Daily Tax Update - September 8, 2009

CONGRESS RETURNS – BAUCUS CIRCULATES HEALTH CARE REFORM “FRAMEWORK”:  Congress returns today from its month-long August recess to resume tackling health care reform. The bipartisan “Gang of Six” Senate Finance Committee members will meet this week to continue working on a health care reform proposal. Senate Democrats are hopeful to have a bill on the Senate floor by the end of this month. Today, Senate Finance Chairman Max Baucus circulated a draft “framework” for health care reform, which includes several revenue offsets:

• High Cost Insurance Excise Tax – An excise tax of 35% would be levied on insurance companies and insurance administrators for any health insurance plan that is above $8,000 for singles and $21,000 for family plans. The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market. The tax would apply to the amount of the premium in excess of the threshold. The threshold would be indexed for inflation, and a transition rule would raise the threshold by 20%, l0%, and 5% for the 17 highest cost states for the first three years.
• Corporate Information Reporting – The proposal would require businesses that pay more than $600 annually to corporate providers of property and services to file an information report with each provider and with the Internal Revenue Service (IRS).
• Health Insurance Provider Fee – The proposal would impose an annual fee of $6 billion on the health insurance sector beginning in 2010. The fee would be allocated by market share. 
• President Obama is scheduled to deliver a joint address to Congress tomorrow night discussing health care reform. Speaking at a rally today, the President said, “I continue to believe that a public option...will help improve quality and bring down costs.” Today, House Majority Leader Steny Hoyer said, “While I am supportive of the public option, I think the bill, if you didn’t have a public option, has much within it that is very good.” Hoyer added, “My position has been I’m for the public option, I want to see us adopt the public option, but I think there is a lot in the bill that is very good in addition to the public option. Interpreted, that means if the public option weren’t in there, I still could support a bill because I think there’s a lot in there that’s good.”
• House Minority Leader, Rep. John Boehner, said today, “It's time for the President to hit the reset button and work with Republicans for better solutions, before more debt is piled on our children and more American jobs are destroyed.”

IRS ISSUES SAFE HARBOR NOTICE DESCRIBING TAX CONSEQUENCES OF PLAN DISTRIBUTIONS AS WELL AS ADDITIONAL GUIDANCE ON PLANS WITH AUTOMATIC CONTRIBUTIONS:  As part of its array of “Savings Initiative” guidance, the IRS has at long last updated the required 402(f) notices describing the tax consequences of distributions from qualified plans and the requirements for effective rollovers. IRS Notice 2009-68 contains two safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy § 402(f) of the Code. (Such explanations are required by law, and plans have had to draft their own updates since 2002 until now). The first safe harbor explanation applies to a distribution that is not from a designated Roth account, as described in § 402A. The second safe harbor explanation applies to a distribution from a designated Roth account. These explanations update the safe harbor explanation that was published in 2002 and purport to be updated through changes made under the Pension Protection Act of 2006. Additional “Savings Initiative” releases include guidance on the application of automatic enrollment for 401(k) and SIMPLE plans, sample amendments for arrangements with automatic enrollment, and guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit contributions for an employee’s accumulated and unused paid time off under the employer’s paid time off plan at a participant’s termination of employment. 

• For additional information, contact Anne E. Moran - amoran@steptoe.com
• The links to the additional guidance are provided below:
  • Revenue Ruling 2009-30 provides guidance on how automatic enrollment in a § 401(k) plan can work when there is an escalator feature included. An escalator feature means that the amount of an employee’s compensation that is contributed to the plan, without the employee’s affirmative election, is increased periodically according to the terms of the plan. Two situations are described, one involves a basic automatic contribution arrangement and the other involves an eligible automatic contribution arrangement described in § 414(w) of the Code. Revenue Ruling 2009-30 is part of the “Savings Initiative” guidance issued by the Service.
  • Revenue Ruling 2009-31 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit annual contributions of an employee’s unused paid time off under the employer’s paid time off plan. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a contribution (including a section 401(k) contribution) or cash out of the unused paid time off, determined as of the end of the plan year (December 31). Rev. Rul. 2009-31 is companion guidance to Rev. Rul. 2009-32 and is part of the “Savings Initiative” guidance issued by the Service.
  • Revenue Ruling 2009-32 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit contributions for an employee’s accumulated and unused paid time off under the employer’s paid time off plan at a participant’s termination of employment. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a post-severance contribution (including a section 401(k) contribution) or cash out of the accumulated and unused paid time off. Rev. Rul. 2009-32 is companion guidance to Rev. Rul. 2009-31 and is part of the "Savings Initiative" guidance issued by the Service.
  • Notice 2009-65 provides two sample amendments that sponsors of § 401(k) plans can use to add automatic enrollment features to their plans. The first sample amendment can be used to add a basic automatic contribution arrangement with, if elected by an adopting employer, an escalation feature. The second sample amendment can be used to add an eligible automatic contribution arrangement (“EACA”) as described in § 414(w) of the Code with, if elected by an adopting employer, an escalation feature. Final regulations under § 414(w) were published in the Federal Register on February 24, 2009 (74 F.R. 8200). Notice 2009-65, by providing sample amendments, facilitates the use of EACAs in § 401(k) plans. Notice 2009-65 is part of the "Savings Initiative" guidance issued by the Service.
  • Notice 2009-66 provides guidance to facilitate automatic enrollment in SIMPLE IRA plans, including questions and answers relating to the inclusion in a SIMPLE IRA plan of an automatic contribution arrangement. This notice also requests comments on whether the Department of the Treasury and the Service should issue guidance regarding SIMPLE IRA plans that include eligible automatic contribution arrangements under § 414(w).
  • Notice 2009-67 provides a sample amendment that can be used by a sponsor of a SIMPLE IRA Plan described in § 408(p) of the Code to add an automatic contribution arrangement to the plan. Only SIMPLE IRA plans that use a designated financial institution described in § 408(p)(7) can use the sample amendment. Notice 2009-67 is companion guidance to Notice 2009-66 and is part of the “Savings Initiative” guidance issued by the Service.

MISCELLANEOUS GUIDANCE RELEASED:
Revenue Ruling 2009-25 (released September 4) holds that disallowed interest under § 264(a)(4) reduces earnings and profits for the taxable year in which the interest would have been allowable as a deduction, but for its disallowance under § 264(a)(4).  It does not further reduce E&P when the death benefit is received under a life insurance contract.

Announcement 2009-67 (released September 4) corrects certain procedures described in Rev. Proc. 2009-39 for a taxpayer that has a refund or credit under review by the Joint Committee on Taxation and that wants to use the procedures of Rev. Proc. 2008-52 or Rev. Proc. 97-27 to obtain automatic or advance consent of the Commission to change a method of accounting.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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