Employers often provide employees with special rewards or prizes as a means to boost morale, recognize achievements, acknowledge long-term service, and retain employees. These special perquisites can take on many forms – anything from holiday turkeys to gift cards to allowing employees to take home the employer’s products for free or at a discount. While these small additional benefits may seem like “gifts” from the employer to the employee, what employers sometimes fail to realize is that there are no “gifts” in the employment context, regardless of the employer’s intent. Generally, anything provided to an employee by an employer is includable in the employee’s taxable income unless specifically excluded under the Code. Common exclusions for perquisites to employees include: no-additional-cost services, qualified employee discounts, working condition fringes, and de minimis fringes. All of these exclusions have specific requirements and rules to qualify for the exclusion. For example, for a benefit… Continue Reading
The IRS recently updated its Nonqualified Deferred Compensation Audit Technique Guide (the “Updated Guide”), which replaces the previous version published in June 2015. The Updated Guide provides more detailed guidance on the legal standards applicable to deferred compensation arrangements, including the addition of specific citations to relevant regulations and revenue rulings. Notably, the Updated Guide also includes significantly expanded discussions about Code Section 409A and its application to deferred compensation arrangements. Code Section 409A, and other regulations impacting deferred compensation, are very complicated and can carry substantial penalties and taxes for noncompliance. As Congress and the Biden Administration look for additional sources of funding for their initiatives, heightened IRS audit activity may be on the horizon. The Updated Guide is a good reminder to employers that they should periodically review their nonqualified deferred compensation arrangements, not only for documentary compliance but operational compliance as well. The Updated Guide is available… Continue Reading
Because of the various benefits, securities, and tax laws that apply to equity awards, what may be permissible (and even commonplace) in one jurisdiction, may be problematic in another. Accordingly, whenever an issuer desires to issue equity awards to service providers (e.g., employees or contractors) in a different jurisdiction, the issuer should engage benefits, securities, and tax counsel in all relevant jurisdictions early in the process to avoid any unanticipated issues that could negatively impact the value or purpose of the awards. For example, a common issue occurs when the issuer is an entity outside of the United States, but equity awards will also be made to service providers in the United States. Under U.S. tax law, there are specific requirements for determining the exercise price of stock options and stock appreciation rights (under Section 409A of the U.S. Internal Revenue Code (?Ç£Section 409A?Ç¥)) that require the exercise price to… Continue Reading
Puerto Rico to Allow Rollovers from the Government Plan for Puerto Rico Employees to Qualified Retirement Plans
On January 20, 2021, the Puerto Rico Department of Treasury released Administrative Determination No. 21-01 (?Ç£AD 21-01?Ç¥), allowing for direct and indirect rollovers of lump-sum distributions from the defined contribution government plan for Puerto Rico employees to a plan that is qualified under Section 1081.01(a) of the Puerto Rico Internal Revenue Code of 2011, as amended (the ?Ç£Code?Ç¥), maintained by a private-sector employer. Such rollovers would be considered exempt transactions and would not be subject to income tax withholding under Section 1081.01(b) of the Code. The provisions of AD 21-01 are effective immediately. AD 21-01 is available here.
Federal Tax Withholding and Reporting Requirements for Distributions from a Qualified Retirement Plan to a State?ÇÖs Unclaimed Property Fund
Third party administrators for employer-sponsored qualified retirement plans often recommend to employers that unclaimed account balances for mandatory cash-outs of small amounts (under $1,000) be remitted to the unclaimed property fund for the participant?ÇÖs state of residence. The IRS recently clarified in Rev. Rul. 2020-24 that amounts remitted to a state?ÇÖs unclaimed property fund are subject to withholding under Section 3405 of the Internal Revenue Code (the ?Ç£Code?Ç¥) and, in the event the amounts distributed exceed $10, reporting under Section 6047 of the Code. A plan sponsor will not be treated as failing to comply with the withholding and reporting requirements with respect to payments made before the earlier of January 1, 2022 or the date it becomes reasonably practicable for the plan sponsor to comply with such requirements. An employer that sponsors a qualified retirement plan should discuss this guidance with their plan?ÇÖs third-party administrator to ensure that any… Continue Reading
The IRS recently released Announcement 2020-17 (the ?Ç£Announcement?Ç¥) postponing the due dates for reporting and paying excise taxes related to certain delayed minimum required contributions to single employer defined benefit plans. The Announcement only applies to excise taxes under Internal Revenue Code Sections 4971(a)(1) (failure to meet minimum funding standards) and 4971(f)(1) (failure to pay liquidity shortfall). Generally, these taxes must be reported and paid by the last day of the seventh month after the end of the employer?ÇÖs tax year or eight and one-half months after the last day of the plan year that ends with or within the filer?ÇÖs tax year. However, because the CARES Act postpones the deadline to make minimum required contributions that are otherwise due in 2020 until January 1, 2021, the Department of Treasury and the IRS are extending the deadline to report and pay the excise taxes under Sections 4971(a)(1) and 4971(f)(1) with… Continue Reading
On Friday, August 28th, just two business days prior to the September 1st effective date of the executive order (the ?Ç£Executive Order?Ç¥) directing the Treasury Secretary to defer the withholding and payment of the employee portion of Social Security taxes otherwise due on wages paid to eligible employees for the last four months of 2020, the IRS issued Notice 2020-65 (the ?Ç£Notice?Ç¥), which provides additional guidance (discussed in the following paragraph) on implementing that tax deferral. Notably, however, the Notice did not answer two key questions for employers and employees alike: (1) is the tax deferral mandatory, and (2) who is ultimately responsible for remitting any deferred taxes to the IRS when they become due (i.e., what if an employee?ÇÖs future paycheck is insufficient to cover the deferred taxes or if the employer is unable to recoup deferred taxes from a former employee). The Executive Order permits the deferral of… Continue Reading
The IRS recently issued Notice 2020-62 (the ?Ç£Notice?Ç¥), 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
Previously, IRS Notice 2020-23 extended the due dates for certain tax payments, filings, and other ?Ç£Time-Sensitive Actions?Ç¥ that would ordinarily fall on or after April 1, 2020 through July 14, 2020 to July 15, 2020. See our prior blog post on Notice 2020-23 here. The IRS recently issued Notice 2020-35 to make additional Time-Sensitive Actions eligible for relief. For example, under this new guidance, an employer that receives a compliance statement issued under the voluntary correction program (VCP) component of the Employee Plans Compliance Resolution System (EPCRS) with a 150-day deadline to implement all corrective actions that ends between April 1, 2020 through July 14, 2020 has until July 15, 2020 to implement the corrections. A full list of the Time-Sensitive Actions is included in Section III.B of Notice 2020-35, which is available here.
Use Care When Implementing CARES Act Retirement Plan Distributions ?Çô State Law and Benefit Offset Concerns
As we have previously reported on our blog here and here, the CARES Act provided relief to participants in retirement plans by allowing employers to amend their retirement plans to include certain coronavirus-related distributions and to permit increased loan amounts for certain qualified individuals. Many employers have agreed to adopt these changes, and under federal law, the treatment of these distributions is clear. But there are other issues that employers and employees should consider, including: The coronavirus-related distributions could be subject to taxation under state law, even if the employee later repays the distribution to the plan; and If employees are receiving unemployment and/or disability benefits, the coronavirus-related distributions may reduce or offset these benefits. However, the enhanced loans would not be subject to taxation and may not offset unemployment and disability benefits, which may make the enhanced loan a better option for employees who anticipate paying back the distribution.… Continue Reading