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Qualified Plan Loans – Repayment Upon Termination of Employment Can Be a Hardship

The situation involved in Private Letter Ruling 201407027 illustrates that a participant can be caught between a rock and hard place when a qualified plan loan must be repaid upon termination of employment.

Administering qualified plan loan repayments following a participant’s termination of employment can be burdensome for employers.  Most plans provide that a qualified plan loan must be repaid upon termination of employment to avoid a situation in which the employer must arrange for loan repayments other than through payroll deduction.  Some plan recordkeepers provide post-termination loan administration services, but since loan administration errors can be costly and time-consuming to fix, employers tend to prefer requiring repayment upon termination of employment.

A plan loan which satisfies all the requirements under Section 72(p) of the Internal Revenue Code does not cause a taxable event at the time the loan proceeds are distributed from the plan.  In addition, if loan repayments are remitted in accordance with the loan terms and the requirements of Code Section 72(p), no taxable event occurs during the term of the loan.  However, if a loan is defaulted during the term for non-payment or any other reason, the tax rules treat the outstanding loan balance as a deemed distribution, meaning that the entire amount is treated for tax purposes as a distribution.  A deemed distribution of a plan loan is not eligible for rollover.  Therefore, when a participant defaults on a loan during employment, she has a deemed distribution which is taxable, but the

Hobby Lobby, Religious Freedom, ACA, and Contraception

Last month, the Supreme Court heard oral arguments in Sebelius v. Hobby Lobby Stores, Inc., and Conestoga Wood Specialties Corp., two highly anticipated cases that deal with the Affordable Care Act (“ACA”), religious freedom, and women’s access to contraception.

Hobby Lobby and Conestoga, each a closely-held family-owned corporation, have challenged the ACA’s preventive care requirement mandating coverage of all FDA-approved contraceptive drugs, devices, and related services.  Although the companies’ owners do not object to most contraceptives, they oppose emergency contraception and certain devices on religious grounds.  They contend that the required coverage of certain contraceptives violates their rights under the Religious Freedom Restoration Act (“RFRA”) and the Free Exercise Clause of the First Amendment. Generally, the RFRA is aimed at providing exceptions to laws that substantially burden a person’s free exercise of his or her religion. The question before the Court was whether secular for-profit companies can exercise religion.

While it will be a few months before a decision is issued, the dialogue during oral arguments posed many compelling questions.  Justice Sotomayor asked Paul D. Clement, who represented the corporations, how courts are to determine whether a corporation holds a particular religious belief:  whose beliefs control, the majority of shareholders; the corporate officers; what happens to the minority?  She and Justice Kagan asked how far corporation’s religious objections might extend.  Would blood transfusion and vaccines be objectionable?  What should occur if other employers in the future claim that they have religious objection to sex discrimination laws,

SCOTUS Speaks in Quality Stores: Severance Payments are Subject to FICA Taxes

On March 25, 2014, the United States Supreme Court issued its unanimous (8-0) decision in U.S.  v Quality Stores, 572 U.S. ____ (2014).  In its opinion authored by Justice Kennedy, the Court held that the severance payments at issue constituted taxable wages for FICA purposes.  The severance payments in question were made to employees in connection with an involuntary termination, were varied based on job seniority and time served, and were not linked to the receipt of state unemployment benefits.  In so holding, the Supreme Court reversed the decision of the Sixth Circuit Court of Appeals and resolved a split in the courts.  See CSX Corp. v. United States, 518 F. 3d 1328 (Fed. Cir.  2008).

The Court reasoned that severance payments of the type described fit plainly within the definition of “wages” under Section 3121 of the Internal Revenue Code, which defines “wages” for FICA tax purposes broadly as “all remuneration for employment”  and defines employment as “any service, of whatever nature, performed by an employee for the person employing him.” According to the Court, common sense dictates that severance payments are remuneration that is received by employees in consideration for employment because severance payments are made only to employees.  In addition, the Court noted that  the fact that severance payments often vary according to the function and seniority of a particular employee was a further indication that the payments are made to reward employees for their service.

The Supreme Court considered the arguments made by

You Can Do With a Carryover What You Can’t Do with the Grace Period: Have an HSA

April 8, 2014

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Recently, the IRS released a Chief Counsel Advice Memo describing the interaction of the health FSA carryover feature we previously discussed and HSAs.  This memo addresses some of the important questions left open by prior guidance.  However, readers should know that CCA Memos are not binding guidance, so while this memo is helpful, employers should recognize that subsequent IRS guidance may take a different approach.

The question raised was whether an employee in a general purpose FSA with a carryover feature can contribute to an HSA.  The answer (a good legal answer) is, “it depends.”

The CCA starts out by noting, correctly, that an individual who is covered under a general purpose health FSA (i.e. one that reimburses for more than just dental, vision, preventive care, and post-HDHP deductible expenses) is not eligible to contribute to an HSA.  So a general purpose carryover makes the individual HSA-ineligible.  This applies even after the entire $500 (or other amount) carried over is spent.  So if a participant who carried over $500 from a prior year goes for laser eye surgery in January and uses up the general purpose carryover amount, he or she is still ineligible for the entire year.  So far, this is consistent with guidance involving the grace period, so there is no real surprise here.

But then the CCA goes on to say that an individual who elects a limited purpose, HSA-compatible FSA (i.e. one that reimburses only for dental, vision, preventive care, or post-deductible

The Wait is Over – IRS Guidance on Amendments Really Was Imminent

The very day after we posted about the IRS’s delay in issuing guidance on the application of the Windsor decision (and guidance previously provided by the IRS under Rev. Rul. 2013-17) to qualified retirement plans the IRS issued Notice 2014-19 (the “Notice”) addressing those very issues.   The brief seven page Notice took the form of a Q&A and weighed in on many of the issues facing plan sponsors:

  • The Basics – The Notice reconfirms the basic principle (which arguably was not questioned by anyone at this stage of the game) that any retirement plan qualification rule that applies because a participant is married must be applied with respect to a participant who is married to an individual of the same sex.  The Notice provides the example of a participant in a plan subject to the rules of IRC 401(a)(11) who is married to a same-sex spouse and notes that such participant cannot waive a qualified joint and several annuity without obtaining his or her same-sex spouses consent as required by IRC 417.
  • Retroactive Application of Windsor – Moving on to the “meaty” questions, the IRS indicated that qualified retirement plans are required to reflect the outcome of Windsor as of June 26, 2013.  This effective date may come as a surprise to some who expected September 16, 2013 to be the magic date given the effective date contained in Notice 2013-17. However, it is a welcome development to others who worried that a

National Employee Benefits Day Crossword Puzzle #3

April 4, 2014

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National Employee Benefits Day Crossword Puzzle #3

April 4, 2014

Authored by: benefitsbclp

This is the third in our series of three crossword puzzles in honor of National Employee Benefits Day on Wednesday!  Go here and here to see the first two posts in this series.

Reminder: Answers for all three puzzles will be posted on Saturday so you can check your work.  Enjoy!

Retirement Plans Post-DOMA: Is IRS Guidance on Amendments Really Imminent?

Update (4/11): See our post here on the recently released guidance.

The employee benefits community continues to wait with baited breath on IRS guidance regarding the amendments necessary to qualified retirement plans in the wake of last Summer’s Windsor decision determining that Section 3 of the Defense of Marriage Act is unconstitutional.  (Recall that Section 3 of DOMA defines “spouse” and “marriage” to exclude same sex spouses and marriages.)  The IRS 2013-2014 Priority Guidance Plan for the period running through June 2014 includes issuance of this guidance as a top priority.   In December 2013, a Treasury Department official said that guidance was expected “fairly imminently.”  In February, such guidance seemed very imminent.  Yet, here we sit in the second quarter of 2014 with no guidance yet issued….

Notwithstanding the absence of guidance, to administer retirement plans in operational compliance with the Windsor decision, employers must currently treat same sex spouses as spouses for purpose of determining rights and benefits thereunder.  Such operational compliance is necessary to avoid exposure both under the Internal Revenue Code and in the courts. Courts have been acknowledging the decision in Windsor and awarding same sex spouses “surviving spouse” status under qualified plans since last summer. See, e.g., Cozen O’Connor, P.C. v. Tobits, CIV.A. 11-0045, 2013 WL 3878688 (E.D. Pa. July 29, 2013).

Although employers must operate retirement plans in compliance with Windsor at this time, we generally recommend that they postpone amendment of any qualified plan pending issuance of additional guidance from the Service

National Employee Benefits Day Crossword Puzzle #1

April 2, 2014

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National Employee Benefits Day Crossword Puzzle #1

April 2, 2014

Authored by: benefitsbclp

In honor of National Employee Benefits Day, we’re taking a break from guidance updates and commentary and providing a little fun.  Over the next few days, we will be posting some crossword puzzles focused on the fascinating and complex world of benefits.  We will post the answers on Saturday so you can check your work.  Enjoy!

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