As we enjoy the Silicon Slopes Tech Summit 2020, it has been
great to catch up with executives, investors, and entrepreneurs working to
build the next technology ideas into successful companies. It is interesting to think that we don’t
quantify the economic benefits that one great company, which brings together a
talented team of founders and executives, finds a successful exit, and then
comes back together to do it again at another company, has on an area. There are many legendary technology companies
that have had this effect, creating places like Silicon Valley and other areas
in the country known for incubating technology companies and ideas.
One great thing about knowing and working with the seasoned
investors and entrepreneurs is their ability to help the new generation see how
to solve problems that these companies encounter, and how to avoid the mistakes
that some people have made. In my small
part of this world, the conversations in 2001-2002 with employees and
executives who were too optimistic in the first internet bubble will never be
forgotten. Yes, you can exercise equity
awards like an incentive stock option (ISO) with a promissory note, second
mortgage, or personal bank loan, and if the stock price goes up from there and
the company achieves liquidity in an IPO or acquisition, you could win big with
large gains all taxed at the long-term capital gains rate. I know a number of people who had this great
outcome. However, the other side is that
if the price does not go up, or if the company does not achieve liquidity, then
there can be tax problems. Exercising an
ISO will result in an alternative minimum tax (AMT) adjustment in the year of
exercise for the spread on the date of exercise. If an optionee is subject to the AMT, then
this tax is due to the IRS based on the value at the date of exercise. There is no consideration for the fact that
the shares are not liquid and have not been sold at the time of or at the value
of the corresponding tax obligation, meaning the optionee is gambling that the
value the shares will continue to go up and that there will be liquidity.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2020-01-31 14:44:002020-03-10 14:14:49Take a Bow For the New Revolution, and don’t let the same tax mistakes fool you again
A plan’s definition of “compensation” tends to be one of the
trickier aspects of 401(k) administration.
Having been asked multiple times in the past 12-months whether deferrals
to a nonqualified deferred compensation plan need to be deducted before
determining eligible compensation for 401(k) deferrals (spoiler: they do), it
seems a blog post on the subject is in order.
The vast majority of 401(k) plan documents define
compensation by starting with one of the following base definitions: W-2 (Box
1) compensation; Section 3401(a) compensation; or Section 415 compensation (the
specifics of these base definitions are beyond the scope of this post). Each definition has its nuances with respect
to whether certain types of compensation should be either included or excluded
from the base definition (e.g., fringe benefits or amounts realized from the
exercise of stock options).
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2020-01-22 14:43:382020-01-22 14:43:40The Long and Winding Road… of 401(k) plan compensation definitions
We interrupt our usual Benefits Dial programming – to take a closer look at developments affecting multiple employer plans (MEPs) as part of our series of posts on the recently enacted benefit plan legislation, including the SECURE Act (background here). The reform to MEPs is seen by many as the biggest disruptor to the retirement plan industry. Why? It facilitates the banding together of retirement plan assets from unrelated employers, helping employers punch above their weight. By combining together to form a larger plan, smaller employers can leverage assets with regard to plan services, and maybe most importantly, investment fees paid by participants.
MEPs have long been permitted but many employers have been
unwilling to participate in those plans.
The biggest deterrent has been the “one bad apple rule.” That rule provides that a defect in any
participating employer’s portion of the MEP can impact the tax qualification
of the entire MEP for other participating employers. In other words, if one participating
employer in the MEP is unwilling (or maybe unable) to correct an error, the
whole plan can be disqualified by the IRS.
The SECURE Act helps solve this issue with a special kind of MEP called
a pooled employer plan (PEP). PEPs have
a specific procedure for dealing with tax qualification defects. In short, a participating employer in a PEP
who refuses to correct the error, can be discharged (spun off) from the PEP to
isolate the disqualification impact. The SECURE Act grants relief under ERISA
to boot. Historically, MEPs were
treated as a collection of separate plans unless the underlying employers met
a commonality standard. A PEP (called a
“Group of Plans” under ERISA) is also treated as a single plan for ERISA
purposes under the SECURE Act. This
means, for example, that such plans would be allowed to file a single Form
5500.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2020-01-09 11:11:262020-03-10 14:20:49We Interrupt This Program – Is a Multiple Employer Plan In Your Future?
After being on the verge of enactment last spring but failing to pass, the SECURE Act will become law after all. Congress included the Setting Every Community Up for Retirement Enhancement Act of 2019 (H.R. 1994) (the SECURE Act) in the year-end spending legislation needed to keep the government running. The House passed the Further Consolidated Appropriations Act, 2020 (H.R. 1865) – which included the SECURE Act provisions – on December 17, 2019. The Senate followed on December 19, 2019, and President Trump signed it on the last day possible for the spending bill – December 20, 2019.
For a summary of the major SECURE Act provisions that impact retirement plans, see our previous article. In addition to including the SECURE Act provisions, the year-end legislation adds a few other provisions impacting retirement plans and other benefits. Defined benefit plans such as cash balance plans can now allow in-service withdrawals once a participant reaches age 59-1/2, instead of age 62. The minimum age for in-service withdrawals from 457(b) plans is also lowered to 59-1/2.
For
welfare benefits, the year-end legislation repeals the “Cadillac Tax” which
would have otherwise taken effect in 2022. The Cadillac Tax was part of the
Affordable Care Act (ACA) and would have imposed a 40% excise tax on the insurer
or employer for any “high cost” employer-provided health plan coverage.
Many
of the benefits provisions are effective in 2020, although some are optional.
The legislation generally provides time to amend retirement plans until the
last day of the plan year that begins in 2022, and some governmental plans and
collectively bargained plans have later deadlines until as late as 2024.
We will be covering many of the specific changes in more detail in upcoming blog posts. Sign up to regularly receive our blog posts (which come more often and on more varied topics than our Alerts).
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2019-12-23 09:27:192020-03-10 14:23:10A Little Less Conversation, a Little More Action: Major retirement plan legislation is finally signed into law
Many private companies assume that if valid federal and
state exemptions from registration are available for private company securities
that there is little risk of problems with the Securities Exchange Commission
(SEC). While it is rare for the SEC to
take an interest in private company transactions, many SEC Rules apply to
private company securities and transactions.
In one example, Stiefel Labs (Company) maintained an
Employee Stock Bonus Plan (Plan) with Company contributions funded, at least in
part, by shares of Company stock. As a
private company, repurchases by the Company were the only way for employees to
receive liquid funds for their shares. The
Company engaged independent accountants to perform fiscal year end valuations
and made this valuation information available to Plan participants and used
this value for repurchases for the next year.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2019-12-19 12:14:422019-12-19 12:14:44[Don’t] Tell Me Lies, Tell Me Sweet Little Lies … or the SEC will charge you with fraud
We are often asked by our private company clients about
making changes to outstanding stock options.
In some cases, changes to the number of shares subject to an option are
needed, or to the vesting schedule, or to the allowed payment forms for
exercising the option. The rules
affecting these decisions come from several, primarily tax, authorities, and
the implications to the option and the company are quite varied depending on
the change being made.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2019-12-13 13:14:332020-03-10 14:24:00Sitting On a Dock of the Bay, watching my post-termination exercise period, roll away
The Internal Revenue Service has extended the due date for providing the 2019 Form 1095-C (applicable to large employers as explained below) and the Form 1095-B (generally applicable to insurance carriers) to participants from January 31, 2020 to March 2, 2020. The deadlines for filing the 2019 Forms 1094-B, 1095-B, 1094-C and 1095-C with the IRS remain at February 28, 2020, for paper submissions, or March 31, 2020, if filing electronically.
In addition, the IRS has issued relief for insurance
carriers generally required to provide the Form 1095-B. Because there is no individual penalty for
not having minimum essential coverage in 2019, individuals don’t need the
1095-B in order to calculate a tax penalty or file an income tax return. Therefore, the IRS will not assess a penalty
to entities that do not provide a Form 1095-B if they meet the following
conditions:
The
reporting entity must post a prominent notice on its website stating that
individuals may receive a copy of their 2019 Form 1095-B upon request, along
with contact information to make such a request; and
The
reporting entity must furnish the 2019 Form 1095-B within 30 days of a
request.
https://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.png00adminhttps://www.employeebenefitslawblog.com/wp-content/uploads/2022/10/logo_vertical-v2.pngadmin2019-12-03 10:05:362019-12-03 11:15:07Time keeps on slippin’, slippin’, slippin’… into the future with an extended deadline for Form 1095-C and Form 1095-B reporting
Take a Bow For the New Revolution, and don’t let the same tax mistakes fool you again
/in Equity Compensation, Executive Compensation, IRSby John Ludlum
As we enjoy the Silicon Slopes Tech Summit 2020, it has been great to catch up with executives, investors, and entrepreneurs working to build the next technology ideas into successful companies. It is interesting to think that we don’t quantify the economic benefits that one great company, which brings together a talented team of founders and executives, finds a successful exit, and then comes back together to do it again at another company, has on an area. There are many legendary technology companies that have had this effect, creating places like Silicon Valley and other areas in the country known for incubating technology companies and ideas.
One great thing about knowing and working with the seasoned investors and entrepreneurs is their ability to help the new generation see how to solve problems that these companies encounter, and how to avoid the mistakes that some people have made. In my small part of this world, the conversations in 2001-2002 with employees and executives who were too optimistic in the first internet bubble will never be forgotten. Yes, you can exercise equity awards like an incentive stock option (ISO) with a promissory note, second mortgage, or personal bank loan, and if the stock price goes up from there and the company achieves liquidity in an IPO or acquisition, you could win big with large gains all taxed at the long-term capital gains rate. I know a number of people who had this great outcome. However, the other side is that if the price does not go up, or if the company does not achieve liquidity, then there can be tax problems. Exercising an ISO will result in an alternative minimum tax (AMT) adjustment in the year of exercise for the spread on the date of exercise. If an optionee is subject to the AMT, then this tax is due to the IRS based on the value at the date of exercise. There is no consideration for the fact that the shares are not liquid and have not been sold at the time of or at the value of the corresponding tax obligation, meaning the optionee is gambling that the value the shares will continue to go up and that there will be liquidity.
Read moreThe Long and Winding Road… of 401(k) plan compensation definitions
/in 401(k) Plans, Executive Compensation, Retirement Plansby Ben Gibbons
A plan’s definition of “compensation” tends to be one of the trickier aspects of 401(k) administration. Having been asked multiple times in the past 12-months whether deferrals to a nonqualified deferred compensation plan need to be deducted before determining eligible compensation for 401(k) deferrals (spoiler: they do), it seems a blog post on the subject is in order.
The vast majority of 401(k) plan documents define compensation by starting with one of the following base definitions: W-2 (Box 1) compensation; Section 3401(a) compensation; or Section 415 compensation (the specifics of these base definitions are beyond the scope of this post). Each definition has its nuances with respect to whether certain types of compensation should be either included or excluded from the base definition (e.g., fringe benefits or amounts realized from the exercise of stock options).
Read moreWe Interrupt This Program – Is a Multiple Employer Plan In Your Future?
/in 401(k) Plans, Benefits Plan Creation, DOL, ERISA, Fees, Fiduciary Duties, Investments, IRS, Legislation, Retirement Plans, SECURE Actby Kevin Selzer
We interrupt our usual Benefits Dial programming – to take a closer look at developments affecting multiple employer plans (MEPs) as part of our series of posts on the recently enacted benefit plan legislation, including the SECURE Act (background here). The reform to MEPs is seen by many as the biggest disruptor to the retirement plan industry. Why? It facilitates the banding together of retirement plan assets from unrelated employers, helping employers punch above their weight. By combining together to form a larger plan, smaller employers can leverage assets with regard to plan services, and maybe most importantly, investment fees paid by participants.
MEPs have long been permitted but many employers have been unwilling to participate in those plans. The biggest deterrent has been the “one bad apple rule.” That rule provides that a defect in any participating employer’s portion of the MEP can impact the tax qualification of the entire MEP for other participating employers. In other words, if one participating employer in the MEP is unwilling (or maybe unable) to correct an error, the whole plan can be disqualified by the IRS. The SECURE Act helps solve this issue with a special kind of MEP called a pooled employer plan (PEP). PEPs have a specific procedure for dealing with tax qualification defects. In short, a participating employer in a PEP who refuses to correct the error, can be discharged (spun off) from the PEP to isolate the disqualification impact. The SECURE Act grants relief under ERISA to boot. Historically, MEPs were treated as a collection of separate plans unless the underlying employers met a commonality standard. A PEP (called a “Group of Plans” under ERISA) is also treated as a single plan for ERISA purposes under the SECURE Act. This means, for example, that such plans would be allowed to file a single Form 5500.
Read moreA Little Less Conversation, a Little More Action: Major retirement plan legislation is finally signed into law
/in 401(k) Plans, 403(b) plans, 457(b) plans, Benefits Plan Creation, Defined Benefit Plans, ERISA, Governmental Plans, Health & Welfare Plans, Legislation, Retirement Plans, SECURE Actby Brenda Berg
After being on the verge of enactment last spring but failing to pass, the SECURE Act will become law after all. Congress included the Setting Every Community Up for Retirement Enhancement Act of 2019 (H.R. 1994) (the SECURE Act) in the year-end spending legislation needed to keep the government running. The House passed the Further Consolidated Appropriations Act, 2020 (H.R. 1865) – which included the SECURE Act provisions – on December 17, 2019. The Senate followed on December 19, 2019, and President Trump signed it on the last day possible for the spending bill – December 20, 2019.
For a summary of the major SECURE Act provisions that impact retirement plans, see our previous article. In addition to including the SECURE Act provisions, the year-end legislation adds a few other provisions impacting retirement plans and other benefits. Defined benefit plans such as cash balance plans can now allow in-service withdrawals once a participant reaches age 59-1/2, instead of age 62. The minimum age for in-service withdrawals from 457(b) plans is also lowered to 59-1/2.
For welfare benefits, the year-end legislation repeals the “Cadillac Tax” which would have otherwise taken effect in 2022. The Cadillac Tax was part of the Affordable Care Act (ACA) and would have imposed a 40% excise tax on the insurer or employer for any “high cost” employer-provided health plan coverage.
Many of the benefits provisions are effective in 2020, although some are optional. The legislation generally provides time to amend retirement plans until the last day of the plan year that begins in 2022, and some governmental plans and collectively bargained plans have later deadlines until as late as 2024.
We will be covering many of the specific changes in more detail in upcoming blog posts. Sign up to regularly receive our blog posts (which come more often and on more varied topics than our Alerts).
[Don’t] Tell Me Lies, Tell Me Sweet Little Lies … or the SEC will charge you with fraud
/in Corporate Governance in Benefits, Equity Compensation, Executive Compensation, Fiduciary Duties, Investments, Litigationby John Ludlum
Many private companies assume that if valid federal and state exemptions from registration are available for private company securities that there is little risk of problems with the Securities Exchange Commission (SEC). While it is rare for the SEC to take an interest in private company transactions, many SEC Rules apply to private company securities and transactions.
In one example, Stiefel Labs (Company) maintained an Employee Stock Bonus Plan (Plan) with Company contributions funded, at least in part, by shares of Company stock. As a private company, repurchases by the Company were the only way for employees to receive liquid funds for their shares. The Company engaged independent accountants to perform fiscal year end valuations and made this valuation information available to Plan participants and used this value for repurchases for the next year.
Read moreSitting On a Dock of the Bay, watching my post-termination exercise period, roll away
/in Equity Compensation, Executive Compensation, IRSTax considerations for modifying stock options to extend the post-termination exercise period
by John Ludlum
We are often asked by our private company clients about making changes to outstanding stock options. In some cases, changes to the number of shares subject to an option are needed, or to the vesting schedule, or to the allowed payment forms for exercising the option. The rules affecting these decisions come from several, primarily tax, authorities, and the implications to the option and the company are quite varied depending on the change being made.
Read moreTime keeps on slippin’, slippin’, slippin’… into the future with an extended deadline for Form 1095-C and Form 1095-B reporting
/in Health & Welfare Plans, IRSby Becky Achten and Bret Busacker
The Internal Revenue Service has extended the due date for providing the 2019 Form 1095-C (applicable to large employers as explained below) and the Form 1095-B (generally applicable to insurance carriers) to participants from January 31, 2020 to March 2, 2020. The deadlines for filing the 2019 Forms 1094-B, 1095-B, 1094-C and 1095-C with the IRS remain at February 28, 2020, for paper submissions, or March 31, 2020, if filing electronically.
In addition, the IRS has issued relief for insurance carriers generally required to provide the Form 1095-B. Because there is no individual penalty for not having minimum essential coverage in 2019, individuals don’t need the 1095-B in order to calculate a tax penalty or file an income tax return. Therefore, the IRS will not assess a penalty to entities that do not provide a Form 1095-B if they meet the following conditions:
- The
reporting entity must furnish the 2019 Form 1095-B within 30 days of a
request.
Read more