The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) added a new category of fringe benefit that is excludable from employees' gross wages - - employer-provided qualified retirement planning services. This exclusion applies to qualified retirement planning services offered for years beginning after December 31, 2001.
Before explaining what qualified retirement planning services are, how they can be used and what the tax advantages are, a general background of fringe benefits is useful.
Fringe benefits are non-compensation benefits provided by an employer to his or her employees. Because of the nature of the employer-employee relationship, such benefits are generally included in the employee's taxable income when received. The employer is able to deduct the value of the fringe benefit, assuming that certain requirements are met. As with any business expense incurred by an employer for which a tax deduction is sought, the employer must be engaged in a trade or business, the expense must be incurred in that trade or business, and the expense must be ordinary and necessary.
Fringe benefits, being a form of compensation paid to the employee, generally meet the qualifications as a business expense, ensuring deductibility by the employer. However, Congress has added a special incentive to certain types of fringe benefits in that the receipt of the fringe benefit will not be taxable to the employee, even though the employer will still enjoy a deduction for providing the fringe benefit. These fringe benefits are specifically exempted from inclusion in the employee's taxable income by IRC section 132:
qualified employee discount;
working condition fringe;
de minimis fringe;
qualified transportation fringe, qualified moving expense reimbursement; and
qualified retirement planning services.
Qualified Retirement Planning Services Defined
The Internal Revenue Code defines "qualified retirement planning services" as "any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan."
There are several interesting aspects to this definition. First, what kinds of information would an employee need in order to assess his or her retirement planning?
For any retirement plan participant, the following list would seem a basic starting point:
1. What are the distribution options? Examples are lump sum, installments, and annuities.
2. What is the impact of the benefit plan on social security payments, if any?
3. How long can receipt of the retirement benefits be postponed?
4. Do any excise taxes apply to the distribution?
5. What is the current balance and present value of the account?
6. What are the employee's rollover options and what are the tax consequences for these options?
7. If the retirement plan was a defined benefit plan, what are the payment amounts for different types of annuity options?
It is this type of information that is likely to be provided to the employee by the employer and that is included within the context of "employer-provided qualified retirement planning services."
The Employer Must Maintain a Qualified Employer Plan
The retirement planning advice must be provided by "an employer maintaining a qualified employer plan." The Internal Revenue Code defines "qualified employer plan" to be "a plan, contract, pension, or account described in section 219(g)(5)." Essentially, plans described in section 219(g)(5) include:
1. pension, profit-sharing and stock bonus plans qualified under IRC section 401(a),
2. annuity plans described in IRC section 403(a),
3. plans established by the U.S. or state government for its employees,
4. Code section 403(b) annuity contracts,
5. simplified employee pensions within the meaning of Code section 408(k),
6. SIMPLE retirement accounts within the meaning of Code section 408(p), and
7. certain trusts described in IRC section 501(c)(18).
This is critical because the intent of Congress in adding qualified retirement planning services to the list of excluded fringe benefits is to encourage employers who had retirement plans in place to offer their employees advice as to how the employer's plan fit into the individual's overall retirement income plan. Clearly, Congress wants to encourage employers who offer retirement plans to also offer planning services to employees.
Though the employee has the advantage of the excluded fringe benefit, the employer also gets a deduction for providing the services. By making this particular fringe benefits exempt for the employee, Congress encourages the employee to ask his or her employer for the fringe benefit. This is a way of using tax policy to encourage certain behavior on the part of both employees and employers. If the employees attach a value to obtaining the fringe benefit, that benefits the employer as well since, as discussed above, the employer gets a tax deduction for providing these services.
What Constitutes Retirement Planning Advice or Information?
Another aspect of the definition of qualified retirement planning services is that it includes "any retirement planning advice or information provided." On its face, this is a very broad definition that could conceivably include a wide range of services. Before pricing out those deductions, however, it is important to note that Congress has given the Secretary of the Treasury orders to write regulations to carry out Congress' intent. Because of the way in which Congress did this, the Treasury has a great deal of latitude in writing the regulations. Treasury usually does not give away the shop to taxpayers when given this type of latitude. Often in such situations, the regulation writers will look to the legislative history of the provision to see what Congress intended and then take a turn or two in narrowing what will actually be provided.
In this case, the legislative history shows that Congress intended to limit the broad services suggested by the plain words of the Code. We have already discussed Congressional intent for this provision generally, but Congress has added this limitation as well: "the exclusion does not apply to services that may be related to retirement planning, such as tax preparation, accounting, legal or brokerage services."
Where the fringe benefit might have been to offer limited accounting, legal or financial advice to an employee, apparently the employer will be limited to offering advice consistent with that provided by retirement plan advisor. The likely application is that the employer will have his retirement plan advisor provide the employee with information similar to the list provided above, but without necessarily taking into account all the factors in that particular employee's life.
It is a valuable and worthy service, but does not reach the "any advice or information" hope that was provided in the Code itself. Had the broader language of the Code been left alone, the employer might have been encouraged to allow the employee to sit down with an employer-provided attorney, for example, to discuss estate planning and how the employer's retirement plan might be maximized for the particular employee, taking into account the employee's particular needs and desires. As it stands, however, the employer will be limited to providing advice on how the pay-out of the retirement plan can be done in the most effective manner. This is useful information, but taken in isolation is not as valuable as it might have been.
It will be interesting to monitor the regulations that are put in place for this fringe benefit and to observe how the Treasury will interpret the Code and legislative history and, especially, to see what kinds of services Treasury is willing to allow the employer to provide.
Application of the Nondiscrimination Rules
An additional hurdle has also been added by the Code. In essence, the nondiscrimination rules from pension law have been imported to this particular fringe benefit. While the nondiscrimination rules are beyond the scope of this article, in the context of a small business, the shareholders or executive class cannot get these benefits to the exclusion of the regular employees.
The exemption for qualified retirement planning services applies to "highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer's qualified employer plan." If the advice and information only goes to highly compensated individuals, then the provision of the services will not be exempt.
Congress did attempt to provide some latitude to employers by stating that "the Secretary, in determining the application of the exclusion to highly compensated employees, may permit employers to take into consideration employee circumstances other than compensation and position in providing advice to classifications of employees. Thus, for example, the Secretary may permit employers to limit advice to individuals nearing retirement age under the plan." On the one hand, this is good news for employers since they can, apparently, limit the information provided to a class of those people nearing retirement age. On the other hand, it would be better for the employees if this type of advice was available much earlier in the process, rather than within sight of retirement.
Any employer looking to offer retirement planning services would do well to inquire about the nondiscrimination rules or to apply the retirement planning services in the same manner as the employer plan.
It makes a great deal of tax sense for employers with retirement plans to offer their employees retirement planning. With Congress' generous treatment of this fringe benefit, employees will no doubt desire such information. Congress has the ability to make such benefits a win-win situation and has done so here. Many middle-class Americans do not have any tax or estate plan in place and this fringe benefit could provide an impetus for them to plan their retirement in a tax-efficient manner. Business owners will also benefit from the same type of planning, and will be able to achieve the planning in a tax-efficient manner, assuming that they are able to accommodate the nondiscrimination rules. Feel free to contact us, and we'll be more than happy to help you decide how the new law's opportunities might help your business - - and your employees.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.