The Internal Revenue Service (IRS) has again extended the temporary nondiscrimination relief for closed defined benefit plans. This extended relief is intended to enable closed pension plans (defined as pension plans that have been closed to new participants before December 13, 2013 but continue to provide ongoing benefit accruals for certain participants) to more easily satisfy certain nondiscrimination testing requirements. In most cases where the relief applies, the closed defined benefit plan is aggregated with a defined contribution plan to satisfy the nondiscrimination testing requirements. The relief assists the aggregated plan in passing nondiscrimination requirements that apply to accrued benefits and to certain rights and features relating to those benefits.

The original nondiscrimination testing relief for closed pension plans was provided in a 2014 IRS Notice. This relief was already extended on three prior occasions, and the most recent IRS Notice further extends the relief until the end of plan years that begin before 2020, as long as the conditions of the original 2014 IRS Notice continue to be satisfied. In 2019, the IRS also intends to issue final regulations under Section 401(a)(4) of the tax code that address the nondiscrimination requirements for closed pension plans. Until then, the IRS indicated that plan sponsors can rely on the proposed 2016 IRS regulations under Section 401(a)(4) for plan years that begin before 2020.

On August 21, 2018, the IRS issued guidance regarding recent statutory changes made to Section 162(m) of the Internal Revenue Code. Overall, Notice 2018-68 strictly interprets the Section 162(m) grandfathering rule under the Tax Cuts and Jobs Act.

Public companies and other issuers subject to these deduction limitations will want to closely consider this guidance in connection with filing upcoming periodic reports with securities regulators. Further action to support existing tax positions or adjustments to deferred tax asset reporting in financial statements may be warranted in light of this guidance.

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On Friday, the IRS released a private letter ruling (PLR) which will help clear the way for employers to provide a new type of student loan repayment benefit as part of their 401(k) plans. By issuing the PLR, the IRS gave its blessing to an employer-provided student loan repayment benefit offered through an employer’s 401(k) plan. Historically, many plan sponsors had questioned whether such an approach would be permissible under IRS rules. As a result, the PLR provides welcome confirmation that such an arrangement is permissible under certain circumstances.

Generally speaking, the PLR confirmed that, under certain circumstances, employers may be able to link the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan. More specifically, as explained in our On the Subject published on Friday, the IRS concluded that an employer could make a non-elective contribution to its 401(k) plan where the amount of the non-elective contribution would be based on an employee’s total student loan repayments and would be contributed to the plan in lieu of the matching contributions that would otherwise be made to the plan had the employee made pre-tax, Roth 401(k) or after-tax contributions.

Because student loan benefit programs are becoming an increasingly powerful way for employers to attract and retain key talent, particularly employers with a young and educated workforce, the PLR will very likely cause many employers to consider offering a student loan benefit as part of their retirement program. Importantly, employers who wish to do so should take care to review their 401(k) plans for special rules, features or design elements (outside those discussed in the PLR) that might create additional hurdles to linking the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan. For example, some of the special rules that apply to safe harbor plans could limit an employer’s ability to create a similar student loan benefit structure.

For more information about this groundbreaking ruling, including the key features of the student loan benefit program described in the PLR, the advantages of such programs and other important considerations, please see our On the Subject published on Friday.

The Internal Revenue Service (IRS) recently released “Issue Snapshots” on a number of topics related to tax-qualified retirement plans, including both pension and savings plans. Historically, the snapshots have explained new(er) laws and guidance, and have often included audit tips for IRS examiners. As a result, although the IRS has indicated that the snapshots are not official pronouncements of law or directives, the snapshots provide helpful insight into issues that the IRS thinks merit further discussion or clarification. Therefore, the snapshots can be instructive for plan sponsors and plan administrators.

Continue Reading IRS Issues “Snapshot” Guidance on Qualified Retirement Plan Issues

US tax reform is changing the game with respect to many of the popular benefits employers have traditionally provided to their employees. These new rules have produced a great deal of questions. However, while the Internal Revenue Service (IRS) is formulating guidance, employers are left to navigate these changes on their own in order to determine the impact on both themselves and their employees. Employers are also reevaluating their benefit offerings in light of the new rules. These issues and more were addressed during the 2018 McDermott Tax Symposium on April 24, 2018.

The McDermott panel left the audience with these core takeaways:

  1. Due to the suspension of their employees’ ability to take many itemized deductions, employers should consider the feasibility of restructuring their compensation arrangements to save income taxes and FICA taxes.
  2. Certain employers that are public employers, private employers with public debt or non-U.S. employers with ADRs traded on a U.S. market should evaluate their executive pay arrangements to determine whether the grandfathering rules under section 162(m) apply to any compensation and further ensure compliance with the new rules under section 162(m).
  3. Employers should consider whether they will continue to provide popular benefits such as qualified transportation fringes and employer-provided meals. If employers choose to continue to provide these benefits, they will need to confirm that their systems are updated to reflect the changes in deductibility.
  4. Employers should begin using the updated Form W-4, if they are not already.
  5. Employers should encourage their employees to utilize the IRS’ updated withholding calculator to verify that the proper tax amounts are being withheld.

For additional information on these topics and other items addressed by McDermott tax professionals during the symposium, please see the compilation of slides. For additional tax reform resources, please visit McDermott’s Take on Tax Reform.

Patrick McCurry and Todd Solomon wrote this bylined article on how family offices are using sophisticated techniques to compensate their employees in a tax-efficient manner. “We expect to see the continued use of equity to deliver tax-efficient compensation to family office employees while aligning the economic interests and incentives of the family and the family office’s key employees,” the authors wrote.

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Originally published in Tax Executive, February 1, 2018.

Last month, the Internal Revenue Service (IRS) published Revenue Procedure 2018-4, which modified the user fee schedule for submissions under the IRS’s Voluntary Correction Program (VCP).

Under the new fee schedule, all VCP compliance fees are now based on the total net plan assets reported on a plan’s annual Form 5500-series return. This means that for VCP submissions filed on or after January 2, 2018, compliance fees will be:

  • $1,500 for plans with assets of $500,000 or less;
  • $3,000 for plans with assets of over $500,000 to $10,000,000; and
  • $3,500 for plans with assets of over $10,000,000.

Prior to January 2, 2018, compliance fees were generally based on the total number of plan participants reported on a plan’s Form 5500, and ranged from $500 (for plans with 20 or fewer participants) to as much as $15,000 (for plans with 10,000 or more participants). In addition, special reduced compliance fees applied to VCPs involving some of the most common plan failures (e.g. certain plan loan and required minimum distribution failures). However, under the new fee schedule, most reduced fees have been eliminated. Only the reduced user fee for group submissions and the special fee waiver for terminating orphan plans remains unchanged.

Ultimately, for many large plan sponsors, the new asset-based fee schedule could significantly reduce the VCP compliance fee for correcting certain plan errors. However, for small plans covering fewer than 100 participants, the cost of correcting plan errors will increase to at least $1,500 (and perhaps even more, depending on the total net assets held by the plan). In addition, for all plan sponsors, the cost of correcting many of the most common plan errors will actually increase significantly.