IRS Reminds Businesses to Classify Workers Correctly

I have written a lot here at Benefitsblog about how improper classification of workers as independent contractors/employees can sometimes wreak havoc with benefit plans. The IRS has issued a fact sheet – FS-2006-21 entitled “IRS Reminds Businesses to Classify Workers Correctly which provides helpful links and tips for those seeking to educate themselves on classifying workers properly. The fact sheet begins:

The rash of natural disasters that have hit the United States in the last several months have caused many businesses to hire additional workers to help them meet increased demand for their goods or services. These businesses must make sure they treat their workers properly to make sure everyone can meet their tax obligations.

Read more about how misclassifications affect benefit plans in previous posts here.

(Hat Tip: TaxProf Blog)

Speech by SEC Commissioner Cox Addresses Backdating of Stock Options

In an address to the New York Financial Writers Association (which you can access here), SEC Chairman Christopher Cox discusses upcoming rules for disclosure of executive compensation as well as what he sees on the horizon as far as addressing the current issue of back-dated options.

Regarding executive compensation disclosure:

The Commission’s proposal to significantly improve the way executive compensation is reported to shareholders has received more than 20,000 comments. No issue in the 72 years of the Commission’s history has generated such interest. Our basic approach is straightforward: We propose to tell Compensation Committees to release all material information regarding their decisions, and we mean all. . .

The principle here is simple: no shareholder should need a machete and a pith helmet to go hunting for what the CEO makes.

And we want shareholders to know how much the executives will get once they retire or leave for any other reason. One of the problems with the current regime for disclosing executive pay is that the shareholder doesn’t get to know what the golden parachute looks like until the CEO floats cheerfully away from the mother ship.

The new executive compensation disclosure will deliver more than just clear and understandable numbers. We’ll also be getting a plain English narrative that will give investors an insight into the Compensation Committee’s thinking when it decides how to pay the CEO.

Today’s Compensation Committee Report and Performance Graph – which have become little more than pro-forma and boilerplate – will be replaced with an explanation by management called Compensation Discussion and Analysis. We expect the new CD&A to be clearly written, so every investor can understand it.

Regarding back-dated options:

Our final rule will very likely address the issue of back-dated options, which is currently so much in the news. . .

While I can’t comment on the SEC’s ongoing investigations of specific companies, I can tell you what the Commission’s position is. Back-dating must be fully disclosed. And the granting of back-dated options must be properly accounted for.

As one means of dealing with this problem, our proposed executive compensation rule will provide better and more useful disclosure of the backdating of options. It would require that a company clearly identify the portion of compensation that results from “in-the-money” option awards resulting from backdating.

The proposed rule will require the disclosure of the full value of an option based on the date the award was actually made. That means the added value from an option’s being in-the-money at the time of grant would be clearly disclosed. It would specifically require a comparison of the exercise price of the option to the grant date market price of the option, whenever the exercise price is lower than market price. That way, investors could see the additional compensation that was immediately conferred on executives when the option was granted.

Just as important as these dates and numbers will be the plain English disclosure of just how the company determined when to make its option awards. . .

The Commission is even now considering further adjustments to our executive compensation proposal to deal with the issue of backdating options. Our staff in the Division of Corporation Finance are collating all of those thousands of comments and will make a recommendation to the Commission at an open meeting soon.

As part of that review process, we will consider the need not only for any changes to the rule, but also for additional guidance to address further the backdating of stock options. So stay tuned. We want this matter settled in time for next year’s proxy season, and I have every reason to expect that it will be. . .

(Hat Tip: TheCorporateCounsel.net Blog)

Benefits-Related Articles from ALI-ABA

For a limited time, ALI-ABA has provided free access to the following articles:

Clarification for Dependent Care Reimbursement Plans

Many employers offer dependent care reimbursement programs as a benefit for their employees. Under these programs, employees can estimate their dependent care expenses for the year, elect to have the money deducted from their pay, and then reimburse themselves on a tax-free basis from the money set aside in their accounts as they incur employment-related dependent care expenses throughout the year. The IRS has recently issued proposed regulations (Proposed Treasury Regulations Sections 1.21-1, 1.21-2, 1.21-3, and 1.21-4, which you can access here) shedding some light on what types of expenses can qualify as employment-related expenses for which an employee may obtain tax-free reimbursement under a dependent care reimbursement plan (officially known as a dependent care assistance program or “DCAP” under section 129 of the Internal Revenue Code).

For instance, the proposed regulations clarify that when it comes to school-related expenses, nursery school and preschool can qualify as employment-related expenses as well as before- and after-school care. The IRS goes on to note that a day camp will qualify even if the camp is a “specialty” camp, such as a camp devoted to just soccer or computer:

The IRS has received many inquiries about whether the cost of a day camp that specializes in a particular activity, such as soccer or computers, may be an employment-related expense. To provide certainty for taxpayers and enhance administrability, the proposed regulations provide that the full amount paid for a day camp or similar program may be for the care of a qualifying individual although the camp specializes in a particular activity.

However, what about kindergarten? The IRS says:

The proposed regulations clarify the existing rule that expenses for programs at the level of kindergarten and above, however, are primarily for education and, therefore, are not employment-related expenses.

A couple of good articles on the new regulations:

Article Detailing Employers' Experiences with HSAs

This is a good article providing some first-hand stories of how three different employers are faring with the implementation of health savings accounts: “Benefit Leaders Tout Consumer-Directed Care Success Despite Low Enrollment.” For those who are curious about how health savings accounts would work in a law firm setting, the article describes the program started at Preston Gates & Ellis:

Despite a communication strategy that began more than a year before the HDHP went into effect, only about 6% of the company’s employees enrolled for the 2005 plan year. Enrollment for 2006, however, nearly doubled to 11%, and 96% of those who enrolled in 2005 stuck with the plan.

The HDHP includes a $1,200 annual deductible for single coverage ($2,500 for family coverage) and an annual HSA contribution of $500 ($1,000 for family coverage). For employees with family coverage, the HDHP offers a 30% savings in premiums versus the more traditional PPO . . .

For the 2006 plan year, Preston Gates boosted the annual HSA contribution from $500 to $750.</blockquote.

Notable Benefits Quote

“The world has evil doers, but fewer than the IRS imagines in the pension world.” From a good article/outline entitled “Phased Retirement” by Robert A. Blum prepared for the ALI-ABA Annual Spring Employee Benefits Law and Practice Update for 2003.

Health and Welfare Plan Compliance Resources

Here’s a good start to a list of Health and Welfare Plan Compliance Resources which will be located over in the sidebar on the right:

(I intend to add more links as they come to mind. Suggestions are welcome.)