Effective for taxable years beginning after December 31, 2017, section 4960 of the Internal Revenue Code imposes a tax at the corporate income tax rate (currently 21 percent) on two types of compensation paid by applicable tax-exempt organizations (ATEOs) to their covered employees. An ATEO’s covered employees generally include its five highest paid
Supreme Court Closes Door to Participant Challenges to Defined Benefit Plan Investments
The extent to which a participant in a tax-qualified defined benefit plan has standing to sue the plan’s fiduciaries for mismanagement of plan assets has long been unclear. The argument against standing is that the participant has not suffered any injury because the participant would receive the same benefit from the plan regardless of the outcome of the lawsuit.
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Benefit Plan Record Retention – A Cautionary Tale from Louisiana
Consider a situation in which a former employee alleges that he or she did not receive a COBRA election notice. That’s the notice that must be provided to group health plan participants when they lose coverage as a result of certain events, including termination of employment, and that gives the participants information regarding their rights and obligations to elect COBRA continuation coverage. If a court finds that the employer failed to provide the notice, the court could (1) allow the employee to retroactively elect coverage after the election period otherwise would have ended, (2) award statutory penalties of up to $110 per day to the employee, or (3) provide other relief to the employee. There is also an excise tax for COBRA failures, including failure to provide a COBRA election notice, of $100 per day per failure. An employer must report the excise tax on Form 8928, and the statute of limitations generally would not start running unless and until the employer does so.
To prevail at the summary judgment stage and avoid a trial, some courts hold that the plan administrator has the burden of proving that the election notice was properly sent to the employee. So, what evidence does the plan administrator need to establish that the notice was sent? According to a recent decision, a declaration of the employer’s normal business practices may not be enough to win a motion for summary judgment.…
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Will Your Group Health Plan’s Anti-Assignment Clause Defeat Provider Claims?
Many lawsuits against employer group health plans hinge on the enforceability of the plan’s anti-assignment provision. ERISA does not give providers the right to sue for plan benefits. A provider’s lawsuit must be derived from the participant’s right to plan benefits. In other words, the participant must assign his or her right to the provider. Even with such an assignment, a provider will lack standing to bring a lawsuit if the ERISA plan has a valid and enforceable anti-assignment clause. (ERISA itself generally prohibits assignment of retirement plan benefits, but the ERISA prohibition on assignment does not apply to health and welfare plans.)
While courts have generally held that anti-assignment provisions are enforceable, states have begun weighing in on the side of providers in an attempt to keep these lawsuits alive. But can a state law invalidate anti-assignment clauses in plans subject to ERISA and mandate that benefits be assignable to a healthcare provider? The Fifth Circuit, in Dialysis Newco, Inc. v. Community Health Systems Group Health Plan, 938 F.3d 246 (5th Cir. 2019), recently invalidated a Tennessee law that sought to do just that.…
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New § 4960 of the Internal Revenue Code Imposes an Excise Tax on Compensation Paid to the Top Five Employees of Tax-Exempt Organizations
As part of the Tax Cuts and Jobs Act of 2017, Congress enacted new § 4960 of the Internal Revenue Code. Section 4960 imposes an excise tax on certain executive compensation paid by tax-exempt organizations – similar to the $1 million limit on deductions for compensation paid to highly paid executives in for-profit companies under § 162(m) of the Code and to the golden parachute rules of § 280G of the Code. The new provision could have a significant impact on some tax-exempt organizations, but it lacks important detail and leaves many questions unanswered. The excise tax provision is in addition to other rules applicable to reasonable compensation paid to employees of tax-exempt organizations.
The statute directs the Secretary of the Treasury to prescribe regulations under § 4960 “as may be necessary to prevent avoidance of the tax under this section, including regulations to prevent avoidance of such tax through the performance of services other than as an employee or by providing compensation through a pass-through or other entity to avoid such tax.” No regulations or other IRS guidance have been issued under § 4960 thus far.
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83(i) Elections: New Deferral Provision Aims to Ease Tax Burden on Employees Receiving Equity in Private Companies
Part of Our Series on the Tax Cuts and Jobs Act of 2017
When an employee exercises a stock option or receives shares of stock from the settlement of a restricted stock unit (or “RSU”), generally the employee has income based on the value of the stock received. Income tax and Social Security and Medicare (“FICA”) taxes are due, and the employer must withhold and report these taxes.
Employees of publicly traded companies usually can sell shares in the public market to cover the cost of their taxes. However, there is typically no market for shares of privately held companies, such as start-ups. As a result, employees receiving shares of a private company through a stock option exercise or RSU settlement usually must come up with the cash to pay the IRS.
The Tax Cuts and Jobs Act of 2017 (the “Act”) adds a new section 83(i) to the Code that allows certain employees of private corporations that broadly grant stock options or RSUs to elect to defer income tax for up to five years. This is referred to as an “83(i) election”.
Section 83(i) was billed as a way to make it easier for employees of start-ups and other private companies to share in their employers’ success. However, as we explore in this post, the benefits of an 83(i) election may be limited. As discussed in more detail below, private employers face a number of questions about how they can — and whether they will want to — offer an equity program that is eligible under section 83(i).…
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Closing the Backdoor on Roth Conversions of After-Tax Amounts?
White House budget proposal released earlier this year would eliminate several methods used by certain taxpayers to convert after-tax contributions into Roth amounts. Although such a change would likely require congressional action, taxpayers who use or are considering these methods should be mindful of the proposed change.
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Department of Labor Establishes Two-Month Grace Period for Participant-Level Fee Disclosure
In 2010 the DOL published a final regulation requiring plan administrators of participant-directed individual account plans to disclose fees, expenses, and certain other plan information to participants and beneficiaries. The regulation requires plan administrators to provide these disclosures on or before the date on which a participant or beneficiary can first direct investments and “at…
Employers Might Be Liable to Nonqualified Plan Participants for Failing to Follow FICA’s Special Timing Rule
Employers should consider reviewing their procedures for withholding and paying FICA tax in light of the recent district court decision in Davidson v. Henkel Corp. The court concluded that the employer was liable to participants in a nonqualified deferred compensation plan for failing to withhold FICA tax in a manner that would have decreased their overall tax liability. The additional FICA tax reduced the participants’ benefits under the plan, and the court concluded that this result was inconsistent with the plan’s design and purpose. …
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Time to Update Tax Notices for Qualified Plans
The IRS has updated its model Special Tax Notice (sometimes called a “402(f) Notice”) for certain changes in the law since 2009. Employers should review their Special Tax Notices to incorporate required updates.
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