The Internal Revenue Service issued Notice 2014-19 and a set of Frequently Asked Questions on April 4, 2014, clarifying certain retroactive retirement plan implications of the Supreme Court’s Windsor ruling. The guidance requires plans to be administered to reflect the Windsorruling effective as of June 26, 2013, but does not require plans to retroactively recognize same-sex spouses prior to that date. In addition, the IRS clarified the requirements for any Windsor-related plan amendments.
Multinational companies increasingly have internationally mobile employees (IMEs) who perform services in more than one country, other than their country of citizenship, during a single taxable year. It can be quite challenging to manage legal compliance and tax risks with a globally mobile workforce using a typical secondment arrangement. Under this arrangement, an IME is employed by the home country (usually the place of citizenship) employer and is then assigned or seconded to work in a host country. This approach can result in several entities within a multinational company’s controlled group having multiple assignment letters for each IME, without having any common administration.
A global employment company, or GEC, is an entity established by a multinational company to employ its IMEs. In effect, the GEC serves as a leasing company that is responsible for the employment, compensation and benefits, immigration and income and social tax matters for IMEs. The GEC provides the assignment letter to the IME, pays – or arranges with a third party to pay – compensation and benefits, and handles all required administrative support for the assignment. The GEC in turn charges a service fee to each entity that uses the IME’s services.
For more details about GECs, read the full article here.
The number of defined contribution plans (including 401(k), 403(b) or 457(b) plans) with a Roth feature has grown significantly in recent years. Roth 401(k) is gaining popularity due in part to tax hedging or tax diversification strategies. Since the federal and state tax rates that apply at retirement are unknown, a participant can hedge future tax exposure by making at least some portion of his or her retirement savings as Roth 401(k) contributions. Other participants want greater retirement security with a large portion of their retirement savings not subject to income taxes. Some high net worth participants want to pass tax-free investments to their beneficiaries.
The Centers for Medicare & Medicaid Services’ Final Notice of Benefit and Payment Parameters for 2015 contains numerous alterations to premium stabilization programs, cost-sharing requirements and employee counting provisions to account for lower-than-anticipated enrollment through the Exchanges and the Obama Administration’s decision to permit individuals to “keep their current plan” through 2016. All of these changes and the fluid regulatory environment create significant challenges for issuers, who must operationalize these changes, some of which are effective in 2014, and prepare for the 2015 benefit year.
Please click here to read the full newsletter.
On March 14, 2014, the Department of Health and Human Services (HHS) Centers for Medicare & Medicaid Services (CMS) released guidance clarifying the final regulations implementing Section 2702 of the Public Health Service Act (PHSA). PHSA Section 2702 addresses guaranteed availability of coverage. Pursuant to that section, health insurance issuers offering non-grandfathered health insurance coverage in the group or individual market, including coverage under a state or federal Marketplace Exchange, must accept every employer and individual in the state that applies for the coverage, subject to limited exceptions. PHSA Section 2702 and the related regulations prohibit discriminatory marketing practices, including discrimination based on sexual orientation.
The new CMS guidance clarifies that health insurance issuers offering non-grandfathered group or individual health insurance coverage must offer coverage on the same terms and conditions to same-sex spouses that is offered to opposite-sex spouses. Prior to this guidance, this requirement to extend coverage to same-sex spouses already applied in states that perform and recognize same-sex marriage. The new CMS guidance clarifies, however, that all insurance companies in all states are required to make such coverage available.
Importantly, the CMS guidance does not require private sector employers to offer coverage to same-sex spouses. Instead, the guidance requires an insurance company offering non-grandfathered health insurance coverage to offer private employers the option to cover same-sex spouses.
Employers will continue to have discretion—subject to other non-discrimination laws—regarding whether or not to offer coverage to same-sex spouses. For example, employers with self-insured plans are not subject to the new CMS guidance. Likewise, employers sponsoring fully-insured plans that are funded by insurance contracts issued in states that do not currently recognize same-sex marriage also are not necessarily required to offer coverage to same-sex spouses; they must simply be offered the opportunity by the insurance company.
Thus, while the CMS guidance ensures that health insurance coverage will always be available to employers that wish to offer coverage to same-sex spouses, it does not ensure that all same-sex spouses will receive coverage under employer plans. The CMS guidance clarifies that while health insurance issuers are encouraged to offer coverage to same-sex spouses in 2014, all issuers must fully comply for plan or policy years beginning on or after January 1, 2015.
Next Steps for Employers
Employers with insured group health plans should review their policies to determine whether existing spousal coverage is required to be extended to same-sex spouses. Plans insured under a contract issued in a state where same-sex marriage is legal already must extend existing spousal coverage to same-sex spouses. Employers with insured plans issued in states where same-sex marriage is not legal must have the option of extending coverage to same-sex spouses beginning on or after January 1, 2015.
Employers offering either insurer or self-insured plans may also wish to consider whether other nondiscrimination laws implicate the decision whether to offer same-sex coverage.
The Supreme Court of the United States has decided in favor of the Internal Revenue Service in United States v. Quality Stores, Inc., holding that severance payments made pursuant to plans that did not tie payments to the receipt of state unemployment insurance are subject to Federal Insurance Contributions Act (FICA) tax. The decision overturns a taxpayer-friendly decision from the U.S Court of Appeals for the Sixth Circuit, which, if upheld, could have resulted in FICA tax refund claims to individuals and employers.
If a German employee claims special payment for overtime he has performed, it is the employee who has the burden of proof regarding the following requirements:
- the fact that he actually worked overtime; and
- the fact that the employer explicitly ordered to work overtime or at least has approved or tolerated the performed overtime.
In situations where there is a dispute regarding the payment of overtime, the second requirement is very difficult for the employee to prove. Nevertheless, in its decision dated 10 April 2013 – file number 5 AZR 122/12 – the German Federal Labor Court confirmed these legal principles, and strengthened the position of employers in disputed cases regarding employee overtime.
Where the disputed overtime was not expressly ordered by the employer, but was merely approved or tolerated by the employer, the German Federal Labor Court emphasized that the employee has to prove the employer’s knowledge of each single case of performed overtime and that the employer expressly or impliedly consented to it.
If the employee claims that the overtime order was given by way of implication, e.g., by assigning tasks that could not have been accomplished during regular working time, he has to prove that these tasks could not have been finished without working overtime.
Given these strict requirements and the modern working environment that generally does not have explicit or even written work orders, employees will likely have a very difficult time producing evidence to support a disputed overtime claim in Germany.
On December 24, 2013, the Departments of Labor, Health and Human Services, and the Treasury issued highly anticipated proposed regulations that would amend the definition of limited excepted benefits. Excepted benefits are generally exempt from the Patient Protection and Affordable Care Act’s (ACA) market reform requirements. The proposed rules would be effective for plan years beginning in 2015. While the proposed regulations provide guidelines on excepted benefits, employers should watch for the final rules to accurately design ACA-compliant excepted benefits plans. To get a better handle on how the proposed rules on excepted benefits impact employers, Wolters Kluwer of Employee Benefits Management Directions, spoke with Joanna C. Kerpen, partner in the employee benefits practice group at McDermott Will & Emery.
On February 26, 2014, U.S. House of Representatives Committee on Ways and Means Chairman Dave Camp (R-MI) released the proposed Tax Reform Act of 2014 (the Camp Proposal), which would simplify the Internal Revenue Code and reduce corporate and individual tax rates. However, to remain revenue neutral, the Camp Proposal would eliminate many important tax incentives and would change the landscape of executive compensation.
Changes to Nonqualified Deferred Compensation
Most significantly, the Camp Proposal would add a new Internal Revenue Code Section 409B under which nonqualified deferred compensation earned after 2014 would be taxed upon the elimination of a substantial risk of forfeiture (typically, upon vesting). Further, under the Camp Proposal, amounts earned before 2015 would generally be includible in income as of the later of: (1) 2022 or (2) the year in which the amounts are no longer subject to a substantial risk of forfeiture. If these provisions are enacted, there would no longer be any tax-advantaged reason to use non-qualified deferred compensation plans and, as a result, there would be an incentive to discontinue them unless they are funded.
Changes to Internal Revenue Code Section 162(m)
Section 162(m) currently limits to $1 million the deduction that public companies may take on the compensation paid to the chief executive officer and the next three highest paid officers. In addition:
- Chief financial officers generally are not subject to Section 162(m) due to a change in SEC proxy disclosure rules in 2007.
- Payments that qualify as performance-based compensation under Section 162(m) are not subject to the $1 million limit.
- The limit only applies to named executive officers in the company’s proxy who are employed by the company on the last day of the company’s fiscal year.
The Camp Proposal would expand the application of Section 162(m) to:
- Cover the chief financial officer
- Eliminate the performance-based compensation exception (so that items like stock options and other performance-based pay would, for the first time, become subject to the $1 million cap)
- Continue to apply the deduction limit to former covered officers and to beneficiaries (which would eliminate the approach of preserving deductions by deferring amounts until Section 162(m) officers terminate employment)
The Camp Proposal’s Section 162(m) provisions remove significant tax incentives to provide compensation in certain types of ways, in particular, to meet the definition of performance-based compensation. While the early consensus appears to be the proposal will not affect the movement toward pay-for-performance for other purposes (e.g., for shareholder “say on pay” votes, etc.), it likely will affect the vehicles and approaches used to implement pay-for-performance. For example, companies may no longer feel compelled to set performance metrics during the first 90 days of a performance period as many companies now do in order to qualify for the existing performance-based exception to Section 162(m).
The Camp Proposal, in its current form, is highly unlikely to be enacted this year. However, these executive compensation provisions (or similar provisions) are attractive revenue raisers that could be used to pay for future legislative proposals
What Does This Mean for Employers?
The changes will take effect on 6 April 2014 and will be applicable to dismissals taking effect on or after that date.
It is important for employers to note that:
- If an employee is given notice prior to 6 April 2014, but the notice period will expire on or after 6 April 2014, the new limits set out above will apply to that dismissal.
- If an employee’s employment is terminated by means of a payment in lieu of notice, the effective date of termination (EDT) is the actual date the dismissal takes effect, plus the amount of statutory notice applicable to the employee, i.e., one week per year of employment, up to a maximum of 12 weeks. If the statutory notice would take the EDT to or beyond 6 April 2014, the new limits will apply.
Employers’ exposure in the event of an unfair dismissal claim will rise and should therefore be factored into decision making regarding litigation or settlement strategies.