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Executive Compensation

Davidson v. Henkel: A Painful Reminder of the Special Rules for FICA Taxation of Nonqualified Deferred Compensation

Although the compensation that an employer pays to an employee is generally subject to FICA taxation at the time the compensation is paid, there are special rules for the FICA tax treatment of amounts payable under nonqualified deferred compensation plans (such as long-term incentive plans or supplemental retirement programs). These rules affect both the timing, and the amount, of the FICA tax that is payable with respect to such compensation (which tax is typically shared 50/50 by the employer and employee).   In the recent case of Davidson v. Henkel, an employer that failed to heed those special rules found itself facing the prospect of bearing substantial additional tax liability – for both the employer’s and the employee’s share of the FICA tax. This case serves as a reminder that employers should pay special attention to when amounts deferred under a nonqualified plan are properly taken into account as “wages” for purposes of FICA taxes.

Year-End Amendment Deadline Under Code Section 409A

Recent IRS guidance makes clear that deferred compensation arrangements under which payments are conditioned on the execution of a release of claims could pose a problem under Section 409A of the Internal Revenue Code.  Fortunately, the IRS has also announced a voluntary correction program under which this Section 409A violation may be corrected.  Employers wishing to take advantage of this correction program must act quickly, however, because this aspect of the program expires at the end of 2012.

Agencies Clarify “Grandfathering” Under Health Care Reform

One of the first things a sponsor of an employer health plan will want to do in response to health care reform is determine whether its plan qualifies for “grandfather” protection under the new law and, if so, whether preserving that grandfathered status makes sense. This agency guidance should help to make those important decisions.

Cafeteria Plan Changes

While the focus of the Affordable Care Act is clearly on the nation’s health insurance system the Act does include several rifle-shot changes to the Tax Code’s cafeteria plan rules.

Health Care Reform: The Near Term

This newsletter is devoted entirely to articles concerning the recently enacted Patient Protection and Affordable Care Act. Check back often for updates on the status of health care reform.

New Reporting and Disclosure Requirements

In addition to transforming the rules governing the benefits that health plans must offer, the Affordable Care Act substantially alters the way that plan sponsors and health insurers must describe and report those benefits. From new claim appeal procedures to standardized benefit summaries to additional governmental reporting, the Act will almost certainly increase administrative costs and complexities for employers. And like many other aspects of the Act, determining precisely how – and even when – to comply with some of the new reporting and disclosure obligations will be difficult. Although regulations will likely answer some of these questions, plan sponsors should start revising many of their procedures immediately. The following discussion summarizes seven of the Act’s most significant reporting and disclosure changes. Unless otherwise noted, these changes will apply to all plans, whether grandfathered or not. The new requirements are summarized in the order in which they become effective.

Short-Term Incentives for Expansion of Health Coverage

Although the key provisions of health care reform do not apply until 2014, the new law included a number of short-term measures designed to expand the number of individuals with health coverage. This article addresses three such program of particular interest to employers.

DOL Releases Model CHIP Notice

As we reported in our February 2009 article, the Children’s Health Insurance Program Reauthorization Act of 2009 (“CHIPRA”) directed the Department of Labor (“DOL”) to draft model notices by which sponsors of employer group health plans could notify their employees of the premium assistance made available under both CHIP and Medicaid. The DOL has now issued a model notice that may be used for this purpose.

HEART Act Guidance Includes Some Surprises

In June of 2008, the Heroes Earnings Assistance and Relief Tax (“HEART”) Act became law. The Act made a number of significant changes to the treatment of military reservists under employee benefit plans. In an August 2008 article, we summarized those changes as they applied to qualified defined benefit and defined contribution plans, Section 403(b) plans, and Section 457(b) plans. In January of 2010, the IRS issued Notice 2010-15 (the “Notice”), which contains guidance on a number of the Act’s provisions. This article summarizes the most significant and surprising elements of that guidance, which apply to differential wage payments, “in-service” distributions on a reservist’s deemed severance from employment, and the Act’s mandatory death benefit provisions.

IRS Opens Determination Letter Program To Remaining Plans

Rounding out the final year of its first five-year cycle, the IRS has now opened its determination letter program for individually designed retirement plans to those plans falling within “Cycle E.” These are plans sponsored by employers whose employer identification number ends with either “5” or “0.”

A Step by Step Guide to Member Discipline

A key function of many associations is to regulate the conduct of their members, or even an entire industry, but associations must understand that legal issues and potential liability come with disciplining members. The disciplinary process can be broken down into seven stages: (1) Authority and Process; (2) Complaint; (3) Investigation; (4) Notice of Charge; (5) Hearing; (6) Decision; and (7) Litigation.

E-Verify Mandate for Federal Contractors Effective September 8, 2009

After lengthy consideration by two administrations, multiple delays in the implementation date, and a ruling by a federal district court in favor of the Government, the regulations mandating use of the E-Verify program by most federal contractors will become effective on September 8, 2009.

Amendment Deadline Looming for PPA Changes

The Pension Protection Act of 2006 (“PPA”) became law on August 17, 2006. It was one of the most sweeping retirement reform bills in recent history, mandating a host of changes for tax-qualified retirement plans. Most of these changes are already in effect – in some cases, for years. Accordingly, most sponsors have long since wrestled with the necessary changes to plan administration and are operating their plans in compliance with PPA’s requirements.

“CYCLE D” Determination Letter Program Now Open

Under the IRS’s determination letter program, all individually designed plans (i.e., those that are not maintained on either a prototype or volume submitter document) are on a 5-year cycle for renewing their determination letters. Plans in “Cycle D” may now file their determination letter applications. The deadline for filing these applications is January 31, 2010.

DHS Delays Effective Date of E-Verify Mandate for Federal Contractors

The Department of Homeland Security has delayed from January 15 to February 20, 2009, the effective date of the amendments to the Federal Acquisitions Regulations requiring a very large number of federal contractors to participate in the E-Verify Program. Spencer Fane previously reported on these new Federal Contractor E-Verify Regulations.

Final Regulations Mandate E-Verify for Federal Contractors

The federal government has released final regulations mandating that federal contractors use the E-Verify Program for all new employees and many current employees. The regulations take effect on January 15, 2009. They implement an Executive Order signed by President George W. Bush on June 6, 2008.

Putting the ADA Back on Track

When Congress passed the Americans with Disabilities Act in 1990, it intended to provide ”equally effective opportunities” to individuals with disabilities.

HEART Act Changes Retirement Plan Rules for Military Reservists

In June, the Heroes Earnings Assistance and Relief Tax (“HEART”) Act became law. The Act makes a number of significant changes to the treatment of military reservists under employee benefit plans. This article summarizes those changes as they apply to qualified defined benefit and defined contribution plans, Section 403(b) plans, and Section 457(b) plans.

Proposed New E-Verify Rules for Federal Contractors Greatly Expand Scope of Program

The Government Services Administration (“GSA”) has issued proposed regulations to implement the June 9, 2008 Executive Order amendment by President Bush mandating use of the E-Verify program for federal contractors. The comment period is until Aug. 11. The proposed regs are at: http://edocket.access.gpo.gov/2008/pdf/E8-13358.pdf.

Genetic Information Nondiscrimination Act (GINA)

On May 21, 2008, President Bush signed the Genetic Information Nondiscrimination Act (GINA) into law. The bill, H.R. 493, prohibits both insurers and employers from using genetic information adversely. Employers are forbidden from firing, refusing to hire or otherwise discriminating against workers based on genetic information. Subject to only a few exceptions, employers also may not request, require or purchase genetic information. This legislation had been pending for more than a decade, and finally passed with broad bipartisan support.

EMPLOYEE VS. INDEPENDENT CONTRACTOR: The Increasing Perils of Misclassification

While this list may be somewhat oversimplified, there is no question that an employer gains concrete economic and administrative advantages from properly using independent contractors. But, if a worker is improperly classified as an independent contractor, all of these benefits are at risk. And, to further complicate matters, there are a myriad of federal and state laws that define “employees” and “independent contractors” in many different ways.

“Good Reason” to Read Final 409A Regulations

The final Section 409A regulations address a concern raised by many employers and their advisors after reading the proposed regulations: the uncertainty concerning the effect of provisions in employment agreements, severance plans, and the like entitling an executive to receive deferred compensation on a voluntary resignation for “good reason.”

IRS Finalizes Section 409A Regulations

As we go to press, the IRS has just issued final regulations under Section 409A of the Tax Code.

Top-Hat Primer

Since Congress enacted sweeping new legislation governing nonqualified deferred compensation arrangements two years ago (in the form of Tax Code Section 409A), the focus of the benefits community has been on how those arrangements are treated for tax purposes.

No Top-Hat Plan When Sales Clerk Permitted to Participate

A nonqualified deferred compensation plan can be an important part of an employer’s overall compensation program. Unlike qualified retirement plans, which limit benefit amounts and require broad coverage, nonqualified plans provide a virtually unlimited opportunity to defer income and may be targeted to key individuals. Additionally, nonqualified plans are generally exempt from ERISA’s fiduciary, funding, and vesting requirements.

New Executive Compensation Disclosure Rules Require Significant Changes

Final rules adopted by the Securities and Exchange Commission on July 26, 2006, will require companies with publicly-traded securities to significantly alter the way that they disclose their executive compensation practices in proxy and registration statements. These rules are generally designed to require the disclosure of all of the compensation that executives receive. They expand the list of executives for whom disclosures must be made, substantially modify the format and content of the required disclosures, and place heightened scrutiny on options-granting practices.

IRS Defers Section 409A Reporting Obligations

Sponsors of nonqualified deferred compensation plans are now beginning to understand the substantive constraints imposed on such plans by Tax Code Section 409A, which was enacted as part of the American Jobs Creation Act of 2004 (AJCA).

The New Law of Training: Part II: Will Your Training Materials Pass Legal Muster?

If a claimant wants to dispute the adequacy of an employer’s training, the training materials will be scrutinized for deficiencies. The following examples are some of the more common problems to avoid in developing training materials:

The New Law of Training: Part I: Training on Discrimination and Harassment: A Necessity, Not A Luxury Anymore

Beginning with the U. S. Supreme Court’s 1998 decisions in Faragher v. City of Boca Raton and Burlington Industries, Inc. v. Ellerth, training on harassment has pretty much became a “must” for employers. In 1999, the Supreme Court’s decision in Kolstad v. American Dental Association not only prompted employers to enhance their harassment training efforts, but also to expand their training to cover the discrimination laws in general. Interestingly, those cases were not just about training.