The Internal Revenue Service (“IRS”) recently announced a new settlement program for employers with misclassified workers. Under the Voluntary Classification Settlement Program (“VCSP”), employers can get a significant reduction in their federal employment tax liability associated with past nonemployment treatment by agreeing to properly classify their workers for future tax periods. This announcement comes on the heels of recent announcements that the IRS, Department of Labor (“DOL”) and various state agencies are collaborating on examining worker misclassification issues.
The VCSP is generally available to employers who want to voluntarily change the prospective classification of their misclassified workers from independent contractors (or other nonemployee status) to employees. To be eligible, the employer must have consistently treated the workers as nonemployees and for the three previous three years filed all required Forms 1099 for such workers. Further, the employer cannot be under audit by the IRS or by the DOL or a state government agency concerning the classification of the workers. An employer who has been previously audited by the IRS or DOL concerning the classification of workers is eligible for the VCSP only if it has complied with the results of that audit.
In exchange for agreeing to prospectively treat the class of workers as employees for future tax periods, the employer will pay only 10% of the employment tax liability that otherwise would have been due on the compensation paid to the workers for the most recent tax year, but determined under the reduced rates of Section 3509 of the Internal Revenue Code. Additionally, the employer will not be liable for any interest and penalties and will not be subject to an employment tax audit with respect to the classification of such workers for prior years. However, the employer must agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the employer has agreed under the VCSP closing agreement to begin treating the workers as employees.
Eligible employers who wish to participate in the VCSP must submit an application, which should include the name of an employer representative or an authorized outside representative with a valid Form 2848 (Power of Attorney), to the IRS. The IRS retains discretion whether to accept an employer’s application for the VCSP. An employer whose application is accepted must enter into a closing agreement with the IRS and simultaneously make full and complete payment of any amount due under the closing agreement.
Overall, the VCSP provides employers with an attractive avenue to come into tax compliance and obtain closure with respect to any worker misclassification. Note however, that the VCSP does not address or provide relief for worker misclassification as it relates to the employer’s employee benefit plans and there’s no guarantee that the IRS will accept an employer’s application to the program.
Information about the VCSP is available on the IRS website.
In a phone forum held on September 12, 2011, Internal Revenue Service (“IRS”) officials were reported by BNA Pension and Benefits Daily in a September 13, 2011 article by Florence Olsen as indicating that the Prime rate + 1% may not be a reasonable interest rate under the Internal Revenue Code prohibited transaction rules which apply to loans from qualified plans. For corrections and audit purposes, the IRS may be looking to the Prime rate + 2%. In recent years, plan administrators typically set the interest rate for plan loans as the Prime rate + 1% in effect on the first of the month during which the loan is originated (or a similar set date). If a participant can not secure a loan in the open market with an interest rate of Prime + 1%, the IRS official indicated that the Prime rate + 2% may be a more appropriate measurement of a reasonable interest rate.
A qualified plan loan is distinctly different than a loan obtained on the open market. Repayments are generally secured through payroll withholding and transmitted by the employer directly to the plan. In addition, the collateral for the loan is secure since it’s the participant’s own account balance in the plan. Therefore, the source of loan repayment and the collateral are likely to be more secure in the context of a qualified plan loan than a loan obtained in the open market. Arguably, these factors weigh in favor of a lower rate being reasonable in the context of a qualified plan loan than a rate which would apply to a loan obtained in the open market.
In order to dot the fiduciary I’s and cross the fiduciary T’s, plan administrators should periodically review the interest rate used for qualified plan loan purposes and document the reasons for establishing the rate at the level determined to be reasonable. These remarks by IRS officials may persuade some plan administrators to raise the plan loan interest rate to Prime + 2%.
With the issuance of Notice 2011-72, the Internal Revenue Service finally addressed the uncertainty relating to the tax treatment of employer-provided cell phones (or other similar telecommunications equipment) and of the personal use of an employer-provided cell phone by the employee.
Historically, cell phones provided by an employer to its employees for business use were deductible to the employer and excludable from the employee’s income as a “working condition fringe benefit”, subject to stringent recordkeeping requirements. However, the Small Business Jobs Act of 2010 removed the cell phones from the definition of listed property for tax years beginning after December 31, 2009. As a result, employers could arguably exclude the value of certain employer-provided cell phones from employee wages without complying with the substantiation requirements applicable to other employer provided property.
This new guidance offers good news for employers. Pursuant to Notice 2011-72, an employee’s use of an employer-provided cell phone for reasons related to the employer’s trade or business will be treated as a working condition fringe benefit and excludable from the employee’s income if the cell phone is issued primarily for business reasons. A cell phone is considered to be issued primarily for business purposes if there are substantial reasons relating to the employer’s business for providing the employee with a cell phone (other than to provide compensation to the employee). But perhaps the best news for employers is that any substantiation requirements that would otherwise be needed to take a deduction will be deemed to be satisfied. The Notice also clarified that the value of any personal use by the employee of the employer-provided cell phone will be excludable from the employee’s gross income as a “de minimis fringe benefit”.
Simultaneous with the issuance of Notice 2011-72, the SB/SE Director of Examination issued an IRS Memorandum to all field examiners, dated September 14, 2011, providing interim audit guidance on employer reimbursement to employees for expenses relating to use of their personal cell phones for business purposes. Where employers, for substantial business reasons, require employees to maintain and use their personal cell phones for business purposes, reimbursement by the employer of employees’ cell phone expenses will not result in wages to the employees. However, the employees must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employees actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee’s personal cell phone cannot be a substitute for a portion of the employee’s regular wages.
Examples of substantial noncompensatory business reasons for requiring employees to maintain personal cell phones and reimbursing them for their use include: (1) the employer’s need to contact the employee at all times for work-related emergencies; and the (2) the employer’s requirement that the employee be available to speak with clients at times when the employee is away form the office or at times outside the employee’s normal work schedule.
Notice 2011-72 is applicable to any use of an employer-provided cell phone occurring after December 31, 2009.
The fall is the time many employers with calendar year group health plans begin to prepare for open enrollment. Below is a list of required notices that employers should consider including in their enrollment materials.
- COBRA Notice. Plan administrators must provide a written initial COBRA notice to each employee and his or her spouse when group health plan coverage first commences of his or her rights under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”). This notice must contain specific information, and the Department of Labor has issued a model notice.
- HIPAA Privacy Notice. If the group health plan is required to maintain a notice of privacy practices under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the notice must be distributed upon an individual’s enrollment in the plan. Notice of availability to receive another copy must be given every three years.
- Special Enrollment Rights. A group health plan must provide each employee who is eligible to enroll with a notice of his or her HIPAA special enrollment rights at or prior to the time of enrollment. Among other things, this notice must describe the recently enacted rights afforded under the Children’s Health Insurance Program Reauthorization Act.
While most of the design changes required for group health plans under the Patient Protection and Affordable Care Act, as amended (“PPACA”), became effective in 2010 or 2011, some additional requirements must be implemented for 2012.
All group health plans subject to PPACA must comply with the following requirements, regardless of its status as a “grandfathered health plan”:
- Provision of a Summary of Benefits. The summary must include the information specified in the regulations but cannot exceed four double-sided pages. A summary must be provided to participants and beneficiaries as part of any written enrollment materials and a summary must be included for each benefit package offered for which the participant or beneficiary is eligible. However, upon renewal, only the summary for the benefit package in which the participant is enrolled needs to be furnished, unless the participant or beneficiary requests a summary for another benefit package. Unless an extension is granted, summaries must be issued no later than March 23, 2012. Instructions and a template of a draft summary of benefits is published in the Federal Register and can be viewed at http://www.gpo.gov/fdsys/pkg/FR-2011-08-22/pdf/2011-21192.pdf.
- W-2 Reporting Obligation. Employers must begin reporting the aggregate cost of applicable employer-sponsored coverage on an employee’s Form W-2 beginning with the Form W-2 issued in January 2013 for the 2012 tax year. Make sure that you have appropriate systems in place to collect and determine the value that must be reported. IRS Notice 2011-28, available at http://www.irs.gov/pub/irs-drop/n-11-28.pdf, provides interim guidance on the reporting requirements (including information on how and what to report).
Last week we looked at the implications of New York’s Marriage Equality Act (“Act”) upon the tax treatment of employer-provided health care benefits for same-sex married couples in New York. Today we’ll consider how the Act affects the administration of family and medical leave, HIPAA special enrollment rights and health care continuation coverage under COBRA and New York’s “mini-COBRA” law.
Should employers include a “drunk driving” benefit exclusion in their death and disability policies? Two recent court cases illustrate that these provisions may determine whether or not an employee is entitled to benefits for injuries that occur while intoxicated.
In Allen v. Standard Insurance Co., an employee was found to be intoxicated when she drove to work, crossed the centerline into oncoming traffic, hit a truck head-on and suffered severe head injuries. Because the long-term disability policy provided by her employer limited benefits for disabilities related to substance abuse, the district court ruled that the employer properly limited her benefits because her disability was caused by a drunk driving accident.
In Thies v. Life Insurance Co. of North America, an employee was found to be intoxicated when he crashed a jet ski and died. His employer-provided life insurance policy did not include a drunk driving benefit exclusion. The district court ruled the plan administrator acted arbitrarily in denying benefits to the employee’s children on the grounds that he was drunk. The court noted there is no current case law that automatically denies benefits for injury or death resulting from operating a vehicle while intoxicated. The court also rejected the argument that the injury was self-inflicted because the employee voluntarily drank alcohol.
On June 22, 2011, an en banc panel of the Ninth Circuit Court of Appeals issued its much anticipated decision in Cyr v. Reliance Standard Ins. Co., 642 F.3d 1202 (9th Cir. 2011) (en banc). Considering the issue of whether ERISA section 1132(a)(1)(B) authorizes actions to recover plan benefits against an insurer, the Court overruled prior decisions and held that a claimant may sue an insurer directly for unpaid benefits, even if that insurer is not the plan administrator.
In that case, Plaintiff Laura A. Cyr (“Cyr”) collected long-term disability benefits based on her compensation. While on long-term disability, Cyr sued her former employer for pay discrimination because of her sex. Cyr and the former employer settled that claim and the former employer retroactively adjusted Cyr’s salary. Cyr then approached the long-term disability insurer, Defendant Reliance Standard Life Insurance Company (“Reliance”) about adjusting her disability payments accordingly. Reliance denied the request and Cyr sued Reliance.
Earlier this year, a split Seventh Circuit panel reversed, in part, summary judgment previously granted in favor of Kraft Foods Global, Inc. (“Kraft”) in a class action ERISA breach of fiduciary duty case involving “excessive fees” claims in connection with Kraft’s 401(k) plan. The majority opinion was authored by Judge Adelman, an Eastern District of Wisconsin judge sitting by designation in the Seventh Circuit, and was joined by Judge Rovner.
This entry provides a high-level summary of the issues reversed by the court:
- The Company Stock Fund Issue: In 2003, Kraft’s then-parent company, Altria Group, Inc. (formerly Philip Morris), made the decision to move the company stock fund in its 401(k) plan from the unitized stock fund (which generally employs a cash buffer) model to “real time” trading where each participant owned shares of the relevant stock rather than units of a fund that invested in the stock. Kraft plan fiduciaries considered similarly moving away from the unitized stock fund mode; however, at that time, Hewitt (the Kraft plan recordkeeper) did not offer real time trading. The court also noted that the unitized model offered advantages (e.g., faster trades and lower transaction costs by “netting” participant transactions). Based on the Court’s review of the record, the Kraft plan fiduciaries considered, but never actually made a decision regarding, whether to retain the unitized fund or move to real time trading. On remand, the Seventh Circuit majority ruled that Kraft must offer evidence that its plan fiduciaries made a decision to retain its unitized company stock fund (and that such decision was prudent).