requirement, which generally requires the repayment period of a loan be limited to five years, unless the loan… Continue Reading
Pursuant to Section 274 of the COVID-related Tax Relief Act of 2020, the IRS recently issued Notice 2021-11 which extends the repayment dates for the payroll tax deferral relief provided under IRS Notice 2020-65 (discussed in our prior blog post here). Under IRS Notice 2020-65, deferred employment taxes had to be withheld and remitted to the IRS in substantially equivalent installments from wages or other compensation paid to employees between January 1, 2021 and April 30, 2021, with interest and penalties on unpaid deferred taxes beginning to accrue on May 1, 2021. Under Notice 2021-11, the timing for withholding and payment of these taxes is extended through December 31, 2021, and the date that interest and penalties begin to accrue on unpaid deferred taxes is delayed until January 1, 2022. Notice 2021-11 is available here.
In the recent case of Mebane v. GKN Driveline N. Am., Inc., No. 1:18-CV-00892 (M.D.N.C. Nov. 05, 2020), the federal district court held that a claim brought under the North Carolina Wage and Hour Act (?Ç£NCWHA?Ç¥) is preempted by ERISA. The employee-plaintiffs in this case alleged their employer violated the NCWHA by deducting from their paychecks, without express authorization, a monetary penalty for those employees who participate in the employer?ÇÖs group health plan and use tobacco products (i.e., a so-called ?Ç£tobacco surcharge?Ç¥). The defendant-employer filed a motion to dismiss this claim for unauthorized payroll deductions as being preempted by ERISA. The court agreed and dismissed the employees?ÇÖ claim, ruling that it was preempted by ERISA. The court?ÇÖs opinion is available here.
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.
Smaller companies often use professional employer organizations (?Ç£PEOs?Ç¥) as a way to reduce benefit costs and to assist with many, if not all, human resources and payroll functions. While PEOs may work well for a company?ÇÖs day-to-day operations, they can create headaches and complications in corporate transactions. When acquiring a company that uses a PEO, it is important to consider the following: Seller?ÇÖs representations and warranties relating to employee benefit plan compliance generally include representations and warranties relating to the compliance of the plans it sponsors. Since individual companies do not sponsor PEOs, the typical benefit plan representations and warranties should be modified to include representations and warranties regarding any plans or benefits provided by the seller or its controlled group members plus more limited representations and warranties regarding the plans sponsored by the PEO. Depending on the PEO involved, it may be more difficult to get copies of actual… Continue Reading
On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act (the ?Ç£Act?Ç¥), which made certain changes to the requirements of forgivable loans made under the Paycheck Protection Program (?Ç£PPP?Ç¥). For a PPP loan to be forgiven, the loan proceeds must be used to cover payroll and other approved operating costs incurred by the employer during a designated time period following the date on which the loan was made (the ?Ç£Coverage Period?Ç¥). The Act extended the coverage period from eight to 24 weeks and reduced the percentage of loan proceeds that must be used to cover payroll costs during the Coverage Period to 60% (down from 75%). Accordingly, up to 40% of the loan proceeds could be used by an employer to cover other non-payroll operating costs, such as rent, utilities, and interest on its other debt obligations that are due during the Coverage Period. The Act is… Continue Reading
The Small Business Administration (?Ç£SBA?Ç¥) continues to update its FAQs on PPP loans to provide additional guidance regarding what costs constitute payroll costs. Borrowers should use care in determining what amounts constitute payroll costs since borrowers are responsible for providing an accurate calculation of payroll costs and must attest to the accuracy of those calculations on their Borrower Application Form. Under the new guidance the SBA clarified: The $100,000 annualized per employee cap only applies to cash compensation and does not include any non-cash benefits, such as employer contributions to defined benefit or defined contribution retirement plans, payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and payment of state and local taxes assessed on employees?ÇÖ compensation. PPP loans can be used to cover costs for employee paid vacation, parental, family, medical and sick leave (other than qualified sick and family wages for… Continue Reading
Businesses that received a loan under the Paycheck Protection Program (?Ç£PPP?Ç¥) are eligible for forgiveness of that loan if, among other things, the loan proceeds are used to cover ?Ç£payroll costs?Ç¥ incurred over the eight-week period after the loan is made. Payroll costs, capped at $100,000 on an annualized basis for each employee (i.e., $15,384 over the eight-week period), are broadly defined to include, among other things: Salary, wages, commissions, or tips; Employee benefits costs, such as for vacation or paid family or medical leave (other than wages for which a credit is received under the Families First Coronavirus Response Act), group health care costs, retirement plan contributions, and severance benefits; and State and local taxes assessed on employee compensation. As of the date of this posting, no guidance has been issued by the IRS or the Department of Treasury to further clarify what specific items qualify as payroll costs.… Continue Reading
Health and Welfare Issues and COVID-19: Reminder: Decrease in Pay/Hours Does Not Permit Dropping Health Plan Coverage If There is No Loss of Eligibility
As many employers reduce employees?ÇÖ work hours, employers should consider that employees will remain responsible for their health plan contributions even though their pay is decreasing. As long as eligibility for coverage does not change, an employee is not permitted to change his or her health plan elections due solely to the decrease in pay or hours. One exception to this general rule is a change in status event created in connection with the Affordable Care Act, which provides that, in certain circumstances, an employee with reduced work hours may drop health plan coverage if the employee enrolls in other health plan coverage. Because the reduced pay may not cover all payroll deductions, employers should consider adopting a priority order for payroll deductions (e.g., health plan deductions are made before 401(k) plan deductions). In addition, an employer may want to consider a waiver of premiums, which is permitted if done… Continue Reading
The Paycheck Protection Program (the ?Ç£PPP?Ç¥) under the CARES Act aims to assist small businesses affected by COVID-19 by covering certain operating expenses as an incentive to retain employees during the crisis. Expenses, such as ?Ç£payroll costs,?Ç¥ are used in the calculation of the amount of the available loan and in the amount that may be forgiven under the program. Notably, the PPP does not consider an individual?ÇÖs compensation in excess of $100,000 annualized, prorated for the covered period, to be covered as a payroll cost. The ?Ç£payment of any retirement benefit[s]?Ç¥ are among the payroll costs that are included. However, at this time, it not entirely clear what is intended to be included in the ?Ç£payment of any retirement benefit.?Ç¥ No formal guidance has been issued by the IRS or Treasury, and initial guidance issued by the U.S. Small Business Administration does not shed much light on this question.… Continue Reading