Compliance October 24, 2007

Ways and Means Committee to Hear Testimony on DC Plan Fees

The U.S. House Ways and Means Committee will hold an October 30 hearing to discuss the fees charged to participants enrolled in defined contribution plans.
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According to a statement from Committee Chairman Charles Rangel’s office, the hearing will cover fees charged to 401(k), 403(b), and 457 plan participants and will begin at 10 a.m.

Rangel announced his intentions to hold a hearing early this year just as Representative George Miller, (D-California) unveiled a fee disclosure proposal (See Ways & Means to Hold Hearings on 401(k) Fees). Rangel vowed in a statement to work with Miller to draft a “reasonable and balanced resolution” to fee disclosure.

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“This is an important issue for millions of American workers who are being asked to shoulder the cost of saving adequately for their retirement,” said Rangel, (D-New York) in the statement about the upcoming hearing. “If we are going to ask our workers to fully take on this level of responsibility, and the federal government is going to subsidize these efforts, we have a duty to make sure that our federal dollars are efficiently and effectively working for the benefit of our workers. We need to make sure that these subsidies are being reflected in the account balances of these workers.”

The U.S. House Education and Labor Committee heard testimony at the beginning of October on the Miller bill (See Fee Disclosure Legislation Introduced in House). The proposal evoked caution from panelists, who mostly argued that Miller’s legislation would impart too heavy a burden on plan sponsors and plan providers and plan participants would be no better off to make investment decisions (See Fee Disclosure Proposal Draws Industry Criticism at House Committee Hearing).

Miller’s proposal would:

  • require plan administrators to disclose, in clear and simple terms, all fees charged to plan participants each year;
  • help workers better understand their investment options by providing more detailed information on investment strategies, risks, and returns when they sign up for their company’s 401(k);
  • ensure that all fees and conflicts of interest are disclosed annually to employers who sponsor 401(k) plans; and
  • enhance the Department of Labor’s oversight of 401(k) plans.

To submit testimony for the upcoming Rangel hearing, visit http://waysandmeans.house.gov, and select “110th Congress” from the menu entitled, “Committee Hearings.’ Select the correct hearing, and click on the link entitled, “Click here to provide a submission for the record.” Further instruction is available here.

Compliance October 24, 2007

409A Tax Reporting Guidance is Extended to 2007

The Internal Revenue Service (IRS) has issued interim guidance generally extending to 2007 the 409A tax reporting guidance that was applicable to 2005 and 2006 tax years.
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An IRS announcement said Notice 2007-89 provides that during the calendar year 2007, employers and payers may omit reporting on amounts deferred under a nonqualified deferred compensation plan (NQDP). An employer or payer is not required to report amounts deferred during the year in Box 12 of Form W-2 using Code Y, or in Box 15a of Form 1099-MISC.

The IRS said an employer must treat money included as gross income as wages for income tax withholding purposes and report it as wages paid on Line 2 of Form 941, and in Box 1 of Form W-2. An employer also must report amounts includible in gross income in Box 12 of Form W-2 using Code Z., the tax agency said.

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Further, a payer must report amounts included in gross income under Section 409A and not treated as wages under Section 3401(a) in Box 7 of Form 1099-MISC, and must also report such amounts in Box 15b of Form 1099-MISC.

Because amounts includible in gross income are considered supplemental wages, employees may have to pay estimated taxes to avoid penalties under Section 6654, the IRS said.

The notice said the amount included in income and reported by the employer equals the portion of the total amount deferred under the plan that, as of December 31, 2007, is not subject to a substantial risk of forfeiture, “and has not been included in income in a previous year, plus any amounts of deferred compensation paid or made available to the [employee]” during calendar year 2007, the IRS said.

An amount may be treated as previously included in income if it was properly reported by the employer or payer in accordance with earlier guidance.

The new guidance provides that money “actually or constructively received” during calendar year 2007 is classified as wages by the employer when the amounts are received by the employee for purposes of withholding, depositing, and reporting. Money neither actually nor constructively received by the employee during calendar year 2007 is treated as wages on December 31, 2007, for purposes of withholding, depositing, and reporting the income, the notice said.

The tax officials said if taxes are not withheld or withholding amounts are less than the required amounts, the employee will receive credit for 2007 if the employer follows one of two possible options:

  • to withhold or recover from the employee the undercollected amount after December 31, 2007, and before February 1, 2008, and report as wages for the quarter ending December 31, 2007, such amounts on that quarter’s Form 941 and in Box 1 of the employee’s W-2 for 2007; or
  • to pay the income tax withholding liability for the employee, “without deduction from the employee’s wages or other reimbursement by the employee,” and report such funds were neither actually nor constructively received but are includible in income for the quarter ending December 31, 2007, as well as other employment taxes and income tax withholding wages on Form 941 and Form 940, and in Box 1 of Form W-2 for 2007.

In addition, the notice provided rules to include income under Section 409A(b) relating to offshore trusts and assets restricted under rules added by the Pension Protection Act. It also provided guidance on calculation of the additional 20% tax and interest at the underpayment rate plus 1%.

IRS and Treasury officials have requested comments on the rules. Comments are due by February 13, 2008. Electronic submissions should be sent to Notice.comments@irscounsel.treas.gov. Include the notice number in the subject line.

Written comments should be sent to IRS, CC:PA:LPD:RU, Rm. 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, or hand delivered to the Courier’s Desk at the IRS, 1111 Constitution Ave., N.W. Washington, D.C. 20224.

The latest IRS guidance is available at http://www.irs.gov/pub/irs-drop/n-07-89.pdf.

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