On Friday, President Obama signed a bill (H.R. 3765) that will temporarily extend the payroll tax holiday. The 4.2% Social Security payroll tax rate for individuals (historically 6.2%), which was set to expire on December 31, 2011, will continue though February 29, 2012. The IRS encouraged employers to implement the tax rate cut as soon as possible, but no later than January 31, 2012. For any Social Security tax over-withheld in January, employers should adjust employees’ pay no later than March 31, 2012.
The legislation also extends unemployment insurance benefits without imposing any new qualifications and prevents reimbursement cuts to Medicare providers, which were scheduled to be cut by 27%. A joint conference committee with House and Senate members was established to negotiate further extensions of the tax cut, unemployment insurance benefits, and Medicare reimbursement provisions. The bill will be paid for by raising the guarantee fee charged by Fannie Mae and Freddie Mac to loan originators.
Recently, the New York State Department of Taxation and Finance issued an Advisory Opinion regarding whether New York State may impose income tax on distributions from a nonqualified deferred compensation plan made to a former resident. Under federal law, states may not impose income tax on these retirement payments. Plan sponsors that participate in nonqualified deferred compensation plans should be aware of the tax implications of this law.
Click here to view the Alert.
UPDATE – The Department of Labor (“DoL”) has updated its previous guidance on electronic disclosures to clarify that investment-related information, including the required comparative chart, may be provided through a secure, continuous-access website, subject to the other requirements in the guidance, as described in our updated post below. The ability to use a secure continuous-access website for these purposes was unclear in the prior guidance.
In September, the DoL released interim guidance on electronic delivery of certain participant fee disclosures which was recently updated. Remember that account balance plans (like 401(k) plans) that allow participant direction of investments have to provide new participant-level fee disclosures beginning in April-May of 2012. Some disclosures can be included in quarterly benefit statements, like the amount and description of administrative and individual fees charged to a participant’s or beneficiary’s account. Other disclosures are required before a participant or beneficiary can first direct his or her investments or at other times and these generally cannot be included in quarterly benefit statements (either for legal or practical reasons).
When the DoL issued these final fee disclosure regulations last year, it intentionally did not address how the information would be furnished. However, given that the compliance deadline is forthcoming, the DoL issued Technical Release 2011-03 that addresses how these disclosures can be provided in an electronic form until more permanent guidance can be issued. Plan sponsors and administrators can choose either to follow this new guidance or use the existing DoL-approved method for providing disclosures electronically.
The Good: Under the Technical Release, those disclosures that are expressly permitted to be included in quarterly benefit statements can be provided on a secure website with the quarterly statement. Participants must be notified that the statement (and disclosures) are available there and be advised of their right to obtain a paper copy, among other requirements. This is consistent with a prior safe harbor the DoL announced for pension benefit statements in 2006.
The Bad: For those disclosures that cannot be included in quarterly statements, participants must voluntarily provide an email address where they can receive the statements electronically to qualify for the safe harbor. Just because an employee is assigned an email address as a part of his or her job does not count. The employee has to affirmatively provide the address to the plan administrator, even if it is the same one he or she has been assigned. Participants must also be provided a notice that tells them what they are receiving electronically and gives them the opportunity to opt out and receive a paper copy, among other requirements. This notice must be provided both before the participant receives the disclosures electronically and annually thereafter. Compliance with this procedure will require some legwork (or perhaps, more appropriately, keyboard work) on the part of plan sponsors and administrators.
The Not so Bad: The not so bad news is that if a participant already has an email address on file with the employer, sponsor or administrator, then the requirement to “voluntarily provide” the email address does not apply. However, he or she must receive a paper notice that includes the information described above, among other requirements.
The Bottom Line: The rules are complex and, frankly, a mixed bag for plan sponsors and administrators. Care should be taken in implementing the rules and benefits counsel should be consulted regarding the disclosures and the timelines for providing them.
‘TIS THE SEASON to check executive deferred compensation practices for operational compliance with section 409A of the Internal Revenue Code and the specific terms of company plans and employment agreements.
Common operational errors include deferring too much or too little and making distributions too large, too small, too early or too late.
Even a minor operational error can cause trouble unless it is corrected promptly. Some types of operational errors discovered in the year of the error or one of the next two years can be corrected without ruinous results under IRS procedures. This makes it appropriate to review your 2011 deferral and distribution records to make sure everything is just right or to identify issues and make prompt corrections. If you did not review your records for 2009 or 2010, that also would be worth doing now. Although the corrections approved by the IRS are more difficult and more costly for errors that occurred in the two prior years, making an approved correction is still far better than the onerous taxes imposed on the affected employee if no correction is made.
The correction procedures are described at length in IRS Notice 2008-113. Please call us if we can be of assistance.
Department of Labor regulations provide that deductions for an employee’s wages are assets of an ERISA fund as soon as these amounts can be segregated from the employer’s general assets. While no similar regulations exist regarding unpaid employer contributions, a recent district court case concluded that case law has developed the following general rule in the context of a multiemployer plan: “unpaid employer contributions are not assets of a fund unless the agreement between the fund and the employer specifically and clearly declares otherwise.” West Virginia Laborers’ Pension Trust Fund v. Owens Pipeline Service LLC, S.D.W.Va., No. 2:10-cv-00131, Nov. 18, 2011 (citing ITPE Pension Fund v. Hall, 334 F.3d 1011, 1013 (11th Cir. 2003)).
In the Owens case, the defendant, the company president and sole shareholder of the corporation, decided to make payments on a piece of equipment instead of making contributions to four multiemployer pension plans. Four pension trust funds sued claiming he was a fiduciary and personally liable for the missed contributions, which the funds argued were plan assets. The pension trust agreement stated that contributions “due and owing” to the fund were considered to be plan assets. While the defendant argued otherwise, the judge found the “due and owing” language mirrored several similar district court decisions in which the unpaid contributions were deemed to be plan assets. The judge held the agreement clearly provided “that once the various contributions were ‘due’ to the funds based upon the number of hours worked by union employees, the employer ‘owed’ the money and the money was a plan asset.”
What does this mean for employers? An employer which is delinquent in its contributions could be liable under ERISA for failing to timely remit assets to a plan. In addition, the individuals who control corporate resources may also be held personally liable under ERISA’s fiduciary provisions since they may be deemed to be controlling plan assets. Employers should review their plan and trust documents for the “due and owing” or similar binding language before halting employer contributions to an employee benefit plan. Employers should also be aware that some courts construe plan assets even more broadly. For example, the Tenth Circuit views a contractual right to unpaid contributions as a plan asset, regardless of the language in plan documents. See In re Luna, 406 F.3d 1192 (2005).