Recent IRS guidance clarifies a number of outstanding questions regarding “in-plan conversions” of non-Roth balances to Roth balances in 401(k), 403(b) and governmental 457(b) plans. In particular, the guidance confirms that converted balances are subject to the same distribution restrictions after the conversion as they were prior to it.
While the funded status of single-employer corporate defined benefit pension plans has improved, the funded status of multiemployer union pension plans has remained stagnate and, in some cases, further deteriorated. The Pension Benefits Guaranty Corporation recently reported to Congress that the aggregate funding ratio of all multiemployer plans was 48 percent. From the most recent data available, the PBGC reports that multiemployer pension plans have $366 billion in assets to satisfy $757 billion in vested liabilities—in short, a funding deficit of $390 billion.
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*Reproduced with permission from Bloomberg BNA Pension & Benefits Daily.
The Supreme Court of the United States granted certiorari in Fifth Third Bancorp v. Dudenhoeffer, suggesting that the Supreme Court will resolve the current division among U.S. circuit courts regarding the application of the “presumption of prudence” in employer stock cases.
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The Supreme Court of the United States ruled that an ERISA plan may properly impose a reasonable time limit on filing a lawsuit to recover benefits. Such time may start to run even before completion of the required administrative review process.
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The Internal Revenue Code of 1986 (the Code), permits governmental and tax-exempt entities to sponsor tax-advantaged retirement plans meeting the Code Section 457(b). Although governmental Section 457(b) Plans primarily operate and act like Code Section 401(k) plans and Code Section 403(b) Plans (i.e., a “qualified” retirement plan). Section 457(b) plans maintained by tax-exempt entities must be “top-hat” plans, thereby limiting participation to a select group of highly-compensated individuals and management employees. Numerous non-profits sponsor Section 457(b) Plans as a means of providing additional nonqualified deferral opportunities for their highly-compensated executives. The Internal Revenue Service (IRS) has decided to take a closer look at these arrangements, announcing recently that it would begin conducting “compliance checks” of Section 457(b) Plans maintained by non-governmental entities (e.g., health systems, educational institutions, museums, etc.). Though the compliance checks are not full audits, plan sponsors can expect the IRS to request extensive information regarding written and operational plan compliance.
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A District Court in Eastern Michigan recently rejected a motion to dismiss a participant’s benefit claim, holding that an employer legally could be liable to a participant in a nonqualified deferred compensation plan when the employer did not properly withhold FICA tax in the manner most advantageous to the participant. As a best practice, plan administrators should scrutinize any participant communications or claim responses because they can open the door to estoppel claims under ERISA.
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The California state legislature recently enacted a law that may affect the taxation of benefits an employer provides to same-sex domestic partners in the state. California AB 362 excludes from gross income for California state income tax purposes the amount of any tax gross-ups paid by an employer to an employee for benefits for that employee’s same-sex spouse or domestic partner. The law was approved by California’s governor on October 1, 2013, and is effective immediately through January 1, 2019.
Earlier this year the Supreme Court of the United States ruled in U.S. v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional (see “Supreme Court Rules on DOMA and California’s Proposition 8” for more). Section 3 of DOMA had provided that, for purposes of all federal laws, the word “marriage” means “only a legal union between one man and one woman as husband and wife,” and the word “spouse” refers “only to a person of the opposite-sex who is a husband or wife.” Subsequent Internal Revenue Service (IRS) and U.S. Department of Labor guidance clarified that, as a result of Windsor, favorable federal tax treatment of spousal benefit coverage would extend to all same-sex couples legally married in any jurisdiction with laws authorizing same-sex marriage, regardless of whether the couple currently resides in a state where same-sex marriage is recognized (see “IRS and DOL Guidance Clarifies Employee Benefits Impact of Supreme Court’s DOMA Ruling” for more information).
As a result of Windsor and the subsequent IRS guidance, the impact of California AB 362 appears fairly limited. Pre-Windsor, some employers provided a federal tax gross-up on the imputed value of coverage provided to an employee’s same-sex spouse or domestic partner. Post-Windsor, same-sex married couples in California no longer need a tax gross-up for either state or federal tax purposes because they no longer have to be taxed on the value of the coverage provided to their spouse. Because of this treatment, application of California AB 362 would be limited to a situation where an employer provides a federal tax gross-up to an employee who is in a California-registered domestic partnership. Such a gross-up, which would have been taxable under prior state law, is now no longer taxable in California. Employers in California will need to update their payroll and tax procedures accordingly. Employers both inside and outside of California that previously provided tax gross-ups may find it desirable to revisit their gross-up policies in light of the Windsor decision and the IRS guidance.
The Internal Revenue Service (IRS) recently announced cost-of-living adjustments to the applicable dollar limits on various employer-sponsored retirement and welfare plans for 2014. Although many dollar limits currently in effect for 2013 will change, some limits will remain unchanged for 2014. This On the Subject provides a chart of these 2014 cost-of-living changes.
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Employers extending benefit coverage to employees’ same-sex spouses and partners should review their payroll procedures to ensure that such coverages are properly taxed for federal income and FICA tax purposes. Employers also should review the options in Notice 2013-61 and consider filing claims for refunds or adjustments of FICA overpayments.
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Please join McDermott partners, Diane Morgenthaler and Jamie Weyeneth, on October 16-18 at the 2013 ERISA Basics National Institute in Chicago, IL. Designed for in-house and union counsel, benefits specialists, private practitioners, litigators, consultants and accountants, this conference provides an opportunity to hear from the ERISA experts. For more information, click here.
2013 ERISA Basics National Institute
Friday, October 18
10:05-10:55 a.m.
Section 401(k) Plans
Diane Morgenthaler, Partner, McDermott Will & Emery
11:05-11:55 a.m.
Cafeteria Plans
Jamie Weyeneth, Partner, McDermott Will & Emery
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