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Tax Issues Related to Employment

 

Retirement and Other Deferred Compensation Arrangements

26 U.S.C. § 401, 26 U.S.C. § 403, 26 U.S.C. § 457, 26 USC § 409A

 

This governs I.R.C. § 401(a) plans, § 403(b) annuities and deferred compensation arrangements (either qualified under I.R.C. § 457 or non-qualified).  

 

IRS Guidance on 12/9 month payments
The question of whether or not a university policy that allows faculty who work nine months to be paid over 12 months consitutes deferred compensation was addressed by the IRS in Notice 2008-62. The IRS will be publishing regulations on the issue, but schools can follow this notice in anticipation of the new rules. The rule will likely state that a 12 month payment is not deferred compensation if:

(1) the arrangement does not defer payment of any of the recurring part-year compensation beyond the last day of the 13th month following the beginning of the service period and
(2) does not defer from one taxable year to the next taxable year the payment of more than the applicable dollar amount under § 402(g)(1)(B) in effect for the calendar year in which the service period begins ($15,500 for 2008).

For a very clear summary and overview of the 9/12 month pay situation, and the IRS pronouncements to date on this topic, see the Sept. 2008 ICEMILLER College and University Tax Alert  by Bert Harding.

IRS Guidance on 403(b) plans
Summary of an IRS webcast with IRS authority Bob Architect. Text of summary provided courtesy of Bert Harding.
"In a recent webcast, Bob Architect, one of the IRS leading authorities in the section 403(b) area, made the following observations about section 403(b) compliance: (i) employers are not required to distribute written plans to their employees, although they may do so if they wish; (ii) employers are not required to file the written plans with the IRS; (iii) while the IRS recommends that the employer have just one written document, it is acceptable to adopt different written plans from different plan providers; and (iv) employees who have severed their employment relationship with the employer, but who have not yet started to draw down their retirement benefits, have to be included as a "plan participant" for LaborDepartment reporting purposes."

403(b) Deadline Extended in IRS Notice 2009-3
The IRS has granted relief from the requirement to have a written 403(b) plan in place by January 1, 2009. Effective January 1, 2009, sponsors of § 403(b) plans are generally required to maintain a written plan that satisfies, in both form and operation, the requirements of the final regulations at 72 Fed. Reg. 41128.  The Service will not treat a § 403(b) plan as failing to satisfy the requirements of § 403(b) and the final regulations during the 2009 calendar year, provided that:
(1) on or before December 31, 2009, the sponsor of the plan has adopted a written § 403(b) plan that is intended to satisfy the requirements of § 403(b) (including the final regulations) effective as of January 1, 2009;
(2) during 2009, the sponsor operates the plan in accordance with a reasonable interpretation of § 403(b), taking into account the final regulations; and
(3) before the end of 2009, the sponsor makes its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written § 403(b) plan. See the IRS Notice dated December 11, 2008.

Final Rule: Revised Regulations Concerning Section 403(b) Tax-Sheltered Annuity Contracts, 72 Fed. Reg. 41127 July 26, 2007
This is the first major overhaul of the 403(b) regulations since 1964. The final regulations are effective Jan. 1, 2009, or Jan. 1, 2010 for certain church related organizations. If a Collective Bargaining Agreement covers a 403(b) plan and the CBA is ratified and in effect on July 26, 2007, then the regulations will not apply until the earlier of the date the CBA terminates or July 26, 2010. Under the new regulations, any 403(b) program must be in writing. The new rules allow 403(b) programs to be terminated under certain conditions, thus a school could more easily make the switch to 401(k) plan. See To Be or Not to 403(b): That is the Question by Drinker Biddle, which was published in two parts:   July 2007 and August 2007. The August 2007 newsletter contains a very helpful chart which addresses the written documentation, universal availability, plan termination, and more. See also the Seyfarth Shaw article on the same topic, and the IRS guide to 403(b) Tax Sheltered Annuity Plans.  For an overview of the new reporting and audit requirements, see McDermott Will & Emery's April 16, 2008 newsletter titled: 403(b) Plan Sponsors Subject to New Reporting and Audit Requirements. See also the IRS Index to the New Regulations.

 

NACUANOTE: Retirement Plans: Compliance with the New 403(b) Regulations

On July 26, 2007, the IRS issued the first comprehensive regulations governing 403(b) plans in over forty-three years. The new 403(b) regulations generally are effective January 1, 2009. Key changes/clarifications include a plan document requirement, non-discrimination rules, post-retirement contributions, in-service withdrawals, transfers and exchanges, timely remittance, plan terminiation, and controlled group rules.

 

Final Rule: Application of Section 409A to Nonqualified Deferred Compensation Plans,
72 Fed. Reg. 19233 (April 17, 2007)

Section 409A generally provides that unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. These final regulations on section 409A are effective for taxable years beginning on or after Jan. 1, 2008. Deferred compensation plans falling under 409A of the Code must be amended to comply with the new rules by Jan. 1, 2008. A specific change made in the final regulations (vis-a-vis the proposed regs) was to liberalize treatment of separation pay. An Arnold and Porter April 2007 Client Advisory summarizes the key changes in the final rules. See also the IRS August 7, 2007 Q and A on 409A and Deferred Compensation. This guide addresses an election by teacher's to have their salary paid over 12 months, and the new rules on what is required for this type of deferred compensation arrangement.

 

Notice 2008-62: Interim Guidance on the Application of Section 457(f) to Certain Recurring Part-Year Compensation: This document describes anticipated regulations under 457(f) and 409A that will address compensation arrangments where faculty and teachers are paid over a 12 month period for work performed during a school year of less than 12 months. Until further guidance, taxpayers may rely upon the rule described herein beginning with the first taxable year that includes July 1, 2008. Faculty are exempt from the deferred compensation rules in the regs if the amount the teacher earns in the first calendar year that is paid in the second calendar year does not exceed a certain dollar amount set forth in section 402(g)(1)(B) applicable for the first calendar year. In plain English, this means that if a faculty member earns under $186,000, they are exempt. (For 2008).

 

 

IRS Notice 2007-87: Pension Plan limitations for 2008

 

IRS Revenue Procedure 2006-27

Revised Plan Correction Program for Retirement Plans

On May 30, 2006 the IRS issued a new revenue procedure revising and expanding the Employee Plans Compliance Resolution System (ECPRS). These plans are a number of programs a plan administrator may use to voluntarily correct plan errors. The self correction program is available for correction of insignificant operational failures any time, and for significant failures by the end of the second plan year following the year in which the failure occurred. This mechanism can help the plan sponsor avoid the loss of tax favored status, and the imposition of significant monetary penalties. This new guidance is effective September 1, 2006.  The EPCRS may by used by retirement plans qualified under 401(a), tax deferred annuity plans under 403(b), simplified employee pension plans (SEPS) and SIMPLE IRAs. 

Filing of Annual Information Returns

26 CFR 301.6058-1 sets forth the requirements for the annual information return that must be filed each year on funded plans of deferred compensation. Form 5500 is the form used for this report.

 

Mandatory Contributions to §403(b) Plan Are Salary Reduction Contributions for FICA Tax  Purposes

See 2003 IRS technical advice memorandum (TAM 200305006) which advised  that 403(b) contributions were salary reduction contributions, even though the contributions were mandatory. Employees had argued that the mandatory nature of the contributions made them not subject to the FICA tax.  

 

Audit guidelines for  § 403(b) plans

See Employee Plans Technical Guidance for guidance on how IRS examiners will review a 403(b) plan. Common I.R.C. § 403(b) violations include:

• exceeding the applicable limitations on
  a.  the exclusion allowance under I.R.C. § 403(b)(2),
  b.  benefits and contributions under I.R.C. § 415, and
  c.  salary reduction contributions under I.R.C. § 402(g);

• noncompliance with the "required beginning date" rules;

• noncompliance with restriction on distributions to participants;

• inadequate salary reduction agreements;

• failure to file Form 500 (the annual report required for plans with 100 or more participants; and

• noncompliance with the good faith, reasonable interpretation requirements of Notice 89-23, 1989-1 C.B. 654, specifically, failure to
  a.  satisfy the nondiscrimination rules with respect to the non-salary reduction contributions, and
  b.  provide universal availability of the salary reduction program because of eligibility restrictions, mandatory contributions, and impermissible participant exclusions.

 

 

Penalties for Failure to Comply with Certain Information Reporting Requirements

I.R.C. §§ 6721 - 6724

These sections contain the penalties for failure to comply with information reporting requirements on or before the time prescribed, failure to file the correct information required or all the information required, and failure to furnish correct payee statements.  The penalty is generally $50 for each return, with opportunity for reduction of the penalty for correcting the error.  When filing by magnetic media, the failure must occur with respect to more than 250 information returns.   See I.R.C. § 6724(c).  This means universities should take care when collecting and reporting social security numbers under various tax related reporting requirements.

 

Resources and Publications

 

Guidance Regarding Application of Section 409A to Split Dollar Life Insurance Arrangements

IRS Notice 2007-34

IRS Resource Guide for Retirement Plans

 

IRS Helps Small Business Retirement Plans Stay Compliant (June 2003)

In Revenue Procedure 2003-44, the IRS revises and simplifies the Employee Plans Compliance Resolution System (EPCRS). EPCRS permits plan sponsors to correct technical and administrative problems with their plans and thereby retain the tax-favored status of their plans. Rev. Proc 2003-44 modifies and supersedes Rev. Proc. 2002-47.

 

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