IRS Delays Additional Amendment Deadlines for Major Retirement Legislation

The IRS has extended additional deadlines for required retirement plan amendments, similar to the extensions we discussed last month found here. Notice 2022-45 extends the deadline for amending qualified retirement plans to comply with certain provisions of:

  • The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

  • The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“Relief Act”)

Notice 2022-45 specifically extends the amendment deadlines for Section 2202 of the CARES Act and Section 302 of the Relief Act. Section 2202 of the CARES Act permitted plans to: (1) provide coronavirus-related distributions, (2) increase retirement plan loan sizes, and (3) pause retirement plan loan payments. Section 302 of the Relief Act permitted qualified disaster distributions.

Notice 2022-45 extends the amendment deadlines relating to the applicable provisions in the CARES and Relief Acts for non-governmental qualified plans and 403(b) plans to December 31, 2025. Governmental plans (including qualified plans, 403(b) plans maintained by public schools, and 457(b) plans) are granted further delays depending on the underlying circumstances of the plan sponsor.  These extended deadlines under Notice 2022-45 align with the previous deadline extensions under Notice 2022-33. Accordingly, most plan sponsors will be able to adopt a single amendment to comply with the SECURE Act, BAMA, the CARES Act, and the Relief Act.

Notably, tax-exempt 457(b) plans do not appear to be covered by the relief granted by either Notice 2022-33 or Notice 2022-45. Accordingly, these plans remain subject to a December 31, 2022, amendment deadline.

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Tax Deficiencies and Automatic Penalties: Challenging by Reasonable Cause?

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Increasingly, taxpayers are seeing the imposition of penalties on deficiency assessments. In fact in a number of situations the imposition of the penalty is automatic upon the issuance of the assessment. The penalties, which may range from 20% to 25% of the liability, are imposed for late payment or underpayment of taxes. Such penalties are generally imposed without taking into consideration the fact there is a lack of guidance or legal authority with respect to the substantive issue which gave rise to the tax underpayment. Absent legal authority or guidance, the taxpayer is left to his own devices to interpret statutory changes or guess at policies when preparing and filing returns. Should the interpretation be inconsistent with that of the taxing authority, the taxpayer is rewarded with a penalty. The imposition of a non-deductible penalty leaves the taxpayer with basically two choices: pay the penalty and move on, or challenge the penalty citing reasonable cause.

A logical person would conclude that if there is no legal authority or guidance addressing the underlying issue, the taxpayer acted reasonably when preparing and filing its return. This is precisely what the New Jersey Supreme Court concluded in United Parcel Services General Services Co. v. Director Division of Taxation. The court noted the absence of legal authority or guidance gives rise to a genuine question of law and fact. A taxpayer who interprets a statute based on his knowledge in light of the lack of legal authority has demonstrated reasonable cause.  The New Jersey Supreme Court’s approach is logical and more importantly fair. Although not precedent outside of New Jersey, one could hope that other Departments review the court’s rationale and re-evaluate their penalty policies particularly in those instances where legal authority or regulatory guidance is nonexistent.

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2013 Year-End Planning for Lesbian, Gay, Bisexual and Transgender (LGBT) Taxpayers

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2013 has been a year of historic change for the LGBT community. The landmark Supreme Court decision in U. S. v. Windsor, decided on June 26, 2013, held that Section 3 of the Defense of Marriage Act (DOMA) (defining marriage for federal purposes as being between a man and a woman) violates the equal protection clause of the Constitution and is therefore unconstitutional.

For married same-sex couples living in one of the 14 states (as of this writing) or District of Columbia which recognize same-sex marriages, their marriages are now recognized for both federal and state purposes. Married same-sex couples living in a state that does not recognize same-sex marriages are left with many questions.

Place of Celebration

On August 29, 2013 the IRS released Revenue Ruling 2013-17 clarifying that where a couple was married (place of celebration) rather than where a couple resides (place of domicile) determines a same-sex couple’s marital status for federal tax purposes. A tremendous benefit of this decision is that married same-sex couples can now travel freely across state lines and be considered married in each state for federal tax purposes. This ruling applies to same-sex marriages legally entered into in a US state, the District of Columbia, a US territory or foreign country. The ruling does not apply to civil unions, registered domestic partnerships or similar relationships that might be recognized under state law but do not necessarily guarantee the same protection as marriage.

Impact on Gift and Estate Taxes

Before the Windsor decision, transfers between same-sex married couples could result in significant gift and estate taxes. Now transfers between same-sex spouses can generally be made with no tax consequences. In addition, certain estate provisions such as portability, the marital deduction and qualified terminable interest property (QTIP) trusts are now available to same-sex married couples. Other commonly used estate and gift planning tools for married couples, such as gift splitting and spousal rollover IRA’s, are also now available to a same sex married couple.

If you die in a state that does not recognize same-sex marriage, your spouse will not automatically inherit under state spousal rights statutes. Therefore, if the couple intends to inherit from each other, a will or living trust is still needed.

Planning tip: An important part of 2013 year-end planning is to review and update wills and estate documents to make sure to take advantage of the new rules and to properly designate beneficiaries.

Impact on Income Taxes

Many married couples have a lower joint tax liability because of netting income and deductions, eligibility for certain tax credits and income exclusions, or have an increased tax liability due to the marriage penalty tax or because of limitations on deductions based on their combined adjusted gross income. For 2013, LGBT couples considered married under the state of celebration rule will have to file their federal tax return as married filing joint or married filing separate, which may cause a shift in tax planning.

Planning tips: As part of 2013 year-end planning, same-sex couples should work with their tax advisors to determine if original or amended returns, using married filing joint or married filing separate status, should be filed for years open under the statute of limitations. The statute for a refund claim is open for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. Projections should be run to compare the potential benefit or cost of a married-joint filing versus separate-single or head of household filing, as there may be a better tax result to leave the returns as filed and not amend.

In addition, same-sex couples should consider credits that might not have been available as single filers, or consider the traditional year-end planning ideas for married couples mentioned in other sections of this guide.

Impact on Benefits

Before the fall of DOMA, benefits provided to the non-employee same-sex spouse, such as employer provided health insurance, flexible spending plans, etc. were paid with after-tax dollars and the benefit was included in the employee’s taxable income. Now, same-sex couples can pay for these benefits with pre-tax dollars and the coverage will not be included in their taxable income. Employees can file amended returns (for years prior to 2013) excluding those benefits from taxable income and request refunds. Also, employers who paid payroll taxes based on previously taxed health insurance and fringe benefits can also file amended returns (Notice 2013-61 provides guidance to employers for correcting overpayments of employment taxes (FICA) for 2013).

On August 9, 2013, the US Department of Labor (DOL) announced that the Family and Medical Leave Act (FMLA) extends only to same-sex marriage couples who reside in states that recognize same-sex marriage.

On September 18, 2013 the DOL announced (in Technical Release 2013-04) that same-sex couples legally married in a jurisdiction that recognizes their marriage will be treated as married for purposes of the Employee Retirement Income Security Act of 1975 (ERISA) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The DOL recognizes the marriage regardless of where the legally married couple currently resides. This announcement covers pensions, 401K’s, and health plans.

The Social Security Administration (SSA) also announced that it will process and pay out spousal retirement claims for same-sex spouses. The SSA urges people who believe they are eligible for benefits to apply as soon as possible in order to establish a protective filing date, which is used to determine the start of potential benefits. Under the SSA’s “Windsor instructions”, claims can be filed when the holder of a social security number was married in a state that permits same-sex marriages and resides in a state that recognizes same-sex marriage at the time of application. Once benefits are approved, the recipient can move to any state without disqualification. Applications that don’t meet these criteria are being held for later processing when further guidance is issued.

Planning tips for employees: Employees in a same-sex marriage should consider amending their tax returns if they were paying for employer-provided benefits to their spouse. Employees in a same sex-marriage should also review the benefits their employer offers to married couples to make sure they are taking full advantage of all benefits. Also, same-sex married couples should provide their Human Resource Department with a copy of their marriage license and confirm that the spouse’s insurance coverage is no longer being included in taxable income and/or that an appropriate adjustment will be made for the 2013 calendar year.

Planning tips for employers: Employers should ensure that their benefits packages are in compliance with the new laws. See Rev. Rul. 2013-61 for guidance on how to correct overpayments of employment taxes for 2013 by either adjusting 4th QTR 2013 Form 941, (correcting the 1st -3rd Quarterly filings) or by filing Form 941-X (correcting all quarters of 2013).

Pre- and Post-Nuptial Agreements

Consider agreements for same-sex couples to avoid disagreements and litigation expenses for future possible divorce. State uncertainty remains.The majority of states currently do not recognize same-sex marriages. There are prominent court cases challenging these state laws, and the resulting impacts on tax and estate planning for same-sex married couples are as yet unknown.

Article by:

Janis Cowhey McDonagh

Of:

Marcum LLP