TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING. August 21, 2018

Transcription

1 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING August 21, 2018

2 CPE and Support CPE Participation Requirements To receive CPE credit for this webcast: You ll need to actively participate throughout the program. Be responsive to at least 75% of the participation pop-ups. Q&A: Please refer the CPE & Support Handout by clicking Handout icon for more information about group participation and CPE certificates. Submit all questions by clicking the Q&A icon on the bottom of your screen. The presenter(s) will review and answer questions as time permits. *Please note that questions and answers submitted/provided via the Q&A feature are visible to all presenters as well as the participants. Technical Support: BDO Employees: Please contact technical support at Alliance, International, and invited Guests: Please contact : TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

3 With You Today JOAN VINES Compensation & Benefits Managing Director (703) CARL TOPPIN Compensation & Benefits Managing Director (212) TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

4 Agenda Tax rates: Executive compensation planning AMT & ISOs [55(d)] Equity deferral elections - 83(i) $1 million deduction limitation - 162(m) Tax-exempt excessive executive compensation Payroll Taxes Entertainment & meal expense deduction limitation 274 Various fringe benefits Paid family leave 45S 401(k) plan updates 4 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

5 Tax Rates Executive Compensation Planning Impact on AMT & ISOs 5 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

6 Tax Rate Planning C Corporation Earnings Retain vs. Distribute Prior Law Current Law Individual Tax Rate Corporate Deduction (35.0) (21.0) Net Tax on Distributions Retaining earnings in C Corp significantly reduces annual tax burden under current law than prior law Increases value of stock, which will be taxed as capital gains upon a sale of the corporation 6 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

7 Tax Rate Planning Distribute Earnings Bonus vs. Dividends to Owner-Executives Bonus Taxes Rate (%) Employee Income Tax Employee Medicare 2.35 Employer Medicare 1.45 Dividends Taxes Rate (%) Employee Dividend Tax Employee ACA Tax 3.80 Total 23.8 Employer Income Tax (21.00) Total Distributions in the form of bonuses may be more tax efficient than dividends 7 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

8 Tax Rate Planning Nonqualified Deferred Comp Employer cost of deferral is lower after Benefit to executive 39.6% deferred income 37% deferred income Cost to Company 35% deferred deduction 21% deferred deduction Deferred income tax must comply with Code section 409A 8 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

9 Tax Rate Planning Pass-Through Entities 199A provides a deduction of up to 20% of income from a domestic business operated as a: Sole proprietorship, partnership, S corp, trust or estate 199A deduction is limited for taxpayers whose income exceeds the statutory limit ($315,000 / $157,500) Deduction is based on: Type of trade or business Amount of wages paid by the trade or business; and/or Unadjusted basis immediately after acquisition of qualified property 9 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

10 Section 55 Individual AMT & ISOs Incentive Stock Options (ISOs) generally No income tax at grant, vest or exercise for optionee if shares are held for statutory period Long-term capital gain upon sale of shares No deduction for employer Strategy: employers already losing deduction under 162(m) on pay exceeding $1m to covered employees may grant ISOs to such employees Downside: AMT reduces the income tax savings AMT: Effective 1/1/ /31/2025 TCJA increases the AMT exemption and phase out of the exemption 10 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

11 Section 55 Increase AMT Exemption & Phase-Out AMT Exemption Status Single 70,300 54,300 MFJ 109,400 84,500 AMTI Phase-Out Threshold Status Single 500, ,700 MFJ 1,000, ,900 28% Rate Status Single 95,750 93,900 MFJ 191, ,800 AMTI Complete Phase-Out Status Single 781, ,900 MFJ 1,437, , TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

12 Section 83(i) Qualified Stock Plan 12 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

13 Section 83(i) Equity Deferral Elections Section 83(i) allows Qualified Employees of an Eligible Corporation to elect to defer income tax on Qualified Stock acquired upon the exercise of stock options or settlement of restricted stock units (RSUs) for up to 5 years. Eligible Corp Qualified Employee Qualified Stock 13 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

14 Section 83(i) Defined Terms Eligible Corporation: Privately-held corporation with a written plan that grants stock nonqualified stock options (NQSO) or restricted stock units (RSUs) to at least 80% of all US full-time employees under the same terms Qualified Stock: Shares received from exercising NQSOs or vesting in RSUs Precludes employee receiving cash in lieu of stock at the time of vesting - Presumably, stock with put rights, repurchase rights and net settlement are disqualified Eligible Employees: Any employee who agrees to satisfy the withholding requirements for qualified stock and who is not an Excluded Employee 14 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

15 Section 83(i) Excluded Employees CEO/CFO Has ever been the CEO or CFO of the corporation (or a family member of such individual) 1% Owner A 1% owner at any time during the calendar year or during the 10 preceding calendar years Highest Compensated Officers One of the 4 highest compensated officers for the taxable year or any of the 10 preceding taxable years (determined under the SEC s proxy disclosure rules) 15 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

16 Section 83(i) Caution: Potential Downsides 80% participation requirement Top executives precluded from benefiting under 83(i) Administrative challenges for the employer Notice requirement, W-2 reporting, separate FICA and income tax processing Withholding at maximum tax rate (37% in 2018) at end of deferral period Unclear whether employer can opt out the arrangement and prevent its employees from claiming the 83(i) tax deferral Liable for penalties for failing to provide the required notice and correct W-2 reporting Avoid the risks by ensuring that its stock option and RSUs do not satisfy 83(i) 16 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

17 Section 162(m) Part I Changes to $1 Million Deduction Limitation for Executive Compensation 17 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

18 Section 162(m) Prior Law Limits a publicly held corporation s ability to deduct certain compensation in excess of $1 million paid to top executives Covered Employees: CEO and 3 highest paid reported on proxy; employed on last day of taxable year CFO excluded due to disconnect from a change in SEC disclosure rules Compensation: Covered: Salary, bonus, equity awards, NQDC Excluded: Qualified retirement plans, performance-based, commission-based, post-termination pay, payments to beneficiary Plan design to mitigate impact of $1 million deduction limitation: Performance-based compensation (incl. stock options) & deferred compensation 18 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

19 Section 162(m) Changes by TCJA Eliminates exceptions for performance-based compensation deduction Modifies definition of Covered Employees PEO, PFO, 3 Highest compensated officers For any tax year beginning after December 31, 2016 Once a covered employee, always a covered employee Expands Covered Employers Listed corporations: Publicly traded equity Certain non-listed corporations: Corporations with registered equity or debt, including foreign companies publicly traded through ADRs 19 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

20 Section 162(m) Effective Date & Grandfather Rule Effective for tax years beginning after December 31, 2017 Grandfather Rule Covered employee had a right to payment under a written binding contract in effect on November 2, 2017 No material changes have been made with respect to such arrangement after November 2, Concerns regarding the right to unilaterally reduce or terminate the covered employee s right to such payment (e.g., discretionary) Grandfathered Compensation: Performance-based compensation (without negative discretion) Outstanding options and SARs Deferred compensation on or before November 2, TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

21 Section 162(m) Planning Considerations Annual pay significantly exceeds $1 million: Planning may be very limited; Value of lost deductions lower than in prior years (21% corporate tax rate) Annual pay closer to $1 million Defer to a future tax year when pay not expected to exceed $1 million Maintain grandfathered status of qualifying arrangements FYE 2018 corp: bonus accrual (at 35%) vs. 162(m) grandfather (at 21%) Set more challenging performance goals Spread vesting on incentive compensation and restricted stock Award incentive stock options (ISOs) Other considerations: Other tax consequences under 409A and 280G Exercise of non-grandfathered options; earnings on NQDC 21 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

22 Section 162(m) Transition for Closely-Held Company The TCJA does not appear to change the existing transition period applicable to closely-held companies that become public as a result of an IPO or spin-off Section 162(m) does not apply to the exercise of an option or vesting of restricted stock if the grant or award occurs before the end of the reliance period, provided: Plan or agreement was in effect when the IPO occurred, provided that such arrangements were disclosed as part of the IPO prospectus Reliance period: Expiration or material modification of the plan or agreement or depletion of all securities or other compensation under the plan IPO: First shareholder meeting that occurs following the close of the third calendar year following the calendar year of the IPO Spin-off: 12 months following the spin-off 22 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

23 Section 162(m) Part II Transition Relief Grandfathered Arrangements 23 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

24 Section 162(m) Transition Relief Grandfather Rule: The new 162(m) rules do not apply to pay made under a written binding contract that was in effect on 11/2/2017, which has not been materially modified after such date. 24 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

25 Section 162(m) Written Binding Contract Historical: Written Binding Contract under 1993 transition rule Code 162(m)(4)(D) contains a transition rule when 162(m) was adopted in 1993 Treasury Regulations interpret the meaning of written binding contract under the earlier transition rule (Reg (h)(1)(i)) - Under applicable state law, the corporation must be obligated to pay the compensation if the employee performs services - A written binding contract that is renewed is treated as a new contract as of the date of renewal - If a contract could be terminated by the employer without the consent of the employee, the contract is treated as a new contract as of the date that any such termination, if made, would be effective 25 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

26 Section 162(m) Material Modification Historical: Written Binding Contract under 1993 transition rule Treasury Regulations interpret the meaning of material modification under the earlier transition rule (Reg (h)(1)(ii)) - Contract amended to increase compensation payable - Accelerated payment unless discounted (present value) - Deferral of payment, unless excess is based on reasonable rate of interest or predetermined investment - Supplemental arrangement that provides for increased compensation where the additional compensation is paid on the basis of substantially the same conditions 26 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

27 Section 162(m) Scenario 1 CFO Becomes a covered employee under TCJA Corporation Z, a public corp, calendar year taxpayer On 1/1/2017, Corp Z awards CFO with performance-based comp, payable 4/15/2018 if certain metrics are met Performance-based pay was not structured to satisfied the 162m exception since CFO was not a covered employee In 2018, CFO becomes a covered employee Is the 2017 performance-based comp paid to CFO grandfathered? Yes. TCJA changes made to 162(m) (including making the CFO a covered employee) do not apply to payments made pursuant to a written binding contract in effect on 11/2/ TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

28 Section 162(m) Scenario 2 Company becomes subject to 162(m) due to TCJA Corporation Y, a private corp, calendar year taxpayer, with publicly traded debt On 1/1/2017, Corp Z awards its CEO, CFO and 3 highest paid officers with performance-based comp, payable 4/15/2018 if certain metrics are met Performance-based pay was not structured to satisfied the 162m exception since the executives were not covered employees In 2018, the executives become covered employees Is the 2017 performance-based comp paid to the execs grandfathered? Yes. TCJA changes made to 162(m) (including making the execs covered employees) do not apply to payments made pursuant to a written binding contract in effect on 11/2/ TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

29 Section 162(m) Scenario 3 CEO becomes a covered employee due to promotion Corporation X, a public corp, calendar year taxpayer On 1/1/2017, Corp X an executive with performance-based comp, payable 4/15/2018 if certain metrics are met Performance-based pay was not structured to satisfied the 162m exception since the exec was not a covered employee In 2018, the exec is promoted to CEO and becomes a covered employee Is the 2017 performance-based comp paid to CFO grandfathered? No. The exec became a covered employee as a result of a promotion and not due to TCJA changes made to 162(m). The payment should not qualify for grandfathered status 29 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

30 Section 162(m) Scenario 4 Automatic renewal of employment agreement On 6/1/2014, Corp W and CEO executed a 4-year employment agreement The terms provide for automatic extension after the 4-year term for additional 1-year periods, unless either the Corp W or CEO gives notice to terminate the agreement within 30 days of the end of the term Employment agreement provides for severance equal to 3x base salary upon an involuntary termination by Corp W On 9/1/2018, Corp W terminates CEO Is the severance paid to CEO grandfathered? No. The employment agreement was renewed on 6/1/2018. The new 162(m) rules apply to a written binding contract that was renewed after 11/2/ TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

31 Section 162(m) Scenario 5 Severance paid to a covered employee On 1/1/2017, Corp V and CEO executed a 3-year employment agreement Employment agreement provides for severance equal to 3x base salary upon an involuntary termination by Corp W In 2017, CEO s salary is $500,000 On 1/1/2018, Corp V increases base salary to $510,000 On 1/1/2019, Corp V increases salary is increased to $700,000 Is the severance grandfathered for an involuntary termination in 2018? 2019? 2018: $1,530,000 severance. $1.5m is grandfathered. $30k (a cost-of-living increase) is subject to 162(m). 2019: $2,100,000 severance. None is grandfathered. Material modification of the agreement since additional comp is paid on same conditions and increase is greater than a reasonable, cost-of-living increase. 31 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

32 Section 162(m) Scenario 6 Stock Options On 7/1/2012, Corp U granted CEO an non-statutory stock option The option exercise period expires on the earlier of 7/1/2022 or 3 months after CEO s separation from service On 5/1/2019, CEO separates from service; and Corp U extends the exercise period so the option expires on 5/1/2020 Does the option retain its grandfathered status? Probably. The supplemental agreement to the original award extends the post-term exercise period. The amount of comp payable under the agreement (i.e., spread) is determined in the same manner 32 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

33 Section 162(m) Grandfather Status Review Issues to be aware of: Entitled to full or prorated bonus payable at target upon termination of employment. - Violates Rev. Rul requiring payout based on actual performance Awards granted under a stock incentive plan in an amount that exceeded the maximum annual limit imposed by the plan Awards granted under a stock incentive plan that lapsed due to Company s failure to seek stockholder re-approval of the plan every 5 years 33 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

34 Section 4960 Executive Compensation for Tax-Exempt Organizations 34 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

35 Section Tax-Exempt Organizations: Excise Tax for Excessive Executive Compensation Imposes an excise tax equal to the corporate rate of tax (currently 21%) on - excess parachute payments and - remuneration exceeding $1 million (other than excess parachute payments) Paid by an applicable tax-exempt organization (or related entity) for a taxable year to a covered employee Excise tax is imposed on the tax-exempt organization (or a related entity) Effective for taxable years beginning after December 31, 2017 No grandfather or other transition rules apply 35 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

36 Section 4960 Defined Terms Applicable Tax-Exempt Organization: Tax-exempt entities (e.g., charitable, religious, qualified retirement plans, certain governmental, farmers cooperative and political organizations) Related entities: (e.g., Controls, or is controlled by, the organization) Covered Employee One of the 5 highest compensated employees for the taxable year; or For any year after Dec. 31, 2016 (once a covered employee, always one) Remuneration: W-2 box 1, less - Roth contributions; and - Amounts paid to a licensed medical professional (including a veterinarian) for medical or veterinary services 36 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

37 Section 4960 Excess Parachute Payment Excess Parachute Payment: An amount equal to the excess of any parachute payment over 1x the base amount Parachute Payment: Payment for the benefit of a covered employee that is in the nature of compensation contingent on the employee s separation from service with the employer aggregate PV of the payments equals or exceeds 3x the base amount Excludes payments - Under qualified plans, 403(b) annuity or a 457(b) plan - To a licensed medical professional (or veterinarian) for such services - To an individual who is not a highly compensated employee (e.g., did not earn at least $120,000 in prior year) Base amount: Generally average annual taxable income for preceding 5 years 37 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

38 Section 4960 Excess Parachute Payment Example: Lump sum payment of $800,000 on separation date Base amount = $250,000 Threshold test = $750,000 (3 x $250,000) - The $800,000 is a parachute payment since the amount exceeds 3x the base amount Excess parachute payment = $550,000 ($800,000 - $250,000) Excise tax = $115,000 (21% x $550,000) 38 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

39 Section Planning Opportunities Identify covered employees Review all existing documents and projected payouts Structure payments to fall under $1 million limitation Shift remuneration from active pay to involuntary separation pay - Distinguished from deferring pay For parachute payments: Cutback provisions to limit separation payments to 2.99% of base amount Increase W-2 compensation in prior years to increase base amount Utilize 457(b) plans - 3-year catch up provision - Distributions are not parachute payments Subject payments to noncompete covenants Phased retirement program (potential strategy; IRS clarification needed) 39 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

40 Payroll Taxes 40 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

41 Payroll Tax Income tax withholding rates modified to reflect New individual tax brackets Changes in available itemized deductions Increases in the child tax credit The new dependent credit & repeal of dependent exemptions Withholding Notice Percentage Method Tables Publication 15 (Circular E) Wage Bracket Method Tables Check withholding: Supplemental withholding rate 22% flat rate; 37% flat rate for supplemental pay over $1m in tax year 2018 Form W-4 released (required for new employees only) 41 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

42 Various Fringe Benefits Deductibility of Entertainment and Food & Beverage Expenses 274 Income Inclusion for fringe benefits 42 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

43 Section 274 Entertainment & Meal Expense 274(a) No deduction for entertainment, amusement, or recreation Repeals exception where taxpayer established that the expense was directly related to or associated with conduct of taxpayer s trade or business 274(e) 274(n) Exceptions to 274(a) (e.g., for employees, compensation, reimbursed expenses, recreational for all employees) 274(n) 50% deduction for meal expenses Several exceptions (e.g., included in compensation, reimbursed, recreational for all employees) Uncertain interaction with 274(k) allowance for business meals 43 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

44 Section 274 Deductibility of Meal Expenses Scenario Fully Deductible 100% Partial Deduction 50% Non-deductible 0% Recreational expenses for all employees X Pantry (coffee, tea, bottled water, bagels, snacks) X X Overtime meals X Cafeteria meals X Business travel X Client meals X X Internal meeting X External meeting X X 44 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

45 Fringe Benefits Various Employee achievement awards 74, 274 Clarifies cash & equivalents and non-tangible property (e.g., theatre tickets) awarded for long service/safety achievement are included in income Qualified bicycle commuting reimbursements 132(f)(8), 274 Suspends exclusion from gross income for periods for 1/1/ /31/2026 Qualified transportation fringe benefits 274(l) No employer deduction (except employer-provided transportation for safety) Qualified moving expenses (employer-paid) 132, 82 Suspends exclusion for 1/1/ /31/2026 Health Savings Account 223 Change to measuring annual inflation impacts 2018 max family HSA limit 45 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

46 Section 5000A(c) - Affordable Care Act Reduces penalty for Individual Mandate to $0 effective 2019 Indirect impact on employers Employers with self-insured plans should no longer be required to report persons covered under plan each month (employees, spouse & dependents) - Form 1095-C, Part III is used to enforce the individual mandate Full-time employees may drop employer coverage - Could impact employer s experience rating Full-time employees may drop Exchange coverage, reducing threat of penalty if such employees qualify for federal subsidy - The B penalty may be reduced (Sec. 4980H(b): ~ $3,000 per affected employee) - The A penalty is unaffected (Sec. 4980H(a): ~ $2,000 for all full-time employees, less 30) 46 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

47 Section 45S Paid Family and Medical Leave 47 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

48 Section 45S Paid Family and Medical Leave Family and Medical Leave Act (FMLA) Provides certain employees with up to 12 weeks of unpaid leave per year Mandatory for employers that are subject to FMLA (e.g., employers with 50 or more employees) No requirement under FMLA to pay employees during the leave - Some states (e.g., California, NY) require paid leave in certain situations TCJA added new tax credit for Eligible Employers who voluntarily provide paid family and medical leave to Qualifying Employees for Qualifying Leave 48 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

49 Section 45S Eligible Employer & Qualifying Employee Eligible Employer has a written policy that provides At least 2 weeks of annual paid family and medical leave to qualifying employees who work full-time (and prorated for employees who work parttime) Leave pay must equal at least 50% of regular wages Qualifying Employees Any employee who has been employed by the employer for one year or more For the preceding year, had compensation not more than 60% of the threshold for a highly compensated employee - For an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

50 Section 45S Qualifying Leave Tax credit is available for any of the following leaves: To care for a newly born, adopted or fostered child To care for the employee s spouse, child or parent with a serious health condition For a serious health condition that makes the employee unable to perform the functions of his or her position To assist loved ones when a spouse, child, or parent is deployed on active military service To care for a service member who is the employee s spouse, child, parent or next of kin 50 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

51 Section 45S Amount of Credit Credit is equal to 25% of the wages paid to a qualifying employee while on family and medical leave Starts at 12.5% of wages paid to an employee on leave Increases by 0.25% for each percentage point by which the rate of leave pay exceeds 50% (capped at 25%) Credit is available for up to 12 weeks of paid family and medical leave Credit is temporary Only effective for 2018 and 2019 taxable years Not eligible for credit Required to provide paid family and medical leave under state or local law Amounts paid by state or local government 51 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

52 401(k) Plan Updates Extended period to rollover plan loan offsets QNEC & QMAC contributions and distributions Hardship withdrawals 52 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

53 Section 402(c)(3) Extended Period to Rollover Plan Loan Offset Plan loan offsets Upon a participant s termination with an outstanding loan balance, the employer uses part of the participant s account to repay the loan A loan offset is an eligible distribution that can be rolled over to an IRA Participant may defer taxation on loan by rolling over and contributing balance to IRA Timeline for making rollover is extended from 60 days after the offset to the due date (including extension) of income tax return for year of offset 53 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

54 Section 402(c)(3) Extended Period to Rollover Plan Loan Offset Example Participant terminates with $100,000 account in 401(k) (with no basis) and $10,000 remaining balance on a plan loan Employer uses $10,000 of the $100,000 balance to repay the loan and leaves the remaining $90,000 in participant s account Participant is taxed on $10,000 if he does not roll over any of the distribution Participant may roll over up to $10,000 of this eligible rollover distribution - Received no money when the offset occurred - Must transfer $10,000 by the due date (including extension) of income tax return for year of offset 54 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

55 TCJA - Hardship Withdrawals TCJA changes to Sec. 165 casualty loss deduction One of the safe harbor hardship withdrawal events for determining immediate and heavy financial need was tied to Sec. 165 TCJA now requires that a person s principal residence must be located in a federally declared disaster area to qualify for a casualty loss deduction Ability to receive hardship withdrawals under the casualty loss safe harbor appears to be restricted based on the location of the casualty loss 55 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

56 Bipartisan Budget Act of Hardship Withdrawals No loan first requirement before taking a hardship withdrawal Current regulations require a participant to receive all distributions and loans from any plan maintained by employer before qualifying for a safe harbor hardship withdrawal Effective plan years on or after Jan. 1, 2019, a safe harbour distribution shall not be treated as failing to be made due to hardship solely because the employee does not take any available loan under the plan Eliminate 6-month suspension for elective deferral contributions Current regulations: plan must prohibit participant from making elective deferrals for a 6-month period to determine financial need Effective plan years on or after Jan , eliminates 6-month suspension rule from regs IRS has until Feb. 9, 2019 to modify regulations 56 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

57 QNECs & QMAC Changes Qualified nonelective employer contributions (QNECs) and Qualified matching contributions (QMACs) Vesting requirements: QNECs & QMACs must be fully vested at all times Under prior regulations, forfeitures could not be used for QNECs and QMACs since not vested at time of contribution Final regulations look to time of allocation and allow forfeitures to be used for QNECs and QMACs effective Jul. 20, 2018 Distribution requirements Previously: Hardship withdrawals could not be made from QNECs and QMACs Budget Act: allows hardship withdrawals from QNECs and QMACs for plan years starting on or after Jan TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

58 Questions? 58 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

59 Conclusion Thank you for your participation! Certificate Availability If you logged in and participated the entire time and responded to at least 75% of the polling questions, your certificate will be ed to you within 48 hours of the webinar. After 48 hours your certificate will also be available under your profile on BDO.com*. More information is available by clicking the handouts icon on the screen. Please exit the interface by clicking the X button in the upper corner of your screen. *If you are participating as part of group, please allow additional time for CPE processing. 59 TAX REFORM IMPACT ON COMPENSATION & BENEFITS PLANNING

60 60 This document is current as of August 21, This document is not written tax advice directed at the particular facts and circumstances of any person. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. If you are interested in the subject of this document we encourage you to contact an independent tax advisor to discuss the potential application to your particular situation.

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