Vision Payroll

The Internal Revenue Service (IRS) recently released Revenue Ruling 2009-31, Annual Paid Time Off Contributions. This Revenue Ruling addressed two issues:

1. Do the amendments described [in the ruling] to an existing qualified profit sharing plan requiring or permitting certain annual contributions of the dollar equivalent of unused paid time off cause the plan to fail to meet the requirements of §401(a) and, if applicable, §401(k) of the Internal Revenue Code of 1986 (IRC)?
2. When is a participant required to recognize gross income with respect to the contributions to the qualified profit-sharing plan and payments to the participant as described [in the ruling]?

In situation 1, the IRS concludes as follows:

Under the facts presented, the amendments requiring or permitting certain contributions of the dollar equivalent of unused paid time off to a qualified profit-sharing plan do not cause the plan to fail to meet the qualification requirements of IRC §401(a), provided that the contributions satisfy the applicable requirements of IRC §401(a)(4) and IRC §415(c) and, where applicable, IRC §401(k) and IRC §401(a)(30).

In situation 2, the IRS concludes as follows:

Under the facts presented, assuming the applicable qualification requirements are satisfied, a participant does not include in gross income contributions of the dollar equivalent of unused paid time off to the profit sharing plan in accordance with IRC §402(a) until distributions are made to the participant from the plan and does not include in gross income an amount paid for the dollar equivalent of unused paid time off that is not contributed to the profit-sharing plan until the taxable year in which the amount is paid to the participant.

Contact Vision Payroll if you have any further questions on annual paid time off contributions.

The Internal Revenue Service (IRS) recently released Revenue Ruling 2009-30, Automatic Contribution Increases under Automatic Contribution Arrangements. This Revenue Ruling addressed two issues:

1. Will default contributions to a profit-sharing plan fail to be considered elective contributions merely because they are made pursuant to an automatic contribution arrangement under which an eligible employee’s default contribution percentage automatically increases in plan years after the first plan year of the eligible employee’s participation in the automatic contribution arrangement based in part on increases in the eligible employee’s plan compensation?
2. Will default contributions under an automatic contribution arrangement fail to satisfy the qualified percentage requirement (including uniformity and minimum percentage requirements) relating to a “qualified automatic contribution arrangement” under §401(k)(13) of the Internal Revenue Code of 1986 (IRC) (providing an automatic enrollment nondiscrimination safe harbor) or the uniformity requirement relating to an “eligible automatic contribution arrangement” under IRC §414(w) (permitting 90-day withdrawals) merely because default contributions are made pursuant to an arrangement under which the default contribution percentage for all eligible employees increases on a date other than the first day of a plan year?

In situation 1, the IRS concludes as follows:

Default contributions to a profit-sharing plan will not fail to be considered elective contributions merely because they are made pursuant to an automatic contribution arrangement under which an eligible employee’s default contribution percentage automatically increases in plan years after the first plan year of the eligible employee’s participation in the automatic contribution arrangement based in part on increases in the eligible employee’s plan compensation.

In situation 2, the IRS concludes as follows:

Default contributions under an automatic contribution arrangement will not fail to satisfy the qualified percentage requirement (including uniformity and minimum percentage requirements) relating to a qualified automatic contribution arrangement or the uniformity requirement relating to an eligible automatic contribution arrangement merely because default contributions are made pursuant to an arrangement under which the default contribution percentage for all eligible employees increases on a date other than the first day of a plan year.

Contact Vision Payroll if you have any further questions on automatic contribution increases under automatic contribution arrangements.

On May 18, 2009, the Internal Revenue Service (IRS) published at 74 FR 23134, REG-115699-09, Suspension or Reduction of Safe Harbor Nonelective Contributions. The proposed regulations take effect May 18, 2009 and may be relied upon by taxpayers until final regulations are issued.

Under §401(k)(12) and §401(k)(13) of the Internal Revenue Code of 1986 (IRC), plans can avoid an IRC §401(k)(3) actual deferral percentage (ADP) failure through the use of a design based safe harbor method that requires specified qualified matching contributions (QMACs) for eligible non-highly compensated employees (NHCEs). The proposed regulations would allow employers that incur a substantial business hardship (similar to one described in IRC §412(c)) the option of reducing the safe harbor contribution during a plan year, eliminating the safe harbor contribution during a plan year, or terminating the employer’s safe harbor plan.

The factors to be taken into account in determining if there is a substantial business hardship include determining whether or not:

1. The employer is operating at an economic loss,
2. There is substantial unemployment or underemployment in the trade or business and in the industry concerned,
3. The sales and profits of the industry concerned are depressed or declining, and
4. It is reasonable to expect that the plan will be continued only if the waiver is granted.

The proposed regulations also require the following:

1. Thirty days notice to eligible employees of the suspension or reduction (the proposed regulations provide the required information to be provided to eligible employees);
2. Reasonable opportunity for employees to change their cash or deferred elections and their employee contributions elections;
3. Amendment of the plan to provide that the ADP test will be satisfied for the year of change of the safe harbor contribution; and
4. That the plan satisfies the safe harbor nonelection contribution requirement through the date of the amendment.

The IRS will hold a public hearing on the proposed regulations on September 23, 2009. Contact Vision Payroll if you have any questions on REG-115699-09.

On January 21, 2009, the US Department of Labor (DOL) published at 74 FR 3822 “final rules under the Employee Retirement Income Security Act, and parallel provisions in the Internal Revenue Code of 1986, relating to the provision of investment advice by a fiduciary adviser to participants and beneficiaries in participant-directed individual account plans, such as 401(k) plans, and beneficiaries of individual retirement accounts (and certain similar plans). These rules [affected] sponsors, fiduciaries, participants and beneficiaries of participant-directed individual account plans, as well as providers of investment and investment advice related services to such plans.”

On January 20, 2009 Rahm Emanuel, Assistant to the President and Chief of Staff, had “directed Agency Heads to consider extending for 60 days the effective date of regulations that have been published in the Federal Register but not yet taken effect.” Pursuant to that memo, the [DOL] announced recently that it was delaying the effective date of those rules from March 23, 2009 to May 22, 2009. This will give the DOL “time to review legal and policy issues raised by many of the 26 public comment letters [it] received.”

Contact Vision Payroll if you have any questions on this delay.

This is one in a continuing series on the 2008 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than February 2, 2009. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 12, codes.

Enter codes and amounts in boxes 12a, 12 b, 12c, and 12d. The letters a, b, c, and d do not relate to the codes, but are strictly for identification purposes. If an employee has code C for $100 and that is the only code for that employee, the employer may enter code C in box 12a; it does not need to be entered in box 12c. If filing copy A on paper, enter only four codes on one Form W-2. Employers should use multiple forms for employees with more than four codes. There is no limit on the number of codes on any other copy of Form W-2. Enter the code and amount without dollar signs or commas.

The codes and their descriptions are as follows:

Employers should combine elective deferrals and elective catch-up contributions into one sum and report under the appropriate elective deferral plan code.

The next topic in this continuing series will be Box 13, checkboxes. Contact Vision Payroll with any questions on the 2008 Form W-2.

This week’s question comes from Greg, a part-time accounts payable clerk. I made almost the same amount of money in 2008 as I did in 2007, but the amount of my federal income tax (FIT) withheld is significantly lower. Why did my FIT withheld go down? There are several reasons why your FIT withheld could be significantly lower, even though your income was almost the same.

1. Inflation creep. Each year, as inflation reduces the value of the dollar, tax tables in Publication 15 (Circular E) are adjusted so that less tax would be withheld on the same amount of income. This is to adjust for the reduced buying power of the same dollar amount of income.
2. Reduced income. At certain low-income levels, no tax is withheld if the withholding allowances claimed are greater than zero. Even FIT withholding of a few dollars each week can add up to a few hundred-dollar difference at year-end compared to no withholding at certain low-income levels.
3. Increased withholding allowances. Many employees file a revised Form W-4, Employee’s Withholding Allowance Certificate or Formulario W-4(SP), Certificado de Exención de la Retención del Empleado. If the number of withholding allowances claimed increases, the amount of FIT withheld will decrease. Instead of receiving a big refund when a Form 1040 is filed, the employee receives a small net pay increase each week. Some employees also file Form W-4 claiming exemption from all FIT withholding.
4. Claiming Earned Income Credit. Many employees file a new or revised Form W-5, Earned Income Credit Advance Payment Certificate. As in the case of increased withholding allowances, claiming an advance EIC payment will increase net pay received each week, but could reduce the amount of FIT withheld.
5. Increase in pre-tax deductions. Employees who increase the amount of a §125 election or elect to contribute more money to a pre-tax retirement plan such as a SIMPLE plan or §401(k) plan, could have a significantly reduced amount of FIT withheld on the same amount of gross pay. Since those amounts are deducted before FIT withholding is calculated, the FIT deduction should be reduced.

Employees should work with their CPA to project their FIT liability for the current year then assess their progress toward meeting that liability each quarter. If the projected FIT withholding be less than the annualized projected liability a revised Form W-4 or Form W-5 should be filed or the need to pay quarterly estimated tax payments using Form 1040-ES should be considered. Employers should update the allowances claimed by logging in to their company file or providing Vision Payroll with the updated information.

This is one in a continuing series on the 2008 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than February 2, 2009. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 1, wages, tips, other compensation.

Box 1 shows the amount employees must enter on line 7 of Form 1040, US Individual Income Tax Return. It may be, but is not necessarily, equal to gross wages. Common adjustments that increase or decrease gross wages include the following:

• Employee elective deferral to qualified retirement plans such as §401(k) plans, SIMPLE plans, and §403(b) plans (decrease).
• Amounts withheld for non-taxable benefits elected under §125 plans (decrease).
• Taxable non-cash fringe benefits, such as personal use of company automobile (increase).
• Certain clergy housing allowances (decrease).
• Reported tips (increase).
• Expense reimbursements paid under a non-accountable plan (increase).
• Accident and health insurance premiums for so-called 2% S corporation shareholders (increase).
• Cost of group-term life insurance in excess of $50,000 (increase).

The next topic in this continuing series will be Box 2, federal income tax withheld. Contact Vision Payroll with any questions on 2008 Form W-2.

In IR-2008-118, the Internal Revenue Service (IRS) announced increases to the limits on deferral contributions for 2009 under §401(k), §403(b), and §457(e)(15). These limitations are codified in those sections of the Internal Revenue Code of 1986 (IRC). Under IRC §415, the Commissioner of the IRS is required to adjust the plan limitations to keep pace with inflation. For 2009, the deferral contribution limitation will increase from $15,500 for 2008 to $16,500 for 2009. The age 50 and over catch-up contribution will also increase from $5,000 for 2008 to $5,500 for 2009 for individuals who plan to reach age 50 before the end of 2009. Contact Vision Payroll if you have questions on changes to these deferral contribution limits.