The Internal Revenue Service announced cost of living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2007. Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost of living increases. Many of the pension plan limitations will change for 2007. For most of the limitations, the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.

The Code provides that various dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:

• The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $15,000 to $15,500. This limitation affects elective deferrals to Section 401(k) plans and to the Federal Government's Thrift Savings Plan, among other plans.
• The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $220,000 to $225,000.
• The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $140,000 to $145,000.
• The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $100,000.
• The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
• The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $325,000 to $335,000.
• The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $15,000 to $15,500.
• The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of "control employee" for fringe benefit valuation purposes is increased from $85,000 to $90,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $175,000 to $180,000.

The IRS has issued final regulations containing updated standards for the provision of notices or the making of elections under a retirement plan, an employee benefit arrangement or an individual retirement plan by electronic means, including the use of email, websites, and automated telephone systems. If the Code or regulations require a notice or election to be made in writing, the requirements of the new regulations must be satisfied for the electronic provision of a notice or the electronic making of an election to be valid. The requirements of the new regulations also may be used as a safe harbor method for providing a notice or making an election that is not required to be in written form. The new regulations make minor changes in the proposed regulations issued in 2005.

The regulations set out two approved methods for providing notices electronically. The "consumer consent method" requires that the recipient of the notice consent in advance to receiving the notice via the electronic method. This method is based on the consumer consent requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229) (E-SIGN). The "alternate method" generally carries forward the rules contained in regulations issued in 2000 (T.D. 8873) governing the provision of notices and consents under Code Secs. 402(f), 411(a)(11), and 3405(e)(10)(B). Under these rules, the recipient of an electronic notice must be advised that the notice is available in a paper form at no charge, and every recipient must be "effectively able" to access the electronic medium used to transmit the notice.

The participant election rules are also based on the standards in the prior regulations. The participants must be effectively able to access the electronic medium in order to make the election, the system must be reasonably designed to preclude anyone other than the eligible participant making the election, the system must provide the participant with a reasonable opportunity to review, confirm, modify, or rescind the terms of an election before it becomes permanent, and the individual making an election must receive some confirmation of the election, either on paper or by an electronic system that satisfies the requirements for providing notices.

The most contentious issue in the public comments on the regulations was the level of safeguards necessary for spousal consents to a waiver of the default annuity distributions. The final regulations retain the requirement that the spouse's consent to a waiver be signed in the presence of a notary or plan representative. Electronic consents, even under a system allowing for separate PINs for each spouse, do not provide enough protection against unauthorized consents.

The regulations apply, beginning January 1, 2007, to

• plan loan documents under Reg. §1.72(p)-1;
• participant elections to contribute to qualified transportation fringe benefit programs under Reg. §1.132-9;
• notices required in connection with a safe harbor 401(k) arrangement under Reg. §1.401(k)-3(d);
• explanations of eligible rollover distributions under Reg. §1.402(f)-1;
• notices of a participant's benefit rights and the participant's consent to an immediate distribution under Reg. §1.411(a)-11(c);
• explanations of qualified joint and survivor and preretirement survivor annuities under Reg. §1.417(a)(3)-1;
• notices to interested parties upon the filing of a motion for declaratory judgment regarding a qualified plan's status under Reg. §1.7476-2;
• notices of a participant's right not to have amounts withheld from plan distributions under Reg. §35.3405-1; and
• notices of pension plan changes reducing the rate of future benefit accruals under Reg. §54.4980F-1

Please read the following article for more information TD 9294.

IRS Provides Guidance to Employers on Use Of Smartcards, Debit Cards as Fringe Benefit

The Internal Revenue Service, in Revenue Ruling 2006-57, set out guidance to employers on the use of smartcards and debit cards to provide qualified transportation fringes under Internal Revenue Code Section 132(f). The ruling set out four fact patterns to illustrate whether employer provided transportation benefits provided through smartcards, debit or credit cards, or other electronic media are excluded from gross income under tax code Sections 132(a)(5) and 132(f) and from wages for employment tax purposes. In three situations, the benefits provided by the employer are excluded from gross income and from wages for employment tax purposes, while in the fourth situation the benefits are not excluded from gross income and are wages for employment tax purposes, IRS said. The ruling is effective Jan. 1, 2008, but employers and employees may rely on it prior to that time, IRS said. The ruling added that terminal-restricted debit cards are not in wide use at present and said the Treasury Department and IRS will issue guidance when the cards are more readily available.

NACUBO TAX FORUM HELD NOVEMBER 5 - 7

TIDBITS

One of the provisions of the Pension Protection Act now requires Forms 990-T to be subject to public disclosure for organizations described in IRC 501(c)(3). The IRS representative pointed out that the provisions make the forms disclosable by the taxpayer only, not by the IRS. Any requests to the IRS for copies of Forms 990-T will not be honored.

In September it was announced that the IRS is considering a large-scale enforcement initiative on post-issuance bond compliance that includes a "compliance check" that is designed to focus on private business use. This initiative was expected to begin in November and target anywhere from 200 to 400 issuers. Topics may include research conducted by hospitals and universities in bond-financed facilities, in addition to other private use issues.

For 2006 Form 990's, efiling is mandatory if the organization total assets exceed $10 million and the organization files at least 250 federal returns (Form W-2, 1099, 1098-T, etc.). If your institution prepares its own returns and is required to efile, make sure to register with the IRS as an Electronic Return Originator (ERO). Allow plenty of time for this step.

Form 990 for 2005 included additional reporting requirements for compensation paid by related organizations with a "close connection." With feedback from organizations and practitioners, it is expected that guidance for 2006 will be revised.

Use of a single member limited liability company can be a great way to manage risk. Generally, it is treated as a disregarded entity for federal tax purposes. However, be aware that it is not disregarded if owned by governmental entities (public institutions) and there may be state tax issues involved, such as sales or property tax.

IRS is aggressively auditing fringe benefit and employment and payroll tax issues of higher education institutions. They are particularly aggressive with cell phone expenses, requiring onerous substantiation requirements.

For further information on the items above contact: Catherine Bonnes at 269.567.4557 or Forrest Lewis at 517.336.7522.