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Depositing
and Reporting Income Tax Withholding
•
Lesli S. Laffie, J.D., LL.M.
AICPA Activities Depositing and Reporting Income Tax Withholding
The AICPA’s Guide to Depositing and Reporting Income Taxes Withheld
Under the Mandatory 20 Percent Withholding Rules (Guide) was updated in
January 2006. It assists tax advisers in dealing with certain issues
that arise for qualified plans required to withhold income taxes under
the mandatory withholding provisions of the Unemployment Compensation
Amendments Act of 1992. The Guide includes references to rules affecting
elective withholdings from qualified plan documents and the general
deposit rules for tax withholding; for access, visit
http://tax.aicpa.org/Resources/Employee+Benefits/Tools+and+ Employer Contributions to HSAs
In December 2005, the AICPA submitted comments to the IRS on the Sec.
4980G proposed regulations (REG-138647-04) on employer contributions to
health savings accounts (HSAs); see
http://tax.aicpa.org/Resources/Employee+Benefits/AICPA+ However, in addition to the statutory carve-out for part-time employees, it recommended that the final regulations allow the comparability rules to be applied separately to employees subject to collective-bargaining agreements, consistent with the carve-outs in other parts of the Code and regulations. Adding this carve-out to the Sec. 4980G final regulations would alleviate the challenge of coordinating multiemployer plans and noncollectively bargained plans for employers offering HSAs in precisely the same manner that this challenge was addressed in the catch-up contribution regulations.
In December 2005, the AICPA sent a letter to Sen. Charles E. Grassley (R-IA), Chair of the Senate Finance Committee, and Rep. William M. Thomas (R-CA), Chair of the House Ways and Means Committee, to correct an inequity in the tax law without increasing complexity and with little revenue effect. The proposal amends the current Sec. 121 exclusion for a spouse dying within a tax year, to offer a 12-month period from the date of death of a spouse, during which the surviving spouse can use the $500,000 gain exclusion. The AICPA’s recommendation would fix the inequity in tax treatment that results when a taxpayer dies late in the year with a simple and fair solution for all taxpayers; see
http://tax.aicpa.org/Resources/Tax+Advocacy+for+Members/Tax+Legislation+and+Policy/
From The IRS
Nonqualified
Deferred Compensation Prop. Regs.
Treasury and the IRS issued Sec. 409A proposed regulations
(REG-158080-04, 9/29/05), which define “nonqualified deferred
compensation” and set forth requirements for avoiding immediate income
taxation and penalties. Effective beginning in 2007, the proposed rules
address: (1) plans and arrangements covered by Sec. 409A; (2) initial
deferral elections; (3) permissible distributions; and (4) subsequent
elections to change the time and form of payment.
Although Sec. 409A became effective starting in 2005, the proposed
regulations offer transition relief. Some actions must have been
undertaken by Dec. 31, 2005, while other actions may be postponed until
the end of 2006.
Information reporting/withholding relief:
Notice 2005-94 temporarily suspended employer and payer reporting and
wage withholding requirements for calendar-year 2005 on Sec. 409A
deferred compensation. However, the IRS warns that it might require
employers to file corrected information returns and provide corrected
statements to employees if gross income is understated due to Sec. 409A.
More guidance expected:
Future guidance will offer operational rules on (1) amounts included in
income due to a Sec. 409A violation; (2) offshore funding arrangements;
(3) applying the 20% tax and interest penalty; and (4) arrangements
triggered by changes in the employer’s financial health. Until further
guidance is issued for arrangements between partnerships and partners,
taxpayers are instructed to continue to rely on Notice 2005-1, Q&A-7.
Stock options and stock appreciation rights generally are excluded from
coverage under Sec. 409A if issued with an exercise price that cannot
fall below the fair market value (FMV) of the stock at the grant date,
and the stock right does not contain any additional deferral feature.
Notice 2006-4 addresses the application of this exclusion to outstanding
stock rights and, specifically, the determination of whether the stock
right has an exercise price no less than the stock’s FMV at the grant
date. For stock issued before 2005, a good faith valuation standard
applies.
For options granted or rights issued after 2004, but not before the
effective date of the final regulations (expected to be Jan. 1, 2007),
the notice relies on the standard set forth in Notice 2005-1 that the
FMV determination may be made using any reasonable valuation method.
Regulation
The IRS has issued final regulations (TD 9237, 1/3/06) on designating
elective contributions to a Sec. 401(k) plan as Roth contributions.
Employees who participate in a Sec. 401(k) plan can choose to make
elective contributions. Such contributions are generally not included in
gross income when contributed (“pre-tax elective contributions”). As of
Jan. 1, 2006, employees who make elective contributions to a Sec. 401(k)
plan can designate some or all of these contributions as Roth
contributions. Designated Roth contributions are elective contributions,
but not pre-tax elective contributions, because designated Roth
contributions are includible in gross income when contributed. However,
when designated Roth contributions are later distributed, any qualified
distributions are excludible from the recipient’s gross income. The
regulations clarify that, to provide for designated Roth contributions,
a qualified cash or deferred arrangement (CODA) must also offer pre-tax
elective contributions.
Definition:
The final regulations define a designated Roth contribution as an
elective contribution under a qualified CODA that is (1) designated
irrevocably by the employee at the time of the cash or deferred election
as a designated Roth contribution; (2) treated by the employer as
includible in the employee’s income at the time the employee would have
received the amount in cash if he or she had not made the cash or
deferred election; and (3) maintained by the plan in a separate account.
Contributions are treated as designated Roth contributions under the
regulations to the extent permitted under the plan. In addition,
designated Roth contributions must satisfy the basic requirements for
elective contributions made under a qualified CODA. This includes the
nonforfeitability requirements and the restrictions on distributions
described in Regs. Sec. 1.401(k)-1(c) and (d).
Separate accounting required:
Under the final regulations, designated Roth contributions must be
placed in a separate account. Thus, contributions and withdrawals of
designated Roth contributions are credited and debited to a designated
Roth contribution account. The account is maintained for the employee
who made the designation, and the plan must maintain a record of the
employee’s investment. Gains, losses and other credits or charges are
separately allocated on a reasonable and consistent basis to the
designated Roth contribution account and other accounts under the plan.
Forfeitures are not allocated to that account.
Effective date:
Sec. 402A, which allows employees to treat elective contributions to a
Sec. 401(k) plan as designated Roth contributions to the extent allowed
by the plan, is effective for tax years beginning after 2005. The final
regulations generally apply to plan years beginning after 2005.
by Eddie Adkins, CPA, Partner, National Tax Office, Grant Thornton LLP, Washington, DC Many deferred compensation agreements between personal service corporations (PSCs)
and their retired owners are subject to a limit based on the PSC’s net income.
This limit is meant to protect the PSC if it experiences financial difficulties.
Typically, if the cap comes into play, the amount otherwise payable is added to
the end of the agreement. Once the deferred compensation is earned, Sec. 409A permits changes to the
payment schedule only under limited circumstances. For instance, generally any
changes in the timing of a distribution must be made 12 months before the date
of the first scheduled payment; the delay in the payment must be for at least
five years from the date the payment would have otherwise been made. Applying these rules to payment caps used by PSCs could result in the
retroactive inclusion of these retirement benefits in income on vesting, and an
additional 20% penalty. The AICPA is drafting comments on the proposed
regulations seeking clarification in this area. For example, do the rules on
payment delays apply to PSC retirement agreements? The AICPA believes that the proposed rules do not adequately address the
determination of payment amounts. For example, if payments are capped based on
an objective written formula, rather than at the firm’s subjective discretion,
is the cap acceptable under Sec. 409A? The AICPA will continue to keep members
informed of developments in this area.
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