Avoiding IRS Penalties

Report
Avoiding IRS Penalties:
Understanding Constructive Receipt
Richard A. Turner
VALIC Vice President and Deputy General Counsel
Lynne L. Wilson
PSEA General Counsel
WEBCAST PARTICIPANTS: Listen to audio over your
computer speakers. (If you prefer to listen by phone, you may
dial-in using the numbers provided in your invitation . Phone
lines will be available 10 minutes prior to the event start.)
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
1
DISCLAIMERS
This presentation relates solely to structuring collectively
bargained retirement incentives or severances in
compliance with IRC § 457 and other tax code provisions,
and federal and state anti-discrimination law.
IRS Circular 230 Disclosure:
Any advice contained in this presentation is not intended or
written to be used, and cannot be used, to avoid penalties
under the Internal Revenue Code or to promote, market,
or recommend to another party any transaction or matter
addressed herein. There are no third party beneficiaries
to this presentation, and it should not be relied upon by
any individual for advice and counsel.
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
2
THE PROBLEM OF CHOICE
IN EARLY RETIREMENT
INCENTIVES
Examples of Constructive Receipt
• Health insurance after retirement OR
cash
• Medical insurance for 5 years OR
$20,000
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
3
A 125 PLAN IS NOT A
SOLUTION
• A choice in a 125 plan of medical
insurance for 5 years OR $20,000
– Cannot be used for retiree choice
– Use it or lose it rules
– Deferred compensation problem
– Does not meet the definition of “cash”
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
4
PROBLEMS WITH CASH ONLY
PAYMENTS
• Cash spread out over time (tax owed
before money received)
• Solutions
– Lump sum (pay in tax year of retirement)
– 403(b) for 6 years (tax year of retirement
and 5 more years)
– Cash in first year and 403(b) in later years.
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
5
403(b) PLANS ALLOW THE
DEFERRAL
OF FEDERAL TAXES
• “Regular” 403(b) – money grows tax
free; federal taxes paid upon distribution
• “Roth” 403(b) – new twist; federal taxes
paid up-front; grows tax free
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
6
ADDED TAX BENEFIT
• Added benefit for both types of 403(b)
plans
• Nonelective (employer) contributions
are exempt from FICA tax
• This saves employer and employee
money
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
7
403(b) CONTRIBUTION LIMITS
• Elective deferrals
– 2011 -- $16,500
– 2012 -- $17,000
• Catch-up contributions (persons over 50)
– 2011 & 2012 -- $5,500
• Total amount that can be contributed
– Lesser of 100% of compensation
– 2011 -- $49,000
– 2012 -- $50,000
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
8
NONELECTIVE (EMPLOYER)
CONTRIBUTIONS
• Limits
– 2011 -- $49,000
– 2012 -- $50,000
• This is the ONLY type of contribution that
can be made to retirees
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
9
QUERY:
WHAT IF THE RETIREE DIES
PRIOR TO RECEIVING ALL
CONTRIBUTIONS?
• Acceleration?
– Contribution limits
– Month of death
• Death benefit?
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
10
PSEA’S RECOMMENDED
LANGUAGE
“In the event of the retiree’s death, the
maximum amount allowed of all
remaining nonelective contributions will
be timely paid to the retiree’s 403(b), as
provided for by the Internal Revenue
Code and its corresponding regulations.”
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
11
ERIPS WITH MEDICAL INSURANCE
• Paid health insurance
– Participation in group plan
– Participation in self-funded plan
• Health Reimbursement Account
– Reimbursement of premium expenses
– Reimbursement of allowable health
care expenses, meaning all 213(d)
allowable expenses
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
12
HEALTH REIMBURSEMENT
ACCOUNTS
• A fund to reimburse medical expenses
• Employer contributions only, with pretax dollars (tax-free to employee).
Money can roll over from year to year.
Money cannot be cashed out but can
only be used for out-of-pocket medical
expenses. Payments can be made into
an HRA after retirement.
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
13
HRA CONSIDERATIONS
• Bargain uniform contributions for
retirees
– Not a percentage of salary
– Not based on years of service
– Avoid tax consequences for highly
compensated employees
• Cover the retiree’s spouse and
dependents (of both retiree and spouse)
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
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QUERY:
ARE CONDITIONAL HRA OR 403(b)
CONTRIBUTIONS ALLOWED?
• Medical insurance unless the retiree has
other health care coverage in which case
the payment goes to an HRA/403(b)
• Payment into an HRA unless the retiree
has other health care coverage in which
case the payment goes to a 403(b)
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
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QUICK SUMMARY
– Cash ERIPs
• Lump sum in tax year of retirement
• 403(b) for tax year of retirement and five more
years
• Lump sum in tax year of retirement and 403(b)
• Address problem of death
– Health insurance
• Continue in group plan
• HRA (uniform amounts, no time limits, broad
coverage possible)
• Questions regarding conditional payments
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
16
CAUTION – AGE
DISCRIMINATION
• Benefits cannot decline based on increasing
age or years of service
• Windows with benefits are permissible
– Retire at age 55
– Retire at superannuation
• Watch out for combinations of benefits
– Retire with 15 years of service in district
(for medical insurance) and in first year of
superannuation (for cash incentive = 25%
of salary)
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
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TAXABLE v. NONTAXABLE
BENEFITS
• Taxable
– Cash
– Cash-out of unused sick leave/vacation
leave
– Employer contributions into a 403(b)
– Term Life insurance that exceeds $50,000
• Nontaxable
– Participation in group health insurance *
– HRA contributions (by employer)
– Term life insurance under $50,000
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
18
CHOICES NOT ALLOWABLE
UNDER TAX LAW
• HRA v. anything else (cash, 403(b), health
insurance, life insurance)
• 403(b) v. anything else (cash, health
insurance, life insurance)
• Choice in 403(b) contributions
– 10,000 in 2011 or
– $6,000 in 2011 and $6,000 in 2012
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
19
CHOICES ALLOWABLE BY TAX
LAW BUT CAUSE
UNNECESSARY TAX
• Cash or health insurance
• Constructive receipt
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
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FOR ACTIVE EMPLOYEES
• Opt-outs for health insurance
– Constructive receipt problem
– Put into 125 plan to avoid tax for persons
keeping insurance
• Cashing out personal days
– Constructive receipt problem
– Difficult to put into 125 plan
– Require mandatory cash-out at end of year
or cash-out of any days over “x” amount
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
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Time for Questions!
CONFERENCE ATTENDEES:
Please come to a microphone to ask
your questions.
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Send text questions using the “Chat”
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Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
22
Thank you for your
participation!
CONFERENCE ATTENDEES:
If you are requesting CPE credit, return the CPE form to
the moderator before leaving the room
WEBCAST PARTICIPANTS:
Attendance Forms are required to receive either PASBO
CEU or CPE credit. Webcast sites are asked to collect
Attendance Forms from each participants and return to
the PASBO office by March 16.
Pennsylvania Association of School Business Officials
2012 Annual Conference & Exhibits
23

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