Qualified Retirement Plans
The Internal Revenue Service (IRS) has announced employers’ new responsibilities under the Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act). (P. L. 110-245, June 17, 2008) Plans do not have to be amended for Heroes Act changes until the last day of their plan year beginning in 2010, although some of the provisions have earlier effective dates.
For deaths (or disabilities as applicable) occurring on or after January 1, 2007:
Provision effective June 18, 2008:
Provisions effective on January 1, 2009:
The U.S. Department of Labor (DOL) has added new audit guidance to its Fiduciary Investigations Program concerning gifts and entertainment provided to fiduciaries of Employee Retirement Income Security Act (ERISA) plans. (DOL Fiduciary Investigation Program, Section 12, August 4, 2008) DOL presumes that a fiduciary’s acceptance of meals, gifts, entertainment, or expenses associated with educational conferences is a possible fiduciary violation. If such items come to the attention of a DOL examiner, the examiner is instructed to review the facts and circumstances to determine whether receipt of the gifts or other consideration was a prohibited transaction under ERISA Section 406(b)(3). That section prohibits a fiduciary from receiving any consideration for his personal account from any party dealing with the plan in connection with a transaction involving plan assets.
DOL may open an investigation based upon information obtained by its field offices or when directed by the national office. Cases may be opened based upon allegations of fiduciary violations deemed worthy of investigation from plan participants, plan officials, employees, employee benefit plan practitioners, the general public, or other governmental agencies. An investigation also may be opened on the basis of a review of plan files, the plan’s annual report, media information, or from any other “applicable targeting approach.”
Some de minimis exceptions are noted in the new guidance, including gifts or other consideration with an aggregate annual value of less than $250 and subsidized attendance at worthwhile educational programs when certain conditions are satisfied, including approval by an independent fiduciary pursuant to a written policy similar to a corporate ethics policy.
The Employee Plans Compliance Resolution System (EPCRS) has been updated by IRS. (Revenue Procedure 2008-50). EPCRS permits plans to correct a broad range of problems by correcting the problem within required time periods and, in certain instances, paying a fee to the IRS for the opportunity to do so. The modifications in the latest version of EPCRS include:
We mention these changes in some detail as a reminder to you that EPCRS is available and can be a very useful, proactive means to correct plan errors that could otherwise jeopardize the plan’s compliance with the law and its tax qualification. It is available for retirement plans that are qualified under Code Section 401(a), 403(b) tax-deferred annuity plans, simplified employee pensions (SEP), and savings incentive match plans for employees in the form of individual retirement accounts (SIMPLE IRAs).
IRS will treat a child of parents who are divorced, separated, or living apart as the dependent of both parents for purposes of Code Sections 105(b) (exclusion from income of medical care expense reimbursement including self-funded health care plans); 106(a) (exclusion from income of employer payment of health insurance premiums); 132(h)(2)(B) (exclusion from income of certain fringe benefits that qualify as no additional cost services or qualified employee discounts); 213(d) (allowance of deduction for medical expenses of the taxpayer and his or her spouse and dependents); 220(d)(2) and 223(d)(2) (allowance of deduction from gross income for distributions from Archer Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs) if the distributions are used to pay qualified medical expenses of the account beneficiary and his or her spouse and dependents). (Revenue Procedure 2008-48). The definition of dependent under Section 152 of the Internal Revenue Code was significantly revised for all Code purposes by the Working Families Tax Relief Act of 2004 (WFTRA). Code Section 152(e), as revised by WFTRA, provides a special rule for certain children whose parents are divorced, separated, or living apart. Under the special rule, a child may be treated as a dependent of the noncustodial parent only if the custodial parent releases the claim to the tax exemption available under the Code for the child. Under the law as in effect before WFTRA, children of divorced and separated parents could be treated as dependents of both parents under certain health coverage and fringe benefit rules in the Code. There was no requirement that the custodial parent release the claim to the tax exemption.
The final regulations issued in July 2008 regarding Code Section 152(e) indicated that if the custodial parent did not release the claim to the tax exemption, then only the person entitled to claim the child as a tax exemption may treat the child as a dependent for applicable health coverage and certain fringe benefit purposes.
Revenue Procedure 2008-48 provides that the IRS will treat as dependents certain children whose parents are divorced, separated, or living apart for purposes of the Code provisions noted above, most importantly those provisions pertaining to employer-provided medical expense reimbursement and group health insurance. The guidance applies to taxpayers who: (1) are divorced, legally separated under a decree of divorce or separate maintenance, legally separated under a written separation agreement, or live apart for the last 6 months of the calendar year, and (2) are the parents of a child who receives more than one-half of the child’s support during the calendar year from the child’s parents, is in the custody of one or both parents for more than one-half of the calendar year, and is a qualifying child or qualifying relative of one of the child’s parents. The Revenue Procedure is effective immediately and also may be applied for tax years beginning after December 31, 2004 under certain circumstances. The Revenue Procedure does not explain the source of its legal authority to create this exception to Code Section 152(e) as revised by WFTRA.
The deadline for compliance with the nonqualified deferred compensation rules of Code Section 409A is December 31, 2008. Section 409A establishes requirements for nonqualified deferred compensation plans (broadly defined to include plans, contracts, and programs of many kinds) comparable to Code requirements for tax-qualified retirement plans. Substantially all such arrangements will need to be amended to comply with the new law by the year-end 2008 deadline. Failure to adopt appropriate amendments prior to the end of 2008 will subject participants in nonqualified deferred compensation plans, contracts, or programs to additional taxes and penalties.
Katherine L. Aizawa
Christopher S. Berry
Lloyd J. Dickinson
Gregg H. Dooge
Carl D. Fortner
Robert E. Goldstein
Samuel F. Hoffman
Sarah B. Krause
Harvey A. Kurtz
Belinda S. Morgan
Isaac J. Morris
Greg W. Renz
Leigh C. Riley
Timothy L. Voigtman
Michael H. Woolever
Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.