Tax Information Center

Terminated Workers

Terminated workers:     American Recovery and Reinvestment Tax Act of 2009

Employer Obligations for COBRA Premium Subsidy

Certain laid-off workers are entitled to a 65% COBRA health insurance premium subsidy for up to 9 months. As with ordinary COBRA premiums, the employer does not pay the subsidy but the employer is responsible for administering the COBRA coverage, which is a significant challenge particularly if your company has laid off employees or has plans to do so.

Even if your company does not have to comply with federal COBRA law because it has fewer than 20 employees, it must comply with the COBRA subsidy if it is covered by a COBRA-type state law.

As you know, COBRA is a federal law that provides that former employees and their families may retain their health insurance coverage, generally for up to 18 months after losing a job. The former employee must pay the full premium, which can be very expensive.

Under the subsidy program, the federal government will help pay for the COBRA benefit of any individual who is involuntarily terminated between September 1, 2008, and December 31, 2009, and whose income in the year of the subsidy does not exceed certain limits. These individuals pay just 35% of the premium to the company as the plan sponsor. The company will be reimbursed by the federal government for the remainder of the premium by a credit against the company's payroll taxes.

If an employee was laid off after September 1, 2008, and declined COBRA coverage, the company must give that employee another chance to elect coverage.

Your company must notify all COBRA-eligible individuals of the subsidy and ordinary COBRA benefits.

Please contact us to discuss how to implement the subsidy program.

The Service will start random exams of employment tax returns in effort to get a better idea of how much misclassification of workers and other employment tax errors contribute to the tax gap. The current (20 year old) estimate is that payroll tax errors cost the Service $15 billion. Look for exams to start in 2010.
The Service will also begin surveying hundreds of 401(k) plan sponsors this year to check if compliance problems are widespread. Suspect areas include failing to abide by nondiscrimination rules and not treating loan defaults as distributions, late deposits of employee contributions and allowing hardship payouts to employees who aren't eligible. Audits may follow.

Alternative Minimum Tax

Re: Individual alternative minimum tax relief for 2008

We're delighted to take this opportunity to pass along some good tax news. Your 2008 federal income tax liability may be several thousand dollars lower because of changes to the individual alternative minimum tax ("AMT") that were enacted October 3, 2008. These changes, together with several other popular tax benefits, were included in the controversial financial bail-out legislation to win support from reluctant lawmakers.

Two of the changes will affect millions of taxpayers. The first change is an increase in the exemption amounts that are subtracted from an individual's "alternative minimum taxable income" to determine the taxable amount (if any). The exemption amounts for 2008 are $69,950 for joint filers, $46,200 for single filers, and $34,975 for married taxpayers filing separate returns.

Although the 2008 exemption amounts represent only modest increases from the 2007 tax year, they are substantially higher than the exemption amounts originally scheduled to apply in 2008: $45,000 for joint filers, $33,750 for single filers, and $22,750 for married taxpayers filing separate returns.

The second broadly applicable AMT change permits taxpayers to use all their "nonrefundable personal credits" (e.g., the dependent care credit) in full to offset both the regular tax and the AMT in 2008. Before this change, which represents a one-year extension of a rule that had expired in 2007, most of the nonrefundable personal credits could not be used to offset the AMT.

Other changes in the new law are aimed at a narrower but nevertheless substantial group of taxpayers. These are the many employees who paid AMT as a result of exercising incentive stock options ("ISOs"), then later suffered losses on selling the stock after its value had declined sharply. Although the tax incurred on exercising an ISO generates a credit that taxpayers can use to offset future tax from a profitable sale, the credit is wasted if the stock is sold at a loss. This scenario is often called the "phantom income" problem because tax is paid on gains that never materialize.

Previously, lawmakers addressed the phantom income problem indirectly by means of a rule that took effect in 2007. Technically, the rule created an "AMT refundable credit amount" based on a taxpayer's "long-term unused minimum tax credit." In essence, the intended effect of the rule as enacted was to allow taxpayers to recover some of the benefit of unused AMT credits over a five-year period. The benefit was reduced, however, by a phase-out provision tied to the taxpayer's adjusted gross income. The new law provides additional AMT relief by eliminating the phase-out provision and reducing the recovery period to two years.

Also, the new law addresses the phantom income problem directly. First, it forgives any tax, including interest and penalties, outstanding on October 3, 2008 (date of enactment), if attributable to the minimum tax adjustment for ISOs. Second, for taxpayers who have already paid any interest and penalties that would have been abated under this new rule, such interest and penalties can be used—half in 2008 and half in 2009—to increase the "AMT refundable credit amount" and the minimum tax credit.

Another AMT change may benefit energy-conscious taxpayers. Beginning in 2008, the credit for "energy efficient residential property" can be used to offset the AMT.

We hope the above information was useful to you. Please feel free to contact my office if you would like additional information on the new law or if you would like to discuss your individual tax situation in more detail.

Business Credits

Refer to provisions of incentives to business contained in American Recovery and Reinvestment Tax Act of 2009

Education and Child Tax Benefits

Refer to provisions of incentives to individuals contained in American Recovery and Reinvestment Tax Act of 2009

Energy Incentives

Refer to provisions of incentives to businesses and individuals contained in American Recovery and Reinvestment Tax Act of 2009

Investment Planning

We invite you to contact us regarding your individual situation and investment planning.

IRA, Retirement Savings Rules

We invite you to contact us regarding your individual situation.

Please note the changes made effective with the Worker, Retiree, and Employer Recovery Act of 2008:

2008 Recovery Act Provisions Affecting Individuals

Recent legislation has created a variety of tax and retirement planning opportunities for individual taxpayers. Some of these opportunities are temporary and require your attention.

In December 2008, the Worker, Retiree, and Employer Recovery Act of 2008 (2008 Recovery Act) was enacted, which modifies the Pension Protection Act of 2006 (2006 PPA) to ease burdens resulting from the current economic crisis.

The following are some of the highlights of the 2008 Recovery Act that affect individual taxpayers.

Required Minimum Distributions Suspended for 2009

The 2008 Recovery Act temporarily suspends the penalty for failure to take a required minimum distribution from a retirement plan. The suspension means that retirees and IRA owners may choose to forego all or part of their required distribution for 2009 without penalty, creating an opportunity to reduce their taxable income for that year. In addition, the suspension helps retirees and IRA owners avoid having to liquidate investments in a down market. Without the suspension, they could be forced to sell — most likely at a steep loss due to the stock market downturn — investments in their accounts in order to take the distribution, or face a 50% tax penalty on the amount that should have been distributed.

Ordinarily, account holders of individual retirement annuities and individual retirement accounts are required to begin taking distributions no later than April 1 of the year following the year they attain age 70 1/2. Except for 5% owners, participants of employer-provided tax-qualified plans generally must begin receiving distributions by April 1 of the year following the year in which they retire or reach age 70 1/2, whichever is later. Required minimum distributions usually are taken over the recipient's life expectancy but, in certain circumstances, continue after the death of the retiree or IRA owner over a 5-year period.

An individual who attains age 70 1/2 in 2009 is not required to take a distribution by April 1, 2010. However, that individual must take the required minimum distribution for 2010. The suspension extends the 5-year distribution period (if applicable). For example, the 5-year period that began after an individual's death in 2007 will end in 2013, instead of 2012.

Required distributions are not eligible for tax-free rollover. Nevertheless, an eligible rollover distribution made in 2009 that would have been a required distribution but for the 2008 Recovery Act is not subject to mandatory 20% withholding and may be rolled over within 60 days of the distribution.

The suspension applies to tax-qualified plans, §403(a) annuity contracts and §403(b) plans, §457 plans maintained by a governmental employer and individual retirement plans, including individual retirement accounts.

The suspension does not apply to required distributions for 2008.

Rollovers from Roth §401(k) Accounts to Roth IRAs

Under the 2008 Recovery Act, rollovers from a Roth §401(k) account to a Roth IRA are not subject to the Roth IRA adjusted gross income limits on contributions. Thus, individuals may make a tax-free rollover from a "designated Roth account" to a Roth IRA without regard to any income limit.

A plan sponsor may elect to add designated Roth accounts to its retirement plan, such as a §401(k) plan. If so, participants may make after-tax contributions to the plan in lieu of elective deferrals. A designated Roth account enables the participant to accumulate earnings on the contributions to the account that will be excluded from income when the participant withdraws them, provided certain requirements are met.

After the 2006 PPA, taxpayers may rollover a distribution from any "eligible retirement plan," including a tax-qualified plan, into a Roth IRA. However, until 2010, generally only taxpayers with modified adjusted gross income under $100,000 could make such a rollover. The 2008 Recovery Act eliminates the income limit, effective for distributions made after 2007.

Nonspouse Beneficiary Rollovers

Retirement plans are required to permit nonspouse beneficiaries to rollover a decedent's interest in the plan. Before the 2006 PPA, only surviving spouses could rollover a decedent's interest in a tax-qualified plan. The 2006 PPA changed this rule effective for distributions made after 2006 so that nonspouse beneficiaries could rollover a decedent's interest. However, the IRS interpreted the provision to mean that a plan could, but was not required to, offer a direct rollover of a distribution to a nonspouse beneficiary. Notice 2007-7, 2007-5 I.R.B. 395, Q&A-14.

After the 2008 Recovery Act, all plans must offer a direct rollover option to nonspouse beneficiaries beginning 2010.

Rollovers by Airline Employees

Airline workers whose defined benefit pension plan was terminated or frozen as a result of bankruptcy (filed after September 11, 2001, and prior to January 1, 2007) are allowed to rollover bankruptcy payments intended to replace lost retirement income into a Roth IRA. The provision is effective for transfers made after the date of enactment of the 2008 Recovery Act for airline payment amounts paid before, on, or after the date of enactment.

Please contact us to discuss how these opportunities may benefit you.

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