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Do you sponsor a 457(f) plan? If so, keep reading!

11.16.16

When it comes to offering non-qualified deferred compensation to executives of not-for-profit organizations, there aren’t many options. Your organization must follow the rules and related guidance outlined in Internal Revenue Code Sections 457 and 409A. There are two types of non-qualified deferred compensation plans: Eligible (457(b) plans) and ineligible (457(f) plans)

  • 457(b) plans operate very similarly to 403(b) or 401(k) plans and have an annual benefit limit.
  • 457(f) plans have no annual benefit limit but the participants must include the benefits in taxable income when the substantial risk of forfeiture lapses.

Changes are on the table
And that's largely a good thing.The proposed regulations provide guidance in several key areas used to determine whether a substantial risk of forfeiture exists or not. For the most part, the proposed guidance is welcome news and provides an employer with more flexibility than originally expected.

Earlier this year, the IRS issued proposed regulations which describe just what constitutes a substantial risk of forfeiture under an ineligible 457(f) plan and what types of benefits are not considered to be ineligible 457(f) plans. Because of the tax implications to the executive, this is important for your organization to understand and communicate.

What the proposed regulations cover:

  1. Non-compete agreements
  2. Rolling risks of forfeiture (e.g., rolling vesting schedules)
  3. Determining the present value of accrued benefits
  4. Plans that are not considered 457(f) plans, including bona fide severance pay plans

In each of these areas, the proposed regulations provide employers with specific rules to follow in order to design and operate a plan, whether it's an existing plan or one adopted before or after the rules are finalized. Current plans will not have grandfathered status. 

What you need to do
For existing deferred compensation arrangements or employment contracts that provide for severance pay for deferred compensation arrangements,you must:

  • Take inventory of the types of benefits you provide (e.g., severance pay, 457(b), 457(f) plans)
  • Review plan provisions and determine the changes you need to make in order for them to be in compliance with the guidelines. 
  • Make the appropriate changes to the plan or employment contract provisions before the final regulations are effective.
  • The final regulations generally will not be effective until 90 days after they've been published. You may rely on them in the interim.

If you have questions or concerns
We've helped many not-for-profit organizations design and develop executive compensation packages, including deferred compensation plans. Our Benefits Compensation experts are well versed in the rules that apply to deferred compensation and severance pay plans and can help guide you through the process to:

  1. Create a plan that meets the needs of your executive and your organization
  2. Determine if any changes must be made to the benefits you’re currently offering

Contact Bill Enck if you have questions or need help.

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Editor’s note: read this if you are a leader in a healthcare organization and have questions concerning the current definition of health care provider in recent legislation regarding COVID-19.

One of the more common questions we receive regarding the paid sick and family leave provisions of the Families First Coronavirus Response Act (the “Act”) is regarding which employees qualify as a “health care provider”, who an organization can elect to exempt from the paid sick and family leave provisions of the Act. The Department of Labor (DOL) has issued FAQs and temporary regulations addressing the issue.

For purposes of determining employees who could be exempt from the paid sick and family leave provisions of the Act, the definition of a “health care provider” has been broadened. It now includes “anyone employed at any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instructions, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institution, employer, or entity”. 

This includes any permanent or temporary institution, facility, location, or site where medical services are provided that are similar to such institutions. 

Additionally, the definition includes any individual employed by an entity that contracts with any of the above institutions to provide services or to maintain the operation of the facility. This also includes anyone employed by any entity that provides medical services, produces medical products, or is otherwise involved in the making of COVID-19 related medical equipment, tests, drugs, vaccines, diagnostic vehicles, or treatments. 

The DOL guidance also indicates the definition includes any individual the highest official of a state determines is a health care provider needed for the state’s response to COVID-19. 

For purposes of the health care provider exclusion for the sick and family leave provisions of the Act, the newly released DOL temporary regulations provide that the term health care provider is not limited to diagnosing medical professionals. Rather, such health care providers include any individual who is capable of providing health care services necessary to combat the COVID-19 public health emergency. Such individuals include not only medical professionals, but also other workers who are needed to keep hospitals and similar health care facilities well supplied and operational.

The DOL encourages employers to be judicious when using this definition to exempt health care providers to minimize the spread of COVID-19.

It is important to note that the preambles to the temporary regulations indicate an employer’s exercise of this option (i.e., to exclude a health care provider or emergency responder from the paid sick/family leave benefits) does not authorize an employer to prevent an employee who is a health care provider from taking earned or accrued leave in accordance with established employer policies.

The preamble to the temporary regulations further indicates the paid sick leave and expanded family and medical leave provisions of the Act exist so employees will not be forced to choose between their paychecks and the individual and public health measures necessary to combat COVID-19. The preambles further state, conversely, providing paid sick leave or expanded family and medical leave does not come at the expense of fully staffing the necessary functions of society.

Organizations face a difficult decision whether to exempt health care providers (and emergency responders) from the paid sick and family leave provisions of the Act. It is not an easy decision to make, and an organization may want to contact legal counsel to understand the legal implications with respect to the decision to exclude health care providers (or emergency responders). 

An organization trying to decide whether to exclude health care professionals (or emergency responders) should consider the following:

  • These employees can’t be prevented from taking paid time off under the organization’s existing paid time off guidelines.
  • Any decision related to the paid sick/family leave provisions doesn’t affect an employee’s eligibility to take FMLA leave under the normal FMLA rules.
  • The organization may want to include health care professionals (and emergency responders) in the sick leave provisions of the Act so the organization can be eligible for tax credits if an employee is diagnosed with or has symptoms of COVID-19 or is caring for an individual diagnosed with or who has symptoms of COVID-19. 
  • An organization may be able to elect to exclude health care providers (and first responders) from only the paid family leave provisions of the Act.

Ultimately, each organization must make a decision in the best interests of their business, their employees, and their consumers. Unfortunately, there is no single best answer that covers all organizations struggling with this decision. 

If the decision is made to exclude health care providers from all or a portion of the paid sick and family leave provisions of the Act, we recommend contacting your legal counsel to review the employee communications before it is provided to employees.

For more information
If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help. 

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"Health care providers" and Department of Labor regulations under COVID-19

Read this if you are an employer that may have to close, or has closed, due to COVID-19.

Here is a brief recap of definitions and explanations of employee retention credits found in the CARES Act. If you have questions about your specific situation, please don’t hesitate to contact us. We’re here to help.

Eligible employer

The term ‘‘eligible employer’’ means any employer: 

(i) that was carrying on a trade or business during calendar year 2020, and 
(ii) with respect to any calendar quarter, for which...
a.     the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID–19), or 
b. such calendar quarter where there is a significant decline in gross receipts...
i. beginning with the first calendar quarter in 2020, for which gross receipts for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year, and 
ii. ending with the calendar quarter for which gross receipts of such employer are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.


For tax-exempt organizations described in section 501(c) of the Internal Revenue Code and exempt from tax under section 501(a) of such Code, clauses (i) and (ii)(a) shall apply to all operations of such organization.

Generally, all organizations treated as a single employer under the controlled group or affiliated service group rules will be treated as one employer for purposes of this section.

If an eligible employer participates in the Paycheck Protection Program, such an employer is not eligible for the employee retention credits.

Amount of credit

There shall be allowed, as a credit against applicable employment taxes for each calendar quarter, an amount equal to 50 percent of the qualified wages with respect to each employee of such employer for such calendar quarter.

The amount of qualified wages with respect to any employee which may be taken into account by the eligible employer for all calendar quarters shall not exceed $10,000 (i.e., the maximum credit is $5,000 per employee).

If the credit exceeds the applicable employment taxes on the wages paid for such calendar quarter, such excess shall be treated as an overpayment that shall be refunded.

Qualified wages

The term ‘‘qualified wages’’ means:

(i) in the case of an eligible employer for which the average number of full-time employees (as defined by the Affordable Care Act Employer Mandate Provisions) employed by such eligible employer during 2019 was greater than 100:
a. wages paid by such eligible employer with respect to which an employee is not providing services due to the suspension of the business or a drop in gross receipts circumstances, or 
(ii) in the case of an eligible employer for which the average number of full-time employees (as defined by the Affordable Care Act Employer Mandate Provisions) employed by such eligible employer during 2019 was not greater than 100:
a. all wages paid by an eligible employer when shut down and each quarter where there was a sharp decline in year-over-year receipts.


Wages do not include amounts paid under the expanded sick/family leave provisions of the FFCRA.

Qualified wages paid or incurred by an eligible employer with respect to an employee who is not providing services may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding leave.

The term ‘‘qualified wages’’ shall include so much of the eligible employer’s qualified health plan expenses as are properly allocable to such wages.


CARES Act: Payroll tax payment delay

An extension of time to remit payroll taxes for the period beginning March 27, 2020 and ending before January 1, 2021 over a two-year period is allowed, with half due by December 31, 2021, and the remainder due by December 31, 2022.

If an eligible employer participates in the payroll tax delay programs, such an employer is not eligible for the employee retention credits.
 

Blog
CARES Act―Employee retention credits for employers subject to closure due to COVID-19

Read this if you are a business owner, in management, or in HR at a company with less than 500 employees.

We have received many questions regarding the FFCRA and its provisions and how it affects different employers and their employees. Here are some of the questions our clients have asked the most. Please contact us if you have questions regarding your specific situation. We’re here to help.  

Besides compensation, what other costs paid by an employer are eligible for the credit (i.e., employer paid health insurance, employer payroll taxes)?
Employers can deduct the cost of providing continuing health care coverage, and the employer’s share of Medicare taxes related to the leave wages. Any compensation paid under the FFCRA is not subject to the employer’s portion of the Social Security tax.

How do you determine the total number of employees? 
In calculating the total number of employees, all full-time or part-time employees working within the US, including all US territories or possessions, are counted, including all employees on leave and temp employees who are jointly employed with another company as determined under the Fair Labor Standards Act (FLSA). 

How does a business know if it employs less than 500 employees and is subject to the FFCRA?
Generally, a private sector employer is subject to the Family and Medical Leave Act of 1993 (FMLA) if it employs 50 or more employees for each working day during each of 20 or more calendar workweeks in the current or preceding calendar year. The FAQs issued by the Department of Labor (DOL) indicate an employer has fewer than 500 employees if, at the time an employee’s leave is to be taken, there are fewer than 500 full-time and part-time employees within the United States, which includes any state of the United States, the District of Columbia, or any territory or possession of the United States. 

In making this determination, an employer should include employees on leave; temporary employees who are jointly employed by you and another employer (regardless of whether the jointly-employed employees are maintained on only your or another employer’s payroll); and day laborers supplied by a temporary agency (regardless of whether you are the temporary agency or the client firm if there is a continuing employment relationship). Workers who are independent contractors under the FLSA, rather than employees, are not considered employees for purposes of the 500-employee threshold.

Where a corporation has an ownership interest in another corporation, the two corporations are separate employers unless they are joint employers under the FLSA with respect to certain employees. In general, two or more entities are separate employers unless they meet the integrated employer test under the FMLA.

Please check with your advisors if you believe the integrated employer test may apply to your businesses.

Which employees are entitled to the $511 payment under sick leave?
For an employee who is unable to work because of the coronavirus quarantine or self-quarantine or has COVID-19 symptoms and is seeking a medical diagnosis, the employee may receive sick leave wages equal to the employee’s regular rate of pay, up to $511 per day and $5,111 in the aggregate, for a total of 10 days. Note that only employers who employ less than 500 employer are required to provide sick leave payments. Such employees may also receive a refundable tax credit for sick leave paid to employees.

Which employees are entitled to the $200 payment under sick leave?
For an employee who is caring for someone with COVID-19, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the coronavirus, the employee may receive sick leave wages equal to two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Note that only employers who employ less than 500 employer are required to provide sick leave payments. Such employees may also receive a refundable tax credit for sick leave paid to employees.

Which employees are entitled to the $200 payment under the family leave portion of FFCRA?
For an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the coronavirus, the employee may receive family leave wages equal to two-thirds of the employee’s regular rate of pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Note that only employers who employ less than 500 employer are required to provide sick leave payments. Such employees may also receive a refundable tax credit for sick leave paid to employees.

What is “regular rate of pay” for purposes of the FFCRA?
For purposes of the FFCRA, the regular rate of pay used to calculate paid leave is the average of the employee’s regular rate over a period of up to six months prior to the date on which leave is taken. If an employee has not worked for the current employer for six months, the regular rate used to calculate paid leave is the average regular rate of pay for each week the employee has worked for the current employer.

If an employee is paid with commissions, tips, or piece rates, these amounts will be incorporated into the above calculation to the same extent they are included in the calculation of the regular rate under the FLSA.

You can also compute this amount for each employee by adding all compensation that is part of the regular rate over the above period and divide that sum by all hours actually worked in the same period.

What is the effective date of the sick leave/family leave provisions?
Employers must comply with the FFCRA from April 1, 2020, until it expires on December 31, 2020. Paid leave prior to April1, 2020 will not count. The IRS recently issued guidance indicating the tax credits for qualified sick leave wages and qualified family leave wages required to be paid by the FFRCA will apply to wages paid for the period beginning on April 1, 2020, and ending on December 31, 2020.

Who is considered a “health care provider”?
For the purposes of employees who may be exempted from paid sick leave or expanded family and medical leave by their employer under the FFCRA, a health care provider is anyone employed at any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instruction, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institution, employer, or entity. This includes any permanent or temporary institution, facility, location, or site where medical services are provided that are similar to such institutions. 

This definition includes any individual employed by an entity that contracts with any of the above institutions, employers, or entities institutions to provide services or to maintain the operation of the facility. This also includes anyone employed by any entity that provides medical services, produces medical products, or is otherwise involved in the making of COVID-19 related medical equipment, tests, drugs, vaccines, diagnostic vehicles, or treatments. This also includes any individual that the highest official of a state or territory, including the District of Columbia, determines is a health care provider necessary for that state’s or territory’s or the District of Columbia’s response to COVID-19.

To minimize the spread of the virus associated with COVID-19, the DOL encourages employers to be judicious when using this definition to exempt health care providers from the provisions of the FFCRA.

For more information
If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help. 

Blog
Families First Coronavirus Response Act (FFCRA): FAQs for businesses

The President signed The Families First Coronavirus Response Act (hereinafter the “Act”) into law on March 18th and the provisions are effective April 2nd. You can read the congressional summary here. There are two provisions of the Act that deal with paid leave provisions for employees. Here are some highlights for employers.

The provisions of the Act are only required for employers with fewer than 500 employees. Employers with over 499 employees are not required to provide the sick/family leave contained in the Act, but could voluntarily elect to follow the new rules. The expectation is that employers with over 499 employees are providing some level of sick/family leave benefits already. In any case, employers with over 499 employees are not eligible for the tax credits. 

Employers with fewer than 500 employees are required to provide employees with up to 80 hours of paid sick leave over a two-week period if the employee:

  • Self-isolates because of a diagnosis with COVID-19, or to comply with a recommendation or order to quarantine;
  • Obtains a medical diagnosis or care if the employee is experiencing COVID-19 symptoms;
  • Needs to care for a family member who is self-isolating due to a COVID-19 diagnosis or quarantining due to COVID-19 symptoms; or
  • Is caring for a child whose school has closed, or childcare provider is unavailable, due to COVID-19.

These rules apply to all employees regardless of the length of time they have worked for the employer. The 80-hours would be pro-rated for those employees who do not normally work a 40-hour week. 

Employees who take leave because they themselves are sick (i.e., the first two bullets above) can receive up to $511 per day, with an aggregate limit of $5,110. If, on the other hand, an employee takes leave to care for a child or other family member (i.e., the last two bullets above), the employee will be paid two-thirds (2/3) of their regular weekly wages up to a maximum of $200 per day, with an aggregate limit of $2,000.

Days when an individual receives pay from their employer (regular wages, sick pay, or other paid time off) or unemployment compensation do not count as leave days for the purposes of this benefit.

Family and Medical Leave Act

Employees who have been employed for at least 30-days also have the right to take up to 12 weeks of job-protected leave under the Family and Medical Leave Act (FMLA). The Act requires that 10 of these 12 weeks (i.e., after the sick leave discussed above is taken) be paid at a rate of no less than two-thirds of the employee’s usual rate of pay. Any leave taken under this portion of the ACT will be limited to $200 per day with an aggregate limit of $10,000.

Exemptions

The Secretary of Labor has the authority to issue regulations exempting: (1) certain healthcare providers and emergency responders from taking leave under the Act; and (2) small businesses with fewer than 50 employees from the requirements of the Act if it would jeopardize the viability of the business.

Expiration

The provisions of the Act are set to expire on December 31, 2020, and unused time will not carry over from one year to the next.

Tax credits 

The Act provides for refundable tax credits to help an employer cover the costs associated with providing paid emergency sick leave or paid FMLA. The tax credits work as follows:

  • A refundable tax credit for employers equal to 100 percent of qualified family leave wages paid under the Act.
  • A refundable tax credit for employers equal to 100 percent of qualified paid sick leave wages paid under the Act. 
  • The tax credits are taken on Form 941 – Employer’s Quarterly Federal Income Tax Return filed for the calendar quarter when the leave is taken and reduce the employer’s portion of the Social Security taxes due. If the credit exceeds the employer’s total liability for Social Security taxes for all employees for any calendar quarter, the excess credit is refundable to the employer.

For more information

We are here to help. Please contact our benefit plan consultants if you have any questions or would like to discuss your specific situation. 

Blog
Highlights of the recently passed paid sick and family leave act: What you need to know

Are you spending enough time on your paid time off plan?
Many questions arise regarding paid time off (PTO) plans and the constructive receipt of income, which can cause payroll complications for employers and phantom income inclusion for employees. In order to avoid being subject to penalties for not withholding income and payroll taxes and having employees be subject to tax on cash they have not received, certain steps need be followed if an employer wants to properly allow employees to cash-out PTO.

What the IRS is looking for.
The Internal Revenue Service (IRS) has issued a number of Private Letter Rulings (PLRs) that examine earned time cash-out programs. While such rulings don’t serve as precedent, it appears the IRS has come up with the following factors that it deems important in order to avoid constructive receipt in a PTO cash-out situation:

  1. Employees must make a written election before the end of December in the year prior to the year they will be earning and receiving the accrued earned time to be cashed-out.  This is an election to receive a cash payout of the earned time to be accrued in the following year.
  2. The election must be irrevocable.
  3. The payout can only happen once the employee has actually earned and accrued the earned time in the following year. Payouts are generally once or twice per year, but may happen more frequently.

The IRS appears to generally require that the earned time being paid out be substantially less than the accrued earned time owed to the employee. This is to ensure that the earned time program remains a bona fide sick or vacation pay plan and not a plan of deferred compensation. This particular requirement can get tricky and may be different in each employer’s case.

Why does it matter?
The danger of failing to follow IRS guidelines regarding earned time cash-outs is that the IRS could claim that the employees offered a choice to cash-out are in constructive receipt of their accrued earned time balances regardless of their choice. This would result in immediate taxation of all accrued amounts to the employees, even if they hadn’t received the cash. The employer would also be subject to penalties for not properly withholding federal and state taxes.

It is important to review your PTO plan to be sure there are no issues regarding constructive receipt and to make sure your payroll systems are correctly reporting income.

The IRS issued proposed regulations under Code Section 457 in June of 2016 regarding, in part, non-qualified deferred compensation plans of not-for-profit (NFP) organizations. Those regulations contain guidance regarding the cash-out of sick and vacation time and the possibility that certain cash-out provisions may create a plan of deferred compensation and not a bona fide sick leave or vacation leave plan. As noted above, such a determination would be disastrous as all amounts accrued would become immediately taxable. NFP organizations and their advisors should keep a close eye on the proposed Section 457 regulations to see how they develop in final form. Once the regulations are finalized, NFP organizations may need to make changes to their cash-out provisions.

Please note that the above information is general in nature and is not meant to provide guidance on any particular case. If you have any questions about your PTO plan, please contact Bill Enck.

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Paid time off plans: IRS guidelines and why they matter