As we move into the final quarter of 2020, this will be a year where there has been significant legislative and regulatory impact in the areas of employee benefits and executive compensation. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 repealed the maximum age for IRA contributions and delayed the age for required minimum distributions (RMDs) to age 72. The Families First Coronavirus Response Act (FFCRA) established two new payroll tax credits, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act created the employee retention credit and payroll tax deferral to help small business employers. With all of that said, the following topics of interest will be important for you to consider for both year-end tax planning and perhaps tax planning in the coming year:
One of the purposes of the SECURE Act was to help individuals save for retirement. This was partly accomplished by repealing the age limit for making contributions to a traditional IRA. Prior to 2020, an individual who attained age 70½ during the calendar year was not permitted to make contributions to a traditional IRA.
Another change made by the SECURE Act was to delay the age requirement to begin taking RMDs from age 70½ to age 72. The CARES Act went a step further by eliminating RMDs for 2019 and 2020. These changes allow taxpayers to retain their retirement savings in tax-favored arrangements, thus delaying income tax on the RMDs.
The FFCRA created the emergency paid sick leave and expanded emergency family and medical leave benefits for employees who are unable to work due to COVID-19. For employers who provide either or both types of emergency leave, the employer is entitled to refundable payroll tax credits equal to the amount of wages required to be paid under the emergency sick pay or emergency family medical leave pay requirements. The emergency paid sick leave entitles employees up to 10 days (80 hours) of sick pay at rates of up to $5,110, or $511 per day, depending on the reason for the leave. The emergency family and medical leave entitles employees up to an additional 10 weeks (40 hours per week) of pay up to $200 per day. The payroll credits are designed to offset these amounts. The credits are claimed on Forms 941, 941-X or 7200 against the employer portion of Social Security taxes (not Medicare taxes). Any credit in excess of total employer Social Security taxes on the wages with respect to the employment of all employees of the employer the excess is a refundable credit to the employer. The credits are allowed for wages paid through Dec. 31, 2020.
The CARES Act created the employee retention credit (ERC) to provide assistance to employers who continue to pay their employees despite their operations being affected by COVID-19. Broadly, the ERC is a refundable quarterly payroll tax credit against certain employer payroll taxes. The ERC is available to employers of all sizes that have experienced either (1) a full or partial suspension in their operations as a result of governmental order or (2) a significant decline in gross receipts due to COVID-19. The amount of the credit is 50% of qualified wages paid or incurred from March 13, 2020, through Dec. 31, 2020. Qualified wages are generally limited to $10,000 per employee, subject to employer size restrictions. Employers may claim the ERC on a timely filed Form 941, through an adjustment with Form 941-X or in advance via Form 7200 in the same manner as the FFCRA credits discussed above.
The CARES Act permits employers to defer timely payment of the employer’s portion of Social Security tax that would otherwise be required to be made during the period from March 27, 2020, through Dec. 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by Dec. 31, 2021, and the remainder by Dec. 31, 2022. Employers are not required to make a special election to be able to defer deposits and payments of these employment taxes. Deferral of the employer’s share of Social Security tax is reported on Forms 941 or 941-X.
Prior to the Tax Cuts and Jobs Act (TCJA), the $1 million executive compensation deduction limitation applied to a covered executive until the executive had, in general, a termination of employment. As a result, if the employer expected that the company’s tax deduction would be limited due to the $1 million executive compensation deduction limitations, the employer could delay payments under the nonqualified deferred compensation (NQDC) arrangement until the limitation no longer applied. However, the TCJA broadened the scope of the $1 million deduction limitation to provide that once an executive is a covered employee, the executive will remain a covered employee regardless of employee status or death. Under the TCJA, a payment could be delayed indefinitely. Because elimination of the delay would otherwise be an impermissible acceleration of payment, the Treasury Department issued proposed regulations that may be relied upon permitting employers to amend their NQDC arrangements to eliminate the delay provision. However, such an amendment must be made no later than Dec. 31, 2020.
An employer may adopt a qualified retirement plan for a taxable year after the last day of the taxable year provided it is adopted before the due date, including extensions, for filing the employer’s tax return for the taxable year. For example, an employer who wants to adopt a qualified retirement plan for calendar year 2020 has until Sept. 15, 2021, for a partnership or corporate employer, or Oct. 15, 2021, for a self-employed employer, to adopt the plan.
Long-term, part-time employee eligibility requirements take effect in 2021: For sponsors of 401(k) plans, a key upcoming change is the requirement to expand eligibility to long-term, part-time employees, effective for plan years beginning on or after Jan. 1, 2021. Under this rule, if a part-time employee has worked at least 500 hours in three consecutive years and is at least age 21 by the last day of the three consecutive year period, he or she must be offered the opportunity to make elective deferrals to the employer’s 401(k) plan. For purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years, plans are not required to take into account hours of service in plan years beginning before Jan. 1, 2021. As a result, although affected plan sponsors will need to start tracking hours for this purpose beginning in 2021, plans will not be required to permit qualifying long-term, part-time employees to make deferrals under 401(k) plans before plan years starting in 2024.
Unrelated employers without any commonality may pool their resources by participating in a new type of multiple employer plan (MEP). The new retirement plans, referred to as pooled employer plans or open MEP, are treated as a single plan. In addition, the “one bad apple” rule will no longer apply provided the procedure is followed for ensuring that one employer’s failure to meet the qualification requirements will not result in the disqualification of the MEP or open MEP. This is effective for plan years beginning after Dec. 31, 2020.
An employer with 100 or fewer employees may be eligible for a nonrefundable income tax credit for startup costs of adopting a new qualified retirement plan. The amount of the credit for a taxable year is the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit is for three years.
We are still seeing numerous instances where employers are not taking into account deferred compensation for FICA at the appropriate time. Pursuant to the FICA “special timing rule,” deferred compensation is required to be taken into account at the later of the time of the performance of services and at such time when there is no longer a “substantial risk of forfeiture” in entitlement to the benefit — this is usually at such time as the benefit becomes vested. This, of course, is in contrast to the SECA rules, that generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit. Employers should be focused on making sure that the deferred compensation, even if not distributed, is taken into account correctly in accordance with the “special timing rule” in a setting that requires payment of FICA taxes.
In the summer of 2016, the Department of the Treasury issued proposed regulations interpreting section 457 deferred compensation rules which apply to tax-exempt organizations and governmental subdivisions. These proposed regulations primarily addressed issues attendant with the granting and administration of “ineligible plans of deferred compensation” under section 457(f) and are slated to become effective until following such time that final regulations have been issued. As of the time of the preparation of this letter, we have seen no activity by the current administration that would suggest that these regulations will be finalized anytime soon. Therefore, for the present, we are regarding these proposed regulations as an indication of the IRS’ interpretation of certain income tax issues attendant with the application of section 457 rules, and nothing more.
For more information on this topic, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.