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Recently Updated Q&As

  • 372. What is the new COBRA election window and subsidy for 2020 and 2021?

    • Editor’s Note: In response to COVID-19, the IRS and DOL announced an extension of the 60-day COBRA election window. The 60-day election window was paused for relevant time periods that include March 1, 2020. The clock is stopped and will not resume ticking until the end of the “outbreak period”. The outbreak period is defined as the window of time beginning March 1, 2020 and ending 60 days after the date that the COVID-19 national emergency is declared ended. The 45-day payment clock and 30-day grace period for late COBRA payments were also paused.


      Planning Point: The emergency period has been extended at least until April 2021. Under ERISA, however, the government only has authority to order relevant time periods to be disregarded for one year.

      The IRS, Department of Treasury, HHS and DOL have clarified that taxpayers subject to the relief will have the applicable periods disregarded until the earlier of (a) one year from the date they were first eligible for relief or (b) 60 days after the announced end of the national emergency (the end of the outbreak period). On the applicable date, the timeframes for individuals and plans with periods that were previously disregarded will resume. In other words, in no case will a disregarded period exceed one year. However, the relief also acknowledges that taxpayers continue to struggle in the wake of the pandemic–and notes that plan fiduciaries should make reasonable accommodations to prevent the loss of benefits or delayed payments where possible.[1]


      Assume the individual terminated employment on February 20, 2020, beginning the 60-day clock to make a COBRA election. Nine days elapse between February 20 and March 1, when the clock is paused. If the emergency is declared ended June 1, 2020, the clock will begin running 60 days later. When the clock begins again, the individual will have 51 remaining days to make a COBRA election.[2]

      The American Rescue Plan Act of 2021 (ARPA) provides free COBRA coverage for a six-month period beginning April 1, 2021 through September 30, 2021 for employees and their family members who lose group health coverage because of involuntary termination or reduced work hours. The new COBRA subsidy applies to all employees who lost employer-sponsored health care due to an involuntary loss of work since the COVID-19 pandemic began. Employees who lost coverage as of April 2020 are potentially eligible for the entire six-month subsidy. Those employees’ 18-month COBRA period includes the period from April 1 through September 30, 2021. However, individuals who are eligible for other group health coverage or Medicare are not eligible. The subsidy is available to both employees who did not elect COBRA coverage during the original election period and those who initially elected COBRA, but let coverage lapse. These individuals must be offered an additional 60-day window to elect COBRA coverage and will not be required to pay retroactive premiums to the original loss-of-coverage date. Plan administrators are required to begin notifying eligible individuals of the subsidy within 60 days of April 1, 2021.

      Generally, individuals remain assistance-eligible individuals (AEIs) during eligibility waiting periods if the period overlaps with the subsidy period. For example, the individual will be an AEI during periods outside the open enrollment period for a spouse’s employer-sponsored health coverage (though once the individual qualifies for the coverage, the subsidy is no longer available).

      Employers who change health plan options must place the AEI in the plan that’s most similar to their pre-termination plan, even if it’s more expensive (and the 100 percent subsidy will continue to apply).

      Importantly, employers who are no longer covered by federal COBRA requirements may still be required to advance the subsidy based on past coverage periods (for example, the employer may no longer be subject to COBRA requirements if the employer terminated employees so that the federal rules no longer apply). If the employer was subject to COBRA when the individual experienced the reduction in hours or involuntary termination, the employer must offer the subsidy.


      Planning Point: The first round of IRS guidance on the new ARPA COBRA premium subsidies clarified the definition of “involuntary termination”–and, thus, offers valuable guidance on who qualifies for the subsidies. An employee is involuntarily terminated if the employee is willing and able to continue working, and yet the employer chooses to end the employment relationship. However, an employee’s termination is considered voluntary if the employee resigns–even if the employee resigns because the employee can no longer find childcare or because a child’s school has closed. Termination for gross misconduct is also treated as a voluntary termination that disqualifies the employee from receiving the subsidy.

      If the employee quits because of concerns about workplace safety, even in response to the employee’s health situation or the health of a household member, it’s treated as a voluntary termination unless the employee can show that the employer’s actions with respect to workplace safety created a material negative change in the employment relationship similar to a constructive discharge. The IRS makes it clear that it takes a facts-and-circumstances analysis to determine whether termination of an employment relationship was involuntary on the employee’s part.[3]


      Notice Requirements

      ARPA requires employers to notify assistance eligible individuals (AEIs) about the availability of the 100 percent COBRA subsidies and their rights under the new law. Earlier this month, the DOL released a series of model notices that must be provided under certain situations. The general notice must be provided within 60 days after a qualifying COBRA event (as is normally the case) for individuals who have any qualifying event between April 1, 2021-September 30, 2021 (including voluntary terminations). Certain employers will also have to provide a notice of alternative deadlines for plans subject to state COBRA laws.

      A “Notice of Extended Election Period” must be provided by May 31, 2021 if the individual had a COBRA qualifying event that caused them to lose federal COBRA coverage because of involuntary termination of employment or reduction in hours between October 1, 2019 and March 31, 2021. Those individuals have a special 60-day window to elect COBRA between April 1, 2021 and September 30, 2021, although the COBRA coverage period cannot exceed the coverage period they would have been entitled to receive based on the original qualifying event. Employers should also attach a Request for Treatment as an Assistance Eligible Individual to the three notices above, providing the form for individuals to complete to request premium assistance.

      The Notice of Expiration of Subsidy Period must be provided between 15 and 45 days before the subsidy ends.


      Planning Point: For taxpayers who lose eligibility upon the end of the last overage period beginning on or before September 30, 2021, the required notice must be given to the impacted individual between August 16 and September 15, 2021. Model notices are available on the Department of Labor website.


      Failure to provide the notices on time can subject the employer to a $100 per day, per beneficiary penalty (up to a maximum of $200 per family, per day).

      Employer Tax Credit

      On the date when the AEI provides the employer with a COBRA election, the employer is entitled to a credit for premiums not paid by the AEI for any coverage period that began before that date. In other words, if the AEI retroactively elects coverage as of April 15, 2021 and provides the election notice in June, the employer is entitled to a credit for premiums not paid from April 15 through June.

      On the first day of each subsequent coverage period (month), the employer is entitled to a credit for premiums the AEI does not pay that month.

      The employer reports the credit and individuals receiving the credit on Form 941 and is entitled to reduce federal employment tax deposits in anticipation of the credit. Like other COVID-19-related tax credits, if tax deposits are not sufficient to cover the entire credit amount, the employer can file Form 7200 with the IRS to receive advance payment of the credit.[4]

       

      [1].      EBSA Disaster Relief Notice 2021-01.

      [2].      See 85 FR 26351 and EBSA Disaster Relief Notice 2020-01.

      [3].      Notice 2021-31.

      [4].      Notice 2021-31.

  • 562. What are the SECURE Act lifetime income rules designed to increase the use of annuities in 401(k)s?

    • The SECURE Act created a fiduciary safe harbor designed to increase the use of annuities to provide lifetime income within the 401(k).  Plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting an objective, thorough and analytical search at the outset (eliminating the need for ongoing monitoring).  The sponsor must also evaluate the insurance carrier’s financial capability to satisfy the annuity obligations, as well engage in a cost-benefit analysis with respect to the annuity offering (the sponsor is permitted to rely upon a written representation from the insurance company demonstrating the carrier’s financial standing).  The written representation must state that the insurance company:

      • Is properly licensed,
      • Has met state licensing requirements for both the year in question and seven prior years,
      • Will undergo financial examination at least once every five years,
      • Will notify the plan fiduciary of any changes in status.[1]

      From this information, to qualify under the safe harbor, the plan sponsor must draw the conclusion that the carrier is financially capable and that the contract cost is reasonable—in other words, the plan sponsor must have no reason to believe the representations are false.  The plan sponsor must also obtain updated written representations at least once a year.

      The plan sponsor must determine that the cost of the annuity option is reasonable in relation to the benefits and features provided by the annuity.  There is no requirement that the plan sponsor choose the least expensive annuity option.[2]

      While this provision is expected to make it easier for plan sponsors to offer annuity options without fear of added fiduciary liability, the SECURE Act also makes the annuity portable once the plan participant has chosen the lifetime income option.   Effective for tax years beginning after December 31, 2019, the annuity can be transferred in a direct trustee-to-trustee transfer between qualified plans (or between a qualified plan and an IRA) if the lifetime income option is removed from the original plan’s investment options.[3]  The option will be available to participants beginning 90 days prior to elimination of the annuity option from their current plan’s investment options (i.e., the portability window remains open for 90 days).[4]

      In connection with the anticipated expansion of annuities within 401(k)s, the SECURE Act also aims to give clients more information that can allow them to evaluate how the annuity option could work for them.  Effective within 12 months after the DOL guidance was released in August 2020, defined contribution plans will be required to provide participants with lifetime income estimates.  Plans must provide this statement at least annually even if the plan does not offer an annuity option.


      Planning Point: The DOL FAQ implement the interim final rule on the SECURE Act lifetime income illustration provisions.  The FAQ clarifies that the earliest statement for which the illustrations are required is a statement for a quarter ending within 12 months of the rule’s effective date (i.e., September 18, 2021) if the plan issues quarterly statements.  Therefore, the illustrations are timely if they were incorporated into any quarterly statement up to the second calendar quarter of 2022.  For non-participant-directed plans, the lifetime income illustrations must be included on the statement for the first plan year ending on or after September 19, 2021 (or, no later than October 15, 2022, which is the deadline for filing the annual return for a calendar year plan).  The FAQ also clarifies that plans are permitted to provide additional lifetime income illustrations as long as the required illustrations are also provided, recognizing that some plans have been including illustrations for many years.


      The SECURE Act itself did not provide many of details about what plan participants should expect.  The DOL rule provides clarification.

      Under the DOL interim final rule, released in August 2020, 401(k) plans and other ERISA-covered defined contribution plans must show plan participants the estimated monthly payment they could receive based upon their account balance and life expectancy.  The plan must also provide the information based on the life expectancy of a participant and a spouse—even if the participant is unmarried—assuming the participant and spouse are the same age.  The spousal information must be presented as a qualified joint and survivor annuity (QJSA).

      In estimating the participant’s lifetime income stream, the plan must make certain assumptions.  The information will assume that benefits begin at age 67 (or the participant’s actual age, if he or she has already reached age 67).  The spousal benefit will be assumed to be 100 percent of the average monthly benefit during the time when both spouses are alive.

      The plan must use the interest rate for specified ten-year constant-maturity Treasury securities and the IRC Section 417(e)(3)(B) unisex mortality tables must be used to determine life expectancies (this is the same table used for most defined benefit plan lump-sum distributions).

      Planning Point: Clients should be advised that the current rules do not require plans to factor in the client’s age or any potential future earnings on the account balance.  Therefore, many clients will see numbers that are much lower than they could realistically expect to receive.

      If the plan actually offers annuities, the actual interest rates can be used, although the uniform assumptions about age upon benefit commencement, marital status, etc. must still be used.

      Plans are also required to provide participants with certain explanations about all of this information.  The DOL rule also contains model language that plans can use to satisfy their obligations and qualify for the fiduciary safe harbor with respect to annuity offerings.

      [1]      ERISA Sec. 404(e)(2).

      [2]      ERISA Sec. 404(e)(3).

      [3]      IRC Sec. 401(a)(38).

      [4]      IRC Sec. 401(k)(2)(B)(i)(VI).

  • 760. Who qualifies for the child tax credit?

    • Editor’s Note: The ARPA expanded and enhanced the child tax credit for the 2021 tax year. For tax years beginning after December 31, 2021 and before January 1, 2022, the child tax credit amount increased from $2,000 to $3,000 per qualifying child. The credit amount is also fully refundable for the 2021 tax year only (under TCJA, $1,400 was refundable, see below). The $3,000 amount is also further increased to $3,600 per qualifying child under the age of six as of December 31, 2021. Also, 17-year-olds will be treated as qualifying children in 2021. The income phaseout ranges for the enhanced tax credit have also been reduced. The phaseout will now begin at $150,000 for married taxpayers filing jointly and $75,000 for single filers (down from $400,000 and $200,000 for the standard child tax credit). Additionally, the IRS will now pay 50 percent of the 2021 child tax credit in the second half of 2021, using 2020 tax data (although the amounts may be subject to clawback in cases where the taxpayer does not qualify using 2021 tax information).

      Eligible taxpayers are not required to take any action to receive the advance payments on the 15th of every month. Monthly payments will total up to $300 for each child under age six and up to $250 per month for each child aged six and older. Depending upon the information the IRS has on file, payments will be made via direct deposit, paper checks or debit cards. The advance payments will total up to 50 percent of the amount the taxpayer is eligible to receive based on 2020 filing information. According to new IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 can file simplified 2020 returns to receive monthly advance payments of the expanded child tax credit. Those taxpayers can file Form 1040, Form 1040-SR or Form 1040-NR to provide Social Security numbers, addresses, and other information. Those taxpayers must write “Rev. Proc. 2021-24” on the forms. Taxpayers who had $0 in adjusted gross income (AGI) can report $1 in AGI in order to file electronically and qualify for advance payments.[1]


      Planning Point: The IRS Child Tax Credit Update Portal provides information about the client’s eligibility for advance child tax credit payments and information about how those payments are made.  Clients can use this portal to set up direct deposit payments or change their bank account information. Taxpayers who do not elect direct deposit will receive a paper check.  Clients can also use the portal to elect to stop receiving advance payments and instead claim their entire child tax credit in a lump sum when they file their 2021 tax returns.  Married couples who elect to unenroll must each separately unenroll.  If only one spouse enrolls, the other will continue to receive 50 percent of the otherwise available monthly child tax credit.  Clients may wish to unenroll if they do not anticipate qualifying for the payment based on their 2021 income or if they would prefer to receive a larger tax refund.


      A child tax credit is available for each “qualifying child” (defined below) of eligible taxpayers who meet certain income requirements. The child tax credit is $1,000 ($2,000 for tax years beginning after 2017 and before 2026, see below).[2]

      Additional Rules for Tax Years Beginning After 2017 and Before 2026

      An expanded $2,000 child tax credit is available for tax years beginning after 2017 and before 2026 ($1,400 of this per-child credit is refundable). The taxpayer must include the Social Security number for each child for which the refundable portion of the child tax credit is claimed.[3] The $1,400 refundable amount will be indexed for inflation and rounded to the next multiple of $100 (the amount has remained at $1,400 through 2021, but see Editor’s Note, above).[4]

      A new family tax credit was created to allow for a $500 nonrefundable credit for dependent parents and other non-child dependents (the requirement for furnishing a Social Security number does not apply to this family tax credit).[5]


      Planning Point: For purposes of the definition of “dependent” for this provision, the IRS has released guidance stating that the exemption amount (which was otherwise reduced to zero for 2018-2025) will be treated as though it remained at the pre-reform $4,150 amount in 2018, $4,200 in 2019, $4,300 in 2020-2021, and $4,400 in 2022.[6]


      The credit will phase out for taxpayers with AGI of $400,000 (joint returns) or $200,000 (all other filers). The phase out amounts are not indexed for inflation.[7] As is the case with the suspension of the personal exemption, these provisions are set to expire after 2025.

      The term qualifying child means a “qualifying child” of the taxpayer (as defined under IRC Section 152(c) – see below) who has not attained the age of seventeen.[8]

      “Qualifying child” means, with respect to any taxpayer for any taxable year, an individual:

      (1)  who is the taxpayer’s “child” (see below) or a descendant of such a child, or the taxpayer’s brother, sister, stepbrother, or stepsister or a descendant of any such relative;

      (2)  who has the same principal place of abode as the taxpayer for more than one-half of the taxable year; and

      (3)  who has not provided over one-half of such individual’s own support for the calendar year in which the taxpayer’s taxable year begins.[9]

      Additionally, a qualifying child must be either a citizen or a resident of the United States.[10]

      The term “child” means an individual who is: (1) a son, daughter, stepson, or stepdaughter of the taxpayer; or (2) an “eligible foster child” of the taxpayer.[11] An “eligible foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment decree, or other order of any court of competent jurisdiction.[12] Any adopted children of the taxpayer are treated the same as natural born children.[13]

      The amount of the credit is reduced for taxpayers whose modified adjusted gross income (MAGI) exceeds certain levels. A taxpayer’s MAGI is his adjusted gross income without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions. Prior to 2018, the credit amount was reduced by $50 for every $1000, or fraction thereof, by which the taxpayer’s MAGI, exceeds the following threshold amounts: $110,000 for married taxpayers filing jointly, $75,000 for unmarried individuals, and $55,000 for married taxpayers filing separately.[14]

      Prior to 2018, the child tax credit was refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000 (previously, this amount was $10,000; see below).[15] For example, if the taxpayer’s earned income is $16,000, the excess amount would be $13,000 ($16,000 – $3,000 = $13,000), and the taxpayer’s refundable credit for one qualifying child would be $1,950 ($13,000 x 15 percent = $1,950). For families with three or more qualifying children, the credit is refundable to the extent that the taxpayer’s Social Security taxes exceed the taxpayer’s earned income credit if that amount is greater than the refundable credit based on the taxpayer’s earned income in excess of $3,000.[16] The previously applicable $10,000 income floor was indexed for inflation. ARRA 2009 reduced the dollar amount to $3,000 for 2009 through 2012.[17] ATRA extended the $3,000 floor amount through 2017, and the PATH Act made this provision permanent.[18] See above for the rules governing the credit from 2018-2026. (Prior to 2001, the child tax credit was refundable only for individuals with three or more qualifying children.)[19]

      The nonrefundable child tax credit can be claimed against the individual’s regular income tax and alternative minimum tax (see Q 760). The nonrefundable child tax credit cannot exceed the excess of (i) the sum of the taxpayer’s regular tax plus the alternative minimum tax over (ii) the sum of the taxpayer’s nonrefundable personal credits (other than the child tax credit, adoption credit, and saver’s credit) and the foreign tax credit for the taxable year.[20] For tax years beginning after 2001, the refundable child tax credit need not be reduced by the amount of the taxpayer’s alternative minimum tax.[21] The nonrefundable credit must be reduced by the amount of the refundable credit.[22]

      Some additional restrictions applying to the child tax credit include: (1) an individual’s tax return must identify the name and taxpayer identification number (Social Security number) of the child for whom the credit is claimed; and (2) the credit may be claimed only for a full taxable year, unless the taxable year is cut short by the death of the taxpayer.[23] For purposes of applying a uniform method of determining when a child attains a specific age, the Service has ruled that a child attains a given age on the anniversary of the date that the child was born (e.g., a child born on January 1, 1987, attains the age of 17 on January 1, 2004).[24] The IRS stated that it would apply Revenue Ruling 2003-72 retroactively and would notify those taxpayers entitled to a refund for 2002 as a result of Revenue Ruling 2003-72.[25]

      __________________

      [1].      Rev. Proc. 2021-24.

      [2].     IRC Sec. 24(a).

      [3].      IRC Sec. 24(h)(7).

      [4].      IRC Sec. 24(h).

      [5].      IRC Sec. 24(h)(4).

      [6].      Notice 2018-70, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45.

      [7].      IRC Sec. 24(h)(3).

      [8].     IRC Sec. 24(c)(1).

      [9].     IRC Sec. 152(c).

      [10].   IRC Sec. 24(c)(2).

      [11].   IRC Sec. 152(f)(1).

      [12].   IRC Sec. 152(f)(1)(C).

      [13].   IRC Sec. 152(f)(1)(B).

      [14].   IRC Sec. 24(b)(2).

      [15].   IRC Sec. 24(d)(1)(B)(i).

      [16].   IRC Sec. 24(d)(1).

      [17].   IRC Sec. 24(d)(3).

      [18].    ATRA, Sec. 103.

      [19].   IRC Sec. 24(d), prior to amendment by EGTRRA 2001.

      [20].   IRC Sec. 24(b)(3).

      [21].   IRC Sec. 24(d).

      [22].   IRC Sec. 24(d)(1).

      [23].   IRC Secs. 24(e), 24(f).

      [24].   Rev. Rul. 2003-72, 2003-2 CB 346.

      [25].   IRS Information Letter INFO-2003-0215 (8-29-2003).

  • 769. What is the new paid sick leave law enacted under the Families First Coronavirus Response Act (FFCRA) to provide assistance during the COVID-19 pandemic? How were FMLA leave rules expanded?

    • In response to the COVID-19 pandemic, Congress enacted the Families First Coronavirus Response Act (FFCRA) in March 2020, which applies to private employers with fewer than 500 employees (and government employers) and made three key changes to the law.

      The Act: (1) provided 80 hours (10 days) of paid sick leave for employees (pro-rated for part-time workers), (2) expanded Family and Medical Leave Act (FMLA) protections and (3) provided a tax credit for employers who pay employee wages under the new rules.


      Planning Point: Employers who temporarily closed were under no obligation to provide paid leave to employees under the FFCRA. Only those who continued to have work for the employee to perform were required to provide the paid leave during 2020.  For 2021, employers had the option of providing paid leave and receiving a tax credit but were not required to offer paid time off.


      The additional paid sick leave is capped at $511 per day (total of $5,110) for employees who cannot go to work or telecommute because they:

      (1)  experienced COVID-19 symptoms and seeking a diagnosis,

      (2)  were advised by a healthcare provider to self-quarantine (the advice had to be specific to the patient, based on the provider’s belief that the person contracted COVID-19 or was particularly vulnerable to the virus), or

      (3)  was subject to government-mandated quarantine or a recommendation to self-quarantine.

      The additional paid sick leave was capped at 2/3 of the employee’s pay rate, subject to a maximum of $200 per day or $2,000 total if the employee was (1) caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable (whether or not that care provider is usually paid for childcare services) or (3) experiencing “substantially similar conditions” specified by Health and Human Services (HHS).  In July 2021, the IRS clarified that an employer is entitled to a tax credit for paid leave provided to employees who take time off to receive a COVID-19 vaccine, accompany a household or family member who is receiving a COVID-19 vaccine or to care for a household or family member who is recovering from a reaction to immunization.


      Planning Point: The Department of Labor (DOL) regulations are clear that orders to quarantine or isolation orders included “stay at home” orders issued by federal, state and local governments in response to COVID-19. This included shelter in place orders and stay-at-home orders that applied to certain categories of taxpayers (those over 65, for example).


      Planning Point: For paid leave based on the need to provide childcare, only one caregiver was eligible for the leave. Further, if the child was over age 14, the parent was required to provide an explanation of the special circumstances giving rise to the need for care during daylight hours.[1]


      The 14 days of paid sick leave generally had to be (1) available continuously and (2) available from the date beginning 15 days after the FFCRA effective date (the requirement expired after December 31, 2020). The applicable rate of pay depended on whether the employee was a salary worker, hourly worker or variable hourly worker. Pay for salary workers was payment for 80 hours. Hourly workers were paid for the average number of hours they were scheduled to work during the two-week period.


      Planning Point: Each employee was only entitled to one cumulative period of leave. For example, if the employee used 30 hours of paid leave with one employer and changes employers, the second employer was only obligated to provide the remaining 50 hours of paid leave.


      A formulaic approach was taken with respect to employees whose hours vary, based on historical or anticipated hours of work. This approach based sick pay on the average number of hours that the employee was scheduled per day over the six-month period ending on the date on which the employee took leave, including hours for which the employee took leave of any type or (2) if the employee did not work over such period, the reasonable expectation of the employee at the time of hiring of the average number of hours per day that the employee would normally be scheduled to work.

      Payment was also based on whether the employee missed work because of personal coronavirus diagnosis (full payment of the employee’s regular rate) or based on a family member’s situation (2/3 of the employee’s regular rate).

      The 80 hours of leave was required in addition to benefits already offered by the employer. Employers could not force employees to use other leave benefits simultaneously. However, employers could agree to allow employees to supplement FFCRA paid leave (when only 2/3 pay was available) with otherwise available employer-sponsored leave so that the employee received 100 percent of pay. Employers could not require employees to use their leave to do so. If an employer allowed FFCRA leave to be supplemented with employer-sponsored leave, only the FFCRA portion of the pay was available for tax credit purposes.

      The DOL regulations created some uncertainty over the concurrent use of leave, but later-released FAQ clarified this point. An employer could require that any paid leave available to an employee under the employer’s policies to allow an employee to care for children because of COVID-19-related childcare needs run concurrently with paid expanded FFCRA FMLA leave.

      The employer was required to pay the employee’s full pay during the leave until the employee had exhausted available paid leave under the employer’s plan—including vacation and/or personal leave (typically not sick or medical leave). However, the employer could only obtain tax credits for wages paid at 2/3 of the employee’s regular rate of pay, up to the daily and aggregate FFCRA limits ($200 per day or $10,000 in total).

      If the employee exhausted available paid leave under the employer’s plan, but had more paid FFCRA FMLA leave available, the employee received any remaining paid FFCRA leave (subject to the FFCRA caps). If both employer and employee agreed, and subject to federal or state law, paid leave provided by an employer could supplement 2/3 pay under the expanded FMLA provisions so that the employee received the full amount of the employee’s normal compensation.

      An employee could elect—but could not be required by the employer—to take paid sick leave under the expanded FMLA rules or paid leave under the employer’s plan for the first two weeks of unpaid expanded family and medical leave, but not both. If, however, an employee used some or all paid sick leave under the FFCRA, any remaining portion of that employee’s first two weeks of expanded family and medical leave could be unpaid. During the period of unpaid FMLA leave, the employee could choose—but the employer could not require—to use paid leave under the employer’s policies that would be available to the employee to take in order to care for the employee’s child or children childcare (or school) was unavailable due to a COVID-19 related reason concurrently with the unpaid leave.


      Planning Point: The new paid leave rule was effective April 1, 2020. Employers were not permitted to “deduct” leave taken before that date from the eighty hours of paid sick leave.


      Small businesses with fewer than 50 employees were exempt from the new rules if providing the leave would jeopardize the viability of the business. See Q 775 for more information on this exemption.

      FMLA eligibility was be extended to apply to all employers (not only those with 50 plus employees) and to employees who have worked at least 30 days (rather than 12 months). The employer was required to provide up to 12 weeks of leave (with the first two unpaid, and the remaining paid at 2/3 of the employee’s regular rate, capped at $200 per day or $10,000 total). (The first two weeks could be paid under the expanded 80-hours of paid sick leave). This relief was available if the employee was caring for a child because the school or care provider was unavailable due to COVID-19 and the employee was unable to work or telecommute.

      FFCRA prohibited covered employers from retaliating or otherwise discriminating against employees for taking paid sick leave or paid FMLA leave. See Q 777.

      The employer tax credit was computed each quarter, allowing as a credit (1) the amount of qualified paid sick leave wages paid in weeks one to two, and (2) qualified FMLA wages paid (in the remaining ten weeks) during the quarter. The credit was taken against the employer’s employment tax liabilities, including Social Security, Medicare and federal income tax withholding. Employers could access amounts that would otherwise be deposited with the IRS with respect to wages paid after April 1, 2020.


      Planning Point: According to IRS FAQ, there is no credit for the employer portion of the Social Security tax because the qualified leave wages are not subject to this tax.


      Amounts in excess of the employer’s taxes due were refundable as a credit (in the same manner as though the employer had overpaid taxes during the quarter).

      Employers could also claim a tax credit for qualified health plan expenses to provide and maintain a group health plan allocable to the employee’s qualified leave wages.


      Planning Point: IRS guidance clarified that the credit for the full amount of qualified leave payments, allocable qualified health expenses and the employer’s share of the Medicare tax are allowed against employment taxes on all compensation paid to all employees.[2]


      To claim the credit, employers simply retained the amount of the credit. For example, if the employer pays $10,000 in qualifying wages and is responsible for payroll taxes of $15,000 for the period, the employer subtracts the $10,000 from that period’s payroll tax payment. The employer is entitled to withhold payments from the employer and employee portions of the Social Security and Medicare tax that the employer is responsible for withholding and paying over to the IRS, as well as from any federal income tax withholding.  If the available credit exceeded the employer’s withholding obligations, the employer could file IRS Form 7200 to claim the remaining amounts.

      Self-employed taxpayers under similar circumstances also qualify for the credits, and could reduce estimated tax payments.

      [1].      See IRS FAQ, available at: https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs.

      [2].      Note that IRS and DOL guidance has been released on a rolling basis. IRS FAQ on the credit are available here: https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs.

  • 1015. What is FBAR, and does a U.S. citizen living in Canada need to be concerned with FBAR requirements?

    • An “FBAR” is a Report of Foreign Bank and Financial Accounts (“FBAR”) that is prepared by a taxpayer and accompanies a tax return. In addition to having to file a U.S. tax return, U.S. citizens with a financial interest in a foreign bank account or brokerage account, for example, that has an aggregate value of over $10,000 during the calendar year is likely responsible for filing an FBAR FinCEN Form 114 with the IRS.[1] FBAR disclosure includes registered Canadian accounts such as RRSPs.


      Planning Point: Both the Ninth Circuit and a Texas district court have confirmed that the total FBAR penalties that can be imposed on an individual should be limited to $10,000 per year, rather than $10,000 per financial account.  However, the IRS has continued to attempt to assess penalties on a $10,000 per account basis.  The most recent challenge to that rule is being held in the District Court for the Northern District of Georgia.[2]


      The fact that a U.S. citizen resides in Canada does not alleviate the responsibility of an individual for filing an FBAR if the individual has a Canadian bank account or other Canadian financial accounts. Thus, U.S. citizens who are not compliant with U.S. filing requirements may want to consider becoming compliant by means of the IRS Offshore Voluntary Disclosure Program.[3]  However, the IRS eliminated this voluntary compliance program on September 28, 2018. The streamlined filing compliance procedures program (available to taxpayers who may not have been aware of their filing obligations) will continue in place, but the IRS has indicated that it may also be winding down in the future.


      Planning Point: For most U.S. persons, the FBAR is due by April 15 (the federal income tax filing deadline) and filed along with their federal income tax return.  However, taxpayers are entitled to an automatic six-month FBAR filing extension.  Under the extension, taxpayers have until October 15 to report their foreign accounts.  Taxpayers are not required to request an extension to obtain the additional time to file.  However, taxpayers who missed the filing deadline in prior years should consult with a qualified tax professional before taking any action in the current tax year.  Taxpayers with outstanding FBAR filing obligations in prior years could face significant penalties and even a potential criminal investigation.


      [1].      http://www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf “IRS FBAR Reference Guide”.

      [2]      See U.S. v. Boyd, 991 F.3d 1077 (9th Cir. 2021) and U.S. v. Bittner, USDC No. 4:19-CV-415 (E.D. Tax. Nov 30, 2021).

      [3].      https://www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program  IRS: Offshore Voluntary Disclosure Program.

  • 3739. Under the Multiemployer Pension Reform Act of 2014, can a plan reduce a participant’s benefit levels?

    • In some cases, a plan may reduce the benefits of plan participants and beneficiaries. The Multiemployer Pension Reform Act of 20141 (MPRA) created a new type of plan status, known as “critical and declining status” that applies to plans that are projected to become insolvent within either (1) the current plan year, or within fourteen subsequent plan years or (2) the current year, or within nineteen subsequent plan years if (a) the ratio of inactive to active participants exceeds two to one or (b) the plan is less than 80 percent funded.2

      If a plan is in critical and declining status, the plan may temporarily or permanently reduce any current or future payment obligations to plan participants or beneficiaries, whether or not those benefits are in pay status at the time of the reduction.3 Once benefits are suspended, the plan has no future liability for payment of benefits that were reduced while in critical and declining status.4

      In order to reduce benefits, however, the plan actuary must certify that the plan is projected to avoid insolvency, assuming that the reductions remain in place either indefinitely or until the expiration date set by the plan’s own terms. The plan sponsor must also determine that the plan is projected to remain insolvent unless benefits are reduced, despite the fact that the plan has taken all reasonable measures to avoid insolvency.5

      Planning Point: There has been increasing activity to reduce plan benefits under the 2014 law in recent years, so much of an increase that the U.S. Chamber of Commerce described the situation as a “crisis”.6 The multiemployer Central States Pension Fund applied to the PBGC to approve benefit reductions but was rejected on the basis the cuts would be insufficient to save the fund. However, the request of the Ironworks Union Local No. 17 Pension Fund was approved by the PBGC and by its members in 2017 to become the first to reduce retiree pension benefits under the law.7 More plans have now followed.8

      The problem of insolvent multi-employer pension plans recently received study from the GAO as part of its “High Risk Series.” In the report, the GAO assessed the risks of these pension liabilities and made recommendations to Congress in February of 2017. In addition, the head of the PBGC has predicted that based upon current trends the PBGC’s fund could be expended by 2025. This has become a priority for Congress and new legislation, allowing loans to plans and consolidation of plans to increase solvency, might be expected as a consequence.9 In light of the rapidly evolving guidance and perhaps new law in this area, practitioners will need to check the status of any legislation and all new PBGC guidance before proceeding to formally request a reduction in benefits for a plan.

      In 2021, the American Rescue Plan Act (ARPA) provided relief designed to address the insolvency problem. The PBGC has since issued an interim final rule implementing the special financial assistance (SFA) rule for multiemployer pension plans in the ARPA. Eligible plans may apply to receive a lump-sum payment from a new Treasury-backed PBGC fund. Under the new rules, eligible plans are entitled to amounts that are sufficient to pay all benefits for the next 30 years. According to the PBGC interpretation, that means sufficient funds to forestall insolvency through 2051 (but not thereafter). Plans are entitled to receive the difference between their obligations and resources for the period. “Obligations” are defined to include benefits and administrative expenses that the plan is reasonably expected to pay through the last day of the plan year ending in 2051. “Resources” are defined to include the fair market value of plan assets and the present value of future anticipated contributions, withdrawal payments and other expected payments.

      Surprisingly, the PBGC rule provides that SFA funds will be taken into account when calculating a plan’s withdrawal liability. However, plans are required to use mass withdrawal interest rate assumptions published by the PBGC when calculating withdrawal liability until the later of (1) 10 years after the end of the year in which the plan received the SFA or (2) the time when the plan no longer holds SFA funds. The PBGC has also stated that it intends to propose a separate rule under ERISA Section 4213(a) to prescribe actuarial assumptions that may be used by a plan actuary in determining an employer’s withdrawal liability.


      1. Consolidated and Further Continuing Appropriations Act, 2015, Pub. Law. No. 113-235.

      2. IRC Sec. 432(b)(5).

      3. IRC Sec. 432(e)(9)(B)(i).

      4. IRC Sec. 432(e)(9)(B)(iii).

      5. IRC Sec. 432(e)(9)(C)(ii).

      6. See generally, “The Multi-Employer Pension Plan Crisis: The History, Legislation and What’s Next,” U.S. Chamber of Commerce (December 2017).

      7See generally, www.PBGC.gov for more detail on recent plan terminations and benefit reductions actions and activities on multiemployer as well as single employer pension plans.

      8. See e.g., letter to Ironworkers Local 16 Pension Funds trustees with preliminary approval of benefits reduction proposals, dated August 1, 2018.

      9. See GAO-17-317, High-Risk Series, Progress on Many High Risk Areas, While Substantial Efforts Needed on Others, GAO, Feb. 2017.

  • 3777. How does a SIMPLE 401(k) plan differ from a 401(k) safe harbor plan?

    • SIMPLE 401(k) plans (Q 3778) also provide a design-based alternative to the use of a safe harbor plan. Some of the differences between safe harbor plans and SIMPLE 401(k) plans are as follows:

      (1) Employees covered by a SIMPLE 401(k) plan may not be participants in any other plan offered by the employer, although employees participating in a safe harbor plan may be covered by more than one plan.

      (2) SIMPLE 401(k) plans are subject to the lower dollar limits on elective deferrals and catch-up contributions that apply to SIMPLE IRAs, rather than those applicable to traditional 401(k) plans.

      (3) Employers offering a SIMPLE 401(k) plan may not offer any contributions other than those provided under the SIMPLE 401(k) requirements, although employers maintaining a safe harbor plan may do so within the limitations described in Q 3775.

      (4) Safe harbor plans may be offered by any employer, although SIMPLE 401(k) plans are available only to employers with 100 or fewer employees earning $5,000 or more in the preceding year.

      (5) Contributions required under a safe harbor design may be made to a separate plan of the employer, although contributions required under a SIMPLE 401(k) design must be made to the SIMPLE 401(k) plan.

      (6) A SIMPLE 401(k) plan must provide the required notice to employees at least sixty days before the beginning of the plan year while safe harbor 401(k) plans must provide notice at least thirty days before the beginning of the plan year, except in the case of certain nonelective contribution safe harbor plans.[1]

      (7) A SIMPLE 401(k) plan cannot be established by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. It requires a formal written plan document.

      Planning Point: A SIMPLE 401(k) must file a Form 5500 but SIMPLE IRAs do not. Anyone considering a SIMPLE 401(k) plan can do the same funding in a SIMPLE IRA. Note that the penalties for failing to file a Form 5500 are steep and increase with every day the filing is late. Pre-SECURE Act, the IRS could assess a penalty of up to $25 per day with a cap of $15,000 per year.  Effective for years beginning after December 31, 2019, the penalty has increased to $250 per day for late filers and up to $150,000 per plan year (note that the additional DOL penalty exceeds $2,000 per day with no annual cap).[2]


      Planning Point: The SECURE Act now allows employers to adopt retirement plans after the close of the employer’s tax year (by the due date, including extensions, for filing its tax return).  The employer may elect to treat the plan as having been adopted as of the last day of the tax year (the new rule applies after December 31, 2019).  If an employer adopts a plan prior to the tax filing deadline in 2021 and treats the plan as having been adopted as of the last day of the employer’s 2020 tax year, the plan sponsor is not required to file Form 5500 for the plan year that begins during the employer’s 2020 tax year.  The first Form 5500 required to be filed instead will be the 2021 Form 5500. The plan sponsor should check a box on the 2021 Form 5500 indicating that the employer elects to treat the plan as retroactively adopted as of the last day of the 2020 tax year.

      _______________
      [1]      Per the SECURE ACT, Sec. 103, the annual participant notice has been eliminated for nonelective contribution safe harbor plans.

      [2]      IRC Sec. 6652(e).  See SECURE Act, Sec. 403.

  • 3912. What restrictions apply to the assignment or alienation of a participant’s qualified plan benefit?

    • A qualified plan must provide that benefits under the plan generally may not be assigned, alienated, or subject to garnishment or execution.[1] Limited exceptions are provided, including a Qualified Domestic Relations Order (“QDRO,” see Q 3915), for collection of taxes or certain federal judgments (see Q 3913), or when a participant has committed a breach of fiduciary duty, or a criminal act, against the plan (see Q 3914).[2]

      The U.S. Supreme Court has held that, for purposes of the anti-alienation provision, a working business owner and the owner’s spouse are ERISA-protected participants, provided the plan covers one or more employees other than the owner and spouse.[3]

      Bankruptcy Protection

      The Supreme Court has held that qualified plan interests generally are protected from the reach of plan participants’ creditors in bankruptcy.[4] The  Supreme Court also has extended the protection offered to qualified plan assets under the federal Bankruptcy Code to an IRA containing a rolled over lump sum distribution from a qualified plan.[5] Even where it is unclear whether a plan was tax qualified, lower courts have allowed anti-alienation provisions to stand.[6]


      Planning Point: The U.S. Bankruptcy Court for the Western District of North Carolina recently held that inherited 401(k)s may also receive creditor protection in bankruptcy if the funds remain in the inherited account when the bankruptcy petition is filed.  The court specifically distinguished this treatment for ERISA-covered plans from the treatment of inherited IRAs, which may not be protected in bankruptcy (in Clark v. Rameker,[7] the Supreme Court unanimously ruled that inherited IRAs were not “retirement funds,” and were thus not entitled to bankruptcy protection.  A key factor in the case was the fact that the funds remained within the inherited 401(k), which was set up by the financial institution in the debtor’s name.  However, this case was decided by a lower district court and is apparently a case of first impression.  Therefore, clients should proceed cautiously and examine state laws when determining whether inherited 401(k)s can be excluded from a bankruptcy estate.[8]


      Payment of a participant’s accrued benefit to a bankruptcy trustee pursuant to a bankruptcy court order, even with the participant’s consent, is a prohibited alienation for qualification purposes.[9] If the plan permits and the participant consents, however, a plan administrator may draw a loan check or a hardship withdrawal check payable to the participant and send such checks directly to the bankruptcy trustee, to be endorsed over to the trustee by the participant, without violating the anti-alienation prohibition.[10]

      A Bankruptcy Code requirement that debtors apply all “projected disposable income to be received … to make payments under the [bankruptcy] plan” does not require a plan participant to take out a plan loan to pay toward his or her debt, because plan loans are not “income” for bankruptcy purposes.[11] If a participant has already taken a plan loan and subsequently files for bankruptcy, amounts used to repay the loan do not receive preferential treatment merely because the loans are secured by plan assets. In at least two rulings, the payments were not deemed necessary for the participant’s “maintenance and support.”[12]


      Planning Point: In a 2021 decision, the Sixth Circuit Court of Appeals confirmed that 401(k) contributions made by debtors in Chapter 13 bankruptcy are not always protected if the debtors had not regularly contributed to the account in the six months prior to filing for bankruptcy.  In other words, debtors cannot shield assets from bankruptcy by beginning to make contributions after filing for bankruptcy.  In this case, the court denied the debtors’ request to exclude $1,375 per month from their disposable income to contribute to a 401(k).  The court confirmed the denial even though the debtor had made contributions in the past, but stopped because he accepted a new job that did not offer a 401(k) savings option.  However, in a similar case where the debtor had been making regular 401(k) contributions in the six months prior to bankruptcy, the debtors were permitted to withhold their contributions from disposable income.[13]


      QDRO Exception

      A plan may not distribute, segregate, or otherwise recognize the attachment of any portion of a participant’s benefits in favor of the participant’s spouse, former spouse, or dependents unless such action is mandated by a QDRO (Q 3914).[14] The voluntary partition of a participant’s vested account balance between the participant’s spouse and the participant in a community property state is an alienation of benefits.[15] The Tax Court ruled that a participant’s voluntary waiver of benefits was a prohibited alienation, despite the PBGC’s approval of the plan’s termination. The waiver resulted in the plan’s disqualification and the participant, who was the sole shareholder, was taxed on benefits the participant did not receive.[16]

      Other Exceptions

      A plan may provide that, after a benefit is in pay status, the participant or beneficiary receiving such benefit may make a voluntary and revocable assignment not to exceed 10 percent of any benefit payment, provided the assignment is not for the purpose of defraying plan administrative costs.[17]

      Payment, pursuant to a court order that is the result of a judicial determination that benefits cannot be paid to a beneficiary who murdered the plan participant, is permitted if the order conforms to the terms of the plan for directing payments when there is an ineligible beneficiary.[18]


      Planning Point: Courts sometimes hold that ERISA preempts state slayer statutes. The U.S. Supreme Court has not yet decided the issue. If faced with this issue, the plan can argue that federal common law precludes payment to a beneficiary who murders the participant.[19]


      A disclaimer of qualified plan benefits that satisfies the requirements of state law and IRC Section 2518(b) is not a prohibited assignment or alienation.[20]

      An anti-alienation provision also will not prevent a plan from holding a rolled over distribution from another plan subject to an agreement to repay a part of the distribution in the event of early termination of the other plan.[21]

      A loan from a plan made to a participant or beneficiary and secured by a participant’s accrued nonforfeitable benefit is not treated as an assignment or alienation if the loan is exempt from the excise tax on prohibited transactions or would be exempt if the participant or beneficiary were a disqualified person.[22]

      A participant or beneficiary may direct payment of his or her plan benefit payment to a third party, including the employer, if the arrangement is revocable and the third party files with the plan administrator a written acknowledgement stating that he or she has no enforceable right to any plan benefit other than payments actually received. The written acknowledgement must be filed within ninety days after the arrangement is entered into.[23] After the death of a participant, an assignment made pursuant to a bona fide settlement between good faith adverse claimants to the participant’s pension plan benefits was not invalidated by ERISA’s anti-alienation provision.[24]

      ___________________________

      [1].     IRC Sec. 401(a)(13), ERISA Sec. 206(d).

      [2].     IRC Sec. 401(a)(13)(C).

      [3].     Yates v. Hendon, 541 U.S. 1, 124 S. Ct. 1330 (2004).

      [4].     Patterson v. Shumate, 112 S. Ct. 2242 (1992).

      [5].     See Rousey v. Jacoway, 540 U.S. 753, 125 S. Ct. 1561 (2005).

      [6].     Traina v. Sewell, 180 F.3d 707 (5th Cir. 1999) (citing Baker v. LaSalle, 114 F.3d 636 (7th Cir. 1997)). See also United States v. Wofford, 560 F.3d 341 (5th Cir. 2009).

      [7]      573 U.S. 122, 134 S. Ct. 2242 (2014).

      [8]      In re Corbell-Dockins, No. 20-10119 (Bankr. W.D.N.C. June 4, 2021).

      [9].     Let. Ruls. 9011037, 8910035, 8829009.

      [10].   Let. Rul. 9109051.

      [11].   In re Stones, 157 BR 669 (Bankr. S.D.Cal. 1993).

      [12].   In re Cohen, 246 BR 658 (Bankr. D. Colo. 2000); In re Estes, 254 BR 261 (Bankr. D. Idaho 2000).

      [13]     Penfound v. Ruskin, Case No. 19-2200 (6th Cir. Aug. 10, 2021).

      [14].   IRC Secs. 401(a)(13)(B), 414(p).

      [15].   Let. Rul. 8735032.

      [16].   Gallade v. Comm., 106 TC 355 (1996).

      [17].   IRC Sec. 401(a)(13)(A); Treas. Reg. §1.401(a)-13(d)(1).

      [18].   Let. Rul. 8905058.

      [19].    See Standard Ins. Co. v. Coons, 141 F.3d 1179 (9th Cir. 1998); see also dicta in Egelhoff v. Egelhoff, 532 U.S. 141 (2000).

      [20].   GCM 39858 (9-9-91).

      [21].   Francis Jungers, Sole Proprietorship v. Comm., 78 T.C. 326 (1982), acq. 1983-1 CB 1.

      [22].   Treas. Reg. §1.401(a)-13(d)(2); Rev. Rul. 89-14, 1989-1 CB 111.

      [23].   Treas. Reg. §§1.401(a)-13(d), 1.401(a)-13(e); TD 7534.

      [24].   Stobnicki v. Textron, Inc., 868 F.2d 1460 (5th Cir. 1989).

  • 7721. How is bitcoin and other forms of “virtual currency” taxed?

    • Until late 2019, the IRS had released very little guidance on the tax treatment of what it refers to as “virtual currency” except Notice 2014-21, which defined virtual currency as “property,” like collectible coins and antiques, which can appreciate in value. Therefore, virtual currency can be included in taxable income and taxed based the sale or exchange of such property. “Convertible virtual currency” is virtual currency that is convertible into real currencies (e.g., US dollars), or as a substitute for a real currency.  Notice 2014-21 provides the basic tax rules that currently apply to bitcoin, Ethereum and other cryptocurrency transactions.

      Under Notice 2014-21, the IRS generally treats bitcoin and other forms of virtual currency as property (and not currency that is legal tender in the United States or elsewhere). In the IRS’ own words, “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.” This means that it is typically subject to capital gains treatment upon sale, exchange or other disposition under the general rules applicable to property dispositions, including intangible property (e.g., stocks, bonds, and collectibles).

      A taxpayer who receives bitcoin in exchange for goods or services must include the fair market value (measured in U.S. dollars) of the bitcoin received in gross income. Therefore, if the fair market value of property or currency received in exchange for the bitcoin exceeds the taxpayer’s adjusted basis in the bitcoin, the taxpayer will recognize capital gain (or loss if the fair market value of property received is less than that of the bitcoin).[1] The generally applicable holding period rules can be used in determining whether the gain or loss is long-term or short-term (Q 699). Similarly, the $3,000 capital loss limitation that can be applied against ordinary income also applies.

      If the bitcoin is held by the taxpayer as inventory or property held for sale to customers in the ordinary course of trade or business (i.e., so that the property is not treated as a capital asset in the hands of the taxpayer), the gain or loss will be treated as ordinary gain or loss in accordance with generally applicable rules. In keeping with this position, the IRS Counsel indicated in a late 2020 internal Tax Advice Memorandum that cryptocurrency paid for providing micro-services, like completing an on-line survey, processing data or reviewing images, is taxable ordinary income to the recipient, and may even be subject to self-employment taxes, depending on the circumstances.[2] Every taxable event involving a taxpayer’s cryptocurrency holdings must be reported on IRS Form 8949, Cryptocurrency Tax Form.

      While these rules seemed clear-cut, a recent letter from members of Congress to the IRS indicated that there was much uncertainty still remaining in the rules and procedures for taxing bitcoin transactions.[3] Perhaps in part as a consequence, on October 9, 2019, the IRS released Revenue Ruling 2019-24 and a set of new FAQ.

      Rev. Rul. 2019-24 and FAQ

      Revenue Ruling 2019-24 defines and addresses the income recognition of certain crypto-currency transactions/events. In doing so, it introduces two new terms into our tax vocabulary; (1) “hard fork”, and (2) “airdropped”. The ruling outlines the taxability resulting from a hard fork when a new crypto-currency is airdropped to the holders of existing crypto-currency. A “hard fork” for tax purposes occurs when crypto-currency on a ledger undergoes a protocol change that results in a permanent diversion from the legacy or existing distributed ledger. An “airdrop” is a vehicle of distributing crypto-currency to the distributed ledger addresses of multiple taxpayers.

      The IRS outlines two scenarios of hard fork ledger protocol change situations:

      (1) A hard fork ledger protocol occurs, but there is no airdrop of new cryptocurrency to current holders as part of the transaction.  Hence, the IRS indicated there is no tax event generated because no new property is received increasing a holder’s wealth (see FAQ 21).

      (2) A hard fork occurs but there is an airdrop of new cryptocurrency to the holders in connection with the hard fork. As a consequence, there is reportable ordinary income generated for a holder because of the receipt of new cryptocurrency (property) at the time of the airdrop.

      Taxability in these situations appears to be based upon the recipient-holder’s “dominion and control” over the property- the receipt of and ability to transfer, sell, exchange, or otherwise dispose of the new cryptocurrency created by the hard fork.[4] The ruling indicates that “[a] taxpayer does not have receipt of cryptocurrency when the airdrop is recorded on the distributed ledger if the taxpayer is not able to exercise dominion and control over the cryptocurrency.” Moreover, the ruling indicates that a hard fork is not considered a sale or exchange of a capital asset; therefore, it generates ordinary income and not capital gain.


      Planning Point: A hard fork, coupled with an airdrop, followed by a drop in value of the holder’s existing cryptocurrency, has the potential to create a wealth decrease in the aggregate for the holder with ordinary income generated at the front end and capital loss at the back of the transaction. Holders with substantial holdings might find themselves stuck with significant taxable ordinary income but an unusable capital loss. Given the likelihood of more hard forks for cryptocurrency holders, anticipatory planning is in order to prevent or ameliorate this potential outcome for the taxpayer.


      The set of IRS FAQs[5] that accompanied Revenue Ruling 2019-24 offered some useful information as well on the taxation of cryptocurrency transactions. In general they appear to reinforce the application of the basic income tax principles applicable to cryptocurrency. Although they cover various types of convertible virtual currency that are currently used as a medium of exchange, they do not address the treatment of contracts for the receipt of virtual currency.

       Cost Basis Methods: As to some specifics, the FAQs allows only two cost basis assignment methods when selling or exchanging cryptocurrency of the same type that was acquired at different times and for different prices

      • They require a taxpayer to use “first-in first-out” (FIFO) cost basis assignment methods; unless,
      • The taxpayer can specifically identify the cryptocurrency being sold or exchanged.[6]

      Prior to this guidance, taxpayers were potentially using five different methods of cost basis assignment (See Q 7723).

      Fair Market Value: The FAQs clarify that a taxpayer is required to look at the specific exchange for pricing data if the cryptocurrency was purchased on an exchange. As evidence, the IRS will accept the fair market value as determined by a cryptocurrency or blockchain “explorer” that analyzes worldwide indices of cryptocurrency and calculates the value at an exact date and time, if the transaction was not facilitated by a cryptocurrency exchange, or the taxpayer engages in a peer-to-peer transaction not involving an exchange. The FAQ does not specify which index or data source should be used. The FAQ allows the taxpayer to establish the fair market value under general valuation principles in lieu of using an explorer value. Finally, per the guidance, the fair market value of the cryptocurrency is the fair market value of the property or services exchanged for the cryptocurrency in the case of a cryptocurrency not traded on any exchange and that does not have a published value.[7]

      It is important to note that in 2019 the IRS announced[8] that it would begin sending letters to holders of various forms of cryptocurrency, including bitcoin, informing those taxpayers of potential misreporting (or failure to report) on virtual currency transactions. The IRS sent out another set of letters in August 2020.[9] The IRS advised taxpayers who receive such a letter to review past tax filings to uncover any errors or underreporting, and amend those returns in order to pay back taxes, interest and penalties as soon as possible.


      Planning Point: The IRS has recently been sending out CP2501 letters to individuals with cryptocurrency holdings.  If a client receives one of these letters, it’s important to act quickly to avoid potential penalties.  The CP2501 letter provides a taxpayer with notice that the IRS has noticed a discrepancy between reported information and other information that the IRS has received.  Any client with a discrepancy could receive a CP2501 letter.  Employers, cryptocurrency exchanges and other entities report information to the IRS.  When that information varies from what the client reports on a tax return, the IRS may issue a CP2501 letter.  These letters do not always include an amount that the taxpayer owes to the IRS.  In some cases, the taxpayer may not owe additional tax.  However, it’s important to respond by the letter’s due date to avoid a penalty.  Clients receiving CP2501 letters should review information, such as Forms 1099-B, 1099-K, 1099-MISC and any W-2s to determine whether their reporting was correct.


      These letters are part of a larger campaign designed by the IRS to crack down on misreporting or underreporting of virtual currency transactions. The IRS also announced a new Schedule 1 (to Form 1040) with a controversial, prominent Yes/No question about crypto-currency holdings and transactions for tax year 2019 returns, and doubled down by moving the question to nearly the top of page 1 of Form 1040 for 2020 tax year.[10]

      This IRS campaign to impose inclusion and taxation on virtual currency transactions has already developed a significant litigation challenge.[11] All this activity suggests the high IRS focus on income tax compliance of cryptocurrency transactions, and the need to carefully comply with IRS reporting and tax calculation guidance. Finally, it seems likely that a “yes” answer to cryptocurrency question in the 2019 or 2020 return will increase a taxpayer’s chances of incurring an audit.


      [1].     Notice 2014-21, 2014-16 IRB 938.

      [2]   See TAM 202035011 (Aug. 28, 2020).

      [3].     Letter from Rep. Jared Polis and Rep. David Schweikert to Commissioner John Koskinen, dated June 2, 2017.

      [4]  Rev. Rul. 2019-24. Also see FAQs 21-24.

      [5]   Published October 9, 2020.

      [6] See FAQs on Virtual Currency, QQ. 36-38 for details, available at https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.

      [7]  See FAQs on Virtual Currency for details, available at https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.

      [8]   IR 2019-132 (July 27, 2019).

      [9]   IRS Ltr. 6173, 6174 and 6174-A.

      [10]  See Draft Form 1040 for tax year 2020, released August 18, 2020.

      [11]  See https://blockchain.news/news/coinbase-user-sues-irs-illegal-seizure-of-crypto-records reference Harper v. Com’r, (USCT, NH July 15, 2020).

  • 8555. What is the CARES Act employee retention tax credit?

    • Editor’s Note: The Infrastructure Investment and Jobs Act of 2021 retroactively ended the employee retention tax credit, so that wages paid after September 30, 2021, will not be eligible for the credit.  The law did exempt recovery startup businesses from the early termination.  Originally, the credit was set to expire after 2021.

      Editor’s Note: The IRS has released guidance on how it will handle the early termination of the employee retention tax credit, which is no longer available for the fourth quarter of 2021.  Employers who received advance payment of the ERC for fourth quarter wages can avoid penalties for failure-to-pay if they repay the amount by the due date of their employment tax returns.  Employers who reduced employment tax deposits on or before December 20, 2021 for fourth-quarter wages in reliance on the ERC will not be subject to penalties for failure-to-deposit if (1) the employer reduced deposits in anticipation of receiving the ERC under the rules in Notice 2021-24, (2) the employer deposits the amounts retained on or before the due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays the wages on that date), and (3) the employer reports tax liability resulting from the end of the ERC on the employment tax return or schedule including the period from October 1, 2021 through December 31, 2021.  Failure to deposit penalties will not be waived if the employer reduces deposits after December 20, 2021.  Employers who do not qualify for relief under these rules can reply to any notice of a penalty with an explanation, and the IRS will consider whether to grant reasonable cause relief.[1]

      IRS regulations allow the IRS to recapture any of the tax credits credited to an employer in excess of the amount that the employer was actually entitled to receive.  That includes the employee retention tax credit, credits for qualified leave wages and credits for qualified health plan expenses under Sections 3131(d) and 3132(d).  Those incorrect tax credits will be treated as underpayments of taxes and may be administratively assessed and collected in the same manner as the taxes. The temporary regulations also provide that the calculation of any credits erroneously claimed must account for any amounts that were advanced to the employer under the processes established in 2020.

      The Consolidated Appropriations Act of 2021 expanded the employee retention tax credit (ERTC), discussed below. Under the CAA, the applicable credit percentage is increased from 50 percent to 70 percent of qualified wages. The limit on qualified wages per-employee is increased from $10,000 per year to $10,000 per quarter. The “decline in gross receipts” threshold is decreased from 50 percent to 20 percent, and a new safe harbor rule allows business owners to use the calendar quarter immediately preceding the current quarter to determine eligibility.


      Planning Point: IRS Revenue Procedure 2021-33 provides a safe harbor allowing employers to exclude certain amounts from gross receipts for the sole purpose of determining eligibility for the ERTC. Amounts that may be excluded include: (1) the amount of the forgiveness of a PPP loan, (2) Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, and (3) Restaurant Revitalization Grants under the ARPA. Employees elect to apply this safe harbor by simply excluding these amounts for purposes of determining whether it is an ERTC-eligible employer on an employment tax return. Employers are required to apply the safe harbor consistently in determining ERTC eligibility (meaning the employer must exclude the amounts from gross receipts for each calendar quarter when gross receipts are relevant to determining ERTC eligibility). If the employer applies the safe harbor, it also must apply the safe harbor to all employers treated as a single employer under aggregation rules.


      The rules discussed below that applied to “large employers” now only apply to those with more than 500 employees (as opposed to 100 under the CARES Act). Further, employers that were not in existence for all or part of 2019 are now eligible to claim the credit. Businesses with 500 or fewer employees have the option of advancing the credit at any point during the quarter, and the amount of the credit is estimated based on 70 percent of the average quarterly wages the employer paid in 2019.

      As long as the wages are not paid for with forgiven PPP loan proceeds, PPP loan recipients are entitled to claim the tax credit retroactive to the date of the CARES Act.

      Editor’s Note: The ARPA made further changes the ERTC, which remains fixed at 70 percent of qualified wages (up to a $10,000 per-quarter cap) for employers who have experienced a 20 percent year-over-year decline in per-quarter gross receipts (or a qualifying suspension of business). Starting June 30, 2021, certain small businesses that began operations after February 15, 2020 will be eligible for a maximum $50,000 per-quarter credit. Qualifying “recovery startup businesses” must have average annual gross receipts for the three-taxable-year period ending with the taxable year that precedes the quarter that do not exceed $1 million. These businesses can qualify to claim the expanded ERTC even if they do not otherwise meet the eligibility requirements for claiming the credit. Beginning in the third quarter of 2021, employers who have suffered a decline of 90 percent or more in gross receipts compared to the same quarter in 2019 can treat all wages paid as qualified wages (up to the $10,000 cap) regardless of the number of employees the business has and regardless of whether the employees provide services (in other words, even employers with more than 500 employees qualify if they are under severe financial distress). Employers can continue to claim the credit even if they’ve received a PPP loan, but cannot claim the credit with respect to wages paid with forgiven PPP funds.

      The new ERTC will be allowed against the Medicare tax only in the third and fourth quarters of 2021. While this procedural shift does not impact the available value of the ERTC, it could be important for business owners who had relied upon taking the credit in advance. Because the Medicare tax is only 1.45 percent, more clients might be required to file a Form 7200 to receive advance payment of the credit. The law also extends the statute of limitations on assessments under the law to five years from the date the return claiming the credit is filed.

      CARES Act ERTC

      The CARES Act created a refundable tax credit designed to help employers who retained employees during the COVID-19 health crisis. The credit is taken against employment taxes and is equal to 70 percent (originally 50 percent) of the first $10,000 of qualified wages paid to the employee. Originally, wages paid between March 12, 2020 and January 1, 2021 counted in calculating the credit (the credit has since been extended).[2] Wages include both cash payments and employer health care payments (see below for allocation rules). Because the credit is refundable, employers are eligible for a refund if the credit amount exceeds the employment taxes due.

      Employers are eligible regardless of size if they were in business during 2020.

      The credit is available for calendar quarters where either:

      (1) operations were either fully or partially suspended because of a government-issued order relating to COVID-19 (see below), or

      (2) the business remained open, but gross receipts declined by more than 20 percent (originally 50 percent) when compared to the same calendar quarter in the previous year. Once gross receipts rebound and exceed 80 percent when compared to the same quarter in 2019, the employer no longer qualifies in the subsequent quarter.

      Eligible government issued orders include restrictions on travel, group gatherings or limitations on commerce (such as the orders requiring certain businesses to close or limit operations).

      Qualification is calculated every quarter.[3] If the employer has no more than 500 (originally 100) employees, the amount of qualified wages includes wages paid during a quarter where COVID-19 impacts the business, including when the employees continue to provide services for payment during the relevant period and when employees are paid, but not working.

      If the employer has more than 500 full-time employees, the wages counted toward the credit include only those paid while the employee was not working for the employer because of a government order or decline in gross receipts. In counting the number of employees, the employer uses average employees during 2019.


      Planning Point: For purposes of determining whether a credit-eligible employer is a large eligible employer or a small eligible employer, employers are not required to include full-time equivalents when determining the average number of full-time employees. However, for purposes of identifying qualified wages, an employee’s status as a full-time employee is irrelevant because wages paid to a part-time employee may be treated as qualified wages if all other requirements are satisfied.[4]


      Employers who pay wages with PPP loans that are forgiven cannot claim the tax credit for the same wages. Further, the credit does not apply with respect to wages paid under the FFCRA paid sick leave laws (in other words, the employer cannot “double dip”).


      Planning Point: Any cash tips treated as wages within the definition of IRC Section 3121(a) or compensation within the definition of IRC Section 3231(e)(3) are treated as qualified wages if all other requirements are satisfied. According to IRS reasoning, eligible employers are not prevented from receiving both the employee retention credit and the Section 45B credit (the FICA tip credit) for the same wages because the CARES Act and subsequent legislation do not reference Section 45B in areas where a “no double dipping” rule applies.[5]


      The amount of wages considered for purposes of the credit cannot exceed the wages the employee would have received for working an equal amount of time in the 30-days preceding the applicable period when the credit is available.

      Qualified wages also include the employer’s health plan expenses allocated to the wages taken into account for the credit. The health plan expenses must be amounts paid or incurred by the employer to provide and maintain a group health plan, but only if the amounts are excluded from employees’ income under IRC Section 106(a).[6]


      Planning Point:  IRS Notice 2021-49 addresses the issue of whether wages paid to majority owners and spouses of majority owners may be treated as “qualified wages”.  “Majority ownership”, for these purposes, means more than 50% of the value in a corporation.  According to the IRS, if the majority owner of a corporation has no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant as defined in IRC Section 267(c)(4), then neither the majority owner nor the spouse is a related individual within the meaning of Section 51(i)(1) and the wages paid to the majority owner and the spouse are qualified wages for ERTC purposes, assuming the other requirements for qualified wages are satisfied.  The notice contains multiple examples that provide guidance on various scenarios and various types of relationships.


      Unless otherwise provided, allocating health expenses pro rata among employees and pro rata based on the periods of coverage (i.e., lining the payments up with the periods to which the wages relate) is sufficient.

      [1]      Notice 2021-65.

      [2].     IR-2020-62, Notice 2020-22.

      [3].     IR-2020-62.

      [4].     Notice 2021-49.

      [5].     Notice 2021-49.

      [6].     See generally, Pub. Law No. 116-136, Sec. 2301.

  • 8564. What tax credit is available for small business retirement plan start-up costs?

    • Editor’s Note: The SECURE Act expanded the retirement plan start-up credit for small businesses who are eligible. The credit available under IRC Section 45E, is available for up to three tax years and, was increased to the greater of (a) $500 or (b) the lesser of (i) $250 per employee of the eligible employer who is not a highly-compensated employee and who is eligible to participate in the eligible employer plan maintained by the employer or (ii) $5,000.

      Eligible small employers (under IRC Section 408(p)(2)(C)(1)) who provide an auto-enrollment feature are eligible for an additional $500 per year credit (for the first three years the auto-enrollment feature is offered).


      Planning Point: The credit for auto-enrollment can be claimed even if a new auto-enrollment feature is added to an existing plan.


      A tax credit for qualified retirement plan start-up costs is available to small business owners. A small business employer is eligible if, during the preceding tax year, it employed 100 or fewer employees who received at least $5,000 in annual compensation from the employer (the same definition that generally applies for SIMPLE retirement plans).1 The plan must be available to at least one employee who is a non-highly compensated employee (a highly compensated employee is one who owns 5 percent of the business or who has earned more than $130,000 in 2020 and 2021).2

      Importantly, the small business employer is only eligible for the credit if its employees were not able to participate in another retirement plan sponsored by the employer, a member of a controlled group or a predecessor of either within three years of establishing the new plan (essentially, this requirement ensures that the plan truly is a newly-established retirement plan).3


      Planning Point: The credit is also available to small business employers who participate in a multiple-employer plan (MEP) and add an auto-enrollment feature.


      The credit is equal to 50 percent of the ordinary and necessary costs of starting up the retirement plan, including both the costs of setting up and administering the plan and costs related to educating employees about the plan, up to a maximum credit of $500 per year.4 The credit is available for three years, with the option of first claiming the credit in the year before the year in which the plan becomes effective.5

      If the entire value of the plan cannot be maximized in a single year, the small business employer has the option of carrying it back or forward to another tax year, so long as that tax year does not begin prior to January 1, 2002. To claim the credit, the taxpayer must file Form 8881 with the IRS.6


      1 .IRS Pub. 560 (2019).

      2 .IRC Sec. 45E(d)(1), IR-2014-99 (Oct. 23, 2014), Notice 2018-83, Notice 2020-45.

      3 .IRC Sec. 45E(c).

      4 .IRC Secs. 38, 45E (a), 45E(b).

      5 .IRC Sec. 45E(b).

      6 .IRS Pub. 560 (2019).

  • 8902. What is a health flexible spending arrangement (FSA)?

    • Editor’s Note: The Affordable Care Act (“ACA”) imposes an annual limitation on contributions to a health FSA. For taxable years beginning after 2012, FSA contributions will not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to the arrangement. The limit will be indexed for inflation ($2,850 in 2022, up form $2,750 in 2020 and 2021).1

      A health flexible spending arrangement (FSA) is a program that is established under IRC Section 125 to provide for the reimbursement of certain expenses that have already been incurred. This benefit may be provided as a stand-alone plan or as part of a traditional cafeteria plan.

      Health coverage under an FSA is not required to be provided under commercial insurance plans, but the coverage that is provided must demonstrate the risk shifting and risk distribution characteristics of insurance. Reimbursements under a health FSA must be paid specifically to reimburse medical expenses that have been incurred previously.

      A health FSA cannot provide coverage only for periods during which the participants expect to incur medical expenses if the period is shorter than a plan year. Further, the maximum reimbursement amount must always be available throughout the period of coverage (properly reduced for prior reimbursements for the same period of coverage).

      This must be true without regard to the extent to which the participant has paid the required premiums for the coverage period, and without a premium payment schedule based on the rate or amount of covered claims incurred in the coverage period.2 Though there was no statutory limit on contributions to a health FSA prior to 2013, most employers imposed a limit to protect themselves against large claims that had not yet been funded by salary reductions.

      The period of coverage must be twelve months, or in the case of a short first plan year, the entire first year (or the short plan year where the plan year is changed). Elections to increase or decrease coverage may not be made during a coverage year, but prospective changes may be allowed consistent with certain changes in family status.

      The plan may permit the period of coverage to be terminated if the employee fails to pay premiums, provided that the terms of the plan prohibit the employee from making a new election during the remaining period of coverage. The plan may permit revocation of existing elections by an employee who terminated service.3

      As is the case with a cafeteria plan, a health FSA may provide a grace period of no more than 2½ months following the end of the plan year for participants to incur and submit expenses for reimbursement. The grace period must apply to all participants in the plan. Plans may adopt a grace period for the current plan year by amending the plan document before the end of the current plan year.4

      For tax years beginning in 2014 and beyond, a health FSA may be amended so that $500 ($570 in 2002, up form $550 in 2020 and 2021) of unused amounts remaining at the end of the plan year may be carried forward to the next plan year.  However, plans that incorporate the carry forward provision may not also offer the grace period.5

      The plan may not reimburse premiums paid for other health plan coverage, but it may reimburse medical expenses of the kind described under IRC Section 213(d).6 Beginning in 2011, reimbursements for medicine are limited to doctor-prescribed drugs and insulin. Before 2020, over-the-counter medicines were not qualified expenses unless the participant obtained a doctor’s prescription.7 However, beginning in 2020 the CARES Act now allows these over-the-counter medical expenses to be reimbursed by an FSA without a prescritption.8

      The reimbursed medical expenses must be expenses incurred to obtain medical care during the period of coverage. The employee must provide substantiation that the expense claimed has been incurred and is not reimbursable under other health coverage.9 The IRS has approved the use of employer-issued debit and credit cards to pay for medical expenses as incurred, provided that the employer requires subsequent substantiation of the expenses or has in place sufficient procedures to substantiate the payments at the time of purchase.10 On a one-time basis, a plan may allow a qualified HSA distribution (see Q 8834).

      An employee must include the value of employer-provided coverage for qualified long-term care services provided through an FSA in gross income.11


      1 .IRC Sec. 125(i), as added by PPACA 2010; Notice 2012-40, 2012-1 CB 1046; Rev. Proc. 2019-44, Rev. Proc. 2020-45.

      2 .Prop. Treas. Reg. §1.125-5(d).

      3 .Prop. Treas. Reg. §1.125-5(e).

      4 .Prop. Treas. Reg. §1.125-1(e); Notice 2005-42, 2005-1 CB 1204; Notice 2012-40, 2012-1 CB 1046.

      5 .Notice 2013-71, 2013-47 IRB 532.

      6 .Prop. Treas. Reg. §1.125-5(k).

      7 .IRC Sec. 106(f).

      8.CARES Act Sec. 3702.

      9 .Prop. Treas. Reg. §1.125-6(b); Rev. Proc. 2003-43, 2003-1 CB 935; superseded and modified by Notice 2013-30, 2013-21 IRB 1099. See Grande v. Allison Engine Co., 2000 U.S Dist. LEXIS 12220 (S.D. Ind. 2000).

      10 .Notice 2006-69, 2006-2 CB 107. See also Notice 2007-2, 2007-1 CB 254.

      11 .IRC Sec. 106(c)(1).