2013-Issue 48—As 2013 comes to an end and our thoughts turn to the holidays, here are a few compensation planning opportunities that should be considered.
1. 2013 Bonus Deductions
Many companies plan to pay 2013 employee bonuses by March 15, 2014 and deduct the bonuses on the 2013 tax return. IRS counsel recently issued Field Attorney Advice 20134301F giving guidance to IRS auditors as to when they should challenge the timing of a company’s bonus deduction. The guidance states that when companies retain the unilateral right to modify or eliminate a bonus prior to its payment, neither the fact of the liability requirement nor the amount of liability requirement of the all-events test is satisfied until actual payment of the bonus. If the all-events test is not satisfied at December 31, 2013, then the deduction is not allowed until 2014.
Therefore, if your company bonus program requires approval from your board of directors or compensation committee and that approval does not occur until after the end of 2013, the bonuses will not be deductible in 2013. In addition, if the amount of the bonus is partially determined by an employee’s performance evaluation and that determination is not made until after the end of 2013, the bonuses will not be deductible in 2013.
If your company intends to take a 2013 bonus deduction for bonus payments paid in 2014, make sure your company’s bonus program complies with the requirements of the all-events test by fixing both the liability and the amount of the bonus by December 31, 2013. Here are a few items to check:
- If an executive were to terminate before the payment date, will the bonus still be paid?
- If the board of directors or some other committee has to authorize the bonus before it can be paid, will the authorization be granted by the end of 2013?
- If anyone else has discretion as to whether the bonus will be paid or how much the bonus will be, will that discretion lapse prior to the end of 2013?
If the answer to any of these questions is no, it is very likely your bonus program does not satisfy the all-events test and your company’s 2013 bonus deduction could be disallowed.
2. Carryover of Flexible Spending Account Balances
For the first time, with the recent issuance of Notice 2013-71, the IRS will allow employees participating in company health flexible spending accounts (FSAs) to carry over, instead of forfeiting, up to $500 of unused amounts remaining at year-end.
Your company can take advantage of this new carryover option by notifying employees that it is available and amending the FSA plan document accordingly.
- If you intend to use the new carryover option for 2013 FSA balances, you must notify employees by the end of the year and formally amend the FSA plan document to incorporate the carryover option by December 31, 2014.
- Note that some FSA plans already allow a grace-period option, which enables employees to use their excess amounts to pay for medical expenses incurred in the first 2½ months of the following year. The carryover option cannot be used if the grace-period option is already in effect.
3. Tax Refunds Resulting from Supreme Court Decision Regarding Defense of Marriage Act (DOMA)
As a result of the United States Supreme Court decision in United States v. Windsor and the subsequent issuance of Revenue Ruling 2013-17, employers and employees may file claims for refunds or adjustments of overpayments of Federal Insurance Contributions Act (FICA) taxes and federal income tax withholding with respect to certain benefits provided to same sex spouses and remuneration paid to same sex spouses. Previously, providing medical benefits to a same sex spouse was treated as income to the employee.
Among other things, Notice 2013-61 provides two special administrative procedures for employers to more easily correct overpayments of employment taxes during 2013:
- Employers may use the fourth-quarter 2013 Form 941, Employer’s QUARTERLY Federal Tax Return, to correct these overpayments of employment taxes for the first three quarters of 2013.
- Alternatively, employers may file one Form 941-X Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, for the fourth quarter of 2013 to correct these overpayments of FICA taxes for all quarters of 2013.
- Identify affected employees and quantify the potential refunds.
- Coordinate with your payroll department or payroll vendor to select the best special procedure to process 2013 refunds.
- Prepare and issue communications for the affected employees.
4. Affordable Care Act Considerations
Although the hefty new employer penalties in the Affordable Care Act are generally delayed until January 1, 2015, employers with hourly employees must establish measurement and stability periods now to determine whether employees are full-time or part-time in 2015. The measurement period is the time frame used to determine if each employee is full- or part-time (part-time employees work fewer than 30 hours per week). Employers may choose measurement periods of three to 12 months. The stability period is the time frame in which employees will be treated as full-time or part-time for purposes of the Affordable Care Act based on their status determined during the measurement period. The subsequent stability periods must be at least six months or, if longer, the length of the measurement period.
- If you haven’t implemented procedures to identify full-time employees, you are already late to the party. There is still time to catch up, but now is the time to make decisions because the time frames involved are long and the rules are complicated.
Alvarez & Marsal Taxand Says:
- Don’t assume bonus payments paid in 2014 will be deductible in 2013. Make sure your bonus program satisfies the all-events test, and doesn’t run afoul of the guidance provided in Field Attorney Advice 20134301F.
- Take advantage of the surprising relaxation of the “use or lose” rule in the health flexible spending account by amending your flexible spending account plan to allow a carryover of up to $500 from 2013 into 2014.
- In an unusual turn of events, the IRS has proposed a very easy procedure for filing for refunds of 2013 FICA tax withholding for employees affected by the Supreme Court’s decision on the Defense of Marriage Act. The procedure works best if performed before the filing deadline for the fourth-quarter Form 941.
- Now is the time to decide how your company will comply with the employer mandate requirements of the Affordable Care Act in 2015.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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