Payroll and Reporting News
Payment for Relinquishment of Tenure Rights Taxable for FICA
In a recent ruling, the U.S. Court of Appeals 6th Circuit held that payments made by a school district to public school teachers who relinquished their tenure rights were wages taxable under FICA. The decision affirmed a federal district court's judgment that the payments were for a right arising from the employment relationship and, therefore, were wages for FICA purposes and reversed a separate district court's judgment that the payments were not wages for FICA purposes.
The Sixth Circuit declined to follow North Dakota State University and determined that the definition of wages as "remuneration for employment" should be interpreted broadly for purposes of FICA. The payments fit within the definition of wages because they arose out of the employment relationship and were conditioned on a minimum number of years of service. Such eligibility requirements indicated that the payments were for services performed, rather than for the relinquishment of tenure rights. Further, the payments were not in exchange solely for the teachers' tenure rights. They were also in exchange for the teachers' early retirement and, therefore, were essentially severance payments. Please read the following articles from CCH Incorporated for more information: FICA Case.pdf and NDSU.pdf.
Good Employee Benefit Checklist
The following is an employee benefit update checklist provided by the AICPA: Employee Benefits Update 4-06.pdf.
IRS Continues to Focus on Executive Compensation
Recently, the IRS announced some preliminary results from its Executive Compensation Initiative related to exempt organizations. Over 1,800 exempt organizations were contacted, resulting in 200 examinations. The primary goals of the initiative are to learn how organizations determine and manage compensation, address instances of questionable compensation practices, and increase organizations' awareness of compensation-related issues. As a result, the IRS discovered substantial/undocumented loans to insiders and errors in reporting benefits and "perks."
The following document is a sample information request sent by the IRS to a hospital client as part of this initiative. It is a good guide to determine if your organization would be prepared in the event of a compliance check and to avoid a potential audit. Information Document Request.pdf.
Non-qualified Deferred Compensation
Final regulations related to IRC Section 409A are expected late summer or early fall. The IRS has indicated that there would be no drastic changes from the existing proposed regulations, although clarification in the area of stock options, severance plans and separation from service would likely be added. Violations of IRC Sec. 409A(b) are costly; the employee must recognize the compensation in income in the year it was promised, pay interest accruing since that time and be subject to a 20 percent penalty on the deferred amount.
The Kiplinger Tax Newsletter reports that the IRS is gearing up for audits of 2005 non-qualified deferred pay plans. The primary focus will be violations of the new IRC ยง 409A rules for salary deferred after 2004.
For further information on the items above contact: Catherine Bonnes at 269.567.4557 or Forrest Lewis at 517.336.7522.
