IRS Issues Tax and Reporting Relief for Proposed Fiduciary Standard Consistent with Department of Labor Regulations

By Monte Schatz

There have been a significant series of regulatory announcements and rulings related to the fiduciary duty and its application to employee benefit plans.  The final fiduciary duty rule became effective on June 7, 2016, and has an applicability date of April 10, 2017. The President by Memorandum to the Secretary of Labor directed the Labor Department to examine the impact of the fiduciary duty rule.  On March 2nd the DOL published 82 FR 12319 seeking public comments about questions raised in the Presidential Memorandum.  The March 2nd notice also provided that a 60-day delay in implementation would be effective on the date of publication of a final rule

The Principal Transactions Exemptions and the accompanying Best Interest Contract provisions, included as part of the fiduciary duty rule, also have an applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018. The BIC Exemption effectively states that the fiduciary advisor must sign a “Best Interests Contract” (BIC) with the client, stipulating that the advisor will provide advice that is in the Best Interests of the client.   The Principal Transactions Exemption allows compensation for certain transactions by certain broker-dealers, insurance agents, and others that will act as investment advice fiduciaries that would otherwise violate prohibited transaction rules that trigger excise taxes and civil liability.

Most investment industry groups’ concerns regarding any non-compliance during a “gap period” of the financial fiduciary rule focused on Department of Labor and its potential civil liability enforcement provisions as outlined under ERISA.  Additional concerns were raised concerning Internal Revenue Service enforcement provisions found in Internal Revenue Code §4975 prohibited transaction rules that provides for the imposition of excise taxes for violations of that rule.

As a result of delays of the Fiduciary Standard rules, the Department of Labor published Field Assistance Bulletin (FAB) 2017-01.  FAB 2017-01 provides that, to the extent circumstances surrounding its decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including retroactive prohibited transaction relief, the DOL will consider taking such additional steps as necessary with respect to the arrangements and transactions covered by the DOL temporary enforcement policy and any subsequent related DOL enforcement guidance.

In Announcement 2017–4 the IRS stated, Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, the Treasury Department and the IRS have determined that it is appropriate to adopt a temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, the IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.

SOURCES:

http://www.asppa.org/News/Article/ArticleID/8480

https://www.irs.gov/pub/irs-drop/a-17-04.pdf

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Nebraska Bill Recognizing Fantasy Sports Fails to Pass

by M. Tom Langan, II

A bill seeking to recognize fantasy sports as a game of knowledge and skill (and not illegal gambling) failed to pass through the Nebraska Legislature.  In addition to permitting fantasy contests for cash prizes, LB862 would have required fantasy contest operators to register with the Department of Revenue and implement certain safeguard features, such as preventing employees from participating and/or sharing confidential “insider” information.  The bill was met with heavy opposition and was indefinitely postponed on April 20, 2016 leaving the legal status of fantasy contests for cash prizes uncertain in Nebraska.

© 2016 Vandenack Williams LLC
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The Supreme Court PPACA Ruling and Your Taxes

On June 25, 2015, the United States Supreme Court made headlines by ruling on King v. Burwell, No. 14-114, pertaining to the Patient Protection and Affordable Care Act (the “Act”). At issue, whether the Internal Revenue Service (IRS) may promulgate regulations that extend subsidies to individuals purchasing health insurance from a federal healthcare exchange instead of a state-based exchange. The question arose because the language of the Act itself suggested the insurance must be purchased through a state exchange in order for the individual to receive a subsidy. The Supreme Court found in favor of the IRS, allowing tax subsidies in the dozens of states that did not establish a state exchange and instead rely solely on the federal exchange.

What does this mean for the individual consumer, from a tax perspective? This means that regardless of the state in which you live, or whether the insurance was purchased on a state or federal exchange, subsidies for health insurance are available. Generally, an individual may receive assistance in obtaining health insurance by qualifying for a premium tax credit, cost sharing reduction subsidy, or Medicaid and CHIP. The premium tax credit,  the focal point of the King v. Burwell case, provides a subsidy based upon the applicant’s income.

Internal Revenue Code § 36B provides a potential premium tax credit for health insurance purchasers, dependent upon the modified adjusted gross income (MAGI) of the taxpayer and individuals in the taxpayer’s household required to file a tax return. If the income is between 100% and 400% of the federal poverty line, currently $11,770 for a one person household, a tax credit may be available. Depending upon the MAGI, the IRS limits the amount a taxpayer is required to pay for a health insurance premium, with a maximum payment range of 2% to 9.5% of the total MAGI. Any premium in excess of the applicable maximum percentage of income will be covered by the premium tax credit. The tax credit is payable in advance, to the insurer, to reduce the premium directly paid by the taxpayer. However, should the advance payments be made, the individual taxpayer must submit IRS Form 8962 with the individual’s annual tax return in order to reconcile the advance tax credit payments provided with the amount of the eligible tax credit based on the income shown on the return. In the event the reconciliation results in the taxpayer receiving a higher or lower tax credit than the amount for which the individual is eligible, an additional credit may be available, or a portion of the advanced credit the taxpayer received may need to be repaid.

King v. Burwell, No. 14-114, allows those purchasing health insurance on the federal healthcare exchange who are receiving subsidies to continue to do so. Although the tax credits are still available, an individual receiving the premium tax credit should be careful to recognize the potential tax implications on their next annual income tax return.

© 2015 Houghton Vandenack Williams

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Federal Contractors Take Note – The Minimum Wage Will Rise to $10.10 in 2015

By Eric W. Tiritilli.

The Department of Labor recently issued a final rule raising the minimum wage for employees working on new covered federal contracts to $10.10 beginning on January 1, 2015.  A “new” contract is one that results from a solicitation issued on or after January 1, 2015, or that is awarded outside of the solicitation process after January 1, 2015.  On January 1, 2016, and annually after that, the minimum wage will be increased in an amount determined by the Secretary of Labor.

Violation of the new Department of Labor rules on minimum wage for covered federal contractors can lead to serious penalties including the withholding of payments due to the contractor to pay wages due to employees and, potentially, debarment.  The Department of Labor notes that the new minimum wage requirements will affect approximately 200,000 workers in the United States.

© 2014 Parsonage Vandenack Williams LLC

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Supreme Court Rules Cell Phones Protected From Warrantless Search

The Supreme Court unanimously ruled today that police may not search the cell phones of people they arrest without a warrant. The decision centered around two cases where police officers arrested suspects. The officers then later searched through their cell phones to find additional evidence.

Police officers generally need a warrant to search a person or their property. But, there are several exceptions to this rule. For example, officers can search the area in a suspect’s immediate control after arrest. Here, the officers argued this included the suspects’ cell phones.

 The Supreme Court disagreed. It focused in part on the fact that searching a person’s cell phone—including data stored in the cloud—was much more intrusive than searching the area immediately around them. This decision is likely to significantly impact data privacy issues in a number of different areas.

© 2014 Parsonage Vandenack Williams LLC

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Tax Court Rules Trusts Can Be Real Estate Professionals

The United States Tax Court has recently released a decision in Frank Aragona Trust v. Commissioner that will affect tax planning for many trusts that own businesses or hold real estate. In that case, a trust operated rental real estate properties and developed other real estate properties. It incurred losses from these activities, which it deducted as non-passive losses.

Under prior law, rental real estate losses were automatically passive losses unless incurred by a “real estate professional.” The IRS’s position in Frank Aragona Trust was that a trust could never qualify as a real estate professional. However, the Tax Court found for the taxpayer. It stated that a trust could qualify as a real estate professional if the rental real estate activities of its trustees were regular, continuous, and substantial. It did not, however, address whether trusts could count the activities of employees who were not trustees. The decision will also have a significant impact on planning for the Net Investment Income Tax.

© 2014 Parsonage Vandenack Williams LLC

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Trusts Can Be Excepted From Passive Activity Losses Related to Real Estate

The IRS has historically argued that trusts are categorically excluded from obtaining an exception to the passive activity rules for rental real estate activities. A recent Tax Court ruling has contradicted this position and indicated that a complex trust engaged in rental real estate activities can qualify for an exception to the passive activity rules.  In determining that the exception was available, the court looked to the activities of the individual trustees and determined that the material participation trust was satisfied. This is an important ruling in the trust income tax regime and creates the opportunity to limit trust exposure to the tax on investment income.

© 2014 Parsonage Vandenack Williams LLC

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