Analysis

IRS to release machine readable Form 990 data next year

Yesterday the IRS announced that it will publish data from Form 990 in a machine readable format beginning in early 2016. Currently, the Form 990 data is available as a low resolution image, which makes it difficult to research many organizations at once. The new format will be XML-based, enabling computers to quickly analyze the data.

This new resource will make peer comparison surveys much easier for healthcare organizations, credit unions, and their consultants. Only state-chartered credit unions submit Form 990, but both federal and state-chartered credit unions can use the data.

For example, the current data looks like this:

Screen Shot 2015-07-01 at 4.00.09 PM.png

That same data in the new format will look like this:

<IRS990ScheduleJ documentId="RetDoc1042400001">
    <FirstClassOrCharterTravel>X</FirstClassOrCharterTravel>
    <TravelForCompanions>X</TravelForCompanions>
    <WrittenPolicyReTAndEExpenses>1</WrittenPolicyReTAndEExpenses>
    <SubstantiationRequired>1</SubstantiationRequired>
    <CompensationCommittee>X</CompensationCommittee>
    <WrittenEmploymentContract>X</WrittenEmploymentContract>
    <CompensationSurvey>X</CompensationSurvey>
    <BoardOrCommitteeApproval>X</BoardOrCommitteeApproval>
    <SeverancePayment>0</SeverancePayment>
    <SupplementalNonqualRetirePlan>1</SupplementalNonqualRetirePlan>
    <EquityBasedCompArrangement>0</EquityBasedCompArrangement>
    <Form990ScheduleJPartII>
        <NamePerson>VINCENT SANDUSKY</NamePerson>
        <BaseCompensationFilingOrg>382438</BaseCompensationFilingOrg>
        <CompBasedOnRelatedOrgs>0</CompBasedOnRelatedOrgs>
        <BonusFilingOrg>0</BonusFilingOrg>
        <BonusRelatedOrgs>0</BonusRelatedOrgs>
        <OtherCompensationFilingOrg>0</OtherCompensationFilingOrg>
        <OtherCompensationRelatedOrgs>0</OtherCompensationRelatedOrgs>
        <DeferredCompFilingOrg>37600</DeferredCompFilingOrg>
        <DeferredCompRelatedOrgs>0</DeferredCompRelatedOrgs>
        <NontaxableBenefitsFilingOrg>24342</NontaxableBenefitsFilingOrg>
        <NontaxableBenefitsRelatedOrgs>0</NontaxableBenefitsRelatedOrgs>
        <TotalCompensationFilingOrg>444380</TotalCompensationFilingOrg>
        <TotalCompensationRelatedOrgs>0</TotalCompensationRelatedOrgs>
        <CompReportPrior990FilingOrg>0</CompReportPrior990FilingOrg>
        <CompReportPrior990RelatedOrgs>0</CompReportPrior990RelatedOrgs>
    </Form990ScheduleJPartII>
    <Form990ScheduleJPartII>
        <NamePerson>JERROLD MARANS</NamePerson>
        <BaseCompensationFilingOrg>149353</BaseCompensationFilingOrg>
        <CompBasedOnRelatedOrgs>0</CompBasedOnRelatedOrgs>
        <BonusFilingOrg>0</BonusFilingOrg>
        <BonusRelatedOrgs>0</BonusRelatedOrgs>
        <OtherCompensationFilingOrg>0</OtherCompensationFilingOrg>
        <OtherCompensationRelatedOrgs>0</OtherCompensationRelatedOrgs>
        <DeferredCompFilingOrg>15848</DeferredCompFilingOrg>
        <DeferredCompRelatedOrgs>0</DeferredCompRelatedOrgs>
        <NontaxableBenefitsFilingOrg>17952</NontaxableBenefitsFilingOrg>
        <NontaxableBenefitsRelatedOrgs>0</NontaxableBenefitsRelatedOrgs>
        <TotalCompensationFilingOrg>183153</TotalCompensationFilingOrg>
        <TotalCompensationRelatedOrgs>0</TotalCompensationRelatedOrgs>
        <CompReportPrior990FilingOrg>0</CompReportPrior990FilingOrg>
        <CompReportPrior990RelatedOrgs>0</CompReportPrior990RelatedOrgs>
    </Form990ScheduleJPartII>
    <Form990ScheduleJPartII>
        <NamePerson>TOM SOLES</NamePerson>
        <BaseCompensationFilingOrg>165945</BaseCompensationFilingOrg>
        <CompBasedOnRelatedOrgs>0</CompBasedOnRelatedOrgs>
        <BonusFilingOrg>0</BonusFilingOrg>
        <BonusRelatedOrgs>0</BonusRelatedOrgs>
        <OtherCompensationFilingOrg>0</OtherCompensationFilingOrg>
        <OtherCompensationRelatedOrgs>0</OtherCompensationRelatedOrgs>
        <DeferredCompFilingOrg>17329</DeferredCompFilingOrg>
        <DeferredCompRelatedOrgs>0</DeferredCompRelatedOrgs>
        <NontaxableBenefitsFilingOrg>24342</NontaxableBenefitsFilingOrg>
        <NontaxableBenefitsRelatedOrgs>0</NontaxableBenefitsRelatedOrgs>
        <TotalCompensationFilingOrg>207616</TotalCompensationFilingOrg>
        <TotalCompensationRelatedOrgs>0</TotalCompensationRelatedOrgs>
        <CompReportPrior990FilingOrg>0</CompReportPrior990FilingOrg>
        <CompReportPrior990RelatedOrgs>0</CompReportPrior990RelatedOrgs>
    </Form990ScheduleJPartII>
    <Form990ScheduleJPartII>
        <NamePerson>DEBORAH WYANDT</NamePerson>
        <BaseCompensationFilingOrg>187821</BaseCompensationFilingOrg>
        <CompBasedOnRelatedOrgs>0</CompBasedOnRelatedOrgs>
        <BonusFilingOrg>0</BonusFilingOrg>
        <BonusRelatedOrgs>0</BonusRelatedOrgs>
        <OtherCompensationFilingOrg>0</OtherCompensationFilingOrg>
        <OtherCompensationRelatedOrgs>0</OtherCompensationRelatedOrgs>
        <DeferredCompFilingOrg>19019</DeferredCompFilingOrg>
        <DeferredCompRelatedOrgs>0</DeferredCompRelatedOrgs>
        <NontaxableBenefitsFilingOrg>10249</NontaxableBenefitsFilingOrg>
        <NontaxableBenefitsRelatedOrgs>0</NontaxableBenefitsRelatedOrgs>
        <TotalCompensationFilingOrg>217089</TotalCompensationFilingOrg>
        <TotalCompensationRelatedOrgs>0</TotalCompensationRelatedOrgs>
        <CompReportPrior990FilingOrg>0</CompReportPrior990FilingOrg>
        <CompReportPrior990RelatedOrgs>0</CompReportPrior990RelatedOrgs>
    </Form990ScheduleJPartII>
    <Form990ScheduleJPartII>
        <NamePerson>ELI HOWARD</NamePerson>
        <BaseCompensationFilingOrg>154565</BaseCompensationFilingOrg>
        <CompBasedOnRelatedOrgs>0</CompBasedOnRelatedOrgs>
        <BonusFilingOrg>0</BonusFilingOrg>
        <BonusRelatedOrgs>0</BonusRelatedOrgs>
        <OtherCompensationFilingOrg>0</OtherCompensationFilingOrg>
        <OtherCompensationRelatedOrgs>0</OtherCompensationRelatedOrgs>
        <DeferredCompFilingOrg>15819</DeferredCompFilingOrg>
        <DeferredCompRelatedOrgs>0</DeferredCompRelatedOrgs>
        <NontaxableBenefitsFilingOrg>16641</NontaxableBenefitsFilingOrg>
        <NontaxableBenefitsRelatedOrgs>0</NontaxableBenefitsRelatedOrgs>
        <TotalCompensationFilingOrg>187025</TotalCompensationFilingOrg>
        <TotalCompensationRelatedOrgs>0</TotalCompensationRelatedOrgs>
        <CompReportPrior990FilingOrg>0</CompReportPrior990FilingOrg>
        <CompReportPrior990RelatedOrgs>0</CompReportPrior990RelatedOrgs>
    </Form990ScheduleJPartII>
    <Form990ScheduleJPartII>
        <NamePerson>STAN KOLBE</NamePerson>
        <BaseCompensationFilingOrg>144829</BaseCompensationFilingOrg>
        <CompBasedOnRelatedOrgs>0</CompBasedOnRelatedOrgs>
        <BonusFilingOrg>0</BonusFilingOrg>
        <BonusRelatedOrgs>0</BonusRelatedOrgs>
        <OtherCompensationFilingOrg>0</OtherCompensationFilingOrg>
        <OtherCompensationRelatedOrgs>0</OtherCompensationRelatedOrgs>
        <DeferredCompFilingOrg>15177</DeferredCompFilingOrg>
        <DeferredCompRelatedOrgs>0</DeferredCompRelatedOrgs>
        <NontaxableBenefitsFilingOrg>24324</NontaxableBenefitsFilingOrg>
        <NontaxableBenefitsRelatedOrgs>0</NontaxableBenefitsRelatedOrgs>
        <TotalCompensationFilingOrg>184330</TotalCompensationFilingOrg>
        <TotalCompensationRelatedOrgs>0</TotalCompensationRelatedOrgs>
        <CompReportPrior990FilingOrg>0</CompReportPrior990FilingOrg>
        <CompReportPrior990RelatedOrgs>0</CompReportPrior990RelatedOrgs>
    </Form990ScheduleJPartII>
    <Form990ScheduleJPartIII>
        <ReturnReference>PART I, LINE 1A</ReturnReference>
        <Explanation>SMACNA PAYS FOR ITS EXECUTIVE COMMITTEE MEMBERS AND THEIR SPOUSES TO FLY TO BOARD MEETING LOCATIONS.
</Explanation>
    </Form990ScheduleJPartIII>
</IRS990ScheduleJ>

It's not as human friendly, but computers can quickly analyze mountains of data formatted like this. If the IRS makes the bulk data reasonably accessible, lots of interesting analysis will be possible next year.

The IRS is adding this option largely because of constant pushing from public.resource.org.

“Anticipated” Section 457(f) Regulations

Section 457 of the tax code governs the taxation of nonqualified deferred compensation plans sponsored by tax-exempt employers. It divides plans into two categories:

  • “Eligible deferred compensation plans” that limit annual deferrals (no more than $18,000 in 2015) and that meet a variety of limitations similar to qualified plans are subject to 457(b); and
  • All other plans. These other plans are governed by section 457(f). Common names for these plans are SERPs, Capital Accumulation Accounts, and Retention Payment Plans.

Implications under 409A for Operational and Documentation Failures

Congress imposed a rigid tax regime on nonqualified deferred compensation plans by adopting Section 409A of the Internal Revenue Code at the end of 2004.  409A imposes various requirements, such as rules relating to time and form of payment and timing of deferral elections.  409A also imposes three penalties on participants in non-compliant plans:

  • Immediate taxation
  • 20% penalty
  • Interest from the year of deferral (at the underpayment rate plus one percent).

That’s old news, right?  Not exactly.  Although plans should be in compliance at this point, we are finding that some employers never updated their plans for 409A, are not administering their plans correctly, or both.  Fortunately, the IRS has provided limited relief on both counts.

For certain operational failures that are both inadvertent and unintentional, the IRS relief varies based on how soon after the failure the correction occurs and on the status of the participant who needs the relief.  For correcting certain unintentional document failures, reporting of the correction and limited penalties may apply.

Example

The correction procedures are too complicated to effectively summarize in a blog post, but consider the following operational failure we recently encountered to get a sense of what can be involved.

A plan had been updated for 409A, but the plan has not been administered correctly.  The plan provides for vesting at age 65, with an annual benefit of $100,000 payable for five years.  The participant is the employer’s chief executive officer.  However, the parties decide when the participant attains age 65 to defer payment to age 68.  409A does not allow for this type of flexibility.  (Payment dates can be extended under 409A, but the extension must be for at least five years and must be made in writing at least one year before the date of entitlement.)  This year, when the CEO attained age 67, the employer tried to resolve the 409A violation.

The correction procedure for an insider (i.e., the CEO) who fails to receive scheduled payments under the plan, and who corrects the mistake by the end of the second year after the error, is as follows:

  • the employer in 2012 pays the CEO $100,000 for 2010 and $100,000 for 2011;
  • gains in the plan are removed, and the employer cannot pay any interest or other payment to the CEO;
  • the employer and the CEO would need to amend their prior tax returns to include the payments and required taxes;
  • the CEO would pay a penalty amount of $20,000 [i.e., 20% of $100,000] for 2010 and $20,000 for 2011; and
  • the employer and CEO would need to file an information statement with their original, timely returns (contains list of affected employees, name of plan, description of failure and circumstances, describes steps taken to avoid recurrence, and a statement of eligibility).

The employer would then pay the remaining three annual installments in a timely manner under the terms of the plan.

So where does this leave us?  Employers with plans that have never been updated for 409A or that are not being administered correctly should take advantage of the correction procedures and start complying with 409A.  Various types of corrections can be made without penalty, but early correction is the key.

The Future of Noncompetes

Thousands of nonqualified deferred compensation plans use noncompete restrictions as substantial risks of forfeiture (SRFs) to defer taxes under 457(f). If the yet-to-be published 457(f) guidance does as expected and "disallows" noncompetes, the restrictions will still have a role to play in deferred compensation planning:

1. Continued Employer Protection.

It may surprise some, but boards really do value noncompete restrictions. In a nonqualified plan, they protect against unfair competition much more effectively than injunctive noncompetes in employment agreements. Enforcing the noncompete in a deferral plan involves doing nothing—not writing the check. Enforcing injunctive noncompetes often involves lawyers, Latin words and long-lasting litigation. We expect many employers to continue to include noncompete restrictions in their plans, just not rely on them to defer taxes.

Example:  The Deferral Plan provides an annual employer contribution of $10,000. Each year's contribution vests three years after it is made. Upon vesting, the contribution is taxable and the employer distributes enough to pay the taxes due, but retains the balance. It distributes the balance two years after the executive terminates employment, provided the executive does not compete with the employer during the two-year period.

2. Section 83.

So far, the IRS comments about the anticipated guidance indicate it will apply only to 457(f) plans, and not to Section 83 plans. Section 83 governs the taxation of property that is transferred to an employee. Like 457(f), Section 83 recognizes bona fide noncompete restrictions as SRFs that defer taxes. Therefore, it appears that noncompete restrictions will continue to defer taxation under Section 83 arrangements even after the IRS publishes the 457(f) guidance.

Example:  The employer transfers ownership of a life insurance policy to a key physician. The physician must return the policy to the employer if the physician terminates employment prior to age 62 and competes with the employer. The life insurance is property, so its transfer is governed by Section 83. Therefore, assuming the anticipated guidance is limited to 457(f), the physician will not be taxed on the value of the policy until remaining employed to age 62 or satisfying the noncompete restrictions.

If the anticipated guidance concludes noncompete restrictions are not SRFs, we fully expect that well-intentioned advisers will use phrases such as "Noncompete restrictions in deferral plans are illegal."  They will not be illegal. They could not be used to defer taxation in 457(f) arrangements, but they can be used to protect against unfair competition. Depending on the scope of the guidance, they may also continue to defer taxation under Section 83 arrangements, and possibly under some 457(f) arrangements if the IRS decides to grandfather any prior plans.

DFVC Procedures for Multiple Top-Hat Plans

A client recently discovered that they failed to file the Department of Labor (“DOL”) top-hat filings for two separate plans.  As we prepared the remedial filing under the Delinquent Filer Voluntary Compliance (“DFVC”) Program, we received conflicting information from the DOL website and staff on the required $750 late filing fee.  If you are faced with this situation, we hope to give you a leg up. The Payment Data Collection page used to file DFVC materials electronically provides under Statement 2 that “I understand that I am only submitting, and receiving relief for, the filings for the plan and the plan years that are listed above.”  As “plan” is singular, and as we could find no way to list multiple plans, we contacted the DOL.  Our concern was each filing required a separate fee, so if we could not list multiple plans, the client would have to pay multiple fees.  This treatment was the opposite of how we had understood the fee in the past.  Previously, we understood that there was only one $750 fee no matter the number of plans covered.

We talked to two different people at the DOL, in the office that handles DFVC filings, and we were told the fee was $750 per plan.  We told them we had never interpreted the rules that way, nor had we understood the DOL to have interpreted them that way in the past.

After reexamining the regulations, we contacted the DOL to make our case one last time. We explained our dilemma and cited the language in the DFVC Regulations (60 Fed. Reg. 20876 (1995) and 67 Fed. Reg. 15060 (2002)), which expressly provides that there is one penalty amount without regard to the number of plans or number of participants covered under such plans.  This time the DOL agreed that only one fee would be required.  Our contact explained how we should make such filings.

The procedure is to put all of the plan names, separated by slashes, into the "Plan Name" box on the online DVFC filing. Then, as in the past, list all plans in need of correction on the hard copy of the top-hat filing with their effective dates and number of participants, and submit it by mail.

Perhaps the DOL does not get many questions on the DFVC Program for top-hat plans, and staff members deal more often with other DFVC filing issues.  In any case, we are glad that we persisted.

Plan Adjustment/Termination Options

As employers consider changes to their key employee benefit packages, many ask whether they can change their current nonqualified deferral plans, and if not, whether they can terminate their plans and start over.  Options are available, but careful attention must be paid to 409A to avoid penalties.  The general principles are:

  • For prior accruals, payment of benefits cannot be accelerated.  Payment can be postponed if the change is made at least 12 months in advance, and if the payment is postponed at least five years.
  • For future accruals, changes must be made by December 31 preceding the first day of the plan year in which the changes are to take effect.
  • Benefit accruals can be frozen at the end of any year, and then held until payable under the normal terms of the plan.
  • Plans can be terminated and benefits distributed early if:
    • All plans in the same category (e.g., account balance) are terminated
    • No benefits are paid for 12 months
    • All benefits are paid in months 13 to 24 after the termination
    • The employer does not adopt a plan in the same category for at least three years after the termination (the employer can adopt a plan in a different category or an exempt plan (e.g., short-term deferral plan))
  • Interests of individual participants in a plan can be terminated and distributed early if the participant’s total benefits from all plans in the same category are paid out, and if the total amount distributed is less than the annual deferral limit (i.e., $16,500 in 2010).