Proposed Tax Reform: Ignore The Noise

While I usually do not post about proposed legislation, because it is so speculative, I am going to make an exception in the case of the House Republicans’ proposed Tax Cuts and Jobs Act for several reasons.

The first reason is that, the much-hyped potential reduction to $2,400 in pre-tax deferral limits to 401(k) and 403(b) Plans is not in the actual proposed legislation. In any event, given the popularity of 401(k) Plans, I would rate the chances of this particular proposal ever making it into law at about as close to zero as one could get. My advice is: don’t spend any time worrying about how to deal with it.

The second reason is that there has been virtually no press coverage of the proposed evisceration of non-qualified deferred compensation plans and other employee benefits changes, which are part of the proposed legislation. More on that below, if you are interested.

The third, and bigger point, is that it is way too early to start spending your precious time figuring out how to deal with this this proposed legislation. Recent history tells us that, even with Republican control of all three branches of government, major legislation is very difficult to pass. I can count this year’s major legislative accomplishments on no hands. And even if tax reform legislation does pass, it will likely look quite different from the initial House proposal once it has gone through the House, the Senate and a joint committee. So again, my advice is: don’t spend any time worrying about how to deal with the potential changes in the tax code. You have better things to do with your precious time.

If you are still interested in more details on these proposals you can read the proposed legislation, the House Committee on Ways and Means section-by-section summary, or the short summary below.

Summary of employee benefits tax proposals

The most significant proposal, in my view, is to eliminate the ability to defer taxation of compensation earned and vested in one year into a subsequent year, which is generally governed by Code Sections 409A and 457(b). If enacted, this would essentially eliminate future non-qualified deferred compensation arrangements.

In addition, proposed changes to qualified plans would repeal the special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions, expand the source accounts from which hardship distributions could be taken, and repeal the six month prohibition on making deferrals after taking a hardship distribution.

Other proposed benefits changes would repeal income exclusions for employee achievement awards, dependent care assistance programs, qualified moving expense re-imbursement, and adoption assistance programs.

IRS Releases 2016-2017 Priority Guidance Plan

The IRS has published its 2016–2017 Priority Guidance Plan containing 281 projects that are priorities for allocation of its resources during the twelve-month period from July 2016 to June 2017.

Significant employee benefits issues prioritized for guidance in the next year include:

  • Additional guidance on the determination letter program, including changes to the pre-approved plan program.
  • Updates to the Employee Plans Compliance Resolution System (EPCRS) to reflect changes in the determination letter program and to provide additional guidance with regard to corrections.
  • Final regulations on income inclusion under §409A.
  • Guidance to update prior §409A guidance on self-correction procedures.
  • Final regulations under §457(f) on ineligible plans.
  • Guidance on issues under §4980H (the Employer Mandate).
  • Regulations under §4980I regarding the excise tax on high cost employer-provided coverage (the Cadillac Tax)
  • Regulations updating the rules applicable to ESOPs.
  • Regulations under §401(a)(9) on the use of lump sum payments to replace lifetime income being received by retirees under defined benefit pension plans.
  • Guidance regarding substantiation of hardship distributions.
  • Guidance on the §403(b) remedial amendment period.

Notably absent is any mention of guidance on the nondiscrimination rules applicable to fully-insured medical plans, which were included in the Affordable Care Act.  The Treasury Department and the IRS, as well as the Departments of Labor and Health and Human Services (collectively, the Departments), previously determined in Notice 2011-1 that compliance with the nondiscrimination provisions will not be required (and thus, any
sanctions for failure to comply do not apply) until after regulations or other administrative guidance of general applicability has been issued. Therefore, for the foreseeable future fully insured plans can continue to discriminate in favor of highly compensated individuals in ways the self-insured plans cannot under Code Section 105(h).

IRS 2016–2017 Priority Guidance Plan

IRS Issues Proposed Regulations Clarifying and Modifying the Final 409A Regulations

IRS has issued proposed regulations that would clarify or modify certain specific provisions of the final regulations under section 409A, including revisions to the rules regarding the calculation of amounts includible in income under section 409A.  The proposed regulations:

(1) Clarify that the rules under section 409A apply to nonqualified deferred compensation plans separately and in addition to the rules under section 457A.

(2) Modify the short-term deferral rule to permit a delay in payments to avoid violating Federal securities laws or other applicable law.

(3) Clarify that a stock right that does not otherwise provide for a deferral of compensation will not be treated as providing for a deferral of compensation solely because the amount payable under the stock right upon an involuntary separation from service for cause, or the occurrence of a condition within the service provider’s control, is based on a measure that is less than fair market value.

(4) Modify the definition of the term “eligible issuer of service recipient stock” to provide that it includes a corporation (or other entity) for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right.

(5) Clarify that certain separation pay plans that do not provide for a deferral of compensation may apply to a service provider who had no compensation from the service recipient during the year preceding the year in which a separation from service occurs.

(6) Provide that a plan under which a service provider has a right to payment or reimbursement of reasonable attorneys’ fees and other expenses incurred to pursue a bona fide legal claim against the service recipient with respect to the service relationship does not provide for a deferral of compensation.

(7) Modify the rules regarding recurring part-year compensation.

(8) Clarify that a stock purchase treated as a deemed asset sale under section 338 is not a sale or other disposition of assets for purposes of determining whether a service provider has a separation from service.

(9) Clarify that a service provider who ceases providing services as an employee and begins providing services as an independent contractor is treated as having a separation from service if, at the time of the change in employment status, the level of services reasonably anticipated to be provided after the change would result in a separation from service under the rules applicable to employees.

(10) Provide a rule that is generally applicable to determine when a “payment” has been made for purposes of section 409A.

(11) Modify the rules applicable to amounts payable following death.

(12) Clarify that the rules for transaction-based compensation apply to stock rights that do not provide for a deferral of compensation and statutory stock options.

(13) Provide that the addition of the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to a payment due to a service provider’s death as a potentially earlier or intervening payment event will not violate the prohibition on the acceleration of payments.

(14) Modify the conflict of interest exception to the prohibition on the acceleration of payments to permit the payment of all types of deferred compensation (and not only certain types of foreign earned income) to comply with bona fide foreign ethics or conflicts of interest laws.

(15) Clarify the provision permitting payments upon the termination and liquidation of a plan in connection with bankruptcy.

(16) Clarify other rules permitting payments in connection with the termination and liquidation of a plan.

(17) Provide that a plan may accelerate the time of payment to comply with Federal debt collection laws.

(18) Clarify and modify the proposed rules regarding the treatment of deferred amounts subject to a substantial risk of forfeiture for purposes of calculating the amount includible in income under section 409A.

(19) Clarify various provisions of the final regulations to recognize that a service provider can be an entity as well as an individual.

Proposed 409A Regulations

Related Post Regarding Proposed 457 Regulations