The original defendants defaulted on a $60 million secured loan. To pay as much of the debt to the bank as possible, they assigned their assets to a bank affiliate that auctioned off the assets. Thomas & Betts won that auction, and the assets were transferred under a contract as “free and clear of all liabilities,” particularly noting that Thomas & Betts would not assume any FLSA liabilities.

However, the district court disregarded the contract provision, and found that Thomas & Betts was responsible for a final judgment of around $500,000 in damages, attorney’s fees and costs, under a settlement agreement that was conditional on the outcome of Thomas & Betts’ appeal to the 7th Circuit.

Thus, the 7th Circuit needed to decide whether Thomas & Betts was liable under successor liability for whatever damages were owed the plaintiffs as a result of Packard’s violations. When liability is based on a violation of a federal statute relating to labor relations or employment, federal law requires a more employee-favorable standard. In particular, a disclaimer of successor liability is not a defense.

To continue reading about the 7th Circuit’s opinion, click here. For more information, go to Fair Labor Standards for Private Employers.

Photo: L.A. Times, Michael Reynolds

Employees who want to help victims of Hurricane Sandy through leave donation may do so without being taxed on the monetary value of the vacation days, sick days and personal leave they donate, the IRS announced Nov. 6.

In a leave donation program, employees forgo vacation, sick or personal leave and return it to their employer. In exchange, the employer converts the leave donations into monetary contributions that it then gives to charitable organizations’ relief funds that provide assistance to those in need.

Ordinarily, significant tax restrictions apply to such employer-sponsored programs. But at times of especially severe hardship —past examples include the Sept. 11, 2001 terrorist attacks and in the aftermath of Hurricane Katrina — the IRS has made exceptions to these limitations and increased the tax advantages for those participating in and operating a leave donation program.

An IRS press release stated, “Under these programs, employees may donate their vacation, sick or personal leave in exchange for employer cash payments made to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy.” Employers must make the cash payments to the charities before Jan. 1, 2014 in order for the relief to apply.

Details of the relief are in IRS Notice 2012-69. More information about other relief actions the IRS has taken in the wake of Hurricane Sandy is available on the IRS website.

Although “improper bonus” cases are not common, they still involve serious penalties. For example, in Solis v. Kinder Morgan Energy Partners LP, et. al., No. 4:11-cv-00454 (S.D. Tex. Feb. 4, 2011), the U.S. Department of Labor settled overtime claims with a company for $830,000, after the company failed to pay proper overtime on bonus payments issued to nearly 4,500 employees. Other companies, such as Office Depot and The Wellpoint Companies, recently have been sued for alleged improper overtime calculations as a result of failing to account for bonuses.

Step One: Calculate the Regular Rate of Pay

The Fair Labor Standards Act requires employers to pay nonexempt employees one and one-half times their regular rate for each hour worked over 40 in a workweek. To ensure proper overtime payments, an employer must be sure it has properly calculated employees’ regular pay rates.

This calculation is two-pronged. First, the employer needs to determine which payments need to be included in the regular rate. Second, the employer must average the total payments over the employee’s work hours, to determine the employee’s hourly wage.

However, the FLSA excludes eight types of payments from the regular rate, and one of those payments is the discretionary bonus. Thus, employers need to know the difference between discretionary and nondiscretionary bonuses before calculating any overtime.

Discretionary bonuses are when the employer has discretion both on whether the payment is actually awarded and on the amount of the payment until a time close to the end of the period for which the bonus is paid. Nondiscretionary bonuses, on the other hand, typically are those agreed to, promised or contracted.

Thus, for FLSA purposes, only nondiscretionary bonuses affect the overtime calculation.

Step Two: Calculate the Overtime Rate of Pay (and Include the Nondiscretionary Bonus)

To calculate the overtime due for a week covered by a nondiscretionary bonus, the employer must first calculate the average rate of pay for the week, given the impact of the bonus. To do this, the employer must:

1. add the nondiscretionary bonus paid (or the value of the nondiscretionary bonus given) to the total pay for the week; and then
2. divide that sum by the total number of hours worked.

The resulting pay rate is then halved and multiplied by the number of hours worked over 40 to calculate the overtime compensation that is due.

For the full story, with examples of such overtime calculations, click here.

The reimbursement rates, commonly called per diems, determine the amount a federal employee can be reimbursed for expenses incurred while traveling on government business. Private-sector employers commonly use the rates too, because:

1. doing so simplifies tax returns;
2. the rates are set for hundreds of locations and account for variations in price between locations;
3. the rates above the reimbursement threshold are taxed; and
4. the rates constitute a safe harbor of sorts — government and private-sector clients are unlikely to challenge the per diem rates (even if they question the necessity of the travel itself) when such costs are passed on to customers.

An Aug. 22 GSA press release said the action was intended to help federal agencies save an estimated $20 million in avoided costs in FY 2013, in line with President Obama’s campaign to cut waste. GSA announced the freeze in Per Diem Bulletin FTR 13-01. GSA’s Office of Governmentwide Policy sets the per diem travel reimbursement rates, adjusted for inflation, each fiscal year. This year is the first in a decade that GSA has frozen travel reimbursement rates.

“While we considered a number of proposals to drive savings through the GSA per diem lodging rates, we needed more time to undertake a comprehensive review of the methodology used to determine those rates,” the GSA release stated.

Standard per diems, which apply to all locations within the continental United States that are not specifically listed as “non-standard areas,” remain unchanged at $77 per day for lodging and $46 daily for M&IE. Currently about 400 areas are considered NSAs. GSA added 10 more NSAs for FY 2013, all of which are listed in FTR 13-01. The per diem rates for all 400 NSAs in the continental United States are listed on the GSA’s website and can be downloaded as an Excel spreadsheet file.

For additional information about fringe benefits, see Thompson’s employee benefits library, including the Employer’s Guide to Fringe Benefit Rules.

Retroactive Application ‘Should Not Be Imposed’

The associations — the National Business Aviation Association and the National Air Transportation Association — met with IRS officials June 19 and “reiterated their concerns about the implications that the [March 9, 2012] Chief Counsel Advice memorandum could have on the industry, particularly with many small and mid-sized businesses that are aircraft management companies,” said NBAA spokesman Dan Hubbard. “We reiterated our opposition to the CCA memorandum” and presented the IRS with an 18-page document setting out their concerns, with top billing given to the issue of whether IRS would apply the tax retroactively. “Management companies would have to attempt to collect tax from former clients who may no longer own aircraft or even exist,” the paper argues.

The paper notes that federal excise tax under Code Section 4261(a) is imposed on the “amount paid for taxable transportation of any person.” In many cases, “passenger” or “client,” as used in the NBAA-NATA paper, could mean an employer that owns an airplane and uses it to transport executives or lets executives use the aircraft for personal reasons, as a fringe benefit.

Many employers choose to outsource operation of their aircraft to aviation management companies, which hire and train pilots, clean and service the aircraft and file flight plans. In such cases, the employer determines the destinations and general time frames for the flights, but safe operation generally is the responsibility of the management company. Whether such fees are considered “taxable transportation” turns on who has “possession, command and control” of an aircraft. The CCA memorandum describes scenarios in which a management company is considered to have possession, command and control and therefore providing taxable transportation.

Reliance on Revenue Ruling 58-215

But the general aviation industry argues that the tax not only should not be applied retroactively, it would not apply in the first place in many instances. The industry representatives say the CCA “incorrectly interprets existing IRS revenue rulings.” The paper points out that the CCA relies heavily on Rev. Rul. 58-215, which is the “first and only revenue ruling dealing with a management company arrangement. For over 50 years, the IRS has relied on Rev. Rul. 58-215 as a basis for concluding that a management company is not providing taxable transportation to the owner.”

The NBAA and NATA argue that the issue is determined on a flight-by-flight basis, citing legislative history of the Airport and Airway Revenue Act of 1970.

Hubbard wrote in a July 3 e-mail to Thompson Publishing Group, “we urged the IRS to look at [Federal Aviation Administration] rules for what constitutes commercial air transportation, and we articulated our view of what constitutes possession, command and control of an aircraft, and how that both relates to, and is different from the FAA’s operational control concept.” Hubbard said the association plans to continue its dialogue with IRS.

About CCA Memoranda

CCA memoranda are not binding on taxpayers. Nevertheless, they often provide insight into how the IRS will approach similar legal issues.

Two of the four pressing matters have to do with estimating the value of coverage and reporting it to the IRS and to plan participants.

Summary of Benefits and Coverage

Employers that sponsor health plans must issue a new uniform four-page SBC (both sides of the page may be used). They must be provided to participants and beneficiaries who enroll or re-enroll, starting on open enrollment periods that start on or after Sept. 23, 2012. Basis: 77 Fed. Reg. 8668 (Feb. 14, 2012).

SBCs are to be distributed by insurers to health plan sponsors and by health plan sponsors to participants and beneficiaries. Only in the case of individual policies are they required to be distributed to dependents.

Reporting Health Coverage on Forms W-2

Employers must begin reporting the value of health coverage as an information item (but not a taxable income item) on employees’ W-2 forms at the end of the year. The W-2 reporting requirement was originally scheduled to become effective for the 2011 tax year, but the IRS delayed the mandatory compliance date to the 2012 tax year.

All employers that provide “applicable employer-sponsored coverage” during a calendar year are subject to the requirement. This includes federal, state and local government entities, churches and other religious organizations, and employers that are not subject to the COBRA continuation coverage requirements.

On April 26, 2012, IRS issued Notices 2012-32 and 2012-33, which invited comments to help inform the development of guidance on annual information reporting related to health insurance coverage. More IRS information about W-2 reporting can be found here.

Determining Whether Coverage Is Minimum-Value

Notice 2012-31, issued by the IRS on April 26, 2012, calls for comment from the public in determining what kind of strategy it will recognize when plans present evidence that their coverage meets or exceeds coverage norms set by the government. It says it prefers to choose from among these three:

(1)   an actuarial value calculator (AV calculator) to be provided by the agencies;

(2)   design-based questionnaires and checklists that would certify that a plan passes muster without actuarial calculations; or

(3)   certification from an actuary when a plan’s feaures escape measurement by either of the first two methods.

On Feb 24, 2012, HHS issued an actuarial value bulletin) describing the assumptions and methodology that HHS anticipates will govern the calculation of actuarial value.

Here is a link to the IRS page with the latest guidance on IRS’ revenue reporting and tax-assessment provisions.

Written Notice of an Exchange

All employers covered by the health reform law have to give employees written notice of an health insurance exchange, for all new hires starting March 1, 2013, and for all existing employees on or by that date. Exchange notices must provide written information:

• that an exchange exists, including a description of the services provided by the exchange and contact information to request assistance;
• that if the employer plan’s share of the total allowed costs of plan benefits is less than 60 percent of the costs, then the employee may be eligible for a premium tax credit and a cost-sharing reduction if the employee gets coverage through the exchange; and that
• if the employee purchases coverage through the exchange, he or she may lose the employer contribution to employer-sponsored coverage and that there might be tax implications for the employee in that case.

Future regulations may impose additional requirements.

Pay or Play Questions Will be Asked

The biggest analysis employers will be asking is about whether to “pay or play.” Employer penalties for not providing coverage may turn out to be less costly then actually providing coverage (particularly if health costs continue to rise as they have in the last 15 years). If that is the case, employers may choose to pay the penalties and stop providing insurance to workers.

Once employers finish assessing the value of their plans as per IRS rules, they then can move on to considering whether to:

• drop plans or options;
• keep plans the way they are even if it exposes them to new taxes; or
• make only those changes necessary to comply with the law’s new provisions.

The HSA annual limits and the annual out-of-pocket expenses for HDHPs are higher than those the IRS set for 2012; the HDHP annual deductibles for 2012 are the same as those the IRS set for 2011. The IRS adjusted the rates after applying the cost of living adjustment rules under Code Section 223, which governs HSAs.

The 2013 rates will be as follows.

HSAs

• annual limit of $3,250 on deductions for an individual with self-only coverage under an HDHP
• annual limit of $6,450 on deductions for an individual with family coverage under an HDHP

HDHPs

The definition of an HDHP will be based on the following for 2013:

• annual deductible of $1,250 for self-only coverage
• annual deductible of $2,500 for family coverage
• annual out-of-pocket expenses of $6,250 for self-only coverage
• annual out-of-pocket expenses of $12,500 for family coverage

Next Steps

Employers do not have to adjust any plan documents or practices in calendar year 2012 to apply these rates, as long as they have a plan whose plan year is based on the calendar year. These rates do not go into effect until 2013. This could, however, create challenges for employers that do not use a calendar year as the basis of their plan year and instead have a plan year that spans calendar years.

The early release of the 2013 HSA and HDHP rates, however, gives employers plenty of time to adjust their documents, plans and policies as they prepare for 2013. The IRS issues the rates early to allow employers and plan administrators time to apply the new rates when they prepare their plan documents and materials for the next year.

Finding out More

Rev. Proc. 2012-26 will be published in Internal Revenue Bulletin 2012-20 on May 14, 2012.

Additional information about Rev. Proc. 2012-26 is available by contacting its principal author, Bill Ruane of the IRS Office of Associate Chief Counsel (Income Tax & Accounting at (202) 622-4920. Additional information regarding Section 223 and HSAs is available by contacting Leslie Paul at (202) 622-6080.

In general, the tax Code does not allow a deduction for expenses paid or incurred for lodging when not traveling away from home. Under the proposed rule, there would be exceptions to that general prohibition within a safe harbor provision on which the IRS is seeking public comment. The public has until July 24 to file comments.

Safe Harbor for Local Business Conferences 

The proposed rule would provide a safe harbor for “certain local lodging at a business meeting, conference or other activity or function.” Other local lodging expenses would be treated according to the facts and circumstances.

Under the proposed rule, local lodging expenses could qualify for a deduction or income exclusion if it met all of the following conditions:

1. the lodging is necessary for the employee to participate in or be available for a bona fide business meeting or function of the employer;
2. the lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
3. the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit; and
4. the individual is an employee, or the employee’s employer requires the employee to remain at the activity or function overnight.

The IRS provides six examples that meet or do not meet the four conditions above in the notice of rulemaking, which is published in the Federal Register at 77 Fed. Reg. 24657.

Professional Sports Teams

In addition to a local conference facilitating training or team building among employees of a company, the IRS envisioned another example in the proposed rule preamble. It stated, “a professional sports team may require its employees (players and coaches) to stay at a local hotel the night before a home game to ensure physical preparedness and allow for last minute training.”

Notice 2007-47 Superseded

The rulemaking has been expected for years; the IRS had it on its list of priorities as far back as 2008. In June 2007, the IRS issued temporary guidance on the subject, which became obsolete with the issuance of the proposed regulation, on April 25. Until a final regulation is published, employers may apply the proposed regulation (see “Effective/Applicability Date” below).

That was IRS Notice 2007-47, which provided that if certain conditions were satisfied, expenses incurred for local lodging could be deductible by an employee under Section 162.

The change meant that if the expense were to be paid by the employer, the amount could be excluded from the employee’s income as a working condition fringe benefit.

Under Notice 2007-47, there were three conditions that must be satisfied in order for local lodging expenses to qualify for a deduction or income exclusion:

1. the lodging is on a temporary basis;
2. the lodging is necessary for the employee to participate in or be available for a bona fide business meeting or function of the employer; and
3. the expenses must otherwise be deductible by the employee under Section 162(a).

Effective/Applicability Date

The regulations are proposed to apply to expenses paid or incurred on or after the date these regulations are published as final regulations in the Federal Register. The proposed rule preamble states that until then, “taxpayers may apply the proposed regulations to expenses paid or incurred in taxable years for which the period of limitation on credit or refund under section 6511 has not expired.” For further information about the proposed regulation, taxpayers may contact R. Matthew Kelley at the IRS, at (202) 622-7900. For information about how to submit comments, contact Funmi Taylor at (202) 622-7180.

More information about fringe benefits is available in Thompson Publishing Group’s Employer’s Guide to Fringe Benefit Rules.

Speaking at the Society for Human Resource Management’s 2012 Employment Law and Legislative Conference March 5, Tammy McCutchen of Littler Mendelson in Washington, a former Bush appointee at DOL, offered tips to help employers reduce their legal exposure:

• Evaluate  current compliance efforts;
• Adopt wage and hour policies and procedures that help correct problems. For instance,   if overtime is prohibited,  tell employees how to report  a manager who forces them to work more than 40 hours in a week;
• Implement a complaint and investigation process internally within your company; and
• Conduct training (target managers specifically so they can ensure proper implementation of policies on the front lines).

DOL’s directed investigations (those initiated without an employee complaint) have increased in recent years from 27 percent of investigations in 2010 to 32 percent in 2011, McCutcheon said.

The agency has announced a number of targeted initiatives in recent years, including a major effort focused on misclassification of independent contractors that has resulted in memorandums of understanding with the Internal Revenue Service and 13 states.

Photo: Dan Macy

Employers will now be able to calculate the depreciation of vehicles — passenger cars, trucks and vans that they provide to employee as a fringe benefit — that they first put into service in calendar year 2012, since the IRS has released the new depreciation deduction limits.

Revenue Procedure (Rev. Proc.) 2012-23, released March 4, sets depreciation deduction limits for vehicle owners, and inclusion amounts for lessees. Since 1988, the IRS has adjusted both figures for inflation annually.

Passenger Car Limit Unchanged

This year, the IRS did not change the threshold at which it requires lessees to start applying the inclusion amounts on passenger cars. Lessees must begin applying the inclusion amounts on passenger cars with an FMV of $18,500.

Trucks and Vans Limit Unchanged

The IRS also left unchanged the threshold at which it requires lessees to start applying the inclusion amounts on trucks and vans; that is, at an FMV of $19,000 or higher.

Depreciation Limits Up

Since 2003, the IRS has calculated the inflationary adjustments for passenger cars and trucks and vans using a consumer price index (CPI) “automobile component” and the CPI “truck component” for trucks and vans, as required by Code Section 280F. For some vehicles, a “bonus” depreciation applies.

Passenger Cars

For vehicles to which a bonus depreciation does not apply, the limit is $3,160 (up from $3,060 in 2011) for passenger cars (see Rev. Proc. 2012-23, Table 3).

Trucks and Vans

Trucks and vans to which a bonus depreciation does not apply have a 2012 limit of $3,360 (up from $3,260 in 2011; see Rev. Proc. 2012-23, Table 4.) Tables 3 and 4 of Rev. Proc. 2012-23 also provide the depreciation deduction limits for successive years.