by Amy M. Gordon, Joanna C. Kerpen, Megan Mardy and Jamie A. Weyeneth
The Internal Revenue Service has provided transition relief for 2014 from the information reporting requirements under Internal Revenue Code Sections 6055 and 6056, and from the employer pay-or-play penalties under Code Section 4980H.
To read the full article, click here.
by Stephen Pavlick, Susan Schaefer and Kary Crassweller
The Internal Revenue Service (IRS) issued Notice 2012-70, extending the deadline for plan sponsors of defined benefit plans to adopt amendments to comply with Section 436 of the Internal Revenue Code (the Code), which generally imposes plan benefit payment and amendment restrictions if a defined benefit plan’s funding dips below specified levels.
Background
Code Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded defined benefit plan (see “New Notice Requirements Effective November 1, 2012 for Single Employer Pension Plans with Funding-Related Restrictions” for more information). Under previous IRS guidance, (see “IRS Extends Year-End Deadline for Pension Plan Amendments Under Code Section 436” for more information), the deadline for adopting the Code Section 436 amendment to reflect such funding-based restrictions was generally the last day of the plan year beginning on or after January 1, 2012 (e.g., December 31, 2012, for calendar year plans).
New Deadlines
On November 21, the IRS extended the deadline for adopting the required Section 436 amendment to the latest of the following:
However, plan sponsors submitting determination letter applications on or after February 1, 2013, for individually designed plans must adopt the Code Section 436 amendment prior to submitting the application. Determination letter applications that are filed prior to February 1, 2013 (Cycle B plans), do not need to include provisions complying with Code Section 436.
Notice 2012-70 also extends the relief period under the anti-cutback requirements of Code Section 411(d)(6), which generally provide that a tax-qualified defined benefit plan may not be amended to reduce or eliminate a participant’s accrued benefit.
Defined benefit plan sponsors should review the new guidance to determine the proper deadline for Code Section 436 amendments for their plans. For more information on this guidance, please contact your regular McDermott attorney or one of the listed authors.
by Jonathan J. Boyles, Robert C. Louthian, III and Ruth Wimer
Section 139 of the Internal Revenue Code (Code) allows an employer to provide tax-free disaster relief to its employees, and the employer may take a tax deduction for these payments, if the payments constitute qualified disaster relief payments. Given the benefits of tax-free status for qualified disaster relief payments, employers that choose to provide such payments should consider adopting an administrative system that validates such payments meet Code Section 139 requirements.
To read the full article, click here.
by Diane Morgenthaler, Maureen O’Brien and Kary Crassweller
Recently the Internal Revenue Service provided the first set of guidance on the new notice requirements for single employer defined benefit plans subject to funding-related restrictions under Section 436 of the Internal Revenue Code. This guidance includes information on notice recipients, content, delivery and timing. Because significant penalties apply to a notice failure, plan sponsors need to carefully review this new guidance.
To read the full article, click here.
by Elizabeth A. Savard, Todd A. Solomon and Brian J. Tiemann
The Illinois Department of Revenue recently issued guidance reversing its position on the state income tax treatment of benefits for non-dependent civil union partners.
Federal law excludes amounts that an employer pays toward medical, dental or vision benefits for an employee and the employee’s spouse or dependents from the employee’s taxable income. However, because civil union partners are not recognized under federal law, employers that provide these same benefits to employees’ civil union partners must impute the fair market value of the coverage as income to the employee that is subject to federal income tax, unless the civil union partner otherwise qualifies as the employee’s “dependent” pursuant to Section 152 of the Internal Revenue Code.
The Illinois Department of Revenue previously indicated that Illinois would follow the federal approach in taxing the fair market value of employer-provided coverage for non-dependent civil union partners because state law did not provide an exemption from such taxation. However, recent guidance issued by the Department of Revenue reverses that position and indicates that employer-provided benefits for a non-dependent civil union partner are now exempt from Illinois state income taxation. Illinois civil union partners are directed to calculate their state income taxes by completing a mock federal income tax return as if they were married for purposes of federal law.
In addition, for federal tax purposes, employees may not make pre-tax contributions to a Section 125 cafeteria plan on behalf of a non-dependent civil union partner (i.e., contributions for the partner generally must be after-tax) and may not receive reimbursement for expenses of the non-dependent civil union partner from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) or health savings accounts (HSAs). However, for Illinois state tax purposes, the employee now can be permitted to pay for the non-dependent civil union partner’s coverage on a pre-tax basis.
Employers providing medical, dental or vision benefits to civil union partners residing in Illinois should take action to structure their payroll systems to tax employees on the fair market value of coverage for employees’ non-dependent civil union partners for federal income tax purposes, but not for state purposes.
by Susan Nash and Jacob Mattinson
The Patient Protection and Affordable Care Act (the Act) revised the definition of “medical expenses” in the Internal Revenue Code as it relates to the reimbursement of funds used to purchase over-the-counter (OTC) medicine and drugs. Prior to January 1, 2011, the full cost of OTC medicine and drugs was considered a medical expense eligible for reimbursement from a flexible spending account (FSA) or health reimbursement arrangement (HRA). After January 1, 2011, the Act limits the definition of medical expenses to include only OTC medicine and drugs that are insulin or prescribed by a doctor.
Due to this change, if an FSA or HRA permits reimbursement for medical expenses, the HRA or FSA plan document must be amended, no later than June 30, 2011, to conform to the Act. Employers should, therefore, amend the plan document to provide that expenses for OTC medication and drugs will not be reimbursed without a prescription, with the exception of insulin. Alternatively, the employer may choose to amend the plan document to not provide for reimbursement of OTC medicine or drugs, even when the individual has obtained a prescription.
Please contact your regular McDermott attorney for assistance with any required amendments.
by Susan M. Nash, Amy M. Gordon, Todd A. Solomon, Raymond M. Fernando and Adrienne Walker Porter
On April 7, 2011, Governor Jerry Brown signed into law California Assembly Bill 36 (AB 36). AB 36 conforms certain California income and employment tax laws to certain changes to the United States Internal Revenue Code (the Code) and Internal Revenue Service (IRS) guidance relating to the favorable tax treatment of health benefits coverage for adult children under age 27. The favorable state tax treatment afforded under AB 36 applies retroactively as of March 30, 2010, which also conforms to the effective date of the parallel provisions under the Code. For a more detailed summary of AB 36, see our related On the Subject, "Health Care Reform: California Adopts Favorable Federal Tax Treatment of Health Coverage for Adult Children Under Age 27."
Background
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the Act), generally requires group health plans that provide dependent coverage for children to continue to make such coverage available for adult children until age 26, beginning as of the first plan year commencing on or after September 23, 2010. Effective as of March 30, 2010, the Act also afforded certain favorable tax treatment under the Code with respect to such coverage. See our related On the Subject, "Health Care Reform: IRS Guidance on Health Coverage for Children Under Age 27."
Discrepancies Between State and Federal Tax Laws
Some states’ tax laws do not automatically conform to corresponding changes in federal tax laws. Thus, although the Act made various changes to the Code relating to the tax treatment of health coverage and reimbursements for children under age 27, some states’ tax laws did not automatically conform to those changes. California recently adopted AB 36 to conform to such changes under the Code.
Next Steps for Employers and Plan Administrators
Employers and plan administrators should take action now in the following ways:
by Nancy S. Gerrie, Jeffrey M. Holdvogt and Brian J. Tiemann
The Commonwealth of Puerto Rico recently adopted a new Internal Revenue Code (PR Code) that contains numerous changes to sections governing qualified retirement plans. The new PR Code will require significant changes to documents and administration for both dual-qualified plans (i.e., plans qualified under both the U.S. and Puerto Rico Internal Revenue Codes) and Puerto Rico-only qualified retirement plans. Many of the changes are effective in 2011.
In general, the new qualified retirement plan provisions in the PR Code make changes to more closely mirror provisions applicable to U.S. qualified retirement plans. For example, qualified retirement plans in Puerto Rico are now subject to annual benefit and contribution limits similar to limits under Section 415 of the U.S. Code and annual compensation limits similar to limits under Section 401(a)(17) of the U.S. Code. However, the PR Code continues to have significant differences from the U.S. Code with respect to qualified plans. For example, limits on deferred contributions and catch-up contributions to a cash or deferred arrangement continue to be lower than the limits under the U.S. Code. In addition, although the definition of highly compensated employee for nondiscrimination testing purposes is now much more similar to the definition under the U.S. Code, it still has some significant differences from the definition applicable to U.S. qualified plans. The new PR Code also still does not permit all U.S. plan design options, such as Roth-type contributions, nor does it specifically address other U.S. plan features such as pass-through of dividends from employee stock ownership plans.
Sponsors of both dual-qualified and Puerto Rico-only qualified retirement plans should begin working with advisors to update plan documents and administration for compliance with the new PR Code as soon as possible. For more details on specific plan implications of the new PR Code, see New Puerto Rico Tax Code Means Significant Changes to Retirement Plans for Puerto Rico Employees.
In addition, sponsors of both dual-qualified and Puerto Rico-only qualified plans should continue to keep in mind potential restrictions on participation in U.S. group and master trusts following the end of the transition period announced in IRS Revenue Ruling 2011-1. For more information on Puerto Rico plan participation in U.S. group and master trusts, see IRS Permits Puerto Rico-Qualified Plans to Participate in U.S. Group and Master Trusts for Transition Period, Extends Deadline for Puerto Rico Spin-Offs.
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