Compliance September 2, 2010

Bonuses and Commissions Could Face Higher Taxes

The American Payroll Association (APA) issued a statement today to alert the public of the potential hit paychecks will take due to expiring tax cuts.   
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In the statement, the APA says that millions of Americans of all income levels could see the amount of taxes taken out of their paychecks increase by 50% in 2011. The rise in taxes would occur if four key pieces of legislation are not extended once they reach their expiration date of December 31, 2010: the Making Work Pay credit, the Advance Earned Income Credit, and the 2001 and 2003 tax cuts. 

If the tax cuts that Congress enacted in 2001 and in 2003 are not extended, one consequence would be that the supplemental tax rate (the rate payroll professionals used to calculate the tax on bonuses, commissions, and other supplemental pay), will increase from 25% to 28%.  

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Other effects of the expiring tax cuts would include: 

  • The 10% tax bracket will be eliminated. The first $8,375 of taxable income of a single filer, now subject to a 10% tax rate, will be taxed at 15% — a 50% increase for Americans whose income, after subtracting the standard deduction and personal exemptions, is $8,375 or less.  
  • The tax credit parents can claim per qualifying child under age 17 will decrease by 50% per qualifying child from $1,000 to $500.  
  • The tax cuts reduced the tax burden on married couples by increasing their standard deduction to exactly twice that of a single person and increasing the amount of income subject to the 10% and 15% taxes to exactly twice that of a single person. These equalizers will disappear if the cuts expire.  
  • Many of the tax rates will increase, with the highest tax rate rising from 35% to 39.6%.  
  • Non-job-related educational assistance will no longer be a tax-free benefit. Currently employers may provide up to $5,250 per employee, per year in non-job-related educational assistance tax-free.  

“All Americans stand to be impacted by these tax changes,” said Scott Mezistrano, CPP, senior manager of government relations for the APA. “We should all take a close look now to see how these tax changes will impact our 2011 take-home pay and plan to review and adjust our withholding as necessary at the beginning of the new year.” 

 

Compliance September 2, 2010

Court Finds Plan Trustee Could not Act on Knowledge of Breaches

A federal court in Illinois ruled that participants of the Antioch Company Employee Stock Ownership Plan are not barred from moving forward with their claim that company fiduciaries and GreatBanc Trust Co. breached their duties under the Employee Retirement Income Security Act.
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Senior U.S. District Judge Milton I. Shadur of the U.S. District Court for the Northern District of Illinois said GreatBanc’s assertion that the former trustee for the ESOP, who is not a party in the case, knew about the alleged breaches more than three years before the suit filing, and that knowledge could be imputed to the plaintiffs, was not the issue. Shadur said the issue was whether the plaintiff in the case was the group of participants who brought the suit or the plan for which they were asking for relief, as the trustee’s knowledge would be considered the plan’s knowledge.   

However, Shadur said that “happily,” he need not come to an ultimate conclusion on the matter, because even if the plan was the plaintiff, that would be dispositive of GreatBanc’s motion to dismiss the case only if it is clear that the trustee could have acted effectively on any knowledge he might have had of the alleged breach. Shadur found that Barry Hoskins, an Antioch vice president and former trustee of the plan, was tightly constrained by the Trustee Agreement that defined his role as directed trustee and gave him very little authority to act without direction from the Plan Committee, and more specifically, prohibited him from bringing any sort of lawsuit on behalf of the plan without direction.  

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In addition, according to the opinion, Hoskins testified that in fact he never acted as directed trustee without direction from the Committee and that there were times when he presented concerns to the Committee that it then disregarded.  

Four ESOP participants and the plan’s current trustee Evolve Bank & Trust filed the suit concerning a dispute over a complicated Antioch corporate refinancing involving a company stock buyback that court papers indicate eventually left the firm in bankruptcy and the ESOP worthless.   The suit claims the company fiduciaries and Greatbanc grossly mishandled the refinancing in ways that constituted ERISA fiduciary breaches.  

The case drew the attention of U.S. Department of Labor Secretary Hilda L. Solis who filed a friend of the court brief arguing that knowledge by the named plaintiffs and not the plan or a fiduciary of the plan who is not a party in the suit starts the statute of limitations period (see Solis Opposes ERISA Statute of Limitations Argument).  

 

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