Health Care Reform Brings Important Tax Changes for Large Employers, Health Care Providers and Insurers
Nonprofit hospital requirements. The Act imposes four new requirements that a hospital must satisfy to be tax-exempt: (1) the periodic preparation of a community health needs assessment; (2) maintenance of a qualified financial assistance policy; (3) limitations on charges to individuals eligible for assistance; and (4) avoidance of certain billing and collections activities.
The new requirements apply to organizations that operate a facility required by a state to be licensed, registered, or otherwise recognized as a hospital, and are determined to have hospital care as its primary function or purpose for exemption. If an organization operates more than one hospital, every hospital facility in the organization must adhere to the provisions of the Act separately to qualify for its tax-exempt status.
To preserve its tax-exempt status under section 501(c) (3), the hospital organization must conduct a community health needs assessment at least once during any three- year period (specifically, the current taxable year or the two immediately preceding years), as well as have an implementation strategy, which is available to the public, to meet the needs identified through the assessment. The needs assessment must take advice from people who represent the community interest including people who have public health expertise. Failure to comply with performing the assessment results in a penalty of $50,000.
In addition to the assessment requirements, organizations:
- Will be subject to Treasury review of their community benefit activities at least once every three years to ensure compliance;
- Must have a description of how they address community health needs, what needs are not addressed, and why those needs are not addressed; and
- Must also have audited financial statements (either stand-alone or part of a consolidation), and submit them with their Form 990 (which is a public document).
Each hospital must adopt, implement, and publicize a written financial assistance policy that includes a description of the criteria for assistance (free or discounted), the basis for calculating amounts charged to patients, the method for applying assistance, the actions an organization may take to collect outstanding debts, methods to widely publicize the financial assistance policy, and a requirement that the organization provide nondiscriminatory emergency care regardless of the ability to qualify under the written financial policy.
Hospitals are limited as to how much they can bill patients who qualify for financial assistance. The prescribed rules on fees require that the amounts charged for emergency or other necessary procedures performed on those patients be no more than the lowest amounts generally billed to insured individuals. The Act also prohibits the use of gross charges when billing those who qualify for financial assistance.
With respect to billing and collection, a hospital cannot engage in extraordinary means of collection until reasonably exploring the eligibility for assistance under the financial assistance program (guidance may be released relating to what constitutes reasonable efforts).
Generally, the requirements apply to taxable years beginning after the enactment date (January 1, 2011 for calendar year end taxpayers – but would be earlier for any fiscal yearend taxpayers with a fiscal year end of March 31 or later). However, the community health needs assessment requirement applies to taxable years beginning two years after the date of enactment.
The Secretary of the Treasury, in consultation with the Secretary of Health and Human Services, will submit an annual report to Congress that addresses issues related to charitable care. These include issues related to the level of charity care, bad debt expense, unreimbursed costs for services provided through means-tested government programs, unreimbursed costs for services provided through non-means-tested government programs, and information about costs incurred by private hospitals for community benefit activities. The Secretary shall also, within five years of the date of enactment, issue a report that analyzes trends in the information collected under the new reporting requirements.
Annual fee on health insurance providers. An annual fee will be imposed on covered entities providing health insurance with respect to U.S. health risks. The fee does not apply to accident and disability, indemnity, long-term, or Medicare supplemental insurance. The fee is apportioned among the providers based on their relative market share and is calculated by taking the provider's net premiums written with respect to health insurance as a percentage of the total net premiums written with respect to health insurance for all U.S. health insurance providers. The aggregate annual fees imposed are $8 billion for 2014, increasing each year through 2014 when the aggregate annual fee will be $14.3 billion and thereafter increasing by the rate of premium growth.
The fee is assessed by the Secretary of Treasury by reference to the provider's market share for each calendar year and is to be paid on a date determined by the Secretary in the following year, but not later than September 30. To determine market share and the fee imposed on each covered entity, health insurance providers are required to report, by a date to be determined by the Secretary, net premiums written. A failure to report this information will result in the imposition of penalties, unless reasonable cause is shown. The Secretary is permitted to rely on any other sources of available information (e.g., annual financial statements) to verify or supplement the reports submitted by covered entities. The Act provides that the first $25 million of net premiums written will not be taken into account and only half of net premiums between $25 million and $50 million will be considered. For net premiums written in excess of $50 million, 100% are included in the calculation. For tax-exempt service providers, only 50-percent of net premiums written will be taken into account.
Under the Act, covered entities subject to the fee do not include employers to the extent they self-insure employee health risks, as well as specified other insurers, including certain non-profit insurers with a medical loss ratio of 90 percent or more. The Act also creates limited exceptions for plans that serve a critical purpose, including plans serving a high percentage of seniors and disabled individuals.
The annual fee on health insurance providers is effective in 2014 with respect to net premium written in 2013. Such annual fee, as is the case with the other industry fees imposed by the Act, is non-deductible.
Fee on pharmaceutical manufacturers and importers. The Act imposes an annual fee on pharmaceutical manufacturers and importers of branded prescription drugs (including certain biological products). The aggregate annual fees imposed on covered entities will be $2.5 billion for 2011 and increasing annually to $4.1 billion for 2018 and then reducing to $2.8 billion per year thereafter. The fees will be allocated by reference to each entity's proportionate share of total branded prescription drug sales during the prior calendar year to (or pursuant to coverage under) a "specified government program," meaning Medicare Parts B and D, Medicaid, Departments of Veterans Affairs and Defense programs, or the TRICARE retail pharmacy program. Excepted from the sales that are counted are so called "orphan drugs" for rare diseases and conditions until such drugs are approved for broad use by the Food and Drug Administration. Pharmaceutical companies with less than $5 million of such sales will be treated as having no market share. For sales of branded prescription drugs between $5 million and $125 million, only 10 percent of such sales are taken into account when determining the applicable fee. The percentages increase for ranges up to $400 million with sales above this level being counted 100%.
The Secretary of the Treasury will assess the fees on the basis of information provided by the Departments of Health and Human Services, Veterans Affairs and Defense; and the Secretary may also consider any other sources of available information. The Act adds joint and several liability for the fee if, with respect to a single covered entity, more than one person is liable for payment under the controlled group rules.
The fee on pharmaceutical manufacturers and importers will first be payable in 2011 with respect to sales in 2010.
Annual medical device fee. The Act imposes an excise tax of 2.3 percent on the sale price of any taxable medical device sold by manufacturers and importers beginning in 2013. The Act generally applies to sales for use in the United States of any medical device (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act) intended for humans. The tax does not apply to eye glasses, contact lenses, hearing aids, and any other device deemed by the Secretary to be of the type available for regular retail purposes.
The excise tax on medical device sales applies to sales beginning in 2013.
Comparative effectiveness fees. The Act established a new Patient-Centered Outcomes Research Trust Fund to fund comparative effectiveness research that is mandated by the Act. The trust fund is to be funded by a fee imposed on private insurance plans equal to $2 for each individual covered under a specified individual or group health insurance policy. For fiscal years beginning after September 30, 2014, the fee is increased to reflect increases in the per capita amount of national health expenditures. The fee is reduced to $1 for policy plan years ending before October 1, 2013.
The comparative effectiveness fee is effective for each policy plan year ending after September 30, 2012, and before September 30, 2019.
Limit deduction for certain compensation to $500,000. The Act limits the deduction for compensation for services provided by certain individuals to a "covered health insurance provider" to $500,000 per year.
Such limit applies to deferred compensation in the year earned and this limitation is effectively carried to the year in which the compensation is paid. An applicable individual includes all officers, employees, directors and other workers or service providers such as non-employee individual independent contractors, performing services for or on behalf of a covered health insurance provider. Compensation is determined on a controlled group basis (for qualified plan purposes). The definition of a covered health insurance provider prior to 2012 is any employer qualifying as a health insurance provider that receives premiums for providing health insurance coverage. After 2011, an employer is a covered health insurance provider if at least 25% of the provider's gross premium income is derived from health insurance plans that meet the minimum creditable coverage requirements in the legislation.
The provision will be effective for remuneration paid in taxable years beginning after 2012 with respect to services performed after 2009. Thus, the limits will apply to deferred compensation earned after 2009.
Eliminate deduction for Medicare Part D subsidy. For taxable years beginning after December 31, 2012, the Act repeals the current rule permitting deduction of the portion of the expenses that is offset by the Medicare Part D subsidy that employers offering retiree prescription drug coverage that is at least as valuable as Medicare Part D receive.
(See separate update on the extension of this subsidy elsewhere in this newsletter.) There are ASC 740 financial reporting (i.e. tax provision) implications for companies because of this law change.
Tax compliance provisions. There are several compliance-related provisions in the Act that result in additional reporting requirements and new penalties for businesses. They include:
- Economic substance codification - Requires taxpayers to show both that a transaction changed their economic position in a meaningful way apart from the federal income tax effects and they had a substantial purpose apart from federal income tax effects for entering into the transaction. Certain basic transactions are excepted from the economic substance rules. Failure to comply with these two standards can cause penalties of 20% if the non-economic substance transaction is disclosed and 40% if it is not disclosed. These provisions became effective upon enactment.
- Wage (W-2) reporting - The aggregated cost of employer-sponsored health benefits is to be reported effective after 2010. The amount to be reported is the aggregate cost determined under rules similar to the applicable premium rules for COBRA continuation coverage. If the employee receives health insurance coverage under multiple plans, the employer must disclose the aggregate value of all such health coverage, but exclude all contributions to HSA's and Archer MSA's and salary reduction contributions to FSAs.
- Business payment (Form 1099) reporting - Expansion of the current-law obligation of persons engaged in a trade or business to report on payments of other fixed and determinable income or compensation. First, the Act extends reporting to include payments made to corporations other than corporations exempt from income tax under IRC section 501(a). Second, the Act expands the kinds of payments subject to reporting to include reporting of the amount of gross proceeds paid in consideration for property or services. The new Form 1099 reporting is effective for payments made after December 31, 2011.
- Reporting related to the individual health coverage mandate - Insurers (including employers who self-insure and governmental units) who provide the minimum essential health coverage to an individual during each calendar year must report certain information to the covered individual and to the Secretary of the Treasury. This reporting is intended to assist the government in monitoring compliance with the individual penalties for lack of minimum essential coverage. These new reporting requirements apply for calendar years beginning after 2013.
- Reporting by large employers - Large employers that provide minimum essential coverage to its employees are also required to provide pertinent information reporting. This reporting is effective for 2014.
- Employer penalties for failure to provide health coverage - Effective 2014, penalties apply for employers with more than 50 full-time employees if ANY employee qualifies for a credit. For purposes of determining the 50 full-time employee threshold, the first 30 employees may be excluded and the number is determined on a controlled group basis. If the employer fails to provide health coverage, then the penalty is $2,000 per full-time employee, indexed for inflation. If the employer provides health coverage, then the penalty is the lesser of the $2,000 per full-time employee penalty or $3,000 times the number of employees that receive a premium tax credit. The penalties are imposed pro-rata on a monthly basis.
Health plan changes. Among other things, the Act:
- Requires the automatic enrollment of employees unless there is evidence of other acceptable coverage;
- Permit only restricted annual limits on essential health benefits;
- Requires external and internal review procedures for claims determinations;
- Prohibits preexisting condition exclusions for children under age 19;
- Requires coverage availability for dependent children until age 26;
- Requires coverage of preventive health services with no cost sharing;
- Caps salary reduction contributions to FSAs; and
- Limits annual out-of-pocket expense reimbursements.
Employers will have to assess the effectiveness of their health plans in light of these new requirements and consider whether plan amendments are needed.
This article discusses only those tax provisions in the Act that we believe are significant for large employers, healthcare providers, and insurers. To read about the other tax provisions in the Act, see the Deloitte publication Prescription for change "filled": Tax provisions in the Patient Protection and Affordable Care Act. Information on the non-tax health reform changes as well as other insights can be found on Deloitte's Health Care Reform page.
Observations
The Act makes non-profit hospitals more accountable for the implementation of their plans to meet community needs by requiring the IRS to review their community assessment process and implementation at least every three years. Hospitals will have to follow a more formalized community health needs assessment and reporting of the needs of their community, a process many may have already begun with the redesigned Form 990 or existing state association reporting. The Act also builds on the redesigned Form 990 disclosures regarding financial assistance policies, charges, and collections with the imposition of additional requirements. Under the Act, the Secretary of the Treasury is required to submit an annual report, in consultation with the Secretary of Health and Human Services, to Congress that addresses issues related to charitable care, and, within five years of enactment, analyze trends in the information collected under the new reporting requirements. This means that the issue of whether non-profit hospitals provide enough charity care or community benefit to warrant continued federal income tax exemption is likely to continue to be a cause for concern for some in Congress.
Most large employers will have to reevaluate and likely amend their health plans to comply with the Act's new requirements. However, care should be exercised to not cause a grandfathered health plan to lose such status unintentionally. Consideration should also be given to proactively addressing the information collection and programming changes needed to meet the various new information reporting requirements.
Although many of the changes made by the Act will become effective over the course of several years, employers should note that some health plan-related changes are going to be effective as early as the first plan year that begins on or after September 23, 2010. For calendar-year plans, this will be January 1, 2011.
These "first-up" changes impose the following restrictions on group health plans:
- Prohibit lifetime limits on essential health benefits,
- Permit only restricted annual limits on essential health benefits,
- Prohibit preexisting condition exclusions for children under age 19,
- Allow coverage of dependent children until age 26, and
- Cover preventive health services with no cost sharing.
Grandfathered plans will be required to comply with certain of the reform provisions (e.g., the prohibition on lifetime limits, coverage of dependent children, prohibition on preexisting condition exclusions) but different effective dates and further modifications sometimes apply. Also, in later years, some of the above-listed restrictions become more restrictive. For example, beginning in 2014 preexisting condition exclusions are prohibited altogether, as are annual limits on essential health benefits.
The reinsurance program for early retirees (i.e., by which participating employer plans are reimbursed a portion of the cost of providing health insurance coverage to early retirees) becomes effective within 90 days and will continue through 2013. For tax years beginning after 2010, non-prescription drugs will no longer be reimbursable by health FSAs, health reimbursement accounts, or health savings accounts. Likewise beginning in 2011, non-qualified distributions from health savings accounts and Archer MSAs will be subject to an excise tax of 20% (increased from 10%). Also beginning in 2011, employers will be obligated to report the cost of providing employer-sponsored healthcare on Form W-2.
The Act leaves many of the details to be articulated by regulation. As a result, there are a significant number of questions to be resolved. The magnitude of these items will put significant pressure on the resources of the Secretary of Treasury, the Secretary of Health and Human Services, and others to render such guidance quickly.
Jobs Bill Provides Tax Incentives for Employers and Makes an Important Change to the Statute of Limitations for Assessing Tax
The Hiring Incentives to Restore Employment (HIRE) Act that President Obama signed into law on March 18, 2010, contains tax law changes that may have planning implications for the tax-exempt community.
Incentives for new hiring. Among other things, the HIRE Act exempts from the employer share of OASDI tax those wages paid by employers to qualified individuals beginning after the March 18 date of enactment and ending on December 31, 2010. Qualified employers do not include federal, state, or local government employers, but do include tax-exempt organizations under section 501(a), as long as the employee's services are made in furtherance of activities related to the organization's exempt purpose. This incentive would be available to qualified employers hiring individuals who begin employment after February 3, 2010, and before January 1, 2011.
Additionally, the Act increases the general business credit under section 38(b) by the lesser of $1,000 or 6.2 percent of the wages paid by the employer over 52 consecutive weeks for each worker that qualifies for the payroll tax exemption and is employed on any date during the taxable year. The Act also extends the increased small business expensing limits under section 179, and expands the Build America Bonds program. However, to pay for this tax relief, the HIRE Act imposes new information reporting requirements, withholding requirements, and penalties to curb abuses of offshore financial accounts. It also delays the effective date of the worldwide interest allocation election until 2021, and modifies certain required estimated tax payments for corporations with assets of $1 billion or more.
The Internal Revenue Service is expected to release a revised second quarter Form 941, Employers Quarterly Federal Tax Return, and has issued a new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit to comply with this new law. Employers should check each quarter this year for a new version of the Form 941 as the IRS is anticipated to change this form more than once this year.
For organizations that are filing protective refund claims for FICA taxes paid with respect to wages or stipends for medical residents, consideration should be given as to whether claiming relief from FICA under the HIRE Act during 2010 as noted above would be inconsistent with such claim for refund with respect to all medical residents.
Credit for providing health care coverage. To assist small businesses, including small tax-exempt organizations, with the cost of providing health care coverage to their employees. To be eligible, the organization must have 25 or less full-time equivalent employees with an average compensation of less than $50,000. Further, at least half of the cost of a single employer insurance rate must be provided. If eligible, the credit phases out for average compensation between $25,000 and $50,000 and for full-time equivalents between 10 and 25. The credit is up to 35% for 2010 (increasing to 50% in 2014) of the employer's premium costs. For tax-exempt employers, the maximum credit in 2010 is 25% and is limited by the total of income tax and Medicare withholding and the employer's share of Medicare taxes. News Release IR-2010-38 provides details on how to claim the credit. FAQs can also be found on the IRS Website.
Extended statute of limitations. Without significant discussion or fanfare, the HIRE Act added two words to Internal Revenue Code Section 6501(c) (8): "tax return."1 This addition may have significant consequences to the tolling of the assessment statute of limitations for tax years of companies engaged in the tax return reporting of international operations.
Section 6501(c)(8) provides an exception to the general rule that taxes are to be assessed within three years after a taxpayer's return is filed. Prior to its recent amendment, section 6501(c)(8) extended the assessment statute if a taxpayer failed to provide information about certain cross-border transactions until three years after the required information is actually provided to the Secretary. More specifically, section 6501(c) (8) stated that "[i]n the case of any information which is required to be reported to the Secretary under section 6038, 6038A, 6038B, 6046, 6046A, or 6048,2 the time for assessment of any tax imposed by this title with respect to any event or period to which such information relates shall not expire before the date which is three years after the date on which the Secretary is furnished the information required to be reported under such section." In other words, the assessment statute of limitations is extended if a taxpayer fails to provide any information required on Forms 5471, 5472, 926, 8621, 8865 and 3520,3 and the three-year statute of limitations does not start until all required information is provided.
The HIRE Act added the words "tax return" such that the relevant portion of the provision now reads as follows: "…the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is three years after the date on which the Secretary is furnished the information required to be reported under such section."
What does this mean?
- The assessment statute of limitations is extended if a taxpayer fails to provide any information required on Forms 5471, 5472, 926, 8621, 8865, and 3520. The extension is not limited to adjustments to income related to the information required to be reported on one of these forms, but rather the Internal Revenue Service can assess any additional tax that may be due on any tax return (e.g. Form 1120 - U.S. Corporation Income Tax Return).
- Section 6501(c)(8), as amended, is effective for returns for which the assessment statute of limitations is open after 18 March 2010.
Why is this important?
- Previously unrecognized tax benefits related to uncertain tax positions are generally recognized when the jurisdiction is statutorily barred from denying that benefit (i.e. upon the closing of the statute of limitations for such tax year).
- Failure to satisfy the reporting requirements described above will result in tax years remaining open for a period of three years after the date the required information is satisfied. Thus, these reporting requirements must be considered when determining whether the statute of limitations has closed for years for which there are unrecognized tax benefits.
Who is impacted?
- U.S. taxpayers planning to recognize the benefit of a tax position because of the expiration of the statute of limitations for that position for any quarter ending after 18 March 2010 will want to analyze the impact of the change to section 6501(c)(8) on such release.
- Internal tax departments responsible for ensuring tax compliance is complete and accurate must assess the completeness and accuracy of the tax compliance process with respect to the information required by sections 1295(b), 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A or 6048. Failure to properly report this information could have financial statement ramifications.
- Individual taxpayers required to file one or more forms covered by section 6501(c)(8).
Form 5500 Reporting for Section 403(b) Plans Is Clarified
As section 403(b) plan administrators and plan auditors prepare to file the 2009 Form 5500 which, for most plans will be the initial annual report, the Department of Labor issued new guidance to clarify when certain annuity contracts and custodial accounts can be excluded.
Explaining the carve-out provided under Field Assistance Bulletin 2009-02, the new guidance makes clear, among other things, that the relief applies to both large and small plans, and applies for 2009 and later reporting years.
Reporting for Section 403(b) Plans. Section 403(b) allows for a tax-sheltered annuity program for public school employees, employees of certain tax exempt organizations, and certain ministers. Historically, these arrangements were treated as a collection of individual contracts or accounts controlled by the employee without the involvement of the plan administrator. However, this changed for tax years beginning in 2009, when section 403(b) plans (other than those qualifying as "governmental plans" or non-electing "church plans") became subject to ERISA's general reporting requirements. As a result, plan administrators became obligated to report financial information regarding pre-2009 individual contracts and custodial accounts over which, in many cases, they had little knowledge. The new reporting also obligated section 403(b) plans with 100 or more participants to file audited financial statements, and obligated all section 403(b) plans to report the plan's aggregate financial information.
FAB Relief. Recognizing the difficulties administrators would face in complying with the new reporting requirements, the Department of Labor issued Field Assistance Bulletin 2009-02. For purposes of satisfying the reporting requirements, this FAB allows administrators to exclude annuity contracts and custodial accounts as part of the plan or as plan assets if:
- The contract or account was issued to a current or former employee before 2009,
- The employer ceased to have any obligation to make, and ceased making contributions to the contract or account before 2009,
- The rights and benefits under the contract or account are all legally enforceable by the individual owner against the insurer or custodian without involvement by the employer, and
- The individual owner is fully vested in the contract or account.
FAB Relief Clarification. In response to questions it received regarding the scope of this relief, the Department issued Field Assistance Bulletin 2010-01.
Among the main clarifications are:
- Relief under FAB 2009-02 applies to 2009 and later reporting years;
- Contributions attributable to 2008, but not deposited until 2009, would not make the account or contract ineligible for relief;
- The relief applies to large and small plans, both for determining what accounts are plan assets for purposes of the audit and for determining the plan assets to be reported on the financial statement;
- Involvement by the employer in consenting to or making discretionary decisions regarding enforcement of the employee's rights under the contract is not permitted;
- If an employer forwards employee loan repayments to the provider, the contract or account would not be eligible for relief;
- The Department will not reject a Form 5500 filing where the plan's independent accountant issues a "qualified," "adverse" or "disclaimed" opinion if the opinion states that the sole reason for the designation is because pre-2009 contracts were not covered by the audit or included in the financial statements; and
- If the independent accountant discovers contracts were incorrectly excluded from the financial statements, the accountant is expected to alert the plan administrator. If the parties cannot agree, the independent accountant is expected to note the issue in the audit report.
The new FAB also addresses the regulatory "safe harbor" by which section 403(b) arrangements funded solely through salary reduction contributions are not considered employee pension plans – and, therefore, not subject to the reporting requirement. The safe harbor is set out in Labor Regulation section 2510.3-02(f). It requires (a) employee participation to be voluntary, (b) all rights under the contract to be enforceable only by the employee, (c) the employer to have only limited involvement, and (d) the employer to receive no compensation other than for expenses in handling salary reduction contributions. The FAB clarifies that the employer cannot, consistent with the safe harbor, appoint a third-party administrator to make discretionary decisions, and cannot itself retain discretionary authority to exchange or move funds from the section 403(b) provider. It can, however, select contracts where the provider is responsible for discretionary decisions. The arrangement generally must offer a choice of more than one section 403(b) contractor and more than one investment product.
IRS unveils draft schedule and instructions for Uncertain Tax Positions Proposal
The IRS on April 19 released a draft schedule and instructions that provide additional details on its proposal announced in January (Announcement 2010-9) to require certain taxpayers to report their uncertain tax positions annually on their tax returns. The draft schedule and instructions contain numerous explanations and examples that clarify the requirements described in Announcement 2010-9. The Service also issued Announcement 2010-30, which describes the content of the new schedule, called Schedule UTP, and instructions.
According to the announcement, the reporting requirement will apply beginning with the 2010 tax year to taxpayers with both uncertain tax positions and assets equal to or exceeding $10 million if (1) the taxpayer or a related party issued audited financial statements; and (2) the taxpayer is required to file a Form 1120, U.S. Corporation Income Return; a Form 1120 L, U.S. Life Insurance Company Income Tax Return; a Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; or a Form 1120 F, U.S. Income Tax Return of a Foreign Corporation.
There is temporary relief from the reporting requirement for Form 1120 filers other than those identified above (such as real estate investment trusts or regulated investment companies), pass-through entities, and tax-exempt organizations. They will not have to report uncertain tax positions for the 2010 tax year. The Service will determine the timing of the requirement to file Schedule UTP for these entities after comments on the proposal have been received and considered. Comments on the proposed reporting requirement as well as the schedule and the instructions must be submitted to the IRS by June 1, 2010.
Department of Labor re-issues investment Advice Regulations
Following last year's postponement and ultimate withdrawal of controversial ERISA regulations on providing investment advice to plan participants, the Department of Labor last week issued new proposed regulations.
The Department said that the new proposed regulations are "nearly identical" to the final regulations that were published in January 2009 and eventually withdrawn. The primary differences between the two are:
Elimination of Class Exemption. The class exemption in the January 2009 regulations that would have allowed investment advisers to provide individualized investment advice to plan participants after the use of a computer model was withdrawn, and no substitute exemption has been proposed. The Department expressed doubts regarding whether it could adequately mitigate potential conflicts of interest where individualized investment advice is given. Therefore, the statutory exemption provides no relief from the prohibited transaction rules for individualized investment advice unless the advice otherwise meets the requirements (i.e., is provided under a computer model or level-fee arrangement).
Explicit Prohibition of Incentives. Even though an affiliate of a fiduciary investment adviser may receive varying fees depending on the investment options that are selected by plan participants, the proposed regulations prohibit the fiduciary investment adviser (or any employee, agent or registered representative of the adviser) from receiving directly or indirectly (from the affiliate or any other party) any financial or economic incentive that is based, in whole or in part, on the participants' selection of an investment option. The Department explained this change as more of a clarification than a revision. It reaffirmed its earlier analysis in Field Assistance Bulletin 2007-1, which concluded that the receipt by a fiduciary adviser of any payment from any party (including an affiliate) that is based on the investments selected by plan participants would be inconsistent with the level-fee arrangement.
Preexisting Guidance is Unaffected. Consistent with the reliance it placed on FAB 2007-1, the proposed regulations explicitly state that neither they nor the statutory exemption itself invalidate or otherwise affect regulations, exemptions, or other guidance that has been previously issued by the Department concerning the provision of investment advice. This responds to concerns raised by plan sponsors and fiduciaries regarding whether previously established programs still pass muster as not violating the prohibited transaction rules (e.g., investment advice programs based on a computer model designed by an independent third-party consistent with the Department's Advisory Opinion 2001-09A known as the "SunAmerica opinion").
The Department has advised that the relevant explanations in the January 2009 regulations (and the August 2008 proposed rule) are still applicable. Accordingly, in order to qualify for the statutory exemption under ERISA sections 408(b)(14) and 408(g), which exempt certain investment-advice related transactions from the prohibited transaction rules, investment advice must be provided on a "level fee" basis or through an unbiased "computer model." Either method requires the authorization of a plan fiduciary, an annual audit, the dissemination of participant disclosures, and the retention of records. Comments on the proposed regulations are requested by May 5, 2010.
Did You Know?
Refund procedures for Type III erroneously paid excise tax. The IRS has provided the procedures (Ann. 2010-19) for qualified Type III supporting organizations to request a ruling confirming their status and to obtain tax refunds if they erroneously filed a Form 990-PF and paid section 4940 tax for the 2008 taxable year. The announcement also describes procedures for charitable trusts that became private foundations after August 16, 2007, and wish to terminate their private foundation status under section 507(b)(1)(B) by operating as Type III supporting organizations.
Updated COBRA premium reduction fact sheets. The Department of Labor has updated its COBRA Premium Reduction Fact Sheet and issued new and revised model COBRA notices that incorporate the changes made by the Temporary Extension Act of 2010 (TEA), which recently extended through March 31, 2010 the eligibility period for the COBRA premium subsidy under ARRA.
Notices: http://www.dol.gov/ebsa/COBRAmodelnotice.html
Fact Sheet: http://www.dol.gov/ebsa/newsroom/fscobrapremiumreduction.html
Supreme Court lets Unisys decision stand. The Supreme Court has declined to review a Third Circuit decision that Unisys violated its ERISA fiduciary duties by not informing retirees that Unisys could terminate their retiree health benefits at any time and for any reason. In re Unisys Corp. Retiree Medical Benefits Litigation (2009, CA3) 579 F.3d 220 , 2009 WL 2767000 , cert den. (2010, S.Ct.) 2010 WL 596599.
Severance payments not subject to FICA. The United States District Court for the Western District of Michigan has ruled that the severance payments a retailer made to employees on their involuntary separation from employment resulting from a reduction in force or discontinuation of an operation did not constitute "wages" for purposes of FICA taxation. United States v. Quality Stores Inc. (In re Quality Stores Inc.), No. 09-44 (W.D. Mich. Feb. 23, 2010). Passive Foreign Investor Company (PFIC) shareholder reporting. The IRS announced in Notice 2010-34 that it is developing guidance regarding reporting obligations under new section 1298(f), and that, in the meantime, persons that previously were required to file Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund) must continue to do so, while PFIC shareholders that were not otherwise required to file Form 8621 annually prior to March 18, 2010, will not be required to file an annual report as a result of the addition of section 1298(f) for taxable years beginning before March 18, 2010.
Illinois Supreme Court upholds denial of property tax exemption. The Illinois Supreme Court on March 18 upheld the decision of the state's Department of Revenue to deny Provina Hospitals' property tax exemption, finding that the hospital failed to establish that it is a charitable institution and that the property at issue was used exclusively for charitable purposes. Provena Covenant Medical Center v. Department of Revenue, Docket No. 107328 (Ill. 3/18/2010)
TAX NEWS - may 2010
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