Category Archives: Compensation

Are Employer Provided Cell Phones Coming Soon to Definition of Compensation

Uncle Sam holding a cell phone
On Friday (Sept. 2, 2011), the IRS released the 2011-2012 Priority Guidance Plan (PGP). 37 items in the PGP relate to retirement plans, and 29 items relate to Executive Compensation, Health Care and Other Benefits, and Employment Taxes. More about these items later this week.

One item on the list that caught my eye is number 7 in the section on Executive Compensation, Health Care and Other Benefits, and Employment Taxes. It says:

7. Notice on the applicability of §§132(d) and (e) to employer-provided cell phones following enactment of §043 of the Small Business Jobs Act of 2010.

Since at least 2005, there have been rumors that the IRS was looking at a number of employer-provided fringe benefits, such as cell phones and points for frequent flyer miles, to see whether they should be included in the definition of compensation. With employer provided cell phones typically averaging a benefit worth at least $1,200 per year ($100 per month) and disproportionately provided to Highly Compensated Employees (HCEs) and key employees compared to rank-and-file or non-highly compensated employees, it was just a matter to time before the IRS issued guidance. Apparently, the catalyst to move employer provided cell phone fringe benefits onto the 2011-2012 Priority Guidance Plan was section 2043 the Small Business Jobs Act of 2010.

Almost a year ago (Sept. 27, 2010), President Obama signed the Small Business Jobs Act of 2010 into law. Section 2043 said:


(a) IN GENERAL.—Subparagraph (A) of section 280F(d)(4) of the Internal Revenue Code of 1986 (defining listed property) is amended by adding ‘‘ ‘and’ ’’ at the end of clause (iv), by striking clause (v), and by redesignating clause (vi) as clause (v).

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31, 2009.

While the language of section 2043 did not immediately trigger thoughts of 415(c)(3), 414(s) or 3041 compensation for me, it did for someone at the IRS. Take the language of section 2043, combine it with Internal Revenue Code sections 132(d) and 132(e), and it may have plan implications.

If you do not have a copy of your Code handy, Internal Revenue Code section 132(d) defines Working Condition Fringe as:

“For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.”

Internal Revenue Code section 132(e)(1) defines De minimis Fringe as:

“The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.”

It will be interesting to see how this plays out in guidance over the next year.

PPACA’s 1099 Requirement is History (For Now)

Last Thursday, April 14, 2011, President Obama signed the Comprehensive 1099 Taxpayer and Repayment of Exchange Subsidy Overpayments Act of 2011, and it became Public Law 112-9. While the public law’s name does not lend itself to an easy acronym, the substance of the public law is pretty important because it repeals the Form 1099 reporting requirements imposed by Section 9006 of the Patient Protection and Affordable Care Act (PPACA).

Section 9006 of PPACA added 2 new subsections to Internal Revenue Code section 6041, subsections 6041(h) and 6041(i), and amended section 6041(a), for payments made after December 31, 2011. New Code section 6041 stated:

“(h) Application to Corporations. – Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).”

New Code section 6041(i) permitted the Secretary of the Treasury to issue new regulations and guidance to implement this change.

Section 6041(a) was amended by PPACA:

    1. by inserting “amounts in consideration for property,” after “wages”;
    2. by inserting “gross proceeds,” after “emoluments, or other”, and
    3. by inserting “gross proceeds,” after “setting forth the amount of such”.

The expected impact of these changes to Code section 6041 was a massive increase in the number of Form 1099s issued by corporations and persons receiving rental income.

The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 expressly strikes New Code sections 6041(h) and 6041(i), along with striking Code section 6041(j), and amends Code section 6041(a) to strike the three changes made by PPACA section 9006.

Senate Passes Lilly Ledbetter Act Addressing Discriminatory Compensation

The Senate has approved S. 181, the Lilly Ledbetter Fair Pay Act of 2009, by a vote of 61-36. This bill has already passed the House and now heads to President Obama for his signature.

This Act is interesting for retirement and pension plans because it addresses the U.S. Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007) by amending Section 706(e) of the Civil Rights Act of 1964 to add the following:

    “(3)(A) For purposes of this section, an unlawful employment practice occurs, with respect to discrimination in compensation in violation of this title, when a discriminatory compensation decision or other practice is adopted, when an individual becomes subject to a discriminatory compensation decision or other practice, or when an individual is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice.

    `(B) In addition to any relief authorized by section 1977A of the Revised Statutes (42 U.S.C. 1981a), liability may accrue and an aggrieved person may obtain relief as provided in subsection (g)(1), including recovery of back pay for up to two years preceding the filing of the charge, where the unlawful employment practices that have occurred during the charge filing period are similar or related to unlawful employment practices with regard to discrimination in compensation that occurred outside the time for filing a charge.”

What this means when calculating allocations which are based on compensation is unclear. Because this Act is designed to address discrimination in compensation, and it doesn’t mention changes in allocations due to a change in the amount of compensation, some clarification from the IRS will be needed.

[tag]pension protection act, ppa, Lilly Ledbetter, Senate, compensation, ERISA[/tag]

Interim CEO is Covered Employee for Purposes of 162(m) Tax Deduction

At what point does a member of a corporation’s board of directors qualify as an “outside director” of purposes of Code section 162(m)(4)(C)(i) after serving as an interim chief executive officer? The IRS answered this question today in Rev. Rul. 2008-32.

In Rev. Rul. 2008-32, the IRS addresses the situation where a CEO suddenly resigns, and the corporation’s Board of Directors hires one of the directors to serve as Interim CEO while the corporation hunts for a CEO. The IRS’ analysis is short and to the point:

“The determination of whether an individual is or was an officer is based on all of the facts and circumstances in the particular case, including without limitation the source of the individual’s authority, the term for which the individual is elected or appointed, and the nature and extent of the individual’s duties. Director A was in regular and continued service from January 7, 2008 through December 11, 2008. Company X did not employ Director A for a special and single transaction and Director A did not merely have the title of officer. Instead, Company X employed Director A for an indefinite period to serve as interim CEO with the full authority vested in that office. Accordingly, under the facts and circumstances analysis, Director A was an officer of Company X.”

Rev. Rul. 2008-32 holds that under these facts, a member of the board of directors who serves as an interim chief executive officer is not an “outside director” for purposes of Code section 162(m)(4)(C) and Treas. Reg. 1.162-27(e)(3). The underlying question for the corporation was the tax treatment of the $1 million base salary compensation plan provided to Director A for serving as the interim CEO as well as Director A particating in Company X’s executive bonus plan, which pays a percentage of base salary. Code section 162(a)(1) provide a deduction for a reasonable allowance for salaries and other compensation for personal services actually rendered. Code section 162(m)(1) provides that for a publicly held corporation, no deduction is allowed for remuneration which exceeds $1 million with respect to any covered employees. If Director A is a covered employee, then no deduction for Company X above the $1 million in remuneration. If Director A is not a covered employee, then Company X may have a deduction for remuneration paid to Director A above $1 million.

Company X contends that Director A is an “outside director” and therefore is not a covered employee, thus they get the deduction. IRS responds with Rev. Rul. 2008-32 that Director A is a covered employee based on their analysis, and thus no deduction above $1 million in remuneration.

[tags]Pension Protection Act, ppa, Interim CEO, 162(m)(1), 162(a)(1), outside director, ERISA[/tags]

Update to Clarian Health Charging EEs for Unhealthy Practices

Back in August, I wrote about the announcement by Clarian Health that they would be charging employees for unhealthy practices, such as smoking.

Daniel Lee, in an article in the Indianapolis Star, reports that Clarian Health has decided to change the program so that it is now voluntary, and involves payment instead of penalty. Employees who participate in the new plan and achieve certain health-related goals, such as not using tobacco or meeting certain measurements for body-mass index or blood pressure, will receive a bonus of up to $30 per pay period. Under the prior plan, employees would have had up to $25 per pay period deducted from their paychecks for engaging in specified unhealthy behavior. (hat tip to

[tags]Pension Protection Act, Clarian Health, compensation, ERISA[/tags]

FedEx Cup – A Few More Deferred Comp Details

I recently blogged about the FedEx Cup – a golf championship newly created by the PGA this year where players are awarded points throughout a defined 33-week period. At the end of that period, the 144 players with the most points will then play in a series of 4 tournaments. At the end of the 4th tournament, $35 million in deferred compensation is allocated among 30 of those players, with the top player receiving $10 million in deferred compensation.

It is the deferred compensation nature of the FedEx Cup which caught my attention. For pension geeks, the FedEx Cup is more like watching a reality TV show where players compete for allocation points than it is like a golf tournament. Especially because the FedEx Cup points awarded each week are separate and distinct from the actual monetary prizes for each tournament throughout the 33-week regular season and the 4-week post-season.

I think the FedEx Cup can be analyzed as a deferred comp plan. One of my colleagues today said he it trying to evaluate the FedEx Cup as an incentive pay plan, not as a deferred comp plan. As an incentive pay plan, the FedEx Cup might be interesting but it is the deferred nature of the FedEx Cup which has both sportwriters, golfers and pension geeks watching this golf tournament. As the FedEx Cup group of potentially eligible participants narrowed this week after the Barclay, the age disparity between the potentially eligible participants became even more apparent.

Adam Schupak, a senior writer with Golfweek magazine, has more details about the structure of the FedEx Cup’s deferred nature in his article Deferred Delivery. He provides that the FedEx Cup replaced two different PGA retirement plans after a committee of players and board members discussed deferred compensation plans with several financial advisors.

Unlike the two previous plans, which contained vesting schedules based on a points system, the current plan is 100% vested.

Richard Sandomir, in his article A FedEx Cup Prize Well Worth the Wait in the New York Times (registration required), provides that the minimum distribution age is 45 with the maximum distribution age starting at age 60. If a player plays at least 15 tournaments a year, distribution is delayed until age 60. If a player does not play in at least 15 tournaments a year, distributions begin. Distributions are then spread over a 5-year time frame.

On a side note, attorneys at 92 law firms have signed a public letter to the IRS. In the letter, the firms ask the IRS to extend the deadline for plans to comply with the new Final 409A Regulations to December 31, 2008. The current deadline is December 31, 2007. The firms contend that the December 31, 2007, deadline to comply is not enough time to review existing plans and make any necessary plan amendments. (hat tip to

[tags]409A, FedExCup, FedEx Cup, golf, allocation, points, deferred, comp, compensation, PGA, pension, retirement, ERISA[/tags]

PGA Creates a Deferred Comp Plan Called the FedEx Cup

The PGA seems to have wandered into the pension universe with the FedEx Cup, a deferred-compensation-plan-slash-golf-championship where participants are publically awarded allocation points based on how well they finish in golf tournaments. The number of allocation points determines a participant/player’s share of the $35 million FedEx Cup deferred compensation award. It is the deferred compensation element in the FedEx Cup which makes evaluating it as a deferred comp plan more applicable than evaluating it as a golf championship.

First, evaluate how is the FedEx Cup is funded, and how it will distribute those funds. The PGA’s official website for the FedEx Cup states that the FedEx Cup will award a total of $35 million in bonus money at the conclusion of the playoffs including $10 million to the FedEx Cup Champion. The is reporting that the $35 million is to be paid as deferred compensation, with $10 million in deferred compensation to be paid to the FedEx Cup Champion.

Next, evaluate how the funds in the plan are allocated to participants. The FedEx Cup allocates the $35 million contribution based on points awarded to the participants during the 33-week PGA Tour regular season according to how they finish in each of 36 events held during that 33-week period. Participants can also earn points by playing additional events which are played the same weeks as the World Gold Championship and the British Open. At the end of the 33-week period, the participants with the top 144 point totals are eligible to play in 4 specific tournaments. It is the points awarded in those 4 tournaments which will be used to allocate the $35 million contribution to the deferred compensation plan.

Then, evaluate the plan’s rules on eligibility. For the FedEx Cup, only members of the PGA Tour are eligible to participate and earn points. A non-PGA Tour member, special temporary member or an amateur is not eligible to earn points. Caddies are also not eligible to earn points, and thus are not eligible to receive an allocation of the $35 million contribution. The caddie issue is what prompted the article on

Finally, does the FedEx Cup meet the definition of a deferred comp plan contained in the recently-released Final 409A Regs? At first glance, I think it does. The Final 409A Regs define a nonqualified deferred compensation plan as a plan which provides for the deferral of income. The FedEx Cup provides for a deferral of income.

The Final 409A Regs further provide:

that a plan generally provides for the deferral of compensation if, under its terms and the relevant facts and circumstances, a service provider has a legally binding right during a taxable year to compensation that, pursuant to its terms, is or may be payable to (or on behalf of) the service provider in a later year. For this purpose, an amount generally is payable at the time the service provider has a right to currently receive a transfer of cash or property, including a transfer of property includible in income under section 83, the economic benefit doctrine or section 402(b). Accordingly, a taxable transfer of an annuity contract is treated as a payment for purposes of section 409A.

Unless something goes horribly wrong in the PGA world, the participants in the FedEx Cup will have a legally binding right to their share of the $35 million in deferred comp.

More on the intersection between the FedEx Cup and the Final 409A Regs in coming weeks.

[tags]409A, FedExCup, FedEx Cup, golf, allocation, points, deferred, comp, compensation, PGA, pension, retirement, ERISA[/tags]

Unhealthy Practice may not make Perfect Compensation

Workforce Management is reporting that Clarian Health has announced it will start fining employees $5 per paycheck, up to a maximum of $25 per paycheck, for engaging in unhealthy practices starting in 2009. The unhealthy practices are listed as having a body mass index over 29.9, blood pressure over 140/90, blood glucose over 120, and LDL cholesterol over 130.

The article, by Joanne Wojcik, states that more employers are expected to implement this same type of policy since it is believed to be permissible under the Final Rules on Nondiscrimination and Wellness Programs in Health Coverage in the Group Market, issued jointly by the IRS, Dept. of Labor and Dept. of Health and Human Services on December 13, 2006.

The Final Rules contain provisions for rewarding employees who participate in wellness programs, including 5 requirements imposed on the reward programs so they comply with the nondiscrimination requirements. The Final Rules do not contain information on negative incentives, including how to treat the deductions from compensation which Cardinal Health has stated they will implement in 2009.

The Final Rules are effective July 1, 2007, which means that they may have an impact on compensation used to calculate benefits and non-elective contributions in 2007 if companies implement such programs this year. Qualified defined contribution plans, such as profit sharing, 401(k), or money purchase plans, as well as defined benefit plans, define compensation in the plan document using one of three standard definitions. The plan will define compensation either as W-2 compensation 414(s) compensation or 415 compensation (typically 415(c)(3) compensation). Each one of these definitions specifically states whether specific items are included in the compensation number used to calculate benefits, or whether it is not included.

For example, if the definition of compensation used in the plan document includes bonuses, and an employee earns compensation in 2007 of $50,000 and earns a bonus of $5,000, the compensation total used for calculating his benefits, such as the profit sharing contribution into his retirement account, is $55,000. If the employer does not include bonuses, then the compensation total used for calculating his benefits is $50,000, not $55,000. With a positive reward program, it is simply working through the examples in the Treasury regulations to determine whether to include or not include the reward in the employee’s compensation total when calculating his benefits under the plan for the year.

With a negative reward program, such as the one announced by Clarian Health, I am wondering how it will be reflected in the yearly compensation figures for their employees who participate in their profit sharing or 401(k) plan. Even though these Final Rules did not explicitly impact qualified retirement plans, they may have a direct impact on qualified plans if the employer implements the incentive, or negative incentive, program in such a way that it impacts the annual compensation amounts for employees.

Another issue pointed out to me by a colleague today is the potential impact such a program may have on vesting. Clarian Health announced that they are implementing their program in 2009, which will give employees time to adjust their lifestyles. As suggested by my colleague, it will also give employees the opportunity to look for employment at a company without such a program. It is possible that the impact of implementing the negative reward program could be a partial plan termination if 20% or more of employees decide to terminate their employment instead of continuing their employment under this type of program.

Note: Nov. 5, 2007: Clarian Health announced that they are changing their program to a voluntary program which rewards employees for meeting certain measurements of good health. I’ve posted an update here.
[tags]compensation, 414(s), 415(c)(3), w-2, vesting, HIPAA, negative incentive, pension, retirement, ERISA[/tags]