In a press release and IRS Notice (Notice 2018-54) issued Wednesday, May 23rd, the IRS warned taxpayers to be wary of state efforts to circumvent new federal limits on deductions for state and local taxes. Under the recent tax overhaul, deductions for state and local taxes (including property taxes) are capped at $10,000. This cap is particularly detrimental for residents of states with high property taxes and/or state and local income taxes (for example, California, Massachusetts, New Jersey, New York and Connecticut).
To mitigate the adverse impact of the new $10,000 cap on state and local taxes, states have been considering alternative methods to raise revenue that would avoid the cap. New Jersey Governor Phil Murphy and New York Governor Andrew Cuomo have both signed legislation permitting local governments to set up charitable organizations that can accept property tax payments as donations (which could be deductible, without limitation, against federal taxable income).
Notice 2018-54 announces that the Department of Treasury and the IRS intend to propose regulations regarding the SALT deduction cap, and signals their view that tax payments in excess of the cap (regardless of how structured) are not deductible. In particular, the Notice highlights the approach taken by New York and New Jersey (structuring tax payments to allow taxpayers to characterize the payments as deductible charitable contributions), and warns that federal law, not state law, controls the proper characterization of payments for federal income tax purposes.
For more information on federal tax reform’s impact on individuals see our earlier Legal Advisory, issued April 17, 2018, titled “Practical Insights on Tax Reform: Impact on Individuals”.
Nutter released a tax advisory, “Practical Insights on Tax Reform: Impact on Employee and Fringe Benefits” that examines how the Tax Cuts and Jobs Act will affect employee benefits and fringe benefits.
Melissa Sampson McMorrow released a tax advisory, "Practical Insights on Tax Reform: Impact on Exempt Organizations" that examines how the Tax Cuts and Jobs Act will affect exempt organizations. In addition to discussing the general impact that Tax Reform will have on exempt organizations, the advisory delves in to the specific impact the legislation will have on fringe benefits and executive compensation and potential penalties that could be imposed on exempt organizations. As a result of these new rules, exempt organizations should immediately review their practices regarding executive compensation and fringe benefits to avoid the application of any excise tax or understand the implication of a potential new item of UBTI.
IRS 2017 Plan Limits
On October 27, 2016, the IRS announced various limits and thresholds applicable to employee benefit plans for 2017. Section 415 of the Internal Revenue Code requires these limits to be adjusted annually due to cost-of-living increases. The majority of these limits remain unchanged from the 2016 limits, but there were increases in some instances. Earlier this year, the IRS also announced the 2017 inflation-adjusted limits for health savings accounts (“HSAs”), including the maximum annual HSA contribution, the minimum annual deductible for a high-deductible health plan (“HDHP”), and the maximum annual out-of-pocket expense for an HDHP.
The Securities and Exchange Commission (the “SEC”) recently announced that it paid a whistleblower award of more than $22 million, when a whistleblower’s detailed tip and extensive assistance helped the SEC halt a well-hidden fraud at the company where the whistleblower worked. With that award, the SEC has now paid out more than $100 million to whistleblowers who have helped the agency investigate and prosecute securities fraud. This large award followed recently issued settlements with two publicly held companies for violating a Rule that prohibits companies (and others) from interfering with potential whistleblowers’ communications with the SEC staff, Rule 21F-17 of the Securities Exchange Act of 1934 (the “Exchange Act”). In each case, the company involved paid substantial civil penalties. These recent activities highlight the value that the SEC places on its whistleblower program and serve as a wakeup call to publicly held companies to ensure that internal practices, policies and agreements do not contravene the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
Ensuring that your employee benefits plans comply with the Employee Retirement Income Security Act of 1974 (“ERISA”) just became more important. That is because the cost of noncompliance just increased (and in some instances, the increases are significant). On June 30, 2016, the U.S. Department of Labor (the “DOL”) issued an interim final rule increasing the penalties for certain violations of ERISA. The interim final rule is effective for penalties assessed after August 1, 2016 if the corresponding violation occurred after November 2, 2015.
On July 25, 2016, the IRS issued final regulations under Section 83 of the Internal Revenue Code (the “Code”) simplifying the process by which taxpayers may make elections under Code Section 83(b) by eliminating one of the filing requirements. These final regulations adopt without change proposed regulations that were issued in July 2015.
On June 21, 2016, the Internal Revenue Service issued long-awaited guidance on deferred compensation arrangements under Sections 409A and 457 of the Internal Revenue Code. The proposed regulations under Section 409A clarify and/or modify certain provisions of the final regulations issued under that Section in 2007, and also withdraw a specific provision of earlier proposed regulations under Section 409A issued in 2008 that addressed the calculation of amounts includible in income under Section 409A(a)(1), replacing it with revised proposed regulations. The proposed regulations under Code Section 457 prescribe rules for the taxation of deferred compensation arrangements established and maintained by state or local governments or other tax exempt organizations. In each case, the proposed regulations would affect participants, beneficiaries, plan sponsors, and administrators.
Stay tuned for our in-depth analysis on these proposed regulations.
On December 1, 2016, the most significant changes to federal overtime law in more than a decade will go into effect. The federal Department of Labor instituted these changes by amending the Fair Labor Standards Act regulations. The primary change is that the minimum amount employers will be required to pay exempt salaried employees will increase substantially. Employers will be required to pay exempt workers at least $913 per week ($47,476 per year), up from the current requirement of $455 per week ($23,600 per year).
In light of the new final and temporary regulations issued by the IRS and the U.S. Department of Treasury (Reg. 301.7701-2T), partnerships that have been using wholly-owned disregarded entities to “employ” partners (in order to provide access to various tax benefits, including cafeteria plans, parking and transit benefits, and other employee benefit plans) will need to reevaluate their structure and treatment of partner/employee classification. In the new rules, which were published on May 4th, 2016, the IRS moved to halt this practice, providing that where partners of a partnership are separately working for a second (disregarded) subsidiary legal entity, such individuals may not be treated as employees of the subsidiary. Instead, they are considered self-employed individuals for both self-employment and employment benefit plan purposes.
In this blog, Nutter's Executive Compensation and Employee Benefits attorneys will provide updates on key developments and offer practical tips and best practices relating to executive compensation, employee benefits, and corporate governance matters.