The Charlotte office of McGuireWoods seeks a mid-level staff attorney for the Tax & Employee Benefits Department. Qualified candidates will have experience working with tax-qualified retirement plans, health and welfare benefits and executive compensation. Please submit cover letter, resume and law school transcript. Disclaimer: At this time, McGuireWoods will not be accepting applicants submitted through search firms or headhunters for this position. All qualified candidates must submit their own applications for consideration. Please reference Req #1332. Apply using the following link – https://lawcruit.micronapps.com/sup/lc_supp_app_frm.aspx?lawfirm=97&id=0
The Charlotte office of McGuireWoods seeks an associate or counsel for the Tax & Employee Benefits Department. Qualified candidates will have at least 5 – 6 years of experience working with tax-qualified retirement plans, health and welfare benefits and executive compensation. Experience with executive compensation securities disclosure rules, ERISA plan-asset regulations in connection with fund formation and/or employee benefits matters relating to corporate transactions a plus. Excellent academic credentials are required. Please submit cover letter, resume and law school transcript. Disclaimer: At this time, McGuireWoods will not be accepting applicants submitted through search firms or headhunters for this position. All qualified candidates must submit their own applications for consideration. Please reference Req #1331. Apply using the following link – https://lawcruit.micronapps.com/sup/lc_supp_app_frm.aspx?lawfirm=97&id=0
As a bit of a curveball, we have a somewhat unique opportunity for you. Our good friend, Rick Unser at Lockton Companies, has allowed us to post the link to his two-part interview with Jerry Schlicter of Schlichter Bogart & Denton. The interview was arranged and held on Rick’s weekly podcast, “401(k) Fridays.” The Schlicter law firm has been the driving force behind many of the large 401(k) lawsuits over the past decade.
Part 1 of Rick’s conversation discusses the origins of 401(k) litigation against employers, why the Schlicter Firm turns down certain cases and why some cases succeed and others don’t. In addition, Mr. Schlicter gives his thoughts on what employers should and should not be doing if they don’t want to run into legal trouble. Part 2 of Rick’s conversation with Mr. Schlicter focuses on whether the strategies employers and plan fiduciaries use to determine the reasonableness of plan fees are effective and how he sees certain plan sponsor practices. One senior ERISA litigator that I spoke with said that “that every client and benefits lawyer should listen to these interviews.”
Again, we’d like to thank Rick Unser, Lockton Companies and “401(k) Fridays” for allowing us to post this two part interview. Also, please check out “401(k) Fridays.” It has a large archive of outstanding interviews with industry leaders on a whole range of topics related to 401(k) Plans.
HR and legal departments have likely confronted the unpleasant situation of having to inform a departing employee that in addition to no longer being employed by their company, they also have a rather limited period to repay an outstanding 401(k) plan loan. With what money am I supposed to do that?!? So goes the common refrain.
In a move that may be helpful in these situations, the 2017 Tax Act (the “Act”) provides additional relief for retirement plan participants in such a situation. Specifically, the Act extends the period in which participants with outstanding loans may repay owed amounts before the loan goes into default, triggering income inclusion and potential additional taxes for those under age 59 ½. Loan balances may now be repaid up to a participant’s due date (including extensions) for personal tax filings.
From a participant’s perspective, this change should be welcome relief as it:
- provides a longer period to repay outstanding retirement plan loans – the typical default deadline is the end of the calendar quarter following the quarter in which separation occurs; and
- contemplates that repayment may be made to a subsequent employer’s retirement plan or an IRA.
On the employer side; however, there are a few items that merit consideration. For instance:
- Consider reviewing and updating existing loan policies and employee communications in light of the extended repayment period.
- Determine whether your retirement plan will accept loan repayments for incoming employees with outstanding balances from a prior employer’s plan.
- Consider how, from a process perspective, to administer predecessor employer plan loans – what information is needed / how to obtain it.
All in all, extending loan repayment periods seems like a good idea. It helps participants in need avoid incurring additional income/penalties, while promoting keeping retirement benefits in the “retirement system”. Still, there may be significant administrative burdens associated with accepting loan balances from prior employer retirement plans that may make such process undesirable for employers. Perhaps, the ability to repay loan balances into an IRA may be the solution for those participants.
For many employers who sponsor qualified retirement plans and have employees impacted by the various natural disasters that occurred in 2016, the 2017 Tax Act offers important relief. Specifically, the Act provides favorable tax treatment for certain qualified retirement plan distributions to employees affected by 2016 natural disasters. The relief includes:
- Income inclusion for distributions spread over 3 years;
- Distributions exempt from early withdrawal penalties (the 10% additional tax); and
- Permissible repayment of distributed amounts into the plan.
An important aspect of the relief is that it requires plan sponsors to take action in 2018 in order to assist affected employees. Employers should consider amending their retirement plans to offer the relief offered by the Act. However, with the relief comes unanswered questions as to how employers wishing to provide these benefits should administer their plans. For example:
- What are the tax reporting/withholding implications associated with qualified 2016 disaster distributions? For example, since withholding and reporting has presumably already occurred, are there additional actions employers should take with respect to these now qualified distributions?
- Do employers who offer the relief need to accept repayments from new employees who received qualified disaster distributions from their prior employer’s plan?
- If so, what information sharing requirements will be required for outgoing/incoming employees in order to allow employers to administer repayments?
- What types of distributions (e.g., loans) can be re-characterized as qualifying for this relief?
This tax relief appears very favorable for impacted employees and should be seriously considered by employers. The operational hurdles outlined above may present challenges, though we hope that additional (and timely) regulatory guidance provides the comfort needed for employers to extend these benefits to employees in need.
One of the biggest changes of the new tax law is that it now provides for a flat 21% tax rate for corporations. Without more changes this would have been a problem for pass-through entities (if companies are taxed at a lower rate than individuals, the pass-through scheme doesn’t work). To solve this problem, the new law provides that business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates less a deduction of up to 20% to bring the rate lower. Unfortunately, this may create some unintended consequences and a disincentive for pass through business owners to contribute to or even maintain a qualified plan because it may increase the taxes paid on amounts contributed to a qualified plan.
Please note, the disincentive discussed herein does not affect everyone. Those businesses and people in fields health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services with income above a certain amount or amounts paid to an S-corporation shareholder that are on the Form W-2 (i.e., constitute reasonable compensation for services) are not subject to these rules.
Using the following example and assuming we have $100,000 of pass through income:
Tax Savings from Deduction taken on the Contribution
|Reduced Tax Savings from Deduction due to Deduction from 20% of Qualified Business Income**||$25,600|
** This 20% deduction means that the effective tax rate on the net income from the business is 32% x 80% (i.e., the portion of the income that is subject to tax after the 20% deduction), or 25.6%.
This means that under the new law we save $25,600 in taxes by contributing $100,000 to a qualified plan rather than taking it straight into income.
The problem arises when we want to take a distribution because the distribution is subject to tax at the full individual rate. That means in our example, at a 32% tax rate, we would pay $32,000 in taxes at distribution on the $100,000 original contribution. That is $6,400 more than the tax savings we received for making the contribution. In other words, in our example, we don’t just defer taxes by contributing to the plan; we actually increase our taxes by $6,400 (about 20%)!!
Now it’s hard to tell if this increase in taxes is offset by the tax free buildup of earnings within the plan, but one has to ask whether pass through owners should make deferral contributions in the form of Roth contributions. Also, there are other reasons to have a retirement plan, including attracting and retaining staff, helping people prepare for retirement, and the sheltering of the funds from creditors but it makes you wonder whether small business owners ultimately fold up their plans and rid themselves of the associated costs and administrative hassle when they understand this unintended consequence.
It may be easy to miss given all of the big-ticket items in tax reform, but embedded in the bill are important changes to certain widely-offered fringe benefits. Now that the holidays are past us, it’s a good time to check on whether any of your offerings are impacted.
As you may recall, the original House and Senate versions of the tax bill overhauled a significant number of fringe benefit programs. The final bill, however, stripped out many of the earlier changes but left a few in. Below is a high-level outline of impacted fringe benefit programs:
- Moving Expenses: Both the individual moving expense deduction and Qualified Moving Expense Reimbursement exclusion from income are suspended for the 2018 through 2025 tax years.
- Paid Family and Medical Leave: Employers may earn a credit if they provide paid FMLA time.
- Bicycle Programs: The Qualified Bicycle Commuting Reimbursement exclusion from income is suspended for tax years 2018 through 2025.
- Entertainment: The employer deduction for certain forms of employer-provided entertainment, amusement and recreation expenses is repealed effective 2018.
- Qualified Transportation Benefits: Disallows the employer deduction for these expenses, except to the extent necessary for ensuring employee safety.
- Food & Beverage: Applies a 50% deduction limitation for employers who provide meals to employees via employer-operated facilities.
- Employee Achievement Awards: This one is interesting, in that earlier versions of the bill would have made these awards taxable for recipients. The final bill made a much more modest change in that it clarified items not considered tangible personal property and the Conference Report (H. Rept. 115-466) makes clear that there is no intended change to present law / guidance.
Fortunately, the list of impacted fringe benefit items is not long; however, certain of these fringes (e.g., moving expense reimbursements) are relatively common among employers. Given the 2018 effective date for the changes, it’s a good idea to coordinate with internal resources to see which, if any, of these programs may be affected, and to determine next steps with HR, tax and accounting.