IRS Seeks Comments on Form W-4 Overhaul for 2020
A draft of the 2020 Form W-4 was released on May 31, by the IRS. This new version includes included major revisions that were designed to make accurate income-tax withholding easier for employees. Continue reading this blog post to learn more.
On May 31, the IRS released a draft 2020 Form W-4 with major revisions designed to make accurate income-tax withholding easier for employees, starting next year. The IRS also posted FAQs about the new form and asked for comments on the changes by July 1.
The form is not for immediate use, the IRS emphasized, and employers should continue to use the current Form W-4 for 2019.
"The primary goals of the new design are to provide simplicity, accuracy and privacy for employees, while minimizing burden for employers and payroll processors," IRS Commissioner Charles Rettig said.
The new form reflects changes made by the Tax Cuts and Jobs Act, which took effect last year. For instance, the revised form eliminates the use of withholding allowances, which were tied to the personal exemption amount—$4,050 for 2017, now suspended. It also replaces complicated worksheets with more straightforward questions.
Addressing a key employer concern, the IRS said that employees who have submitted Form W-4 in any year before 2020 will not need to submit a new form because of the redesign. Employers can compute withholding based on information from employees' most recently submitted Form W-4, if employees choose not to adjust their withholding using the revised form.
Easier for Employees, More Complex for Employers
"Generally, the new Form W-4 is an improvement for employees," said Pete Isberg, vice president of government relations at payroll and HR services firm ADP. It shifts the burden of several calculations from employees to the employer, he noted. "For example, previously. employees would complete a difficult worksheet to convert expected deductions to a number of withholding allowances. With the new form, they'll just enter their full-year expected deductions over the standard deduction amount."
Because existing employees won't have to complete a new Form W-4, "employers must still observe their current Form W-4 withholding allowances," Isberg said. "However, for employees hired after 2019—and anyone that wants to adjust their withholding after 2019—the 2020 version will be the only valid Form W-4."
Not requiring employees to submit the new W-4 will ease HR's burden, but it also means that "payroll systems will need to accommodate the existing withholding allowance calculation, as well as the new method," which could make reprogramming payroll systems more arduous, said Mike Trabold, director of compliance at Paychex, an HR technology services and payroll provider.
In addition to supporting two distinct withholding systems, employers will need to accommodate three sets of withholding calculations, Isberg said:
- The old system based on withholding allowances.
- The 2020 system with a checkbox for optional higher withholding.
- The 2020 system that allows employees to input new data, listed below in the W-4 forms comparison chart.
| 2019 Form W-4 | 2020 Form W-4 (draft) |
| Number of withholding allowances. | Checkbox for multiple jobs or optional higher withholding. |
| Per-payroll additional amount to withhold. | Full-year child and dependent tax credits. |
| Full-year other (non-wage) income. | |
| Full-year deductions (over the standard deduction amount). | |
| Per-payroll additional amount to withhold. |
"One interesting question is how long employers might need to support the old and new systems simultaneously," Isberg said. "It will probably be many years before the last withholding allowances [used by current employees] drop off."
Addressing Privacy Concerns
In June 2018, the IRS issued an earlier revision of Form W-4 and instructions for 2019. But in September 2018, the IRS said it would delay major revisions until 2020 to respond to criticism about the form's release date and complexity.
"We anticipate this version will be better received than the prior draft," Trabold said. The earlier version "asked for much more specific information on other sources of income, such as second jobs, spousal income, non-earned income, etc., which was intended to increase withholding accuracy but which many taxpayers may have felt to be invasive and wouldn't necessarily want to share with their employer."
With the new version of the form, taxpayers can check a box "to indicate their desire to have more tax withheld, without having to share details with their employer," Trabold said. Although this may lead to too much withholding for some taxpayers, "it will help address concerns of those who prefer to get a refund check every year or who may have had to unexpectedly pay tax when filing this year," he explained.
While there will be a worksheet to help taxpayers with the new form, "it will not be provided to the employer, further assuring privacy," Trabold noted.
What's Next
The IRS said it plans to release a "close to final" version of the form in late July, after which employers and payroll administrators can start making programming changes to their systems. A final version, expected in November, will contain only minor adjustments.
The IRS also plans to release instructions for employers in the next few weeks for comment.
In the meantime, the IRS encouraged employees to use its online Paycheck Checkup tool to ensure they're having the right amount of tax withheld. While useful in its current form, the tool will be updated to reflect the new W-4 when it becomes final.
SOURCE: Miller, S. (6 June 2019) "IRS Seeks Comments on Form W-4 Overhaul for 2020" (Web Blog Post). Retrieved from https://www.shrm.org/ResourcesAndTools/hr-topics/compensation/Pages/IRS-seeks-comments-on-Form-W-4-overhaul-for-2020.aspx
Developing guidance could free employers from ACA mandate
A future path for employers to avoid ACA employer mandate penalties was outlined in a recent IRS notice. Read this blog post from Employee Benefits News to learn more.
A recent IRS notice provides a future path for employers to avoid ACA employer mandate penalties by reimbursing employees for a portion of the cost of individual insurance coverage through an employer-sponsored health reimbursement arrangement.
While the notice is not binding and at this stage is essentially a discussion of relevant issues, it does represent a significant departure from the IRS’s current position that an employer can only avoid ACA employer mandate penalties by offering a major medical plan.
Here is everything employers need to know.
Background: As described in more detail in a previous update, the ACA currently prohibits (except in limited circumstances) an employer from maintaining an HRA that reimburses the cost of premiums for individual health insurance policies purchased by employees in the individual market.
Proposed regulations issued by the IRS and other governmental agencies would eliminate this prohibition, allowing an HRA to reimburse the cost of premiums for individual health insurance policies (individual coverage HRA) provided that the employer satisfies certain conditions.
The preamble of the proposed regulations noted that the IRS would issue future guidance describing special rules that would permit employers who sponsor individual coverage HRAs to be in full compliance with the ACA’s employer mandate. As follow up, the IRS recently issued Notice 2018-88, which is intended to begin the process of developing guidance on this issue.
On a high level, the ACA’s employer mandate imposes two requirements in order to avoid potential tax penalties: offer health coverage to at least 95% of full-time employees (and dependents); and offer “affordable” health coverage that provides “minimum value” to each full-time employee (the terms are defined by the ACA and are discussed further in these previous updates).
Offering health coverage to at least 95% of full-time employees: Both the proposed regulations and notice provide that an individual coverage HRA plan constitutes an employer-sponsored health plan for employer mandate purposes. As a result, the proposed regulations and notice provide that an employer can satisfy the 95% offer-of-coverage test by making its full-time employees (and dependents) eligible for the individual coverage HRA plan.
Affordability: The notice indicates that an employer can satisfy the affordability requirement if the employer contributes a sufficient amount of funds into each full-time employee’s individual coverage HRA account. Generally, the employer would have to contribute an amount into each individual coverage HRA account such that any remaining premium costs (for self-only coverage) that would have to be paid by the employee (after exhausting HRA funds) would not exceed 9.86% (for 2019, as adjusted) of the employee’s household income.
Because employers are not likely to know the household income of their employees, the notice describes that employers would be able to apply the already-available affordability safe harbors to determine affordability as it relates to individual coverage HRAs. The notice also describes new safe harbors for employers that are specific to individual coverage HRAs, intending to further reduce administrative burdens.
Minimum value requirement: The notice explains that an individual coverage HRA that is affordable will be treated as providing minimum value for employer mandate purposes.
Next steps: Nothing is finalized yet. Employers are not permitted to rely on the proposed regulations or the notice at this time. The proposed regulations are aimed to take effect on Jan. 1, 2020, if finalized in a timely matter. The final regulations will likely incorporate the special rules contemplated by the notice (perhaps with even more detail). Stay tuned.
This article originally appeared on the Foley & Lardner website. The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.
SOURCE: Simons, J.; Welle, N. (17 January 2019) "Developing guidance could free employers from ACA mandate" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/developing-guidance-could-free-employers-from-aca-mandate?brief=00000152-14a5-d1cc-a5fa-7cff48fe0001
From HSA to 401(k) contribution limits, 11 numbers to know for 2019
Do you offer HSAs, FSAs or 401(k)s to your employees? There are many important numbers companies and employees need to know regarding HSAs, FSAs and 401(k)s. Read this blog post to learn more.
There are a slew of important figures companies and employees need to know regarding health savings accounts, 401(k)s and flexible spending accounts. While the IRS announced HSA changes in May, the agency only recently announced annual changes to FSAs and 401(k)s. From contribution limits to out-of-pocket amounts, here are the figures employers need to know — all of which take effect in January.
$19,000: 401(k) pre-tax contribution limits
$6,000: 401(k) catch-up contribution limit
$6,000: IRA contribution limits
$3,500: Annual HSA contribution limit for individuals
$7,000: HSA contribution limit for family coverage
$1,350: HDHP minimum deductible for individual
$2,700: HDHP minimum deductible for family
$6,750: HDHP maximum out-of-pocket amounts (individual)
$13,500: HDHP maximum out-of-pocket amounts (family)
$1,000: HSA catch-up contributions
$2,700: FSA contribution limit
SOURCE: Mayer, K. (6 December 2018) "From HSA to 401(k) contribution limits, 11 numbers to know for 2019" (Web Blog Post). Retrieved from https://www.benefitnews.com/list/from-hsa-to-401-k-contribution-limits-11-numbers-to-know-for-2019
2019: A Look Forward
A number of significant changes to group health plans have been made since the Affordable Care Act (ACA) was enacted in 2010. Many of these changes became effective in 2014 and 2015 but certain changes to a few ACA requirements take effect in 2019.
Changes for 2019
- Cost-sharing Limits – Non-grandfathered plans are subject to limitations on cost sharing for essential health benefits (EHB). The annual limits on cost sharing for EHB are $7,900 for self-only coverage and $15,800 for family coverage, effective January 1, 2019.
- Health plans with more than one service provider can divide maximums between EBH as long as the combined amount does not exceed the out-of-pocket maximum limit for the year.
- Beginning in 2016, each individual – regardless of the coverage the individual is enrolled – is subject to the self-only annual limit on cost sharing.
- The ACA’s annual cost-sharing limits are higher than high deductible health plans (HDHPs) out-of-pocket maximums. For plans to qualify as an HDHP, the plan must comply with HDHP’s lower out-of-pocket maximums. The HDHP out-of-pocket maximum for 2019 is $6,750 for self-only coverage and $13,500 for family coverage.
- Coverage Affordability Percentages – If an employee’s required contribution does not exceed 9.5 percent of their household income for the taxable year (adjusted each year), then the coverage is considered affordable. The adjusted percentage for 2019 is 9.86 percent.
- Reporting of Coverage – Returns for health plan coverage offered or provided in 2018 are due in early 2019. For 2018, returns must be filed by February 28, 2019, or April 1, 2019 (if electronically filed). Individual statements must be provided by January 31, 2019.
- ALEs are required to report information to the IRS and their eligible employees regarding their employer-sponsored health coverage. This requirement is found in Section 6056. Reporting entities will generally file Forms 1094-B and 1095-B under this section.
- Every health insurance issuer, self-insured health plan sponsor, government agency that provides government-sponsored health insurance, and any other entity that provides MEC is required to finalize an annual return with the IRS, reporting information for each individual who is enrolled. This requirement is found in Section 6055. Reporting entities will generally file Forms 1094-C and 1095-C under this section.
- ALEs that provide self-funded plans must comply with both reporting requirements. Reporting entities will file using a combined reporting method on Forms 1094-C and 1095-C.
- Forms Used for Reporting – Reporting entities must file the following with the IRS:
- A separate statement for each individual enrolled
- A transmittal form for all returns filed for a given calendar year.
- Electronic Reporting – Any reporting entity that is required to file 250 or more returns in either section must file electronically on the ACA Information Returns (AIR) Program. Reporting entities that file less than 250 returns can file in paper form or electronically on the ACA Information Returns (AIR) Program.
- Penalties – Entities that fail to comply with the reporting requirements are subject to general reporting penalties for failure to file correct information returns and failure to furnish correct payee statements. Penalty amounts for failure to comply with the reporting requirements in 2019 are listed below:
| Penalty Type | Per Violation | Annual Maximum | Annual Maximum for Employers with up to $5 million in Gross Receipts |
| General | $270 | $3,275,500 | $1,091,500 |
| Corrected within 30 days | $50 | $545,500 | $191,000 |
| Corrected after 30 days but before August 1 | $100 | $1,637,500 | $545,500 |
| Intentional Disregard | $540* | None | N/A |
**Intentional disregard penalties are equal to the greater of either the listed penalty amount or 10 percent of the aggregate amount of the items required to be reported correctly.
Expected Changes
- Health FSA Contributions – Effective January 1, 2018, health FSA salary contributions were limited to $2,650. The IRS usually announces limit adjustments at the end of each year. This limit does not apply to employer contributions or limit contributions under other employer-provided coverage.
- Employer Shared Responsibility Regulations – The dollar amount for calculating Employer Shared Responsibility 2 penalties is adjusted for each calendar year. Applicable large employers (ALEs) must offer affordable, minimum value (MV) healthcare coverage to full-time employees and dependent children or pay a penalty. If one or more full-time employees of an ALE receive a subsidy for purchasing healthcare coverage through an Exchange, the ALE is subject to penalties.
- Applicable Large Employer Status – ALEs are employers who employ 50 or more full-time employees on business days during the prior calendar year.
- Offering Coverage to Full-time Employees – ALEs must determine which employees are full-time. A full-time employee is defined as an employee who worked, on average, at least 30 hours per week or 130 hours in a calendar month. There are two methods for determining full-time employee status:
- Monthly Measurement Method – Full-time employees are identified based on a month-to-month analysis of the hours they worked.
- Look-Back Measurement Method – This method is based on whether employees are ongoing or new, and whether they work full time or variable, seasonal or part-time. This method involves three different periods:
- Measurement period – for county hours of service
- Administration period – for enrollment and disenrollment of eligible and ineligible employees
- Stability period – when coverage is provided based on an employee’s average hours worked.
- Applicable Penalties – ALEs are liable for penalties if one or more full-time employees receive subsidies for purchasing healthcare coverage through an Exchange. One of two penalties may apply depending on the circumstances:
- 4980H(a) penalty – Penalty for not offering coverage to all full-time employees and their dependents. This penalty does not apply if the ALE intends to cover all eligible employees. ALEs must offer at least 95 percent of their eligible employees’ health care coverage. Monthly penalties are determined by this equation:
- ALE’s number of full-time employees (minus 30) X 1/12 of $2,000 (as adjusted), for any applicable month
- The $2,000amount is adjusted for the calendar year after 2014:
- $2,080 – 2015; $2,160 – 2016; $2,260 – 2017; $2,320 – 2018
- 4980H(b) penalty – penalty for offering coverage – ALEs are subject to penalties even if they offer coverage to eligible employees if one or more full-time employees obtain subsidies through an Exchange because:
- The ALE didn’t offer all eligible employees coverage
- The coverage offered is unaffordable or does not provide minimum value.
- Monthly penalties are determined by this equation: 1/12 of $3,000 (as adjusted) for any applicable month
- $3,120 – 2015; $3,240 – 2016; $3,390 – 2017; $3,480 – 2018
- 4980H(a) penalty – Penalty for not offering coverage to all full-time employees and their dependents. This penalty does not apply if the ALE intends to cover all eligible employees. ALEs must offer at least 95 percent of their eligible employees’ health care coverage. Monthly penalties are determined by this equation:
Contact one of our advisors for assistance or if you have any questions about compliance in the New Year.
SOURCES: www.dol.gov, www. HHS.gov, https://www.federalregister.gov/documents/2018/04/17/2018-07355/patient-protectionand-affordable-care-act-hhs-notice-of-benefit-and-payment-parameters-for-2019, https://www.irs.gov/e-fileproviders/air/affordable-care-act-information-return-air-program
IRS bumps up 401(k) contribution limit for 2019
Do you offer a retirement plan to your employees? The IRS recently raised the annual contribution cap for 401(k) and other retirement plans. Continue reading to find out what the new contribution caps are.
Participants in 401(k) and other defined contribution retirement accounts will see their annual contribution cap raised from $18,500 to $19,000 in 2019, according to the Internal Revenue Service.
The catch-up contribution limit on defined contribution plans remains unchanged at $6,000.
Savers with IRAs will see the annual contribution cap raised from $5,500 to $6,000 — the first time the cap on IRA deferrals has been raised since 2013. The annual catch-up contribution for savers age 50 and over will remain at $1,000.
Cost-of-Living Adjustment (COLA) increases will also be applied to the deduction phase-out scale for IRA owners who are also covered by a workplace retirement plan:
- for single filers the scale will be $64,000 to $74,000, up $1,000
- for joint filers where the spouse contributing to an IRA is also covered by a workplace plan, the phase-out slot increase to $103,000 to $123,000
- for an IRA contributor whose spouse is covered by a plan, the income phase-out is $193,000 to $2003,000
Single contributors to Roth IRAs will see the income phase-out range increase to $122,000 to $137,000, up $2,000 from last year. For married couples filing jointly the range will increase to $193,000 to $203,000, up $4,000 from last year.
More low and moderate-income families may be able to claim the Saver’s Credit on their tax returns for contributions to retirement savings plans. The threshold increases $1,000 for married couples, to $64,000; $48,000 for head of households, up $750; and $32,000 for singles and single filers, up $500 from last year.
The deferred compensation limit in defined contribution plans for pre-tax and after-tax dollars will increase $1,000, to $56,000. And the maximum defined benefit annual pension will increase $5,000, to $225,000.
SOURCE: Thornton, N. (1 November 2018) "IRS bumps up 401(k) contribution limit for 2019" (Web Blog Post). Retrieved from https://www.benefitspro.com/2018/11/01/irs-bumps-401k-contribution-limit-for-2019/
4 best practices for implementing a gamification-based compliance training system
Many employees may dislike and even disengage when their employer mentions implementing training sessions. Continue reading to learn how implementing a gamification-based training system can help improve employee engagement.
For most employees, compliance training is the Brussels sprouts on the kid’s plate of working life. Everyone knows it’s good for you — one mistake could lead to violations, accidents, reputation issues and maybe a not-so-friendly visit from regulatory body officials — but most workers turn up their noses and disengage when it’s time to dig in.
Considering that merely a third of American workers report feeling engaged at work as it stands, anything that makes matters worse is dangerous. Why risk inflaming indifference — not to mention spending money for on-site instructors — with dull-as-dry-toast workshops?
A far better bet is to embrace technology and go virtual. Of course, online-based compliance training won’t guarantee heightened participation or enthusiasm unless they have one specific aspect: gamification.
Gaming elements can turn any virtual compliance training learning management system (LMS) into an immersive experience. ELearning compliance training participants can enjoy customization and flexibility while getting up to speed on the latest rules, guidelines and protocols. With LMS gamification, HR managers and chief learning officers can cultivate and retain top talent. Best of all, it’s far easier to get buy-in for a robust LMS system with badges, bells and whistles than it is to make a pile of Brussels sprouts disappear from a toddler’s tray.
What exactly is so exciting about game-based learning? In essence, the process prompts active and immediate participation because of extra motivation in the form of rewards. Whether it’s badges or points, these features make eLearning interesting and enjoyable.
In one study, workers who enjoyed themselves retained concepts 40% better than those who weren’t having fun. As you might guess, this is what game-based learning is all about. Engaged employees who rapidly earn rewards are less likely to make errors, so they naturally increase a company’s bottom line and lower the likelihood of compliance fees and penalties. Plus, according to research from TalentLMS, 87% of employees report that gamification makes them more productive.
Merging gamification with training makes plenty of sense. It’s also easy to build a gamification-based compliance training LMS by following a straightforward LMS implementation checklist.
1. Identify your training goals and gaps. Before you can find the best LMS for your needs and move forward with an implementation project plan, you need to spot the inefficiencies of your existing compliance training program. For example, your strategy might not facilitate real-world applications. Knowing this, you would want a compliance training LMS that bridges gaps and imparts practical experience.
2. Discover what motivates and drives employees. Employee gamification only works when employees are properly incentivized, so find out what motivates your team based on their backgrounds and experience levels. Whether a task is challenging or boring, people respond better when they are internally driven to succeed.
Do you need an intuitive LMS with a personalized dashboard? Are the introverts on your team more driven by badges and points than by a sense of competition? Conduct surveys to gauge expectations, and try to follow a 70:20:10 model of training amplified by gaming to foster experimentation and collaboration.
3. Choose the right rewards for desired outcomes. With the plethora of LMS choices on the market, you can select from rewards and mechanics that lead to the exact behaviors and criteria you desire. Want employees to achieve safety online training certifications? Reward “graduates” with points after they have displayed their proficiency. Reinforce favorable behaviors without punishing workers who lag behind. Carrots are far more effective than sticks.
4. Invest in a feature-rich, gamification-supported LMS. Your LMS should not only be user-friendly, but it should also be a portal to game-based learning support and an online asset library. Ideally, your gamified learning platform should include themes and templates that allow you to design visually appealing rewards without reinventing the wheel. Just make sure you have game-based reporting on your side, which makes it simple to track employee performance, completion rates, and other LMS metrics.
Implementing a gamification-based compliance training strategy requires careful budgeting, planning, and analysis. Once you find an LMS platform that delivers the features you need within your price range, you’ll be on your way to mitigating risks and retaining superstar employees. And thanks to gamification, everyone can have a little fun along the way.
SOURCE: Pappas, C. (10 October 2018) "4 best practices for implementing a gamification-based compliance training system" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/4-best-practices-for-implementing-a-gamification-based-compliance-training-system?brief=00000152-14a5-d1cc-a5fa-7cff48fe0001
IRS updates required tax notice to address plan loan offsets
The model notices that all plan sponsors are required to send to plan participants before they receive an eligible rollover distribution from qualified plans were recently updated by the IRS. Continue reading to learn more.
The IRS has updated the model notice that is required to be provided to participants before they receive an “eligible rollover distribution” from a qualified 401(a) plan, a 403(b) tax-sheltered annuity, or a governmental 457(b) plan.
Notice 2018-74, which was published on September 18, 2018, modifies the prior safe-harbor explanations (model notices) that were published in 2014. Like the 2014 guidance, the 2018 Notice — sometimes referred to as the “402(f) Notice” or “Special Tax Notice” — includes two separate “model” notices that are deemed to satisfy the requirements of Code Section 402(f): one for distributions that are not from a designated Roth account, and one for distributions from a designated Roth account. The 2018 Notice also includes an appendix that can be used to modify (rather than replace) existing safe-harbor 402(f) notices.
The model notices were updated to take into consideration certain legislation that has been enacted, and other IRS guidance that has been published, since 2014. They include:
- changes related to qualified plan loan offsets under the Tax Cuts and Jobs Act of 2017;
- changes in the rules for phased retirement under the Moving Ahead for Progress in the 21st Century Act (“MAP-21”);
- changes in the exceptions to the 10% penalty for early distributions from governmental plans under the Defending Public Safety Employees’ Retirement Act; and
- IRS guidance (in Revenue Procedure 2016-47) regarding a self-certification procedure for waivers of the 60-day rollover deadline.
The model notices also make some “clarifying” changes to the 2014 notices, including:
- clarification that the 10% additional tax on early distributions applies only to amounts includible in income;
- an explanation of how the rollover rules apply to governmental 457(b) plans that include designated Roth accounts;
- clarification that certain exceptions to the 10% tax on early distributions do not apply to IRAs; and
- recognizing that taxpayers affected by federally declared disasters and other events may have an extended deadline for making rollovers.
The updated model 402(f) notices should be particularly useful in communicating to participants the extension, under the Tax Cuts and Jobs Act, of the time to roll over a “qualified plan loan offset amount.”
Inside the plan load offset
By way of background, Notice 2018-74 reminds us that distribution of a “plan loan offset amount” is an eligible rollover distribution, and that a “plan loan offset” occurs when, under the plan terms governing a plan loan, the participant’s accrued benefit is reduced, or offset, in order to repay the loan. According to the Notice, this can occur when, for example, the terms of the plan loan require that, in the event of an employee’s termination of employment or request for a distribution, the loan is to be repaid immediately or treated as in default.
The Notice also indicates that a plan loan offset may occur when, under the terms of the plan loan, the loan is canceled, accelerated, or treated as if it were in default (for example, when the plan treats a loan as in default upon an employee’s termination of employment or within a specified period thereafter). The Notice also reminds us, however, that a plan loan offset cannot occur prior to a distributable event.
This is helpful guidance for distinguishing between a “deemed distribution” of a defaulted loan (a taxable event which is not eligible for rollover) and a “plan loan offset amount,” which is an eligible rollover distribution.
Generally, if a default occurs before the participant has a distributable event (such as termination of employment, or attainment of age 59½), and the default is not cured by the last day of the cure period, it must be treated as a “deemed distribution” and reported on Form 1099. Such defaulted amounts are not eligible for rollover.
However, if the default occurs at or after a distribution event, and the plan terms require that the participant’s account be offset to pay off the loan, then the reduction of the account may be treated as a plan loan offset, which is an eligible rollover distribution.
Notice 2018-74 (and the new model notices) also reflect that, prior to the Tax Cuts and Jobs Act of 2017, participants who incurred a “plan loan offset” only had 60 days to “roll” an equivalent amount of money to an IRA or another employer plan (to avoid the offset being treated as a taxable distribution). However, for plan loan offsets that occur after December 31, 2017, if the plan loan offset is a “qualified plan loan offset” (meaning it occurs in connection with termination of employment or termination of the plan), then the participant has significantly more time (until the extended due date of the participant’s tax return for the year of the offset) in which to roll an amount equal to the loan offset amount to an IRA or another employer plan.
SOURCE: Browning, R (4 October 2018) "IRS updates required tax notice to address plan loan offsets" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/opinion/irs-updates-required-tax-notice-to-address-plan-loan-offsets?brief=00000152-146e-d1cc-a5fa-7cff8fee0000
Business meal deductions likely here to stay after new IRS guidelines
Business meal deductions are expected to continue to qualify for deductions. After much confusion following the IRS’s decision to end deductions for client entertainment, they are expected to release guidance regarding business meal deductions. Read on to learn more.
Employers wondering whether they can still deduct business meals from their tax returns may soon be getting an answer from the Internal Revenue Service.
The agency is expected to release guidance saying that business meals will continue to be 50% deductible, according to an article in the Wall Street Journal.
The confusion over the deductibility of business meals stems from the IRS’s decision to end deductions for client entertainment, a move that was part of the government’s tax overhaul. Previously, the entertainment-related deduction was 50% of qualified expenses.
The elimination of deductions for client entertainment left many tax professionals wondering whether client meals might be considered entertainment and therefore no longer qualify for deductions.
The anticipated IRS guidance — which comes at the urging of the American Institute of Certified Public Accountants and other groups — is expected to preserve the 50% deduction for the cost of meals with clients and elaborate on how the 50% meal write-off meshes with entertainment expenses, the Wall Street Journal said.
If a business owner or employee, for example, takes a client to a ballgame, the cost of the tickets is not deductible because the expense is for entertainment. Hots dogs and drinks purchased at the event, however, could still be 50% deductible, the IRS is expected to say, according to the Wall Street Journal.
The IRS, which did not respond to a request for comment, is not likely to change the normal requirements corporate executives must meet to take deductions for client meals.
They must discuss business with the client before, during and after the meal, and the meal must not be “lavish or extravagant,” the Wall Street Journal said.
SOURCE: Correia, M. (28 September 2018) "Business meal deductions likely here to stay after new IRS guidelines" (Web Blog Post). Retrieved from https://www.benefitnews.com/news/business-meal-deductions-likely-here-to-stay-after-new-irs-guidelines?brief=00000152-14a5-d1cc-a5fa-7cff48fe0001
Avoiding red flags: How to lower your plan's audit risk
Any size plan can be selected for an IRS or DOL audit. Businesses should learn how to avoid the red flags to help lower their plan’s audit risk. Read this blog post to learn more.
Are only the largest retirement plans audited? The truth is that plans of any size can be audited by the IRS and the DOL. Your plan could be selected for a random audit, or as a result of IRS datasets that target certain types of plans. However, lots of audits are triggered by specific events. Learning to avoid the red flags can help reduce your risk and increase the odds that you will survive any audit for which you are selected without major problems.
Your Form 5500 can be audit bait
Bad answers to Form 5500 can attract the Labor Department’s attention and serve as audit bait. The best way to make sure that your Form 5500 filing doesn’t lead to an audit is to check it carefully — with outside assistance if necessary — to make sure that the compliance questions are answered correctly.
For example, one compliance question asks whether the plan is protected by an ERISA bond and if so, the amount of coverage. Never answer “no” to this question. If for some reason you didn’t have a bond before, get one now. It is even possible to obtain retroactive coverage.
A coverage amount that is too low is also a red flag. In most cases, the bond must be for at least 10% of plan assets at the beginning of the year, although plans with certain types of investments must have higher coverage. Since assets at prior year end and at the beginning of the year are also shown on the 5500, showing an amount lower than 10% of those assets will invite the DOL to follow up.
The DOL will also look at the investment and financial information shown in the asset report. If your plan has many alternative investments such as hedge funds, has invested in other hard-to-value investments, or if you have large amounts of un-invested cash, you may also be inviting a follow up by the DOL. If your asset values as of the end of the prior year do not match your opening year balance for the succeeding year, you are also inviting unwanted inquiries.
Other answers that may get you targeted for further investigation are: if you indicate that you have late deposits of employee contributions or that you have not made required minimum distributions to former employees who are 70.5 years old. Note that this question does not need to be answered “Yes” if reasonable efforts have been made to find the participants but they still can’t be located.
Don’t ignore employee claims and complaints
Many plan sponsors don’t realize that employee complaints to the IRS and DOL often lead to audits. Make sure that employee questions and complaints receive a response, and if a formal claim for benefits is filed, make sure to follow the ERISA regulations on benefit claims and appeals. It is a good idea to run any denials past your ERISA attorney to make sure they are consistent with the written plan terms and clearly explain the participant’s appeal rights and the reason for the denial.
Be prepared
If your plan is selected for IRS or DOL audit, expect to be asked to provide executed plan documents, participant notices and fiduciary policies, such as your Investment Policy Statement. Keep these in a file to avoid a last-minute scramble to satisfy the auditor’s requests. You should also be prepared to show that you are making diligent efforts to find missing participants, deal with defaulted loans and review plan fees, which are current hot issues for auditors.
To be even better prepared, you can do a self-audit to identify problems that need correction before the IRS or DOL do.
SOURCE: Buckmann, C (29 June 2018) "Avoiding red flags: How to lower your plan's audit risk" (Web Blog Post). Retrieved from: https://www.benefitnews.com/opinion/irs-dol-audit-red-flags-and-avoiding-plan-risks
Consequences and/or Remedies for Late or Missing Form 5500s
The Form 5500 deadline is approaching quickly. Below, Employee Benefits Corporation discusses the three different options employers have if they fail to file their Form 5500 or if they file late.
The Form 5500 is due on the last day following seven months after the end of the plan year. In order to be granted an extension, the employer would have to send the IRS a Form 5558 for each plan subject to Form 5500 obligations. The Form 5558 needs to be postmarked by the original due date or it will be rejected.
Failure to file or failure to file required Form 5500s on time can prove to be costly for an employer as daily penalties are assessed for late or missing filings.
What should an employer do if they find out they never filed a Form 5500 or they failed to file the Form 5500 by the deadline?
The employer should consider their risk tolerance, the number of plans they have not filed and the potential penalties to determine what the best course of action is for them.
They have three options:
- Do not file and hope that no one questions them if they are audited. There is a potential consequence of $300/day for each plan (per plan/ per plan year) that did not get filed or get filed on time. Penalties capped at $30,000 per year.
- File late and hope that no one notices. There is a potential consequence of $50/day for each plan (per plan/per plan year) that filed late or not on time. No cap on the penalty in this case.
- File late under the Delinquent Filers Voluntary Compliance Program (DFVCP). There is late fee of $10/day for each plan (per plan per plan year) that is filing late. Penalties capped at $2,000 per large plan/$750 per small plan if filing multiple plan years for a plan. Penalties for large plans that file more than 1 delinquent plan year per plan number filing at the same time, the maximum penalty is $4,000 per plan and $1,500 for small plans.
The Bottom Line:
Employee Benefits Corporation can assist employers with the preparation of their delinquent Form 5500s as part of our Compliance Services offerings. Employers will pay the DFVCP penalties directly to the DOL online as part of the process. We can help educate the employer on the risk factors associated with each approach and to assist, if contracted to do so, in the preparation of the Form 5500s.
SOURCE:
Employee Benefits Corporation (29 June 2018) "Consequences and/or Remedies for Late or Missing Form 5500s" [Web Blog Post]. Retrieved from https://www.ebcflex.com/Education/ComplianceBuzz/tabid/1140/ArticleID/613/Consequences-and-or-Remedies-for-Late-or-Missing-Form-5500s.aspx?utm_source=7.19.18+Need+to+Know+%7C+Missing+Form+5500s&utm_campaign=7-19-18_Need+to+Know+email-Form+5500+season&utm_medium=email