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Florida Stamp Tax

Florida Stamp Tax

September 26, 2014

Authored by: Richard Arenburg

FloridaIf your 401(k) plan maintains a participant loan program, you may discover that you have compliance concerns thanks to a relatively obscure Florida tax statue. 

Under its revenue laws, Florida imposes a document tax on loan transactions that are made, signed, executed, issued, or otherwise transacted in the State.  The Florida Department of Revenue has specifically ruled that 401(k) plan loans are subject to the tax.  The law further provides that no state court may enforce the provisions of a promissory note if the document tax is not paid. 

We believe it would be a challenge to sustain a position that the Florida statute is preempted by ERISA.  A failure to pay the tax, therefore, could mean that a 401(k) plan is extending loans that are not adequately secured, creating the potential for both prohibited transaction issues and plan operational failure issues. 

The Florida statute arguably reaches not only plan loans extended to participants who are Florida residents but to plans with sponsors resident in Florida or third party administrators resident in Florida. 

The Florida law does contemplate a process for paying past due taxes.  The only other good news here is that no other state appears to have a similar transactional tax that would apply to plan loans.

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

Do Your Plan a Favor: Eschew Escheating

Given the migratory nature of society these days, it is not uncommon for an employee benefit plan to accumulate significant sums of money attributable to the accounts of lost participants.  For a number of States, the assets attributable to lost participants are an attractive revenue source.  Utilizing their unclaimed property statutes, many States attempt to seize these funds so they can add them to the State’s coffers.

Most employee benefit plans subject to ERISA can sidestep this potential leakage of plan assets through the use of clear plan language that expressly provides for the forfeiture of amounts from the accounts of participants who are determined to be lost after some predetermined period. The language should also provide that those forfeited funds will be utilized either through a reduction of the sponsor’s contribution obligation or their application to reduce plan expenses.  The Department of Labor has unequivocally concluded that such plan provisions are to be honored irrespective of unclaimed property statutes that might otherwise dictate a contrary result. Most plans that provide for the forfeiture of the accounts of lost participants further provide that those accounts will be restored if the lost participants are later found.

Employee benefit plans that are not subject to ERISA and, therefore, do not benefit from  ERISA preemption, can be designed to sidestep unclaimed property statutes with plan provisions that provide for forfeitures before the shortest applicable escheat period runs.

An exception to this approach, however, applies to employee benefit plans that

FMLA Rights for (Some) Same-Sex Spouses

On August 9, 2013, the Department of Labor (DOL) took its first action in response to the Supreme Court decision in United States v. Windsor, which struck down those provisions of the Defense of Marriage Act (DOMA) prohibiting the treatment of same-sex couples who were legally married under applicable state law as spouses for purposes of federal law.  In an e-mail to DOL staff, Secretary of Labor Thomas Perez announced that several guidance documents had been updated to remove references to DOMA and provide that employees residing in states in which same sex marriage is legal would be entitled to leave under the Family and Medical Leave Act (FMLA) to care for a same-sex spouse with a serious health condition.  Specifically, a DOL Fact Sheet which describes the qualifying reasons for FMLA leave was revised to provide that a spouse is “a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including…same-sex marriage.”

While significant as an explicit statement of policy, the DOL’s action in effect simply confirms the general approach previously taken in the regulations under FMLA, which have always provided that an employee’s spouse is determined under the law of the state of residence.  Without the overlay of DOMA, that regulation leaves the determination of who is a spouse for purposes of FMLA with the state where the employee resides.  Accordingly, whether this is a signal of how same-sex marriages will be recognized for purposes of

SEC Releases Letter Clarifying Application of Section 402 of Sarbanes-Oxley Act

Last month the SEC issued a no-action letter to a financial services firm that sheds light on the scope of the prohibition under Section 402 of the Sarbanes-Oxley Act of 2002 which makes it unlawful for an issuer to “extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or any executive officer . . . of that issuer.” 

Historically, the SEC appears to have been reluctant to issue formal guidance respecting the parameters of the loan prohibition under Section 402.  Common arrangements left in limbo by this lack of regulatory guidance extend to personal use of company credit cards, personal use of company cars, travel-related advances, and broker-assisted option exercises. 

The SEC’s no-action letter was issued to RingsEnd Partners, a financial services firm.  The letter addresses a program established to facilitate the payment of taxes associated with the grant of restricted stock awards.  Under this program, recipients of restricted stock awards make a qualifying election to be taxed on those shares at the time of grant (a so-called 83(b) election) and then transfer those shares to a trust administered by an independent trustee who is directed to borrow funds from an independent bank through non-recourse loans sufficient in amount to pay the tax liability incurred as a result of the stock awards.  Through this mechanism, recipients of these awards can retain ownership of all shares granted to them rather

Prototype and Volume Submitter 403(b) Plans May Soon Be On Their Way

Last week, the Internal Revenue Service (“IRS”) issued Rev. Proc. 2013-22 describing the procedures for submitting an application for an opinion or advisory letter on a prototype or volume submitter 403(b) plan. This news is relevant for employers sponsoring 403(b) plans. Why? Read on.

The IRS issued regulations in 2007 requiring sponsors of 403(b) plans to have a written plan document in place by January 1, 2009, that complied both in form and operation with the requirements of the regulations. In Rev. Proc. 2007-71, the IRS provided model language that school districts (and other employers, with some modifications) could utilize to draft the required written document. In 2009, the IRS requested comments on a draft revenue procedure that was intended to provide an opinion letter program for 403(b) prototype plans. Despite suggestions by the IRS that it was just a matter of months, no program for either the issuance of opinion and advisory letters for prototype 403(b) plans or a favorable determination letter for individually designed 403(b) plans was forthcoming.

Now, under Rev. Proc. 2013-22, sponsors of both pre-approved and individually designed 403(b) plans can amend their plans (including any investment arrangements and any other documents incorporated by reference into the plan) retroactively to the first day of the plan’s remedial amendment period (i.e., the later of January 1, 2010 or the plan’s effective date) to satisfy the requirements under Code Section 403(b) and the 2007 regulations and to correct any defects in the form of its written plan.   This requirement is automatically satisfied

Proposed Wellness Rules Provide Updates and Clarifications

Responsible federal agencies have recently issued proposed amendment to the existing regulations governing wellness programs.  As expected, the proposed amendments increase the maximum permissible reward (or absence of surcharge) under health-contingent wellness programs from 20% to 30% of the cost of coverage and increase the maximum permissible reward (or absence of surcharge) to 50% for health-contingent wellness programs that prevent or reduce tobacco use.

The proposed amendments clarify that a reasonable alternative standard developed by a medical professional who is not independent of the employer ceases to be reasonable if it conflicts with the recommendations of an individual’s personal physician and also clarify that it is not reasonable for an employer to seek verification of a health condition where the individual’s medical condition is known or patently obvious.

The proposed amendments also provide a safe harbor notice with regard to advertising the availability of an alternative standard in all plan materials describing the specific terms of a health-contingent wellness program.  The agencies also utilize the issuance of the proposed amendments to encourage employers to utilize a variety of reward systems and alternative standards.

The proposed regulations indicate that the work of the agencies is not complete.  While acknowledging complexities associated with apportioning rewards among eligible family members and with determining compliance with the size of a reward that is variable in nature, the proposed regulations do not provide any guidance on such issues.

The release of these regulations has prompted insurance industry representatives to advocate granting

The NHL Goes Back to the Past (Pension-wise)

After a long lockout, the NHL will begin its season this weekend thanks, in part, to a pension plan.  Among the sticking points for the players, as noted in this article, was the desire to return to a defined benefit pension plan.  The NHL was somewhat ahead of its time in 1986 when it switched to a DC-only style retirement plan.  However, the players in this recent round of bargaining pushed hard for a pension plan, and succeeded.  While the NHL has not released very many details about the pension plan, and some of the information we’ve found is conflicting, this report from CSN Washington suggests that players can be eligible for the maximum benefits permitted by law.

While it is interesting to see an institution as prominent as the NHL buck a clear trend in the retirement space, it goes without saying that this is probably not the beginning of a sea change in retirement benefits back to defined benefit plans.  As noted in this Globe and Mail article, even Kevin Westgarth, a Los Angeles Kings forward and a member of the NHLPA’s bargaining committee, called moving to a pension plan “way out of style.”  .

While pensions may be way out of style for most of us non-athletes, as noted in this article from Bankrate.com, many U.S. professional sports organizations actually offer some kind of pension plan for their players (we’ve previously discussed the pension plans for MLB players

IRS Proposes Regulations on Substantial Risk of Forfeiture

The IRS has released proposed regulations under Section 83 of the Internal Revenue Code to refine the concept of what constitutes a substantial risk of forfeiture for the purpose of narrowing the scope of the concept.

The proposed regulations are in response to case law, tracing back as far as 1986, which the IRS claims has created confusion over the appropriate elements of what may constitute a substantial risk of forfeiture.

In the proposed regulations, the IRS clarifies that a substantial risk of forfeiture may be established only through (1) a service condition or (2) a condition related to the purpose of the transfer, such as a performance condition relating to the services provided by a service provider. In addition, the proposed regulations further clarify that in determining whether a substantial forfeiture exists based on a condition is related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered.

The IRS emphasizes in the proposed regulations that transfer restrictions do not create a substantial risk of forfeiture, such as lock-up agreements or restrictions related to insider trading. However, the IRS acknowledges that the statutory exception related to potential short-swing profits liability under Section 16(b) of the Securities Exchange Act does delay taxation under Section 83.

The IRS appears to be laying the groundwork for the anticipated issuance of new regulations under Section 457 of the Internal Revenue Code, which incorporates the

IRS Updates COBRA Audit Guidelines

The IRS recently updated its audit guidelines for field agents conducting reviews of employers COBRA programs.

In these updated guidelines, the IRS has advised agents that any COBRA audit should consist of a review of the following minimum level of documentation: (i) the employers procedure manual; (ii) form letters; (iii) internal audit procedures; (iv) the underlying group health plan documents; and (v) details of any past or pending COBRA-related litigation. If any of the foregoing materials appear deficient or problematic, agents are advised to make follow-up inquiries relating to the number of qualifying events, the method of notifying qualified beneficiaries, the method of notifying the plan administrator in connection with qualifying events, qualified beneficiary elections and the amount of premiums paid by COBRA beneficiaries. In performing more comprehensive reviews, the IRS advises agents to request an employer’s federal and state employment tax returns; lists of individuals affected by qualifying events; and lists of individuals covered by each group health plan and to compare those lists against the employer’s personnel records.

In outlining these materials, the IRS appears to have the expectation that agents will be seeking to confirm that an employer is offering COBRA coverage under all of the group health plans that are legally required to offer COBRA coverage, that all participants terminating employment are being offered COBRA coverage; that those being offered COBRA coverage are being provided the opportunity to elect any and all appropriate coverages and that the cost of those coverages are in conformance

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