Category: Benefits

What is the IRS telling its agents to look for in the executive compensation arena when they audit an employer? The IRS has recently posted on their website “audit technique guides (ATGs) that agents use during the course of corporation and/or executive employee tax examinations” which cover these topics:

• Transfers of Compensatory Stock Options to Related Persons
• Non-Qualified Deferred Compensation Plans
• Stock Based Compensation
• IRC 162(m) Salary Deduction Limitation
• Fringe Benefits
• Golden Parachutes
• Split Dollar Life Insurance

The ATGs contain some very useful information for practitioners, including statements about where the agents wil be looking for information and whom they will interview in search of information in an audit. For instance, agents will be asking to interview “company personnel that are most knowledgeable on executive compensation practices, such as the director of human resources or a plan administrator,” determining “whether the company paid a benefits consulting firm for the executive’s wealth management” and reviewing copies of the “contract between the consulting firm and the corporation.” According to the guides, agents will also be reviewing Board of Directions and Compensation Committee minutes, 10-K and 14-A Proxy Statements, websites for the employer, as well reading Fortune magazine articles and “googling” the internet for “information on the corporation for the years under audit.” (Does that mean that agents will be searching blogs such as Foonoted.org, seeking to uncover information that would be useful in an audit?)

The ATGs could also be helpful for companies that wish to perform a self-audit of their executive compensation practices, by providing a road map of the issues that IRS will be looking at and pointing out areas of concern that can occur such as as this one under the “Non-Qualified Deferred Compensation Plans” section:

A NQDC plan that references the employer’s § 401(k) plan may contain a provision that could cause disqualification of the § 401(k) plan. Section 401(k)(4)(A) and § 1.401(k)-1(e)(6) provide that a § 401(k) plan may not condition any other benefit (including participation in a NQDC) upon the employee’s participation or nonparticipation in the § 401(k) plan. Watch for things like a NQDC plan provision that limits the total amount that can be deferred between the NQDC plan and the § 401(k) plan or a NQDC provision that states that participation is limited to employees who elect not to participate in the § 401(k) plan. Contact Employee Plans in the TEGE Operating Division or Counsel TEGE if provisions such as these are encountered.

Also, the “Non-Qualified Deferred Compensation” section of the guides goes on to mention briefly new Internal Revenue Code § 409A (which provides comprehensive rules governing nonqualified deferred compensation arrangements) but states that the “audit guide will be updated to elaborate on § 409A once comprehensive regulations have been issued.”

Haynes and Boone discusses the ATGs here in a Compensation Alert.

Don’t miss this New York Times article–“States and Employers Duel Over Health Care“–reporting how many states have been looking into legislation that would attempt to shift more of the cost of health care onto employers. Excerpt from the article:

The focus of the debate is whether there should be an employer mandate,” said Ellen Valentino, Maryland director for the National Federation of Independent Business, whose state group of small companies opposed the legislation.

But backers of the Maryland bill, which seemed to take special aim at . . the nation’s largest employer, say the support for it there indicates a growing recognition of the growing financial burden of caring for the uninsured. They say taxpayers are unfairly supporting too many companies’ uninsured workers, who turn to government programs like Medicaid or simply show up in the emergency rooms of hospitals subsidized by the state to provide care to people unable to pay.

Also, this graphic here illustrates which states have considered some type of legislation that would place more of the responsibility for health care on employers.

PricewaterhouseCoopers has published on their website a 61-page reference guide for companies entitled “Questions That Shareholders Might Ask During the 2005 Annual Meeting.” The document, intended to assist management of public companies in preparing for the annual meeting, contains a section on Executive Compensation and Stock Option Plans.

(Source: CorporateCounsel.net Blog)

The Wall Street Journal today has an interesting article on the impact that baby boomers’ retirement may have on the future of the stock market—“As Boomers Retire, a Debate: Will Stock Prices Get Crushed?” Excerpt:

For tens of millions of baby boomers and younger workers, the basic long-range financial plan is simple: accumulate stocks and bonds while working, then slowly sell them off to keep up a comfortable lifestyle in retirement.

Not so fast, says Jeremy Siegel, the Wharton School finance professor well-known until now for recommending stocks as a long-term investment. In speeches and a new book, he is warning that a flood of boomer retirees with trillions of dollars of assets to sell over the next 20 to 40 years threatens to crush stock and bond prices. He says it will take a massive investment in U.S. stocks by people in India, China and other developing countries to prevent a market meltdown.

You can also access a copy of the article here at jeremysiegel.com.

At yesterday’s seminar–“From an HR Perspective: What To Expect From an IRS Audit” (mentioned here)–both of our speakers from the IRS, one from the employment tax division and the other from the employee plans division, discussed how in an audit IRS agents will most always examine worker classification issues, i.e. to determine whether individuals who should be classified as “employees” have been wrongly classified instead as “independent contractors.” Reclassifying the individual as an employee can not only have unpleasant consequences for the employer, but also for the individual who is no longer being treated as an independent contractor. The impact of reclassification on the individual can be seen in this recent Tax Court decision–Levine v. Commissioner, T.C. Memo 2005-86–in which the IRS was seeking to deny an individual a deduction for a SEP contribution, claiming the individual was an employee of the State Department and not an independent contractor. The Tax Court sided with the individual, holding the individual was indeed an independent contractor.

One of the interesting aspects of the case, however, was the discussion of benefits and how the “[r]eceipt of employee benefits is an important factor in determining whether an employer-employee relationship exists” (citing Packard v. Commissioner, 63 T.C. at 632). The court pointed out that the State Department’s provision of annual leave for the individual as well as reimbursement for 50% of the individual’s health insurance costs pointed towards “employee” status, while the absence of retirement benefits, or other employee benefits, e.g., death benefits or transit checks, was indicative of an “independent contractor” relationship.

Two things to note here:

(1) Employers should beware of reclassifying employees as “independent contractors” just to avoid coverage under benefit plans. Such actions can lead to ERISA section 510 claims as well as problems with the IRS in an audit, which can impact both the employer as well as the individual being reclassified.

(2) An individual or a business may ask the IRS to determine the whole matter of employment status by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. If a worker or a business files for the determination, the IRS will then contact “all parties who could be affected by a determination of employment status” in an attempt to get information.

Also, as was discussed in our seminar, even the IRS finds it difficult sometimes to determine the proper worker classification of an individual. Nevertheless, the IRS has a couple of resources which employers may find useful as they try to make a determination regarding worker classification which will hopefully hold up in an audit:

• IRS Publication 1779–Independent Contractor or Employee
• IRS Publication 15-A–Employer’s Supplemental Tax Guide

Over in the right-hand column, I have provided a truncated list of provisions of the Internal Revenue Code pertaining to benefit plans as well as ERISA provisions. I often find that feature of this blog personally helpful to my own practice. For your information, Dave Baker at Benefitslink.com has compiled a more exhaustive list of Internal Revenue Code provisions pertaining to benefits here and a list of ERISA provisions here which you may find very useful from time to time.

If you can make it and are in the area, please join us for a seminar put on by the Legislative Commitee for the Greater Valley Forge Human Resource Association: “From an HR Perspective: What to Expect from an IRS Audit?” (I am currently Legislative Chair for the Association.)

Update: The link above for some reason did not seem to be working earlier. Here is the info for the seminar:

From an HR Perspective: What To Expect From an IRS Audit
7:45-11:30 a.m
Main Building, Room 131
Penn State Great Valley
30 East Swedesford Road
Main Building
Malvern, Pennsylvania 19355
610.869.7694

Some retirement humor from the TaxGuru here.

The DOL back in January of this year issued some important opinion letters addressing recently revised Fair Labor Standards Act (FLSA) white-collar exemption regulations. There has been much written by law firms about the opinion letters, but the actual opinion letters themselves are not easy to find on the DOL’s website. You can access the eleven FLSA opinion letters here. One of the opinion letters–FLSA2005-9–addresses the status of paralegals, reaffirming that paralegals do not qualify for the “professional employee” exemption and are generally eligible for overtime pay.

In addition, DOL has also issued some opinion letters related to the Family and Medical Leave Act which you can access here.

Articles discussing the FLSA Opinion Letters:

Veddar Price: “DOL Issues Opinion Letter Rulings Addressing New White-Collar Exemption Regulations.”

Kilpatrick Stockton LLP: “U.S. Department of Labor Issues a Series of Wage-and-Hour Opinion Letters.”

PlanSponsor.com is reporting: “PA Senate Passes HSA State Tax Exemption.” The article contains a link to the Senate bill here.