Monday, June 26, 2017

ABLE Accounts - Savings Tool for Special Needs Individuals

By: Joan Skrzyniarz (Member, Troy)

ABLE (Achieving a Better Life Experience Act) accounts have become a popular savings tool for special needs individuals since the ABLE Act became law in December of 2014.  Now that such accounts have been in existence for few years, many individuals are more familiar with the benefits of establishing an ABLE account.  However, it is important to remember when an ABLE account should not be used:  1)  for an individual who was not disabled before age 26; 2) when receiving an inheritance or settlement that exceeds $14,000 (or annual gift tax exclusion amount); 3) for a beneficiary who may be susceptible to exploitation, given that a beneficiary has the unilateral right to withdraw money from the ABLE account; and 4) as the sole answer to estate planning for an individual with special needs.  An ABLE account should not replace a conversation with your estate planner on the potential benefits of a special needs trust. 
For more information, contact Joan Skrzyniarz in the Troy, Michigan office at 248-433-7521.

Monday, June 19, 2017

If Timely Notice is Given, the Cost to Correct a 401(k) Exclusion Error May Be Reduced

By:  Deborah L.Grace (Member, Troy)

Occasionally, an employer may determine that it did not withhold deferral contributions for a new employee in accordance with the terms of its 401(k) plan.  If the plan has an automatic enrollment feature, and the error is found within 9 1/2 months after the end of the plan year in which the error occurred, the cost to correct the error is reduced if the employer provides the employee with a notice of the error within 45 days of the date that deferrals are started.  

The notice must include general information about the error, such as the time when deferrals should have started and the percentage that would have been deferred, the approximate date when deferrals will begin, confirmation that a corrective match has or will be made, a description of how the employee may increase his or her deferrals to make up for the missed deferral opportunity, the plan name, and the name, address and telephone number of a plan contact.  

If this notice is provided timely, then the employer contribution consists solely of the match that the employee would have received if contributions had started on a timely basis.  If timely notice is not given, then the employer also owes a missed deferral contribution of 50% of the amount that would have been withheld from the employee’s pay if deferrals had started timely.   

Similar rules apply for failure to correctly withhold salary deferrals from a non-automatic enrollment plan.  While these safe harbor rules have been in existence since 2015, we still encounter clients who do not know that by providing notice of the correction within 45 days of the date that deferrals commence they may reduce their correction costs.  If you or your clients have questions about correcting salary deferrals errors, please call Deb Grace in the Troy, Michigan office at 248-433-7217. 


Monday, June 12, 2017

Tax Reform 2017 - Will it Ever Come?

By:  Peter J. Kulick
For tax attorneys, tax reform is always a hot topic.  President Trump was elected with GOP majorities in both chambers of Congress, which would normally make the forecast for tax reform actually being enacted favorable.  While the early conventional wisdom suggested comprehensive tax reform was possible by Labor Day; the political reality makes 2018 more likely to see the light of tax reform.

What will tax reform look like?  The answer is we do not really know because the details have been incredibly light.  The Trump Administration has released a “framework” for tax reform, but did not take the usual step of releasing a “Green Book”.  The Green Book provides a detailed discussion of tax policy proposals, including an explanation of each changes and the reason for the policy changes. 

To analyze tax reform, it may be appropriate to consider the typical tax policy mantra: “broaden the base, lower the rates.”  The concept is quite simple -- aim for revenue neutral law changes by eliminating numerous deductions and lower the marginal tax rates.  Sounds familiar?  The following is a summary of the Trump Administration’s tax reform framework:
  1. Reduce the corporate tax rate to 15%, from the current highest rate of 35%.
  2. Offer taxpayers a one-time opportunity to repatriate foreign earnings at no or a low tax cost.
  3. Eliminate the world-wide tax philosophy of the Internal Revenue Code of 1986 and replace it with a territorial tax approach -- meaning only U.S. activities would be reached by the Code.
  4. Reduce the individual tax rates to 3 brackets at yet-to-be determined rates.
  5. Broaden the base by eliminating many existing tax deductions.  From public comments, we know that the Trump Administration has backed away from eliminating the interest exclusion for state and local bonds, eliminating the home interest deduction, and eliminating the charitable contribution deduction.
While the framework is light on details, the scope of reform embedded in the framework suggests a comprehensive, wide-ranging tax reform effort.  There is also a strong desire to make any tax reform permanent, which means lost revenue will ultimately need to be offset by savings.  All these signs point to a long, protracted policy debate.  In turn, the political realities call into question whether meaningful tax reform can be enacted by the end of 2018.

If you have any questions, please contact Peter Kulick in the Lansing, Michigan office at 517-487-4729.


Monday, June 5, 2017

What Do You Do If You Receive A Notice From The IRS That Your Tax Return Is Under Audit?

By: James Mauro and Robin Miskell

Depending on the amount that may be at issue, call a tax lawyer immediately.  A tax lawyer that has handled audits before is able to provide important strategy and structure to the audit that will present your case in the best light to the auditor.  If you have determined to do it yourself, two techniques a tax lawyer might use to limit the scope of the audit are the following.  One, always ask the auditor to provide you with a Form 4564, Information Document Request (“IDR”), to request information.    Requesting an IDR is useful for clarifying the issues, limiting the scope of the audit and providing a time frame for your response.  Two, if the auditor has requested an extension of time, you may agree to a limited extension as to the issue and request the auditor to identify the issues for which he or she needs more time for examination.  This provides you with the knowledge to assist you in addressing the issues that the auditor is investigating.  It also is evidence that you are cooperating because you are agreeable to an extension, but under specific circumstances that are within your control.    
Please contact James Mauro in the Lansing, Michigan office at 517-487-4701, or Robin Miskell in the Phoenix, Arizona office at 602-889-5329 if you have any questions.

Monday, May 29, 2017

Classifying Taxpayer Business Hours

By:  Jim Mauro

The Internal Revenue Service has increased its audit activity in the area of deductible losses from real estate investments. A taxpayer who is classified as a “real estate professional" (or “REP”) is eligible for certain relief from the automatic passive rule regarding rental real estate.  A REP must satisfy one of seven tests to qualify his or her participation as “active” in order to currently deduct losses related to such activity. 
Please contact Jim Mauro in the Lansing office at 517-487-4701 for further information.

Monday, May 22, 2017

Key Tax Changes in the American Health Care Act

By:  Cyndi Moore

The American Health Care Act ("AHCA"), passed by the House of Representatives on May 4, 2017, repeals many of the taxes added by the Affordable Care Act ("ACA") and makes changes to other tax rules.  Some of the notable changes proposed to be made to the Internal Revenue Code are: 

1.         The individual mandate to maintain health insurance and the employer mandate to offer health insurance remain in the Code, but the taxes are "zeroed out" effective retroactively to 2016.
2.         The following taxes, fees, credits and limitations are repealed as of the year shown below:  

·         The net investment income tax (NIIT) (2017)

·         The 0.9% additional Medicare tax (2023)

·         The small employer health insurance credit (2020)

·         The $2500 limitation on contributions to a health flexible spending account (FSA) (2017)

·         The annual fee on branded prescription drug sales (2017)

·         The medical device excise tax (2017)

·         The annual fee on health insurance providers (2017)

·         The elimination of a deduction for expenses allocable to the Medicare Part D subsidy (2017)

·         The 10% tanning salon tax (June 30, 2017) 

3.         The "Cadillac" tax on high cost health plans is delayed until 2026.  

4.         Individuals may be reimbursed for over-the-counter medications under a health savings account (HSA), health FSA or a health reimbursement arrangement (HRA) (2017). 

5.         The penalty tax on withdrawals from an HSA not used for a qualified medical expense is reduced from 20% to 10% (2017). 

6.         The bill would replace the current ACA premium tax credit with a new refundable, advanceable tax credit effective January 1, 2020.  The credit could be applied toward the cost of any eligible health insurance coverage, whether purchased on or off the Exchange.  The credit is age-based as follows:

Annual Credit
Under 30
30 – 40
40 – 50
50 – 60
60 and over

The maximum credit for a family is $14,000. The credit is adjusted each year by CPI + 1%.

The credit is phased out depending on the individual’s modified adjusted gross income (MAGI) for the year.  It begins phasing out for an individual with income of $75,000 ($150,000 for joint filers) by $100 for every $1,000 in income above those thresholds.  The MAGI dollar limitations are also indexed for inflation beginning in 2021.  

            To be eligible to claim the credit, the individual must be covered by “eligible health insurance,” not be eligible for “other specified coverage” (including employer coverage or a government sponsored health program) and be a U.S. citizen or a qualified alien. 

7.         The bill would make the following changes to health savings accounts, effective in 2018:

§  The maximum contribution to an HSA would be increased to the out-of-pocket maximum (in 2017, $6,550 for self-only and $13,100 for family coverage).  Under current law, HSA contributions are limited to $3,400 for self-only and $6,750 for family coverage.
§  Both spouses could make a “catch-up” contribution to the same HSA.  Under current law, each spouse must have his or her own HSA. 
§  If an HSA is established within 60 days after coverage under a high deductible plan begins, the individual could be reimbursed for medical expenses incurred within that 60-day period.  Under current law, an individual cannot be reimbursed for any expense incurred before the HSA is established.
The bill now moves to the Senate where significant changes are expected.   

Please contact Cyndi Moore (Member and Practice Department Manager: Domestic Relations, Employee Benefits, Estate Planning, Gaming and Immigration) in the Troy, Michigan office at 248-433-7295 or any other member of the Dickinson Wright employee benefits group for further information. 

Monday, May 15, 2017

New Cash Balance Retirement Plan Guidance

By: Roberta Granadier

On April 7, 2017, the IRS issued a memorandum relating to cash balance retirement plans.  A cash balance plan is a defined benefit pension plan which looks like a defined contribution plan because participants have individual “hypothetical” account balances.  The employer typically credits a flat percentage of compensation to each eligible employee, and the employee’s account balance grows based on specified interest credits. 

The new IRS guidance addresses cash balance plans that calculate benefits using only a portion of annual compensation, a special bonus or pay over a certain threshold rather than annual compensation.  The IRS cautions that cash balance plans which give the employer discretion to determine what compensation is included for benefit contribution purposes may violate the Internal Revenue Code “definitely determinable” requirement that applies to all defined benefit pension plans, including cash balance plans.  The problem arises when the employer has discretion to determine which part of compensation is considered.  The plan terms may specify whether base compensation,  bonuses or specified pay credits are included in the plan benefit formula.  However, if the employer has discretion or the inherent ability to determine how much W-2 compensation is paid in a way that manipulates pay credits or compensation used in the benefit formula, then the plan may violate IRS rules.  Any operational defect would have to be corrected pursuant to IRS correction procedures. 

Cash balance plans are still relatively popular and can be particularly beneficial for certain employers.  We would be happy to assist in reviewing any cash balance plan to ensure compliance with the recent IRS guidance and to ensure the plan is meeting the employer’s cost and compensatory objectives. 

For more information, please contact Roberta Granadier in our Troy, Michigan office at 248-433-7552.