Tag Archives: compensation

The Unintended Consequences of Year-End Bonuses and Awards

The holiday season is upon us and joy is in the air! It’s the time of year when employers are happy to bestow year-end performance bonuses, awards, and gift cards on their employees for jobs well done. Undoubtedly, employees are excited to receive these special types of compensation. The feeling of anticipation from both the employees and employers is heavy in the air. The payroll department is busy running special payroll runs for such compensation, and HR is busy prepping the personnel files with the necessary documentation for these payments. With all of this excitement, it’s likely that no one is considering the impact of this compensation on the retirement plan.

Employers typically don’t realize that the most common error in operating a retirement plan is the proper treatment of special types of compensation, often paid at year-end. The New Year is just around the corner and if you require an audit, with the New Year comes another retirement plan audit. Your plan auditor will surely address whether or not these special types of compensation were properly handled based on your plan’s definition of compensation.

Aronson knows that year-end is a busy time filled with holiday-related demands and various year-end close activities. Additionally, determining the proper treatment of special compensation can be especially tough when a company has experienced turnover in the payroll department. This is further complicated by the fact that regulations recently required that plan documents be restated creating additional opportunities for the improper treatment of special compensation types. Do not run afoul of your plan’s provisions and get caught in an operational failure at year-end. These failures can lead to plan audit difficulties and often result in a corrective contribution to the Plan. Don’t let the good intentions of additional compensation and employee awards turn bad!

For additional assistance with the proper retirement plan treatment of your year-end bonuses and awards, contact Aronson Employee Benefit Plan Services Group Director Mark Flanagan at 301.231.6257.

Dollar Limits on Compensation and Benefits Announced

The Internal Revenue Service has announced the 2017 cost-of-living adjustments for various limits affecting employee benefit plans with very little change. The more common limits are detailed below for both 2016 and 2017.

2017

2016

401(k) & 403(b) Elective Deferrals

$18,000

$18,000

Catch-Up Contribution for Participants Age 50 and above

$6,000

$6,000

Defined Contribution Plans-IRC 415 (Including SEP and Keogh Plans)

$54,000

$53,000

Maximum Benefit for Defined Benefit Plans *This is not the maximum contribution, it is the maximum benefit that can be funded.

$215,000

$210,000

SIMPLE Retirement Plans Elective Deferrals

$12,500

$12,500

Catch-Up Contribution for Participants Age 50 and above

$3,000

$3,000

Maximum Annual Compensation for Determining Contributions and Benefits

$270,000

$265,000

Compensation Limit for Key Employee Determination

$175,000

$170,000

Compensation Limit for Highly Compensated Determination

$120,000

$120,000

IRA Contributions

$5,500

$5,500

IRA Catch-Up Contribution

$1,000

$1,000

 

A detailed listing of all the adjusted limitations can be found here.

For questions about how these limits apply to you, please contact Aronson’s Compensation and Benefits Practice Director, Mark Flanagan at 301.231.6257.

 

IRS Releases Proposed 409A and 457 Deferred Compensation Guidance

The IRS recently released proposed Section 409A and Section 457 guidance.

Since the original 409A regulations were issued in 2007, the practicing community has anxiously awaited additional guidance; hoping it will make the requirements under 409A and 457 easier for employers and practitioners to administer. In general, 409A outlines the rules and regulations for all employers maintaining non-qualified deferred compensation plans, while 457 specifically relates to plans maintained by tax-exempt organizations and state and local governments. The new proposed regulations provide some clarifications but do not alleviate many of the difficulties associated with administering deferred compensation arrangements.

Some of the highlights of the proposed guidance are detailed below:

  • Currently, a separation of service may or may not occur when an employee terminates employment but continues to be employed in a consulting capacity. The determination is made based on the reasonable expectation of the number of hours to be worked as detailed in the employment agreement. The new rules seem to indicate that a separation of service does not occur until a separation of service has occurred under the rules (service levels would decrease to less than 20% of the levels prior to the employment change).
  • Clarification that stock rights designed to avoid 409A inclusion are not deemed to be deferred compensation solely because the amount payable due to a service provider’s termination for cause or that was within their control, is based on a valuation method that is less than fair market value.
  • The proposed regulations allow a stock option to be granted by an entity prior to the date the employee is actually hired, as long as it is reasonably anticipated they will be hired by the entity within the next twelve months. Previously, the employee actually had to be employed by the entity prior to granting the option.
  • As a result of the death of an employee, an inadvertent 409A violation will not occur if payment is made to the beneficiary by 12/31 of the year following the year of death.
  • Clarification that the 409A regulations apply separately and in addition to the rules under IRC 457A.
  • Enhanced definition of what constitutes a “substantial risk of forfeiture” under 457(f).
  • Exclusion of certain types of bona fide severance and vacation pay plans from 457.

The non-qualified deferred compensation plan rules are quite complex. In particular, the interplay between 409A and 457 is very challenging. The proposed regulations do help with some of the complexity but in the end, those of us affected by these complex rules were hoping for so much more.

Employers should work with their advisors to understand the impact of the proposed changes now and moving forward. To further discuss the impact of the proposed regulations, please contact Aronson’s Compensation and Benefits Practice Director Mark Flanagan at 301.231.6257.

Compare Yourself to The Competition

Retaining talent in an ever-changing market can be a daunting task. With flexible work schedules, healthcare reform and other demands placed on the modern employee, providing a benefit package that is mutually beneficial to both you and them is paramount. In its second year, Aronson’s Employee Benefit Plan Survey is now available thru March 10, 2016. The final report based on the survey findings will help you to determine your strengths and weaknesses, and determine how your plan matches up against the competition. For more information about our Employee Benefit Group and to take the survey, visit here. Stay tuned for the report release in April and join us for our event on March 22, where we will give participants a sneak peak of this year’s survey findings. Visit here to register.

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