Back in the Saddle Again … How Rehired Employees Affect Partial Termination Analysis

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by Beth Nedrow

In June, we wrote about one of the multitude of issues raised by COVID-19 furloughs – the possibility of triggering vesting in the company’s qualified retirement plan under the partial plan termination rules. Recently the IRS issued new guidance that will be relevant to employers who might be rehiring employees before the end of 2020. On its website, the IRS posed this question: “Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred?” The IRS then answered the question, “Generally, no.” This means that the employer may be able to continue to maintain vesting (and enforce forfeitures) in its retirement plan if enough formerly furloughed employees are brought back before the end of the year. While this answer isn’t earth-shattering or even frankly surprising, it’s welcome clarity in a time of so many uncertainties.

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Under Pressure… Payroll Taxes Deferred

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By Kevin Selzer and Sarah Ritchey Haradon

President Trump signed an executive order (the “Order”) on August 8, 2020 that directs Treasury to suspend collection of the employee portion of Social Security (6.2%) for workers who earn less than $4,000 (on a pre-tax basis) during a two-week period. The Order only defers the collection of the tax, it does not waive the tax. It is, at essence, an interest-free loan from the federal government. While the Order directs Treasury to explore ways to eliminate the deferred payroll tax obligation, an elimination of the tax, even on a temporary basis, presumably requires action from Congress. The Order may also be challenged in court.

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Tell Me Something Good: IRS Eases Restrictions on Mid-Year Changes to Safe Harbor Contributions

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by Brenda Berg

The IRS has eased the restrictions on mid-year changes to safe harbor contributions, in response to the hardships caused by the coronavirus pandemic.

Employers are generally not allowed to reduce or suspend safe harbor matching or nonelective contributions mid-year unless either (1) the annual safe harbor notice included a statement that the employer could amend the plan mid-year to reduce or suspend the safe harbor contribution, or (2) the employer can demonstrate that it is operating at an economic loss during the plan year. Even if the employer satisfies one of these requirements, the employer must provide a 30-day advance notice before the effective date of the suspension. The suspension of the safe harbor contribution will also mean that the plan becomes subject to nondiscrimination testing for the current plan year.

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Into the Mystic . . . Employee Benefit Considerations for Returning Workers

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by Kevin Selzer

Many employers are venturing into uncharted waters as significant numbers of employees are being rehired or returning from extended leaves of absence (e.g., furloughed employees). In this environment, it can be easy to overlook the employee benefit plan implications of this workforce shift. Below are some best practices for employers faced with employees returning to work.

Ensure that retirement plans are crediting service for returning employees correctly. In most cases, employers will not be able to treat a rehired employee as a new employee for retirement plan purposes. This means that the employer will have to consider the employee’s prior service for purposes of determining proper eligibility and vesting credit. This is a good time for employers to check and confirm that any systems that track service (e.g., payroll systems and the retirement plan administrator’s systems) are configured correctly to credit prior service.

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Moves Like Jagger … But Is It Deductible? Taxation of Job Search and Moving Expenses

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by Beth Nedrow

Job mobility is a fact. Employees are more mobile than ever – changing jobs multiple times in a career. When an employee transitions between jobs and incurs job search and moving expenses, are those expenses deductible? If the employer pays for them, is it taxable income? Here are a few tips.

Job search expenses like travel for interviews, printing resumes and the like used to be deductible by the employee, at least to some extent. Unfortunately, the 2017 TJCA removed the 2% miscellaneous itemized deduction starting in 2018, so employees can’t deduct these expenses anymore.

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Might as Well Face It… Your Annual Retirement Plan Audit is Not a Clean Bill of Health

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by Ben Gibbons

With calendar year-end Form 5500s due on July 31, or October 15 with an extension (and still no COVID-19 filing relief as of the date this blog was published), it’s that time of year where plan sponsors begin thinking about their annual retirement plan independent audits.  However, these are not the only audits companies should be thinking about.

Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) routinely select qualified retirement plans for examination.  In the event of an audit by either agency, a plan’s records, procedures and processes will be examined.  If errors or deficiencies are found, at a minimum, corrections will be required, and in some instances, fines or sanctions will be levied.

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Relief . . . Just a Little Bit – IRS Notice 2020-23: Limited Extensions of Form 5500

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By Kevin Selzer and Lyn Domenick

In the midst of everything going on, we wanted to point out a few “under the radar” implications of IRS Notice 2020-23.  The Notice, issued on April 9th, provides that tax-related deadlines that fall between April 1, 2020 and July 14, 2020 (the “delay period”) are automatically extended to July 15, 2020. 

Delayed 5500s.  Most plan sponsors hoping for Form 5500 relief will have to wait for additional guidance since only a small group of plans have Form 5500 deadlines fall during the delay period.  For example, the regular Form 5500 due date for calendar year plans (July 31st) falls just outside of the delay period.  We note that the DOL has authority under the CARES Act to provide additional Form 5500 relief.

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Take a Bow For the New Revolution, and don’t let the same tax mistakes fool you again

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by John Ludlum

As we enjoy the Silicon Slopes Tech Summit 2020, it has been great to catch up with executives, investors, and entrepreneurs working to build the next technology ideas into successful companies.  It is interesting to think that we don’t quantify the economic benefits that one great company, which brings together a talented team of founders and executives, finds a successful exit, and then comes back together to do it again at another company, has on an area.  There are many legendary technology companies that have had this effect, creating places like Silicon Valley and other areas in the country known for incubating technology companies and ideas.

One great thing about knowing and working with the seasoned investors and entrepreneurs is their ability to help the new generation see how to solve problems that these companies encounter, and how to avoid the mistakes that some people have made.  In my small part of this world, the conversations in 2001-2002 with employees and executives who were too optimistic in the first internet bubble will never be forgotten.  Yes, you can exercise equity awards like an incentive stock option (ISO) with a promissory note, second mortgage, or personal bank loan, and if the stock price goes up from there and the company achieves liquidity in an IPO or acquisition, you could win big with large gains all taxed at the long-term capital gains rate.  I know a number of people who had this great outcome.  However, the other side is that if the price does not go up, or if the company does not achieve liquidity, then there can be tax problems.  Exercising an ISO will result in an alternative minimum tax (AMT) adjustment in the year of exercise for the spread on the date of exercise.  If an optionee is subject to the AMT, then this tax is due to the IRS based on the value at the date of exercise.  There is no consideration for the fact that the shares are not liquid and have not been sold at the time of or at the value of the corresponding tax obligation, meaning the optionee is gambling that the value the shares will continue to go up and that there will be liquidity.

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We Interrupt This Program – Is a Multiple Employer Plan In Your Future?

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by Kevin Selzer

We interrupt our usual Benefits Dial programming – to take a closer look at developments affecting multiple employer plans (MEPs) as part of our series of posts on the recently enacted benefit plan legislation, including the SECURE Act (background here).  The reform to MEPs is seen by many as the biggest disruptor to the retirement plan industry.  Why?  It facilitates the banding together of retirement plan assets from unrelated employers, helping employers punch above their weight.  By combining together to form a larger plan, smaller employers can leverage assets with regard to plan services, and maybe most importantly, investment fees paid by participants. 

MEPs have long been permitted but many employers have been unwilling to participate in those plans.  The biggest deterrent has been the “one bad apple rule.”   That rule provides that a defect in any participating employer’s portion of the MEP can impact the tax qualification of the entire MEP for other participating employers.  In other words, if one participating employer in the MEP is unwilling (or maybe unable) to correct an error, the whole plan can be disqualified by the IRS.  The SECURE Act helps solve this issue with a special kind of MEP called a pooled employer plan (PEP).  PEPs have a specific procedure for dealing with tax qualification defects.  In short, a participating employer in a PEP who refuses to correct the error, can be discharged (spun off) from the PEP to isolate the disqualification impact. The SECURE Act grants relief under ERISA to boot.  Historically, MEPs were treated as a collection of separate plans unless the underlying employers met a commonality standard.  A PEP (called a “Group of Plans” under ERISA) is also treated as a single plan for ERISA purposes under the SECURE Act.  This means, for example, that such plans would be allowed to file a single Form 5500. 

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Sitting On a Dock of the Bay, watching my post-termination exercise period, roll away

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Tax considerations for modifying stock options to extend the post-termination exercise period

by John Ludlum

We are often asked by our private company clients about making changes to outstanding stock options.  In some cases, changes to the number of shares subject to an option are needed, or to the vesting schedule, or to the allowed payment forms for exercising the option.  The rules affecting these decisions come from several, primarily tax, authorities, and the implications to the option and the company are quite varied depending on the change being made. 

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