Revenue Ruling 2014-18 holds that stock options and stock-settled stock appreciation rights (stock rights) granted by offshore funds and other entities domiciled in tax-indifferent jurisdictions can be structured to avoid immediate taxation under Section 457A of the U.S. tax code. Among other things, this ruling allows an offshore fund to compensate its managers with stock rights that will only be subject to U.S. tax upon exercise, so long as the stock right is exempt from Section 409A and the manager has the same redemption rights with respect to acquired shares as other shareholders of the hedge fund.
In a highly anticipated decision, the Supreme Court recently ruled that ESOP fiduciaries are not entitled to a presumption of prudence under ERISA in connection with their decisions to buy, hold or sell the employer’s securities. While the elimination of this presumption is a loss for ESOP fiduciaries, the decision imposes additional burdens on plaintiffs that will make it easier for plan sponsors and fiduciaries to defend so-called “stock-drop” cases. It also requires plan sponsors to reevaluate plan language requiring that certain funds be invested in employer securities and to reconsider hiring an independent fiduciary to manage the employer stock fund.
On July 8, 2014, the Pension Benefit Guaranty Corporation (PBGC) issued a press release announcing a moratorium on its enforcement of Employee Retirement Income Security Act of 1974(ERISA) Section 4062(e) through the end of 2014. In general, ERISA Section 4062(e) allows PBGC to require that employers financially guarantee pension obligations in the form of plan contributions or a bond or escrow amount based on a plan’s unfunded termination liability when an employer with a pension plan shuts down operations at a facility and, as a result of the shutdown, more than 20 percent of the employer’s employees who are plan participants incur a separation from employment.
PBGC had recently been quite aggressive in its enforcement actions under ERISA Section 4062(e). As a result, ordinary business decisions, like asset deals and other business decisions impacting less than a facility’s full operations, were gaining PBGC’s attention. PBGC believes that the moratorium will enable it to target future enforcement efforts to those cases where employee pensions are genuinely at risk and allow it to continue to consult with businesses, labor and other stakeholders in developing a practical approach to enforcement. The moratorium runs through December 31, 2014, and applies to currently pending as well as new cases. Importantly, PBGC advised that companies must continue to report potential ERISA Section 4062(e) events to the PBGC during the period of the moratorium. Further, the moratorium does not preclude PBGC enforcing ERISA Section 4062(e) with respect to any reportable event that occurs during the moratorium period. The moratorium is not a safe harbor and there is no indication that it will continue past December 31, 2014.
In March 2013, the Internal Revenue Service (IRS) issued the final version of Form W-8BEN-E Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. This form allows certain non-U.S. retirement plans to claim exemption from the reporting and withholding requirement of the Foreign Account Tax Compliance Act (FATCA). However, the final version of the Form W-8BEN-E did not include instructions. On June 24, 2014, the IRS published the long-awaited instructions, which address many of the ambiguities inherent in completing the form. For additional information regarding the FATCA exemptions that may be claimed using Form W-8BEN-E, please click here.
The Internal Revenue Service recently established a one-year pilot program that provides plan administrators and plan sponsors of certain non-ERISA and foreign plans subject to the annual Form 5500 reporting requirements relief from penalties under the Internal Revenue Code. The penalty relief is temporary and expires on June 2, 2015.
In January 2013, the Internal Revenue Service (IRS) published final regulations under the Foreign Account Tax Compliance Act (FATCA). FATCA is intended to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts. In order to obtain information about offshore accounts, FATCA imposes significant reporting obligations on both non-U.S. foreign financial institutions (FFIs) and U.S. taxpayers holding foreign financial accounts. A non-U.S. retirement plan is generally included within the definition of an FFI, meaning that, absent an exemption, it is required to register and disclose information about its U.S. taxpayer-participants. A non-exempt FFI that fails to comply with FATCA is subject to immediate 30 percent withholding on interest and dividend payments from U.S. stocks and bonds and, beginning in 2017, on the sales proceeds of such investments. If a non-U.S. retirement plan is an FFI, it must document its exemption from FATCA by July 1, 2014, or be subject to the withholding described above.
In March of this year, the IRS issued the final version of Form W-8BEN-E, which allows certain non-U.S. retirement plans to claim exemption from the reporting and withholding requirements of FATCA. In order to be exempt from FATCA, a plan is required to document its exempt status on Form W-8BEN-E. It is prudent for plan sponsors to take steps to ensure a complete Form W-8BEN-E is provided to any person or entity that will be distributing amounts to a non-U.S. plan that might by subject to FATCA withholding.
Following the release of Form W-8BEN-E, the IRS published IRS Notice 2014-33 (the Notice) announcing that it will treat calendar years 2014 and 2015 as a transition period for FATCA compliance. Pursuant to the Notice, taxpayers must ensure good-faith compliance with the due diligence, reporting and withholding provisions of FATCA, including the creation and documentation of a FATCA compliance policy.
The final Form W-8BEN-E contains several revisions to Part XV of the draft form, pertaining to exempt retirement plans. In particular, the final form is revised from the July 2013 draft to include several references to retirement and pension accounts and other retirement funds described in an applicable Model 1 or Model 2 intergovernmental agreement (IGA). The U.S. Department of the Treasury worked with several countries to develop two model IGAs that allow an FFI to report information about financial accounts held by U.S. taxpayers directly to its own governmental authority, which then either provides the information to the United States (Model 1 IGA) or allows the signing countries’ FFIs to report directly to the Treasury (Model 2 IGA). The model IGAs are generally reciprocal in nature, meaning that the United States would provide the same type of information to the signing country about financial accounts held in the United States by the signing country’s taxpayers.
Importantly, the final form retains the exemptions for broad participation retirement plans, treaty-qualified retirement plans, 401(a)-type plans and investment vehicles designed exclusively for retirement plans. (View “What You Need to Know [...]
On May 9, 2014, the Internal Revenue Service finalized regulations that govern the tax treatment of payments made by retirement plans to pay accident or health insurance premiums. Under the final regulations, accident or health insurance premium payments by qualified defined contribution plans are taxable distributions to the participant unless those payments are used to pay premiums for disability insurance that replace retirement plan contributions for disabled employees. The regulations apply for tax years beginning January 1, 2015, although taxpayers may elect to apply them to earlier years.
ERISA imposes numerous obligations on fiduciaries holding assets of employee benefit plans. In addition to discharging its duties prudently and for the exclusive purpose of providing benefits to benefit plan participants and their beneficiaries, ERISA establishes other fiduciary obligations, including prohibiting fiduciaries from engaging in a variety of transactions with plan assets known as ‘‘prohibited transactions.’’ Failure to follow fiduciary duties can result in lawsuits, Department of Labor (DOL) investigations and penalty taxes for which fiduciaries may be personally liable, as discussed below. This article discusses ERISA issues of relevance to private equity and hedge funds and their benefit plan investors. The first part discusses issues and problems resulting from being an ERISA fiduciary, while the second describes ways private equity and hedge funds can escape ERISA coverage and some pitfalls to avoid when attempting to do so.
“I would like to start receiving my retirement benefits now, but I would also like to keep working for a bit. Can I do this?” Baby boomers pose this question to their employers on a routine basis.
Unfortunately, there is no stock answer to this common question. The employer response depends on a variety of factors, including the types of retirement benefits payable to the employee and the arrangement under which the employee will continue providing services to the employer.
This article provides employers with a roadmap for analyzing this common employee request.
The Internal Revenue Service issued Notice 2014-19 and a set of Frequently Asked Questions on April 4, 2014, clarifying certain retroactive retirement plan implications of the Supreme Court’s Windsor ruling. The guidance requires plans to be administered to reflect the Windsorruling effective as of June 26, 2013, but does not require plans to retroactively recognize same-sex spouses prior to that date. In addition, the IRS clarified the requirements for any Windsor-related plan amendments.
Subscribe
