The IRS has modified Q&A-23 of Notice 2007-7, I.R.B. 2007-5, 395, to provide that health insurance premiums paid to self-insured accident or health plans are eligible for the Code Sec. 402(l) exclusion. The modification reflects pending technical corrections to Code Sec. 402(l) and certain special considerations involving eligible retired public safety officers.
Code Sec. 402(l), which was added by the Pension Protection Act of 2006 (PPA) (P.L. 109-280), generally excludes from gross income certain distributions paid from an eligible governmental plan that are used to pay qualified health insurance premiums of an eligible retired public safety officer or his or her spouse or dependents. For this purpose, qualified health insurance premiums are defined as premiums for coverage for the eligible retired public safety officer, his spouse, and dependents, by an accident or health insurance plan or qualified long-term care insurance contract (Code Sec. 402(l)(4)(D)). The exclusion is further limited to premiums that are paid directly to the provider of the accident or health insurance plan or qualified long-term care insurance contract (Code Sec. 402(l)(5)(A)).
Consistent with Code Sec. 402(l), Q&A-23 of Notice 2007-7 provides that premiums paid to self-insured accident or health plans are not eligible for the Code Sec. 402(l) exclusion because the accident or health plan receiving the premium payments must be an accident or health insurance plan. Thus, the plan must be providing insurance issued by an insurance company regulated by a State (including a managed care organization that is treated as issuing insurance). However, proposed legislation containing technical corrections to the PPA would revise Code Sec. 402(l) by deleting the word "insurance" from the term "accident or health insurance plan" that appears in both the Code Sec. 402(l)(4)(D) definition of qualified health insurance premiums and the direct payment requirement of Code Sec. 402(l)(5)(A). As a result, payments of qualified health insurance premiums received by self-insured accident or health plans would qualify for the exclusion because an accident or health plan, as defined in Code Sec. 105(e), includes a self-insured plan. Notice 2007-7 is modified.
Notice 2007-99, 2007FED ¶46,737
Other References:
Code Sec. 402
CCH Reference - 2007FED ¶18,207.185
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The IRS has issued transition relief and guidance on the correction of certain failures of nonqualified deferred compensation plans to comply with the operational requirements of Code Sec. 409A(a). The transition relief and guidance provide: (1) methods for correcting operational failures during the tax year of the service provider in which the failure occurs to avoid income inclusion; (2) transition relief limiting the amount includible in income for certain operational failures occurring in a service provider's tax year beginning before January 1, 2010; and (3) an outline of, and request for comments on, a potential corrections program for operational failures of nonqualified deferred compensation plans. Notice 2006-100, I.R.B. 2006-51, 1109, and Notice 2007-89, I.R.B. 2007-46, 998, are modified.
Corrections relief is provided to plans that make unintentional errors, such as mistakenly paying out deferred compensation earlier than required by a plan. Plans that correct under this guidance within the service recipient's tax year can avoid adverse tax consequences. Plans that do not qualify for such relief, but nevertheless correct before January 1, 2010, can avoid some of the adverse consequences of plan failure. The guidance provides detailed descriptions of the information that must be provided to the IRS in the event of a plan correction. It also seeks comments on a permanent corrections program for nonqualified deferred compensation plans.
Corrections Within the Service Provider's Tax Year
Plans are treated far more generously if they correct an operational failure within the service provider's tax year. No amount is required to be included in income as a result of an unintentional operational failure if it is corrected as provided by the new guidance during the service provider's tax year during which the mistake was made. Relief is conditioned on the service recipient taking commercially reasonable steps to avoid a recurrence of the operational failure. Relief is unavailable for: (1) plan terms and provisions that fail to meet the requirements of Code Sec. 409A and relevant guidance; (2) any exercise of a stock right that otherwise would result in a failure to comply with Code Sec. 409A; (3) any intentional failure to comply with the terms of a plan or the requirements of Code Sec. 409A in the operation of a plan; or (4) an operational failure that is egregious, or where the failure is directly or indirectly related to participation in an abusive tax avoidance. Relief is not available with respect to any erroneous payment occurring during any tax year of the service provider in which the service recipient experienced a substantial financial downturn.
Failure to defer amount or incorrect payment corrected in the same tax year. The new guidance provides relief for amounts of deferred compensation that were mistakenly paid. An amount to which this relief applies is treated as having been timely paid if the service provider repays the amount to the service recipient within the service provider's tax year in which the error was made. Immediately after repayment, the service provider must have a legally binding right under the plan to be paid the amount that would have been due if such amount had not been erroneously paid or made available to the service provider during such tax year. In addition to repayment, service recipient insiders who take advantage of this relief must also pay interest to the service provider if the total of all amounts to which the relief applies exceeds the limit on elective deferrals that would apply to a qualified plan for the year in which the erroneous payment was made (the amount is $15,500 in 2007 and 2008).
Incorrect payment in violation of six-month delay rule for specified employees. Relief is provided for mistaken payment with respect to specified employees subject to the six-month delay rule for separation of service payments. The service provider will not be treated as having failed to comply with the six-month delay rule as a result of the amount being paid or made available at an earlier date if, on or before the last day of the service provider's tax year in which the amount was paid or made available, the service provider repays to the service recipient the amount that was erroneously paid or made available. Immediately after such repayment, the service provider must have a legally binding right to receive the amount from the service recipient on a certain date.
The new payment date is pushed back from either the originally scheduled payment date, or the repayment date, whichever is later. The date is pushed back a period that equals the number of days from the date the service recipient made the erroneous payment through the date the service provider repaid the erroneous payment to the service recipient. If repayment is made before the scheduled payment date, the extension is tacked onto the scheduled payment date. If repayment takes place after the scheduled payment date, the extension is tacked onto the repayment date. For example, if payment is originally scheduled for June 1, 2008, but the employer accidentally pays on May 1, the mistake is caught on July 1, and the employee repays the amount on that date, the extension (which would be 61 days in this example), is tacked onto July 1 (the repayment date) so that the new payment date would be August 31, 2008. If, however, the scheduled payment date was November 1 instead of June 1, the 61 day extension is tacked onto the scheduled payment date, which is November 1, resulting in a new payment date of January 31, 2009. The guidance indicates that in such a case, the payment would be taxed in 2009 to the service provider.
Excess deferred amount corrected in the same tax year. If an amount that should not have been deferred compensation is credited to the service provider's account or otherwise treated as deferred compensation as a result of an unintentional plan operational failure, and such excess amount otherwise would have been paid to the service provider during the service provider's tax year in which the excess amount was incorrectly credited to the service provider's account, the excess amount is not treated as deferred if paid to the service provider on or before the last day of the service provider's tax year in which the excess amount was incorrectly deferred. The amount to which the service provider has a legally binding right under the plan at the end of the year must be adjusted to reflect the payment. If the service provider is an insider, the remaining account balance (or other deferred compensation under the plan) must be adjusted for positive earnings retroactive to the date the excess amount was incorrectly credited to the service provider's account or otherwise incorrectly treated as deferred under the plan, provided that such adjustment must be made on or before the last day of the service provider's tax year in which such amount was incorrectly treated as deferred. If it is impracticable to make the adjustment by the end of such year, the service recipient must have a legally binding right on the last day of such tax year to make the adjustment retroactively to such date.
Correction of exercise price of otherwise excluded stock rights. Relief is available if a stock right would be excluded from the definition of nonqualified deferred compensation (and hence, the reach of Code Sec. 409A) as an excluded stock option or stock appreciation right, except that the exercise price of the stock right is less than the fair market value of the underlying stock on the date of grant. Corrections relief is available only if the failure of the exercise price to equal or exceed the fair market value of the underlying stock results from an unintentional administrative error in determining the exercise price.
Relief for Operational Failures During Tax Years Beginning Before 2010
If an unintentional operational failure occurs during a service provider's tax year beginning before January 1, 2010, and the failure does not qualify for correction under the rules governing corrections within the same tax year, the failure may nevertheless qualify for limited corrections relief.
Failure to defer limited amount not corrected in the same tax year and certain erroneous payments. Relief is available if during a service provider's tax year beginning before January 1, 2010, an unintentional operational failure occurs in which an amount should have been treated as deferred compensation was not, and was, instead, paid out to the service recipient. In such a case, the amount includible in income as a result of such payment is limited to the amount that should have been treated as deferred compensation under the plan (or should have continued to be deferred compensation under the plan) but was instead paid or made available to the service provider, and does not include any other amounts deferred under the plan. In addition, with respect to such amount includible in income under Code Sec. 409A(a), the service provider is required to pay the additional 20 percent tax, but is not required to pay the premium interest tax. This relief is available only if the amount paid or made available to the service provider does not exceed the limit on elective deferrals that would apply to a qualified plan under Code Sec. 402(g)(1)(B) for the year of the operational failure ($15,500 for 2007 and 2008).
Limited excess deferred amount not corrected in the same tax year. Relief is available if on or before the last day of a service provider's tax year beginning before January 1, 2010, due to an unintentional operations failure, an amount of deferred compensation under the plan should have been paid but was not, or an amount is treated as deferred compensation under the plan that should have been paid but was not. Relief is conditioned on the amount that should have been paid during that service provider's tax year, not exceeding the limit on elective deferrals that would apply to a qualified plan ($15,500 for 2007 and 2008) for such year. Under the relief provision, by the later of the end of the service provider's tax year in which the failure is discovered or the 15th day of the third month following the date upon which the failure is discovered, the service recipient must pay the service provider the amount that should have been paid or made available to the service provider. Any earnings allocable to such amounts through the date of the payment must be either forfeited or added to the payment to the service provider, and any losses allocable to such amounts through the date of the payment must be either permanently disregarded or subtracted from the payment to the service provider. The amount includible in income as a result of such failure is limited to the excess amount paid to the service provider, and does not include any other deferred compensation under the plan. The amount is includible in income only when paid to the service provider in accordance with the corrections guidance.
Potential Program to Correct Operational Failures and Comments Requested
The Treasury Department and the IRS are considering establishing a corrections program under which taxpayers could correct certain operational failures, including correction after the end of the service provider's tax year in which an operational failure occurs. The Treasury Department and the IRS request comments on all aspects of this potential program. The Treasury Department and the IRS request comments on all aspects of a potential corrections program, including the potential corrections program. Comments must be submitted by March 3, 2008.
Notice 2007-100, 2007FED ¶46,738
Treasury Department News Release, TDNR HP-707, 2007FED ¶46,739
Other References:
Code Sec. 409A
CCH Reference - 2007FED ¶18,960.01
CCH Reference - 2007FED ¶18,960.025
CCH Reference - 2007FED ¶18,960.028
CCH Reference - 2007FED ¶18,960.042
CCH Reference - 2007FED ¶18,960.043
CCH Reference - 2007FED ¶18,960.046
CCH Reference - 2007FED ¶18,960.06
CCH Reference - 2007FED ¶18,960.061
CCH Reference - 2007FED ¶18,960.062
CCH Reference - 2007FED ¶18,960.075
CCH Reference - 2007FED ¶18,960.20
CCH Reference - 2007FED ¶18,960.30
Code Sec. 3401
CCH Reference - 2007FED ¶33,506.1857
Code Sec. 6041
CCH Reference - 2007FED ¶35,836.23
Code Sec. 6051
CCH Reference - 2007FED ¶36,425.28
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CCH Reference - TRC COMPEN: 15,052
CCH Reference - TRC COMPEN: 15,054
CCH Reference - TRC COMPEN: 15,056
CCH Reference - TRC COMPEN: 15,060
CCH Reference - TRC COMPEN: 15,064
CCH Reference - TRC COMPEN: 15,066
CCH Reference - TRC COMPEN: 15,068
CCH Reference - TRC COMPEN: 15,070