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This issue contains the following articles: IRS Discusses Ability of Accrual Based Taxpayer to Deduct Bonuses; Remittance of Participant Contributions to Retirement Plans – Timing is Everything; Supreme Court Declines to Review 401(k) Fee Case; February 17, 2010 COBRA Notice Deadline is Fast Approaching.

For Your Benefits J. Paul Jacobson, Robert D. Rothacker, David P. Olson, Amy A. Ciepluch, Sarah M. Linsley, Marla B. Anderson

FROM THE EDITOR

Welcome to the first issue of the Quarles & Brady Employee Benefits and Executive Compensation Group's For Your Benefits, a newsletter dedicated to keep benefit plan managers and HR and compensation professionals informed of legal changes affecting benefit programs. We will continue to supplement this regular publication with timely, special alerts that provide in-depth coverage of significant changes.
IRS DISCUSSES ABILITY OF ACCRUAL BASED TAXPAYER TO DEDUCT BONUSES

In December 2009, the Internal Revenue Service ("IRS") released a Chief Counsel Advice Memorandum discussing the timing of a taxpayer's deduction for bonus payments. The tax rules provide that an accrual based taxpayer can deduct bonuses for a year if the "all events test" is satisfied as of the last day of the taxable year, and the bonuses are paid in the first 2½ months of the following year. The "all events test" requires that: (1) all events have occurred that establish the liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred with respect to the liability. The IRS discussed a situation where an employer required individuals to be employed on the date of payment in order to receive a bonus, with any forfeited amounts paid to charity. The IRS concluded that the employer's liability for bonuses was subject to an employment contingency until the date of payment even though the employer had committed to paying any forfeited amounts to charity. Thus, the "all events test" was not met at year-end and the bonuses were not deductible by the employer until paid.

Q&B Key: In connection with Code Section 409A compliance, many employers modified their bonus plans to impose a requirement that employees be employed on the payment date to receive the bonus. This type of change can affect the timing of the employer's tax deduction. Employers will want to review their plans and procedures to determine that their bonus plans strike a proper balance between the Section 409A requirements and the tax deduction rules.

REMITTANCE OF PARTICIPANT CONTRIBUTIONS TO RETIREMENT PLANS - TIMING IS EVERYTHING

Under regulations that the Department of Labor ("DOL") finalized earlier this month, employers sponsoring 401(k) or ERISA 403(b) plans with fewer than 100 participants will be considered to have timely transferred participant contributions to such plans if they do so within seven business days of payroll withholding. All other employers must continue to remit such contributions by the earliest date on which they can be segregated from the employer's general assets. The DOL has informally stated that for larger employers with electronic payroll systems, participants' contributions should generally be contributed to the plan the same day as they are withheld from pay, and that participant contributions remitted even a few days after withholding may be considered late - in violation of the so-called "plan asset" rules. The DOL has also indicated that this is an issue that they are focusing on in audit, particularly as the economic downturn may cause some employers to delay remitting participant contributions to the plan to help with the company's cash flow.

Q&B Key: All employers should examine their procedures for remitting participant contributions, including salary deferrals and loan repayments, to 401(k) and ERISA 403(b) plans. Anything over seven business days for employers with small plans, or over a few days for all other employers, may put those employers at risk of DOL audit failures. For employers that discover a past problem, there is a DOL correction procedure that can provide protection from penalties on audit.

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SUPREME COURT DECLINES TO REVIEW 401(k) FEE CASE

On January 19, 2010, the Supreme Court declined to review the Seventh Circuit Court of Appeal's decision to uphold the dismissal of Hecker v. Deere, a controversial 401(k) fee case that has garnered significant national attention. In Hecker, participants in John Deere's 401(k) plans sued John Deere, alleging that the Company breached its fiduciary duty by offering investment options under the plans that had unreasonable fees and by failing to properly disclose the fees to plan participants. In upholding the lower district court's dismissal of the case, the Seventh Circuit held that the plans offered a sufficient mix of investments. As a result, John Deere had fulfilled its duty to provide an acceptable array of investment options - even if several of the investment options had high fees. Further, the Seventh Circuit held there was no obligation under ERISA to disclose revenue sharing, one of the particular types of fee arrangements in John Deere's 401(k) plans, to participants. Because the Supreme Court has declined to review the case, the Seventh Circuit's ruling, at least for now, will stand.

If you have questions, please contact Paul Jacobson at 414-277-5631 / paul.jacobson@quarles.com, Robert Rothacker at 414-277-5643 / robert.rothacker@quarles.com, David Olson at 414-277-5671 / david.olson@quarles.com, Amy Ciepluch at 414-277-5585 / amy.ciepluch@quarles.com, Sarah Linsley at 312-715-5075 / sarah.linsley@quarles.com, Kerri Hutchison at 414-277-5287 / kerri.hutchison@quarles.com, Marla Anderson at 414-277-5453 / marla.anderson@quarles.com or your Quarles & Brady attorney.

Q&B Key: Don't assume that plan fiduciaries and sponsors get a free pass on plan fees because of the Supreme Court's decision. The number of fees cases that participants are filing against 401(k) plan fiduciaries continues to rise. We continue to recommend that plan fiduciaries regularly review the fees charged by the plan and the disclosure of those fees to plan participants. Plan fiduciaries should document the process that was used to select plan investments, including any analysis of the fees that took place during this process. These procedures will not prevent a lawsuit; however, they will be instrumental in establishing a defense to any fee lawsuits that participants file.

FEBRUARY 17, 2010 COBRA NOTICE DEADLINE IS FAST APPROACHING

The Defense Department Appropriations Act of 2010 extended the eligibility period and the duration of the COBRA subsidy. Currently, employees who are involuntarily terminated between September 1, 2008 and February 28, 2010 are eligible to receive subsidized COBRA coverage for up to 15 months. The Internal Revenue Service has announced that plan administrators must notify assistance eligible individuals of the COBRA subsidy extension by February 17, 2010.

If you have questions, please contact Paul Jacobson at 414-277-5631 / paul.jacobson@quarles.com, Robert Rothacker at 414-277-5643 / robert.rothacker@quarles.com, David Olson at 414-277-5671 / david.olson@quarles.com, Amy Ciepluch at 414-277-5585 / amy.ciepluch@quarles.com, Sarah Linsley at 312-715-5075 / sarah.linsley@quarles.com, Kerri Hutchison at 414-277-5287 / kerri.hutchison@quarles.com, Marla Anderson at 414-277-5453 / marla.anderson@quarles.com or your Quarles & Brady attorney.

Q&B Key: Plan Administrators must send revised COBRA notices to assistance eligible individuals by February 17, 2010.

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UPCOMING...

  • The Department of Labor plans to broaden its regulatory definition of fiduciary to include additional people, such as pension consultants and financial asset appraisers. The proposed regulation is expected to be published in June.
  • The Internal Revenue Service is expected to issue a revenue procedure in 2010 that will describe the procedures for correcting operational errors in 403(b) plans.
  • The passage of health care reform is uncertain, but Quarles & Brady continues to monitor developments in the legislation. If health care reform is passed, we will be presenting client seminars in multiple cities to inform you of the legislation and actions you need to take.

If you have questions, please contact Paul Jacobson at 414-277-5631 / paul.jacobson@quarles.com, Robert Rothacker at 414-277-5643 / robert.rothacker@quarles.com, David Olson at 414-277-5671 / david.olson@quarles.com, Amy Ciepluch at 414-277-5585 / amy.ciepluch@quarles.com, Sarah Linsley at 312-715-5075 / sarah.linsley@quarles.com, Kerri Hutchison at 414-277-5287 / kerri.hutchison@quarles.com, Marla Anderson at 414-277-5453 / marla.anderson@quarles.com or your Quarles & Brady attorney.