Articles Posted in Employee Benefits

In IRS Tax Reform Tax Tip 2018-69, May 4, 2018, the IRS offers guidance on the tax credit available to employers for paid family and medical leave.  Here is what the Tax Tip says:

During National Small Business Week, the IRS focuses on educating employers about the employer credit for paid family and medical leave created by the Tax Cuts and Jobs Act passed last year. Employers may claim the credit based on wages paid to qualifying employees while they are on family and medical leave.

Here are some facts about this credit and how it benefits employers:

In Pizza Pro Equipment Leasing, Inc. v. Commissioner of Internal Revenue, No. 17-1297 (8th Cir. 2018) (Unpublished Opinion), Pizza Pro Equipment Leasing, Inc. (“Pizza Pro”) appeals a tax court decision upholding determinations by the Commissioner of Internal Revenue that it owes excise taxes and additions to tax related to its defined benefit pension plan.  After reviewing the case, the Eighth Circuit Court of Appeals (the “Court”) affirmed the district court’s ruling.

In this case, in 1995, Pizza Pro established a defined benefit pension plan (the “Plan”).  This case involves a dispute about a limitation on the Plan’s annual benefit, see I.R.C. § 415(b)(2)(C), which in turn determines Pizza Pro’s deductible contributions to the Plan.  The Commissioner concluded that from 2002 to 2006 Pizza Pro incorrectly calculated the limitation on the annual benefit and therefore made nondeductible contributions to the Plan. See I.R.C. § 404(j)(1)(A).  Section 4972 of the Internal Revenue Code imposes “a tax equal to 10 percent of the nondeductible contributions.”  The Commissioner further imposed additions to tax for failure to file a return of excise taxes and to timely pay the excise tax owed. See I.R.C. § 6651(a)(1) & (a)(2).

Pizza Pro petitioned the tax court, challenging the excise tax and additions.  The tax court decided the case without trial based on the parties’ stipulated facts and expert reports, and it upheld the Commissioner’s determinations.  It also concluded that Pizza Pro did not make a valid election under I.R.C. § 4972(c)(7), which allows a taxpayer to disregard contributions to a defined benefit plan under certain conditions, thereby avoiding the excise tax on nondeductible contributions.  Pizza Pro timely appealed.

In Notice 2018-24 (the “Notice”), the Internal Revenue Service (the “IRS”) requests comments on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year, beyond provision of determination letters for initial qualification and qualification upon plan termination.  Here is what the IRS says:

INTRODUCTION:  In reviewing comments submitted in response to this Notice, the Department of the Treasury (the “Treasury Department”) and the IRS will consider the factors regarding the scope of the determination letter program set forth in section 4.03(3) of Revenue Procedure 2016-37, 2016-29 I.R.B. 136.  The Treasury Department and the IRS will issue guidance if they identify any additional types of plans for which plan sponsors may request determination letters during the 2019 calendar year.

BACKGROUND:  Revenue Procedure 2016-37 sets forth procedures for issuing determination letters and describes an extension of the remedial amendment period for individually designed plans.  Effective January 1, 2017, the sponsor of an individually designed plan may submit a determination letter application only for initial plan qualification, for qualification upon plan termination, and in certain other limited circumstances identified in subsequent published guidance.  Section 4.03(3) of Rev. Proc. 2016-37 provides that the Treasury Department and the IRS will consider each year whether to accept determination letter applications for individually designed plans in specified circumstances other than for initial qualification and qualification upon plan termination.

The case of  Duncan v. Muzyn, No. 17-5389 (6th Cir. 2018), Jerry Duncan and a class of pension-plan participants sued their employer and its pension system when the system cut their benefits. Their suit has already produced one appeal before this the Sixth Circuit Court of Appeals (the “Court”). Duncan v. Muzyn, 833 F.3d 567 (6th Cir. 2016). They now pursue the second.

In this case, the Tennessee Valley Authority (the “TVA”) provides funding for the Tennessee Valley Authority Retirement System (“the Plan”). A seven-member board (“the Board”) administers the Plan and manages its assets. And the Plan, in turn, provides defined benefits to participants. That means the Plan, by way of the TVA’s contributions, pays a pension benefit to participants in a defined amount.  That benefit includes a cost-of-living adjustment.  In 2009, the Plan found itself in financial trouble. Thanks in no small part to the recession, the Plan’s liabilities exceeded its assets and it needed to make some changes to ensure its long-term stability. So the Board cut some benefits. These cuts included temporarily lowering cost-of-living adjustments while also increasing the age at which certain Plan participants would first become eligible to receive cost-of-living adjustments. This litigation followed.

There are two issues in this appeal. First, Plaintiffs maintain that the Board failed to give proper notice to the TVA and Plan members before it made the cuts. Second, Plaintiffs contend that the Board violated the Plan’s rules by paying their cost-of-living adjustments for certain years out of the wrong account, an accounting claim. The district court granted summary judgment for the TVA and the Board on both claims.

The Tax Cuts and Jobs Act of 2017 (the “Act”), which was enacted on December 22, 2017, extends the time for rolling over the plan offset amount (defined below) from an outstanding plan loan, thereby helping the borrowing participant to avoid adverse tax consequences.

Background.  A qualified defined contribution retirement plan (such as a 401(k) plan) often allows a participant to take a loan from his or her individual account under the plan.  The loans are repaid through installment payments made at least quarterly.  The participant may terminate employment (or the plan may terminate) while there is an outstanding balance on the loan.  In such case, the plan may provide the following: The outstanding balance will become immediately due and payable to the plan.  Should the participant fail to make the payment, the plan will terminate the loan, and reduce the balance of the participant’s individual account by the amount of the outstanding loan balance. This reduction is called a “plan offset”, and the amount of the reduction is called a “plan offset amount”.

The plan offset amount is taxed to the participant as ordinary income. Further, if the participant is under age 59 and ½, the plan offset amount will be subject to the 10 percent excise tax on the early plan distributions.  However, the tax as ordinary income and 10% excise tax can be avoided, if the plan offset amount is rolled over by the participant, within 60 days after the date of the offset by the plan, to an eligible retirement plan (generally a qualified retirement plan or an IRA).

The IRS has issued a memorandum (TE/GE-04-1017-0033) which directs EP examiners not to challenge a qualified plan as failing to satisfy the required minimum distribution (“RMD”) standards under Internal Revenue Code (“IRC”) § 401(a)(9) in the circumstances it describes.  The memorandum is helpful to practitioners, as it indicates what the IRS will do (or not do) in specified circumstances, and therefore provides guidance on actions that a plan should be taking.

The memorandum states that it addresses only the application of IRC §401(a)(9) to certain circumstances involving a plan’s action related to a benefit of a participant or beneficiary whom the plan is unable to locate, and does not address the application of any other qualification requirements or other applicable law, including Title I of ERISA. The memorandum then says the following:

Background

In Morrissey v. United States, No. 17-10685 (11th Cir. 2017), the Eleventh Circuit Court of Appeals (the “Court) was called on to determine whether the IRS properly denied a taxpayer’s claimed deduction on his 2011 tax return.  In making this determination, the Court had to decide two questions.  First: was the money that a homosexual man paid to father children through in vitro fertilization (“IVF”)—and in particular, to identify, retain, compensate, and care for the women who served as an egg donor and a gestational surrogate—spent “for the purpose of affecting” his body’s reproductive “function” within the meaning of Code Section 213 (and therefore deductible under that Section)?  Second: in answering the first question “no,” and thus in disallowing the taxpayer’s deduction of his IVF-related expenses, did the IRS violate his right to equal protection of the laws either by infringing a “fundamental right” or by engaging in unconstitutional discrimination?

Upon analyzing the case, the Court held that the costs of the IVF-related procedures at issue were not paid for the purpose of affecting the taxpayer’s own reproductive function—and therefore are not deductible under Code Section 213—and that the IRS did not violate the Constitution in disallowing the deduction.

The Guidance Provided.  In Technical Memorandum 201736022, the IRS provides guidance on how a cure period, as described in § 1.72(p)-1, Q&A-10(a), is applied for a participant who fails to make installment payments required under the terms of a plan loan.  This guidance consists of a description of two situations, one in which a later single large loan payment is applied to cure loan payments that are missed, and one in which a replacement loan from the plan is applied to cure to missed loan payments, with the cures in each situation occurring during the regulation’s period during which cures can be made.

Here is the guidance:

Assumptions. In presenting the two situations, the IRS makes the following assumptions:

In Notice 2017-61, the IRS announces an increase in PCOR Fees generally for years ending on or after October 1, 2017 and before October 1, 2018.  Here is what the Notice says.

PURPOSE

The Notice provides the adjusted applicable dollar amount to be multiplied by the average number of covered lives for purposes of the fee (commonly called the “PCOR Fee”) imposed by §§ 4375 and 4376 of the Internal Revenue Code (the “Code”), for policy years and plan years that end on or after October 1, 2017, and before October 1, 2018.

In Pollard v. The New York Methodist Hospital, Docket No. 15-3231 (2nd Cir. 2017), the plaintiff, Jacintha Pollard (“Pollard”), who was dismissed from employment by the defendant, The New York Methodist Hospital (“Hospital”), for taking unauthorized leave, appeals from the order of the district court granting summary judgment to the defendant dismissing plaintiff’s suit brought under the FMLA.  In this suit, Pollard had alleged that the Hospital terminated her illegally for taking medical leave to which she was entitled under the FMLA.  The Second Circuit Court of Appeals (the “Court”) held that the district court erred in concluding that plaintiff could not, as a matter of law, establish a “serious health condition,” so as to qualify for medical leave.  Accordingly, the Court vacated and remanded the district court’s decision.

In this case, Pollard had developed a growth on her left foot.  The growth became increasingly painful and, to a contested degree, limited her ability to perform her job for the Hospital.  Pollard’s podiatrist concluded that the growth was a benign soft tissue mass.  The podiatrist and Pollard agreed to remove the mass by surgery to alleviate the pain.  The podiatrist certified on an FMLA medical form that the growth was a serious health condition that required surgery.  On March 28, 2013, the podiatrist performed the surgery.  Because of Pollard’s failure to report to work that day, the Hospital terminated her employment by letter dated April 1, 2013.  This suit followed.

In reaching its decision to overturn the district court’s decision, the Court noted that the FMLA provides that an eligible employee is entitled to a total of 12 workweeks of leave during any 12-month period because of a serious health condition.  The FMLA defines “serious health condition” as including an illness, injury, impairment, or physical or mental condition that involves continuing treatment by a health care provider. 29 U.S.C. § 2611(11).