Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

The IRS Notices 2010-55 (pdf) and 2010-56 (pdf) explain that plan sponsors should meet their deadlines for filing Form 5500 (and Schedule SM or MB) for the plan year, taking into account the rules for obtaining an extension. The agency notes that it will issue future guidance on the special funding rules, particularly how a sponsor can avail itself of the funding relief when it has already filed the Form 5500 for the plan year. With respect to single-employer plans, this future guidance may also address the following topics:

• calculation of the alternative amortization schedules permitted under PRA 2010 (and the effect on funding balances);
• the rules relating to making accelerated contributions to plans;
• the procedures for making the election to use an alternative amortization schedule; and
• the notice requirements for plan participants, beneficiaries, and the Pension Benefits Guarantee Corporation (PBGC).

If a plan year ends before the guidance is issued, the plan sponsor will be allowed to elect to use an alternative amortization schedule under PRA 2010 without regard to whether the Form 5500 (and Schedule SB) has been filed for that plan year.

With respect to multi-employer plans, guidance may cover:

• determination of the portion of the experience loss or gain attributable to net investment losses incurred in either or both of the first two plan years ending after August 31, 2008;
• the requirement under tax code section 431(b)(8)(E) to notify participants and beneficiaries of application of the special rules; and
• the effect of application of the special rules on the certification of a multiemployer plan’s status (i.e., endangered, critical or neither) under section 432(b), including certifications already made.
   

With respect to the pension funding relief provisions, according to a summary (pdf) of the bill, “[e]mployers that elect the relief would be required to make additional contributions to the plan if they pay compensation to any employee in excess of $1 million, pay extraordinary dividends, or engage in extraordinary stock buybacks during the first part of the relief period. Additional relief is available to certain plans sponsored by charitable organizations.”

As outlined in the legislation, single employer plan funding relief measures include: extended period for single employer defined benefit plans to amortize certain shortfall amortization bases; application of an extended amortization period to plans subject to prior law funding rules; lookback for certain benefit restrictions; and lookback for credit balance rule for plans maintained by charities.

Multiemployer plan funding relief measures include adjustments to funding standard account rules, such as expanded “smoothing” periods for losses incurred during the period of economic decline; and modification of certain amortization extensions under prior law, among other provisions.

This last-minute compromise comes after the Senate on Thursday failed to move forward a more expansive “tax extender” bill, the American Jobs and Closing Tax Loopholes Act (H.R. 4213). (pdf)  On Wednesday, Senate Finance Committee Chairman Max Baucus (D-MT) unveiled an amended version of the bill in order to reduce its price tag from $140 billion to $110 billion. Generally, this measure would have continued a number of individual and business tax cut programs and extended emergency unemployment, in addition to providing a number of pension funding relief measures.

This bill had been gradually scaled back over the last few weeks in the hope of gaining sufficient support. In May, the House approved this legislation once COBRA premium subsidy extensions were dropped. Last week, the Senate introduced a substitute version of the bill that lacked certain defined contribution pension plan fee disclosure provisions. After it became evident Wednesday that the Senate did not have enough votes to limit debate on the bill, Baucus introduced the trimmed down draft. Despite Baucus’s efforts to reduce the bill’s costs, however, the Senate voted 56-40 – four votes shy of the necessary 60 – to limit debate on the measure and submit it to the Senate floor for a final vote.

During yesterday’s Senate session, Sen. Robert Casey (D-PA) offered an amendment (S. Amt. 4371) to the bill that would extend the COBRA premium subsidy program through November 2010. In urging approval of his amendment, Casey stated that “[w]ithout the extension of the COBRA Premium Assistance Program, a report from the National Employment Law Projects predicts as many as 150,000 Americans each month will lose out on the subsidies necessary to afford quality health care.” At this point, however, the fate of the tax extender bill – and its amendments – is unclear.

According to the summary, (pdf) the joint bill contains provisions that would offer the following:

COBRA

• Extension of premium assistance for COBRA benefits. The American Recovery and Reinvestment Act (ARRA) created a program to provide a 65% COBRA health insurance premium subsidy for up to 15 months for workers who have been involuntarily terminated. After several extensions, eligibility for the COBRA premium assistance will expire for individuals terminated after May 31, 2010. The bill would extend eligibility for the program to individuals terminated on or before December 31, 2010.

Unemployment Insurance

• Extension of the Emergency Unemployment Compensation (EUC) program. The Emergency Unemployment Compensation (EUC) program is scheduled to phase out at the end of May 2010. This program provides up to fifty-three (53) weeks of extended benefits. The bill would extend the EUC program through December 2010.
• Extension of the Extended Benefits (EB) program. 100% federal funding for the Extended Benefits (EB) program is scheduled to phase out at the end of May 2010. This program provides up to an additional 13 to 20 weeks of benefits in certain states (i.e., 13 weeks for states at or above 6.5% unemployment and another 7 weeks for states at or above 8% unemployment). The bill would extend full funding for the EB program through December 2010.

Pension Funding Relief

• Single employer plan funding relief measures include: extended period for single employer defined benefit plans to amortize certain shortfall amortization bases; application of an extended amortization period to plans subject to prior law funding rules; suspension of certain funding level limitations; temporary allowance of election to apply balances against minimum required contribution; modification of the reporting requirement by requiring additional reporting if aggregate unfunded vested benefits of plans maintained by the sponsor exceed $75 million; and rollover of amounts received in airline carrier bankruptcy.
• Multiemployer plan funding relief measures include: optional use of 30-year amortization periods; optional longer recovery periods for multiemployer plans in endangered or critical status; modification of certain amortization extensions under prior law; alternative default schedule for plans in endangered or critical status; and the provision of transition rules for the certifications of plan status.

Miscellaneous Business Provisions

• Employer wage credit for activated military reservists. The bill would extend through 2010 the provision that provides eligible small business employers with a credit against the taxpayer’s income tax liability for a taxable year in an amount equal to twenty percent of the sum of differential wage payments to activated military reservists.
• Refundable AMT credits for corporations making domestic investments. The bill would allow corporations to receive a refund of a portion of their alternative minimum tax (AMT) credits if they invest during 2010 in capital equipment for use in the United States.

It is expected that the legislation will be considered by the House and Senate next week.
 

In addition to extending the premium COBRA subsidy until the end of the year, the bill makes certain technical changes to the program itself. Specifically, the bill makes the following clarifications, among others:

• Adds a new section clarifying special rules in the case of individuals losing COBRA coverage due to a reduction in hours;
• Clarifies the period of assistance; and
• Adds a provision stating that the government or the individual may bring a civil action to enforce applicable provisions of this law, and provides that the Secretary may assess a penalty of up to $110 per day against a plan sponsor or health insurance issuer for each violation.

The Senate also approved by voice vote an amendment (S. Amdt. 3430) to the bill that aims to encourage employers to continue their defined benefit pension programs by providing temporary relief from statutory pension funding obligations. According to a press release issued by Sen. Isakson (R-GA) – who introduced the amendment with Sen. Ben Cardin (D-MD) – the amendment would provide employers with two options “to spread out” their pension obligations:

Under the first option, employers would be able to repay their pension shortfall over seven years, but the seven-year amortization would start two years late. During the two-year delay period, the employer would only owe interest on the shortfall. Under the second option, employers would be able to pay back their pension shortfall over 15 years.

Employers electing to avail themselves of the “two and seven”, or 15-year relief plans would be required to abide by the “cash flow rule,” under which an employer must make an extra “matching” contribution equal to the amount by which any of its employees’ taxable compensation exceeds $1 million. An employer would also be required to contribute an amount equal to the “extraordinary dividends” paid during the year, and an amount equal to the aggregate fair market value of the “stock redeemed” during the year that exceeds the employer’s net income for accounting purposes.

Other pension funding relief measures are included in the bill, which, according to Sen. Baucus, are designed to provide temporary, targeted funding relief for single employer and multiemployer pension plans that suffered significant losses in asset value due to the 2008 market downturn.

The bill includes other tax credit measures, including an extension until Dec. 31, 2010 of an employer wage credit for employees who are active duty members of the uniformed services. This extension would provide eligible small business employers with a credit against income tax liability for a taxable year in an amount equal to 20 percent of the sum of differential wage payments to activated military reservists, up to $4,000, and be applicable to payments made after December 31, 2009. Other program extensions include one that provides a tax credit for employers of qualified employees that work or live on or near an Indian reservation, and an extension of the Work Opportunity Tax Credit (WOTC) for qualifying employers that hire employees in the areas hit hardest by Hurricane Katrina.

The measure will now need to be reconciled with the House bill and undergo a second round of approval before it can be signed into law.