Federal Agencies Delay Automatic Enrollment for Group Health Plans

Posted by Dana Thrasher on February 20, 2012

iStock_nowlater.jpgRecall that the Patient Protection and Affordable Care Act (“PPACA”) – the health care reform legislation passed in 2010 – originally required that group health plans implement automatic enrollment in 2014.  The Internal Revenue Service, Department of Labor and Department of Health and Human Services have jointly issued, in the form of “Frequently Asked Questions” or “FAQs,” guidance that delays the implementation of the group health plan automatic enrollment requirement.  Employers (to whom the Fair Labor Standards Act applies and with more than 200 full-time employees) have reprieve regarding the original 2014 deadline until the DOL issues final regulations that provide automatic enrollment guidance.

The FAQs detail issues regarding the requirement for employers to provide coverage to full-time employees or be subject to a penalty assessment (the “employer shared responsibility provisions”).  The FAQs also provide guidance on how employers will determine whether employees are “full time employees” and how to use W-2 income rather than household income to determine whether coverage is “affordable coverage.”  The FAQs provide that the agencies will issue further guidance on the coordination of the employer shared responsibility provisions and the 90-day waiting period limitation (and even more specifically, the application of the waiting period limitation to part-time and seasonal employees).

This guidance provides specific examples that will assist companies in preparing for future compliance.  The agencies are accepting public comments on the guidance through April 9, 2012. 

IRS Announces Pilot Program for Large Companies and Their Retirement Plans

Posted by Jewell Lim Esposito on February 06, 2012

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Last week, at a Joint Meeting of the IRS's top officials with ERISA/tax attorneys and accountants from across the country, the IRS announced a pilot program that targets companies with at least 2,500 participants.  Colleen Patton, the IRS's Area Manager for the Pacific Coast, says the pilot program has rolled out in her region, and the IRS expects to expand the program across the nation's remaining four geographic areas (Northeast, Mid-Atlantic, Great Lakes, and Gulf Coast). 

Under this program, the IRS hones in on a large plan sponsor (greater than 2,500 participants), rather than one specific qualified retirement plan. Thus, whereas a company usually worried about whether the IRS would audit a qualified retirement plan it sponsored, that same company, if targeted, will now have to worry that the IRS will audit all of the company's qualified retirement plans in just one examination.  Indeed, it is not atypical for one company to sponsor several 401(k) plans and several defined benefit plans and perhaps an ESOP too . . . in this case and under this pilot program, the IRS would examine all those plans together.  

Large companies: brace for FULL IRS audit of all retirement plans at once

A targeted company should expect the IRS to conduct an extensive review of all of its qualified plans' procedures, processes, and systems (e.g., how various company payrolls feed data to plans; how the various TPAs coordinate testing across plans; how money moves from the employee paychecks to the plan trusts).  The IRS hopes that after reviewing these procedures, etc., it can then use data-driven factors to surgically target a company's compliance weaknesses. 

Based on recent exam and survey activities, it seems large companies confront these types of compliance weaknesses:

  • control group issues,
  • deficient plan amendments,
  • employees who are not collectively bargained improperly participating in a plan,
  • minimum distribution failures,
  • improper loan provisions,
  • failure to adjust actuarially if termination is after normal retirement age,
  • misclassification of employees as higher- or lower-paid,
  • misclassification of employees as part-time, temporary, foreign national, independent contractor, etc.

Large companies must brace for this super-enhanced IRS audit of retirement plans.  It will be thorough and comprehensive; indeed, an IRS audit can easily last over two years.  Consider the effect on in-house counsel, HR, and payroll personnel.

Employers should not rely on the annual TPA testing or annual accountant's audit to vet out   these compliance issues.  Many of the compliance problems identified above are outside the limited engagement of the TPA's end-of-year testing or the annual accountant's audit.  Employers who sponsor retirement plans should consider performing a very compliance review to determine if tax qualification failures exist (plan document? operational? demographic?) with each of their qualified plans. 

If failures are found, companies should consider applying under the IRS compliance program to voluntarily identify and correct them, with the hope that the plan would receive an IRS letter confirming continued tax qualification.  Self-correcting and/or applying under the IRS program might postpone an IRS audit and certainly would help ameliorate any sanctions that the IRS would impose if it were the IRS instead who vetted out these compliance issues on audit.   

Timeshare Sales Force? Employees, Of Course

Posted by Jewell Lim Esposito on October 26, 2011
iStock_timeshare.jpgLots of comments sent in regarding yesterday's post about California's penalties regarding intentional misclassification of workers.  Now, onto timeshare sales people.
 
Timeshare and hotel companies who think  their sales force is made up of independent contractors and not employees should really weigh the exposure.  The case of Whitehead et al v. Kalins (August term 2008, No. 03764) (Court of Common Please of Philadelphia County, PA) shows how both the IRS and a Pennsylvania court concluded this year that timeshare sales people are indeed employees:  Timeshare Employee Determination.pdf .  Class plaintiffs sued the timeshare company and won over $2.2 million in wages, benefits, penalties, and interest for the employees. 
TIMESHARE COMPANIES:
AREN'T YOUR SALES PEOPLE REALLY EMPLOYEES?
Other timeshare and hotel companies have as much risk with penalties (at least in California), wage-and-hour liability, federal/state employment taxes, Medicare, unemployment insurance, workers compensation, and coverage under employee benefit plans (health/401(k)/stock option). 

Gambling on the Employee/Independent Contractor Issue?

Posted by Jewell Lim Esposito on October 25, 2011

JLE_Headshot_Swidler.jpgWelcome to the Worker Classification Casino!

First, the IRS is scrutinizing the employ/independent contractor issue -- and offering a very nice settlement program to encourage companies to prospectively classify as "employees" workers who they improperly classified as "independent contractor."  See our earlier blog piece about the IRS's new program at 2011 Voluntary Amnesty Employee Classification.pdf.

Second, the Department of Labor and 11 state governments (Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah and Washington) are working together to fight improper classification of workers as "independent contractors." 

And now, California -- who is NOT a state listed above -- has enacted legislation effective for the new calendar year that imposes as high as a $25,000 per violation penalty for companies  who willfully misclassify "employees" as "independent contractors."   See CA Penalties.pdf. 

The federal government and state legislatures send a clear message:  misclassification is wrong.  

Companies should expect challenges not only from the federal and state governments, but plaintiffs' lawyers who can use "whistle blower" statutes to coax employers to confront the statutory penalties (at least in California), wage-and-hour liability, federal/state employment taxes, and ERISA obligations.  iStock_poker chips.jpg

Companies must grapple with the worker classification issue now.  To not do so is to take a big gamble, with very bad odds.

An IRS Discount. . . 90% Off Payroll Taxes; 100% Off Interest and Penalties

Posted by Jewell Lim Esposito on September 23, 2011

A devotee of Groupon and Living Social, I am a tax/ERISA geek at heart. . . and this offer from the IRS is the best discount that I have seen in a verrrrry long time. . .

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Just two days ago, the IRS unveiled a hard-to-resist deal that allows a company to dodge all but 10 percent of past employment tax liability, all the interest, and all penalties that it would have owed for prior years if the company had treated individuals as "independent contractors," but where the IRS nonetheless had mandated a reclassification as "employees."  See 2011_Voluntary Amnesty_Employee Classification.pdf.

The IRS refers to this amnesty-type program as a "Fresh Start," with the IRS Commissioner, Doug Shulman, confirming that it is a "part of a wider effort" to give a company certainty under the federal tax law for previous 1099ers.  To apply for the tax relief, a company:

  1. must have treated the workers as nonemployees in the past;
  2. filed all required Forms 1099 for the previous three years; and
  3. not be under audit by the IRS, DOL, or state agency with respect to these workers.

In exchange, the company avoids the signicant dollar amounts above by paying the most minimal of sanctions.  It also spares itself an employment tax audit of these workers for prior years.   Prospectively, the company will voluntarily agree to classify these workers as employees (and thus issue W-2s) for future payroll tax periods.

 

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Next IRS Target: College and University Retirement Plans

Posted by Jewell Lim Esposito on May 04, 2011

iStock_College.JPGFirst, it was K-12.  Now, it's higher education.  It's the IRS's next featured project.  In fact, the IRS web page refers to it as that:  

Employee Plans Compliance Unit (EPCU) - Featured Project - 403(b) Universal Availability Higher Education

As part of a a larger compliance initiative, the IRS is now zeroing in on the 403(b) plans that colleges and universities sponsor.  Plan fiduciaries must take note. 

Over 300 large, small, public, and private higher education institutions will receive a 21-item questionnaire from the IRS.  Make sure to respond.

Failing to complete the questionnaire will almost guarantee follow-up by way of a formal IRS audit.  As the IRS warns "[f]ailure to provide the information requested could result in further action or examination of your plan."

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Health Care Coverage and Form W-2

Posted by Robert Ellerbrock on April 04, 2011

iStock_W_2.jpgLate last month, the IRS issued guidance on how employers will report the aggregate cost of employer-sponsored health coverage provided to an employee on Form W-2.   The Patient Protection and Affordable Care Act (PPACA) imposed the reporting requirement, originally effective for the 2011 Form W-2s (for issuance in 2012).  However, an earlier IRS Notice postponed this reporting requirement until the 2012 Form W-2s (for issuance in 2013). 

Calculation of Aggregate Cost.  The aggregate cost of coverage provided to the employee includes amounts that both the employer and the employee pay.  In addition, the aggregate cost includes any portion of the cost of coverage that is includable in the employee's gross income (for example, the cost of coverage provided to over-age 26 dependents).  The reporting requirement applies to only "applicable employer sponsored coverage," defined as coverage under any group health plan that is excludable from the employee's gross income under Internal Revenue Code Section 106, or that would be so excludable if it were employer-provided coverage that same section.     

In Notice 2011-28, the IRS provides that an employer should determine the aggregate cost of coverage in a manner similar to that used to determine COBRA premiums.  That Notice specifies that the employer may use one of the following methods to determine cost to be reported: 

  • the COBRA applicable premium method under Code Section 4980B(f)(4),  
  • the premium charged method, or  
  • the modified COBRA premium method (where the employer subsidizes COBRA premiums or bases them on premiums calculated in a prior year.)   

The Notice clearly states that this reporting requirement is for the employees’ information only, to inform them of the cost of their health care coverage.  Such reporting does not affect whether or not the health coverage is taxable.  Nothing in this requirement or the related guidance causes otherwise excludable employer-provided health care coverage to become taxable.

 Some Relief for Smaller Employers.  For employers who will have fewer than 250 Form W-2s in 2011 (for issuance in 2012), the Notice postpones the reporting requirement for at least one year.  The Notice provides that this relief will continue until the issuance of further guidance. 

 

Eligibilty Requirements for 403(b) Plans Differ From 401(k) Plans

Posted by David Pearson on March 16, 2011

iStock_Warning.jpgEmployers who sponsor a 403(b) tax-deferred annuity plan for their employees need to be aware of the "universal availability" eligibility requirement for employee pre-tax deferral contributions.  This rule requires that all employees must be eligible to make deferral contributions to the plan as of their first day of employment.

The universal availability requirement for 403(b) plans is significantly different from the rules applicable to qualified retirement plans.  For example, a 401(k) plan can require employees to wait for up to a year before becoming eligible to make deferral contributions.

One of our tax-exempt clients who sponsors a 403(b) plan ran afoul of the universal availability requirement by requiring employees to complete a 90-day "probationary" period before being eligible to make deferral contributions.  This service requirement could have been included in a 401(k) plan, but not in a 403(b) plan.

The result? The employer had to go through a costly correction process, involving both a submission to the IRS under the Voluntary Correction Program (including the payment of a significant compliance fee), plus making corrective "deferral" contributions to the plan on behalf of the excluded employees.  The employer had to make this expensive correction even though the employees had been paid the entire amount that they presumably would have contributed to the plan!

IRS Focuses on 401(k) Plans -- Audits Will Begin

Posted by Jewell Lim Esposito on February 07, 2011

Thumbnail image for iStock_Microscope.jpgDuring the 2010 summer, the IRS issued its first-ever electronic 401(k) Compliance Check Questionnaire to 1,200 plan sponsors.  According to Monika Templeman, IRS Director, Employee Plan Examinations at a meeting with both IRS officials and tax practitioners last week, some "double digit" (i.e., 10 to perhaps 99) plan sponsors refused to respond.  She signaled that the IRS intends to conduct a full scope audit of those non-responder plans.  As to those who did respond, the IRS will help guide those who might have experienced some compliance issues, as a sort of gesture of gratitude for helping the IRS determine where the ERISA/tax lapses were overall. Compared to the full scope audits, Templeman said the IRS involvement for those who took the time to respond would be "nothing draconian."

The IRS expects to publish the full compilation of the compliance issues revealed through the 401(k) Questionnaire this coming summer.  Templeman listed, though, the issues that seem to pervade:

  • Participants obtain loans or hardship distributions, without having met the Internal Revenue Code for allowing such loans or hardship distributions;
  • Companies fail to transmit employee elective deferrals timely to the plan;
  • Companies fail to amend their plan documents timely and, better yet, fail to execute the documents;
  • Companies do not use the proper definition of "compensation" when determining match or other allocations;
  • Companies fail to include eligible employees into their plans;
  • Companies do not know how to evaluate results of discrimination testing, including the ADP/ACP test (and, if there are failures, companies do not know how to resolve them). 

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