Congress | Fraser Blog

Corporate Transparency Act ‘Unconstitutional’ says Federal District Judge

A U.S. District Court in Alabama has determined that Congress overstepped its constitutional authority in passing the Corporate Transparency Act (“CTA”) (see National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.)). The CTA requires the disclosure of the Beneficial Ownership Information (“BOI”) of millions of American corporations, limited liability companies, and other entities.

In the wake of this decision, FinCEN seems to have accepted the decision but only insofar as it affects its enforcement of the CTA against the named plaintiffs. The reporting obligations for the remaining 30 million or so entities is unchanged. Time will tell if FinCEN will appeal the decision and/or how it will deal with the seemingly inevitable series of similar cases that will start filling up courts across the country.

At present, we encourage businesses and other entities to continuing collecting the information necessary to complete their BOI report. Especially, as we approach the earliest deadline for filing a BOI report at the end of this month (for entities that were created on January 1, 2024, the 90-day filing deadline would be March 31, 2024). As always, businesses and business owners should consult with knowledgeable counsel prior to taking (or not taking) any action that carries the threat of criminal penalties, such as the CTA’s $10,000 fine and up to two years in jail.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. You can reach him at 517.377.0848 or at bburgee@fraserlawfirm.com.

Tax Changes Incoming for Research and Experimental Expenditures

Update (12/23/22): In the omnibus spending bill passed by Congress, no changes to the Section 174 rules requiring capitalization and amortization of research and experimentation expenses were included in the final bill of 2022. So, required capitalization will be fully applicable to the 2022 tax year.

For tax years beginning in 2022, research and experimental (R&E) expenditures are no longer immediately expensed but rather must be amortized over five years (15 years for foreign expenditures).

To illustrate, if a business spent $1,000 on domestic research activities in 2021, it could deduct the full $1,000 on its 2021 tax return. But, starting in 2022, $1,000 spent on research will be deducted incrementally over a five-year period; approximately $200. The reduction of currently allowable deductions ($800 in our example) could lead to a possible unexpected increase in taxable income, especially in the first few years that these rules apply.

How did we get here? This change to the tax treatment of R&E expenditures was included as a revenue raiser for the federal government to help pay for other tax breaks in the Tax Cuts and Jobs Act passed at the end of 2017.

Congress sometimes uses a special legislative process called “reconciliation” to quickly advance high-priority tax, spending, and debt limit legislation. This was the case with the Tax Cuts and Jobs Act passed at the end of 2017. This special legislative process of “reconciliation” comes with its own set of operating rules, one such rule being that the final legislative package must either increase or decrease revenue by a specified amount over a specified time.

So, for example, in 2017, to enact large tax cuts, the fiscal year 2018 budget resolution included instructions to the House and Senate tax-writing committees directing them to report legislation increasing the deficit by not more than $1.5 trillion over ten years. In other words, to pay for tax provisions that decreased federal revenues, there had to be tax provisions that off-set these decreases to achieve the targeted result; hence, the changes to the tax treatment of R&E expenditures.

The conventional wisdom back at the end of 2017 and the beginning of 2018, was that because the tax changes to R&E expenditures was not set to take place for 5 years in the future, Congress would act in the intervening years (we have seen this many times before, most notably with the Estate and Gift Tax Exclusion due to sunset at the end of 2025). Thus, far, Congress has not (but not without lack of trying).

There have been discussions in Congress to postpone the TJCA changes to R&E expenditures or repeal them entirely and restore the rules allowing immediate expensing of R&E expenditures. Unfortunately, these discussions seem to have stalled so far. Without any legislative relief, guidance from the IRS on implementation of the mandatory amortization post-2021 changes isneeded. To be perfectly blunt, this guidance is needed immediately for the 2022 tax year, especially for corporations that must prepare financial statements. The post-2021 tax treatment of R&E expenditures is inconsistent with financial accounting principles that requires most research and development costs to be expensed immediately.

To learn more about how the changes to R&E expenses could affect your business and for updates on the status of attempts to change the law, please contact us.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Congress Provides Welcome Relief for FSAs Amidst Continuing Pandemic

The COVID-19 pandemic continues to wreak havoc, affecting lives not only on a personal level, but on a professional one. Employers at a minimum must be well versed in various new employment and labor issues as well as employee benefit matters which greatly affect their workforce.

Due to closure of schools and day cares throughout 2020, many dependent care flexible spending accounts (FSAs) remain overfunded, leaving numerous employees with the threat of forfeited account balances. Similarly, due to delay and cancellation of certain medical procedures, health FSA amounts were also unused. While the IRS relaxed Code section 125 change in election rules in May of 2020, many employees simply did not have enough claims to use up the funds in their FSA accounts, resulting in forfeiture risks.

However, Congress passed the Consolidated Appropriations Act, 2021 (“Act”) late December 2020, which further relaxes the otherwise strict election changes rules of Code section 125, allows carryovers of account balances, extends grace periods, and increases the dependent age for dependent care FSA qualifying expenses.

Background

Once an election is made under a Section 125 cafeteria plan, that election is irrevocable for the entire plan year, unless (1) one of the mid-year qualifying change in election events occurs as set forth in Treas. Reg. 1.125-4; and (2) the employer’s cafeteria plan incorporates the mid-year change rule.

However, in May 2020, the IRS released IRS Notice 2020-29 which relaxed the Code section 125 rule requiring qualifying change in status events in order to make a mid-year change in election. With respect to FSAs, employers wanting to implement such changes could amend their plan documents in order to allow employees to revoke an election, make a new election, or decrease or increase an existing election applicable to a health or dependent care FSA on a prospective basis. These changes apply regardless of whether the basis for the election change meets the Treas. Reg. 1.125-4 requirements. Please note the term prospective. Employees could not retroactively change their elections.

This was a voluntary change and was only for the 2020 plan year.

Additionally, Notice 2020-29 provided flexibility and allowed employees to “spend down” their FSAs through December 31, 2020. As calendar year plans already allowed expenses to be incurred through December 31, 2020, this Notice did not provide relief in those circumstances. It instead applied to plans with grace periods that ended in 2020 or whose plan year ended in 2020. Upon amendment, participants in those plans could continue to incur eligible expenses through December 31, 2020 and submit requests for reimbursement consistent with plan terms.

This relief ended on December 31, 2020, and, aside from any already applicable grace periods, no relief was provided for employees who had unused FSA amounts after that date, which are subject to forfeiture.

Consolidated Appropriations Act, 2021

Relief is found in the newly passed Consolidated Appropriations Act, 2021.

This Act, in part, loosens certain rules associated with both health and dependent care FSAs. Specifically, upon amendment to appropriate plan documents, the Act allows for the following:

Carryover to the 2021 Plan Year: This provision allows any unused benefits or contributions in FSAs from plan years ending in 2020 to be carried over to the plan year ending in 2021;
- The Act states the carryover must follow rules similar to the health FSA rules… however, while health FSA carryovers are subject to a $550 cap, the Act specifically states that any unused benefits or contributions may be carried over.
- Significantly, dependent care FSAs were not previously allowed to have a carryover provision.
Carryover to the 2022 Plan Year: This provision allows any unused benefits or contributions in FSAs from plan years ending in 2021 to be carried over to the plan year ending in 2022;
- Again, the Act states the carryover must follow rules similar to the health FSA rules…
- This provision is important especially in situations involving the dependent care FSAs. These FSAs have a maximum reimbursement of $5,000 per calendar year. If an employee is allowed to carry over unused contributions into 2021 from 2020, but had also elected a full $5,000 for plan year 2021, s/he would have an overfunded account. This can be handled in one of two ways: (1) this additional carryover provision from 2021 to 2022, and/or (2) prospective election changes for FSAs for plan years ending in 2021 without regard to the strict status change rules (see last bullet below). With regard to the latter, employees can change their dependent care election for 2021 to prevent future contributions from being made.
Grace Periods: For health or dependent care FSAs that have a grace period for plan years ending in 2020 or 2021, the grace period may be extended from the traditional two months and 15 days to a full 12 months after the end of such plan year in order for unused benefits or contributions to be utilized.
Post-Termination Health FSA Reimbursements: Health FSAs are now allowed to continue to reimburse former participants for claims incurred post-termination similar to dependent care FSAs, namely:
- Employees who ceased participation in the plan during calendar years 2020 or 2021 may continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which participation ceased.
Dependent Care FSA Age Out Rule: In order for eligible employees to receive reimbursement for dependent care assistance, their dependent must be under the age of 13 when the expenses were incurred. However, for employees who were enrolled in the dependent care FSA (as long as the regular enrollment period was on or before January 31, 2020), age 14 is substituted for age 13 for the last plan year, and, if the employee had an unused balance in the FSA for such plan year, age 14 is also substituted for the subsequent plan year with respect to those unused amounts.
Change in Election: Similar to the IRS Notice 2020-29, but for plan years ending in 2021, health and dependent care FSAs may allow employees to make mid-year election changes prospectively without regard to change in status rules.

To allow any of the above provisions, the cafeteria plan or arrangement including the FSAs must be amended to allow for such provisions no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective (so generally by December 31, 2022). The amendment may be retroactive as long as the plan is operated consistently with the terms of the amendment beginning its effective date.

Employer Action

Plan sponsors must determine whether they wish to proceed with any of the above provisions, largely in part depending on whether plan year 2020 would otherwise result in unprecedented forfeitures due to the pandemic. If so, they must communicate such provisions with their workforce and must administer the cafeteria plan or arrangement accordingly as of the amendment’s effective date, even if the amendment is adopted at a later date.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Congress Passes SECURE Act

Yesterday (December 19, 2019), Congress finally passed the Setting Every Community Up for Retirement Enhancement Act (i.e., the “SECURE Act”), and President Trump is expected to sign it. The SECURE Act was previously passed by the U.S. House of Representatives in May on a 417-3 vote, but got held up in the Senate for political reasons, even though it enjoyed virtually unanimous support there as well.

The version of the Act that was eventually passed includes only minor changes from the version that the House passed in the Spring. This legislation is the most significant change to the laws governing retirement plans since the Pension Protection Act of 2006. Among the significant changes made by the SECURE Act are:

Relaxation of the rules governing eligibility to participate in a multiple employer retirement plan, which will make it easier for unrelated employers to participate in the same plan (also known as “Open MEPs”).
Increase in the age for required minimum distributions (“RMDs”) from 70½ to 72.
Required retirement plan eligibility, at least for elective deferral purposes, for long-term part-time employees who work at least 500 hours during each of three consecutive years. The Act does contain nondiscrimination testing relief with respect to these individuals.
Relaxation of certain timing and notice rules relating to safe harbor 401(k) plans.
Penalty-free distributions from qualified retirement plans for births and adoptions.

These changes, and others included in the SECURE Act, will have a major impact on both plan sponsors and participants, and will eventually require plan amendments. These changes will also have a significant impact on existing and future estate plans that involve retirement plan assets. Most of the changes are effective January 1, 2020, and thus will require almost immediate changes to plan administration.

If you have any questions about the upcoming changes made by the SECURE Act, please contact Brian Gallagher at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Fraser Trebilcock Attorney Visits Lawmakers in Washington, Addresses Pending Legislation Including Health Care Reform

Fraser Trebilcock Health Care Law Department Chair Jonathan Raven spent two days in Washington, DC this week to advocate for adequate federal funding and appropriate regulatory burden so that urban and rural hospitals, physicians, nurses and their colleagues can continue to provide badly needed medical care and public health services to underserved populations in our home communities.

Mr. Raven is a volunteer member of the American Hospital Association Committee on Governance, which meets throughout the year across the country and allows hospital trustees to assist in development of Capitol Hill advocacy priorities for our nation’s hospitals. Mr. Raven is also a Board Member Emeritus

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Employers Be Wary of Upcoming Health Plan Fees

Through the passage of the Patient Protection and Affordable Care Act (“Act”), the Patient-Centered Outcomes Research Institute (“Institute”) was created to promote research to advance the quality of evidence-based medicine. The Institute is funded through the Patient-Centered Outcomes Research Trust Fund, which is financed, in part, by fees paid by plan sponsors of applicable self-insured health plans and issuers of specified health insurance policies. For the first year of applicability, the fee is $1 per covered life and increases for later years.

The first deadline for payment of the Patient-Centered Outcomes Research Institute (PCORI) fee is this July 31, 2013.

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Obama and Death Taxes

President Obama spoke about the future of federal estates tax during his recent bus tour through the Midwest. A family farmer expressed her concern about the pending return of the 2001 federal estate tax exemption in 2013. If Congress and the President fail to act, the federal estate tax exemption per person will drop to $1,000,000, commencing January 1, 2013. The exemption is currently $5,000,000 per person.

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Seeking Consensus Through Controversy

Why do we always have to wait for the last hour before something gets done in Washington? No, I take that back, Congress exceeds the deadline by which to decide on important issues so they or The White House pass extensions on laws, such the Transportation Equity Act or the No Child Left Behind Act or even the budget so they by time before a decision has to be made. The stalemate on what to do about the debt ceiling is no exception and just the status quo. While the Democrats and Republicans have been talking there seems to be an impasse, where no one is agreeing with anybody, even on the most basic of issues. It seems that Washington, needs the support and guidance of a neutral third party to resolve these disputes and bring some closure to a number of long standing issues, most importantly today, the debt ceiling.

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Cutting through the clutter

This week marked the official kickoff of the 2012 Presidential Election. From now until August 2012, we will be bombarded with candidates announcing their candidacy, being critical of each others policies and otherwise complicating the issues that are now before Congress.

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