BENEFITS BYTE

September 2, 2004
BB 04—91

In this issue:

  • IRS Issues Final ISO Regulations and Request for Comment on ESPPs
  • Council Comment on "Sourcing" Rule?
  • Guidance on Plan Amendment Restrictions Following DRC Relief

IRS Issues Final ISO Regulations and Request for Comment on ESPPs

The Council would like to hear if your company has an Employer Stock Purchase Plan (ESPP) and is interested in providing input for a potential Council comment letter. As reported in the August 4, 2004 Benefits Byte, the Internal Revenue Service (IRS) has issued final regulations providing guidance on incentive stock options and requested comments (IRS Notice 2004-55) on whether similar rules should be applied to Employee Stock Purchase Plans (ESPP). The final regulations are essentially the same as proposed regulations issued in June 2003 with a few modifications.

IRS Notice 2004-55 indicates that the IRS is considering whether revisions should be made to longstanding ESPP regulations under Code Section 423 to make them consistent with the newly finalized ISO regulations. The notice listed eight additional questions the IRS had received on ESPPs and requested comments on whether these and other issues should be addressed in revisions to the ESPP regulations. Comments are due by October 1, 2004.

Issues listed in the notice included whether (1) any subcategory of employees may be excluded from participation in the ESPP (and whether additional rules are needed to address the inadvertent exclusion of employees), (2) the $25,000 annual limit on purchases under an ESPP should be determined in a manner consistent with the $100,000 limitation for ISOs, (3) individuals should be allowed to carryover amounts for an earlier plan or offering to a new plan or offering, and (4) the regulations should include limitations on the increase or decrease of contribution amounts under an ESPP.

If you are interested in providing input, or for more information, contact Jan Jacobson, Council director of retirement policy, at (202) 289-6700.

Council Comment on "Sourcing" Rule?

On August 6, the Internal Revenue Service (IRS) issued proposed regulations that, while not directly related to employee benefits, will have an effect on employee benefits for multinational companies. The proposed regulation relates to the proper "sourcing" of compensation (including fringe benefits) for U.S. taxpayers and non-resident aliens. The proposed regulations would replace the "facts and circumstances" test for individuals that work both within and outside the United States during the year with a required allocation of the compensation based on the time spent here and abroad. A more detailed explanation of the proposal has been provided by Groom Law Group.

As you know, the Council often files comment letters on proposals made by various government agencies on behalf of our membership when the proposals relate to employee benefits. If this proposal affects your company, the Council would like to hear from you. Comments on the proposal are due November 1, 2004 and the Council will prepare a comment letter if several member companies express interest and provide input. If you are interested in providing input, or for more information, contact Jan Jacobson, Council director of retirement policy, at (202) 289-6700.

Guidance on Plan Amendment Restrictions Following DRC Relief

On August 19, the IRS issued guidance in a question and answer format on restrictions that are placed on plan amendments following an employer’s election of deficit reduction contribution relief, as permitted under the Pension Funding Equity Act of 2004. (This relief is primarily limited to airlines that meet certain criteria). For more information, contact Jan Jacobson, Council director of retirement policy, at (202) 289-6700.

###

The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council’s members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.