Tag Archives: IRS

IRS Issues Final Section 162(m) Regulations on Companies’ Ability to Deduct Executive Pay

Contributed by Kelly Haab-Tallitsch, March 2, 2021

Cut tax with scissor isolated on white, 3D rendering

The Internal Revenue Service (IRS) recently published final regulations implementing changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) to Section 162(m) of the Internal Revenue Code (Section 162(m)) expanding the scope of Section 162(m)’s compensation tax deduction limitation. Publicly held companies that already exceed or that may soon exceed the Section 162(m) $1 million deduction limit will need to carefully consider the impact of amended Section 162(m).

Section 162(m) generally disallows a tax deduction for compensation paid in excess of $1 million in any taxable year to certain current and former executive officers (“Covered Employees”) of publicly held corporations. Prior to the TCJA, payments of qualified performance-based compensation made to covered employees were exempt from the $1 million annual limitation. The TCJA eliminated this exemption for performance-based compensation and expanded the scope of entities and individuals covered by Section 162(m). However, the TCJA includes an important transition rule under which the changes made to Section 162(m) do not apply to certain “grandfathered” arrangements. The final regulations provide further details and clarification. Key provisions are highlighted below.

Relief for New Public Corporations Eliminated.

Prior to the TCJA, special transition relief was available to newly public corporations. Compensation paid under arrangements that pre-dated the corporation’s initial public offering (IPO) and were disclosed to prospective shareholders was exempt from Section 162(m)’s deduction limitation for a limited period following an IPO. The final regulations eliminate this transition relief for corporations that became publicly-traded after December 20, 2019.

Scope of Individuals Covered Expanded.

The TCJA significantly expanded the scope of individuals covered by Section 162(m). Under Section 162(m) as amended, Covered Employees include the CEO, CFO and three other most highly compensated executive officers of a public company. Any employee who served as the CEO or CFO at any time during the year is a Covered Employee and an employee does not need to be employed by the company at year-end to qualify as a Covered Employee (unlike pre-TCJA  days). Any employee who was a Covered Employee for any taxable year beginning after December 31, 2016 continues to be a Covered Employee, meaning once an executive officer qualifies as a Covered Employee, he or she will continue to be treated as a Covered Employee under Section 162(m) indefinitely.

The final regulations further expanded the number of individuals covered by providing that an individual who was a Covered Employee of any predecessor to a publicly held corporation continues to be a Covered Employee of the corporation indefinitely.

Grandfathering Rules Further Clarified.

The changes made to Section 162(m) by the TCJA do not apply to compensation payable under a “written binding contract” that was in effect on November 2, 2017 and not materially modified after that date (the “Grandfather Rule”). The final regulations provide the following clarifications:

  • A compensation arrangement that allows a company to exercise negative discretion to reduce an amount payable under an objective formula does not qualify for the Grandfather Rule (even if no changes or modifications are made to the arrangement).
  • The existence of a clawback provision in a compensation arrangement giving a corporation the right to recover compensation if certain conditions occur does not affect the arrangement’s grandfathered status. Further, a corporation’s exercise of its right to recover compensation is not considered a material modification under the Grandfather Rule.
  • The extension of the exercise period of otherwise grandfathered Stock Options and Stock Appreciation Rights will not result in loss of grandfathered status if the extension complies with Code Section 409A. Generally, an extension complies with Section 409A if: (i) at the time of the extension the exercise price exceeds the fair market value of the underlying stock, and (ii) the  exercise period is extended to a date no later than the earlier of (1) the original expiration date of the Stock Option/SAR, or (2) the 10th anniversary of the original grant date.

Applicability Dates

In general, the final regulations apply to taxable years beginning on or after December 30, 2020, but certain provisions have earlier effective dates such as the clarifications to the Grandfathered Rule and definition of Covered Employee.  

IRS Gives Employers a Welcome Christmas Gift

Contributed by Kelly Haab-Tallitsch, December 28, 2017

On December 22, 2017, the Internal Revenue Service (IRS) announced a 30-day extension of the deadlines for certain information reporting requirements under the Affordable Care Act (ACA).

In IRS Notice 2018-06, the agency announced a 30-day automatic extension — until March 2, 2018 — for employers and insurers to provide 2017 IRS Forms 1095-C (Employer-Provided Health Insurance Offer and Coverage) and 1095-B (Health Coverage) to employees. The original due date was January 31. This extension is virtually identical to the extension provided last year for 2016 Forms.

Despite the extension, the IRS encourages employers and other coverage providers to furnish the forms to individuals as soon as possible and states that due to the automatic extension, further extension beyond March 2, 2018 is not available.

Employers and insurers should be aware that although the due date to furnish forms to individuals has been extended, the due date to file the forms with the IRS was not extended and remains February 28, 2018 for paper filers, or April 2, 2018, if filing electronically.

Notice 2018-06 also extends the prior good-faith transition relief from certain penalties related to the 2017 information-reporting requirements. Relief from penalties for incomplete or inaccurate information reported on a 1095-C or 1095-B is available to employers or insurers that can show they made a good faith effort to comply with the requirements. No relief is available for entities that fail to furnish the forms to employees by the due date or fail to file the forms with the IRS.

Employers should be ready for questions from employees who do not receive their Forms 1095-B or 1095-C by the time they are ready to file their 2017 individual income tax return. Although the forms contain information that can be helpful when preparing a tax return, they are not required to file an individual income tax return. Notice 2018-06 explains that individual taxpayers can prepare and file their returns using other information about their health coverage. Individuals do not have to wait for Forms 1095-B or 1095-C.

To address employee questions head on employers should consider a proactive communication to employees. Such a communication should:

  • Provide the expected timeframe for distribution of the Forms 1095-B or 1095-C;
  • Remind employees the forms are not required to file an individual tax return; and
  • Provide information on employer-sponsored health coverage to assist employees in preparing their returns, such as whether the coverage provided was minimum essential coverage under the ACA.

ACA Employer Mandate Penalty Letters Coming Before Year-End!

Contributed by Kelly Haab-Tallitsch, December 7, 2017

With only 30-days to respond, employers should be watching their mail for Affordable Care Act (ACA) employer mandate penalty letters (IRS Letter 226J), coming before the end of 2017.

Recent updates to the “Questions and Answers on Employer Shared Responsibility Provisions (ESRPs) Under the Affordable Care Act” on the Internal Revenue Service (IRS) website indicate the agency is gearing up to begin enforcement of the ESRP provisions of the ACA, commonly known as the employer mandate. According to Q&As 55-58, “Making an Employer Shared Responsibility Payment,” the IRS will start sending penalty notices in “late 2017” to employers whom the IRS believes may owe penalties for not complying with the ACA employer mandate in 2015. Penalties will be proposed and assessed via Letter 226J.

The determination of whether an employer is liable for a penalty and any proposed amount is based on the information reported to the IRS on Forms 1094-C and 1095-C and information on which full-time employees received a premium tax credit. The 2015 information reporting process was not without problems and it is possible employers who complied with the employer mandate may receive IRS 226J letters due to reporting errors or other issues.

Employers have the opportunity to respond to a Letter 226J within 30 days, prior to official assessment of liability and demand for payment.

I received a Letter 226J…Now What?

  1. Review the letter and enclosed information carefully. Letter 226J will include information showing your proposed penalty by month and a listing of employees that received a premium tax credit.
  2. Compare with your records. Review the Forms 1094-C and 1095-C you filed for 2015, and other relevant records.
  3. Complete and return the Form 14764 included with your Letter 226J within 30 days. Include any supporting documentation.
    • If you agree with the IRS’s penalty determination:
      • Complete Form 14764 indicating your agreement.
      • Include payment for the penalty (or pay electronically). If you do not pay the entire penalty amount, the IRS will issue a Notice and Demand for payment.
    • If you disagree with the IRS’s penalty determination:
      • Complete Form 14764 indicating your disagreement.
      • Include a signed statement explaining why you disagree with part or all of the proposed penalty.
      • Include any documentation supporting your statement (i.e. date of employment termination records, proof of offer coverage or premium amounts).
      • Make changes, if any, to the Employee PTC Listing enclosed with your Letter 226J and submit with Form 14764.
  4. The IRS will acknowledge your response with a Letter 227 describing any further actions you may need to take.
  5. If, after receipt of Letter 227, you still disagree with the proposed or revised penalty, you may request a pre-assessment conference with the IRS Office of Appeals within 30 days. Instructions on requesting a pre-assessment conference will be included in the Letter 227. Upon receipt of your request, the IRS will contact you to arrange the time and place of the conference. According to IRS Publication 5 “Your Appeal Rights and How To Prepare a Protest If You Don’t Agree,” conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone or in-person.

Bottom Line

Failure to timely respond to a Letter 226J can result in steep penalties for employers – even those who complied with their responsibilities under the ACA. Be sure to closely watch your mail this holiday season.

ACA Information Reporting Deadlines Extended by the IRS

Contributed by Kelly Haab-Tallitsch

Late yesterday afternoon, the Internal Revenue Service (IRS) announced it was extending the due dates for certain 2015 Affordable Care Act (ACA) information reporting requirements. The welcome delay gives employers almost two additional months to furnish statements to employees and close to three additional months to file required returns with the IRS.

Specifically, Notice 2016-4 extends:

  • the due date for providing individual Forms 1095-C and 1095-B to clock and calendaremployees from February 1, 2016, to March 31, 2016
  • the due date for filing Forms 1094-B, 1094-C and 1095-C with the IRS from February 29, 2016, to May 31, 2016, if not filing electronically, and from March 31, 2016, to June 30, 2016 if filing electronically

Previous posts covering the ACA information reporting requirements for employers can be found here and here.

How does the extension impact employees?

The IRS is also providing relief to employees who receive their Form 1095-C or Form 1095-B after they have filed their individual tax returns.  Individuals are required to furnish information from their Form 1095-C or Form 1095-B with their individual tax returns to determine eligibility for the ACA premium tax credit and demonstrate compliance with the individual mandate to maintain qualified health coverage.  According to the Notice, individuals who rely upon other information received from employers or health coverage providers about their coverage, or offers of coverage when filing their 2015 income tax returns, will NOT be required to amend their return once they receive their Forms 1095-C or 1095-B.  As such, employers should not be concerned that providing the Forms 1095-C on the extended timeline will require employees to file amended 2015 income tax returns.

What if an employer fails to meet the new deadlines?

In light of the extended due dates, the IRS states that requests for additional extensions of time to furnish individual statements and or file information returns will not be granted.  Employers that fail to meet the extended due states are still encouraged to comply and the IRS states that it will take such filing and furnishing of statements into account when determining whether to abate penalties for reasonable cause. Additionally, the IRS will take into account whether an employer made reasonable efforts to prepare for reporting for 2015 and the extent to which the employer is taking steps to ensure that it is able to comply with the reporting requirements for 2016.

 

New Guidance: A Reminder the Cadillac Tax is Still Looming

Contributed by Kelly Haab-Tallitsch

The Internal Revenue Service (IRS) recently released its second set of guidance discussing approaches to the excise tax on employer-sponsored health coverage, often referred to as the “Cadillac tax.” Starting in 2018, the Cadillac tax imposes a 40% tax on the cost of employer-sponsored health coverage in excess of $10,200 for self-only coverage and $27,500 for family coverage. Intended to target overly-generous employer-provided health plans, the Cadillac tax continues to be one of the most controversial parts of the Affordable Care Act (ACA) as dollar thresholds set in 2010 look increasingly too low for 2018 plan costs.

The Cadillac tax is extremely complex and we don’t expect final regulations any time soon. The guidance issued so far Health insurnce photodescribes “potential approaches” that may be incorporated into future regulations. Although this preliminary guidance cannot be relied on, it gives some insight into the direction the agency is going.

Notice 2015-52, released July 30, 2015, addresses employer aggregation and the payment of the tax, among other issues. The guidance suggests that related employers will be treated as a single employer for tax calculation and payment purposes. Annually, employers will calculate the cost of the coverage for each month of the calendar year to see if the ‘Cadillac’ threshold was exceeded. The employer will then inform the IRS and the coverage provider (insurance company for a fully insured plan) of their share of the tax. For multiemployer plans, the plan sponsor will make the calculations and provide notice to the IRS.

Notice 2015-16, released February 23, 2015, addressed the definition of applicable coverage, the determination of the cost of coverage and application of the annual statutory limits. Most notably, applicable coverage would include both fully insured and self-insured employer-sponsored health plans, regardless of whether the employer or employee pays for the coverage or whether it is paid for with pretax or post-tax dollars. This would include major medical coverage, employer and employee contributions to health flexible spending accounts (FSAs) and health savings accounts (HSAs), health reimbursement arrangements (HRAs), onsite medical clinics, retiree coverage and executive physical programs.

What is the bottom line? Although opponents of the Cadillac tax continue to fight to have the provision amended or repealed, employers should proceed with the expectation that the Cadillac tax will be implemented in 2018 as planned. Employers should review the coverage offered to employees and begin to take steps to reduce exposure to the tax. Further, employers should consider providing input into the regulatory process—directly or through trade groups—by providing comment on the preliminary guidance.

Penalties Doubled for Affordable Care Act Reporting Noncompliance

Contributed by Kelly Haab-Tallitsch

The Trade Preferences Extension Act of 2015 (“Trade Bill”), signed into law by President Obama on June 29, significantly increases potential penalties for employers and insurers that fail to comply with the Affordable Care Act (ACA) reporting requirements, beginning in early 2016.

As a reminder:

  • IRS Code 6056 requires employers with 50 or more full-time equivalent employees to file reports with the IRS annually stating whether the employer offered health coverage to full-time employees and their dependents during the preceding calendar year.
  • IRS Code 6055 requires all employers with self-insured plans, and insurers, to file reports with the IRS indicating whether an individual had health coverage during the preceding year. These reports must also be furnished to employees.
  • The reporting requirements help the IRS enforce the ACA individual and employer mandates, and are effective for the 2015 calendar year, with reports first due in early 2016.

The penalty for failure to file a required information return with the IRS was increased by the Trade Bill from $100 per return to $250 per return. The annual cap on penalties doubled from $1,500,000 to $3,000,000. In the event a failure to file is due to intentional disregard, the new $250 penalty is doubled and no annual cap applies. Records Room

In addition to filing reports with the IRS, the ACA requires employers to provide certain forms to employees, similar to the existing WS-2 reporting requirements. It is important for employers to be aware that the penalties apply separately to both requirements. For example, a failure to file a Form 1095-C with the IRS and a failure to furnish the same Form 1095-C to the employee will result in two penalties of $250 each, or $500 per affected employee.

These increased penalties also apply to other IRS information returns and filings, such as W-2s, and are effective in 2016. Reduced penalties apply when the failure to file is corrected within a certain period of time and the cap is reduced to $500,000 for employers (or insurers) with $5,000,000 or less in gross annual receipts.

Despite the hike in penalties, the IRS’s enforcement policy for the first year of ACA reporting remains unchanged. The IRS has stated it will not penalize employers that can show they made good faith efforts to comply with the ACA reporting requirements for 2015.

Employers can reduce the risk of noncompliance by taking the following steps:

  • Ensure you are capturing and tracking the data needed to complete the required forms now, to allow for reporting in early 2016
  • Understand what forms are required and their applicable due dates (statements to employees are due as early as January 31)
  • Review the 2014 IRS forms and instructions available at www.irs.gov

IRS Begins Implementation of the ACA “Cadillac Tax” for High-Cost Health Plans

Contributed by Kelly Haab-Tallitsch

The IRS and Treasury Department recently issued Notice 2015-16 discussing initial approaches to implementing the 40% excise tax imposed on high-cost health plans under the Affordable Care Act (ACA).  This notice is the first step in the process leading to final regulations.

Beginning in 2018, the excise tax, also called the “Cadillac Tax,” will impose a 40% tax on the cost of employer-sponsored health plans that exceeds certain thresholds. The tax may affect few plans initially, but is expected to affect many more over time as the cost of health care grows faster than inflation.

Notice 2015 -16 addresses three key areas, including:

  • The definition of “applicable coverage”;
  • The determination of the cost of applicable coverage; and
  • The application of the annual statutory limits.

Benefits considered “applicable coverage” will be subject to the excise tax. The notice addresses several areas that were previously unclear.  Most notably, the agencies anticipate that pretax salary reduction contributions made by employees to health savings accounts (HSAs) will be subject to the tax. The ACA statute provides that employer contributions to an HSA are subject to the excise tax, but did not address employee pretax contributions.  Retiree coverage, multiemployer plan coverage, executive physicals and health reimbursement arrangements are also expected to be included as applicable coverage.

Notice 2015-16 anticipates excluding from applicable coverage onsite medical clinics that offer only de minimis care to employees, provided the care consists primarily of first aid during work hours for treatment of an illness or injury that occurs during work hours. Still undetermined is the treatment of onsite clinics that provide additional services such as immunizations, allergy injections, nonprescription pain relievers, and treatment of work injuries beyond first aid.

Self-insured dental and vision plans (consistent with the exclusion of fully insured dental and vision plans in the statute), employee after tax contributions to HSAs, accident or disability insurance, workers’ compensation, long-term care insurance and possibly employee assistance programs are also expected to be excluded.

What This Means for Employers

The cost of applicable coverage that exceeds the thresholds (currently $10,200 for self-only and $27,500 for family coverage) will be subject to a 40% non-deductible excise tax imposed on the employer. To avoid the tax, employers must continue to analyze health plan costs and explore strategies now to manage future costs.

The anticipated treatment of employee pretax contributions to HSAs will likely have a significant impact on HSA programs. As described, many employer plans that provide for HSA contributions will be subject to the tax as early as 2018, unless an employer limits the amount an employee can contribute on a pretax basis.

2015 IRS Mileage Rates Are Here

Contributed by Julie Proscia

The IRS recently released its standard mileage reimbursement rates for the year 2015.  As of January 1, 2015, those rates, which apply to the use of a car, van, pickup, or panel truck, are:

  • 57.5 cents per mile for business miles driven;
  • 23 cents per mile driven for medical or moving purposes; and
  • 14 cents per mile driven in service of charitable organizations.

Employers should remembCar on Roader that the law does not require mileage reimbursement at these or any other rates.  Instead, employers must reimburse employees for mileage only if a contract requires such reimbursements.  Employers should also note that such contracts can be formed orally or by implication in certain circumstances, and if a contract exists, the actual reimbursement rate depends on the terms of the contract—which may not necessarily call for the IRS reimbursement rates.

With all of that in mind, employers who reimburse according to the IRS rates should be sure to update their reimbursement practices to reflect the current IRS mileage rates for 2015.

 

ACA Employer Reporting Obligations are Effective January 1, 2015 – Are You Ready?

Contributed by Kelly Haab-Tallitsch

Beginning January 2015, employers will be subject to extensive ACA reporting requirements. Although submission of the data for 2015 will not take place until early 2016, employers and insurers need to start capturing the required data in January and should ensure that all the proper data can be captured and tracked prior to the beginning of the year.

The rules require extensive data reporting and are intended to help the IRS enforce various tax provisions of the ACA, including the employer and individual mandates.  Proposed instructions for reporting and draft forms were issued by the IRS at the end of August.

Employer Mandate Reporting – IRC Section 6056

Employers with more than 50 full-time equivalent employees are required to report if they made a “qualifying offer” of coverage to individual full-time employees and their dependents on a per month, per employee basis. The required amount of data is extensive and includes:

  • Name, address, and SSN of each full-time employee and the months, if any, during the calendar year which the employee was covered under the health plan;
  • The months for which minimum essential coverage was available;
  • Each full-time employee’s share of the lowest cost monthly premium (self-only) for coverage providing minimum value offered to that full-time employee under an eligible employer-sponsored plan, by calendar month; and
  • The number of full-time employees for each month during the calendar year.

Certain additional information will be required through indicator codes.

Individual Mandate Reporting – IRC Section 6055

Employers with self-funded plans (including those with under 50 employees) and insurers are required to report overall information on the plan and the plan sponsor, as well as data for each individual covered under the plan. The required individual information includes:

  • Name, address, and SSN (or date of birth if SSN not available) of each individual covered; and
  • Months during the calendar year when the individual was covered.

Employers who are self-funded are subject to both the required individual mandate reporting and the employer mandate reporting and will report for both at the same time on the same forms.

Timing and Implications

Under both IRC Sections 6055 and 6056, the reporting entity (employer or insurer) is required to report data on the prior calendar year to employees by January 31 and to the IRS by March 31.

Even though reports will first be submitted in early 2016 for calendar year 2015, the reporting period begins January 1, 2015, requiring employers to start capturing the needed data as of that date. Employers must take necessary steps now to ensure that all required data can be tracked prior to the first of the year.

 

There’s No Escaping Taxable Wages: Are You Improperly Giving Employees Nontaxable Dollars to Purchase Individual Coverage?

Contributed by Rebecca Dobbs Bush

It’s that time of year again when we’re all settling up with the IRS and hoping and searching for as many deductions as we can.  Many employers would like a way to offer employees nontaxable dollars with which they could purchase individual coverage through the marketplace or in the individual private market, without the employer needing to establish its own group health plan (or allowing the employer to terminate the existing group health plan they might be providing).

However, the following prohibitions took effect January 1, 2014:

  • Stand-alone HRAs can no longer be used to provide employer-sponsored health coverage to active employees.
  • Employer payment plans are prohibited.
  • Premiums for coverage elected through the ACA Marketplace or a state-based exchange cannot be paid for or reimbursed through an employer’s cafeteria plan.
  • Health FSAs can be offered to employees only if those employees are also eligible for the employer’s group health plan (major medical plan).

As alternative options, employers can:

  • Adopt a small group market plan through the SHOP Marketplace for small employers
  • Pay for individual policies for employees with dollars reported as taxable wages and subject to employment taxes and income tax withholding, or
  • Reimburse employees with taxable dollars.