American Benefits Council
Benefits Byte


May 9, 2014

The Benefits Byte is the American Benefits Council’s regular e-mail and online newsletter for members only, providing timely reports on legislative, regulatory and judicial developments, along with updates on the Council’s activities in support of employer-sponsored benefit plans.

The Benefits Byte is published by the American Benefits Council, based on staff reports and edited by Jason Hammersla, Council director of communications. Contact information for Council staff related to specific topics can be found at the end of each story.

Click here to read past issues on the Benefits Byte Archive page.

Follow us on Twitter at @BenefitsCouncil

IRS Issues Final Regulations Regarding Tax Treatment of Payments by Qualified Plans for Medical or Accident Insurance

The Internal Revenue Service (IRS) released final regulations on May 9 clarifying the rules regarding the tax treatment of payments by qualified retirement plans for accident or health insurance. These regulations affect administrators, participants and beneficiaries of qualified retirement plans and generally apply for taxable years that begin on or after January 1, 2015. Taxpayers are permitted to elect to apply the regulations to earlier taxable years.

The final regulations adopt, with some modifications, the provisions of the proposed regulations issued in August 2007. Consistent with the proposed regulations, the final regulations clarify that a payment from a qualified plan for an accident or health insurance premium generally constitutes a distribution under Section 402(a) that is taxable to the distributee in the taxable year in which the premium is paid. The taxable amount generally equals the amount of the premium charged against the participant’s benefits under the plan.

The Council submitted formal comments to Treasury in November 2007, expressing concern that the regulations could affect a wide variety of common practices that our members use to provide and protect the retirement income of disabled employees under qualified plans, including the provision of continued employer-funded defined benefit pension accruals for employees on long-term disability and the provision of continued defined contribution plan accruals for those employees. The Council further suggested that the final regulations clearly assert that the prescribed tax consequences (for example, taxation of current coverage/premiums or deemed receipt/contributions of funds for disability accruals) do not apply to various disability waiver practices.

Most notably, the final regulations provide a special rule for disability insurance coverage under which the payment of disability insurance premiums from a qualified plan is excepted “if the insurance contract provides for payment of benefits to be made to the trust in the event of an employee’s inability to continue employment with the employer due to disability, provided that the payment of benefits with respect to an employee’s account does not exceed the reasonable expectation of the annual contributions that would have been made to the plan on the employee’s behalf during the period of disability, reduced by any other contributions made on the employee’s behalf for the period of disability within the year.” The final regulations further state that “The Treasury Department and the IRS agree that the purchase of this type of disability coverage by a qualified plan is distinguishable from the purchase of medical insurance by a plan because the functional purpose of the disability insurance coverage is to replace retirement contributions to the plan, instead of providing medical benefits outside of the plan.”

The final regulations also make technical and conforming changes based on various laws enacted since the issuance of the proposed regulations.

For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700. 

IRS Offers Relief from Certain Late Filing Penalties

The Internal Revenue Service (IRS) issued Notice 2014-35 on May 9, providing administrative relief from penalties under the Internal Revenue Code for a failure to comply in a timely fashion with regard to certain annual reporting requirements. The relief is intended for late filers participating in the Delinquent Filer Voluntary Compliance (DFVC) Program administered by the U.S. Department of Labor Employee Benefits Security Administration (EBSA).

Administrators of employee benefit plans subject to Title I of ERISA who fail to file annual reports on a timely basis can be subject to civil penalties. The DFVC Program, adopted in 1995 and most recently updated in 2002, is intended to encourage delinquent plan administrators to comply with their annual reporting obligations under ERISA by reducing these penalties. EBSA updated the DFVC in January 2013, incorporating the mandatory electronic filing of annual reports through the ERISA Filing Acceptance System (EFAST2).

According to Notice 2014-35, IRS will not impose penalties (related to the filing of Form 5500, Form 5500-SF, and Form 8955-SSA) “with respect to a year for which filing of such a form is required on a person who (1) is eligible for and satisfies the requirements of the DFVC Program with respect to a delinquent Form 5500 series return for such year and (2) files separately with the [IRS], in the form and within the time prescribed by this notice, a Form 8955-SSA with any information required to be filed under [Section] 6057 for the year to which the DFVC filing relates (to the extent that the information has not previously been provided to the [IRS]). Relief is provided under the notice only if a Form 8955-SSA is filed on paper with the IRS.

For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700. 

IRS Provides Transition Period for Withholding Agents Complying with FATCA

In Notice 2014-33, issued May 2, the Internal Revenue Service (IRS) announced that “calendar years 2014 and 2015 will be regarded as a transition period” for purposes of enforcement and administration of the Foreign Account Tax Compliance Act (FATCA). The guidance does not directly apply to retirement plans but rather “to withholding agents, foreign financial institutions (FFIs), and other entities” that have withholding responsibilities.

This notice also announces the intention of the U.S. Treasury Department and the IRS to further amend the regulations that a withholding agent or foreign financial institution (FFI) may treat an obligation (which includes an account) held by an entity that is opened, executed, or issued on or after July 1, 2014, and before January 1, 2015, as a “preexisting obligation,” subject to certain modifications. Prior to the issuance of such amendments, taxpayers may rely on the provisions of this notice regarding these proposed amendments to the regulations.

A summary of Notice 2014-33, provided courtesy of Groom Law Group, Chartered, is available on the Council website. For more information, contact Jan Jacobson, senior counsel, 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.

Notice: the information contained herein is general in nature. It is not, and should not be construed as, accounting, consulting, legal or tax advice or opinion provided by the American Benefits Council or any of its employees. As required by the IRS, we inform you that any information contained herein was not intended or written to be used or referred to, and cannot be used or referred to (i) for the purpose of avoiding penalties under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party any transaction or matter addressed herein (and any attachment).