ERISA Advisory Council Urges DOL to Streamline Retirement Plan Disclosures

The Advisory Council on Employee Welfare and Pension Benefit Plans (often called the “ERISA Advisory Council”) has released a report urging the Department of Labor (“DOL”) to streamline retirement plan disclosure requirements. The report reiterates concerns the Council expressed in 2005 and 2009, echoed by the U.S. Government and Accountability Office (the “GAO”) in 2013, that the number and complexity of mandatory disclosures confuses participants and burdens plan administrators. The Council’s latest report goes further than previous reports have done, outlining four recommendations for specific rule changes and proposing new model notices to simplify the current disclosure scheme.

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New Paid Family & Medical Leave Tax Credit for Businesses

For taxable years starting after December 31, 2017 and before January 1, 2020, the Tax Cuts and Jobs Act of 2017 adds a new Section 45S to the Internal Revenue Code that provides a tax credit for businesses offering paid family and medical leave (“F&M Leave”).  The IRS recently issued FAQs that begin to answer questions about F&M Leave and how the tax credit will work, but many open questions remain.

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SEC Proposal Dives Into Long-Standing Debate About the Duties of Investment Professionals

On Wednesday, April 18th, the SEC introduced a much-anticipated package of proposed rules and formal guidance concerning the standards of conduct for financial professionals. The more than 1,000-page proposal, which emerged eight years after Congress required the agency to conduct a study on the topic, addresses whether investment advisers and broker-dealers should have identical or different standards of conduct vis-à-vis their retail customers. Covington recently published this alert, which takes a look at the four key parts of the SEC’s proposal and provides a brief overview of how the proposal interacts with the DOL fiduciary rule.

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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HSA Family Contribution Limit Reduced for 2018

Changes to cost of living adjustments for health savings accounts (“HSAs”) by the Tax Cuts & Jobs Act of 2017 (the “Act”) caused a $50 decrease in the contribution limit for family coverage to HSAs for 2018.  The limit was reduced from $6,900 to $6,850 (original limit here; revised limit here).

This affects only 2018 contributions for employees with family coverage who have exceeded or made elections that will exceed the original HSA contribution limit for 2018.

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Significant Reductions to Deductible Pay at Public Companies

Part of Our Series on the Tax Cuts and Jobs Act of 2017

Employers generally may deduct reasonable salaries and other compensation paid to their employees. However, section 162(m) of the Internal Revenue Code imposes a $1 million annual limit on the amount of compensation that a publicly held corporation can deduct with respect to each of its “covered employees.”

The Tax Cuts and Jobs Act of 2017 substantially revises section 162(m) in ways that will significantly limit the amount of compensation that many public companies will be able to deduct.

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No Tax Deductions for Sexual Harassment Settlements with Non-Disclosure Agreements

Part of Our Series on the Tax Cuts and Jobs Act of 2017

The Tax Cuts & Jobs Act of 2017 adds a new provision to the Code, section 162(q), that eliminates deductions for settlement payments related to sexual harassment or sexual abuse “if such settlement or payment is subject to a nondisclosure requirement.”

  • The new provision also prohibits, in a separate subsection, deductions for attorney’s fees “related to such a settlement or payment.”
  • Thus, if an employee asserts a claim of sexual harassment against a coworker or supervisor, and the employer enters into an agreement to settle the claim that includes a standard confidentiality provision, neither the amount of the settlement nor any amount of the settlement allocated to attorneys’ fees can be deducted as a business expense.
  • The provision applies to payments made after December 22, 2017.

The new provision leaves several questions unresolved:

  • It does not include a definition of the phrase “related to sexual harassment or sexual abuse,” which creates uncertainty about the scope of the new prohibition, especially as applied to settlement agreements covering multiple types of employment claims in addition to sexual harassment or abuse claims.
  • It is also unclear, because of the structure of the new provision, whether the denial of a tax deduction for legal fees is independent from or contingent upon the presence of a nondisclosure clause.
  • It is unclear how the term “nondisclosure agreement” will be interpreted; for example, whether it will reach nondisparagement clauses.
  • Traditionally, plaintiff-employees have been permitted an above-the-line deduction for attorneys’ fees related to their employment claims. The new provision purports to disallow any deduction for any party to the settlement. The Act’s drafting history arguably supports a narrower interpretation, but it is hard to predict how IRS will interpret the plain language of the new provision.

Supreme Court Deals Another Blow to Sixth Circuit’s “Yard-Man Inferences”

On February 20, 2018, the Supreme Court decided CNH Industrial N.V. v. Reese, 574 U.S. ___ (2018), which raised, for the second time in three years, the question of how courts should interpret collective-bargaining agreements (“CBAs”).  Reese involved a dispute between retirees and their former employer, CNH, about whether an expired 1998 CBA created a vested right to lifetime health benefits.  In a per curiam opinion, the Court found that a straightforward reading of the CBA compelled the conclusion that retiree health benefits expired when the CBA expired in 2004.  The Court’s opinion emphasized the significance of CBA expiration dates for retiree health benefits and forcefully reiterated its decision in M&G Polymers USA, LLC v. Tackett, 574 U.S. ___ (2015), that collective-bargaining agreements must be interpreted according to “ordinary principles of contract law.”

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Repeal of the ACA’s Individual Mandate: Potential Impact on Employers

Part of Our Series on the Tax Cuts and Jobs Act of 2017

Starting January 1, 2019, the Tax Cuts and Jobs Act of 2017 (the “Act”) permanently repeals the Affordable Care Act’s tax penalty on individuals who fail to purchase minimum essential health coverage. Accordingly, any individual who is not covered by a health plan that provides at least minimum essential coverage for any month beginning after 2018 will not be required to pay a shared responsibility payment on their federal tax return.

  • The repeal does not affect the “employer mandate” which requires larger employers to offer affordable minimum essential coverage to full-time employees or potentially pay a tax penalty.
  • It also does not repeal requirements for an employer to report to the IRS and to employees information related to the employer’s health plans (including employees who have been offered, or enrolled in, the health plans).

Possible Effects on Employers

The repeal of the individual mandate could affect employers in a few ways:

  • The repeal reduces the incentive for individuals, particularly healthy individuals, to enroll in health coverage, including employer-sponsored coverage. Lower enrollment by healthy individuals could cause premiums for employer-sponsored plans to increase.
  • The potential penalties imposed on an employer that fails to offer minimum essential coverage or offers minimum essential coverage that does not meet affordability or minimum value requirements are triggered only if one or more full-time employees purchase coverage on a health exchange with federal subsidies (g., premium tax credits). Eliminating the individual mandate is expected to cause fewer individuals to obtain subsidized coverage on a health exchange. This would allow employers to at least potentially pay lower penalties related to any violations of the employer mandate, and in some cases could allow employers to potentially avoid paying any such penalties.
  • The IRS will no longer need to receive information necessary to enforce the individual mandate. Accordingly, the employer reporting requirements that are currently designed to help the IRS enforce the individual mandate may be reduced or repealed completely.

Hidden Opportunity: Deducting 2018 Pension Contributions Against 2017 Income

Part of Our Series on the Tax Cuts and Jobs Act of 2017

At the end of 2017, many businesses scrambled to find expenses before year-end that could be deducted on their 2017 federal income tax return against the higher income tax rates in effect for last year. For most expenses, the deadline to act passed on New Year’s Eve 2017. However, businesses that sponsor a tax-qualified defined benefit pension plan may have the opportunity to generate deductions on their 2017 return by making contributions to the plan during 2018.

In order to do so, the contributions will need to satisfy the general deductibility requirements for expenses, the specific deductibility requirements for pension contributions, and the minimum funding rules. This combination of requirements and rules is difficult to navigate, but in general, a deduction should be available to the extent the contribution (1) is made no later than September 15, 2018, (2) is otherwise deductible under the income tax provisions of Chapter 1 of the Code, (3) is designated as a contribution for the 2017 plan year on Schedule SB of the plan’s 2017 Form 5500, and (4) does not cause the plan to be more than 150-percent funded, measured in a very specific way provided under the Code.

The analysis and deadlines above apply to single-employer plans subject to the minimum funding requirements of Code section 430 that have a calendar plan year and are maintained by employers that have a calendar taxable year. The analysis and relevant deadlines will differ in the case of multiemployer plans, plans not subject to the minimum funding requirements of Code section 430, plans with non-calendar plan years, and plans sponsored by employers with non-calendar tax years. An analogous deduction may be available with respect to contributions to defined contribution plans, but the opportunity is likely to be more limited.