Volume 28 Number 1, Winter 2007
401(k) Highlight - Late Remittance
of Participant Contributions
Expanded Use of Debit Cards
for FSA or HRA
Workshop Helps Tax Exempt
Organizations Remain in Compliance
Extended Tax Filing Deadline
The Better Way
2007 Standard Mileage Rates Set
401(k) Highlight - Late Remittance
of Participant Contributions 
by Kara M. Darlington, CPA
The
Employee Benefits Security Administration (EBSA) continues to focus on the
timeliness of participant contributions in contributory employee benefit
plans. Department of Labor (DOL) regulations require employers who sponsor
pension plans to remit employee contributions as soon as practicable, but
in no event more than fifteen business days after the month in which the
participant contribution was withheld or received by the employer.
Failure to remit or untimely remittance of participant contributions may
constitute a prohibited transaction, regardless of materiality. Plan
sponsors faced with remitting delinquent participant contributions should
consider utilizing the DOL's Voluntary Fiduciary Correction (VFC) Program.
The program will lead an employer through the steps necessary to pay "lost
earnings" on late deposits and will result in the DOL's issuance of a
"no-action letter" and no imposition of DOL penalties. In addition,
applicants could be eligible for immediate relief from payment of certain
prohibited transaction excise taxes imposed by the IRS.
The
DOL has conducted many investigations involving late remittances, often
times triggered by the reporting of late remittances on the plan's Form
5500. It is not uncommon for the DOL to find additional late remittances
that were not reported once they begin their investigation. Employers should
be certain they are remitting employee withholdings promptly, certainly
within the 15 business day threshold and earlier if at all possible.
Information regarding the VFC Program is available on the EBSA's web site at
www.dol.gov/dol/ebsa. Plan sponsors can telephone the EBSA regional office
in their area with any questions about the application process. These
telephone numbers may be found on the EBSA's web site:
http://askebsa.dol.gov
Employers not utilizing the VFC Program are required to remit lost earnings
to the plan as well as file form 5330, Return of Excise Taxes Related to
Employee Benefit Plans, with the IRS to pay the 15% excise tax on the
earnings on the late employee contributions and could be assessed additional
penalties by the DOL.
Smith Elliott Kearns
& Company, LLC is pleased to assist our clients with their retirement plan
needs by offering a division of the firm that specializes in Employee
Benefit Plan design and administration as well as a team of audit
specialists that perform audits of benefit plans. Give us a call to see how
we can help.
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Expanded Use of
Debit Cards for FSA or HRA
New
guidance from the Internal Revenue Service (IRS)
expands use of debit cards for medical expense reimbursements to
supermarkets, discount stores and other stores.
Employees using health flexible spending arrangement (FSA) or health
reimbursement arrangement (HRA) debit cards for medical expense
reimbursements now have more options of where they can use the cards. The
IRS has expanded the roster of stores where these cards can be used to
include supermarkets, discount stores and other establishments. At the same
time, the IRS changed the rules for using debit cards at drug stores and
pharmacies.
2003 rules. In 2003, the IRS addressed the use of debit cards for
medical expense reimbursements in Rev. Rul. 2003-43. Use of a debit card is
generally limited to merchants and service providers with specific merchant
category codes related to health care. Using the cards at other merchants
would not be allowed.
Supermarkets, discount stores and other stores.
Now, the IRS has decided to allow the use of debit cards at supermarkets,
grocery stores, discount stores, and wholesale clubs that do not have a
merchant category code related to health care. The treatment will be
permitted for a limited time.
Employers will still be required to substantiate all debit card charges
incurred during the transition relief period as qualifying for medical
expense reimbursement and must follow the required correction procedures for
any unsubstantiated payments. After December 31, 2007, health FSA or HRA
debit cards may not be used at any store, vendor or merchant that does not
have a health-care-related merchant category code unless the store, vendor
or merchant has implemented an inventory information approval system.
Enhanced rules for drug stores and pharmacies.
Under Rev. Rul. 2003-43, health FSA and HRA debit cards may be used at
stores with the merchant category code for drug stores and pharmacies. The
IRS recognized, however, that many stores with this code also sell a
significant number of items which do not qualify as medical expenses.
After
December 31, 2008, health FSA and HRA debit cards may not be used at stores
with the drug stores and pharmacies merchant category code unless:
(1) The store participates in an IRS-approved inventory information approval system;
or
(2) On a store location by store location basis, 90 percent of the store’s gross
receipts during the prior taxable year consisted of items which qualify as
expenses for medical care under IRS rules.
The rules for using debit cards for medical expense reimbursements are complex.
Give our office a call if you have any questions.
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Workshop Helps Tax
Exempt Organizations Remain in Compliance
The
Internal Revenue Service
has launched a new Internet-based version of its popular Exempt Organizations
workshop covering tax compliance issues confronted by small and mid-sized
tax-exempt organizations, including charities and churches.
The workshop consists of five interactive modules on tax compliance topics.
Users can access this new training program at:
www.stayexempt.org
or from a link on the IRS web site at:
www.irs.gov/eo
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Extended Tax Filing
Deadline
T he
IRS has announced that taxpayers will have until Tuesday, April 17, 2007 to
file federal 2006 individual tax returns (and certain other forms) and pay any
taxes due. The filing date was extended because April 15 falls on a Sunday in
2007 and the following day, April 16, is Emancipation Day, a newly instituted
legal holiday in the District of Columbia. Legal holidays observed in the
District of Columbia have nationwide impact on federal tax deadlines. IRS
officials became aware of this statute with respect to the April 16
Emancipation Day holiday only recently, after forms and publications for the
2006 tax year had gone to print. These forms and publications will not be
updated, but the IRS web site will include information on the new filing
deadline.
Among the forms and IRS actions that the new deadline apply to are:
Ø
2006 Form 1041 filed by estates and trusts that report their income on a
calendar-year basis and any balance due;
Ø
2006 Form 1065 filed by partnerships
that report their income on a calendar-year basis;
Ø
extension requests for any of the above-mentioned forms;
Ø
tax year 2006 contributions to a Roth or traditional IRA;
Ø
individual estimated tax payments for the first quarter of 2007, as well as
estimated tax payments of corporations, estates and trusts that are
calendar-year taxpayers;
Ø
individual refund claims for tax year 2003, subject to the regular three-year
statute of limitations;
Ø
the March tax deposit for employers that deposit withholding taxes on a
monthly basis; and
Ø
withholding tax deposits for larger employers, subject to the next day deposit
rule.
Contact
your tax professional at SEK&Co regarding state deadlines which, at the time
of print of the Quarterly Review, were yet to be determined.
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The Better Way
Hi Bracket wanted to sell a commercial building and land to his son, Junior, who was
continuing with the family business. Junior was willing to pay fair market
value (surprise) if Hi financed the sale (no surprise). After the sale, Hi
was picking up interest income and capital gain (mostly at 15%) as he
collected the principal on the mortgage note. Junior had a low interest rate
and long payment term. Now, everyone was happy.
Sometime later Hi's return got audited and, boy, was he surprised that
since Junior was his son, and the building was depreciable property, all of
the gain was fully taxable and even worse, the tax was due when the sale
took place, not over the collection period. Man, did that hurt! The problem
was that since Junior was a "related party" the regular rules didn't apply.
The Better Way would be to have the tax implications of significant
transactions researched before they are finalized. There are many instances,
such as dealing with related parties where normal rules and logic don't
apply.
We often work with people to restructure transactions to improve tax
consequences. For Hi and Junior, allocating the sale price between land and
building or buying only land and leasing the building could have helped a
lot. But remember, the restructuring has to be before the transaction
is done.
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2007 Standard Mileage Rates Set
The
standard mileage rate
for business use of autos during 2007 has increased from 44.5 cents to
48.5 cents per mile. Taxpayers may base their deduction on either the
standard mileage rate (plus business-associated parking fees, tolls, and,
to the extent allowable, interest and taxes) or deduct their actual
expenses incurred for business use of an auto.
Employers
may use the standard mileage rate when computing payments for employees' auto
expenses incurred under a reimbursement or expense allowance arrangement and
thereby substantiate the amount of such expenses, if the accountable plan
requirements are satisfied.
|
2007 Standard Mileage Rates
|
| Type of |
2007 rate |
| Expense |
(per mile) |
|
| Business |
48.5 cents |
| Charitable |
14 cents |
| (The special charitable contribution
mileage rates connected to Hurricane Katrina expired on December 31,
2006) |
| Medical/Moving |
20 cents |
|
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| 
