Are Employer Provided Cell Phones Coming Soon to Definition of Compensation

Posted on September 6, 2011 by Administrator

Uncle Sam holding a cell phone
On Friday (Sept. 2, 2011), the IRS released the 2011-2012 Priority Guidance Plan (PGP). 37 items in the PGP relate to retirement plans, and 29 items relate to Executive Compensation, Health Care and Other Benefits, and Employment Taxes. More about these items later this week.

One item on the list that caught my eye is number 7 in the section on Executive Compensation, Health Care and Other Benefits, and Employment Taxes. It says:

7. Notice on the applicability of §§132(d) and (e) to employer-provided cell phones following enactment of §043 of the Small Business Jobs Act of 2010.

Since at least 2005, there have been rumors that the IRS was looking at a number of employer-provided fringe benefits, such as cell phones and points for frequent flyer miles, to see whether they should be included in the definition of compensation. With employer provided cell phones typically averaging a benefit worth at least $1,200 per year ($100 per month) and disproportionately provided to Highly Compensated Employees (HCEs) and key employees compared to rank-and-file or non-highly compensated employees, it was just a matter to time before the IRS issued guidance. Apparently, the catalyst to move employer provided cell phone fringe benefits onto the 2011-2012 Priority Guidance Plan was section 2043 the Small Business Jobs Act of 2010.

Almost a year ago (Sept. 27, 2010), President Obama signed the Small Business Jobs Act of 2010 into law. Section 2043 said:

SEC. 2043. REMOVAL OF CELLULAR TELEPHONES AND SIMILAR TELECOMMUNICATIONS EQUIPMENT FROM LISTED PROPERTY.

(a) IN GENERAL.—Subparagraph (A) of section 280F(d)(4) of the Internal Revenue Code of 1986 (defining listed property) is amended by adding ‘‘ ‘and’ ’’ at the end of clause (iv), by striking clause (v), and by redesignating clause (vi) as clause (v).

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31, 2009.

While the language of section 2043 did not immediately trigger thoughts of 415(c)(3), 414(s) or 3041 compensation for me, it did for someone at the IRS. Take the language of section 2043, combine it with Internal Revenue Code sections 132(d) and 132(e), and it may have plan implications.

If you do not have a copy of your Code handy, Internal Revenue Code section 132(d) defines Working Condition Fringe as:

“For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.”

Internal Revenue Code section 132(e)(1) defines De minimis Fringe as:

“The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.”

It will be interesting to see how this plays out in guidance over the next year.

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20 Questions on Terminations, Partial Terminations and Severance from Employment

Posted on August 24, 2011 by Administrator

20 questions
How much do you know about terminations, partial terminations and severance from employment? Here is your chance to find out! Test your knowledge of IRS guidance on terminations, partial terminations and severance from employment by playing 20 Questions on Terminations, Partial Terminations and Severance from Employment.

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IRS Updates FAQ on Hardship Distributions

Posted on August 11, 2011 by Administrator

checklist
The IRS has posted a new FAQ on hardship distributions. It includes a handy list of items which plan administrators should follow when processing a hardship distribution. It starts with this reminder:

A plan may only make a hardship distribution:

  • If permitted by the plan;
  • Because of an immediate and heavy financial need of the employee and, in certain cases, of the employee’s spouse, dependent or beneficiary; and
  • In an amount necessary to meet the financial need.

It then provides a step-by-step guide of 9 things a plan administrator should do when processing a hardship distribution.

1. Review the terms of the plan, including:

  • whether the plan allows hardship distributions;
  • the procedures the employee must follow to request a hardship distribution;
  • the plan’s definition of a hardship; and
  • any limits on the amount and type of funds that can be distributed for a hardship from an employee’s accounts.

2. Obtain a statement or verification of the employee’s hardship as required by the plan’s terms.

3. Determine that the exact nature of the employee’s hardship qualifies for a distribution under the plan’s definition of a hardship.

4. Document, as may be required by the plan, that the employee has exhausted any loans or distributions, other than hardship distributions, that are available from the plan or any other plan of the employer in which the employee participates.

5. If the plan’s terms state that a hardship distribution is not considered necessary if the employee has other resources available, such as spousal and minor children’s assets, document the employee’s lack of other resources.

6. Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee’s financial need. However, amounts necessary to pay any taxes or penalties because of the hardship distribution may be included.

7. Ensure that the amount of the hardship distribution does not exceed any limits under the plan and consists only of eligible amounts. For example, a plan could limit hardship distributions to a specific dollar amount and require that they be made only from salary reduction contributions.

8. If the plan’s terms require that the employee is suspended from contributing to the plan and all other employer plans for at least 6 months after receiving a hardship distribution, inform the employee and enforce this provision.

9. If a plan does not properly make hardship distributions, it may be able to correct this mistake through the Employee Plans Compliance Resolution System (EPCRS).

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IRS Seeks Comments on ERPA CPE Redesign

Posted on July 29, 2011 by Administrator

suggestion box
On July 18, 2011, the IRS issued Notice 2011-61 seeking comments on how ERPA CPE should be provided. The IRS must receive comments by August 17, 2011. The Notice contains the email address for submitting comments electronically and also the address for mailing comments into the IRS.

Notice 2011-61 contains 14 specific items the IRS would like comments on. Most of the items focus on who should provide CPE. The last item asks for any additional information the IRS should consider, which, for ERPAs, allows for comments on some of the larger CPE issues, such as how should CPE be provided and who should provide it. With advances in technology offering so many possibilities which were not possible 10 years ago, such as delivering CPE by podcast or YouTube, or attending CPE by iPhones or Google+’s Hangout, now is the time for ERPAs to let the IRS know what they want the future of CPE to be.

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Can a Multiple Employer Plan use a Prototype Plan Document?

Posted on July 20, 2011 by Administrator

question mark

Can a 413(c) multiple employer plan use a pre-approved prototype plan document? I am asked this question frequently, and I’m not sure what the answer is. Will the IRS accept a 413(c) multiple employer plan created by using a pre-approved prototype plan document with additional adopting employer agreements as within the scope of the opinion letter issued to the prototype plan document?

If the plan document is outside the scope of the opinion letter issued to the prototype plan document, Rev. Proc. 2007-44 classifies the plan as individually designed. Section 19.01 of Rev. Proc. 2007-44 states that:

“an employer that amends any provision of an approved master & prototype plan including its adoption agreement (other than to change the choice of options if the plan permits or contemplates such a change) is considered to have adopted an individually designed plan. (See section 5.02 of Rev. Proc. 2005-16.)”

One of the issues is whether the IRS contemplated the approved master & prototype plan being used to create a multiple employer plan when the IRS issued the opinion letter. Some would argue that because the IRS approved language in the prototype plan documents which permit additional adopting employer agreement, the IRS did contemplate prototype plan documents being used by 413(c) multiple employer plans.

For multiple employer plans, not understanding whether the plan document is individually designed or not can have especially cruel consequences. Section 10.03 of Rev. Proc. 2007-44 assigns all individually designed multiple employer plans to restatement Cycle B. Submit a plan to early but within a few years of the correct submission date, and the IRS will mail it back with an admonition to submit the plan on-cycle. Submit a plan too late, and the plan is headed to the Voluntary Correction Program (VCP) because it missed the applicable restatement and submission deadline.

Section 6.02(1) of Rev. Proc. 2005-16 states that opinion letters will not be issued for multiple employer plans, which means that the IRS will not pre-approved a prototype plan document as a multiple employer plan document. I’m not absolutely certain this means that the IRS will not accept a 413(c) multiple employer plan using a prototype plan document with additional adopting employer agreements which the IRS has approved for general use.

I checked a number of EGTRRA opinion letters for various prototype plans, and the IRS has not included a caveat in the letters stating that use of a prototype plan document by a multiple employer plan is outside the scope of the opinion letter. I don’t believe the lack of a caveat answers this question but the existance of a caveat certainly would have made answering this question much easier.

The reason this matters is that, with the recent increase in fees the IRS charges for determination letter applications, whether a plan is classified as individually designed is no longer a minor consideration. For individually designed plans submitting a determination letter application using Form 5300 with no Demo 5 or 6, the fee starts at $3,000 for a multiple employer plan with 2 to 10 Form 5300s submitted at the same time. Compare this to the $300 fee charged to each plan which uses a pre-approved plan document.

Pre-approved plan documents also have an advantage under Rev. Proc. 2007-44 in that they are not required to file a determination letter application with the IRS because the IRS has already reviewed the plan document before it was issued an opinion/advisory letter.

With the start of another restatement cycle, I hope the IRS clarifies this. The submission deadline for opinion letters is fast approaching, and whether the IRS will issue an opinion letter to a multiple employer plan using a prototype plan document is a growing issue as the number of 413(c) multiple employer plans using prototype plan documents increases.

413(c) multiple employer plans using volume submitter documents do not face the same issue. Section 16.02 of Rev. Proc. 2005-16 does not include multiple employer plan documents on the list of plans that IRS will not issue an advisory opinion for. This means that the IRS will approve a multiple employer plan document as a pre-approved volume submitter plan, so a 413(c) multiple employer plan can use a volume submitter plan document and not be classified as individually designed for purposes of Rev. Proc. 2007-44.

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Free ERPA Ethics CPE from the IRS

Posted on July 8, 2011 by Administrator

free sign
On July 29, 2011, at 2pm ET (11am PT), the IRS is hosting a phone forum on Ethics for Employee Plans Practitioners.

Karen Hawkins, the Director of the IRS’ Office of Professional Responsibility and Gabriel Minc, a Senior Tax Law Specialist in IRS Employee Plans, will discuss the ethical standards of practice before the IRS applicable to employee benefits practitioners, focusing on Circular 230.

The phone forum is 50 minutes long. If you are not familiar with the IRS’ phone forums, they are audio only, so computer access is not required.

You can register through the IRS’ website for phone forums.

Even if you do not need ERPA Ethics CPE credit, it is always interesting to hear the IRS’ perspective on Circular 230.

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ASPPA Issues ASAP on Multiple Employer Plans

Posted on July 6, 2011 by Administrator

On July 5, 2011, ASPPA issued an ASAP on Multiple Employer Plans. Within that ASAP, Advisory Opinion 83-15A is mentioned for the idea that:

“The opinions take a limited view of associations that, in the DOL’s opinion, don’t have the necessary commonality, ruling, for example, that the American Dental Association was not a bona fide group of employers because the ADA includes members which are not employers (such as individual dentists who are employees). [See DOL Advisory Opinion 83-15A.]“

We have a copy of DOL Advisory Opinion 83-15A in our library, and we will be discussing it on July 12, 2011 as part of our live web seminar on The Basics of Multiple Employer Plans.

Advisory Opinion 83-15A was issued on March 22, 1983 by the DOL in response to a request for an opinion that the the Individual Retirement Accounts (IRA’s) offered by the Equitable Life Assurance Society of the United States (Equitable) to members of certain professional associations, including the American Dental Association, do not constitute employee benefit plans within the meaning of section 3(2) of ERISA because these professional associations were neither employers within the meaning of section 3(5) of ERISA or employee organizations within the meaning of section 3(4) of ERISA.

In 1981, the American Dental Association (ADA) decided to have an IRA product available to its members, and selected the Equitable IRA as that product. Equitable issued a group individual retirement annuity contract to US Trust Company of New York, whose was to act as the contract holder and custodian. Members of the ADA who adopted the Equitable IRA would be issued individual certificates containing the provisions of this contract as the individual’s IRA. The ADA itself was not a party to the group contract, and was not involved other than helping advertise the Equitable IRA to its members. Equitable was to deal directly with the individuals who wanted to adopted the Equitable IRA.

The DOL did an analysis of whether the ADA was an employer or employee organization to determine whether this offering of the Equitable IRA to its members constituted an employee pension benefit plan. The person requesting the opinion had claimed that the IRA did not constitute an employee pension benefit plan, and wanted the DOL to agree with that conclusion.

As part of that analysis, the DOL determined that the ADA was not an employee organization for purposes of ERISA section 3(4) because the ADA does not exist for the purpose of dealing with employers on behalf of employees concerning either an employee benefit plan or other matters incidental to employment relationships.

The DOL then looked at whether the ADA met the definition of “employer” as stated in ERISA section 3(5). In 1983, ERISA section 3(5) defined “employer” as any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.

In Advisory Opinion 83-15A, the DOL states one of the criteria it uses to determine whether an organization is an employees’ beneficiary association for purposes of ERISA section 3(5) is whether there is “a commonality of interest among members with respect to their employment relationship”. The DOL specifically stated that:

“We do not express an opinion as to whether membership in the same profession or business, in this case, satisfies the commonality of interest criterion.”

The DOL then determined that the ADA is not an employees’ beneficiary association because employees do not control the ADA’s affairs. Active and Life Members of the ADA have equal rights and equal voting power without regard to their status as employees or employers.

For a group or association to be an “employer” within the meaning of ERISA section 3(5), the DOL said they apply a facts and circumstances test. Some of the factors they consider are:

    1. the manner in which the association members are solicited;
    2. identification of persons eligible to participate (and who actually participate) in the association;
    3. the presence of a pre-existing relationship among the members;
    4. the powers, rights, and privileges of employer members that exist by reason of their employer status; and
    5. the identification of the parties who actually control and direct the activities and operations of the association and its benefit program.

The DOL concluded that because members of the ADA who are also employers enjoy “no special powers, rights or privileges because of their employer status”, the Equitable IRA offered to members of the ADA was not an employee pension benefit plan.

The DOL stated that:

It is the Department’s position that where membership in a group or association is open to anyone engaged in a particular trade or profession regardless of employer status, and where control of such a group or association is not vested solely in employer members, such group or association is not a bona fide group or association of employers within the meaning of section 3(5) of the Act. See Opinions 80-68A (dated December 1, 1980, copy enclosed), and 81-51A (dated June 9, 1981, copy enclosed).”

In 1995, the DOL issued Advisory Opinion 1995-01A. In that opinion, the DOL found that a health benefit plan established by the Pennsylvania Division, Horsemen’s Benevolent & Protective Association Inc. to provide benefits to individuals associated with thoroughbread racing at Pennsylvania National Turf Club was not an employee welfare benefit plan within the meaning of ERISA section 3(1). In that opinion, the DOL stated:

“Based on the documents and representations presented, the department cannot conclude that the PHBPA is a bona fide group or association of employers within the meaning of section 3(5) of ERISA. The voting membership of PHBPA includes self-employed owners and trainers who are not necessarily employers of common- law employees. Eligibility for membership in PHBPA therefore is not limited to “employers” but is open to anyone in the trade or profession of owner or trainer. In this regard, PHBPA is similar to many other associations open to individuals engaged in trades or businesses without regard to whether those individuals are employers. In previous opinions involving such associations, the Department has consistently taken the position that the subject associations were not groups or associations of employers within the meaning of section 3(5) of Title I of ERISA. Because we cannot conclude that PHBPA is an employer as defined in ERISA section 3(5), we are unable to conclude that the PHBPA Plan is an employee welfare benefit plan within the meaning of section 3(1) of ERISA.”

In making this decision regarding the health plan for trainers and backstretch personnel at Penn National, the DOL cited to Opinion 88-07A (issued March 28, 1988) regarding professional golfers, Opinion 86-26A (issued December 5, 1986) regarding accountants, Opinion 83-15A (issued March 22, 1983) regarding dentists, and Opinion 79-49A (issued July 31, 1979) regarding osteopaths.

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Help Wanted: ERISA Attorney – The DOL is Hiring

Posted on July 5, 2011 by Administrator

help wanted sign

The Dept. of Labor is looking for an ERISA attorney with 4 years of experience to work in the Plan Benefits Security Division.  The job duties include working on ERISA enforcement litigation or regulatory projects, or a combination of both.  The ideal candidate will have expertise in sophisticated financial transactions, investments, business valuations, and financial issues. 

The pay range is $105,211 to $136,771.

The Plan Benefis Security Division is part of the DOL’s Office of the Solicitor.  It provides legal services to the Employee Benefits Security Administration in connection with the implementation of ERISA and the Federal Employees Retirement Security Act (FERSA).  The Division represents the Secretary of Labor in ERISA civil ligitation in the United States district courts and courts of appeal and represents the Secretary of Labor as amicus curiae in the Federal courts.  The Division’s regulatory responsibilities include the review and drafting of ERISA regulations, legislation, prohibited transaction exemptions, advisory opinions and interpretative guides.

The deadline to apply is July 14, 2011.

To apply, go to http://www.usajobs.opm.gov enter PBS-USAJOBS-11-03 in the search box.

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Have Ethics Presentation and Will Travel

Posted on June 10, 2011 by Administrator

ethics road sign

One of my favorite ERPAs called today.  He is a member of a small regional group of retirement plan professionals.  The group has a non-existent budget for speakers, and everyone in the group needs ethics CE.  They were wondering if I could drive up and speak to them about ethics for 50 minutes.  I told him absolutely – just let me know where and when. 

Saying “yes” was easy.  I like to speak about ethics and professional conduct, among other topics, and don’t mind a little travel.  I also like to support the industry trend toward requiring annual ethics and professional conduct continuing education.  The IRS requires Enrolled Retirement Plan Agents (ERPAs) to earn continuing professional education (CPE) on ethics and professional conduct each year.  ASPPA now requires its members to earn ethics continuing education credits annual, and I expect the other organizations covering our industry to follow this trend.  I like to read Circular 230 from cover to cover once a year, and highly recommend this practice as annual ritual.  Circular 230 is a good read, and full of best practice reminders.  Later this year, the IRS is expected to release an updated version of Circular 230, and I’m hoping it remains a good read. 

If you are wondering who the IRS has approved to provide ERPA CPE, the Service recently updated the Who’s Who of companies approved to provide ERPA CPE on their website.

Later this year, after the updated version of Circular 230 is released, the IRS has announced that oversight of continuing education sponsors and programs for both enrolled persons and registered return preparers will shift from the Office of Professional Responsibility to the Return Preparer Office.

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ESOP Style Over Substance Loses in Tax Court

Posted on June 8, 2011 by Administrator

“These transactions lacked economic substance and economic purpose and were entered into for the primary purpose of obtaining tax benefits.”

 In Weekend Warrior Trailers, Inc., et al. v. Commissioner, T.C. Memo 2011-105 (May 19, 2011), the U.S. Tax Court addressed a tax deficiency resulting from a fancy corporate two-step that included the creation and demise of an ESOP within a 3-year time period.

In 1988, Mark Warmoth started a company. 

In 1995, he incorporated it as a C-corp and named it Weekend Warrior. 

On January 1, 2003, Weekend Warrior elected S corporation status.  From 1995 through 2009, Mr. Warmoth was the only shareholder of Weekend Warrior.

On Nov. 14, 2002, Mr. Warmoth incorporated Leading Edge and received all 10,000 of Leading Edge’s shares of stock.  According to the Tax Court, Mr. Warmoth was suppose to pay $20,000 for the shares but failed to do so.  Leading Edge also elected S corporation status.  Mr. Warmoth was the only member of Leading Edge’s board of directors, its CEO and President.  Leading Edge and Weekend Warrior shared the same address and phone number.   

Effective Dec. 15, 2002, Leading Edge established a deferred compensation (NQDC) plan to benefit Mr. Warmoth.  The Board, which consisted solely of Mr. Warmoth, was to decided annually which employees were entitled to participate in the NQDC plan. 

On Dec. 28, 2002, Leading Edge adopted an ESOP and a 401(k) plan, effective Dec. 1, 2002, with Mr. Warmoth and one other person as trustees.  On Dec. 18, 2002, Mr. Warmoth sold 9,990 shares of Leading Edge stock to the ESOP for $1.50 per share, leaving Mr. Warmoth with the remaining 10 shares of Leading Edge stock.  The plan executed a promissory note to Mr. Warmoth for the shares for $14,985.        

Also on Dec. 28, 2002, Weekend Warrior and Leading Edge entered into an agreement signed by Mr. Warmoth on behalf of both companies.  Leading Edge agreed to provide design, personnel and management services to Weekend Warrior.  In exchange, Weekend Warrior paid Leading Edge an initial payment of $4,175,000 plus agreed to make monthly payments to Leading Edge based upon Weekend Warriors’ gross sales with Leading Edge guaranteed a minimum monthly payment.  As part of the personnel agreement, in 2003 Weekend Warrior transferred all of their employees to Leading Edge, and Leading Edge leased those employees back to Weekend Warrior at a mutually-agreed to rate. 

On June 1, 2004, Leading Edge executed a stock repurchase agreement and acquired all 9,990 shares of its stock from the ESOP for $150,000.  The Tax Court states that the reason for this transaction was the change to Code section 409(p) which made the ESOP unattractive.  After the stock repurchase, Mr. Warmoth again became Leading Edge’s sole shareholder.  

After Dec. 31, 2004, Leading Edge became inactive and, according to the Tax Court, the ESOP was terminated and converted into a profit-sharing plan. 

The IRS challenged the deductions Weekend Warrior paid to Leading Edge for design and management fees for 2002, 2003 and 2004.  The IRS did not challenge the amounts paid between the two companies for personnel services. 

The IRS argued that Leading Edge should be disregarded for Federal income tax purposes because it lacked a legitimate business purpose and economic substance and was formed solely for the purpose of obtaining tax benefits.  Mr. Warmoth argued that there were several potentially legitimate reasons for incorporating Leading Edge, including the desire to motivate the rank-and-file employees by establishing an ESOP.  The Tax Court rejected that reason, stating that viewing the ESOP through the lens of the deferred compensation plan that solely benefited Mr. Warmoth cast doubt that the benefits to rank-and-file employees were more than minimal. 

The Tax Court did find that, even though Leading Edge was not formed for a valid business purpose, it engaged in sufficient business activity to be respected as a separate entity for tax purposes.  Some of that sufficient business activity included providing personnel services to Weekend Warrior, maintaining investment and bank accounts, paying its employees by check, adopting a retirement plan, keeping books and records, engaging a professional to appraise its stock and following corporate formalities.

Even though the Tax Court found that Leading Edge was a separate entity for tax purposes, the Tax Court agreed with the IRS, in part, finding that the management fees were not necessary or reasonable, and therefore were not deductible under Code section 162.

The IRS also challenged the sale of Leading Edge stock to the ESOP, stating that it lacked a business purpose because the true purpose of establishing the ESOP was not to provide an incentive for the employees due to the short lifespan of the plan and the fact that as soon as the changes to Code section 409 made the ESOP arrangement less appealing from a tax standpoint, the retirement plan’s shares were redeemed and the company’s founder once again became Leading Edge’s sole shareholder.  Because the IRS first asserted this issue on brief, the Tax Court declines to consider whether the sale of Leading Edge stock to the retirement plan lacked a business purpose.

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