The latest round of guidance pertaining to Internal Revenue Code (IRC) § 409A (§ 409A) provides transition relief and correction procedures for certain inadvertent violations of the rules governing nonqualified deferred compensation plans. Under Notice 2007-100, certain unintentional operational failures can be corrected without penalty if the correction is made in the same taxable year that the failure occurs. Documentary failures and intentional or egregious operational failures are not eligible for relief under the program. Errors that may be eligible for correction in the same tax year under the notice include failures to defer amounts of nonqualified deferred compensation that should have been deferred, payments made to specified employees in violation of the six-month delay rule, and excess deferrals. To take advantage of this correction relief, the employer must comply with certain reporting requirements and must take commercially reasonable steps to avoid a recurrence of the operational failure.
The notice also provides transition relief for certain operational failures occurring before 2011 that are not corrected in the same taxable year and that involve limited amounts. If the failure qualifies for the relief provided in the notice and all conditions are met, the amount required to be included in income and the resulting additional taxes imposed under § 409A are limited under the terms of the notice. Again, this relief applies only to unintentional operational failures and is not available for documentary violations of § 409A.
Information and reporting requirements related to the correction program and relief are described in some detail, and the notice concludes with a description of a potential expanded program that would cover § 409A failures that are not eligible for correction under the current program. The proposed correction program would be restricted to service providers that are not under examination for the year(s) in which the operational failure occurred and would be limited to operational failures that are corrected promptly after discovery and within two years of the occurrence. Comments on the proposed program are requested and must be submitted by March 3, 2008.
DOL Issues Rules on Fee Disclosure
The Department of Labor (DOL) has taken a significant second step in developing new disclosure rules for service providers to qualified plans. The first step was the development of new guidelines for disclosures by plans that will be required for the 2009 annual reporting on Form 5500. The third step will be an announcement of additional requirements for plan disclosures to participants.
The new proposed rules redefine what constitutes a "reasonable contract or arrangement" for qualified plan services. The DOL noted that there have been changes in the ways services are provided to employee benefit plans and in the ways service providers are compensated. Many of these changes have improved efficiency. At the same time, the complexity of the changes has made it more difficult for plan sponsors and fiduciaries to understand what a plan actually pays for specific services rendered and the extent to which compensation arrangements among service providers present potential conflicts of interest that may affect not only administrative costs but also the quality of services provided. The new set of disclosure rules, which are proposed to go into effect 90 days after the rules become final, is designed to give further guidance to plan sponsors in the selection and monitoring of service providers. The proposal is likely to provoke considerable comment from service providers because of the impact it will have on communications on a broad range of services to plans, including banking, consulting, custodial, insurance, investment advisory, investment management, recordkeeping, accounting, actuarial, valuation, and other services. The proposal follows numerous announcements by the DOL of its intent to require greater disclosure and understanding for plan sponsors and participants in areas where it has often been difficult to analyze or compare compensation arrangements for plan services. The DOL has made available various tools on its Web site to assist plan fiduciaries in understanding their obligations, in understanding the impact of fees, and in assessing service provider relationships.
These tools can be found at www.dol.gov/ebsa and are found in publications and in a model plan fee disclosure form designed to assist fiduciaries of 401(k) plans in particular to analyze and compare costs associated with service providers and investment products.
In general, the new disclosure rules will require:
- that service providers disclose information regarding services to be performed and compensation that will be received either directly from the plan or indirectly from parties other than the plan or the plan sponsor.
- disclosure of information about relationships or interests that may raise conflicts of interest for the service provider.
- disclosure of material changes to prior disclosures within 30 days of making changes.
- disclosure of compensation and other information related to the plans reporting and disclosure requirements.
Under the proposal, the failure of a service provider to meet the disclosure requirements contained in these rules will result in a prohibited transaction because of the failure of the service provider to provide a "reasonable" contract for plan services. Prohibited transactions are subject to excise taxes and other sanctions and thus would have a serious impact on any nonconforming service provider. Because of the penalties that can result from a prohibited transaction, the DOL has also proposed an exemption for plan sponsors from the prohibited transaction rules that would mitigate the impact of a prohibited transaction in this area when a service provider, unbeknownst to the plan fiduciary, fails to satisfy the disclosure obligations in the regulation. This exemption would minimize the impact on a plan in appropriate circumstances while continuing to impose obligations on service providers. The proposed exemption would become effective at the same time that the disclosure regulations are finalized.
DOL Publishes Rules for Assessing Penalties for Failures to Satisfy Post-PPA Notice and Disclosure Requirements
The Pension Protection Act (PPA) established new notice and disclosure requirements relating to various aspects of retirement plan operation they cover. They include fundingbased limits on benefit accruals and certain forms of benefit distributions, plan actuarial and financial reports, multiemployer plan withdrawal liability of contributing employers, and participants rights and obligations under automatic contribution arrangements. The PPA gives the DOL authority to assess civil monetary penalties of up to $1,000 per day against plan administrators for violations of the new notice and disclosure requirements. In December 2007, the DOL published a proposed regulation for assessing civil penalties against plan administrators who fail to provide required disclosures or notices under the PPA. The proposed regulation sets forth the administrative procedures for assessing and contesting such penalties; those procedures are similar to the procedures used by the DOL to assess penalties for failure to file an annual Form 5500. The regulations, however, do not address substantive provisions of the new disclosure requirements. (72 Fed. Reg. 71842).
2% Shareholder-Employee Health Insurance Tax Deduction
The Internal Revenue Service (IRS) published Notice 2008-1 allowing a 2 percent shareholder-employee of an S corporation to deduct the cost of health insurance premiums paid or reimbursed by the S corporation. The deduction is permitted under IRC § 162(l) which generally allows self-employed individuals to take a deduction for the cost of health insurance.
S corporations are taxed as partnerships, and a 2 percent shareholder-employee is treated as a partner in the partnership. Under IRC § 106, employer-provided health care coverage is excluded from an employees gross income. However, since a 2 percent shareholder-employee is treated as a partner (and not an employee), the premiums paid on his or her behalf are not excluded from his or her income under IRC § 106.
Notice 2008-1 provides that when computing adjusted gross income, the 2 percent shareholder-employee can take a deduction under IRC § 162(l)(1)(A) for health insurance paid during the taxable year for the 2 percent shareholder-employee and his or her spouse and dependents.
For the health insurance premiums to be deductible, the S corporation must report the amount of the premiums paid on behalf of the 2 percent shareholder-employee as income on his or her Form W-2. The 2 percent shareholder-employee must also have earned income from the S corporation exceeding the total of all premiums paid and must report the cost of the health insurance premiums as income on his or her individual return. However, the 2 percent shareholder-employee will not eligible for the deduction if he or she is eligible to participate in any subsidized health plan maintained by the individual's or a spouse's employer.
PBGC Announces Premiums for 2008 and Other Guidance
The Pension Benefit Guaranty Corporation (PBGC) has announced the inflation-adjusted premium rates for 2008. For defined benefit plans covered under the single-employer program, the rate will increase to $33 per participant in 2008, an increase from the $31 rate in 2007. For multi-employer plans, the premium is $9 per participant in 2008, an increase from the $8 rate in 2007.
The PBGC also issued final regulations regarding the new flat rate premiums. Generally, the regulations do not modify the calculation rules from those set out in the Deficit Reduction Act of 2005 and the Pension Protection Act of 2006. The regulations address the new termination premium that applies to termination of defined benefit plans in a distress or involuntary termination. For those employers in financial difficulty, a careful review of the new termination premium (or, as some have referred to it, the "exit fee") of $1,250 per participant per year for three years should be carefully reviewed and considered in any financial planning decisions.
The PBGC released technical update 07-02 to provide guidance on the reporting of annual financial and actuarial information for plan years beginning after 2007. The technical update provides non-binding guidance that will assist employers and actuaries in reporting and complying with the reporting requirements for the 2008 and subsequent plan years.
Finally, the PBGC released technical update 07-03 to provide guidance on the calculation of lump sum values and the effect of the Pension Protection Act of 2006. The update addresses plans with a termination date prior to the first day of the plan year occurring in 2008 where distributions occur in a plan year after the effective date. According to the update, the lump sum value is calculated using the definition of "applicable interest rate" and "applicable mortality table" based on plan provisions in effect on the termination date while the time for determining the rates and tables is based on the later distribution date.
More News on Retiree Medical Benefits and Coordination With Medicare
In the August 2007 issue of Employee Benefits Developments, we reported that the Court of Appeals for the Third Circuit rebuffed an attempt by AARP, the membership organization for people age 50 and over, to prevent the Equal Employment Opportunity Commission (EEOC) from finalizing a proposed regulation that would permit sponsors of retiree medical plans to provide reduced benefits or no benefits for Medicare-eligible retirees. This decision gave the EEOC the green light to issue the proposed regulation in final form. In December of last year, more than four years after the issuance of the proposed regulation, the EEOC followed the courts lead and published a final regulation exempting retiree health plans that alter, reduce, or eliminate benefits when a retiree becomes eligible for Medicare (or comparable state health benefits programs) from the prohibitions of the Age Discrimination in Employment Act (ADEA). The final rule became effective December 26, 2007.
Employers should take note that the exemption crafted by the EEOC in the final regulation permits for coordination only with Medicare (and comparable state health plans), not other governmental programs. In addition, the exemption does not apply to non-health benefits, such as life insurance or disability plans, and applies only to retirees, not current employees for whom Medicare is secondary.
We note that AARP refuses to give up in this matter. On November 20, 2007, following the decision of the Court of Appeals for the Third Circuit, AARP asked the Supreme Court to review the matter. The Supreme Court has yet to decide whether to do so. If the Supreme Court declines to review the matter, as many experts expect, plan sponsors can finally rest assured that their retiree plans, if they conform to the final EEOC regulations, will not violate ADEA. We suggest all employers maintaining retiree health plans review the terms of those arrangements to confirm compliance with the final EEOC regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
