IRS advises Hurricane Katrina victims of tax-favored treatment for early distributions from IRAs and other retirement plans. IRS has advised taxpayers who suffered losses as a result of Hurricane Katrina of recent changes in the tax law that may be beneficial if they have funds in certain retirement plans. (IR 2005-122). The Katrina Emergency Tax Relief Act of 2005 (P. L. 109-73), was signed by President Bush on September 23, 2005. It provides for tax-favored withdrawals, re-contributions, and loans under certain circumstances. To qualify for the tax-favored treatment, a distribution must be made on or after August 25, 2005, and before January 1, 2007, from an eligible retirement plan to an eligible individual (someone whose principal residence was in the Hurricane Katrina disaster area on August 28, 2005, and who sustained an economic loss from Hurricane Katrina). The total amount of tax-favored distributions an individual can receive from all plans, annuities, or IRAs is $100,000. Please note that, although certain early distribution penalties are waived, withdrawn amounts are currently taxable and, if repaid to certain types of plans, may be taxable a second time upon a subsequent distribution. Careful planning for such distributions is strongly recommended.
Vast amounts of benefits-related hurricane relief information is collected on websites maintained by some of our paid subscription research services.
There is too much information to summarize here but we want to be sure you know that we can access it if you need it.Major pension legislation continues to work its way through Congress.
The leaders of the two Senate committees with jurisdiction over pension issues reached an agreement on a 617-page pension funding and reform bill, the "Pension Security and Transparency Act" (S. 1783), clearing the way for Senate consideration, according to a September Senate press release, although Senate consideration has recently been delayed. The bill would modify single-employer plan funding rules, increase PBGC's flat-rate single-employer plan premiums to $30 per participant, and the full-funding limit exemption would be eliminated. Airlines would be given special 14-year funding rules to utilize before the new rules would apply. Prospective rules would be adopted regarding hybrid (cash balance) plans.The House Education and the Workforce Committee, which shares jurisdiction for pension legislation with the House Ways and Means Committee, reported out its pension bill, the "Pension Protection Act of 2005" (H.R. 2830), on June 29, 2005. A provision to increase the PBGC single-employer plan premium to $30 per participant also cleared the House Education and the Workforce Committee on October 26, 2005, as part of budget reconciliation legislation. The House bill (H.R. 2830) includes provisions that address employers’ conversions of traditional defined benefit plans to cash-balance plans. Sponsors of the bill report that cash balance plans now provide PBGC with approximately 25 percent of its premium income and make up the only part of the defined benefit pension system that is growing. The House bill would establish an age discrimination standard for all defined benefit plans and clarify current law with respect to age discrimination requirements under the Employee Retirement Income Security Act and the Internal Revenue Code. The bill would bar employers from reducing or cutting any vested benefits workers have earned during a conversion to a cash balance plan, but, as critics point out, it does not protect older workers in cash balance plan conversions from the loss of their anticipated future service benefit accruals.
Employee Welfare Benefit Plans: October 2005 Developments
The Medicare Part D Notice deadline is November 15, 2005.
Please see our July EB Newsletter for a short description of the Notice requirement.The Internal Revenue Service expects to issue interpretive guidance in the near future on the problem created by a grace period offered by some flexible spending accounts which precludes employees from adopting health savings accounts
. Speaking at an American Bar Association program in Washington, D. C., on October 27, 2005, Harry Beker, branch chief of the Health and Welfare Branch, Office of Associate Chief Counsel (Tax Exempt and Government Entities), said the agency expects to issue new guidance with respect to the impact of health FSA grace periods on HSAs "in a couple of weeks," and to issue amended regulations on Code Section 125 within a few months. IRS issued Notice 2005-42 in May 2005, which allowed employers to amend their FSAs to offer employees a two and a half month grace period after the end of the plan year to use up their account balances. Practitioners promptly pointed out that to be eligible for an HSA, an employee must be covered by a high deductible health plan and have no other coverage. A health FSA that reimburses general medical expenses is other coverage, so an employee covered by a health FSA that has a grace period is not HSA-eligible.Mr. Beker noted that such an employee could become eligible after the end of the grace period, but would then not be able to make the maximum contribution to the HSA and this could discourage people from signing up for HSAs. Mr. Beker indicated that the guidance being worked on will provide some options to permit individuals who would ordinarily be covered by the grace period to be eligible for HSAs as of January 1, 2006.
How much may be contributed to the HSA of an employee who is covered by a high deductible health care plan ("HDHCP") covering the employee and the employee's domestic partner (who is not a tax code dependent of the employee)?
The answer depends on whether the employee has individual or family coverage. IRS Notice 2004-50, Q&A-12, states that any coverage other than single coverage is family coverage. This means that an employee covering the employee and the employee's domestic partner (assuming the plan allows this) has family coverage and the family HSA deductible limit applies. Of course, any disbursements from the employee's HSA to pay the medical expenses of the domestic partner will be taxable income to the HSA owner (so long as the domestic partner is not also a dependent of the HSA owner under the tax code).Executive Compensation: October 2005 Developments
The Proposed Regulations under Code Section 409A were issued at the end of September.
Please see our October 7, 2005, EB Newsletter for a summary of the proposed rules.Daniel Hogans, Attorney Advisor at the Treasury Department’s Office of Tax Policy, and Stephen B. Tackney, Senior Attorney at IRS’s Office of the Chief Counsel, offered the following insights on the proposed rules at a recent seminar.
- The proposed rules do not cover three major subjects: the Code Section 409A(b) offshore funding and rabbi trust rules; computation of the income inclusion, interest, and 20% penalty under Code Section 409A(a)(1); and the reporting and withholding requirements. Regulations on those three topics are currently being worked on and should be proposed soon.
- The IRS has no intention of being .unreasonable. with respect to the reporting and withholding requirements for 2006. (See discussion of this concern below.)
- While the proposed rules, which are proposed to be effective for tax years beginning after December 31, 2006, can be relied upon until the final rules take effect, Notice 2005-1 remains outstanding and can also be relied upon.
- The proposed rules are .more robust. than Notice 2005-1 with respect to operational compliance, but there aren’t many large differences between the proposed rules and Notice 2005-1, and there are few areas in which the proposed regulations tighten the rules provided in Notice 2005-1.
IRS experts identified the following as .action items. that need to be addressed in 2005:
- 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.
The American Payroll Association (APA) has asked the Internal Revenue Service to waive the Form W-2 and Form 1099 reporting requirements of Code Section 409A for the 2005 reporting year.
In an October 26th letter, the APA spelled out the difficulties employers will face measuring deferral amounts or even knowing whether there will be deferrals that must be reported under the new requirements. Code Section 409A requires reporting of amounts deferred by a service provider under a nonqualified deferred compensation plan. Notice 2005-1, the initial guidance issued by IRS, requires these amounts to be reported on Form W-2, Box 12 (codes Y and Z) for employees and Form 1099-MISC (Boxes 15a and 15b) for nonemployees. The APA notes that it is late in the year and no one has had the opportunity to program their payroll systems to calculate the numbers to report and to code them properly for submission to the IRS. The proposed regulations issued September 29th provide no guidance on a method of calculation of current deferrals and amounts to be included in income.401(k) "wrap" plans are allowed by the recently issued proposed Code Section 409A regulations.
Prior to enactment of Code Section 409A, the IRS issued several letter rulings approving arrangements "wrapping" a 401(k) arrangement with a nonqualified deferred compensation plan. The primary purpose of such an arrangement was to permit highly compensated employees to avoid the necessity of receiving a corrective distribution of the employee's deferrals if the 401(k) plan failed the ADP or ACP tests. The wrap-around plan also permitted the employee to make a single, coordinated deferral election to the employee's deferred compensation plans. Most practitioners. first impression of new Code Section 409A was that it would not allow "401(k) wrap arrangements," but the proposed rules allows them, provided certain requirements of the regulations are met. Most 401(k) wrap plans will require amendment to continue in effect on and after January 1, 2005.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.
