Update on Employment Taxes, Section 409A, and Cafeteria Plan by ufl29091


									Update on Employment Taxes, Section
             409A, and
     Cafeteria Plan Regulations
            Marianna Dyson
             Fred Oliphant
       AGA/INGAA Tax Committee
          November 5, 2007
                Presentation Overview

 Update   on fringe benefits and IRS examinations
     signing bonuses
     Industry Issue Focus (impact on audit activity)
     2007 Fringe Benefit Guide
     cell phones – IIR submission on August 31 and recent
      general information letter
     proposed regulations on entertainment use of
      company aircraft

             Presentation Overview

   Section 409A
       Where are we now?
       409A extension and relief
       Special problem areas
       Compliance strategy considerations
   Proposed Cafeteria Plan Regulations
       Overview
       Hot issues
       Recommended actions

       Signing Bonuses – Ford’s Challenge to
       Retroactive Application of 2004 Ruling
   Rev. Rul. 2004-109 reversed 50 years of rulings that
    certain signing bonuses do not constitute wages for
    payroll tax purposes
   Ruling explains that employment encompasses
    establishment, maintenance, furtherance, alteration,
    or cancellation of ER-EE relationship or any of the
    terms and conditions thereof
   1996 and 1999 lump-sum payments to incentivize
    workers to sign CBA
   FICA tax refund claim denied
   Petition filed in Claims Court claiming retroactive
    application of ruling is abuse of discretion
                          Tier I Issues

   Tier I – issues with high importance, significant
    impact, high dollars, substantial compliance risk or
    high visibility
       Belief by IRS that law is well established – audit teams
        have little practical control
   Backdating of stock options is a Tier I issue
   Nonqualified deferred compensation (i.e., section
    409A) was originally a Tier I issue, but IRS quietly
    backed off that position in July

                 Executive Compensation
                     Audit Initiatives

   6 Audit Techniques Guides issued in early 2005
       Stock-based compensation, nonqualified deferred
        compensation, section 162(m), golden parachutes,
        split-dollar life insurance, and fringe benefits
   Additional employment tax specialists added to LMSB
   Focus on executives’ perks – examples of “irrational
    corporate largesse”
   Uptick in examinations led to broader employment tax
    examinations and issuance of “Taxable Fringe
    Benefit Guide” in January 2007

                  Audit Themes Specific to
                     Executives’ Perks
   Deduction disallowances under §§ 274 and 162(m),
    in addition to failure to impute and report wages
   Entertainment (e.g., personal travel, club memberships)
   Spousal travel benefits
   Expense accounts (misuse of credit cards)
   Loans
   Meals
   Post-termination benefits (including taking property)
   Use of employer-provided transportation
   Personal use of listed property
   Security
          Audit Themes in Taxable FB Guide

   section 132 fringe benefits;
   accountable plans;
   travel advances;
   travel expense reimbursements;
   per diem and actual expense reimbursements;
   transportation expense reimbursements;
   moving expenses;
   meals and lodging for the convenience of the
   meal allowances and reimbursements;
   employee-vehicle used for employer’s business;
          Audit Themes in FB Guide (cont’d)

   employer-provided vehicles;
   qualified transportation fringe benefits;
   independent contractor expenses;
   allowances paid by the employer (including uniforms,
    equipment, mileage, cell phones);
   other types of compensation;
   awards and prizes;
   professional licenses and dues for organizations;
   student wages - Social Security/Medicare exception;
   volunteers; and
   education reimbursements/allowances
                  Update on Cell Phones

   Statutory characterization as “listed property”
    imposed detailed recordkeeping requirements
   Insufficient records of business use results in wage
   With exception of sampling, no streamlined
    substantiation rules under section 274(d)
   Recent IRS activity – reference in FB Guide
   Miller & Chevalier’s Aug. 31 request for guidance
    under Industry Issue Resolution Program
   Recent general information letter

        Entertainment Use of Company Aircraft

   AJCA of 2004 amendment to section 274(e)(2),
    limiting deductions for entertainment expenses,
    including use of corporate aircraft
   Notice 2005-45 released in May 2005 set forth an
    allocation method based on passengers’ reasons for
    flying rather than primary purpose test
   Proposed regulations under section 274(e)(2)
    published on June 15, 2007
       Reaffirmation of allocation approach

         409A Guidance – Where Are We Now?

   Current Status
       Final regulations issued in April 2007
       Extension for full documentary and operational
        compliance until December 31, 2008 under Notice
   Expected Additional Regulations
       Guidance on calculation and inclusion of non-
        compliant amounts
       Reporting and withholding guidance
       Offshore trust guidance
       PPA technical guidance regarding funding NQDC

               409A Extension and Relief:
               Notices 2007-86 and 2007-78

   Extension of compliance deadline
   Relief for special situations
       Adoption of “good reason” definition
       Employment agreements renewals
       Application of cashout provisions
   Voluntary compliance program
   Relief under Notice 2006-33

                   Design Considerations
                   Special Problem Areas
 SERPs   with offset features
 Alternative form of death benefit payments
 Separation agreements and potential application of
  substitution rule where payments are in lieu of other
     Connecting the dots – lump sum payments in lieu of
      other deferred amounts
     Connecting the dots – does this also extend to deferred
      payments in lieu of forfeited short-term deferrals?
 Guaranteed  bonuses
 Director/employee separation from service

           Compliance Strategy Considerations

   Compliance strategy for 2007 and 2008
       Continue efforts to formulate and implement
        409A approach – watch application of “in/out” rule
       Coordinate among Tax, Legal, and HR with
        respect to all covered arrangements
       Address related operational issues
        Consider contracts with vendors
        Consider policy on gross-ups re mistakes
        Consider safeguards re administration of plans
       Watch for possible future legislation

         Cafeteria Plan Proposed Regulations

   On August 6, 2007, the IRS published new proposed
    regulations on cafeteria plans
   IRS intent was to consolidate and update prior rules
    dating back as far as 1984
   For the most part, the rules will take effect for plan
    years beginning on or after January 1, 2009;
    however, employers may begin relying on the rules
   Prior proposed and temporary regulations were
    withdrawn; therefore primary guidance is found in the
    new proposed rules and §§ 1.125-3 (cafeteria plans
    and FMLA) and 1.125-4 (qualified changes in status)
                              Hot Issues
   Zero tolerance compliance standard -- plans must
    precisely follow all of the rules in terms of plan design,
    written plan documents and operations
       Noncompliance with these rules means the employees’ entire
        elections will be included in their gross incomes, regardless of
        whether they elected taxable or nontaxable benefits
       No de minimis rule or method for correcting identified errors
   Written plan document requirements are very specific and
    much more expansive
   All claims must be substantiated before being reimbursed
   Debit card rules are very exacting yet often unworkable
   Nondiscrimination rules define key terms and provide
    information about performing the tests, but leave many
    important questions unanswered
                      Recommended Action
   Consider submitting comments to IRS (even after
    comment deadline)
   Review plan documents, vendor contracts, and operations
    for compliance with the proposed regulations
       When these rules are finalized (likely in the fall of 2008),
        employers may not have much time if major program changes
        are needed; it may be prudent to start making a contingency
        plan now
       We also recommend talking with current vendors to determine
        whether they will be able to comply with these standards,
        particularly with regard to the debit card and substantiation
   Consider incorporating newly available options, perhaps
    for the 2008 plan year (plan amendments must first be
    adopted in accordance with the new rules)
For more information, please contact:

Fred Oliphant

Marianna Dyson


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