Section 457A: Not Going Away

Transcription

1 Section 457A: Not Going Away SPEAKERS Christine Furie, Deloitte Tax LLP Marlies Noll, Medtronic, Inc.

2 Agenda v Welcome & Introductions v What is 457A? v v Current Knowledge Identifying Risk v v Impacted Employees - Identifying the Employees Impacted Employers v v v v Identifying the Employers Tax Indifferent Employers Lower Risk Jurisdictions Real Life Examples 2

3 Agenda v Impacted Plans - Identifying the Plans v What Will You Need to Do? v Amend Programs and/or Participation v Re-Examine 457A Annually v Questions 3

4 What is 457A v Internal Revenue Code Section, 10/03/08 v IRC 457A applies to amounts deferred attributable to services performed after December 31, v Those amounts not included in income in a taxable year beginning before 2018 are includible in income in the later of the: v Last taxable year beginning before January 1, 2018, or v First taxable year in which there is no substantial risk of forfeiture v Potential 20% excise tax 4

5 457A Current Knowledge v There are no specific requirements for W-2 reporting or withholding v Employees, however, need information to prepare a complete and accurate income tax return v For expatriates with company-paid tax preparer, the tax preparer will need company guidance regarding the positions to take a current and accurate W-2 may no longer be sufficient to determine taxable income 5

6 457A Identifying Risk 457A Risk Employees Plans Employers 6

7 457A Identifying Risk v Impacted Employees v Identify U.S. citizens or permanent residents employed by - or treated as employed by - foreign entities v Impacted Employers v Identify employing entities within the company which are considered by the IRS to be Tax Indifferent v Impacted Plans v Identify plans in which impacted employees of impacted employers participate which are covered by 457A 7

8 Impacted Employees: Identifying the Employees v Individuals subject to U.S. tax working for a nonqualified entity v Often includes expats and local hires, but also includes U.S. citizens working in the U.S. for a tax indifferent party v Filing of a U.S. W-2 for an individual does not mean that individual is not covered by 457A, and in fact means that compensation to that person should be reviewed if the employer is tax indifferent 8

9 Impacted Employers: Identifying the Employers v The key is who is the employer v For purposes of 457A, the employer is the economic employer (i.e., the primary entity for which the employee is rendering services) v In general, the receiving employer is the economic employer for employees seconded from another entity v The employing entity is treated as the plan sponsor v The employing entity is the focus for 457A v Employer is the specific entity employing the individual, not the controlled group 9

10 Impacted Employers: Identifying the Employers v No bright-line test for determining tax indifferent jurisdiction v Tax havens (i.e., Bermuda) or zero-tax countries (i.e., UAE) will likely be considered tax indifferent under 457A v Employers in these locations are likely to be considered tax indifferent irrespective of the type of entity (i.e., corporation, partnership, etc.) 10

11 Impacted Employers: Identifying the Employers v Employers in other countries with corporate and individual income tax may still be tax indifferent under 457A v If 80% or more of income is not either effectively connected with a U.S. trade or business or subject to comprehensive foreign income tax 11

12 Real Life Examples v Tax holiday v Non-resident corporate source income v Check the box organizations 12

13 Lower Risk Jurisdictions on the Surface Moderate Risk High Risk Low Risk General Rule: Non-U.S. Territories are red 13

14 Lower Risk Jurisdictions in Reality High Risk Moderate Risk Low Risk General Rule: Non-U.S. Territories are red 14

15 Impacted Plans: Identifying the Plans Partial list of plans that may be subject to 457A includes: v Deferred bonus arrangements v Short and long term incentive plans v Restricted stock unit programs v Stock appreciation rights that can be settled in cash 15

16 Impacted Plans: Identifying the Plans v Supplemental retirement plans and other retirement plans that are unfunded for U.S. tax purposes v Exceptions exist for v Qualifying short term deferral plans v At the money options on employer equity (options, stock, restricted stock) 16

17 What Will You Need To Do? v Determine how 457A affects your company v Decide how 457A income will be addressed on the individual tax returns v Revise budgets with respect to tax equalization/ gross-up impacts v Amend programs and/or participation as necessary v Track on-going income inclusion annually 17

18 Amend Programs and/or Participation v Grand-father rule generally applies to benefits earned after December 31, 2008; however: v Deferrals for services performed prior to 2009 must be included in income by the later of the last taxable year beginning before January 1, 2018 or the first taxable year in which there is no substantial risk of forfeiture. v Amend plans to meet the 2017 rule: v in writing, and v effective by December 31,

19 Amend Programs and/or Participation v Amend to remove for substantial risk of forfeiture exceptions (e.g., retirement related exceptions to vesting requirement) v Amend to revise for substantial risk of forfeiture exceptions (e.g., change negative performance requirements to positive ) 19

20 Re-Examine 457A Annually v The occurrence of any of the following could change/ expand the scope of the impact of IRC 457A: v Acquisition of new entities in tax indifferent countries v Negotiation (or renegotiation) of significant tax breaks/ holidays for existing/new entities in any county v Any significant corporate income tax exclusions due to nonresident source income tax exceptions for existing/new entity in any country 20

21 Re-Examine 457A Annually v Award of any benefits under broad LTIP which are not excluded from IRC 457A coverage (e.g., SARs settled in cash, equity benefits based on stock which is not equal to the FMV on the date of grant, etc.) v Extension of coverage of existing IRC 457A NQDC plans to U.S. taxpaying employees new tax indifferent locations v Movement of any U.S. taxpaying employees covered by any IRC 457A NQDC plans to an entity in a tax indifferent location, or to an entity in an existing location with newly negotiated (renegotiated) significant tax breaks/holidays or significant non-resident source income tax exceptions 21

22 Questions? 22

23 Contact Information v Christine Furie v Senior Manager Deloitte Tax LLP Chicago v , cfurie@deloitte.com v Marlies Noll v Program Director, International Total Rewards v Medtronic, Inc. v , marlies.noll@medtronic.com 2

24 Disclaimer This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation. 24

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