Compliance October 5, 2009

IRS Indicates Guidance Coming on 457 Plans

October 5, 2009 (PLANSPONSOR.com) - Officials from Treasury and the IRS have indicated that the IRS is planning to issue guidance on a number of issues involving Code Section 457 deferred compensation plans, CCH reports.
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According to CCH, Cheryl Press, a senior attorney with the IRS Associate Chief Counsel (Tax Exempt and Government Entities), noted that the IRS has not issued major guidance under Code Section 457 since it released final regulations in 2003.

She expects guidance on ineligible plans under Code Section 457(f); the definition of a governmental plan under Code Section 414(d); excess benefit plans under Code Section 415(d); and welfare benefit plans excluded from Code Section 457, such as bona fide sick and vacation leave, severance, and death benefit plans.

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Press said that in the meantime, the IRS is issuing private letter rulings and responses to congressional inquiries on hardship issues, grandfathered plans, and other concerns. Press and Bill Bortz, Treasury associate benefits tax counsel, spoke at an American Law Institute-American Bar Association (ALI-ABA) conference on deferred compensation plans of tax-exempt and governmental employers.

Prior Guidance

Bortz noted that the 2003 regulations focused on eligible Code Section 457(b) plans and provided less guidance on the exceptions to Code Section 457 and ineligible 457(f) plans. CCH said he further noted that various legislative changes that have yet to be addressed under Code Section 457, include the enactment of Code Section 409A deferred compensation requirements; new rules expanding eligible rollovers to nonspouse beneficiaries; and rollovers of payments under Code Section 402(l) for retiree medical benefits.

Notice 2007-62 requested comments on a number of Code Section 457 issues that need guidance (see Guidance Coming, Comments Requested on § 457: IRS ). Bortz said comments focused particularly on severance pay plans and whether the definition should incorporate elements of the 409A definition (benefits limited to twice final compensation; benefits conditioned on involuntary termination).

Covenants not to compete

According to CCH, Bortz expressed concern about 457 plans deferring benefits using covenants not to compete and rolling risks of forfeiture. While the issues involve specific facts and circumstances, Bortz said he does not think these clauses work. Press said she has never seen a good noncompete clause. A big problem is that employers do not monitor the actions of their former employees, so there is no enforcement, she stated.

Corrections and audits

Press said, the government also is exploring relief for 457 plans maintained by agencies and instrumentalities that believed they were government employers (which must maintain funded plans) but turned out to be private exempt organizations. Correction of 457 plans is less of an issue for actual government employers, who have 180 days to correct their plans retroactively after notice from the IRS, she stated, according to CCH.

She also expressed some concern about the treatment of amounts deferred until retirement as severance pay, ineligible plans under Code Section 457(f), and employees entitled to "buckets of benefits" with a default allocation to a 457(f) plan. While the IRS is less concerned about government plans, it will audit them if there is an interaction between Code Sections 403(b) and 457.

Hardship distributions

The IRS is receiving a number of inquiries, such as letters from Congress, concerning 457 plan participants who have been denied a hardship distribution, Press stated. She said that plan administrators are very conservative since hardship distributions are an optional plan provision. The IRS changed the rules to allow distributions for circumstances affecting dependents, and the IRS intended for this to add flexibility, but administrators saw it as a tightening of the rules. So the IRS has instructed plan administrators to "loosen up a little bit," she said.

The IRS "wants to see good practices and procedures," a trail of information documenting the reason for the hardship distribution, Press told the conference, emphasizing that the IRS looks for certification and back-up information, according to the news report.

Compliance October 2, 2009

Finance Committee Finalizes Health Reform Proposal

October 2, 2009 (PLANSPONSOR.com) - The U.S. Senate Finance Committee completed the amendment process for its health reform proposal and set a vote for next week.
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Reuters reports that the panel is awaiting an official cost estimate on the roughly $900 billion measure before advancing the measure to the full Senate.

The bill requires Americans to purchase coverage, includes tax credits to help individuals and families purchase insurance, proposes improvements to health care delivery and Medicare, and does not include a government-run insurance option (see U.S. Senate Finance Committee Presents Health Care Bill ). A provision imposing a fee on employers who do not offer health insurance to employees was withdrawn last week (see Kerry Pulls Back Health Bill ‘Pay to Play’ Provision ).

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The bill would impose a 40% excise tax on insurance plans in excess of $8,000 for individuals and $21,000 for families. According to Reuters, an amendment approved on a 13-10 party line vote raises those levels for retirees and high-risk professions, such as coal miners, to $9,850 and $26,000, respectively.

In addition, the panel voted 22-1 for an amendment by Senators Charles Schumer (D-New York) and Olympia Snowe (R-Maine) that would exempt more lower-income people from the requirement to purchase insurance and delay implementation of penalties for failure to purchase insurance. The bill would have allowed hardship waivers only if the cost of insurance exceeded 10% of a person’s income, but the amendment lowered that threshold to 8%, the news report said.

The amendment would also delay imposition of penalties on people who fail to purchase insurance – with no penalties for anyone who failed to purchase in 2013, and after that, penalties phased in by increments of $200 a year, up to a maximum of $950 for individuals and $1,900 for families.

The committee approved a proposal by Senator Maria Cantwell (D-Washington) that would allow states to negotiate deals with health care plans for those on low incomes. The amendment to the panel's health reform bill would allow states to voluntarily negotiate with health care plans to provide coverage to people with incomes lower than twice the poverty level, about $44,000 for a family of four, but who are not eligible for the Medicaid health program for the poor, according to Reuters.

The committee's bill would create state-based exchanges where individuals without employer-sponsored coverage and small businesses could shop for insurance, but the exchanges would not include a government-run plan. Instead, the committee's bill would create nonprofit insurance cooperatives to create competition.

The news report said the panel also voted for an amendment offered by Senator Blanche Lincoln (D-Arkansas) that would set a $500,000 limit on the amount of executive pay that health insurance companies can deduct from taxable income.

The bill will be merged with one approved earlier by the Senate Health, Education, Labor and Pensions Committee (see U.S. Senate HELP Panel First to Report out Health Reform Measure ) before it is taken to the full Senate in mid-October.

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