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  • BC Network
    Monday, October 31, 2016

    The IRS recently released updated limits for retirement plans.  Our summary of those limits (along with the limits from the last few years) is below.

    Type of Limitation 2017 2016 2015 2014
    Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1)) $18,000 $18,000 $18,000 $17,500
    Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate) $6,000 $6,000 $6,000 $5,500
    SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals $3,000 $3,000 $3,000 $2,500
    415 limit for Defined Benefit Plans $215,000 $210,000 $210,000 $210,000
    415 limit for Defined Contribution Plans $54,000 $53,000 $53,000 $52,000
    Annual Compensation Limit $270,000 $265,000 $265,000 $260,000
    Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993 $400,000 $395,000 $395,000 $385,000
    Highly Compensated Employee 414(q)(1)(B) $120,000 $120,000 $120,000 $115,000
    Key employee in top heavy plan (officer) $175,000 $170,000 $170,000 $170,000
    SIMPLE Salary Deferral $12,500 $12,500 $12,500 $12,000
    Tax Credit ESOP Maximum balance $1,080,000 $1,070,000 $1,070,000 $1,050,000
    Amount for Lengthening of 5-Year ESOP Period $215,000 $210,000 $210,000 $210,000
    Taxable Wage Base $127,200 $118,500 $118,500 $117,000
    FICA Tax for employees and employers 7.65% 7.65% 7.65% 7.65%
    Social Security Tax for employees 6.2% 6.2% 6.2% 6.2%
    Social Security Tax for employers 6.2% 6.2% 6.2% 6.2%
    Medicare Tax for employers and employees 1.45% 1.45% 1.45% 1.45%
    Additional Medicare Tax* .9% of comp >$200,000 .9% of comp >$200,000 .9% of comp > $200,000 .9% of comp > $200,000

    *For taxable years beginning after 12/31/12, an employer must withhold Additional Medicare Tax on wages or compensation paid to an employee in excess of $200,000 in a calendar year for single/head of household filing status ($250,000 for married filing jointly).

    Tuesday, October 25, 2016

    HHScloud recently posted guidance on its website addressing HIPAA’s approach to cloud computing.  Basically, any time a cloud service provider has electronic protected health information (ePHI), it’s a business associate.  This is true even if the cloud provider only stores encrypted ePHI and even if the cloud provider does not have the encryption key (and therefore, in theory, could not access the data).  This means that both health plans and their business associates who use outsourced cloud computing services must have business associate agreements with those services.

    At first blush, this might seem like it doesn’t directly touch the health plan, but cloud computing can take many forms. For example, if your company has an off-site data server that is managed by a third party and ePHI is stored on that server, a business associate agreement with that third party is probably necessary.  Even if all you do is use something like Google Docs, OneNote, Evernote, or Dropbox for storage, that could be considered cloud computing subject to these rules.  Therefore, the sweep is broad and employees working on health plan matters would be well advised to consult with the plan’s Security Officer and their IT departments about this guidance.  HHS’s position is that it is a HIPAA violation if ePHI is shared with a cloud provider and there’s no business associate agreement in place.

    The HHS guidance provides some points to consider in contracting with cloud providers. Some of those points will likely be addressed in a general service agreement between the company and the provider.  In addition, this one page summary from Bryan Cave’s data privacy team has some additional general thoughts on issues to consider when contracting with cloud providers.

    Next Steps

    In response to this information, employees charged with health plan matters should consider the following steps:

    1. Evaluate with your IT department and HIPAA Security Officer whether you use any cloud service providers.
    2. Review the HHS guidance with the relevant IT personnel.
    3. Determine whether ePHI is created, received, maintained, or transmitted by the cloud service provider or if it is possible to avoid having ePHI handled by the cloud service provider.
    4. Determine whether a business associate agreement is in place with the cloud service provider (and if not, get one as soon as possible). In negotiating that agreement, consider what data protections you may need or want to include.
    5. Include an evaluation of the cloud service provider in your HIPAA risk assessment.
    Thursday, October 20, 2016

    old-way-new-wayWith the looming end of the determination letter program as we know it, the IRS has issued an updated Revenue Procedure for the Employee Plans Compliance Resolutions System (EPCRS). Released on September 29, 2016, Rev. Proc. 2016-51 updates the EPCRS procedures, replaces Rev. Proc. 2013-12 and integrates the changes provided in Rev. Proc. 2015-27 and Rev. Proc. 2015-28. The updated revenue procedure is effective January 1, 2017 and its provisions cannot be used until that date. Rev. Proc. 2013-12, as modified by Rev. Proc. 2015-27 and Rev. Proc. 2015-28, should be used for any corrections under the EPCRS for the remainder of 2016. Highlights from the new revenue procedure are outlined below.

    Changes

    • Determination Letter Applications. Determination letter applications are no longer required to be submitted as part of corrections that include plan amendments. The new revenue procedure also clarifies that any compliance statement for a correction through plan amendment will not constitute a determination that the plan amendment satisfies the qualification requirements.
    • Favorable Letter Requirements. A qualified individually designed plan submitted under the Self Correction Program (SCP) will still satisfy the Favorable Letter requirement when correcting significant failures even if its determination letter is out of date.
    • Fees. The Voluntary Correction Program (VCP) fees are now user fees. Effective January 1, 2017 a plan sponsor must refer to the annual Employee Plans user fees revenue procedure to determine the applicable VCP user fees.
    • Model Forms. The model forms for a VCP submission (Forms 14568-A through 14568-I) can now be found on the IRS website.
    • Audit CAP Sanctions. The method used to determine Audit Closing Agreement Program (Audit CAP) sanctions has been revised. Sanctions will no longer be a negotiated percentage of the Maximum Payment Amount (MPA), but will be determined by the IRS on a “facts and circumstances” basis. The MPA will be one factor used to determine a sanction. Generally, sanctions will not be less than VCP fees.
    • Refunds. The IRS will no longer refund half of the user fee if there is disagreement over a proposed correction in an Anonymous Submission.

    Incorporations

    • The provisions of Rev. Proc. 2015-27, which clarify the methods that may be used to correct overpayment failures, modify the SCP for Code Section 415(c) failures to extend eligibility to certain plans with repeated corrections of excess annual additions so long as elective deferrals are returned to affected employees within 9½ months after the end of the plan’s limitation year, and lower the fees for certain VCP submissions, have been incorporated.
    • The provisions of Rev. Proc. 2015-28, which modify EPCRS by adding safe harbor correction methods for employee elective deferral failures in both 401(k) and 403(b) plans, have also been incorporated into Rev. Proc. 2016-51.
    Friday, October 7, 2016

    where-are-youFor many years, the PBGC has been helping reunite missing participants with their benefits under single-employer defined benefit plans. Now, a new PBGC proposed rule may open up the program to missing participants under other terminated plans.

    Under this proposed rule, terminated defined contributions plans may choose to transfer benefits of missing participants to the PBGC or to establish an IRA to receive the transfer and send information to the PBGC about the IRA provider.   The PBGC will attempt to locate the missing participants and add them to a searchable database. The PBGC notes that once the program is established, it may issue guidance making the reporting requirement mandatory for defined contribution plans as authorized under section 4050 of ERISA.

    The PBGC will accept the transfer of accounts of any size. If a plan sponsor chooses to transfer accounts to the PBGC, it must transfer the accounts of all missing participants.  There will be no fee for transfers of $250 or less. For transfers above that amount, a one-time flat fee will apply which the PBGC indicates will not exceed its costs associated with the program.  Initially, the fee has been set at $35.

    This newly-proposed voluntary program for defined contribution plans has certain limitations. For instance, it would only be available to locate missing participants upon plan termination.  It would not be available to locate missing participants for ongoing plans.  For example, the program would not be available to find missing participants in connection with a plan correction under EPCRS.  In addition, although the program would be available to many types of single-employer and multiemployer defined contribution plans, including abandoned plans, it would not be available to governmental plans and church plans.

    The proposed rule also establishes a similar voluntary program for terminated professional service defined benefit plans with 25 or fewer participants and a mandatory program for terminated multiemployer plans covered by title IV of ERISA, similar to the existing program for single-employer defined benefit plans.

    Finally, the proposed rule contains numerous changes to the existing rules. Most notable for defined contribution plans, the proposed rule modifies the criteria for being “missing” to include distributees of defined contribution plans who fail to elect a form or manner of distribution although their whereabouts are known.  The PBGC notes that this change is consistent with existing DOL regulations which currently treat such individuals similarly to individuals who cannot be found for purposes of the safe harbor for terminated defined contribution plans.  For terminating defined benefit plans, it would include distributees subject to mandatory “cash-out” who do not return an election form.  According to the PBGC, it can be difficult to find the benefits of non-responsive distributees after they have been transferred to IRAs.  It hopes to address this problem by bringing non-responsive distributees “into the PBGC fold” with its centralized governmental repository and pension search capability.   Defined benefit plan distributees whose benefits are not subject to a mandatory cash-out provision would only be considered missing if the plan did not know their whereabouts.   In making this distinction, the PBGC indicates that individuals with benefits that are not subject to cashout enjoy rights and features not available to those whose benefits may be cashed out and, absent an election, their benefits will be annuitized, preserving those rights and features.  In addition, for title IV plans the identity of the insurer issuing the annuity must be provided to the PBGC if their whereabouts are unknown.

    Other changes include more detailed requirements for diligent searches for defined benefit plans similar to those already required of defined contribution plans by DOL guidance, simplification of the existing rules and assumptions used for valuing benefits to be transferred to the PBGC, and changes in the defined benefit plan rules for paying benefits to missing participants and their beneficiaries.

    The new rule is generally proposed to be effective for plan termination dates after calendar 2017. In addition to the proposed rule, the PBGC has issued a set of FAQs as well as draft forms with instructions for each of the proposed programs.  Additional information can be found on the PBGC website here.

    Tuesday, October 4, 2016

    stethoscope-and-dollar-billsWhile the litigation over wellness programs rages on, the EEOC is still marching forward with the implementation of its wellness rules that we wrote about previously.  As most people in the wellness space are aware, the EEOC’s rules under ADA and GINA do not align completely with the HIPAA wellness rules, particularly on the issue of the amount of the incentive.  The ADA and GINA rules apply to all wellness programs, whether participation-only or health contingent, and generally limit the incentive that is available to 30% of the cost of self-only coverage.

    One open question under the ADA and GINA rules was how to calculate the incentive when an employer offers multiple tiers of coverage (e.g. Gold, Silver, Bronze) under a health plan. The ADA and GINA rules address the calculation of the incentive when there are multiple group health plans, but not multiple tiers.  When an employer offers multiple group health plans, and an employee is eligible for a wellness program as long as he or she is enrolled in any one of them, then the maximum incentive is 30% of the lowest cost self-only option among the plans.

    In a recently released informal discussion letter, the EEOC addressed how these rules apply to a single group health plan with multiple tiers where an employee enrolled in any tier can participate in the same wellness plan.  Not surprisingly, the same rules used for multiple group health plans apply.  In other words, the incentive is limited to 30% of the lowest cost self-only tier of coverage.  (There are minor language differences between the ADA and GINA regulations in this regard, but the EEOC says they are “legally inconsequential.”). This means that if a company offers Gold, Silver, and Bronze tiers, for example, and employees enrolled in any tier get the same wellness plan, the reward is limited to 30% of the self-only Bronze premium.

    While not a watershed piece of guidance, this clarification at least lets employers know what the rules of the road are. Because the letter is informal, it is not necessarily binding on the EEOC, but given the restrictive nature of the guidance, it seems unlikely the EEOC would take a different position in court or an investigation.  If you have comments about this piece of EEOC guidance, or the wellness program rules in general, feel free to leave them in the comment section on this post.

    Friday, September 23, 2016

    griefWhen the IRS announced that it would virtually eliminate the determination letter program for individually designed retirement plans, many practitioners moved through the classic Kübler-Ross five stages of grief (see the picture at the right).  Some have yet to finish.  In Announcement 2016-32, the IRS requested comments on how these plans can maintain compliance going forward since determination letters are no longer available.

    As a general rule, the IRS used to deny plans the ability to incorporate tax code provisions by reference (rather than reciting them wholesale in the plan), except for a very short list available here.  The IRS is asking if there are additional provisions that would also be appropriate to incorporate by reference.  This would avoid the need to reproduce these provisions wholesale and run the risk of a minor foot fault if the language did not line up.  It would also help avoid the need to update plans for law changes, in some cases.

    Additionally, much to the anger of many practitioners, the IRS has historically sometimes required a plan to include provisions that were not applicable to the plan.  For example, there are special diversification requirements for plans that hold publicly-traded employer stock, yet the IRS has required them even for private companies.  One wonders if the IRS actually observed numerous situations where privately held corporations became public companies and then failed to amend those of their plans that held employer stock.  What a scourge on the individually designed plan world this must have been!  The IRS would like to know if there are other provisions that could possibly be avoided and the likelihood that the plan sponsor will actually amend the plan when the provision becomes applicable.  While there may be a few of these provisions out there, there likely aren’t enough to make a significant difference in the length of individual designed plans or to stem the tide of faulty individually designed plans.

    For those employers who still want the comfort of an IRS letter of some kind, they could bargain with a company that offers a pre-approved plan.  However, there are challenges to switching to a pre-approved prototype or volume submitter plan, and the IRS wants to know about them.  For example, employers with unique plan designs or multiple different benefit formulas may not be able to fit under a particular pre-approved form.  Under the rules applicable to those plans, too much variation from the pre-approved form destroys the ability to rely on the letter and turns the plan into an individually designed plan (which can’t then get a determination letter).

    What might depress practitioners most is that the above areas are the only ones the IRS came up with as possibilities.  For example, it would make sense to let plans apply for a determination letter when there is a plan merger.  The IRS has historically requested the documents of plans that were merged into a plan under determination letter review.  Without allowing this, the IRS will end up not reviewing a plan until it is terminated.  At that time, the Service may be asking for plans that were merged from 20 or more years ago.  That level of recordkeeping would be prohibitive for some plan sponsors.  Additionally, if the IRS found an error at that time, it could be extremely difficult to fix.  Therefore, allowing a complete review of the plan when it is a party to a plan merger would be highly valuable. Additionally, since plans will be permitted to obtain a determination letter on initial adoption, a limited determination approval process might be available to review amendments to the already approved plan rather than the entire plan again.

    The Service will accept comments in writing on or before December 15.  Service employees responsible to draft the rules may also read this post, so feel free to leave your comments below.

    Friday, September 9, 2016

    certified-with-ink-padAs retirement plan professionals know, certain distributions from plans and IRAs to taxpayers can be rolled over to another plan or IRA within 60 days. Of course, sometimes 60 days is just not enough and the IRS recognizes that, having permitted a seemingly innumerable number of private letter rulings granting extensions.  These often occur where a financial advisor gave bad advice or made some kind of mistake or where some tragedy worthy of a blues or country song (or worse) befell the taxpayer that made it impossible to complete the rollover in 60 days.

    The IRS has had a small cottage industry the last decade or so of granting private letter rulings extending the 60-day period for these rollovers.  But now, they’ve decided to let plans and IRAs just take the taxpayer’s word for it.

    Under a new revenue procedure, taxpayers can now self-certify as to the reason that they need more time.  Now, taxpayers can’t just certify for any reason.  They have to have missed the 60-day period because of one or more of the following reasons:

    • An error on the part of the financial institution receiving the rollover or making the distribution
    • The distribution was made in the form of a check and the check was misplaced and never cashed (“I put the check where I knew I’d remember it. It was right next to my keys.”)
    • The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was a retirement plan or IRA (“but this email said that it was an eligible plan and the money would also help the deposed prince of Nigeria…”)
    • The taxpayer’s primary residence was severely damaged (but not a vacation home, it seems)
    • A member of the taxpayer’s family died
    • The taxpayer or a member of his or her family was seriously ill
    • The taxpayer was incarcerated
    • Restrictions were imposed by a foreign country (does not include mandates from the deposed prince of Nigeria)
    • A postal error occurred (“I told them to address it to Santa Claus at the North Pole…”)
    • The distribution was made on account of a tax levy, but the proceeds of the levy were returned
    • The financial institution making the distribution delayed providing information that the receiving plan or IRA needed to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information (e.g., phone calls, emails, bad reviews on Yelp maybe?)

    There are other conditions too. The taxpayer has to make the contribution as soon as practicable once the identified impediment is no longer holding up the process.  A contribution within 30 days after the issue is resolved is treated as meeting this requirement.

    The good news for plans and IRA custodians is that they can rely on the certification unless they have actual knowledge that the excuse is not real. So they don’t have to have the same lie detector skills as parents or teachers.

    Of course, the IRS also reserves the right to verify this on audit. We are left to wonder how some of these will be verified.  For example, how does the IRS plan to prove that the taxpayer didn’t misplace a check?  Nonetheless, if the IRS finds that the self-certification was inappropriate, taxpayers will be subject to additional taxes and penalties.

    It’s worth noting that some “explanations” still don’t fly, even under this broad relief. Ignorance of the law is still no excuse (“I didn’t know I only had 60 days.”).  Also, an inability to count to 60 properly is not going to be enough to get someone off the hook.

    The IRS plans to modify the Form 5498 (which reports IRA contributions) to report any contributions received after the 60-day deadline, which will help let the IRS know whom to audit.

    For employers, this ruling may result in some questions from their third party administrators. Most rollovers to qualified plans are likely made in direct trustee-to-trustee transfers, which are not a part of this ruling.  Because of that, the questions are likely to be few, but there could be some.  For example, if an employee comes forward with a self-certification that does not clearly fit into the list, but is close, the TPA may request that the plan administrator (which may be the employer or someone there) make a decision about whether the certification is sufficient.  Practically, however, certifications outside this specific list should not be accepted.

    The IRS has provided other resources on this issue as well which are available at the links below:

    – IRS Webpage – Accepting Late Rollover Contributions

    IRS frequently asked questions

    Wednesday, September 7, 2016

    Regulations and RulesAs promised in Notice 2015-68, the IRS has proposed clarifications to the regulations under IRC Section 6055 relating to information reporting rules for minimal essential coverage providers.  These rules affect employers sponsoring self-funded health plans or self-funded health reimbursement arrangements (HRAs) that coordinate with insured plans.  These proposed regulations also address how employers and others solicit taxpayer identification numbers (TINs) to facilitate this reporting.  These rules only impact employers and others who report on the B-series forms (1094-B and 1095-B).  They do not change the reporting or solicitation rules for the C-series forms (1094-C and 1095-C).

    Reporting Requirements for Employers Providing Multiple Types of Health Coverage

    Information reporting is generally required of every person who provides minimum essential health coverage to an individual. However, in some cases, this reporting would be duplicative, such as where an individual is covered under a major medical plan and an HRA.  Some employers and insurers complained that the existing rules preventing this duplication were confusing.  The proposed regulations seek to clarify the rules on duplicate reporting.

    One change is that an entity that covers an individual in more than one plan or program must only report for one of the plans or programs. Therefore, if an employer has both a self-funded health plan and an HRA that covers only the same people who are enrolled in the self-funded plan, then reporting is only required for the self-funded plan.

    Additionally, if an employer offers an insured plan, but then also offers an HRA to employees enrolled in that insured plan, reporting on the HRA is not required. Here, the insurer would be required to report on the insured plan, so the IRS would already be notified that the employee has health coverage and the HRA reporting would be unnecessary.

    On the other hand, if an employer offers an HRA to employees who are enrolled in their spouses’ employer’s plan, then the employer would have to report on employees covered by the HRA. These arrangements are not very common, but they do exist.  This reporting still seems duplicative, but it seems that the IRS made this change to simplify the rules.  Of course, this “simplification” just results in additional reporting for employers with these arrangements.

    TIN Solicitation Rules

    Under the reporting rules, coverage providers have to solicit TINs (which include social security numbers) if they are not provided by the employees. This is because the TINs appear on the reporting forms for every individual covered under the arrangement.  There were preexisting rules for soliciting TINs that we wrote about previously.  However, in response to concerns that the TIN solicitation rules were designed primarily to apply to financial relationships rather than Code Section 6055 information reporting, the proposed regulations provide specific TIN solicitation rules for Section 6055 reporting.  These changes do not apply to the reporting on the C-series forms, so they will only apply to employers sponsoring self-funded plans and other coverage providers, but not to employers offering insured plans, for example.  The existing rules timed the requests for TINs off of when an account is “open.” Under these rules, one solicitation generally occurs at the time the account is opened and then there are two annual solicitations after that if the TIN is not obtained.

    These new rules include specifying the timing of when an account is considered “open” for purposes of Section 6055 reporting and when the two annual TIN solicitations must occur. The proposed regulations provide that, for the purpose of Section 6055 reporting, an account is considered “opened” on the date the filer receives a substantially complete application for new coverage or to add an individual to existing coverage.  This could be before the coverage is actually effective or after (in the case of retroactive coverage, such as due to certain HIPAA special enrollment event).  As such, health coverage providers may satisfy the requirement for initial solicitation by requesting enrollees’ TINs as part of the application for coverage.

    The proposed regulations also specify the timing of the first and second annual TIN solicitations. Under these regulations, the first annual solicitation must be made no later than seventy-five days after the date on which the account was “opened” or, if coverage is retroactive, no later than the seventh-fifth day after the determination of retroactive coverage is made.  Basically, this would be within 75 days after the application for coverage (or the time that application is approved, in the case of retroactive coverage).  The second annual solicitation must be made by December 31 of the year following the year the account is “opened”.

    To provide relief with respect to individuals already enrolled in coverage, if an individual was enrolled in coverage on any day before July 29, 2016, then the account is considered “opened” on July 29, 2016. Accordingly, employers have satisfied the initial solicitation requirement so long as TINs were requested as part of the application for coverage or at any other point prior to July 29, 2016.  The deadlines for the first annual solicitation can then be made within 75 days after July 29 (or by October 12, 2016) and the second annual solicitation can be made by December 31, 2017.

    Reliance and Proposed Applicable Date

    These regulations are generally proposed to apply for taxable years ending after December 31, 2015. Employers may rely on these proposed regulations (and Notice 2015-68) until final regulations are published.

    Friday, August 12, 2016

    IRSAs we previously reported, the IRS had said last year that determination letter program for retirement plans would largely be going away. Rev. Proc. 2016-37 includes information with respect to the future of the determination letter program.  As highlighted in a recent IRS webcast, a noteworthy development is that “subject to IRS resources” that post-initial determination letters may be available after 2017 in specified circumstances:

    (1) significant law changes,

    (2) new plan designs, and

    (3) Plan types that can’t convert to a pre-approved format.

    Number 3 means complex plans that do not fit on a pre-approved document may, ‘subject to IRS resources’ as published annually, be able to be submitted for a ruling under the determination letter program.  Therefore, complex individually designed plans may still have hope that the IRS will continue to rule on their qualified status.

    There were two other key points in the webcast.  First, the IRS will publish a “required amendments” list and that employers will have until the end of the second calendar year after the date the list is published to amend their plans.  Second, there will also be an operational compliance list issued annually that will be accessible on the IRS website, not published. The purpose of the operational list is to focus on the operation of the plan prior to the date of adoption of the amendment.  These lists will include information that is prospective only and will not include information from prior annual lists.

    Tuesday, August 2, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.  Additionally, taxpayers can rely on the proposed regulations.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This last in our series is about the changes to the proposed income inclusion regulations and the other minor changes and clarifications made by the regulations.  See our prior posts, “Firing Squad,” “Taking (and Giving) Stock,” “Don’t Fear the (409A) Reaper,” and “Getting Paid.”

    Preventing Waste, Fraud, and Abuse (Okay, well, mostly just abuse). The only change to the proposed income inclusion regulations was to “fix” the anti-abuse rule that applied to correcting unvested amounts that violated 409A.  “Why?” you might ask.  Apparently, because people were abusing it.

    Under the proposed income inclusion regulations, a broken (that’s a technical legal term) 409A arrangement could be fixed in any year before the year it would vest (what we will call “nonvested” amounts). The prior proposed regulations did not put many parameters on how the fix had to happen (other than it needed to, you know, comply with 409A).

    Some hucksters (again, technical term) were apparently amending arrangements that complied with 409A to make them noncompliant. Then they would amend them again to “fix” them in the way they wanted.  This would allow them to get around the change in election rules, as long as the amount would not vest that year.  Clever, perhaps, but pretty clearly not within the spirit of the rules.

    To prevent this kind of abuse, the IRS has revised this permitted correction rule. First, if there is no good faith basis for saying that the arrangement violates 409A, it cannot be fixed.

    Second, the regulations provide a list of facts and circumstances for determining if a company has a pattern or practice of permitting impermissible changes. If they do, then they would not be able to fix a nonvested amount.  The facts and circumstances include:

    • Whether the service recipient has taken commercially reasonable measures to identify and correct substantially similar failures upon discovery;
    • Whether substantially similar failures have occurred with respect to nonvested deferred amounts to a greater extent than with vested amounts;
    • Whether substantially similar failures occur more frequently with respect to newly adopted plans; and
    • Whether substantially similar failures appear intentional, are numerous, or repeat common past failures that have since been corrected.

    Finally, the regulations require that a broken amount be fixed using a method provided in IRS correction guidance. This doesn’t mean that you have to use the correction guidance for unvested amounts.  What it means is that, if a method is available and would apply if the amount was vested, then you have to use the mechanics of that correction (minus the tax reporting or paying any of the penalties).  For example, under IRS Notice 2010-6, if a plan has two impermissible alternative times of payment for a payment event, it has to be corrected by providing for payment at the later of the two times.  You would have to fix a nonvested amount in the same manner under these rules.

    While these changes are intended to ferret out abusers of the rules, this does make it harder for well-intentioned companies who merely have failures to make changes.

    Other Minor Changes and Clarifications.  The proposed regulations also confirmed and clarified the following points of the current final regulations:

    – 409A does apply to non-qualified arrangements of foreign entities that are also subject to 457A.

    – Entities can be subject to 409A as service providers in the same way that individuals are.

    – Payments can be accelerated for compliance with bona fide foreign ethics laws or conflicts of interest laws.

    – On plan termination and liquidation outside a change in control, all plans of the same type (e.g., all account balance plans) have to be terminated. And no additional plans of that type can be adopted for three years.  This is what the IRS always understood the rule to be, but they just made it clearer in these proposed regulations.

    – Payments can also be accelerated, without limit, to comply with Federal debt collection laws.