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.

Compliance October 24, 2007

DoL’s Campbell Gives More Details of Final QDIA Regs

Saying it was “probably the most important regulation issued resulting from the Pension Protection Act of 2006,″ Bradford Campbell, Assistant Secretary for the Employee Benefit Security Administration (EBSA) at the Department of Labor, addressed media representatives regarding the final regulations on Qualified Default Investment Alternatives (QDIAs).
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The regulation means plan sponsors of participant directed individual account plans will not be liable for investment outcomes for investments to which participants who do not otherwise select their investments are defaulted if they choose a QDIA as the default investment and follow the guidelines set out by the department. Campbell warns, however, that sponsors will still be responsible for prudently selecting and monitoring the particular funds that make up the QDIA and the managers of those funds. Campbell pointed out that in the final regulation the DoL did not specify particular investment products, but provided mechanisms with which to ensure participants are invested appropriately.

Change From Proposed Regulation

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The more broad definitions of QDIAs, along with the expansion of eligible providers from just fund managers and investment managers to include plan sponsors and trustees also allows for portfolios of funds offered in the plan selected by the plan sponsor or an adviser to the plan to qualify as a QDIA. In the case where an adviser selects the asset allocation of such a portfolio, the plan sponsor would be the fiduciary or investment manager under the plan, Campbell said.

One significant change from the proposed regulations issued last year is a transition rule by which contributions that were previously defaulted into stable value funds are grandfathered under the protections of the QDIA regulation. Such contributions invested in stable value funds prior to the effective date of the regulation (roughly, December 23) may stay invested in the funds, but new contributions for those participants going forward must be invested in a QDIA in order for the plan sponsor to remain protected from liability.

Campbell pointed out that stable value funds would likely still be a very big part of QDIAs as underlying investments.

The regulation provides that a QDIA generally must not invest in employer securities.

Notice Requirement

The regulation as originally proposed by the DoL required notice be given to participants 30 days prior to eligibility for plan participation, but some commenters pointed out this would not work for plans with immediate eligibility that utilize automatic enrollment. The final rule adds that notice be given 30 days prior to eligibility or 30 days prior to the initial investment into the default fund and also includes the option to provide concurrent notice in cases where 30 days prior to the initial investment is not feasible.

Rather than stating that participants who opt out of enrollment and wish to withdraw their funds from the default investment must be allowed to do so without penalty, the regulation specifies that no fees or penalties must be imposed that are not otherwise imposed on participants who deliberately select the QDIA as an investment.

More information available at Final QDIA Rules Published.

More information, and a fact sheet about the final regulations, are available on EBSA’s Web site here. The final regulations are available here.

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