...from the HR Perspective

Human Resource Update

January 2011

In This Issue

2011 IRS Reporting Change

IRS Kicks Off 2011 Tax Season

The Fix Is In: Common Plan Mistakes

eLaws Quick Link

Five Year Cycle for IDP's

Track Government Spending

Creating a Healthy Office

Track Government Spending

Terms of Use

2011 IRS Reporting Change

The 1099 will undergo significant changes for filing after December 31, 2011. Employers will be required to furnish and file an information return for payments made to all for-profit companies regardless of corporate status. In addition, all payments for goods, materials, merchandise, supplies, and other property may need to be reported as well. This increase in information will most likely cause reporting volume to increase dramatically, as well as associated B-Notices.

If you issue 1099s you will need to start making expensive changes, including implementing broadened W-9 solicitation procedures, preparing for increased 1099 year-end printing, mailing, and filing obligations, and making necessary changes to your systems and processes to meet these new requirements.

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Greetings:

The President's State of the Union speech and Congress's new seating arrangement for that speech reminded me of married couples. The most common subject married couples fight over is money. Some couples stay together with the never realized hope of compromising on this issue, some stay together for the sake of appearances, some fight constantly, and many times, one of the couple tries to pull the wool over the other's eyes. I believe we saw all of that on January 25^th.

What does this mean for us and our companies? Among other things, the President proposed cutting the corporate tax rate, "investing" in new initiatives, expanding free trade, increasing exports, increasing taxes on couples making over $250,000, and more. Nation-wide health insurance, despite the House voting it down, may make some headway. All of it (with the exception of the increased personal taxes) sounds good. That is until you connect the dots.

How does this affect our companies and employees? If personal income taxes are increased, executive compensation programs will have to be examined. How will you maintain the after tax income levels of those who guide your company? If corporate taxes are lowered, the resulting higher profits may permit companies to fund these losses to executives. Executive compensation plans may also have to be reexamined if the reduced corporate tax rate results in unintended rewards. Don't forget to look at executive benefits and perquisites that also may be affected by increased personal tax rates.

Increased federal spending may excite inflation, and affect the stock and bond markets. If you have a defined benefit pension plan, be sure your investment advisors are vigilant. The same goes for 401(k) and other defined contribution plans. It may be a good time to review the funds, education and communications that are provided.

Increased free trade is likely to first result in the export of higher technology goods and services. How will you prepare to recruit the additional qualified staff members needed to produce these goods and services? Maintaining a pool of potential employees is one way to be sure critical positions can be filled quickly. On the other side of the coin, increased free trade may also mean increased imports that are on the lower end of the scale. This could mean fiercer competition and possible layoffs of US workers.

Union activity is likely to grow. If you have a union free workplace don't be complacent. If you have unions, but white collar employees are not unionized, also be watchful - particularly so with lower level technical and scientific workers. If you have not yet contacted your congressmen/women about the NLRB posting requirements, please refer to last month's newsletter:

The uncertainty of national health care is preventing some companies and some insurers from going forward with plan changes. This issue must be brought to a head this year. The UK is now delaying hip and knee replacements and cataract surgery by about four months. Other cuts may be coming such as having terminally ill cancer patients manage their own symptoms during evenings and weekends, the actual rationing of joint replacements, cutting the number of hospital beds and closing nursing homes. Canada continues to have its health care problems as well. As these are the models the drafters of the US bill used, we need to change the path, or more appropriately, start over again. Please write your Senators and Representative http://www.usa.gov/Contact/Elected.shtml

Your part in responding to the changing world is becoming more important each day. Please let us know if we may be of assistance as you face these and other challenges.

______________________________

If you find value in this newsletter please let us know. Feel free to call me with a comment and/or ask a question at any time (908-689-4200) or send me an email (myates@mfyco.com).

We offer this timely information as another benefit of your relationship with our company. If you feel a friend or colleague would benefit from receiving our newsletter, please feel free to forward a copy.

Sincerely,

0.8791208791208791

Michael F. Yates

President

PS: You can view all of our newsletters by clicking the 'newsletter archives' link at our company website (www.mfyco.com).

______________________________

IRS Kicks Off 2011 Tax Season

(Courtesy of IRS.gov)

The Internal Revenue Service opened the 2011 tax filing season on January 4, 2011 by announcing that taxpayers have until April 18 to file their tax returns. The IRS reminded taxpayers impacted by recent tax law changes that using e-file is the best way to ensure accurate tax returns and get faster refunds.

Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

The IRS also reminded tax professionals preparing returns for a fee that this is the first year that they must have a Preparer Tax Identification Number (PTIN). Tax return preparers should register immediately using the new PTIN sign-up system available through www.IRS.gov/taxpros.

Who Must Wait to File

For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some taxpayers will need to wait until mid to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.

Taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act), enacted Dec. 17^th, who need to wait to file include taxpayers in any of the following groups:

Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid to late February.
Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students, covering up to $4,000 of tuition and fees paid to a post-secondary institution, is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

In addition to extending the tax deductions listed above for 2010, the Act also extended the deductions listed above for 2011 and a number of other tax deductions and credits for 2011 and 2012, such as the American Opportunity Tax Credit and the modified Child Tax Credit, which help families pay for college and other child-related expenses. The Act also provides various job creation and investment incentives including 100% expensing and a 2% payroll tax reduction for 2011. Those changes have no effect on the 2011 filing season.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by these tax law changes can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes. Additional information will be available at www.IRS.gov.

For taxpayers who must wait before filing, the delay affects both paper filers and electronic filers. The IRS urges taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax law changes and ensure accurate tax returns. Except for those facing a delay, the IRS will begin accepting e-file and Free File returns on January 14.

The Fix Is In: Common Plan Mistakes

Periodically the Internal Revenue Service (IRS) publishes an article that it calls "The Fix Is In: Common Plan Mistakes" that present common mistakes that happen in retirement plans. These articles describe a common problem, how it happened, how to fix it and how to lessen the probability of the problem happening again. Over the course of the next several months, we will be reproducing some of those articles that we believe would be helpful to you in the day-to-day administration of your plan.

Plan Loan Failures and Deemed Distributions

The Issue

Many employers make participant loans available in their retirement plans. When a plan makes loans available, there are two important statutory requirements to consider: §72(p) dealing with taxability of participant loans and §4975(d) dealing with prohibited transactions. This web page focuses on the tax rules under §72(p).

A plan loan is a taxable distribution unless the loan satisfies the exception under §72(p)(2) which sets limits on the amount of a nontaxable loan and the repayment of the loan. Participants may receive a nontaxable loan of up to 50% of their vested account balance not to exceed $50,000. A minimum loan up to $10,000 can be made that exceeds the 50% rule as long as the excess is secured with additional collateral. The participant loan, by its terms, must be repaid within five years. The repayment period may be exceeded if the loan is for the purchase of a primary residence. Principal and interest must be paid in substantially level payments at least quarterly.

The Problem

The most common plan loan failures relate to:

1.      loans that exceed the maximum dollar amount,

2.      loans with payment schedules that don't meet the time or payment limits, and

3.      defaulted loans due to failure to make required payments.

Each of these will cause the loan (or portion thereof) to become a "deemed" distribution for tax purposes. A deemed distribution differs from other distributions in that the participant is taxed as if the distribution were received, but the treatment of the loan as a distribution does not excuse the participant from the obligation to repay the loan. A failure to repay the loan may result in additional tax consequences and, in some cases, a prohibited transaction.

If a participant loan is in excess of the maximum amount allowed, only the excess portion is taxable. For example, a $60,000 non-principal residence loan would trigger a $10,000 deemed distribution. If a participant loan doesn't satisfy the 5-year, quarterly payment requirement, the entire loan is taxable, including a loan that is within the dollar limit. For example, a non-principal residence loan for $5,000 with a 6-year repayment period is made. Since the 5-year repayment term limit is exceeded, the entire $5,000 is taxable even though it is within the dollar limit. Similarly, if the loan was properly set up as a 5 year loan but provided for 5 annual payments, the entire $5,000 is taxable as a deemed distribution. When a loan goes into default, whether from participant or administrator error, a deemed distribution of the entire unpaid loan balance plus accrued interest results.

The Fix

If the plan contains language that reflects the loan limits under §72(p)(2), the violations discussed will also cause a plan to become disqualified, resulting in adverse tax consequences to the employer and employees under the plan; however, employers may get relief from these adverse consequences through the Employee Plans Compliance Resolution System (EPCRS) by correcting the failures. The Voluntary Correction Program (VCP) can be used to correct these mistakes.

Revenue Procedure 2006-27 adds three new corrections for plan loan failures which, when made through VCP, removes the §72(p) deemed distribution tax reporting requirements. These corrections are only allowed if the normal maximum period for repayment of the loan has not expired. The Service reserves the right to limit the use of the correction methods to situations that it considers appropriate: for example, where the loan failure is caused by employer action.

Where a plan loan has exceeded the dollar limit, correction will be permitted if there is a payment to the plan based on the excess loan amount. If loan repayments were made before correction, the prior repayments may be applied either:

1.      to interest on the excess so the participant only repays the excess loan amount,

2.      only to the amount of the loan not exceeding the dollar limit so that the participant repays the excess loan amount (plus interest), or

3.      pro rata against the loan excess and the maximum loan amount, so that the corrective repayment would equal the outstanding balance remaining on the original loan excess on the date that corrective repayment is made.

Where a plan loan has a payment schedule that is greater than allowable by law, the loan can be reamortized over the remaining period of the proper maximum payment period measured from the original date of the loan. For example, a participant loan has a repayment period of six years. Two years later it was discovered that the loan should have been repaid over five years. To correct the error, the outstanding loan balance is reamortized over the remaining 3-year period. Correction is not available where the statutory term of the loan has expired. In that case, VCP can be used to report deemed distributions in the current year.

Finally, for loans that are deemed in default, correction can be:

1.      a lump sum payment equal to what should have been made to the plan, plus interest,

2.      reamortization of the outstanding balance of the loan over the remaining payment schedule of the original term of the loan, or

3.      a combination of either of the above methods.

Additionally, in certain situations involving defaulted loans (e.g., where the employer didn't start payroll withholding for repayment of the loan), the employer may be required to pay a portion of the repayment made by the employee in order to correct the defaulted loan.

Making Sure It Doesn't Happen Again

Employers need to have a system in place to ensure that plan loans are administered in compliance with the plan document and any separate written loan policy adopted. Employers should work with plan administrators to ensure that the administrators have sufficient participant loan information to verify that the proper loan payments are being made timely. However, keep in mind that, despite all of your good efforts, mistakes can happen. In that case, the IRS can help you correct the problem and retain the benefits of your qualified plan and delay or eliminate the need for reporting deemed distributions.

Page Last Reviewed or Updated [by the IRS]: June 02, 2010

Quick Link to 'elaws'

Five-Year Cycle for Individually-Designed Plans

How time flies when you're having fun! As of January 31, 2011, the first five year determination letter submission cycle will be completed. We begin the second five year cycle on February 1, 2011.

Under the IRS' five-year determination letter submission cycle for individually-designed plans (IDPs), IDPs are required to submit an application for a favorable determination letter once every five years. IDPs include both defined benefit and defined contribution plans that are not pre-approved plans. The timing of the submissions for IDPs is determined by the last digit of the plan sponsor's Employer Identification Number (EIN). Please refer to the following chart to see when you have to amend, restate and submit your plan(s) during the second five year cycle.

If the EIN of the employer ends in:

The plan's cycle is

The last day of cycle is

The next five-year remedial amendment cycle ends on

1 or 6

Cycle A

January 31, 2012

January 31, 2017

2 or 7

Cycle B

January 31, 2013

January 31, 2018

3 or 8

Cycle C

January 31, 2014

January 31, 2019

4 or 9

Cycle D

January 31, 2015

January 31, 2020

5 or 0

Cycle E

January 31, 2016

January 31, 2021

Multiple Employer Plan

Cycle B

January 31, 2013

January 31, 2018

Multiemployer Plan under IRC § 414(f)

Cycle D

January 31, 2015

January 31, 2020

Exceptions to the General Rule for Determining a Plan's Five-Year Cycle

The following rules apply to determine the five-year remedial amendment cycle of a plan maintained by more than one employer, a plan maintained by multiple members of a controlled group under IRC §414(b) or (c) or employers that are members of an affiliated service group under IRC §414(m), a governmental plan and other special situations.

1.   If a plan is (i) a jointly trusteed single employer collectively bargained plan where the joint board of trustees is treated as the plan sponsor for purposes of Form 5500, or (ii) a plan maintained by multiple members of a controlled group under IRC §414(b) or (c) or an affiliated service group under IRC §414(m) (other than a multiemployer plan under § 414(f), a multiple employer plan, or a governmental plan under IRC §414(d)), then the plan's five year remedial amendment cycle is determined with reference to the last digit of the EIN that is or will be used to report the plan on Form 5500.

2.   If more than one plan is maintained by members of a controlled group under IRC §414(b) or (c) or an affiliated service group under IRC §414(m), the employers may elect that the five-year remedial amendment cycle for all plans maintained by any members of the group (other than a multiemployer plan under IRC §414(f), a multiple employer plan, a governmental plan under IRC §414(d) plan, or a jointly trusteed single employer collectively bargained plan where the joint board of trustees is treated as the plan sponsor for purposes of Form 5500) will be Cycle A. The Cycle A election must be made jointly by all members of the controlled or affiliated service group, except that this election may be made on behalf of all of the members by the parent, in the case of a parent-subsidiary controlled group. Alternatively, if more than one plan is maintained by a controlled group under IRC §414(b) or (c) that is a parent-subsidiary controlled group, the election may be made that the remedial amendment cycle for each plan (other than a multiemployer plan under IRC §414(f), a multiple employer plan, a governmental plan under IRC §414(d) plan, or a jointly trusteed single employer collectively bargained plan where the joint board of trustees is treated as the plan sponsor for purposes of Form 5500) is determined by reference to the last digit of the parent's EIN. This alternative parent's EIN election must be made by the parent.

3.   If (i) separate tax-exempt organizations which are a group of related organizations but are not a controlled group under IRC §414(b) or (c) or an affiliated service group under IRC §414(m) are maintaining separate plans, (ii) the terms of those plans are substantially the same, and (iii) all or substantially all of the discretionary authority concerning the plans' administration and operation is handled by a centralized organization (such as a national headquarters or a common administrative committee), then an election may be made by such centralized organization that the remedial amendment cycle for all of the plans is determined based on the EIN of the centralized organization (other than a multiemployer plan under IRC §414(f), a multiple employer plan, a governmental plan under IRC §414(d) plan, or a jointly trusteed single employer collectively bargained plan where the joint board of trustees is treated as the plan sponsor for purposes of Form 5500). If the group of related organizations also includes related taxable entities to which this paragraph would apply if they were tax-exempt, the plans maintained by those taxable entities whose terms are substantially the same are permitted to apply the same election that can be applied for the tax-exempt entities.

Required Updates

The Cumulative List of Changes in Plan Qualification Requirements (Cumulative List) is the annual listing of changes required to be reflected in the following year's opinion, advisory, or determination letter submissions.

The Cumulative List tells plan sponsors what issues the Service has specifically identified for review in determining whether a plan, filing in any particular cycle, has been properly updated.

While the Cumulative List may not include specific, a plan must comply with all relevant qualification requirements, not just those on the applicable Cumulative List in order to be qualified. In addition, terminating plans must include all law changes in effect at the time of termination.

Call: 908-689-4200 to contact a

MFYCO professional consulting associate.

Future Effective Dates for The Patient Protection and Affordable Care Act (PPACA)

The Patient Protection and Affordable Care Act (PPACA) was signed into law on March 23, 2010 and on July 19, 2010, the IRS, the EBSA, and the HHS jointly issued final interim regulations prohibiting preexisting condition exclusions, set lifetime and annual dollar limits on benefits, and addressed restrictions on rescissions and patient protections. The regulations are generally applicable to plan or policy years beginning on or after September 23, 2010.

Currently Effective Dates

September 23, 2010 - Rescissions of Insurance Coverage with Retroactive Effect

Rescission is a cancellation or discontinuance of insurance coverage that has a retroactive effect. Health insurance issuers in the group and individual markets cannot cancel, or fail to renew, coverage for an individual or a group for any reason other than nonpayment of premiums; fraud or intentional misrepresentation of material fact; withdrawal of a product or withdrawal of an issuer from the market; movement of an individual or an employer outside the service area; or, for bona fide association coverage, cessation of association membership.

Group health plans, or a health insurance issuers offering group health insurance coverage, must provide at least 30 calendar days advance notice to an individual before coverage may be rescinded. The notice must be provided regardless of whether the rescission is of group or individual coverage; or whether, in the case of group coverage, the coverage is insured or self-insured, or the rescission applies to an entire group or only to an individual within the group.

Future Effective Dates

January 1, 2014 - Elimination of Preexisting Condition Exclusion (September 23, 2010 for those 19 and under.)

Group health plans and health insurance issuers offering group or individual health insurance coverage may not impose any preexisting condition exclusion. The elimination of preexisting conditions is effective generally for plan years beginning on or after January 1, 2014, but for enrollees who are under 19 years of age, this prohibition becomes effective for plan years (in the individual market, policy years) beginning on or after September 23, 2010. Until the new Affordable Care Act rules take effect, the HIPAA rules regarding preexisting condition exclusions continue to apply.

Grandfathered Health Plans that are group health plans or group health insurance coverage are prohibited from excluding preexisting conditions; however, Grandfathered Health Plans that are individual health insurance coverage are not required to comply.

September 23, 2010, 2011, 2012 - Lifetime and Annual Dollar Limits on Benefits.

Health FSA

· Salary reduction contributions for health flexible spending arrangements (health FSAs) are specifically limited to $2,500 (indexed for inflation) per year, beginning with taxable years in 2013.

Restrictions and Prohibition on Annual Limits

The prohibition on annual limits, including the special rules regarding restricted annual limits for plan years beginning before January 1, 2014, apply to group health plans and group health insurance coverage that qualify as a Grandfathered Health Plan, but do not apply to Grandfathered Health Plans that are individual health insurance coverage.

The restricted annual limits will be phased in over a three-year period. Annual limits on the dollar value of benefits that are essential health benefits may not be less than the following amounts for plan years beginning before January 1, 2014:

· $750,000 for plan or policy years beginning on or after September 23, 2010 but before September 23, 2011;

· $1.25 million for plan or policy years beginning on or after September 23, 2011 but before September 23, 2012; and

· $2 million for plan or policy years beginning on or after September 23, 2012 but before January 1, 2014.

Generally, a plan or policy cannot impose an annual limit for a plan year beginning after December 31, 2013. Annual limits rules do not apply to Health FSAs, Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs).

Prohibition on Lifetime Limits

· The prohibition on lifetime limits apply to all group health plans and health insurance issuers offering group or individual health insurance coverage, whether or not the plans qualify as Grandfathered Health Plans, for plan years beginning on or after September 23, 2010. The interim final regulations issued under section 1251 of the Affordable Care Act provide that:

Grandfathered Plan is:

· A plan or health insurance coverage that, on March 23, 2010, did not impose an overall annual or lifetime limit on the dollar value of all benefits ceases to be a Grandfathered Health Plan if the plan or health insurance coverage imposes an overall annual limit on the dollar value of benefits.

· A plan or health insurance coverage, that, on March 23, 2010, imposed an overall lifetime limit on the dollar value of all benefits but no overall annual limit on the dollar value of all benefits ceases to be a Grandfathered Health Plan if the plan or health insurance coverage adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010.

· A plan or health insurance coverage that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits ceases to be a Grandfathered Health Plan if the plan or health insurance coverage decreases the dollar value of the annual limit (regardless of whether the plan or health insurance coverage also imposed an overall lifetime limit on March 23, 2010 on the dollar value of all benefits).

What would you like to see in a future issue?

Contact our office with your suggestions.

email: info@mfyco.com

Creating a Healthy Office Environment

If you work from home, or you simply spend a lot of time in your office, then the environment you create within this space can dramatically impact your personal health and energy level. The office is the center of productivity, so you want to make sure that the energy in this area is positive and uplifting.

Office group

Here are a few simple ways you can use the principles of feng shui to make sure your office offers you supportive, inspiring energy:

First, make sure that your office is a dedicated workspace. Often when people work from home they make do with any work space, such as the dining room table or a corner of the family room as an office. With the prevalence of laptop computers, even the living room sofa has become a popular office space.

However, having an office that is part of another area creates conflicted energy that hampers your ability to work effectively and efficiently. It invites distractions and makes it difficult for you to focus on your work, creating more stress. It also makes it difficult to get away from your work when you are ready to spend some time with your family, or to simply take a few moments to relax and unwind. Having your work on your mind all the time can lead to poor health from stress and exhaustion.

Also make sure that your office is well lit. A poorly lit office creates depressive energy, and makes it difficult to be productive. An office space that has fluorescent lights and no windows can be very depressing, resulting in headaches. If possible, you should select a space for your office that has access to natural lighting via multiple windows. If this is not possible, use desk lamps or floor lamps to brighten the room and invite the flow of positive, inspiring energy. This will not only help you work more efficiently, it will make you feel better while you are working, which promotes vibrant health.

Choosing the right colors for your office will also create a productive, healthy working environment. The colors you choose should depend on the type of work you do. If you need to feel energized, use warm, inspiring colors like yellow, orange, and red. If you need to work in a relaxed, calm environment, choosing cool, relaxing colors like blue, green, and tan will give you the peace of mind you need to get your work done efficiently.

about MFYCO ...

Michael F. Yates & Company, Inc. can help you with a variety of services ranging from retirement plans to providing results-oriented survey instruments, training and development programs for your employees. Our products and services are intended to help you maximize the effectiveness of your Human Resources function.
These products and services incorporate our years of experience so that you receive rapid results and exceptional value. From onsite consulting, to strategic business integration, to Web enablement, we understand how Human Resources can be applied to solve your problems and achieve your goals. As a result, we can help you get the most out of your investment and turn your most precious resource into a competitive advantage.
We offer Consulting, Retirement Planning, Pension and 401(K) both qualified and non qualified Plans, Welfare Plans, Communications, Computer Systems, Executive Plans, Compensation, Mergers, Acquisitions, Divestitures and Other Services.
We offer a true and honest, Client Partnership.

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