New ERISA Service Provider Disclosure Requirements

On February 3, 2012, the U.S. Department of Labor issued the long-awaited final service provider fee disclosure regulation under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA). The regulation requires certain service providers to make written disclosure of their services and fee arrangements to a responsible plan fiduciary. A responsible plan fiduciary is defined as a fiduciary with authority to cause the plan to enter into, or extend or renew, the contract or arrangement, and typically includes the plan sponsor, officer, trustee or custodian. The disclosure must be made reasonably in advance of entering into, extending, or renewing a contract or service arrangement with that provider. The rule does not require a particular format for the required disclosures, which may be contained in a single document or in multiple documents.

Background
ERISA requires plan fiduciaries, when selecting and monitoring service providers and plan investments, to act prudently and solely in the interest of the plan's participants and beneficiaries. Responsible plan fiduciaries also must ensure that arrangements with their service providers are "reasonable" and that only "reasonable" compensation is paid for services. According to the Department of Labor, reasonable compensation does not mean that a plan fiduciary needs to select the cheapest provider. An unreasonable arrangement could lead to a prohibited transaction. By requiring covered service providers to disclose their fee arrangements, plan fiduciaries will have a means to compare service providers on an even playing field with all of the services and fees they provide being disclosed and all parties involved identified. The disclosures will also provide plan fiduciaries with knowledge of any potential conflicts of interest.

When is the new Service Provider Disclosure rule effective?
The rule goes into effect on July 1, 2012. This means that covered service providers must provide the required disclosures to the plan fiduciary for any arrangements with a covered plan that will be renewed, extended or entered into as of July 1, 2012.

What does this mean for Plan Fiduciaries?
Plan fiduciaries must be diligent to secure the proper disclosures from covered service providers to the plan and should implement a process to ensure:

·         The sufficiency and accuracy of the information received from the service provider pursuant to the final regulation;

·         Timely receipt of all information, including any changes to previously provided information;

·         Timely requests to service providers for required information, especially with respect to any indirect compensation;

·         A format and disclosure language that is understandable to the plan participant population involved;

·         Appropriate notice and action if the information is not timely provided or is deficient;

·         Appropriate indemnifications with respect to timely compliance; and

·         Appropriate documentation of the receipt of the information, the fiduciaries’ consideration of it, and any actions taken.

Who is a “Covered Service Provider”?
The final regulation defines a covered service provider as “a service provider that enters into a contract or arrangement with the covered plan and reasonably expects $1,000 or more in compensation, direct or indirect, to be received in connection with providing” certain specified services, including fiduciary or registered investment advisor services, and recordkeeping or brokerage services. It also applies to other services for which the covered service provider expects to receive indirect compensation; these other services include accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services. Indirect compensation is compensation received from a source other than the plan sponsor or the plan itself.

What is a “Covered Plan” for purposes of the service provider disclosure rule?
This regulation applies to ERISA-covered defined benefit and defined contributions pension plans, including 403(b) annuity contracts and custodial accounts subject to ERISA. It does not apply to simplified employee pension plans (SEPs), SIMPLE retirement accounts, employee welfare benefit plans, and IRAs. Also exempt are annuity contracts and custodial accounts in 403(b) plans that were issued to employees before January 1, 2009, where no additional contributions have been made, and the contract is fully vested and enforceable by the employee.

What information needs to be disclosed?
Covered service providers are required to disclose (before the parties enter into an agreement for services):

·         All services to be provided under the agreement

·         The compensation or fees to be received for each service

·         The manner of receipt of compensation or fees

·         Information about conflicts of interest

What happens if the Plan Fiduciary (Plan Administrator) does not receive the required disclosures by July 1, 2012?
The disclosure burden is on the service provider. However, if the information is not disclosed by July 1, 2012, then the contract or arrangement between the plan and the service provider will not be deemed reasonable under ERISA, and the plan will have engaged in a prohibited transaction, not only subject to excise taxes but required to be disclosed in both a supplemental schedule to the 2012 Form 5500 filing and the Plan’s 2012 audited financial statements, if the Plan is subject to audit. If this occurs, the plan fiduciary should first make a written request to the covered service provider for the missing information. If that proves unsuccessful, the plan fiduciary should contact the Department of Labor’s Employee Benefits Security Administration (EBSA).

Conclusion
Due to the complexity of the service provider disclosure rules, and the additional reporting requirements for prohibited transactions, we suggest that you contact ERISA counsel to ensure you receive the proper disclosures in a timely manner.

For more information, please contact Judy Fryer at (800) 477-7458.

© 2012 EisnerAmper LLP

Legislative Alert - Update on IRS Form 1099 and Other Payment Returns

Background

An information return is a tax document businesses are required to file to report certain business transactions to the Internal Revenue Service (IRS). The requirement to file Information Returns is mandated by the Internal Revenue Service and associated regulations.

Any person, including a corporation, partnership, individual, estate, and trust, who engages in reportable transactions during the calendar year must file information returns to report those transactions to the IRS. Persons required to file Information Returns to the IRS generally must also furnish statements to the recipients of the income. Filers of 250 or more such returns must file these returns electronically with IRS.

Key Developments & Observations

• Earlier in 2011, previously expanded Form 1099 rules – that were originally passed as a component of the Patient Protection and Affordable Care Act of 2010 – were repealed. If the rules had not been repealed, effective for payments made after December 31, 2011, the general requirement for information reporting by all persons engaged in a trade or business who make payments in any tax year aggregating $600 or more to a single payee would be expanded to include payments made to a corporation (but not payments to a tax exempt corporation). Additionally, the class of payments for which reporting is required would be expanded to include all amounts paid in consideration for property, and other gross proceeds for both property and services.
• Starting January 1, 2011, brokers required to file Form 1099-B regarding a covered security must also report the customer’s adjusted basis in the security and whether any gain or loss with respect to the security is long term or short term.

• An entity should use Form W-9 to request the taxpayer identification number of a U.S. person (including a resident alien) who will receive an information return.

• An entity should use the appropriate Form W-8 for foreign persons who will receive an information return.

For more information or to ask questions about this legislative alert, contact one of our tax and accounting advisors at 800-488-7458, or visit our website to learn more.
© 2011 EisnerAmper LLP

This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

New Legislative Alert - Deducting Bonuses

Background
Internal Revenue Code (IRC) S. 461 governs the timing of deduction for certain expenses incurred by accrual method taxpayers. A common expense for which many companies provide an accrual is incentive compensation. The IRS released Revenue Ruling 2011-29 on November 9, 2011, providing guidance on how a plan should be structured in order to permit a deduction in the year the services are provided.

S. 461 and its associated regulations require the following tests be considered in order to determine the timing of a deduction:

• All events must have occurred to establish the fact of the liability,

• The amount of the liability must be able to be determined with reasonable accuracy

• Economic performance must occur for the liability.

The economic performance rule as it relates to deductions for bonus payments, as defined in IRC S. 404, is straightforward. Regulations S.1.404(b)-1T prescribes that economic performance is deemed to occur in the current taxable year as long as payment is made by the 15th day of the 3rd month following such taxable year.

The New Ruling
The first test, in which all events must have occurred to establish the fact of the liability, is the focus of Rev. Rul. 2011-29. This has been a topic scrutinized in various court cases and previous Internal Revenue Service (IRS) rulings. The Washington Post Co. v. United States case allowed deduction of a bonus accrual even when the employer provided a general bonus accrual at the end of the year but did not specifically identify the bonus recipient and the amount payable to that particular recipient prior to the end of the taxable year. IRS Rev. Rul. 76-345 stated that the IRS would not follow the holding in that case. This suggested that individual recipients and the amounts payable to such recipient do need to be specifically identified prior to the end of the year in order for the all events test to be met. Rev. Rul. 2011-29 revokes Rev. Rul. 76-345.

The new ruling states that the following facts are now acceptable evidence to prove the all events test has been met in determining the timing of the deduction:

• The taxpayer’s liability to pay a minimum amount of bonuses to a group of eligible employees is fixed as the end of the year in which the services are rendered,

• The taxpayer is obligated under the program to pay the group the minimum amount of bonuses determined by the end of the taxable year, and

• Any bonus allocable to an employee who is not employed on the date on which bonuses are paid is reallocated to other eligible employees.

In order to satisfy the above conditions, the incentive compensation plan should specifically identify which employees are eligible to participate. The plan requirements should be communicated to eligible employees prior to the end of the taxable year. Lastly, the exact amount of the bonuses payable should be determinable through a formula in effect prior to the end of the taxable year. It is advisable that the plan be formally documented. If all the conditions noted further above are met, all events which fix the liability should be deemed to have occurred and the accrual should be determined with reasonable certainty. Provided the economic performance rule is also met, the tax deduction should be permitted in the year the services are provided.

Observation: Changes in a taxpayer’s treatment of bonuses to conform to this ruling constitute a change in accounting method under Revenue Procedure 2011-14. This procedure allows for an automatic accounting method change. An automatic change is permitted to be submitted with the taxpayer’s timely filed tax return, including extensions, and no user fee is required.

Limitation
A distinction should be noted with respect to bonuses paid to related parties. The related party rules under IRC S. 267 require the matching of income and deductions arising from transactions between related parties. Related parties include individuals owning more than 50% in value of the outstanding stock of the company. The law requires that even if all events have occurred to fix the liability and the economic performance rules are met, the deduction may not be claimed until the year in which the related party recognizes the income. Thus, in the instance of a bonus payment to a greater than 50% shareholder, the amounts will not be deductible by the company until the period in which the income is recognized by the shareholder.

Legislative Alert: Details on Form PF

On October 26, 2011 the Securities and Exchange Commission (the “SEC”) voted and approved a new rule requiring investment advisors to report information about their private funds to the SEC. The rule, which implements Sections 404 and 406 of the Dodd-Frank Act, requires SEC-registered investment advisors with at least $150 million in private fund assets under management to periodically file a new reporting form (Form PF).

Under the rule, private fund advisors are divided by size into two broad groups, large fund advisors and smaller fund advisors. Large private fund advisors are i) those with at least $1.5 billion in assets under management attributable to hedge funds; ii) liquidity fund advisors with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds; and iii) advisors with at least $2 billion in assets under management attributable to private equity funds. All other registered private fund advisors are considered smaller fund advisors.

The advisors group classification will determine the information and the frequency of reporting required of the advisor.

Large fund advisors will provide more information than smaller fund advisors, and the frequency of reporting depends on the type of fund the advisor manages. Large hedge fund advisors must file Form PF within 60 days of the end of each fiscal quarter. Large liquidity fund advisors must file Form PF within 15 days of the end of each fiscal quarter. Large private equity fund advisors must file Form PF annually within 120 days of the end of the fiscal year.

Smaller private fund advisors must file Form PF annually with 120 days of the end of the fiscal year.
Compliance with the Form PF filing requirements will have a two-stage phase-in period. The initial Form PF for private fund advisors with at least $5 billion in assets under management must be filed 60 days after the first fiscal quarter (or fiscal year) ending June 15, 2012. Large hedge fund advisors who have assets under management greater than $1.5 billion but less than $5 billion will be required to file their initial Form PF 60 days after 2012. Smaller hedge fund advisers and private equity advisors will be required to file their initial Form PF 120 days after the end of 2012.

Under the current proposal, Form PF requires smaller fund advisors to report only basic information regarding the private funds they advise. Smaller fund advisors are required to provide information regarding size, leverage, investor types and concentration, liquidity, fund performance, fund strategy, counter party credit risk, and use of trading and clearing mechanisms.

Large hedge fund advisors must report the basic information as required for smaller fund advisors and on an aggregate basis provide information regarding exposure by asset class, geographical concentration, and turnover by asset class. In addition, large hedge fund advisors who manage funds with at least $500 million in net asset value must provide certain information relating the individual fund’s exposures, leverage, risk profile, and liquidity.

Large private equity fund advisors must provide information regarding leverage used by their funds’ portfolio companies, use of bridge financing, and their funds’ investments in financial institutions.

Based on the proposed reporting requirement, fund advisors should contact their attorneys, auditors, prime brokers and administrators to discuss the information that these service providers have available to complete Form PF. For example, the information disclosed in the funds financial statements and tax returns can be used to meet the requirements of Form PF.

For more information, please contact Saltmarsh, Cleaveland & Gund at (850) 435-8300.

© 2011 EisnerAmper LLP