October 1996
Volume 60 |
Number 10
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| Retirement Plan
Laws Change With 1996 Tax Act |
David W. Rowan, Esq.
Gregory J. Viviani, Esq.
Squire, Sanders & Dempsey
Retirement plans must meet certain "nondiscrimination"
rules under the Internal Revenue Code (IRC) to be "tax-qualified."
In general, the nondiscrimination rules require that a plan cover
both "highly compensated" and nonhighly compensated
employees and provide comparable benefits to each category of
employees.
The Small Business Job Protection Act of 1996 (the "1996
Tax Act") modifies a variety of the nondiscrimination rules
for tax-qualified retirement plans. Discussed below are several
changes to the law that may be of particular importance to physicians
and physician groups.
Modifications to "Leased Employee" Rules
The IRC coverage and nondiscrimination requirements for tax-qualified
retirement plans are generally based on an examination of all
employees of the employer and certain affiliates. In addition,
an employer must take into consideration any "leased employees."
If an employer has leased employees, its retirement plan might
not be able to satisfy the IRC coverage and nondiscrimination
rules.
Under current law, a worker is considered a leased employee if:
1) the worker performs services for the recipient on a substantially
full-time basis for a period of at least one year; and
2) the services are of a type that historically were performed
in the business field of the recipient by employees.
The 1996 Tax Act removes the "historically performed"
test from law. In its place, the law requires that the worker
be "under the primary direction and control of the recipient."
This change in the leased employee rules is effective for years
beginning after December 31, 1996. However, the change in law
does not apply to any relationship determined not to be
a leased employee situation under an Internal Revenue Service
ruling issued before the 1996 Tax Act was enacted.
The change to a "primary direction and control" test
may be important to anesthesiologists who regularly work with
hospital employees, including nurse anesthetists, whether or not
they are employed by the hospital. In contrast to the "historically
performed" test, it could require that some nurse anesthetists
and hospital employees be treated as "leased employees"
for purposes of the retirement plan nondiscrimination rules.
The House Committee Report for the 1996 Tax Act states that the
intent of the change in the law is to narrow the focus of the
leased employee rules in order to target abusive situations. It
is unclear how this change will be applied to hospital-based physicians,
including anesthesiologists who work with nurse anesthetists and
other hospital employees. As ASA's legal counsel, Squire, Sanders
& Dempsey will continue to monitor developments in this area.
Coverage Requirements Eased
To be tax-qualified, an employer's plan currently must cover
either 1) at least 40 percent of all employees who have met the
eligibility requirements for the plan or 2) 50 employees. For
sole practitioners and small groups of physicians, this requirement
can be difficult to meet, especially if there are affiliated employers
and leased employees who must be considered.
The 1996 Tax Act provides that the 40-percent or 50-employee
coverage requirement only applies to defined benefit pension plans.
Thus, it will no longer apply to profit-sharing plans (including
401(k) plans), money purchase plans and stock bonus plans (e.g.,
ESOPs). This change in the law is effective for years beginning
after December 31, 1996.
Highly Compensated Employee Categories
For tax-qualified retirement plan nondiscrimination testing,
employees must be classified as either "highly compensated
employees" (HCEs) or "nonhighly compensated employees."
Under current law, an employee must be classified as an HCE for
a plan year if, in the current or preceding plan
year, the employee 1) is a 5-percent owner of the business; 2)
earns $100,000; 3) earns $66,000 and is in the top 20 percent
of all employees ranked by compensation; or 4) is an "officer"
who earns more than $60,000.
The 1996 Tax Act simplifies the definition of an HCE for years
beginning after December 31, 1996. Under the new law, an employee
will be considered an HCE for a plan year if the employee either
1) is a 5-percent owner of the business in the current
or preceding plan year or 2) earned $80,000 or more in
the preceding plan year. In addition, the employer may
elect to limit application of the $80,000 rule to those employees
who were in the top 20 percent of all employees ranked by compensation
in the preceding year. The $80,000 figure is to be indexed for
inflation.
Since hospital-employed nurse anesthetists often earn more than
$80,000 per year, this new provision may serve to render the "leased
employee" issue moot in many cases.
Repeal of Family Aggregation Rules
Under current law, an employee, spouse and certain family members
must be treated as a single employee (i.e., aggregated) for most
IRC nondiscrimination tests. This can often make the nondiscrimination
tests difficult to meet, even in nonabusive situations. In addition,
a retirement plan can only count $150,000 of compensation for
an employee, spouse and dependent children under age 19.
The 1996 Tax Act repeals the family aggregation rules. Thus,
some plans may find it easier to pass certain nondiscrimination
tests. Further, the compensation of each family member can now
be counted up to the $150,000 maximum. This change in the law
is effective for years beginning after December 31, 1996.
The 1996 Tax Act has a number of other changes that affect the
tax-qualification requirements for retirement plans, many with
extended effective dates.
David W. Rowan, Esq., is a Partner at Squire,
Sanders & Dempsey, Cleveland, Ohio.
Gregory J. Viviani, Esq., is a Partner
at Squire, Sanders & Dempsey, Cleveland, Ohio.
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