Tag: Tax

The Complicated Landscape of US Estate Tax

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Canadians who own assets in the U.S. may be subject to U.S. estate tax.

This tax is based on the fair market value of all U.S. assets owned at the time of death. It can reach 40%, depending on the value of U.S. assets and the world-wide estate.

But not all Canadians who own U.S. assets will be subject to U.S. estate tax. A close look at the new U.S. estate tax rules will help you determine whether your Canadian clients are exposed to U.S. estate tax.

New U.S. estate tax rules

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2013 (the Act) into law. The Act resolves many of the issues raised by the fiscal cliff.

Pursuant to the Act, U.S. estate tax liability of non-U.S. residents depends on the answers to the following two questions:

  1. Is the value of the U.S. estate more than $60,000?
  2. Is the value of the worldwide estate greater than $5,250,000?

If the fair market value (FMV) of U.S. assets is less than $60,000 on the date of death, then there is no U.S. estate tax. If the value of U.S. assets on death exceeds $60,000, a Canadian’s estate may still be exempt from U.S. estate tax if the value of his or her worldwide estate upon death is less than what is known as the “exemption.”

Worldwide exemption for 2013 and beyond

The Act provides an exemption from U.S. estate tax if a non-resident dies with a worldwide estate with a FMV of less than $5,250,000. This exemption amount is inflation-adjusted. Everything counts when calculating a Canadian client’s worldwide estate—including RRSPs and life insurance.

Additionally, when advising a married couple about U.S. estate tax exposure, it’s important to calculate the value of both spouses’ estates combined.

Clients often ask whether the U.S. estate tax is on the worldwide estate. The answer is no; the IRS does not tax a Canadian resident (who is not a U.S. citizen) on his or her worldwide estate.

The only assets that are subject to U.S. estate tax for Canadians are U.S. assets.

What are U.S. assets?

Common U.S. assets include real estate in the U.S. and personally held stocks of U.S. corporations, both public and private.

Here’s a complete list of U.S. assets subject to U.S. tax:

  • real estate property located in the U.S;
  • certain tangible personal property located in the U.S., such as furniture, vehicles, boats and airplanes;
  • golf club equity memberships;
  • shares of U.S. corporations, regardless of the location of the share certificates (even inside RRSPs or RRIFs);
  • interests in partnerships owning U.S. real estate or carrying on business in the U.S.;
  • U.S. pension plans and annuity amounts (IRAs and 401K plans);
  • stock options of a U.S. company;
  • U.S. mutual funds;
  • money owed to Canadians by American persons; and
  • money market accounts with U.S. brokerage firms.

The following is a list of U.S. assets not subject to U.S. estate tax:

  • U.S. bank deposits;
  • certain debt obligations, such as U.S. government bonds;
  • American depository receipts;
  • term deposits/guaranteed investment certificates;
  • real estate situated outside the U.S.;
  • Canadian mutual funds denominated in U.S. dollars that invest in U.S. stocks;
  • life insurance proceeds payable on the death of a Canadian citizen and resident who is not an American citizen; and
  • non-U.S. stocks, bonds and mutual funds.

Many Canadians own assets subject to U.S. estate tax with vacation homes and shares of U.S. corporations topping the list. How can you help clients who own these assets?

The following scenario provides some answers.

Strategies for Canadians who own U.S. assets

Richard is a Canadian citizen and resident, single, with a worldwide estate of $10 million. He owns an $800,000 property in Ft. Lauderdale, Fla.

Richard’s inherited 25% of the shares of four Florida corporations from his deceased father, which he estimates have a value of $200,000. Each corporation owns an apartment building in South Florida.

The chart “Example estimates” (this page) approximates Richard’s 2013 exposure to U.S. estate tax.

Tax planning for U.S. real estate

The goal of any tax-planning for a Canadian owner of U.S. real estate is to ensure the estate of the Canadian decedent is not subject to U.S. estate tax. Consequently, title should not be in his or her name. Alternative ownership structures include:

  • corporation;
  • cross-border trust (irrevocable or revocable); and
  • limited partnership.

These ownership structures avoid probate and guardianship proceedings in the case of incapacity and can defer or avoid U.S. estate tax.

Tax planning for stocks

Although Richard’s shares of U.S. stock are considered U.S. assets, there are tax-planning techniques for avoiding U.S. estate tax.

01 Sell

This may trigger capital gains tax in Canada, though Richard may have some capital losses to apply against it.

02 Create a Canadian holding corporation

Transfer the shares of U.S. stocks on a tax-free basis into a Canadian corporation, of which Richard is the shareholder.

Should Richard pass away with U.S. stock in his Canadian holding company, there will be no U.S. estate tax because Richard no longer owns shares of a U.S. company; he only owns shares of a Canadian holding corporation that owns shares of the Florida companies that Richard’s father passed on to him.

The U.S. Foreign Investment in Real Property Tax Act (FIRPTA) may apply to Richard’s transfer of U.S. stocks into a Canadian company. FIRPTA requires that 10% of the sale price or transfer value of U.S. real estate by a non-resident of the U.S. be withheld and remitted to the IRS. Richard can avoid this with proper structuring and reporting, which we’ll explain next time. No withholding will be required and no disposition will have occurred.

Example estimates of U.S. Estate Tax Payable for 2013

Article by:

David A. Altro

Of:

Altro Levy LLP

“Dual” Employment Contracts for US Executives Working in the UK

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Background

February 2014

Individuals, whether of British or foreign nationality, who reside in the UK are, in principle, taxable on their worldwide employment income. Many US executives who are “seconded” by their US employer to work in the UK may therefore become UK tax resident.

Such US executives who have not been UK resident in the three previous tax years and are not UK domiciled need not pay UK tax on their overseas earnings if they do not bring the income to the UK. Other US executives resident in the UK over the longer term may incur liability for UK tax on their overseas income unless their employer structures their employment duties under separate employment contracts, one with the UK subsidiary for their UK duties and another with the US parent for their overseas duties. These have become known as “dual contracts”. If the non-UK domiciled executive keeps the income earned under the overseas contract outside the UK, no UK income tax should arise on that income. He or she will pay UK income tax on the income earned in the UK under his or her UK contract.

“All Change”

In December 2013 HM Government announced that it would be clamping down on the artificial use of dual contracts for longer-term UK residents and has now published draft legislation that makes offshore employment income in a dual-contract arrangement taxable in the UK in certain cases.

The New Rules

Under the new anti-avoidance rules, which come into force on 6 April 2014, the dual-contract overseas income of US executives resident in the UK will be taxed in the UK if:

  • the executive has a UK employment and one or more foreign employments,
  • the UK employer and the offshore employer either are the same entity or are in the same group,
  • the UK employment and the offshore employment are “related”, and
  • the foreign tax rate that applies to the remuneration from the offshore employment is less than 75 percent of the applicable rate of UK tax. The current top rate of UK income tax is 45 percent, and 75 percent of this rate is 33.75 percent.

The UK employment and the offshore employment will be “related” where, by way of non-exhaustive example:

  • one employment operates by reference to the other employment,
  • the duties performed in both employments are essentially the same (regardless of where those duties are performed),
  • the performance of duties under one contract is dependent on the performance of duties under the other,
  • the executive is a director of either employer, or is otherwise a senior employee or one of the highest earning employees of either employer, or
  • the duties under the dual contracts involve, wholly or partly, the provision of goods or services to the same customers or clients.

Action

US corporations should urgently review the use of dual contracts for their non-UK domiciled executives seconded to their UK subsidiaries before the 6 April 2014 start date. The proposed legislation is widely drafted and has the potential to catch even genuine dual-contract arrangements. If one of the dual contracts is with a group employer in a low-tax jurisdiction, that contract may be especially vulnerable. Dual contracts will not necessarily become extinct, but in the future, careful cross-border tax advice should be sought in their structuring.

Article by:

Of:

Vedder Price

It’s That Time of the Year Again Re: Wisconsin Property Taxes

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It’s time to open up the unwelcome envelope with your property tax bill inside. Property taxes are necessary, of course, for roads and schools and all of the other services your property receives, but you should take some time to make sure that you are not paying more than your fair share of these taxes.

Wisconsin’s State Constitution has a provision requiring that all real estate be taxed “uniformly.” Regular real estate and personal property is taxed by the local municipality. Property which is used for manufacturing purposes, is taxed by the State of Wisconsin, in an effort to make sure that manufacturing property throughout the State is taxed in the same manner. Land which is in agricultural use enjoys a separate “use value assessment” system, which not only allows a lower assessment for land in that use, but also requires a per-acre penalty if that land is removed from the ag use, as defined by those statutes.

Of course, each of those taxing categories is controlled by pages of regulations containing definitions and limitations which are too complicated to insert into this article. Be aware that if you bought a parcel during calendar year 2013, your tax assessment may rise next year to the sale price named on the Transfer Tax Return filed with that deed, and you will receive a notice next spring of that increased assessment. The notice will tell you the procedure for contesting that new higher assessment and the time period, usually very short, during which you must file an appeal or lose the opportunity for another year. However, if your tax assessment should have been reduced and was not, you might not receive a notice at all, which means you must affirmatively seek out the date for filing the tax challenge and the forms needed to preserve the right to challenge. You must affirmatively notify the assessor if you demolished a building, lost a tenant, suffered a casualty loss, signed new leases for lower rents or had to offer rent concessions to renew a lease, or moved a parcel of land into or out of ag use, if you want to be sure the tax assessment is properly calculated for the actual use of the land and actual income from it. We can help you evaluate behind the scenes if the property is accurately assessed, and if it is not, file and defend a claim for you. We often charge a nominal amount for the investigation and then take the tax challenge on a contingency basis so you are only billed if we secure a tax savings for you.

Article by:

Nancy Leary Haggerty

Of:

Michael Best & Friedrich LLP

Same Sex Marriages: Are You Filing Your Taxes Properly?

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In late 2013, I met with my first same sex couple clients since the U.S. Supreme Court overruled the Defense of Marriage Act (DOMA) last year.  If you recall, DOMA  was the federal law barring the federal government from recognizing same sex marriages legalized by states.  It was ruled unconstitutional by the U.S. Supreme Court as violative of the Fifth Amendment.  The IRS issued a statement on August 29, 2013 that provided that same sex couples legally married in a jurisdiction that recognizes their marriage would be treated as married for federal tax purposes regardless of the laws of their domiciliary state.  As a result, same sex couples married in a state that legally recognizes their marriage will be entitled to the estate and gift tax marital deduction, and they must also file their federal income tax returns with the status of married or married filing separately.  (The Department of Labor issued a similar statement in Technical Release No. 2013-4, meaning that for purposes of ERISA, legally married couples are treated as married, regardless of the laws of their domiciliary state.)

North Carolina does not recognize same sex marriage as valid, so for purposes of North Carolina taxes, where does that leave our North Carolina-residing same sex couple clients that were legally married in another state?  NCDOR directive PD-13-1 provides that “Because North Carolina does not recognize same-sex marriage as valid… individuals who enter into a same-sex marriage in another state cannot file a North Carolina income tax return using the filing status of married. Such individuals who file a federal income tax return as married must each complete a separate pro forma federal return for North Carolina purposes with the filing status of single  to determine each individual’s proper adjusted gross income, deductions and tax credits allowed under the Code for the filing status used for North Carolina purposes.”

My clients are considering getting married in a state that recognizes same sex marriage, but they want to understand the legal implications for them if they do.  They are concerned about the “marriage penalty” for federal income tax purposes and the complexity of having different laws and rules for federal and  state purposes. They do not have an estate tax problem, so the availability of the unlimited estate tax marital deduction is of no consequence to them. However, they are considering retitling the house currently owned by one of them into their joint names.  I cautioned them that such transfer would constitute a taxable gift to the extent the value of the interest transferred exceeded the donor owner’s $14,000 annual exclusion. In fact, one partner’s use of funds for the benefit of the other in excess of the donor-partner’s annual exclusion in any year will require the donor-partner to file a gift tax return. If they are legally married, there would be no taxable gifts in those circumstances due to the unlimited marital gift tax deduction. My clients each have a 401(k) plan, so if they were to marry, under ERISA, they must be designated beneficiary of each other’s accounts unless the spouse waives that right.

As an advisor, if you have same sex couple clients who have been married in a state that recognizes same sex marriage and they have paid taxes or used exemptions (income, gift or estate tax) based on separate status, you may consider whether they can and should file amended returns based on married filing status to recoup taxes or exemptions. And they should be advised to revisit their beneficiary designations and their estate planning documents if they have not done so already.

Article by:

Westray B. Veasey

Of:

Poyner Spruill LLP

Show Me the Money: When Can I Expect My Tax Refund?

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Tax filing season got a late start this year thanks to the 2013 government shutdown; the IRS pushed back its official return acceptance date from January 21 to January 31. Now that IRS is accepting returns, when can taxpayers expect to see their refund?

The IRS claims that 9 out of 10 refunds are issued in less than 21 days. The IRS website has a tool called, “Where’s My Refund?” that can be used to check the status of a return 24 hours after the agency receives it electronically or 4 weeks after it is received by mail (i.e., paper return).

The IRS and tax professionals alike strongly encourage taxpayers to file electronically. Doing so can result in a quicker refund. In addition, how a taxpayer elects to receive a refund, via direct deposit or paper check, can affect wait times. Generally, the closer to the deadline (April 15th) that a return is filed, the longer the wait will be (as a majority of filers tend to wait until the deadline approaches).

It is important to note that a return can be filed without immediate payment. No penalty or interest will be levied until the April 15th deadline. Of course, there is always the option of filing for an extension, but generally speaking it is better to timely file your return, and it is important to remember that payments are still due by April 15th even when an extension has been timely filed.

In some cases, individuals can receive tax breaks and refundable credits even if they do not have to pay income tax for a given year. Thus, just because a tax return is not filed does not mean that an individual cannot benefit from professional assistance.

Don’t delay – April 15th will be here before you know it!

Article by:

H. Trigg Mitchell

Of:

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Bulgaria Adopts New Gambling Tax Regime

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Bulgaria has a new gambling taxation regime effective January 1, 2014, which, together with the reasonable and balanced regulations currently in place, makes the country attractive for local licensing and gambling operations based upon a low corporate tax and highly qualified and low-priced technical specialists. One and a half years after theGambling Act (“Act”) was introduced, the tax base for gambling has been changed and is now in line with good business practices: switching from a turnover base to aGross Gaming Revenue (“GGR”) base.

On December 19, 2013, amendments in the Act (“Amendments”) for liberalizing gambling regulation in Bulgaria passed successfully the second reading in the Bulgarian Parliament amidst tense disputes. The Amendments were promulgated in the National Gazette on January 3, 2014, and came into force effective January 1, 2014.

The Amendments assure that as of January 1, 2014, the taxation of any online games in Bulgaria will be based on GGR with a 20% tax rate. For games in which fees and commissions are collected (such as poker), the tax rate will be 20% of the collected fees. In addition, there is a single fee for issuing and maintenance of a five-year license in the amount of approximately EUR 50,000 (BGL 100,000). No annual fee will be required during the five years’ validity of the license.

Offline bingo and keno will be taxed at a 10% corporate tax rate.

The GGR-based taxation is not a part of the common tax system, but rather it is an administrative fee regulated entirely in the Act instead of the tax laws. Nevertheless, any operator who decides to have an establishment in Bulgaria can take advantage of a favorable and stable corporate tax – only 10%. The low corporate tax rate would apply only to operators who decide to establish a local company in Bulgaria, which might be strongly supported from other economic arguments – for example, a very well-educated and qualified labor force at insignificant costs.

The Amendments introduce a new requirement for any licensed operator not established in Bulgaria but established in any other EU/EEA country or Switzerland. Such operators must have an authorized representative in Bulgaria, but this would not constitute having a local business in the country for purposes of obtaining the 10% corporate tax rate. An operator, in all events, is required to have a local representative in Bulgaria, who should be authorized for representation before Bulgarian authorities and courts.

From a regulatory perspective, the Bulgarian gaming regime is now one of the most balanced in Europe. It does not require a local establishment and main server in Bulgaria for any foreign operator who decides to obtain a local Bulgarian license (nevertheless, a local control server in Bulgaria is required). There are no specific requirements for performing payments through a local bank or to make certain investments in the country. The operators are not required to operate a dot bg domain. Foreign operators – registered, investing, and having a main server anywhere within EU, EEA, and Switzerland – can apply for a license. Nevertheless, the restrictions the Act imposes on an applicant whose shareholder is an offshore company should be carefully considered in light of provisions of the Act relating to economic and financial relations with companies registered in preferential tax regime jurisdictions and their actual shareholders.

A significant number of online gambling operators are expected to apply for a license in Bulgaria. The first online operators have already submitted applications. They are eager to enjoy not only reasonable taxation but also liberal regulation. The Bulgarian government has further stimulated the licensing of online operators by approving amendments that allow the operator to be removed from the blacklist even before being granted a license if the online operator applies for such removal not later than March 31, 2014.

The Amendments also permit the operators to perform any other business activity apart from organized gambling, which was not the case until now.

The efforts of the Bulgarian Parliament are of major significance. Instead of concentrating on blocking measures (such as ISP and/or payment blocking), the government has focused on best practices and introduced regulations that motivate the online gambling operators to get a license and work not only in a balanced regulatory environment but also under a favorable tax regime. These changes are aimed at balancing and optimizing the new sector regulation model that was introduced back in 2012. They give the online operators promising conditions to work legally in the Bulgarian market. At the same time, the new regulations impose stricter administrative sanctions on illegal online gambling operations.

Nadya Hambach, of Velchev & Co., authored this article.

Article by:

Dickinson Wright PLLC

A Look Ahead: Top 5 Health Law Issues for 2014

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From Affordable Care Act implementation to the continued transition to quality and evidence-based medicine, we expect to see a host of new regulatory and industry changes in 2014. Moreover, federal and state governments will continue to ramp up detection and enforcement of fraud, abuse, and other laws. These changes provide ample opportunities for lawyers to represent and counsel health care industry clients.

In addition to health lawyers, these changes and new opportunities will also affect lawyers who practice in other areas, including business, antitrust, technology, employee benefits, and elder law. Below is an overview of five hot issues in health care law that practitioners – new and seasoned – should monitor in 2014.

1. Affordable Care Act Implementation

Exchanges and the Individual Market. As millions of Americans obtain insurance on the individual market through Exchanges (a.k.a. the “Marketplace”), the ACA individual mandate and the individual insurance market will create a host of issues for health lawyers in 2014. Beginning early in the year, health lawyers will be called on to address coverage, enrollment, and compliance issues. Attorneys and firms looking to expand their ACA practice should consider employee benefits regulations and related legal issues as ACA implementation continues and employers look for help understanding and complying with coverage requirements and pay or play rules.

Medicaid. The ACA’s expansion of Medicaid will also bring increased attention to the Medicaid program in 2014. Attorneys should be prepared to see increased scrutiny of program integrity in the coming year, including inspector general attention at the state and federal levels (e.g., program audits). Attorneys may be called upon to address these and other Medicaid issues in 2014, including issues with eligibility, covered benefits, and movement between Exchanges and Medicaid.

Tax Exemption. Section 501(r) of the Internal Revenue Code, introduced as part of the ACA, requires, among other things, that tax-exempt hospitals conduct a community health needs assessment and adopt a written financial assistance policy. Hospitals that do not meet the 501(r) requirements risk an excise tax, taxing of hospital revenue, and revocation of exempt status. Proposed regulations outlining the 501(r) requirements were released in 2013, and final rules are expected in 2014.

2. Health Information Privacy and Security

This year is shaping up to be another big year for health information privacy and security and the Health Insurance Portability and Accountability Act (HIPAA), as providers, payers, and businesses that support the health care industry (including lawyers) adapt to new compliance requirements and increased liability under the Omnibus Rule regulatory scheme.

This is an area that will be important for health lawyers, as the Omnibus Rule outlines clear compliance requirements for lawyers providing legal services to providers and payers. (For more information on lawyers as business associates, see “Casting a Wider Net: Health Information Privacy is Not Just For Health Lawyers” in the September 2013 Wisconsin Lawyer).

Health lawyers are also awaiting the 2014 release of another major HIPAA rule – expected to outline requirements for tracking uses and disclosures of health information – as well as legislative changes in Wisconsin dealing with confidentiality of mental health records (an in-depth Wisconsin Lawyer article on this is forthcoming).

Lawyers that deal with health information should be familiar with HIPAA and other federal and state laws protecting the confidentiality of health information to address an increased emphasis on HIPAA audits, security, and technology issues in 2014.

3. Provider Reimbursement and Emphasis on Quality Care

Medicare Billing and Payment. As of this writing, Congress is still debating options for repealing the sustainable growth rate (SGR), which is part of a reimbursement formula used to calculate Medicare physician payments. For years, the SGR has resulted in cuts to physician payments. However, Congress has always used SGR “doc fixes” to extend and delay the cuts (most recently, on Dec. 18, 2013, a 23.7 percent cut set to take effect Jan. 1, 2014, was delayed until March).

However, bipartisan efforts in Congress may make 2014 the year of the SGR repeal. Health care attorneys should take note because the SGR repeal will mean significant changes in how Medicare physician reimbursement is calculated, and the wide-spread effect will touch any number of contractual arrangements that use Medicare reimbursement to set compensation terms.

Quality-based Reimbursement. We have seen a steady change from productivity-based compensation models, which pay for volume, to quality-based reimbursement models, and 2014 will continue this progression. Attorneys that represent physicians and physician practices should be prepared for the introduction (or addition) of quality metrics in physician compensation arrangements, as well as an increase in co-management arrangements and opportunities, which engage physicians in hospital management to better align physicians and hospitals.

Narrow Networks. With additional products available in the individual insurance market in 2014 and an increased focus on performance-based contracting, payers are tying rate increases to quality metrics and tightening provider networks. Attorneys representing physician groups may see an increase in narrow network products and, as a result, their clients’ exclusion from networks.

Changing reimbursement concepts are not new but some methodologies will affect physician behavior, require more patient engagement, and influence efficiency as the industry demands accountable care and continues to introduce quality-based incentives.

4. Increased Joint Venture Activity and Market Consolidation

We expect to see increased joint venture activity and market consolidation in 2014. Increasing market share and patient population allows providers and payers to introduce and monitor their quality care initiatives to a broader base of patients and standardize care with the hope of better outcomes and efficiency. Attorneys representing parties in these transactions should be mindful of fair market value and other fraud and abuse requirements, leasing and construction considerations, and potential antitrust implications.

5. Government Enforcement

The health care industry has seen increased government scrutiny, including emphasis on payment, program integrity, and compliance. From Medicare and Medicaid compliance audits, Strike Teams, increased HIPAA penalties, overpayment recoupment, to fraud and abuse self-disclosures and intervening in whistleblower suits, the federal government is improving its enforcement mechanisms used against hospitals and providers. The federal agencies and their contractors have increased their damages and penalty recoveries over the last few years, and we expect this to continue in 2014.

The primary goal of the U.S. Department of Health and Human Services Office of Inspector General’s (OIG) strategic plan for 2014 to 2018 is fighting fraud, waste, and abuse. In order to achieve its goal, the OIG intends to build upon existing enforcement models, refine self-disclosure protocols, and use all appropriate means (including exclusions and debarments) to maximize recovery.

If you are new to health care, or if you want to expand your practice into health law, these areas of strict liability and increased enforcement will be fundamental to your practice in 2014. Understanding the complex regulations and strict liability statutes is fundamental to providing sound legal and business advice to health care clients.

Honorable Mentions

Retail health clinics and on-site health services, changes in medical malpractice standards, increased emphasis on post-acute care, non-physician health care professionals, and the corporate practice of medicine will also be hot topics in 2014.

This article was first published in WisBar Inside Track, Vol. 6, No. 1, a State Bar of Wisconsin publication.

Article by:

Meghan C. O’Connor

Of:

von Briesen & Roper, S.C.

2014 Update for California Employers

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While 2013 was marked by some novel and interesting judicial and administrative decisions, including Quicken Loans (in which the National Labor Relations Board invalidated certain common employee handbook policies), Vance v. Ball State University (in which the U.S. Supreme Court established the parameters of who could be deemed a “supervisor” for employment discrimination purposes), Nelson v. Knight (in which the Iowa Supreme Court opined that an attractive female employee could be terminated because she was “too distracting” to the small business owner), and Purton v. Marriott (in which the California Court of Appeal addressed an employer’s liability for accidents caused by alcohol consumption at its holiday party), the California Legislature also enacted a number of new bills that become effective in 2014.

Among the most significant of these are the following:

Minimum Wage Increase and Resulting Salary Increase to Maintain Exempt-Employee Status (AB 10)

The California minimum wage will increase to $9.00 per hour, effective July 1, 2014, and to $10.00 per hour effective January 1, 2016. A less-advertised consequence of this increase, however, is the impact it will have on the salary test for preserving an employee’s exempt status. Under California law, a supervisor classified as exempt must be paid a monthly salary that is no less than two times the wages paid to a full-time minimum wage employee. After July 1, 2014, the minimum monthly salary to preserve exempt status under California Labor Code section 515, will rise to $3,120 per month, annualized to $37,440. As this change is scheduled to occur mid-year, employers are advised to make their adjustments early, if needed, to avoid this potential pitfall. In addition, under AB 442 the penalties available for minimum wage violations will now include “liquidated damages.”

Wage Rate Increases for Computer Software Employees and Physicians

Labor Code sections 515.5 and 515.6 provide exemptions for overtime for certain computer software employees and licensed physicians who earn a set minimum wage that is adjusted annually by the Division of Labor Standards Enforcement. Effective January 1, 2014, the minimum hourly rate increased to $40.38 (from $39.90) for computer professionals and to $73.57 (from $72.70) for physicians, reflecting a 1.2 percent increase in the California Consumer Price Index. Affected employers should adjust their rates accordingly.

Meal Periods, Rest Breaks, And Now “Recovery Periods” (SB 435)

For several years, the California Code of Regulations has required employers of outdoor-working employees to allow their outdoor workers the opportunity to “take a cool-down rest in the shade for a period of no less than five minutes when they feel the need to do so to protect themselves from overheating.” (Cal. Code. Regs., tit. 8, § 3395, subd. (d)(3).) Previously, an employer who failed to provide these cool-down recovery periods was subject to a citation issued by the California Division of Safety and Health. But now, effective January 1, 2014, SB 435 provides employees with a right, under California Labor Code § 226.7, to seek recovery of statutory damages each workday that an employer fails to provide an employee with these cool-down recovery periods. Employers with outdoor-working employees should review their current policies and practices to ensure that meal periods, rest breaks, and recovery periods are addressed and afforded. 

Making It Harder For Prevailing Employers To Obtain Attorney’s Fees And Costs In Wage Cases (SB 462)

California Labor Code Section 218.5 allows the “prevailing party” to recover attorney’s fees and costs in any action brought for the nonpayment of wages (e.g., minimum or overtime wages), fringe benefits, or health and welfare or pension fund contributions. SB 462 amends Labor Code Section 218.5 to make it more difficult for employers to obtain attorney’s fees and costs under this section. Indeed, effective January 1, 2014, to obtain attorney’s fees and costs under Labor Code Section 218.5, an employer must not only be the “prevailing party” in such an action, but the court must also find that the “employee brought the court action in bad faith.” On the other hand, due to the enactment of AB 1386, which amends Section 98.2 of the Labor Code, a final order of the Division of Labor Standards Enforcement can create a lien on the employer’s real property to secure amounts due to a prevailing employee-claimant. Unless the lien is satisfied or released, it will continue for 10 years after the date of its creation.

The IRS To Begin Enforcing Its Rule That Automatic Gratuities Are Wages, Not Tips

Restaurants often add automatic gratuities on the bill of large parties (for example, a 20% automatic gratuity for parties of eight or more). Previously, for IRS purposes, these automatic gratuities were considered part of an employee’s “tips,” and thus the employee could pocket their share of automatic gratuities, and it was up to the employee to report them to their employer and on their tax return. Starting in 2014, however, the IRS will treat an employee’s portion of automatic gratuities as the employee’s regular wages and, as such, they will be subject to tax withholdings by the employer. Thus, employees will now receive their portion of automatic gratuities as part of their normal paychecks, and employers will be tasked with the responsibility of actively monitoring these wages, performing the necessary tax withholdings, and correctly reporting these wages to the IRS. Notably, because automatic gratuities will now be considered part of an employee’s regular wages for IRS purposes, employers should analyze whether they are required to account for these automatic gratuities when computing an employee’s overtime rate.

Wage Withholdings (SB 390)

Under Labor Code Section 227, it is unlawful for an employer to willfully, or with the intent to defraud, fail to make agreed-upon payments to health and welfare funds, pension funds or vacation plans, or other various benefit plans. SB 390 amends this provision so that it is now also unlawful for an employer to fail to remit withholdings from an employee’s wages that were made pursuant to state, local, or federal law, such as taxes. SB 390 further provides that in criminal proceedings under this section, any withholdings that are recovered from an employer shall be forwarded to the appropriate fund or plan and, if restitution is imposed, the court shall direct to which agency, entity, or person it shall be paid. 

Criminal History Inquiries (SB 530)

On October 10, 2013, Governor Jerry Brown approved SB 530, which amends California Labor Code Section 432.7 to include additional prohibitions for employers related to pre-employment inquiries into an individual’s prior criminal history. California law already prohibits employers from asking applicants to disclose, or from using, arrest records. Effective January 1, 2014, employers are prohibited from asking job applicants to disclose, or from utilizing as a factor in determining any condition of employment, information concerning a conviction that has been judicially dismissed or ordered sealed. SB 530 exempts employers from the above requirements in the following circumstances: (1) the employer is required by law to obtain such information; (2) the applicant would be required to possess or use a firearm during the course of the employment; (3) an individual who has been convicted of a crime is prohibited from holding the position sought by the applicant, regardless of whether that conviction has been expunged, judicially ordered se
aled, statutorily eradicated, or judicially dismissed following probation; and (4) the employer is prohibited by law from hiring an applicant who has been convicted of a crime.

As with the existing version of Section 432.7, SB 530 allows an applicant to recover from an employer the greater of actual damages or two hundred dollars ($200), plus costs and reasonable attorneys’ fees, for a violation of the statute and the greater of treble actual damages or five hundred dollars ($500), plus costs and reasonable attorneys’ fees, for an intentional violation of the statute. An intentional violation of the statute is a misdemeanor punishable by a fine not to exceed five hundred dollars ($500).

This expanded protection for applicants with criminal conviction records supplements the federal government’s recent efforts on this topic. The U.S. Equal Employment Opportunity Commission has published an Enforcement Guidance on the consideration of conviction records in employment decisions. In order to avoid claims of disparate treatment or impact, the EEOC recommends that employers develop narrow policies that determine the specific criminal offenses that may demonstrate unfitness for particular jobs. The EEOC recommends individualized assessments as opposed to blanket policies. Employers should carefully review their job application form to ensure compliance with these new requirements.

Domestic Worker Bill of Rights (AB 241)

Another wage-and-hour change comes from the Domestic Worker Bill of Rights, which took effect January 1, 2014. The new legislation establishes, among other things, overtime compensation at a rate of one and one-half times the regular rate of pay to caregivers who work more than nine hours a day or more than 45 hours a week. Covered caregivers include those who provide one-on-one care for 80 percent or more of their duties, such as nannies and in-home caregivers of the elderly or disabled. It does not cover babysitters, family members who provide babysitting services, or caregivers of low-income individuals through California’s In Home Supportive Service. Caregivers who work at facilities that provide lodging or boarding are also excluded.

Victims’ Rights to Time Off From Work (SB 288)

Employers may not retaliate or discriminate against employees who are victims of certain felony crimes, domestic violence or sexual assault for taking time off from work to appear in court or to obtain prescribed relief. A new addition to California Labor Code — Section 230.5 — now will also prohibit an employer from terminating or discriminating against an employee who is a victim of certain additional specified criminal offenses from taking time off to appear in court. These specified offenses include vehicular manslaughter while intoxicated, felony child abuse, felony stalking and many other “serious felonies.” The employee-victim may take such time off from work to appear in court to be heard at any proceeding involving a postarrest release decision, plea, sentencing, postconviction release decision, or any proceeding in which a right of the victim is at issue. Employers should include a policy addressing this leave of absence right in their employee handbooks.

Victims of Stalking (SB 400)

Sections 230 and 230.1 of the California Labor Code set forth various protections for victims of domestic violence or sexual assault. SB 400 expands these protections to victims of stalking and also requires employers to provide “reasonable accommodations” to such victims. The bill defines reasonable accommodations to include a transfer, reassignment, modified schedule, changed work telephone, changed work station, installed lock, an implemented safety procedure, or another adjustment to a job structure, workplace facility, or work requirement in response to domestic violence, sexual assault, or stalking, or referral to a victim assistance organization. As with reasonable accommodations for disabilities, employers must engage in a timely, good faith, and “interactive process” with the affected employee to determine effective reasonable accommodations. Again, language should be added to an employee handbook to address this new right.

Family Temporary Disability Insurance Program (SB 770)

Beginning on July 1, 2014, the scope of the family temporary disability program will be expanded to include time off to care for a seriously ill grandparent, grandchild, sibling or parent-in-law. The employee’s certification required to qualify to take such leave to care for a family member must include a number of items, including a statement that the serious health condition warrants the participation of the employee to care for the family member. “Warrants the participation of the employee” includes providing psychological comfort as well as arranging third party care for the family member.

Sexual Harassment Definition Clarified (SB 292)

SB 292 amends the definition of harassment under California law to clarify that sexually harassing conduct does not need to be motivated by sexual desire. This law is intended to overturn the decision in Kelley v. Conoco Companies which had affirmed summary judgment against the plaintiff in a same-sex harassment case on the grounds that the plaintiff had failed to prove that the alleged harasser harbored sexual desire for the plaintiff. This legislation may signal an interest by Sacramento in passing broader “anti-bullying” protections for California employees.

Expansion of Employee Whistleblower Protections (SB 496)

On October 12, 2013, California Governor Jerry Brown signed into law SB 496, which amends Section 1102.5 of the California Labor Code to provide greater whistleblower protections to employees who disclose information related to their employer’s alleged violations of or failure to comply with the law. Specifically, SB 496 now provides that an employee’s disclosure of information to a government or law enforcement agency regarding their employer’s violation of local rules or regulations is a legally protected disclosure. Formerly, employees were only protected if they disclosed information regarding their employer’s noncompliance with state and federal laws. Employees now enjoy complete whistleblower protection for disclosing information if the employee has reasonable cause to believe that the information shows a violation of a state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation. Also, disclosures made to a supervisor of another employee who has the authority to investigate, discover and correct the alleged legal violation is a significant expansion of the protection under SB 496. Interestingly, the statute’s expansion now also includes the circumstance where the employer merely “believes the employee disclosed or may disclose information.” Employers are subject to steep civil penalties, up to $10,000 per violation, if they prevent or retaliate against an employee for an employee’s disclosure of information related to their employer’s violation of the law or refusal to participate in any activity which would result in a violation of local, state, or federal law.

Unfair Immigration-Related Practices (AB 263, SB 666)

AB 263 amends several sections of the California Labor Code, all with the goal of providing greater employee protections for making complaints regarding unsafe, unfair and illegal work practices. First, AB 263 amends Section 98.6 of the Labor Code to include an employee’s written or oral complaint of unpaid wages as a legally protected activity. Employers may not discharge or in any manner discriminate, retaliate or take any adverse action against an employee for making such a complaint regarding unpaid wages owed to them. Under AB 263, employers are now at risk of facing a civil penalty of up to $10,000 per employee for each violation for failing to comply with Section 98.6.

AB 263 further amends the Labor Code by adding protections for immigrant
employees. Under the new Unfair Immigration-Related Practices section of the Labor Code (sections 1019 et seq.), employers may not engage in any unfair immigration-related practice, as defined under the statute, against any employee for the purpose or intent of retaliating against employees for the exercise of any right afforded to them under the law. The term “unfair immigration-related practice” is defined to include: (i) requesting more or different documents than are required under federal immigration law, (ii) refusing to honor immigration-related documents that on their face reasonably appear to be genuine; (iii) using the federal E-Verify system to check the employment authorization status of a person at a time or in a manner not required by federal law, (iv) threatening to file or the filing of a false police report, and (v) threatening to contact immigration authorities. Now, without the threat of reprise from their employer regarding their immigration status, employees are allowed to (1) make a good-faith complaint or disclosure of an employer’s violation of or noncompliance with any federal, state or local law; (2) seek information regarding their employer’s compliance with federal, state or local laws; or (3) inform and assist other employees of their rights or remedies under the law. Employers are subject to heavy sanctions for any unlawful threat, attempt, or actual use of an employee’s immigration status to retaliate against an employee for engaging in legally protected workplace activities. Sanctions may include, but are not limited to, up to a 90-day suspension of the employer’s business licenses and a host of other civil damages.

Another legislative enactment, SB 666, provides that businesses licensed under the Business and Professions Code (including lawyers, accountants, engineers, and contractors) are subject to suspension, revocation, or disbarment if they are determined to have reported or threatened to report an employee’s, former employee’s, or prospective employee’s citizenship or immigration status, or the citizenship or immigration status of a family member of the same, to a federal, state, or local agency because the employee, former employee, or prospective employee exercises a right under the provisions of the Labor Code, the Government Code, or the Civil Code. In addition to any other remedies available, the bill provides for a civil penalty, not to exceed $10,000 per employee for each violation, to be imposed against a corporate or limited liability company employer. The bill contains an important exception, stating that an employer is not subject to suspension or revocation for requiring a prospective or current employee to submit, within three business days of the first day of work for pay, an I-9 Employment Eligibility Verification form. (Beginning not later than January 1, 2015, the DMV will be required to issue driver’s licenses to certain non U.S. citizens, although this particular form of driver’s license may not be used to verify employment eligibility for purposes of a Form I-9.)

Finally, certain unfair immigration-related practices are also a crime. For example, Penal Code section 518 defines “extortion” as the obtaining of property from another, with his/her consent, or the obtaining of an official act of a public officer, induced by a wrongful use of force or fear. Extortion is punishable as a felony by up to four years in jail. AB 524, which amends the Penal Code, provides that “wrongful use of force or fear” now includes the threat to report an individual or their family’s immigration status or suspected immigration status.

Expansion of Leaves of Absence for Emergency Duty (AB 11)

Existing California law requires employers to provide temporary leaves of absence for volunteer firefighters so that they could attend required fire or law enforcement trainings. AB 11 expands the protected leave rights for volunteer firefighters, reserve peace officers, and emergency rescue personnel, and allows for leave for emergency rescue training in addition to fire or law enforcement training. The law applies only to employers with 50 or more employees. Under the law, employees that are fired, threatened with being fired, demoted, suspended, or otherwise discriminated against because they took time off for qualifying training are entitled to reinstatement and reimbursement for lost wages and benefits. Employee handbooks should be revised to comply with this expanded law.

Military and Veteran Status Is Now a Protected Category Under the FEHA (AB 556)

AB 556 broadens the scope of “protected categories” under the California Fair Employment and Housing Act to include “military and veteran status.” Under the law, an employee with “military and veteran status” is defined as a member or veteran of the United States Armed Forces, United States Armed Forces Reserve, the United States National Guard, and the California National Guard. The law provides an exemption in circumstances where an employer makes an inquiry into an employee’s military status to afford the employee preferential treatment in hiring. All equal employment opportunity policies should now include this additional protected category.

Family Friendly Workplace Ordinance

San Francisco’s Family Friendly Workplace Ordinance (“FFWO”) became effective on January 1, 2014. As currently written, the ordinance applies to employers with 20 or more employees, although an amendment is expected to pass early in the year which will clarify that the ordinance applies regardless of where the 20 employees are based. The ordinance provides employees who are employed within San Francisco, who have been employed for six months or more, and who work at least eight hours per week with the right to request flexible work arrangements to assist with caregiving responsibilities. Such requests may include but are not limited to modified work schedule, changes in start and/or end times for work, part-time employment, job sharing arrangements, working from home, telecommuting, reduction or change in work duties, and predictability in the work schedule. The employee may request the flexible or predictable working arrangement to assist with care for a child or children under the age of eighteen, a person or persons with a serious health condition in a family relationship with the employee, or a parent (age 65 or older) of the employee. Within 21 days of an employee’s request for a flexible or predictable working arrangement, an employer must meet with the employee regarding the request. The employer must respond to an employee’s request within 21 days of that meeting. An employer who denies a request must explain the denial in a written response that sets out a bona fide business reason for the denial and provides the employee with notice of the right to request reconsideration. The ordinance also has posting and recordkeeping obligations and prohibits retaliation for exercising rights protected by the ordinance. Employers with any San Francisco based employees (whether they telecommute or otherwise) should consider revisions to employee handbooks, comply with posting obligations (in English, Spanish, Chinese and any language spoken by at least 5% of the employees the workplace or job site), and establish a procedure to timely handle written requests for flexible work arrangements under the FFWO.

Employers throughout California (whether in San Francisco or not) should also be aware of possible discrimination against workers with caregiving responsibilities, as this might constitute employment discrimination based on sex, disability or other protected characteristics. Some of these issues are summarized in the EEOC’s guidance entitled “Employer Best Practices for Workers With Caregiving Responsibilities.” 

Article by:

Of:

Allen Matkins Leck Gamble Mallory & Natsis LLP

Treasury and IRS Provide Thanksgiving Surprise: Proposed 501(c)(4) Political Activity Rules

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As most of America travelled over the river and through the woods to Grandma’s house before the Thanksgiving holiday, the Treasury Department and the IRS delivered their own holiday gift.  On Tuesday, November 26, they released proposed guidance aimed at clarifying which conduct by tax-exempt social welfare organizations – 501(c)(4) entities – qualifies as political campaign activity.

Under existing IRS regulations, the promotion of social welfare does not include direct or indirect participation in political campaigns on behalf of or in opposition to any candidate.  Over the years, the IRS has used a wide-ranging facts and circumstances test to determine whether an organization is engaged in an impermissible level of political campaign activity.  In the aftermath of the recent IRS scandal regarding the review of 501(c)(4) applications, Treasury and the IRS believe that more definitive political activity rules would reduce the need to conduct fact-intensive inquiries when applying the rules for qualification as a social welfare organization.

To accomplish this objective, Treasury and the IRS have coined a new term, “candidate-related political activity.”  This term encompasses existing definitions of political campaign activity from federal tax and campaign finance laws, and includes the following:

  • Express advocacy communications;
  • Public communications made within 60 days before a general election or 30 days before a primary election that clearly identify a candidate for public office, as well as any other communications that have to be reported to the FEC (including independent expenditures and electioneering communications);
  • Monetary and in-kind contributions to or the solicitation of contributions on behalf of campaign, party and other political committees, and other tax-exempt organizations that engage in political activity; and
  • Other election related activities such as voter registration and get-out-the-vote drives, distribution of candidate or political committee materials, and the preparation and distribution of voter guides.

The proposed rules raise many serious concerns.  For example, candidate-related political activity could include conducting nonpartisan voter registration drives and distributing nonpartisan voter guides.  Moreover, the proposed rules attribute to 501(c)(4) organizations, among other things, political activities conducted by their officers, directors or employees acting in that capacity.

Unfortunately, the draft rules do not elaborate on the possible differences between conduct taken in an official capacity and personal political conduct by an officer, director or employee.  Finally, many contributions from a 501(c)(4) to another tax-exempt organization would appear to qualify as candidate-related activity unless the contributor receives a written confirmation that the recipient does not engage in such activity and the contributor restricts the use of the contribution.

The proposed political activity rules also leave many important issues unaddressed.  Under existing rules, 501(c)(4) entities must be “primarily” engaged in activities that promote the common good or social welfare.  The proposed rules provide no guidance on what proportion of an organization’s activities must be dedicated to this purpose to qualify under section 501(c)(4).   The proposed regulations also do not apply to entities that qualify under Section 501(c)(3) (charitable organizations),  Section 501(c)(5) (labor unions),  Section 501(c)(6) (trade associations), or Section 527 (political organizations).  Treasury and the IRS are, however, accepting comments on the advisability of making changes in each of these areas.  Interested persons may submit comments to the IRS by February 27, 2014.

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Of:

Womble Carlyle Sandridge & Rice, PLLC

IRS Announces Modification to “Use-It-Or-Lose-It” Rule for Health Care Flexible Spending Accounts

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On October 31, 2013, the Internal Revenue Service (“IRS”) announced a modification to the “use-it-or-lose-it” rule that applies to health care Flexible Spending Arrangements (“FSAs”) under a cafeteria plan. Under the use-it-or-lose-it rule, unused amounts in a participant’s health care FSA for a plan year not used to pay eligible medical expenses incurred during the plan year were required to be forfeited to the employer, unless the employer adopted the 2 1/2 month grace period. The grace period rules permit participants to use amounts remaining from the prior year to pay eligible medical expenses incurred during the first two months and 15 days immediately following the end of the plan year (March 15 for a calendar year plan).

The New Carryover Provision

Under the new rule, an employer, at its option, may permit a participant to carryover to the immediately following plan year up to $500 in unused amounts from a health care FSA. This carryover may be used to pay or reimburse medical expenses under a health care FSA incurred during the entire plan year to which it is carried over. The rule also provides that:

  • The carryover does not count against or otherwise affect the maximum payroll reduction limit for the plan year ($2,500 for 2014).
  • Although the maximum unused amount allowed to be carried over to any plan year is $500, the plan may specify a lower amount.
  • If a plan permits a carryover, the same dollar limit must apply to all plan participants.
  • A plan that adopts the carryover provision is not permitted to provide the FSA grace period.
  • The use of the carryover option does not affect the plan’s ability to provide for the payment of expenses incurred in one plan year during a permitted “run-out” period at the beginning of the following year.
  • A plan is not permitted to allow unused amounts related to an FSA to be cashed out to the participant or used for any other taxable or non-taxable benefit.
  • A plan is permitted to treat reimbursements of all claims that are incurred in the current plan year as reimbursed first from unused amounts credited for the current plan year and, only after exhausting these amounts, as then reimbursed from unused amounts carried over from the previous year.
  • Any carryover amount used to pay for eligible medical expenses in the current plan year will reduce the amounts available to pay claims during the run-out period from the prior plan year.

For example, Jane Smith participates in her employer’s FSA with a calendar plan year, a run-out period from January 1 to March 31, an open enrollment in November for making salary reductions for the following year and the $500 carryover.

In November 2014, Jane elects a salary reduction of $2,500 for 2015. By December 31, 2014, she has $800 remaining from 2014. The plan may treat $500 of the unused $800 as available to pay 2015 expenses. Jane now has a total of $3,000 to spend in 2015. She is reimbursed for a $2,700 claim incurred in July 2015. The plan treats the first $2,500 as reimbursed with 2015 contributions, and the remaining $200 of the claim as reimbursed with unused 2014 contributions (leaving $300 for any further 2015 expenses). If she submits no further claims in 2015, the remaining $300 is carried over to 2016.

Assume these same facts, except that Jane’s $2,700 expense is incurred and submitted in January 2015 (during the 2014 run-out period). Jane is reimbursed for the claim first from 2015 contributions ($2,500) and then from 2014 contributions ($200). Since this claim was incurred during the run-out period, the 2014 run-out amount is reduced to $600 ($800-$200). If on February 1, 2015 Jane receives a medical bill from 2014 for $700 and submits the expense, the plan may only reimburse her for $600 of the total $700 claim. Jane continues to have $300 available for any 2015 expense, which may be carried over to 2016.

Next Steps

An employer that wants to implement the new carryover option must amend its cafeteria plan on or before the last day of the plan year from which amounts may be carried over and the amendment can be made effective retroactively to the first day of that plan year. For example, an employer can amend a calendar year plan on or before December 31, 2013 and have the carryover rule apply for 2013. The employer must notify participants of the new rule.

This increased flexibility will reduce a key barrier for many potential FSA users and may increase enrollment in FSA programs. Participants will no longer have to perfectly predict normally unpredictable health expenses a year in advance. Even though the carryover is limited to $500, the majority of forfeitures under the use-it-or-lose-it rule were less than $500.

Employers should carefully consider whether their employees would benefit from adopting the carryover rule instead of the grace period rule. The carryover rule is limited to $500 but permits the $500 to be used to pay for eligible expenses during the entire year into which it was carried over. In contrast, the grace period rule permits the entire amount of unused dollars in a health care FSA to be used but only to pay expenses incurred during the first 2 1/2 months of the next year.

Employers seeking to modify a 2013 plan that currently has a grace period should also carefully consider the ERISA implications of eliminating the availability of the grace period for 2013 contributions.

Article by:

Eric W. Gregory

Of:

Dickinson Wright PLLC