26th Annual Health Sciences Tax Conference

Transcription

1 26th Annual Health Sciences Tax Conference Nonqualified deferred compensation: new proposed regulations and Form 990 reporting December 5, 2016

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2016 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Christian Hofstadter Sutter Health Sacramento, California Lucille White Ernst & Young LLP Chicago, IL Helen Morrison Ernst & Young LLP Washington, DC Page 3

4 Agenda Background Sutter Health Recently issued Section 457 proposed regulations What is nonqualified deferred compensation? When is nonqualified deferred compensation subject to Section 457 rules? What amount of nonqualified deferred compensation is included in income and in what taxable year? Coordination of Section 457(f) nonqualified deferred compensation with: Section 4958 excess benefit transactions Form 990 reporting Page 4

5 Background Sutter Health Nonprofit health system; headquarters in Sacramento, CA Sutter Health Network includes: 28 acute care hospitals in northern California and Hawaii 35 outpatient surgery centers throughout California 5 medical foundations Cancer centers Home health and hospice services Long-term care centers Research institutes Education and training programs (e.g., Samuel Merritt University) Approximately 51,000 employees Page 5

6 Nonqualified deferred compensation Page 6

7 Nonqualified deferred compensation subject to Section 457 Three types of nonqualified deferred compensation Eligible Section 457(b) plans nongovernmental tax-exempt Eligible Section 457(b) plans state or local government Section 457(f) (ineligible deferred compensation plan) tax-exempt or governmental entity Eligible Section 457(b) plan maintained by tax-exempt entities Participation limited to a top hat group. Employer and employee contributions limited to Section 402(g) limit. For 2016, $18,000, plus $6,000 catch-up Contributions and earnings are pre-tax. Minimum required distributions rules apply. Page 7

8 Ineligible nonqualified deferred compensation Legally binding right to receive payment of compensation in the future Deferred compensation arrangement that does not comply with Section 457(b) requirements (or Sections 401(a) or 403(b) rules) Subject to both Section 457(f) and Section 409A Section 457(f) requires deferred compensation amount to be included in income when no longer subject to a substantial risk of forfeiture (vested), regardless of when actually paid. Section 409A imposes an additional 20% tax, plus premium interest, on deferred compensation amounts that fail to meet payment timing requirements. Page 8

9 Sutter Health: nonqualified deferred compensation Section 457(b) Deferred Compensation Plan Supplemental Executive Retirement Plan (457(f) plan) Special Supplemental Executive Retirement Plan (457(f) Plan) Page 9

10 Section 457(f) proposed regulations Page 10

11 Section 457 proposed regulations Section 457 proposed regulations address important issues Plans that are excluded from definition of deferred compensation Timing of income inclusion and definition of substantial risk of forfeiture Calculation of present value amount of deferred compensation Coordination of Section 457(f) with Section 409A Page 11

12 Section 457 proposed regulations: excluded plans Bona fide sick and vacation leave plan excluded from definition of deferred compensation. Primary purpose of the plan is to provide paid time off due to sickness or vacation; regulations include factors to assess plan s status. Caution: Tax-exempt employers that permit employees to accumulate unused vacation leave in exchange for cash should assess whether the plan is excluded from deferred compensation definition. Page 12

13 Sutter Health: sick and vacation leave plan The Sutter Health system maintains several paid time off (PTO) plans and other leave policies. PTO plan design and leave policies vary by affiliate. Sutter Health is currently working on revising and standardizing its PTO and leave policies. Page 13

14 Section 457 proposed regulations: excluded plans Bona fide severance pay plan excluded from the definition of deferred compensation. Payable on involuntary severance from employment and amount and timing of payment is limited. Caution: Rules are similar to Section 409A rules for excluded separation plans, but differences may cause plan to be excluded from Section 457(f), but subject to Section 409A. Page 14

15 Sutter Health: severance plan Non-executive severance plan Severance paid upon involuntary termination of employment not for cause due to elimination of position Severance distributions paid as salary continuation payments Executive severance plan Severance paid upon involuntary termination of employment not for cause Severance distributions paid as salary continuations payments Page 15

16 Section 457(f) proposed regulations: definition of substantial risk of forfeiture Substantial risk of forfeiture (SRF) exists if compensation is conditioned on future performance of services or occurrence of a condition related to the purpose of the compensation if the possibility of forfeiture is substantial. SRF rules that apply for Section 457(f) purposes, but do not constitute an SRF under Section 409A: Noncompete or other restricted covenants may be considered an SRF if certain conditions are satisfied. New employees may elect to cause current compensation to be subject to SRF if certain conditions are satisfied. Caution: The Sections 457(f) and 409A definition of SRF overlap considerably, but there are differences that taxexempt employers must monitor. Page 16

17 Substantial risk of forfeiture: conditions for noncompete Right to compensation is conditioned in writing on refraining from services Employer consistently verifies compliance Employer has a valid interest in preventing services and employee has ability to engage in services Facts and circumstances test Tested at the time the enforceable agreement becomes binding Page 17

18 Substantial risk of forfeiture: conditions for deferral election Present value of amount to be paid upon the lapse of the substantial risk of forfeiture must be materially greater (i.e., 125% of what employee would have received). Extended risk of forfeiture must be based on services; may not be based solely on the occurrence of a condition related to employment. Period of service must be at least two years. Agreement in writing prior to beginning of the year or at least 90 days prior to lapse of initial substantial risk of forfeiture. Page 18

19 Section 457(f) proposed regulations: calculation of deferred compensation Regulations set forth how to calculate the amount of deferred compensation to be included in income. Most challenging calculation is the present value of nonaccount balance plans, with benefits determined by reference to a formula (e.g., a supplemental executive retirement plan, commonly known as a SERP ). Caution: Tax-exempt employers that do not make lump sum distributions when the deferred amount is included in income should assess how the present value of the benefit is calculated to avoid participant receiving a loss when amount is paid. Page 19

20 Sections 409A and 457(f) Section 457(f) rules apply to an ineligible deferred compensation plan separately and in addition to the requirements to the plan under Section 409A. Section 457(f) income inclusion at vesting is treated as a payment for purposes of Section 409A. Interest or earnings on undistributed amounts is subject to Section 409A payment timing rules. Caution: Section 457(f) rules for severance and SRF differ from the Section 409A rules, and deferred amounts may become subject to Section 409A. Page 20

21 Coordination with Section 4958 Page 21

22 Coordination with Section 4958 Increased administrative focus on hospitals and health insurers levels of executive compensation Section 162(m)(6): $500,000 compensation deduction limitation Section 4958: 25% excise tax on excess benefit transactions Section 4958 Excess benefit transaction is any transaction in which an economic benefit (including compensation) is provided to a disqualified person if the value of the benefit exceeds the value of the services. Disqualified person is any person, during the prior five years, in a position to exercise substantial influence (e.g., CEO, president, CFO, treasurer, COO). Compensation is reasonable if it is an amount ordinarily paid for like services by a like enterprise that is taxable or tax exempt; rebuttable presumption standard applies. Page 22

23 Coordination with Form 990 reporting Page 23

24 Coordination with Form 990 filing Form 990 compensation disclosure Generally tracks public company disclosure Reporting of tax-exempt organizations compensation practices Intended to address tax administration concerns and potential areas of abuse Particular areas of concern addressed on Form 990 include: Reporting of entire compensation, including incentive compensation Payments of fringe benefits, such as vacation homes, personal legal fees, or personal automobiles, meals and gifts Compensation from related organizations Payments to an officer s for-profit corporation in excess of the value of services provided by the corporation Page 24

25 Coordination with Form 990 reporting Part VII: compensation disclosures Whom to report What to report When to report Page 25

26 Coordination with Form 990 reporting Schedule J: compensation information Page 26

27 Coordination with Form 990 reporting Schedule J: reporting considerations Calculation of nonqualified deferred compensation should be consistent with calculation of present value for Section 457(f) income inclusion purposes; but reporting and tax may differ Defined benefit (DB)/SERP versus defined contribution (DC)/SERP DB plan/db SERP: report increase or decrease in actuarial value DC plan/dc SERP: report current deferrals, but do not report earnings or losses accrued on the balance Life insurance policy If a loan, not reported on Schedule J, but reported on Schedule L If deferred compensation, reported on Schedule J May be automatic excess benefit considerations for supporting organizations Performance-based compensation Consider consequences if paid or accrued based on net earnings Page 27

28 Coordination with Form 990 reporting Other Schedule J pitfalls Failure to report compensation provided under a deferred compensation plan Failure to report severance benefits Failure to report fringe benefits such as air travel, entertainment Failure to report compensation from related organizations Failure to report compensation to former officers, directors, key employees and highest-compensated employees Reporting compensation in the wrong years Page 28

29 Questions? Page 29

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