Bryant - Course 5. Retirement Planning & Employee Benefits. 12. Regulatory Considerations Flashcards
Imagine an Internal Revenue Service (IRS) bill for 16.7 million dollars! Unbelievable isn’t it? But that’s exactly what Willie Nelson, a Grammy award winner, got. Although he made millions of dollars, he had ignored his finances, including his taxes, entirely. How did Nelson manage to run up such a tax bill? On bad advice, he got involved in a number of tax shelters that were disallowed by the IRS because they were such blatant tax-avoidance schemes.
The result of this lack of attention to financial and tax planning was that Nelson had to nearly auction off all his properties, leaving him with virtually nothing to show for all his hard work over the years.
Though the tax regulatory system is cumbersome, tax-planning decisions could be made easier, and definitely faster, with knowledge of the rules and procedures. The advantage is that you won’t have to lose money, and you will know the benefits and tax deductions you can save on.
The Regulatory Considerations module, which should take approximately three hours to complete, will explain the rules of the Employee Retirement Income Security Act (ERISA) reporting disclosure and other regulatory considerations.
Upon completion of this module, you should be able to:
* List the steps taken by the government for retirement plans.
* Explain the reason behind the enormous paperwork involved in tax procedures.
* List the basic government regulations.
* Categorize the various types of laws under statutory laws.
* Differentiate between statutory and court laws.
* List the assessable penalties, if laws are not followed.
* Define the basic functions of ERISA.
* Distinguish between welfare plan and benefit plan under ERISA.
* Identify the various elements of reporting and disclosure under the two ERISA plans.
* List the additional IRS reporting to be made in addition to ERISA.
* Explain the role of the Department of Labor and the fiduciary obligations.
Module Overview
Benefit planners must have the knowledge of rules, laws and regulations to guide taxpayers. If a taxpayer does not abide by these rules, this could lead to fines, penalties and even imprisonment. So to avoid the penalties, a taxpayer must adhere to the Employee Retirement Income Security Act of 1974. Though there are exemptions to these rules, there are also several reporting and disclosure requirements imposed on a broad range of employee benefit plans by ERISA. To fulfill these requirements, a taxpayer and/or company has to fill out various forms and file them with the IRS or Department of Labor.
The Department of Labor mainly deals with employee welfare. Certain fiduciary obligations must be fulfilled if the employer opts for certain pension plans. Under Section 406 of ERISA, the prohibited transactions are covered.
To ensure that you have a solid understanding of regulatory considerations, the following lessons will be covered in this module:
* Knowing the Rules
* ERISA Reporting and Disclosure
* Other Regulatory Considerations
Section 1 - Knowing the Rules
History helps to explain the why and how of so many things, even with the tax laws. Benefit planners can understand the rules, as well as get a feel for potential future changes in laws. The field of taxes is so thoroughly encompassed by rules, laws and regulation that it is impossible to escape the enormous amount of paperwork it generates. With so many rules, it is imperative to know and understand these rules.
Knowledge of these rules and regulations can help define the areas where the taxpayer may be penalized, and thus can help to avoid these penalties. Failure for abiding by these rules could result even in imprisonment. So it is useful to have a good understanding of the regulatory considerations.
To ensure that you have a solid understanding of the rules, the following topics will be covered in this lesson:
* Why the Rules Exist
* The Rules
* How to Find the Answers
* Laws Not Followed
Upon completion of this lesson, you should be able to:
* Outline the reasons for the growth of tax benefits and deductions with respect to retirement plans,
* Enumerate the various rules and regulations that exist,
* Describe the procedure to simplify the use of tax benefit laws,
* identify the penalties that can be assessed, and
* explain the requirements of a legal opinion letter.
Which of the following best describes a revenue ruling? Click all that apply.
* Published by the IRS as general guidance to all taxpayers.
* Initiated from IRS agent in the field during a taxpayer audit.
* Addressed only to the specific taxpayers who requested the rulings.
* Binding on IRS personnel on the issues covered in them.
Published by the IRS as general guidance to all taxpayers.
Binding on IRS personnel on the issues covered in them.
* Revenue rulings are published by the IRS as general guidance to all taxpayers. The IRS publishes its Revenue Rulings in IRS Bulletins and is binding on IRS personnel on the issues covered in them.
Section 1 - Knowing the Rules Summary
The tax regulatory system is made of several laws, rules and regulations. It is important to know not only the laws, but also to have knowledge of the history, the types of rules, and also the penalties of not following those rules. This helps in simplifying the tax regulatory system.
In this lesson, we have covered the following:
* Why the Rules Exist takes a look into the history of the American economy and the growth and the beginnings of tax benefits and deductions. This started in the 1920s when the federal government provided tax benefits for pension plans. Besides this, the adoption of the Social Security system in the 1930s was the second big federal initiative in the retirement plan area. The reason behind the current, highly complex regulatory scheme can also be found here: to make sure that the benefits go where they are most needed, and that plans do not benefit highly compensated employees only. Rules are significant to the benefit planner because knowing where the rules come from makes them easier to understand and helps planners give clients useful advice about potential future changes in the law.
- The Rules especially the statutory rules, are required to be studied and understood by benefit planners, because they are the basis for all other rules, regulations, and court cases. The law, as expressed by statutes, is the basis of all regulation. The court cases, rulings, and regulations are simply interpretations of the statute. The IRC governs the deductibility and taxation of pension and employee benefit programs. ERISA governs the non-tax aspects of federal regulation. PBGC provides termination insurance and also regulates plan terminations and imposes certain reporting requirements on covered plans in financial difficulty. Securities laws are designed to protect investors. Civil rights and age discrimination laws have specific provisions aimed at benefit plans. Disabled employees laws generally prohibit an employer from discriminating against a person on the basis of the person’s disability. State legislation deals with particular issues not covered by ERISA. Besides statutory laws, court laws, which are created when a specific taxpayer decides to appeal a tax assessment made by the IRS, exist. Regulations are interpretations of statutory law that are published by a government agency in the benefits area.
- The answers to employee benefit tax questions can be found using the following approach: Investigate secondary sources, choose the suitable ones, and keep them handy. When a tax or other benefit issue arises, review the secondary sources. Then review the statutory provisions and regulations relating to the issue and finally review court cases and rulings dealing with the issue and compare.
- Laws not followed includes either taking too large a deduction or underreporting items of income. This can result in civil and criminal penalties. Certain penalties, for violations such as failure to file a return, understatement of income tax, negligence of tax law, fraud, and valuation overstatement, can be assessed. To avoid negligence or fraud, a taxpayer can rely on a legal opinion. But there are some things the client should watch for because many legal opinion letters avoid expressing an opinion on certain aspects of a transaction. Not only that, the legal opinion should apply to the taxpayer and transaction in question, and not any other. The opinion letter should provide a basis for the more-likely-than-not standard in these cases.
The basis of all regulation, which is treated as the highest level of authority by the U.S. Congress, is which of the following?
* Rules in IRC
* Statements in IRS
* Laws expressed by statutes
* Court case rulings
Laws expressed by statutes
* The law as expressed by statutes passed by the U.S. Congress is the highest level of authority and is the basis of all regulation. The court cases, rulings, and regulations are simply interpretations of the statute.
Laws Used to prohibit employment discrimination on the basis of race, religion, sex, or national origin.
Civil Rights Laws
Provides room for issues that cannot be dealt with by ERISA.
State Legislation
It is an internal IRS document prepared for its own staff’s guidance in administering the Code.
General Counsel Memorandum
It is an IRS document prepared for internal use within the IRS.
Section Field Service Advice
Section 2 - ERISA Reporting and Disclosure
The Employee Retirement Income Security Act of 1974 (ERISA) imposes extensive reporting and disclosure requirements on a broad range of employee benefit plans. According to these provisions, various forms and information have to be disclosed to plan participants and/or filed with the IRS or the Department of Labor.
Under ERISA, employee benefit plans are divided into two types, pension plans and welfare plans. It usually makes sense to think of them in terms of their exceptions rather than their definitions. That is, an employee benefit plan should be considered covered by the provisions of ERISA unless there is a specific exemption in ERISA or the regulations interpreting ERISA.
To ensure that you have a solid understanding of ERISA Reporting and Disclosure, the following topics will be covered in this lesson:
* Plans Exempt from ERISA
* Pension Plans Under ERISA
* Welfare Plans Under ERISA
Upon completion of this lesson, you should be able to:
* List the various plans exempt from ERISA,
* Define the employee pension benefit plan,
* Describe the regulatory exemptions for pension plans,
* List the various reporting and disclosure elements, and
* Describe the various welfare plans under ERISA and its regulatory exemptions.
Section 2 - ERISA Reporting and Disclosure Summary
A vast range of ERISA’s reporting and disclosure requirements govern employee benefit plans, though there are a few plans that are exempt from ERISA’s requirements. Treatment of Pension and Welfare plans and their regulatory exemptions also come under ERISA. The reporting and disclosure requirements too are an important aspect under ERISA’s plans, which need to be followed.
In this lesson, we have covered the following:
* Plans Exempt from ERISA are those of state, federal, or local governments or governmental organizations, plans of religious organizations (they can elect to be covered under ERISA), plans maintained outside the United States for nonresident aliens, unfunded excess benefit plans, and plans maintained to comply with workers’ compensation, unemployment compensation, or disability insurance laws.
- Pension Plans Under ERISA can be described as any plan, fund, or program which is established or maintained by an employer or by an employee organization, or both, that as a result of surrounding circumstances provides retirement income to employees, or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. This is regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan, or the method of distributing benefits from the plan. ERISA also defines a pension plan as any employee benefit plan that involves deferral of an employee’s compensation to the retirement date or later. Several regulatory exemptions also exist, such as Section 2510.3-2 of the labor regulations, which give partial exemption to certain pension-like plans. Supplemental payment plans are also exempt from numerous ERISA requirements. Employer-facilitated IRAs, simplified employee pensions, SIMPLEs, and Section 403(b) TDA plans are, in some cases, either exempt from ERISA’s reporting and disclosure requirements or subject to reduced ERISA. A few elements of reporting and disclosure are the Summary Plan Description, which describes the major provisions of the plan, the annual financial reporting form, and the Summary Annual Report, which is a brief summary of financial information from the Annual Report. The Individual Accrued Benefit Statement is another element of reporting and disclosure. The Title IV of ERISA, the plan termination insurance provisions, also has reporting and disclosure obligations on certain defined benefit pension plans.
- Welfare Plans Under ERISA can be described as any plan established or maintained by an employer for the purpose of providing for its participants or their beneficiaries through the purchase of several services. Section 2510.3-1 of the labor regulations provides exemptions and limitations from the applicability of ERISA. Several employment practices and benefits such as overtime pay, compensation for absence from work due to sickness, vacation, shift pay, holiday premiums, holiday gifts, group insurance programs, and similar compensation paid for work done other than under normal circumstances are exempt from the ERISA reporting and disclosure requirements. Welfare plans with fewer than 100 participants need not file an annual report under certain criteria, due to the Small Welfare Plan exemption.
Employer plans exempt from ERISA are which of the following? (Select all that apply)
* Plans of governmental organizations
* Plans of churches
* Plans in the United States for nonresident aliens
* Plans of state, federal or local governments
Plans of governmental organizations
Plans of churches
Plans of state, federal or local governments
* The employer plans that are exempt from ERISA are plans of state, federal, or local governments or governmental organizations. Plans for churches, synagogues, or related organizations are also exempt. If plans are maintained outside the United States for aliens, then they are exempt. Unfunded excess benefit plans that are a type of nonqualified deferred compensation plan, and plans that are maintained solely to comply with workers’ compensation, unemployment compensation or disability insurance laws are also exempt from ERISA.
Which plans are either exempt from ERISA’s reporting and disclosure requirements or subject to reduced ERISA reporting and disclosure requirements? (Select all that apply)
* Simplified Employee Pension plans
* Section 403 (b) plans
* Simple IRAs
* 401(k) plans
Simplified Employee Pension plans
Section 403 (b) plans
Simple IRAs
* Employer-facilitated IRAs, simplified employee pensions (SEPs), SIMPLEs, and Section 403(b) TDA plans are, in some cases, either exempt from ERISA’s reporting and disclosure requirements or subject to reduced ERISA reporting and disclosure requirements. Code Section 125 plans refer to cafeteria plans, which are not included in the ERISA exempt list
Which employment practices and benefits have been declared exempt from the ERISA reporting and disclosure requirements? (Select all that apply)
* Holiday premiums
* Holiday gifts
* Recreational facilities in employer’s premises
* Compensation during sabbatical leave
* Employer sponsored group insurance programs
Holiday premiums
Holiday gifts
Recreational facilities in employer’s premises
Compensation during sabbatical leave
