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Lump Sum Payouts Halted, Penalties for Healthcare Support, UK Tax Credit

Saul Brenner, CPA, J.D., LL.M. 08.05.2015 | eVisor

Federal Tax

Pension Plan Lump Sum Payouts Halted by IRS

The IRS has dealt a blow to pension plans looking to replace annuity payments with lump sum payouts. A July 9, 2015 notice1 announcing plans to modify tax code Section 401(a)(9) effectively halts this practice commonly used by struggling defined benefit plans as a de-risking strategy.

The amended regulations will provide that qualified defined benefit plans are generally not permitted to replace joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated distribution method. There may be some exceptions for certain accelerations of annuity payments.

This move highlights the concerns of the IRS, as well as the Department of Labor and the Pension Benefit Guaranty Corporation, about companies transferring risk to plan participants who would then no longer expect a lifetime income.

1 Notice 2015-49

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 | sbrenner@berdonllp.com.

Employers may be Penalized for Subsidizing Employee Medical Costs

Newly instituted rules1 could result in small employers being penalized for subsidizing employee medical costs. Obamacare exempts small employers- those with fewer than 50 full-time employees - from the requirement of establishing a group health plan.  For employers that cannot afford to set up a group plan, there is a natural tendency to reimburse employees for some of the costs of buying individual insurance. Unfortunately, employers who do this could be subject to significant penalties.

The IRS treats "employer payment plans" (plans or arrangements to subsidize an employees' medical insurance costs) as group health plans that need to comply with the regulatory requirements for employer-provided health insurance.  As a result, a plan to pay an employees' cost of medical insurance, directly or through reimbursement, in many cases will violate some of the rules and lead to the employer being liable for penalties.

The Service recently issued guidance as to whether an increase in compensation to assist with the cost of healthcare is considered to be an employer payment plan. Increased compensation is allowed if it is not conditioned on the purchase of health insurance.  Employers who are currently paying or reimbursing such costs should consider increasing their employees' salaries instead.

The IRS previously provided penalty relief to small employers for employer payment plans. However, the relief ended on June 30, 2015. This means that small employers were potentially liable for penalties for non-complying plans since  July 1, 2015. For S corporations, the IRS has extended the penalty relief through December 31, 2015 for reimbursements of individual health insurance coverage of 2% shareholders.

The penalty for failing to meet certain group health plan requirements is $100 per day of noncompliance per employee. The yearly rate for this penalty is $36,500 per employee. The minimum penalty is $2,500 per individual affected by a violation.

1 Guidance on the Application of Code Section 4980D to Certain Types of Health Coverage Reimbursemnet Arrangements. Notice 2015-17.

Questions? Contact your Berdon advisor

International Tax

UK OKs Tax Credit for US LLC Shares

On July 1, 2015, the Supreme Court of the United Kingdom held that a British citizens' share of the profits in a Delaware limited liability company (LLC) qualified for a UK tax credit under a tax treaty between the two nations.1 The court held this position because, based on Delaware law and the LLC agreement, the profits taxed in the UK were the same as those taxed in the US. With this decision, the taxpayer was granted relief from double taxation.

The ruling is something of a surprise.  British revenue and customs authorities have long held that, for tax purposes, a US LLC's profits should be treated as taxable at the entity level and not to its members.  The ruling may have a considerable impact on planning for future UK/US cross-boarder structures. Traditionally, LLCs have been avoided in favor of more cumbersome formations such as limited liability partnerships.  

1 Anson v. HM Revenue & Customs (2015 UKSC 44)

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 | sbrenner@berdonllp.com.