401(k)

$15,500

$16,500

401(k) new "catch-up" substitute limit

$20,500

$22,000

403(b)(annuity)

$15,500

$16,500

403(b) new "catch-up" substitute limit

$20,500

$22,000

403(b) old "catch-up" substitute limit

$23,500 *

$25,000 *

408(k)(SEP)

$15,500

$16,500

408(k)(SEP) new "catch-up" substitute limit

$20,500

$22,000

408(p)(SIMPLE)

$10,500

$11,500

408(p)(SIMPLE) new "catch-up" substitute limit

$13,000

$14,000

457

$15,500

$16,500

457 new "catch-up" substitute limit

$20,500

$22,000

457 old "catch-up" substitute limit

$31,000 **

$33,000 **

501(c)

$15,500

$16,500

DOL issues 2007 annual UC certifications of states under FUTA

The Secretary of Labor has signed the annual 12-month certifications under the Federal Unemployment Tax Act that enable employers who make contributions to state unemployment funds to obtain certain credits against their liability for federal unemployment tax. All 50 states, as well as the District of Columbia, Puerto Rico and the Virgin Islands, have received certifications for the maximum additional credit allowable based on the 12-month period ending on October 31, 2007.

Non-Qualified Deferred Compensation Plans

Section 409A, added by the American Jobs Creation Act of 2004, provides that all amounts deferred under a non-qualified deferred compensation plan for all tax years are currently included in gross income unless certain requirements are met. If section 409A requires an amount to be included in gross income, the section imposes a substantial tax. The Act requires reporting of the yearly deferrals (plus earnings) under a section 409A non-qualified deferred compensation plan, using code Y in box 12 of Form W-2. Income included under section 409A from a non-qualified deferred compensation plan will be reported in Form W-2 box 1, and in box 12 using code Z. This income is also subject to an additional tax reported on Form 1040.

Discrimination Testing Limits

Two important benchmarks for discrimination testing performed on "cafeteria" and "P.O.P." plans, are the plan treatment of "Highly-Compensated" employees and "Key" employees. For 2006, the compensation threshold for "Highly-Compensated" employees as determined by the I.R.S. under Code section 414(q)(1)(B) is $100,000, increased from $95,000 in 2005 Likewise, the 2006 compensation threshold for a "Key" employee in a top-heavy plan, under Code section 416(i)(1)(A)(i), is $140,000, increased from $135,000 in 2005.

Tax Levy Exemption Tables

Effective January 1, 2009, a revised I.R.S. table is used for figuring the amount of wages, salary and other income exempt from Federal tax levy. Generally, the 2009 exemption amounts are somewhat higher than for year 2008. For example, for a person with a marital status of "single" and claiming 3 withholding exemptions, the 2009 weekly tax levy exemption is $320.19, compared to $306.73 in 2008. For more information see I.R.S Publication 1494

Format Changes For Magnetic/Electronic Reporting of Forms W-2

The last year for filing Forms W-2 on magnetic tapes and cartridges was tax year 2004 (forms timely filed with the SSA in 2005). The last year for filing Forms W-2 on diskette was tax year 2005 (forms timely filed with the SSA in 2006). When filing 250 or more Forms W-2, it is required that they be filed electronically unless the IRS has granted a waiver.

Taxability of Frequent Flyer Miles

In Announcement 2002-18, published February 20, 2002, the I.R.S. stated that it would not attempt to tax frequent flier miles received for business travel but used for personal purposes. The I.R.S. indicated that any future guidance issued on this subject would only be applied prospectively. The I.R.S. said it did not attempt to tax frequent flyer miles because of the difficulty of determining the timing and valuation of the imputed income. Also, establishing the source of the benefit, as between business or personal expenditures, was unreliable, noted the I.R.S.

The Application of Employment Taxes to Stock Options

A. STATUTORY (QUALIFIED) STOCK OPTIONS

In general, upon the exercise of a statutory stock option, the amount by which the fair market value of the stock on the date of exercise exceeds the exercise price, is "income" to the employee and later is subject to Federal income tax on Form 1040 (after the stock has been sold). Because the opportunity for this "income" arises out of an employment relationship, some commentators have argued that such "income" should also be subject to employment taxes (FIT W/H, FICA and FUTA). However, the IRS originally did not take this position, stating that FICA and FUTA taxes did not apply to the exercise of a statutory stock option because the transaction had not been made subject to income tax withholding. In Notice 2001-14, issued in January, 2001, the IRS changed its position and took the opposite view, contending that the "income" should be subject to employment taxes (FICA and FUTA). However, the IRS also provided both employers and employees a transition period for implementing the new taxability rules, proposing a delay on the imposition of employment taxes until January 1, 2003. This date was later changed. On November 13, 2001, the IRS issued proposed regulations providing for FICA and FUTA taxes to apply when an individual exercises a STATUTORY stock option, and that Federal income tax withholding would NOT apply to the exercise of a statutory stock option. The IRS requested comments as to the proposed regulations. Comments from the public were received on a wide variety of issues. Recognizing the complexity of the issues raised, the IRS concluded it would need more time, and extended the moratorium on applying employment taxes to statutory stock options. Consequently, in July, 2002, the IRS issued Notice 2002-47 which states that until Treasury and the IRS issue further guidance, the IRS will not assess Federal employment taxes (FIT W/H, FICA and FUTA) upon either the exercise of statutory stock options or the disposition of the stock acquired by an employee pursuant to the exercise of the option. Notice 2002-47 further stated that the future application of employment taxes to statutory stock options will not affect any exercise of a statutory stock option that occurs before January 1 of the year that follows the second anniversary of the publication of the final IRS guidelines thus, at least two years after the regulations are issued in final form. NOTE: The IRS uses the term "statutory stock option" to cover the incentive stock option (ISO) described in Code section 422(b), and/or an option granted under an employee stock purchase plan (ESPP) described in Code section 423(b).

B. NON-STATUTORY (NON-QUALIFIED) STOCK OPTIONS

Importantly, the imposition of employment taxes and income tax withholding on the exercise of NON-STATUTORY (non-qualified) stock options (as opposed to statutory stock options) has been in place for some time. If the option is for stock with a readily ascertainable market value at grant, the option itself is taxable to the employee upon receipt. The taxable amount is the difference between the market value of the stock and the amount payable by the employee for the stock. The amount is treated as wages for purposes of FIT W/H, FICA and FUTA taxes. The amount treated as wages should be reported on Form W-2. However, if a readily ascertainable fair market value cannot be determined at grant, the option is taxable to the employee when the individual exercises the option. NOTE: Beginning in 2003, employers were required to use code "V" in Box 12 of Form W-2, to report income from the employee's exercise of NON-statutory stock options. The I.R.S. defines such "income" as the price spread (fair market value of stock over the exercise price of the option). The amount reported with code "V" in Box 12, must also be included in Boxes 1, 3 (up to the Social Security wage base), and Box 5.

I.R.S. Penalties for Form W-2 Errors

In August, 2004, notwithstanding the earlier intentions reported below, the I.R.S. indicated that it intends to re-direct its efforts to penalize employers for name and Social Security number mismatches on Forms W-2, to focus only on the employers with the most egregious mismatch rates.

The I.R.S. has long been authorized to assess employers with penalties for failure to file correct information on Form W-2. The penalty is $50 per form, but it can be reduced to $15 if the employer corrects the form within 30 days, or to $30 if the employer corrects it by August 1. In October, 2002, the I.R.S. indicated that for 2002 Forms W-2 it would strictly enforce the $50 penalty for employee names and Social Security Numbers which do not match the records of the Social Security Administration. Unresolved, however, was the definition of conditions employers would be able to cite in defense of their actions (or inaction). As the IRS described it, there was no clear definition of the employer defense of "reasonable cause" for failure to provide the correct name and number. In the case of information returns, such as Form 1099-MISC, under present rules the employer can establish "reasonable cause" for failure to match names and tax identification numbers (TINS), by presenting a properly completed Form W-9 (Request for Taxpayer Identification Number and Certification). However, employers do not have an equivalent document to prove due diligence for Form W-2 reporting. Form W-4 (Employee's Withholding Allowance Certificate) has been suggested for this purpose, but there is no current requirement that every employee must file Form W-4 with the employer.

"Reasonable Cause" Has Been Clarified As An Employer Defense

Employers penalized for putting an incorrect SSN on a Form W-2 are now helped by a seemingly more lenient I.R.S. view of "reasonable cause," based on the employee's failure to provide a correct SSN. Specifically, the I.R.S. requires only three things for the "reasonable cause" defense to apply:

• that the employer received an SSN from the employee
• that the employer relied on that number in good faith, entering it into its payroll records and putting it on the employee's Form W-2;
• that the employer later received a penalty notice from the I.R.S. notifying that the employee's SSN was incorrect.

In addition to showing that the failure to include a correct SSN was caused by the employee, the employer must also show that it exercised reasonable care to avoid or mitigate the problem, in order to warrant waiver of the penalty. In practical terms, the I.R.S. says, "reasonable care" by the employer, justifying waiver by the I.R.S. of the penalty, could work as follows. The employer would have to show that it made an initial request for the employee's SSN, normally done routinely when the employee begins working for the employer; and that the employer indeed received the SSN from the employee, usually on Form W-4 (Employee's Withholding Allowance Certificate). The employer would not be required to make a further solicitation for the employee's SSN unless the I.R.S. notifies the employer that the employee's SSN is incorrect, for example by means of a penalty notice. An employer which receives such a notice may be required to make up to two annual requests after receiving the notice. The employer's first request for the employee's SSN must be made by December 31 of the year in which the penalty notice is received. A second annual request for the employee's SSN will be required if the employer receives an I.R.S. notice of an incorrect SSN for the employee in any later year. The I.R.S. says the employer may rely on the SSN provided by the employee in response to such requests, and may report it on the employee's Form W-2.

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