One of the more controversial and complex provisions of the Tax Cuts and Jobs Act has been the 21 percent excise tax on certain nonprofit executive compensation. On December 31, 2018, the IRS issued interim guidance that addresses how this tax will apply in various situations that commonly arise for tax-exempt employers. Establishing internal systems to comply with this guidance will be challenging.

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In a recent 2-1 decision, the Fifth Court vacated the US Department of Labor’s controversial expansion of the ERISA fiduciary regulations (the New Fiduciary Rule). If the DOL does not seek a rehearing, the Fifth Circuit will enter a mandate revoking the New Fiduciary Rule nationwide. However, given recent fiduciary regulations proposed by the Securities and Exchange Commission, the DOL may be less likely to appeal the ruling and no longer seek to enforce the New Fiduciary Rule.

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Section 162(m) of the Internal Revenue Code (Code) previously limited the tax deduction to $1M annually for covered employee compensation paid by a company that is publicly traded, subject to some important exceptions. The Tax Cuts and Jobs Act modified the reach of Code Section 162(m) in several significant ways.

  • Expanding the number of companies to which Section 162(m) will apply, including non-public companies that register debt or equity securities with the Securities and Exchange Commission, like foreign companies publicly traded through American depositary receipts (ADRs);
  • Expanding the number of covered employees to five and including the chief financial officer, with a provision that any covered employee after 2016 permanently remains a covered employee;
  • Eliminating performance-based and commission-based exceptions to the $1M deduction limit; and
  • Grandfathering certain compensation provided under a written and binding agreement in effect on November 2, 2017, if no material changes are made to such agreement.

These changes will have a significant effect not just on performance-based compensation, but also on stock options, stock appreciation rights and even nonqualified deferred compensation plans and supplemental executive retirement plans. To navigate these changes, Andrew Liazos stressed the importance of understanding the new grandfathering provisions under Section 162(m) and their corresponding planning opportunities at the Mid-Year Meeting of the American Bar Association’s Tax Section on February 10, 2018 in the attached slides.

The IRS has taken actions indicating that employer mandate penalties under the ACA are about to be enforced. The recently updated Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act includes the section, “Making an Employer Shared Responsibility Payment,” which expands specifically upon the soon-to-be-issued Letter 226J and what that will include. Continue Reading.

The new Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides additional relief and flexibility for retirement plan participants impacted by recent hurricanes, including relaxed rules for plan distributions, withdrawals and loans.

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The US House of Representatives Committee on Ways and Means proposed Tax Cuts and Jobs Act intends to reduce corporate and individual tax rates. To pay for the proposed changes, the House Tax Bill would, if enacted, negatively impact long-standing current executive compensation practices.

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Tax-exempt employers face a matrix of tax and disclosure issues in designing an appropriate supplement retirement program. This resource intends to examine the income tax, payroll tax and Form 990 reporting aspects of the major plans currently available to tax-exempt employers, and review those major plans from the reference point of several major design considerations.

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The Internal Revenue Service and the Department of Labor relaxed some deadlines for eligible employee benefit plans and expanded the availability of withdrawals and loans for eligible defined contribution plan participants in the disaster area. However, the Pension Benefit Guaranty Corporation announced that some of its required filings will not be extended automatically.

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