New D.C. Transportation Benefits Law Creates Potentially Bumpy Road for Employer Compliance

Soon, many District of Columbia employers will be subject to a new “parking cash-out” law designed to promote environmentally friendly commuting options, i.e., other than individual commutes by automobile.  At a high-level, parking cash-out laws generally require employers that provide free or subsidized parking to offer to pay employees cash in lieu of the subsidized parking if the employee uses another commuting method. Failure to satisfy the act’s requirements may result in the imposition of civil fines and penalties.

The Transportation Benefits Equity Amendment Act of 2020 (the “Act”) became effective June 24, 2020, but originally contained a funding provision that delayed its operational effect.  Similar legislation has been in place in some areas for over 20 years.  The D.C. Council has since repealed the funding provision, and we expect the Act’s requirements to take effect in mid-November 2020.  The timing of the Act’s adoption has raised some eyebrows, as many employers and employees are seeking ways for employees to commute that avoids crowded public transportation in light of the ongoing COVID-19 pandemic.

As this post discusses, the Act’s requirements pose difficult compliance questions for employers.  Guidance would be welcome in helping employers implement the Act, and will hopefully be forthcoming soon.  Employers are encouraged to consult with tax and benefits counsel as they evaluate their fringe benefit programs for compliance with the Act. Continue Reading

IRS Updates Guidance on Qualified Plan Distributions to State Unclaimed Property Funds

The IRS recently published new guidance on the tax withholding and reporting consequences associated with qualified retirement plan distributions to state unclaimed property funds.  In Revenue Ruling 2020-24, the IRS clarified that distributions from qualified retirement plans to state unclaimed property funds are subject to both federal income tax withholding and 1099-R reporting requirements.  In a companion revenue procedure, Rev. Proc. 2020-46, the IRS permitted taxpayers to self-certify for a waiver of the 60-day deadline for rolling over funds between qualified plans when the funds had been distributed to a state unclaimed property fund.

Revenue Ruling 2020-24

Rev. Rul. 2020-24 addresses an employer-sponsored qualified retirement plan which distributed a participant’s $900 accrued benefit to a state unclaimed property fund.  (See earlier Inside Compensation articles discussing benefits of missing participants.)  The IRS ruled that section 3405 requires the employer, who is the plan administrator under the facts of the ruling, to withhold federal income tax on the distribution.  Moreover, the plan administrator is required to report the distribution on Form 1099-R under section 6047. The IRS’s analysis in the ruling is consistent with the approach the IRS took in Rev. Rul. 2018-17, which ruled that the escheatment of amounts from an IRA or qualified annuity to a state unclaimed property fund was subject to withholding under section 3405 and Form 1099-R reporting. That ruling took effect this year.

In general, distributions from qualified plans are subject to withholding under section 3405.  The amount required to be withheld differs depending upon whether the distribution is a periodic or nonperiodic distribution, and whether the distribution is an eligible rollover distribution.  On the question of income tax withholding, the IRS considered the exemptions from withholding under section 3405 and determined that none of those exemptions applied.  In particular, the IRS concluded that, under the facts of the ruling, it would not be reasonable for the employer to conclude that the distribution to a state unclaimed property fund was not includible in the participant’s gross income.  Thus, the employer was required to withhold income tax from the deferred compensation distribution to the unclaimed property fund.

Additionally, because the distribution exceeded $10, the IRS ruled that Section 6047(d) and the 2020 instructions to Form 1099-R require the plan administrator to report to the IRS and the participant the total distribution as income to the participant and the amount of federal income tax withheld on Form 1099-R.

Transition Relief

The IRS provided transitional relief, giving qualified retirement plans until the earlier of January 1, 2022, or the date it becomes reasonably practicable to comport their withholding and reporting procedures with the requirements of this ruling.  Plan administrators who make distributions from qualified plans to state unclaimed property funds should review their procedures to ensure that income taxes are withheld and distributions are properly reported under this new guidance.  Plan administrators should not wait for 2022 to implement the guidance.  To avoid potential penalties, steps should be taken to implement the required withholding and reporting as soon as practicable.

Rev. Proc. 2020-46

To avoid income inclusion from an indirect rollover from a qualified plan or IRA (i.e., a distributed to a participant which the participant deposits into an IRA), taxpayers generally must complete the rollover within 60 days after the distribution.  However, the Treasury Secretary may waive this requirement when failure to do so would be “against equity or good conscience.”  Prior to 2016, a taxpayer generally requested a private letter ruling to waive the 60-day requirement.  In Rev. Proc. 2016-47, the IRS developed a new procedure permitting taxpayers to self-certify to the recipient plan or IRA that the requirements for a waiver of the 60-day rollover deadline were satisfied.  The self-certification procedure is available only under certain circumstances, such as an error by the financial institution, severe damage to the taxpayer’s personal residence, postal error, or the death of a family member, among others.  The self-certifying taxpayer is required to complete the rollover as soon as is practicable after the reason preventing completion of the rollover is resolved.

Rev. Proc. 2020-46 adds “the distribution was made to a state unclaimed property fund” to the list of permissible reasons taxpayers may cite in support of a waiver of the 60-day deadline.  Plan administrators and IRA trustees may rely on the taxpayer’s self-certification in accepting the rollover, so long as they do not have actual knowledge contrary to the self-certification.  The taxpayer should retain a copy of the self-certification, which is subject to verification by the IRS during a later examination.  It should be noted that the distribution must still be otherwise eligible for rollover treatment; the waiver only applies to the 60-day deadline.  The revenue procedure also provides model language to be used for waiver self-certification.

Bad News for New York Nonresident Telecommuters: New York Issues COVID-19 Telecommuting Guidance

Without notice or fanfare, the New York Department of Taxation updated guidance on its website to address the application of its “convenience of the employer” rule to COVID-19 telecommuters.  The question of whether New York would consider employees who are working remotely due to the pandemic as doing so for “convenience” or “necessity,” has been vexing employers and employees since April.  New York’s latest update, which is disappointing but not surprising, has come down on the side of convenience.  As a result, an employee whose principal office is in New York State but who is working outside of the state during the pandemic will generally remain subject to New York State income tax, and the employer should generally continue to withhold New York State tax from the employee’s compensation. Continue Reading

New Hampshire Brings COVID-19 Tax Dispute to Supreme Court; Case Highlights Challenges Facing Employers and Employees

On Monday, October 19, the State of New Hampshire filed a bill of complaint in the Supreme Court of the United States asserting that its southern neighbor, Massachusetts, is violating its state sovereignty.  The suit attacks Massachusetts’s emergency regulations governing the taxation of income during the COVID-19 state of emergency. Massachusetts enacted a rule pursuant to which income earned by a nonresident of Massachusetts who worked in Massachusetts prior to the pandemic but who is working from home outside of the state remains Massachusetts-source income subject to Massachusetts income tax.  Accordingly, employers would be required to continue to withhold Massachusetts income tax on wages paid to those individuals even though the individuals are no longer working in Massachusetts.  Although the Massachusetts guidance is among the most sophisticated and detailed withholding guidance issued by the states during the pandemic, it is not alone in taking this approach.  Rhode Island issued regulations substantially similar to Massachusetts, and the Pennsylvania Department of Revenue has issued similar guidance in the form of FAQs posted on its website.  Other states have hinted at taking a similar approach, but the guidance is often vague and left open to interpretation. Continue Reading

Final Regulations Address TCJA Disallowance for Meal and Entertainment Expenses

On October 9, the IRS published final Treasury Regulations addressing the deduction disallowance of expenses associated with providing entertainment, business meals, and other food and beverages in the Federal Register.  The final regulations, which track the proposed regulations published on February 26, 2020, preserve, with certain limitations, taxpayers’ ability to deduct 50 percent of the cost of business meals, even though the Tax Cuts and Jobs Act (“TCJA”) repealed the directly related and business discussion exceptions to the general prohibition on deducting entertainment expenditures.  Treasury Regulation § 1.274-11 addresses the deduction disallowance under Section 274(a)(1) for entertainment costs.  Treasury Regulation § 1.274-12 addresses the limitations on food or beverage expenses under Sections 274(k) and (n), including the application of exceptions in Section 274(e).

The TCJA’s elimination of a taxpayer’s ability to deduct 50 percent of meal and entertainment expenses meeting the directly related and business discussion exceptions took effect for tax years beginning after December 31, 2017.  In 2018, IRS Notice 2018-76 provided transitional guidance on the deductibility of expenses for certain business meals and other food and beverage expenses under Section 274(a)(1).  The proposed regulations largely adopted the guidance provided in Notice 2018-76, while also providing some significant updates.  The final regulations made only a few substantive changes to the proposed regulations.

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IRS Posts Tax Tip on Backup Withholding

On October 14, 2020, the IRS posted Tax Tip 2020-136 entitled, “Helpful information for taxpayers on backup withholding.”  This particular Tax Tip serves as a great reminder for payers making payments for which backup withholding is required, especially if they are unaware of the troubling consequences of noncompliance. Continue Reading

OASDI (Social Security) Wage Base Up Over 3.7% for 2021

On October 13, the Social Security Administration announced that the Old Age, Survivors, and Disability Insurance (“OASDI”) wage base will increase to $142,800 for 2021.  The 3.7% increase follows a 3.6% increase in the wage base for 2020 and a 3.5% increase for 2019.  Wages in excess of the wage base paid by an employer to an employee are not subject to social security tax.  As a result of the increase, the maximum amount of social security tax paid by an employee in 2021 will be $8,853.60, an increase of $316.20 from 2020.  The maximum amount of social security tax paid by an employer for an employee in 2021 will increase by the same amount.

Regulations Addressing Section 958(b)(4) Repeal Provide Relief for U.S. Payors but Hold the Line on the Portfolio Interest Exception

On October 2, 2019, Treasury and the IRS issued proposed regulations relating to the repeal of section 958(b)(4) by the Tax Cuts and Jobs Act (“TCJA”).  On September 22, 2020, Treasury and the IRS issued final regulations largely following the proposed regulations, along with additional proposed regulations. Continue Reading

IRS Tells Lenders not to File Forms 1099-C for Forgiven PPP Loans

On September 22, 2020, the IRS issued IRS Announcement 2020-12 to inform lenders that they should not file Forms 1099-C with the IRS or furnish copies of the Forms 1099-C to borrowers with respect to the  forgiveness of covered loans made under the Paycheck Protection Program (“PPP”). Continue Reading

IRS Final Regulations on Default Withholding Rates for Periodic Deferred Income Distributions: No Changes for 2021, but Future Rates Not Clarified

The Treasury and IRS have published final regulations governing federal income tax withholding from periodic payments of deferred income made after December 31, 2020. The new regulations follow changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) to the default withholding rate rules. Payors and plan administrators who hoped that the IRS would set out predictable and uniform standards will be disappointed: while the regulations remove the pre-TCJA default withholding rate, they do not replace it with a new default rate. Instead, the Commissioner of the IRS will be responsible for providing sub-regulatory guidance to determine the default rate. At least for calendar year 2021 distributions, however, there appears to be no need for payors and plan administrators to worry about the transition to a new default-rate-determination method. Continue Reading