Additional time is provided by IRS for certain qualified plan amendments.
IRS Notice 2005-95 (IRB 2005-51, 12/02/205) cleared up uncertainties concerning the timing of some required qualified plan amendments and added extensions in two important situations:- Retroactive Annuity Starting Dates . For any defined benefit pension plan that provided retroactive annuity starting dates at any time in the plan year containing January 1, 2004, an authorizing amendment was required to be made not later than the tax return filing deadline (with extensions) of the employer for its taxable year that contains January 1, 2004. For calendar year plan years, this deadline was September 15, 2005, and has now been extended to December 31, 2005.
- Automatic Rollover Amendments . Prior to Notice 2005-95, the last day for a calendar year plan to adopt the automatic rollover amendments required by IRS Notice 2004-42 was December 31, 2005. This has been extended to the tax return filing deadline (with extensions) of the employer for its plan year that includes March 28, 2005.
Other extensions and clarifications of compliance deadlines are included in Notice 2005-95 that apply for fiscal year employers and in other special circumstances. Of general interest to defined benefit plan sponsors is the extension of the requirement of those plans to comply with the final required minimum distribution rules (RMD rules). This deadline has been extended to the end of the EGTRRA remedial amendment period. The EGTRRA remedial amendment period has recently been extended to the end of the initial 5-year remedial amendment period for individually designed plans and to the end of the initial 6-year remedial amendment period for prototype plans under the new IRS cyclical determination letter filing program announced earlier this year in IRS Notice 2005-66.
Employee Welfare Benefit Plans: November 2005 Developments
An employer may amend its cafeteria plan document to allow employees covered under a grace period for reimbursements from health flexible spending arrangements (health FSAs) to also contribute to a health savings account (HSA)
. IRS Notice 2005-86 resolved the conflict between the rule forbidding participants in a general-purpose health FSA from contributing to an HSA during the grace period and another rule permitting otherwise HSA-eligible individuals to participate in limited-purpose or post-deductible FSAs. The IRS explained that an employer can enable FSA participants to contribute to an HSA during the grace period using either of the following two options:- Amend the cafeteria plan document to provide a grace period but take no other action with respect to the general-purpose health FSA. Under this approach, if a health FSA grace period ends March 15, 2006, an individual not otherwise disqualified from having an HSA is HSA-eligible on April 1, 2006, and may contribute 9/12ths of the 2006 contribution limits; or
- Amend the document to provide both a grace period and mandatory conversion of the general-purpose health FSA to a limited-purpose or post-deductible FSA (or combined limited-purpose and post-deductible health FSA) during the grace period. The amendment must apply to the entire grace period and to all participants in the health FSA who are covered by the grace period.
Effective January 1, 2006, calendar year group health plans must comply with the final HIPAA portability rules.
Although the final rules do not alter the basic framework of the previous proposed rules, there are some changes and clarifications. Group health plan documents, forms, and procedures may need to be reviewed, and summary plan descriptions may need to be updated.
Executive Compensation: November 2005 Developments
W-2 and 1099-MISC reporting and wage withholding requirements of Code Section 409A are suspended for 2005.
This welcome relief is explained in detail in IRS Notice 2005-94:
- Employers are not required to report 2005 Section 409A deferrals under a nonqualified deferred compensation plan in Box 12 of Form W-2 using code y.
- Employers are not required to include in the total amount of 2005 wages, as defined in Code Section 3401(a), amounts includible in the gross income of an employee under Code Section 409a .that the employee has neither actually nor constructively received during the calendar year.. Employers will not need to report such amounts as Section 409A income in Box 12 of Form W-2 using code z.
- Payers are also not required to report amounts includible in the gross income of a Nonemployee under Section 409A .that the nonemployee has neither actually nor constructively received during the calendar year.. Such amounts need not be reported in Box 7 of Form 1099-MISC as nonemployee compensation or as Section 409A income in Box 15b.
The relief granted suspends the reporting of this information. The IRS has reserved the right to collect it at a later time.
Although most deferred compensation plan amendments required by Code Section 409A may be adopted through December 31, 2006, a few year-end reminders are in order.
- Taxpayers who wish to use the plan-termination relief under Notice 2005-1, Q&A-18(c), must meet the December 31, 2005, deadline to terminate the plan and distribute the deferred compensation, since that deadline hasn’t been extended.
- The December 31, 2005, deadline for terminating participation in a plan or canceling outstanding deferral elections (permitted by Notice 2005-1, Q&A-20) also has not been extended. Taxpayers who wish to cancel deferrals must do so by December 31, 2005, and the related plan must be amended by that date to permit such cancellations.
- Stock options and other equity based compensation which would be subject to the new Code Section 409A 20% excise tax on account of having a below fair market strike price on the grant date can avoid the tax if exercised on or before December 31, 2005, or if the option or equity grant is amended to eliminate the below market strike price feature on or before December 31, 2005. Eliminating the below market strike price feature remains available until the end of 2006, under the transition rules, but there are more options available for making the option holder whole if action is taken in 2005.
Special Notice: Below is a summary of year-end gift planning using Katrina-related tax benefits prepared by Foley & Lardner LLP tax attorneys.
It is an excellent resource for persons interested in year-end giving for hurricane relief.Year-End Charitable Gift Planning Using Katrina-Related Tax Benefits
December 2005
In September, less than a month after Hurricane Katrina swept through New Orleans and the Gulf Coast, the President signed into law the Katrina Emergency Tax Relief Act of 2005. This legislation encourages enhanced charitable contributions during 2005 as described below.
Attorneys at Foley & Lardner LLP are familiar with the details of the Katrina tax legislation and are ready to assist with tax planning and gift planning using the opportunities provided by Congress in the new law.
Temporary Suspension of Gross Income Limits on Cash Charitable Contributions
For charitable contributions of cash made to recognized public charities and governmental entities between Aug. 28 and Dec. 31, 2005, the percentage-of-income limitations are suspended. That is, both individuals and corporations may take deductions for those contributions up to 100 percent of their gross income, instead of the usual 50%-of-income limitation imposed on individuals and 10%-of-income limitation imposed on corporations for charitable contribution deductions. Corporate contributions must be specifically directed to Hurricane Katrina relief efforts in order to qualify for the nolimitation rule, but there is no such restriction for charitable contributions made by individuals between Aug. 28 and Dec. 31, 2005. All cash charitable contributions by individuals, through Dec. 31, 2005, qualify for the suspension of the 50%- of-income limitation. In addition, for cash contributions through Dec. 31, the new law suspends the rule that reduces itemized deductions of higher income individuals by 3% of gross income. In other words, cash donations to charity through the end of 2005 are very tax-favored.
Contributions to private foundations, and to so-called donor-advised funds, do not qualify for the no-limitation rule, nor do donations of stock or other non-cash property.
Indirect IRA Rollovers to Charity
Although direct rollovers of Individual Retirement Account (IRA) assets to charity was not included in the final Katrina tax legislation, the suspension of the deduction limitation through the end of 2005 does facilitate what may be the next best thing . the .indirect. IRA rollover to charity.
If a donor, age 59 1/2 or older, makes a withdrawal from an IRA, the withdrawal amount will increase the donor.s adjusted gross income by the amount withdrawn and, therefore, will increase the ability to deduct cash donations of that amount on a dollar-for-dollar basis. In addition, since the 100% deduction applies regardless of the gift source, withdrawals and gifts may be made from 401(k) plans, 403(b) plans, and other qualified retirement plans. To make such a gift, the donor should withdraw the desired amount this year and make the gift by Dec. 31, 2005. Note . some IRA custodians and plan administrators take two or three weeks to process withdrawal requests. Donors should make the withdrawal request by early December to allow time for processing. Donors must have the cash in hand, and donate it, by December 31 to qualify.
CAVEATS: Because the IRA withdrawal increases gross income, the withdrawal will increase the 3%-of-gross-income amount by which total itemized deductions (apart from the charitable contribution) are reduced, and this could reduce the amount of deductions otherwise available to you. The rollover would also increase the 2% floor for miscellaneous itemized deductions and the 7.5% floor for medical deductions. So the federal tax cost of the rollover may not be zero. Furthermore, some states use definitions of taxable income that do not fully track the federal definition, so there may be a state income tax cost to an indirect IRA rollover to charity. Your tax return preparer could advise on these computational issues; Foley attorneys will work with your other professional advisors in structuring a indirect rollover.
The indirect rollover offers a significant charitable contribution opportunity for selected donors for 2005, but careful planning is necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
