Proceeds Taxable Because Of Transfer For Value

August 08, 2024

Texas Court Nationwide Stay on Fiduciary Rule

Ahead of its expected September effective date, two Texas district courts granted separate stays to block the DOL from enforcing its new investment advice fiduciary standard. (See Federation of Americans for Consumer Choice v. Department of Labor, No. 6:24-cv-163-JDK (E.D. Tex. 2024) and American Council of Life Insurers v. Department of Labor, No. 4:24-cv-00482-O (N.D. Tex. 2024)). The injunction applies to both the investment advice fiduciary standard itself and amendments to PTE 84-24, and, while the Eastern District did not include PTE 2020-02, the Northern District later extended the stay to PTE 2020-02. Until further court action occurs, the new fiduciary standard will not be effective, and the 1975 "five-part test" will remain in place. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether the Texas courts were correct to grant the plaintiffs' stay of the fiduciary standard on a nationwide basis. Below is a summary of the debate that ensued between the two professors. Their Votes: <img class="alignnone size-medium wp-image-62920" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/BloinkThumbsUp-300x105.png" alt="" width="300" height="105" /> <img class="alignnone size-medium wp-image-62922" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/ByrnesThumbsDown-300x105.png" alt="" width="300" height="105" /> Their Reasons: Byrnes: Staying enforcement of the DOL's final fiduciary standard on a nationwide basis was the only viable option for the district court. The alternative would create confusion among both clients and advisors. Advisors in some areas would be required to comply with the rule just next month, while others would still be permitted to work with the tried-and-true 1975 standard. Bloink: Courts typically only grant preliminary orders preventing imposition of new requirements for the plaintiffs in the case who have demonstrated a likelihood of suffering some type of harm. Preventing a finalized rule from becoming effective on a nationwide basis is unusual and uncalled for, given the fact that the rule has been through the administrative rulemaking procedures. Everyday investors are the ones who will be hurt by this nationwide stay. ______________________________ Byrnes: The fact is that the plaintiffs are very likely to succeed on the merits. The new rule simply mimics the Obama-era rule, which has already been struck down. The rule is a massive expansion of the ERISA fiduciary standard that's extremely unlikely to stand in its current form. There's no rational reason to force advisors and firms into compliance with yet another rule that will be rejected by the courts. Bloink: The plaintiffs in this case have yet to argue or prove their case. It's likely that additional appellate review will be required even if they do succeed on the merits. This nationwide stay puts advisors in a period of limbo once again, with the threat of the new rule becoming effective immediately after a court finally issues an opinion. Advisors and clients shouldn't be forced to guess at what the Fifth Circuit will decide when the DOL has already released its rule. The reality is that many firms will unfortunately be forced to take steps to comply with two sets of rules concurrently. ______________________________ Byrnes: We simply can't have a rule where one-time advice is going to generate fiduciary liability. It's extremely unlikely that courts are going to permit such a broad and sweeping fiduciary standard to apply. One-off advice transactions simply don't create a relationship of trust and confidence between advisor and advisee. There is no reason to require firms to comply with a standard that will never stand in its existing form. Bloink: This new fiduciary standard is simply too important to allow a court that leans this conservatively to essentially engage in what amounts to lawmaking. The Fifth Circuit should not have the authority to dictate standards that apply on a nationwide basis. Unfortunately, that's exactly what has been occurring in recent years. Investors should be entitled to expect that their advisors will be looking out for their best interests, rather than the advisor's own financial gain. That's true even in situations involving one-time rollover advice, which is often some of the most important advice that clients ever receive.

August 01, 2024

Employer Matching Contribution Rules

Employers have the option of making matching contributions when their employees contribute to their own retirement accounts. Most matching contributions, when offered, are available to all employees and are calculated based on the employee's income once the employee contributes the relevant amount. Some critics have called for reforms to this system to provide a stronger benefit to the lowest-income employees who are contributing to retirement accounts. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether the rules governing employer matching contributions should be revised. Below is a summary of the debate that ensued between the two professors. Their Votes: <img class="alignnone size-medium wp-image-62919" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/BloinkThumbsUp-300x105.png" alt="" width="300" height="105" /> <img class="alignnone size-medium wp-image-62921" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/ByrnesThumbsDown-300x105.png" alt="" width="300" height="105" /> Their Reasons: Bloink: The vast majority of employer matching contributions are paid for the benefit of employees who are already contributing more to their retirement accounts than what is strictly required to obtain the match. That tells us that the matching contribution is not what is motivating those employees to contribute. Revising the rules could more accurately reflect reality. Today, most matching contributions actually go to the highest earning taxpayers—meaning that they aren't primarily benefitting the lower-income taxpayers that they're meant to help. Byrnes: Employer matching contributions provide a powerful benefit to motivate all employees to contribute to their own retirement income planning. These benefits also provide critical support to lower-income and younger employees who may not have the resources to maximize their savings. When these employees can see their balances begin to grow at a more rapid rate than they could afford on their own, they're going to be much more motivated to continue on that track. _________________________________ Bloink: The current regulatory landscape governing employer matching contributions is, in practice, serving to increase and exacerbate pay inequality by providing benefits to the highest earners. Matching contributions are currently typically based on the employee's salary. When we're expressing the employer match as, for example, a 50% match on 6% of the employee's pay, the employee who's earning much more is going to see a far more significant benefit than the lower-income employee whom the match is designed to benefit. Byrnes: We also have to remember that employer matching benefits are entirely optional. If we overly complicate the rules, we create an administrative burden that could actually have the opposite effect as intended—functioning to discourage employers from offering any matching contribution at all. That's something that we should work to avoid. _________________________________ Bloink: We should be examining the actual impact of the rules--regardless of the fact that these benefits are generally available to all employees across-the-board regardless of income level. There's no reason that the rules couldn't be revised to provide a higher benefit that actually phases out for employees with high income levels and the means to fund their own retirement accounts without the need for employer-based incentives. Byrnes: Rather than turning the regulations on employer matching contributions upside down, we should focus on helping employers educate employees about the benefits of taking advantage of the match--because many employees are not contributing because they simply don't understand the financial benefits. That's not a sign that the rules need to be revised, but it is a sign that employers could be doing more to educate their employees.

July 25, 2024

Annuities in Retirement Plans

Many now believe that defined contribution plans should now be more widely used to offer participants a guaranteed defined-benefit style option. The original SECURE Act sought to encourage plans to offer an annuity option by creating a fiduciary safe harbor for the plan sponsor when selecting the annuity provider. Plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting an objective, thorough and analytical search at the outset to evaluate annuity providers. The SECURE Act also makes the annuity portable once the plan participant has chosen the lifetime income option. Some now suggest that it would be even more beneficial to automatically enroll participants in the annuity option. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether employers should auto-enroll employees in annuities within their retirement plans. Below is a summary of the debate that ensued between the two professors. Their Votes: <img class="alignnone size-medium wp-image-62919" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/BloinkThumbsUp-300x105.png" alt="" width="300" height="105" /> <img class="alignnone size-medium wp-image-62921" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/ByrnesThumbsDown-300x105.png" alt="" width="300" height="105" /> Their Reasons: Bloink: The vast majority of retirement plans and healthcare benefits are provided by employers. These are common types of insurance designed to protect employees. While we don't think of annuities as insurance, they really do perform that insurance function by insuring against the risk of outliving savings. Employers are in the best position to encourage employees to select annuity options within their retirement plans on a more widespread basis. Byrnes: We all know that annuities aren't always a wise choice for all investors, let alone the best choice. In fact, the fees and expenses can be extremely high, and the annuity is far from the option that would benefit the widest group of individuals. That itself makes auto enrollment highly inappropriate and a huge fiduciary risk for the plan itself. _____________________________________________ Bloink: Many employers already offer an annuity option within their retirement plans, but most participants simply select the default investment option and never modify those choices. Employees who could benefit significantly from the annuity option don't necessarily dig deep enough into the available options to even evaluate whether an annuity is the best choice. Of course, the annuity option won't be right for every single individual—but that doesn't mean we shouldn't do everything impossible to encourage the evaluation. Byrnes: While annuities can, of course, be extremely valuable in the right situation, these aren't the types of investments that we should be auto-directing retirement savers into. Yes, employees don't always evaluate the various options carefully when directing their retirement investments within an employer-sponsored plan. We don't want to end up in a situation where a large percentage of plan participants are auto-enrolled and remain in the annuity option that really isn't in their best interests. _____________________________________________ Bloink: If employees were automatically enrolled in annuities within defined contribution plans, they would be forced to consider the option more carefully when deciding whether to opt out. They would be under no obligation to actually keep their funds invested in the initial annuity option. Auto-enrollment would have to be accompanied by conspicuous notice and educational materials for employees to evaluate when deciding whether to maintain the annuity investment option. These types of lifetime income options are simply too valuable, and we should be taking steps to at least ensure employees have to consider the option. Byrnes: Annuities are such a complicated financial product that it seems it would be virtually impossible to provide the types of educational materials that participants would have to evaluate when deciding whether to opt out. Individualized financial advice is the key to making the right annuity choice for the client's specific financial goals and situations. Auto-enrollment simply can't provide the types of custom-tailored advice that's necessary to ensure a good fit.

July 18, 2024

HDHPs for Health Savings

High deductible health plans (HDHPs) have often been described as an option that allows employers to offer health insurance without the traditionally high price tag. As the name suggests, employees who participate in HDHPs must satisfy higher deductibles before certain types of health services are covered. HDHP participation also allows employees to simultaneously fund a health savings account (HSA) with pre-tax dollars. HDHPs are also subject to certain annual out-of-pocket limits (currently, $8,050 for self-only coverage and $16,100 for family coverage). We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether HDHPs provide a valuable money-saving option for employees and employers. Below is a summary of the debate that ensued between the two professors. Their Votes: <img class="alignnone size-medium wp-image-62919" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Up_Icon_200x200.jpg" alt="" width="100" height="105" /> <img class="alignnone size-medium wp-image-62921" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Down_Icon_200x200.jpg" alt="" width="100" height="105" /> Bloink: HDHPs, when combined with HSAs, give employees more control over their healthcare spending decisions. Because deductibles are high, employees, of course, have greater out-of-pocket expenses. That's where HSAs come in. However, that combination gives employees an incentive to make smarter healthcare spending decisions--because those dollars are coming out of their own pockets, in the end creating savings for those taxpayers. Byrnes: HDHPs are an extremely expensive option for the employee. We're overlooking the fact that while participation in an HDHP makes an employee eligible to contribute to an HSA, not all employees actually maximize their HSA contributions—or contribute at all. That means they're spending more on basic health expenses out-of-pocket without the tax savings that are touted as justification for the HDHP structure.   <hr /> Bloink: Regardless of the fact that HSA contributions are extremely valuable to the employee from a tax perspective, in reality, it feels to the employee as though they're spending their own money (of course, because they are). That makes it much more likely that the employee will more carefully evaluate their healthcare spending and make choices that will generate long-term savings. Byrnes: We also have to remember that many individuals aren't really equipped to analyze and evaluate whether a particular healthcare expense is a smart move. They don't necessarily have the ability to "shop around" and evaluate different options, so end up spending more in the long run with the HSA option.   <hr /> Bloink: The HDHP/HSA combination gives employees the ability to accumulate health savings balances that can be used in the years when the individual is much more likely to have significant healthcare expenses. We can't pretend that health-related expenses are distributed evenly over an individual's lifetime. Younger employees may be less likely to have significant health costs. The HDHP/HSA structure gives them the ability to save on a tax-preferred basis during those low-cost years to fund higher health expenses later in life, or during a health emergency. Byrnes: HDHPs also aren't as cost-effective for employers as we might think. When given an option, it tends to be the higher-income, lower-risk employees who will choose the HDHP/HSA option. Employees who are more expensive from a claims perspective tend to choose lower-deductible options. Yes, the HDHP/HAS structure has its benefits if used in a smart way, but not when it comes to current cost savings.

July 11, 2024

Clean Vehicle Reporting Requirements

The Inflation Reduction Act of 2022 created a new tax credit for certain vehicles that meet certain standards with respect to the use of "clean" energy. The maximum credit is $7,500--$3,750 if certain critical minerals requirements are met and $3,750 if certain battery components requirements are met. Now, the IRS has released detailed guidance requiring manufacturers to submit information about their vehicles to determine whether those vehicles are eligible for the Section 30D tax credit. Among other requirements, starting in 2025 the manufacturer must provide information so that the IRS can establish a compliant battery ledger each year. The manufacturer is subject to certain due diligence requirements with respect to all battery components and relevant critical minerals. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether the IRS' new reporting requirements for clean vehicle tax credits will have a positive impact. Below is a summary of the debate that ensued between the two professors. Their Votes: <img class="alignnone size-medium wp-image-62919" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Up_Icon_200x200.jpg" alt="" width="100" height="105" /> <img class="alignnone size-medium wp-image-62921" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Down_Icon_200x200.jpg" alt="" width="100" height="105" /> Their Reasons: Bloink: This guidance provides much-needed clarity for taxpayers and vehicle manufacturers alike. These new vehicle credits completely changed the way the government is rewarding taxpayers for investing in clean energy. Without comprehensive guidance as to the information reporting the IRS will require in exchange for the credits, taxpayers may be wary about taking advantage of the credits by purchasing clean vehicles. Byrnes: The reporting requirements are overly complex and will significantly discourage car manufacturers from participating in the program. We can't increase the use of green energy in vehicles unless we have the cooperation of all major car manufacturers. The IRS is asking for details that manufacturers simply aren't accustomed to providing and may not be equipped to evaluate. _______________________________________ Bloink: The rules for taking advantage of the clean energy credits are complex because they must be. We must ensure that the credits are operating as intended and rewarding only taxpayers who purchase qualified clean energy vehicles going forward. Only certain vehicles and certain taxpayers qualify. Without strong reporting requirements, these clean vehicle credits could become yet another loophole to allow the ultra-wealthy to avoid paying their fair share of taxes simply by purchasing luxury vehicles that wouldn't qualify for the new tax credits. Byrnes: The tax credits do nothing to encourage taxpayers to purchase clean vehicles if we're imposing an unreasonably rigid reporting regime. Yes, the IRS needs the information to ensure correct application of the tax credit, but we must also consider the burden on manufacturers and taxpayers alike--and take our time to develop a more streamlined procedure designed to encourage compliance. _______________________________________ Bloink: The information required forms the basis for determining whether the vehicle is qualified for the purposes of the new tax credit. That means the IRS will need information both from the taxpayer who purchases the vehicle and the vehicle's manufacturer. Yes, the rules are complex, partially because the information required is unfamiliar to many taxpayers—but the IRS has taken steps to mitigate the burden by releasing a template that the manufacturer can use to make compliance less onerous. The IRS has also created a transition period, so that when battery materials are impractical to trace prior to 2027, those battery requirements can be excluded in completing the due diligence for reporting purposes. Like any new law, there will be an adjustment period—but that doesn't mean the IRS shouldn't implement strong procedures to prevent taxpayers from taking advantage of the new credit with respect to vehicles that do not legitimately qualify. Byrnes: The IRS and DOE do need certain information with respect to qualifying vehicles. That is no excuse for implementing a reporting regime that is going to create such a significant administrative burden. In many cases, manufacturers may have to bring in consultants to comply with these due diligence requirements. That may detract from the actual work of developing eco-friendly vehicles that are attractive to consumers. Yes, we're dealing with a new law—but that doesn't mean the IRS is not equipped to create a reporting regime that is manageable for both manufacturers and individual taxpayers who are claiming the credits.

July 05, 2024

USSC Overturns Chevron

In a 6-3 ruling, the Supreme Court held that, under the Administrative Procedure Act (APA), courts must not merely defer to agencies' interpretations of the law when those laws are ambiguous, overturning the decades-old Chevron doctrine. The court further held that courts exercise their own judgement when determining whether an agency has acted within their legal authority. In making their decision, the court found that the APA incorporates a traditional understanding where judges must exercise independent judgement when assessing the meaning of the law. The court noted that it's up to Congress to decide whether to delegate interpretive authority to agencies. The court found that the Chevron precedent, which essentially required judicial deference to agencies' interpretation of the law, prevented judges from performing their core function of judging. While the court did specifically overrule Chevron, the opinion also stated that previously issued opinions that relied on Chevron were not called into question. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about the Supreme Court's decision to overrule the Chevron doctrine. Below is a summary of the debate that ensued between the two professors. Their Votes: <img class="alignnone size-medium wp-image-62920" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Up_Icon_200x200.jpg" alt="" width="69" height="69" /> <img class="alignnone size-medium wp-image-62922" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Down_Icon_200x200.jpg" alt="" width="69" height="69" /> Their Reasons: Byrnes: Regulatory agencies are not elected officials. They should not have the authority that they have been using for decades under the Chevron rules. We've for far too long given regulatory agencies an inappropriate amount of power in this country. Agencies have no special skills when it comes to resolving ambiguities in the law. That's what the courts are here for. Bloink: We all know that the bare bones laws enacted by Congress leave much to interpretation. Without interpretation from agencies like the IRS and DOL, taxpayers and advisors alike would be left in the dark as to how to comply with the law. Every advisor knows that when a new law is released, we wait to see how the agencies will interpret complex and ambiguous provisions in the law. It's simply not realistic to expect Congress to enact laws that account for every contingency and situation. _________________________________ Byrnes: Judges are elected or appointed based on specific skills when it comes to rendering decisions and interpreting ambiguous situations. Judges are much better equipped to resolve ambiguous legal issues than the agencies. Congress has clear authority to choose to specifically delegate interpretive authority to agencies as long as those delegations remain within the bounds of the constitution. That doesn't mean courts should automatically be expected to defer to agencies without clear delegation of that authority. Bloink: Without Chevron's rule requiring deference to agency interpretations, will each and every ambiguous legal provision have to be litigated before taxpayers are given clarity? We aren't talking about ambiguous laws that are few and far between. Interpretive guidance from agencies like the IRS and DOL is released on a continual basis. This guidance is critical to taxpayers' actions. _________________________________ Byrnes: The court clearly noted that judges are permitted to look to agency interpretations for guidance when reaching their own conclusions. This ruling doesn't mean that courts will never defer to agencies on important issues. It simply means that they aren't required to automatically grant deference to agency interpretations without exercising their own independent judgement. Bloink: This ruling essentially gives the courts exclusive authority over every major issue without regard to expertise or whether the issue has political policy implications. Agency employees are explicitly selected based on their expertise in various fields. Courts simply don't have that specialized expertise. It really makes very little sense to transfer authority from the specialized agencies to judges who simply cannot have specialized expertise in every single relevant field.

June 27, 2024

Health Coverage Exclusion Cap

Currently, taxpayers who receive employer-sponsored health benefits are not taxed on the value of those benefits. A group of Republicans in Congress have recently proposed creating a cap on the current employee tax exclusion for employer-sponsored health insurance benefits. While the proposal did not contain a specified amount for the cap, a separate paper released by a conservative research firm called for capping the tax exclusion at 125 percent of the national average value of employer-sponsored health insurance plans. We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about recent Congressional proposals to impose a cap on the value of employer-sponsored health coverage that can be excluded from taxable income. Below is a summary of the debate that ensued between the two professors. Their Votes: <a href="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Up_Icon_200x200.jpg"><img class="alignnone wp-image-33388" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Up_Icon_200x200.jpg" alt="" width="69" height="69" /></a> Byrnes <a href="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Down_Icon_200x200.jpg"><img class="alignnone wp-image-33387" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Down_Icon_200x200.jpg" alt="" width="69" height="69" /></a> Bloink   Their Reasons: Byrnes: Capping the tax exclusion for employer-provided health insurance benefits is a tool that we can use to reign in the amount employers spend on health insurance benefits. Right now, employees are allowed to receive employer health insurance benefits with an unlimited tax exclusion. Health coverage costs are constantly increasing, and this type of cap is one way that we can motivate individuals to proactively minimize their healthcare spending—because they'd also be motivated to avoid additional taxes. Bloink: The current system delivers an incredible amount of value for employees who have access to comprehensive health insurance via employer-sponsored plans on a 100% tax-free basis. We want to encourage robust employer health coverage options. This proposal is essentially a repackaging of the ACA Cadillac tax—a tax that was repeatedly delayed and ultimately repealed altogether because of concerns over the adverse tax impact it would have on the lowest-income taxpayers. There's no valid reason to resurrect this tax. ___________________________ Byrnes: By including the value of high dollar plans in employee income, employers and employees will be motivated to make more cost-effective decisions when it comes to choosing the types of health benefits that are offered and received. Those that do choose to offer more expensive plans aren't prohibited from doing so—the decision will just have to be one that is more fully considered from a cost-benefit perspective. Bloink: Although the federal government may be losing tax revenue by allowing the full value of health benefits to go untaxed, encouraging employers to spend on health insurance for employees is actually benefiting the government in the long run. Without the exclusion, the government would inevitably end up picking up the tab through credits and other assistance. Ultimately, that would increase the cost of health coverage for the government and, thus, all taxpayers. ___________________________ Byrnes: Employers constantly shy away from offering comprehensive health coverage unless they're absolutely required by law to provide it to employees. By capping the exclusion and taxing the value of high dollar health coverage, we'll effectively be capping the amount employers can spend before employees also begin to feel the financial burden of that employer-sponsored health coverage. In the end, this would have the effect of reducing the cost of health coverage so that even the smallest employers would find the benefit cost-effective. Bloink: This cap would ultimately end up increasing tax rates for the lowest income Americans who can ill afford the additional tax liability. We should be doing everything we can to encourage employers to offer generous tax benefits, not the other way around. This cap is a type of stealth tax on low-income Americans---and in the end, it's highly unlikely that it'll ever become a reality.

June 20, 2024

283 / MEP Impact

The SECURE Act relaxed the “one bad apple rule” for small business owners interested in the multiple employer plan (MEP) structure. Under the one bad apple rule, the entire MEP could be disqualified based upon the actions of only one employer that participated in the plan. The SECURE Act provides that if one employer’s actions would disqualify the plan, only that employer’s portion of the MEP will be disqualified. The SECURE Act relief from one-bad-apple violations applies if the MEP terms provide: (1) the assets of the plan attributable to employees of the employer will, in most cases, be transferred to a plan maintained only by that employer and (2) the employer (and not the plan in which the failure occurred) will be held liable for any liabilities with respect to such plan attributable to the employees of the employer. We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether recent changes to the MEP rules will have a positive impact on the availability of retirement savings options. Below is a summary of the debate that ensued between the two professors. Their Votes: <a href="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Up_Icon_200x200.jpg"><img class="alignnone wp-image-33388" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Up_Icon_200x200.jpg" alt="" width="70" height="70"></a> Bloink <a href="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Down_Icon_200x200.jpg"><img class="alignnone wp-image-33387" src="https://imageserver.amlaw.com/tax-facts/uploads/2019/02/Thumbs_Down_Icon_200x200.jpg" alt="" width="70" height="70"></a> Byrnes   Their Reasons: Bloink: Many small business owners simply don't want to bear the burden of offering a retirement plan on their own so they do nothing—meaning that those employees don’t have a simple option for retirement savings at their fingertips. MEPs give them an attractive option to spread that burden among several different employers. Eliminating the one bad apple rule shields participating employers from fiduciary liability if one member of the MEP violates the MEP rules or otherwise fails to satisfy applicable fiduciary duties—providing powerful protection for employers participating in the MEP. Byrnes: The fact is, most small business owners have never heard of MEPs and PEPs--so there remains both the task of convincing these business owners to offer a retirement plan and educating them about the MEP and PEP options. There's also really no guarantee that these types of plans will actually generate the cost savings that smaller employers are looking for, meaning that we shouldn’t be relying on these vehicles to save the day when it comes to retirement savings options. ____________________________ Bloink: Relaxation of the one bad apple rule and common bond requirements will go a long way toward opening the MEP structure to small business owners. Employers no longer have to worry about the risk of one single default disqualifying the entire plan--and the relaxed rules make it much easier to join a MEP or PEP in the first place. Many employers are just looking for the most simple option when it comes to offering this type of employment benefit. Byrnes: Employers do retain some degree of fiduciary responsibility when joining a MEP. With all of the publicity surrounding the widespread applicability of the fiduciary standard generally under the DOL’s new standard, that is something that many business owners have likely heard about even if they don’t know anything about MEPs --and it could be something that serves to make the idea of offering any retirement plan less attractive as a whole. ____________________________ Bloink: The new Pooled Employer Plan (PEP) option will reduce administrative burdens and the risk of fiduciary liability, removing some of the major barriers to employers' willingness to offer retirement plans. While MEPs and PEPs aren’t the perfect solution for every single employer, any steps toward increasing the availability of employer-sponsored retirement plans should be viewed as a positive. MEPs will ultimately give some employers the tools they need to offer employees a retirement savings option. Byrnes: We also have to remember that it isn't always easy to exit the MEP--meaning that when an employer grows and wants to offer a standalone 401(k), it might not be a simple undertaking. The bottom line is that MEPs aren’t always the best tool and we should be taking steps to make more traditional types of defined contribution plans more attractive.

March 13, 2024

290 / Is there a loss of the tax exemption for death proceeds after a life insurance policy is transferred to a corporation in a tax-free organization or reorganization?

<div class="Section1"> No, if the insured is an officer or shareholder in the corporation to which the policy is transferred ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="285">285</a>). Moreover, even where an insured is not an officer or shareholder of a transferee corporation, proceeds will not lose their tax-exempt status if a policy is transferred as part of a general tax-free transfer. For example, a transfer of property in organizing a corporation is tax-free if immediately after the transfer the persons who exchanged property for stock own at least 80 percent of the voting stock and 80 percent of all other classes of stock in the corporation. This kind of transfer usually takes place, for example, when an unincorporated business is incorporated. <div class="Section1"> Other examples of tax-free transfers include tax-free reorganizations, which include statutory mergers, consolidations and the transfers of substantially all the property of one corporation solely in exchange for the voting stock of another corporation.<a href="#_ftn1" name="_ftnref1">1</a> Where an asset changes hands in a tax-free transfer, the tax basis of the asset does not change.<a href="#_ftn2" name="_ftnref2">2</a> Consequently, such a transfer comes within the exception to the transfer for value rule set forth in IRC Section 101(a)(2)(A) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>). If proceeds would not have been exempt had a policy been retained by a transferor, the tax-free transfer will not cause them to become tax-exempt unless the insured is an officer or shareholder of the transferee corporation.<a href="#_ftn3" name="_ftnref3">3</a> If a corporation purchases the assets of another corporation in a transaction that is not a tax-free reorganization and those assets include a life insurance policy, the sale will cause a loss of exemption for the proceeds unless the insured is an officer or shareholder of the purchasing corporation ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="285">285</a>).<a href="#_ftn4" name="_ftnref4">4</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 368. <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 358. <a href="#_ftnref3" name="_ftn3">3</a>.     Treas. Reg. § 1.101-1(b)(3). <a href="#_ftnref4" name="_ftn4">4</a>.     IRC § 101(a)(2)(B); Spokane Dry Goods Co. v. Commissioner, 1 TCM (CCH) 921 (1943). </div></div>

March 13, 2024

289 / Is there a loss of the income tax exemption for death proceeds following a transfer of life insurance policies between partners or to a partnership in which the insured is a partner?

<div class="Section1"> No. The transfer for value rule does not apply where a policy is transferred to a partner of the insured or to a partnership in which the insured is a partner.<a href="#_ftn1" name="_ftnref1">1</a> The partnership actually must operate as a partnership, however, and not exist in form only.<a href="#_ftn2" name="_ftnref2">2</a> A partner can sell a policy on the partner's life to the partnership or to another partner. A retiring partner can sell to an incoming partner the policy the partner owns on another partner's life. A partnership can sell a policy to an insured partner or to a copartner of the insured. Where a partnership owns a key person policy on the life of a non-partner, there is no transfer for value when a new partner enters or an existing partner leaves the partnership, provided the partnership is not terminated by that action.<a href="#_ftn3" name="_ftnref3">3</a> Sale of a policy to a member of an insured's family who is not a partner would disqualify the proceeds for exemption. Where there is an insurance-funded buy-sell agreement between more than two partners and a partner dies, a surviving partner may buy policies on the lives of other surviving partners from the deceased's estate without loss of tax exemption for the death proceeds.<a href="#_ftn4" name="_ftnref4">4</a> The IRS has ruled in a private letter ruling that members of a limited liability company ("LLC"), which was classified as a partnership for federal tax purposes, would be considered partners for purposes of the transfer for value rule.<a href="#_ftn5" name="_ftnref5">5</a> A transfer for value by a corporation to a partnership in which an insured shareholder is a partner comes within the exception.<a href="#_ftn6" name="_ftnref6">6</a> Similarly, a transfer to shareholders who are partners, even though in an unrelated partnership, falls within the exception.<a href="#_ftn7" name="_ftnref7">7</a> Further, the IRS has ruled privately that a transfer of policies insuring shareholders/partners from a corporation to a partnership established specifically to receive and manage the policies comes within the exception.<a href="#_ftn8" name="_ftnref8">8</a> A sale of policies by an insured's grantor trust to a limited partnership where the insured was a limited partner was ruled to fall within the exemption.<a href="#_ftn9" name="_ftnref9">9</a> The IRS has indicated, however, that it will not issue rulings concerning whether or not the exception applies to a transfer of a life insurance policy to an unincorporated organization where substantially all of the organization's assets consist or will consist of life insurance policies on the lives of its members.<a href="#_ftn10" name="_ftnref10">10</a> If a policy is transferred more than once and the last transfer, or the last transfer for value, is to a partner of the insured or to a partnership in which the insured is a partner, proceeds will be entirely tax-exempt regardless of any previous transfer for value.<a href="#_ftn11" name="_ftnref11">11</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 101(a)(2)(B). <a href="#_ftnref2" name="_ftn2">2</a>. Swanson v. Commissioner, 518 F.2d 59 (8th Cir. 1975), aff'g TC Memo 1974-61. But see Let. Rul. 9309021. <a href="#_ftnref3" name="_ftn3">3</a>. Let. Rul. 9410039. <a href="#_ftnref4" name="_ftn4">4</a>. Let. Rul. 9727024. <a href="#_ftnref5" name="_ftn5">5</a>. Let. Rul. 9625013. <a href="#_ftnref6" name="_ftn6">6</a>. Let. Rul. 9042023. <a href="#_ftnref7" name="_ftn7">7</a>. Let. Rul. 9347016; Let. Rul. 9045004. <a href="#_ftnref8" name="_ftn8">8</a>. Let. Rul. 9309021. <a href="#_ftnref9" name="_ftn9">9</a>. Let. Rul. 9843024. <a href="#_ftnref10" name="_ftn10">10</a>. Rev. Proc. 2006-3, 2006-1 IRB 122; Rev. Proc. 2017-3, 2017-1 IRB 130. <a href="#_ftnref11" name="_ftn11">11</a>. Treas. Reg. § 1.101-1(b)(3)(ii). </div>