The Employee Benefits & Executive Compensation attorneys at Chamberlain Hrdlicka represent public companies, large and closely-held private companies, tax-exempt organizations, and the fiduciaries who oversee those entities' employee benefit plans. We understand incentives in the workplace, and we stand ready with an integrated approach to help you deal with them.
From qualified retirement plans, to executive compensation, to fiduciary advice, to health and welfare programs, to mergers and acquisitions, to ERISA litigation, our broad experience helps companies answer questions in these areas of the law. A background in tax, securities, and fiduciary matters is our foundation. A common theme runs through our work in these areas: we specialize in representing employers in protecting their interests and maximizing tax advantages. We understand the work that goes into creating and maintaining incentives in the workplace, and we have the technical skills to help keep a company's employee benefit plans operating at peak efficiency.
At Chamberlain Hrdlicka, we stand with company Boards of Directors, Compensation Committees, and the HR teams that serve those directors and committees, as they seek to provide a stable, productive environment for company executives and workers.
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The Internal Revenue Service (IRS) has a division called Tax Exempt & Government Entities (TEGE). This division has updated its Compliance Program and Priorities (CPP) webpage on IRS.gov to provide information about its fiscal year2021 compliance initiatives. TEGE's purpose and mission are to help tax-exempt and government entities comply with applicable tax laws as well as to try and protect the public by making sure the tax law is applied to tax-exempt organizations with integrity and fairness. The TEGE is also responsible for compliance around employee benefit plans as qualified retirement plans have a tax-exempt trust as the owner of the plan assets.
The updated webpage has announced eight new compliance initiatives for fiscal year 2021. Seven compliance initiatives in the list below, the IRS will be conducting audits. The last compliance initiative will be done by a compliance check or request for information.
The newly announced compliance initiatives are:
1. Small exempt organizations that sponsor retirement plans.
TEGE is looking for retirement plans of small tax-exempt organizations (EOs) to review whether (1) the plan's investments are properly administered, (2) there are any party-in-interest transactions in the plan trust, and (3) any participant loans should be treated as distributions because they violate the rules in Internal Revenue Code (“Code”) § 72(p). Unpermitted transactions between the qualified plan and the plan participants may result in what the Code refers to as prohibited transactions. A prohibited transaction will create a deemed distributions as taxable income, or result in Code § 72(t) early distribution penalties.
2. One-participant 401(k) plans.
TEGE is going to audit one-participant 401(k) plans to review for operational or qualification failures, income and excise tax adjustments, or plan document violations.
3. Worker classification.
TEGE is wanting to see how EOs classify their workers to confirm that EOs are not trying to reduce their tax liability by improperly classifying employees as independent contractors. The IRS believes that worker misclassification results in employers (EOs and non-EOs) underreporting and underpaying Federal Insurance Contributions Act (FICA) and Federal income taxes. The concern is also that worker misclassification will result in a worker's exclusion from an EO's retirement plan.
4. Officers of an EO treating the organization as a Schedule C Business.
TEGE is concerned that officers and insiders of EOs are claiming the EOs' expenses as Schedule C business deductions. TEGE will scrutinize potential private benefit and inurement within the EO and will consider making potential adjustments to an officer or insider's Form 1040, personal income tax return.
5. Form 990-N filers/gross receipts model.
TEGE will examine if an EO was truly eligible to file the Form 990-N, Electronic Notice (or e-Postcard) where other filings may indicate that the EO actually had more than $50,000 in gross receipts which triggers the inability to file a Form 990-N.
6. Student loan bonds market segment.
TEGE is interested if certain student loan bonds meet the requirements under Code § 144(b). Failure to satisfy these requirements could result in the interest on the bonds being taxable to the bond holders.
7. Form 8038-G, Information Return for Tax-Exempt Governmental Obligations, and yield restrictions.
TEGE will audit EOs with yield restrictions on bond proceeds to determine whether the bond proceeds are "yield restricted." If the bond proceeds are not yield restricted (after a certain temporary grace period), the bonds will be deemed taxable arbitrage bonds. Additionally, the interest paid to the bondholders will be taxable.
8. Plan liabilities and unrelated business income.
TEGE will audit EOs if, as plan sponsors, the EO reported plan liabilities on their Form 5500-series (Annual Return/Report of Employee Benefit Plan) return showing they are engaging in activities that result in unrelated business taxable income. TEGE is looking for large, unusual, or questionable liabilities/assets that may result from prohibited transactions. Further TEGE is looking at these liabilities/assets for unrelated business income or failure to value assets properly. The Code’s unrelated business income tax provisions do tax income earned by EOs from activities that are unrelated to the charitable (or tax-exempt) purpose for which they were granted exempt status.
Every qualified retirement plan under Code § 401 has a tax-exempt trust under Code § 501. Thus, ERISA attorneys must understand tax-exempt law under Code § 501 to protect our clients and help them comply with the Code’s requirements. TEGE is one part of the IRS that regulates both EOs and employee benefit plans. Tax-exempt organizations need to make sure that they are complying with all parts of the Code including the law relating to employee benefit plans. Likewise, non-EO employers should also understand that they sponsor an EO if they are a plan sponsor of a qualified retirement plan. Thus, all employers need to understand and comply with tax-exempt law under Code § 501, et. seq.
Joshua Sutin helps clients unravel complex legal and business issues related to employee benefit plans, tax-exempt organizations, and business tax planning. He counsels both businesses and not-for-profit organizations on the ...