Tag: IRS

DOL and IRS Releases Updated Form 5500 Series for 2015

DOL and IRS recently posted the new 2015 Form 5500, Form 5500-SF, and a draft of the 2015 Form 5500-EZ. Of significance is the “IRS Compliance Questions” added to the various forms and schedules:

  • Schedules H and I add two new compliance questions about unrelated business taxable income and in-service distributions.
  • Schedule R adds ten new compliance questions in five areas: (1) ADP and ACP testing; (2) coverage testing and plan aggregation; (3) recently adopted plan amendments; (4) the type of plan (whether individually designed or preapproved); and (5) plans maintained in U.S. territories.
  • Form 5500-SF adds the above compliance questions and one additional question about whether required minimum distributions were properly made to 5% owners who are still employed and are were 70-1/2 or older.
  • Form 5500-EZ adds most of the above questions, except the testing and coverage questions, which do not apply to single person plans.

2015 Form 5500 series and Instructions

Draft 5500-EZ and Instructions

IRS Updated Plan Limits for 2016

IRS has announced the retirement plan and employee benefits limits for 2016. Most of the limits are unchanged. The exception is the HSA Maximum Contribution for Family increased $100 to $6,750. Here is a chart showing the limits for 2014 through 2016:

Type of Limitation 2016 2015 2014
415 Defined Benefit Plans $210,000 $210,000 $210,000
415 Defined Contribution Plans $53,000 $53,000 $52,000
401(k) Elective Deferrals, 457(b) and 457(c)(1) $18,000 $18,000 $17,500
401(k) Catch-Up Deferrals $6,000 $6,000 $5,500
SIMPLE Employee Deferrals $12,500 $12,500 $12,000
SIMPLE Catch-Up Deferrals $3,000 $3,000 $2,500
Annual Compensation Limit $265,000 $265,000 $260,000
SEP Minimum Compensation $600 $600 $550
SEP Annual Compensation Limit $265,000 $265,000 $260,000
Highly Compensated $120,000 $120,000 $115,000
Key Employee (Officer) $170,000 $170,000 $170,000
Income Subject To Social Security Tax (FICA) $118,500 $118,500 $117,000
Social Security (FICA) Tax For ER & EE (each pays) 6.20% 6.20% 6.20%
Social Security (Med. HI) Tax For ERs & EEs (each pays) 1.45% 1.45% 1.45%
SECA (FICA Portion) for Self-Employed 12.40% 12.40% 12.40%
SECA (Med. HI Portion) For Self-Employed 2.9% 2.90% 2.90%
IRA Contribution $5,500 $5,500 $5,500
IRA catch-up Contribution $1,000 $1,000 $1,000
HSA Max Single/Family $3,350/6,750 $3,350/6,650 $3,300/6,550
HSA Catchup $1,000 $1,000 $1,000
HSA Min. Annual Deductible Single/Family $1,300/2,600 $1,300/2,600 $1,250/2,500

Health Care Coverage Information Returns – Update

Final Versions of 2015 Health Care Information Reporting Forms Now Available

The Internal Revenue Service has released the final versions of two key 2015 forms and the related instructions that employers and insurers will send to the IRS and individuals this winter to report health care coverage they offered or provided. The IRS published these forms in 2014 and released draft forms and instructions for 2015 earlier this summer. The final forms and instructions for 2015 are largely unchanged from the previously released drafts.

The 2015 version of Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and instructions used by employers with 50 or more full-time employees are now available on IRS.gov.

Form 1095-B, Health Coverage, and instructions primarily used by insurers and health coverage providers, including employers that sponsor self-insured plans, have been released as well.

The related document transmittal Forms 1094-B and 1094-C are also available on IRS.gov.

The health care law requires certain employers and providers to submit the 2015 forms to the IRS and individuals in early 2016. Though the forms were available for voluntary use in tax-year 2014, the upcoming tax season will be the first time that reporting is mandatory.

Now is the Time to Determine ALE Status

Employers that are applicable large employers should be taking steps now to prepare for the coming filing season. You must determine your ALE status each calendar year based on the average size of your workforce during the prior year. If you had at least 50 full-time employees, including full-time equivalent employees, on average during 2014, you are most likely an ALE for 2015.

In 2016, applicable large employers must file an annual information return – and provide a statement to each full-time employee..

If you will file 250 or more information returns for 2015, you must file the returns electronically through the ACA Information Reports system. You should review draft Publication 5165, Guide for Electronically Filing Affordable Care Act (ACA) Information Returns, now for information on the communication procedures, transmission formats, business rules and validation procedures for returns that you must transmit in 2016.

 

IRS Announces Significant Reduction in Determination Letter Program

On July 21, 2015, the IRS announced changes to the favorable determination letter program for qualified retirement plans. Employers that sponsor individually designed plans should take a close look at whether they can state their plans on a pre-approved plan document, particularly a volume submitter document, for the reasons explained in this post.

Most significantly, the IRS will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans as of January 2017. This means that, effective as of January 1, 2017, sponsors of individually designed plans will only be permitted to submit a determination letter application for qualification in two circumstances:

  • upon initial plan adoption; and
  • upon plan termination.

In addition, effective immediately, the IRS will no longer accept determination letter applications for individually designed plans that are submitted off-cycle, except for new plans and for terminating plans.

Implications for Plan Sponsors

These changes to the determination letter program increase the risk that document failures may get into, and remain for a long period of time in, plan sponsor’s qualified retirement plans. For example, a failure to adopt a required amendment to the plan document, which ordinarily would have been discovered and corrected in connection with the staggered 5-year determination letter remedial amendment cycle, could now persist for years or even decades before being discovered. Plan terminations will likely become more difficult, time consuming and costly if such errors are not discovered until the Plan submits for a favorable determination upon termination.

Plans that are stated on a pre-approved document (such as a volume submitter or prototype plan document) will continue to receive IRS opinion letters on the language in those plans. In addition, plan sponsors who adopt a volume submitter plan and make limited modifications to the approved specimen plan, which does not create an individually designed plan, will still be able to get a favorable determination on their plans every six years. These plans will thereby avoid the above risks.

For this reason, employers that sponsor individually designed plans should closely evaluate whether they can convert their plans to a pre-approved plan document, with a goal of completing the transition by January 1, 2017. Many individually designed plans may be able to fit onto a volume submitter plan with minor modifications, which will allow those sponsors to continue receiving a favorable determination lettre on their plan every six years.

Additional Guidance Expected from the IRS

The IRS has asked for comments, and expects to issue further guidance, regarding how it can assist plan sponsors that wish to convert individually designed plans to pre-approved plans.

We should also expect some changes to the IRS’s EPCRS correction program, to help correct errors that inevitably will increase as a result of this curtailment in the favorable determination letter program.

In addition, the IRS is considering ways to make it easier for plan sponsors that continue to sponsor individually designed plans to comply with the qualified plan document requirements, including:

  • providing model amendments,
  • not requiring certain plan provisions or amendments to be adopted if and for so long as they are not relevant to a particular plan (for example, because of the type of plan, employer, or benefits offered),
  • or expanding plan sponsors’ options to document qualification requirements through incorporation by reference.

icon IRS Announcement 2015-19

Final Rules Regarding Religious Accommodation of Contraceptive Coverage Mandate

On July 14, 2015 the IRS, DOL and HHS will jointly issue final rules regarding no additional cost preventive services, including contraceptive services, under the Affordable Care Act.

The final rules maintain the existing accommodation for eligible religious nonprofits, but also finalizes an alternative pathway for eligible organizations that have a religious objection to covering contraceptive services to seek an accommodation from contracting, providing, paying, or referring for such services. The rules allow these eligible organizations to notify HHS in writing of their religious objection to providing contraception coverage, as an alternative to filling out the form provided by the Department of Labor (EBSA Form 700) to provide to their issuer or third-party administrator. HHS and the DOL will then notify insurers and third party administrators of the organization’s objection so that enrollees in plans of such organizations receive separate payments for contraceptive services, with no additional cost to the enrollee or organization, and no involvement by the organization.

The alternative notice must include:

  • the name of the eligible organization and the basis on which it qualifies for an accommodation;
  • its objection based on sincerely held religious beliefs to covering some or all contraceptive services, as applicable (including an identification of the subset of contraceptive services to which coverage the eligible organization objects, if applicable);
  • the plan name and type; and
  • the name and contact information for any of the plan’s third party administrators and health insurance issuers.

The departments issued a model notice to HHS that eligible organizations may, but are not required to, use.

Nothing in this alternative notice process (or in the EBSA Form 700 notice process) provides for a government assessment of the sincerity of the religious belief underlying the eligible organization’s objection.

In addition, the final rules provide certain closely held for-profit entities the same accommodations. Relying on a definition used in federal tax law, the final rules define a “closely held for-profit entity” as an entity that is not publicly traded and that has an ownership structure under which more than 50 percent of the organization’s ownership interest is owned by five or fewer individuals, or an entity with a substantially similar ownership structure. For purposes of this definition, all of the ownership interests held by members of a family are treated as being owned by a single individual. The rules finalize standards concerning documentation and disclosure of a closely held for-profit entity’s decision not to provide coverage for contraceptive services.

The final rules also finalize interim final rules on the coverage of preventive services generally, with limited changes.

iconFinal Rules

icon Model Notice

IRS Ends Lump Sum Risk Transferring Programs in Defined Benefit Plans

Treasury Department and the IRS announced today in Notice 2015-49 that they intend to amend the required minimum distribution regulations under Code Section 401(a)(9) to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.

The revised regulations will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution. These amendments to the regulations will apply as of July 9, 2015.

Background

Section 401(a)(9) prescribes required minimum distribution rules for a qualified plan under Code Section 401(a). Under the regulations, a defined benefit pension plan cannot permit a current annuitant to convert their annuity payments to a lump sum or otherwise accelerate those payments, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement, death, or plan termination. In addition, the regulations permit annuity payments to increase “[t]o pay increased benefits that result from a plan amendment.”

A number of defined benefit plan sponsors have amended their plans pursuant to this “plan amendment” exception to provide a limited period during which certain retirees who are currently receiving joint and survivor, single life, or other life annuity payments from those plans may elect to convert that annuity into a lump sum that is payable immediately. These arrangements are sometimes referred to as lump sum risk-transferring programs because longevity risk and investment risk are transferred from the plan to the retirees.

In 2012, the IRS issued Private Letter Rulings to General Motors and Ford specifically approving such programs for those companies. See PLR 201228045 and PLR 201228051. While Private Letter Rulings do not apply to anyone other than the person to whom they are issued, many employers found support in those PLRs for their risk transfer programs. With the change in the regulations announced today, those PLRs no longer provide any support.

Conclusion

The Treasury Department and the IRS have concluded that a broad exception for increased benefits that would permit lump sum payments to replace rights to ongoing annuity payments (of the kind approved in the two 2012 PLRs) would undermine the intent of the required minimum distribution regulations. Therefore, the exception for changes to the annuity payment period provided in the regulations (as intended to be amended) will not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.

icon Notice 2015-49

IRS Expands Pre-Approved Plan Document Program to Include Cash Balance Plans and ESOPs

On June 8, 2015, the IRS issued Revenue Procedure 2015-36, which announces the IRS expansion of its pre-approved plan program to include cash balance plans and employee stock ownership plans (ESOPs). With this expansion, master & prototype and volume submitter plan providers can apply for opinion and advisory letters for cash balance plans by October 30, 2015, and for ESOPS during the defined contribution application period beginning February 1, 2017.

While this presents opportunities for ESOP sponsors to streamline their plan documentation, it is not without risks. As Cindy Shupe warned back in 2013, use of pre-approved documents can increase the risk of non-compliance if plan sponsors assume that use of a pre-approved document will ensure compliance with the complicated ESOP financing and prohibited transactions rules. Therefore, while we encourage ESOP sponsors to consider adopting a pre-approved plan document in the next cycle, we also encourage early conversations with ERISA counsel to evaluate the viability and implications of doing so. In addition to the above compliance issues, Employers currently maintaining individually designed ESOPS that intend to adopt a pre-approved plan (when available) will need to complete Form 8905, Certification of Intent To Adopt a Pre-approved Plan, before the end of their plan’s current 5-year remedial amendment cycle.

IRS Updates Health Savings Account Limits for 2016

The IRS has updated the Health Savings Account (HSA) limits for 2016:

  • The annual limit on HSA contributions for individuals with self only coverage under a High Deductible Health Plan (HDHP) is $3,350 (unchanged from 2015). For an individual with family coverage, the limit is $6,750 (up from $6,650 in 2015).
  • The minimum annual deductible for a HDHP is $1,300 for self only coverage and $2,600 for family coverage (both unchanged from 2015).
  • The annual out of pocket maximum for an HDHP is $6,550 for self-only coverage (up from $6,450 in 2015) and $13,100 for family coverage(up from $12,900 in 2015)

icon Rev Proc 2015-30

IRS Proposes Various Approaches to Cadillac Tax Implementation

IRS released Notice 2015-16 on February 23, 2015. The notice describes potential approaches the IRS may take in developing regulations to implement the Cadillac Tax, which imposes a 40% excise tax on high cost employer-sponsored health coverage in excess of a statutory dollar limit. The tax applies if the cost of coverage is in excess of $10,200 per employee for self-only coverage and $27,500 per employee for other than self-only coverage. The issues addressed in Notice 2015-16 primarily relate to:

(1) defining the coverage to which the tax applies,

(2) determining the cost of applicable coverage, and

(3) applying the annual statutory dollar limit to the cost of applicable coverage.

Significant for many employers: the cost of applicable coverage will most likely include amounts made available under a Health Reimbursement Arrangement (HRA), as well as both employer and employee salary reduction contributions to Health Flexible Spending Accounts (Health FSAs), Health Savings Accounts (HSAs), and Archer MSAs. In addition, Notice 2015-16 describes various potential approaches where an employee is covered by both individual coverage (for example an employee may have self-only major medical coverage and supplemental coverage (such as an HRA) that covers the employee and the employee’s family. The notice invites comments on various potential approaches to these and other issues raised by the Cadillac Tax.

icon Notice 2015-16

Calculating and Paying the Excise Tax for Violating the ACA Market Reforms

Code Section 4980D imposes an excise tax equal to $100 per day per individual (theoretically, $36,500 per year per person) for not complying with the ACA market reforms. For employers with “employer payment plans” that do not satisfy the ACA market reforms, this penalty theoretically could be imposed for every employee who receives reimbursement of insurance premiums. In addition to the transition relief discussed in a prior post the tax can be reduced, or potentially eliminated entirely, if it was due to reasonable cause and not willful neglect.

No Tax If No-One Knew or Should Have Known About the Failure

First, the penalty could be avoided entirely for any period that the employer could show that no-one at the employer knew, or exercising reasonable diligence would have known, that the failure occurred. Code Section 4980D(c)(1). It is not clear what evidence a taxpayer would need to support taking this position. The Excise Tax return used to report the tax (Form 8929) permits tax payers to calculate the tax as $0 by claiming this exemption without submitting anything other than the Form 8928 claiming the exemption. See the form 8928 here and the Form 8928 Instructions here

No Tax If Failure Was Due to Reasonable Cause and Is Corrected Within 30 Days

Second, the penalty could be avoided if the employer could show that (1) the failure was due to reasonable cause and not willful neglect, and (2) the failure is corrected within 30 days after the employer learned of the failure. Code Section 4980D(c)(2). Correction means the failure is retroactively undone to the extent possible and each beneficiary of the plan is put in the same financial position they would have been in if the failure had not occurred.

It is not clear how one would correct a failure to satisfy the market reforms. In the case of employer re-imbursement plans, options to consider include (1) undo the premium reimbursement arrangement by requiring the recipients to return the re-imbursement; (2) make the reimbursements taxable and then provide additional taxable compensation to all employees so that all employees receive the same amount of additional taxable compensation (either as a percentage of their base, or as a dollar amount); or (3) determine whether anyone was subject to an annual limit or preventative care cost sharing provision under the individual policy (i.e. the market reforms applicable to group plans) that they would not have been subject to had those policies complied with the group policy mandates in that regard, and then provide them additional reimbursement to cover the costs of those services. Each of these options has potential problems and none of them is specifically approved. We recommend employers consult their counsel regarding their particular facts and circumstances before fashioning a correction.

The Tax is Limited to 10% of the Premiums paid.

Finally, for a single employer plan the maximum penalty in the case of a failure that was due to reasonable cause and not willful neglect, is 10% of the amount paid for the group health plan by the employer for the year. In the case of a n employer reimbursement plan, this would be 10% of the mount of the premiums paid or reimbursed by the employer. Code Section 4980D(c)(3).