The Internal Revenue Service recently established a one-year pilot program that provides plan administrators and plan sponsors of certain non-ERISA and foreign plans subject to the annual Form 5500 reporting requirements relief from penalties under the Internal Revenue Code. The penalty relief is temporary and expires on June 2, 2015.
In January 2013, the Internal Revenue Service (IRS) published final regulations under the Foreign Account Tax Compliance Act (FATCA). FATCA is intended to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts. In order to obtain information about offshore accounts, FATCA imposes significant reporting obligations on both non-U.S. foreign financial institutions (FFIs) and U.S. taxpayers holding foreign financial accounts. A non-U.S. retirement plan is generally included within the definition of an FFI, meaning that, absent an exemption, it is required to register and disclose information about its U.S. taxpayer-participants. A non-exempt FFI that fails to comply with FATCA is subject to immediate 30 percent withholding on interest and dividend payments from U.S. stocks and bonds and, beginning in 2017, on the sales proceeds of such investments. If a non-U.S. retirement plan is an FFI, it must document its exemption from FATCA by July 1, 2014, or be subject to the withholding described above.
In March of this year, the IRS issued the final version of Form W-8BEN-E, which allows certain non-U.S. retirement plans to claim exemption from the reporting and withholding requirements of FATCA. In order to be exempt from FATCA, a plan is required to document its exempt status on Form W-8BEN-E. It is prudent for plan sponsors to take steps to ensure a complete Form W-8BEN-E is provided to any person or entity that will be distributing amounts to a non-U.S. plan that might by subject to FATCA withholding.
Following the release of Form W-8BEN-E, the IRS published IRS Notice 2014-33 (the Notice) announcing that it will treat calendar years 2014 and 2015 as a transition period for FATCA compliance. Pursuant to the Notice, taxpayers must ensure good-faith compliance with the due diligence, reporting and withholding provisions of FATCA, including the creation and documentation of a FATCA compliance policy.
The final Form W-8BEN-E contains several revisions to Part XV of the draft form, pertaining to exempt retirement plans. In particular, the final form is revised from the July 2013 draft to include several references to retirement and pension accounts and other retirement funds described in an applicable Model 1 or Model 2 intergovernmental agreement (IGA). The U.S. Department of the Treasury worked with several countries to develop two model IGAs that allow an FFI to report information about financial accounts held by U.S. taxpayers directly to its own governmental authority, which then either provides the information to the United States (Model 1 IGA) or allows the signing countries’ FFIs to report directly to the Treasury (Model 2 IGA). The model IGAs are generally reciprocal in nature, meaning that the United States would provide the same type of information to the signing country about financial accounts held in the United States by the signing country’s taxpayers.
Importantly, the final form retains the exemptions for broad participation retirement plans, treaty-qualified retirement plans, 401(a)-type plans and investment vehicles designed exclusively for retirement plans. (View “What You Need to Know [...]
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On May 9, 2014, the Internal Revenue Service finalized regulations that govern the tax treatment of payments made by retirement plans to pay accident or health insurance premiums. Under the final regulations, accident or health insurance premium payments by qualified defined contribution plans are taxable distributions to the participant unless those payments are used to pay premiums for disability insurance that replace retirement plan contributions for disabled employees. The regulations apply for tax years beginning January 1, 2015, although taxpayers may elect to apply them to earlier years.
ERISA imposes numerous obligations on fiduciaries holding assets of employee benefit plans. In addition to discharging its duties prudently and for the exclusive purpose of providing benefits to benefit plan participants and their beneficiaries, ERISA establishes other fiduciary obligations, including prohibiting fiduciaries from engaging in a variety of transactions with plan assets known as ‘‘prohibited transactions.’’ Failure to follow fiduciary duties can result in lawsuits, Department of Labor (DOL) investigations and penalty taxes for which fiduciaries may be personally liable, as discussed below. This article discusses ERISA issues of relevance to private equity and hedge funds and their benefit plan investors. The first part discusses issues and problems resulting from being an ERISA fiduciary, while the second describes ways private equity and hedge funds can escape ERISA coverage and some pitfalls to avoid when attempting to do so.
“I would like to start receiving my retirement benefits now, but I would also like to keep working for a bit. Can I do this?” Baby boomers pose this question to their employers on a routine basis.
Unfortunately, there is no stock answer to this common question. The employer response depends on a variety of factors, including the types of retirement benefits payable to the employee and the arrangement under which the employee will continue providing services to the employer.
This article provides employers with a roadmap for analyzing this common employee request.
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.
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.
On December 6, 2013, in Rochow v. Life Insurance Company of North America, 737 F.3d 415 (6th Cir. 2013), the Sixth Circuit affirmed a district court ruling that an insurance company that improperly denied ERISA disability benefits must not only pay the benefits sought, but also disgorge its profits earned on those benefits. In that decision, a split panel of the Sixth Circuit held that ERISA’s remedial provisions did not preclude a participant from seeking recovery of his wrongfully denied benefits under ERISA Section 502(a)(1)(B) as well as other equitable relief under ERISA Section 502(a)(3). However, Judge McKeague wrote a stinging dissent, arguing that the majority’s ruling was “an unprecedented and extraordinary step to expand the scope of ERISA coverage” that was “contrary to clear Supreme Court and Sixth Circuit precedent.”
After that decision, the insurance company sought a rehearing and review of the majority’s ruling en banc, which involves a rehearing by all active Sixth Circuit judges. On February 19, 2014, a majority of the Sixth Circuit’s judges granted the motion for rehearing en banc, which serves to vacate the earlier panel’s December 6, 2013 decision. The parties are now set to file supplemental briefs by May 12, 2014, with an argument to the en banc panel expected for this summer. This decision will be important in determining whether ERISA’s remedial provisions provide for both recovery of benefits and disgorgement of profits (or other equitable relief) in the same lawsuit.
Wednesday, March 26, 2014
Chicago, Illinois
Studies show that over 40% of large employers now include a Roth 401(k) feature in their defined contribution plan. New legislation in early 2013, and new IRS guidance issued late in December of 2013, expand the availability of in-plan Roth conversions. While 401(k) record keepers gear up to implement this new feature, now is a good time to take stock of Roth 401(k) and understand whether this is a good feature that should be added to your plan or whether the new expanded in-plan Roth conversions make sense as a next step for your plan.
Panelists will cover Roth 401(k) basics and the new guidance as well as discuss the successful utilization of the Roth feature in one employer’s plan that has a 99% employee participation rate. In addition, the experts will also provide helpful tips on how to successfully communicate the confusing Roth concepts to your plan’s participants.
Event speakers include:
Nancy Gerrie, Partner, Employee Benefits Practice Group, McDermott Will & Emery
Kathleen Davis, Benefits Manager, Sargent & Lundy
Under the Employee Retirement Income Security Act, retirement plans generally come in two flavors – (i) retirement plans qualified under Section 401 of the Internal Revenue Code (the Code) and (ii) executive retirement plans, called “top hat” plans, which aren’t Code-qualified. What does that mean? While qualified retirement plans are subject to all of ERISA’s funding, participation and fiduciary provisions, top hat plans aren’t and may offer benefits exceeding those allowed under Code-qualified plans. Simply put, top hat plans are unique animals under ERISA.
Litigation involving top hat plans isn’t plentiful—likely due to the fact that such plans are available only to a small number of highly paid executives. However, within the limited top hat litigation realm, there exists a conflict among the federal courts of appeals over a seminal question—what review standard is to be applied to a benefit determination? While the U.S. Supreme Court has definitively answered this question for most ERISA plans in Firestone Tire & Rubber Co. v. Bruch, the unique nature of top hat plans has resulted in conflicting rules among the circuits. Whether these conflicting standards elicit similar results is an open and complex question for most ERISA practitioners.
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