Translate this page RSS Share this page Print this page


Compensation and Benefits Insights - January 2013

30 Jan 2013

American Taxpayer Relief Act of 2012: Expanded Roth Conversions and Other Benefit and Retirement Related Provisions

Authors, Eleanor Banister, Atlanta, +1 404 572 2755, 4930, ebanister@kslaw.comand Ryan Gorman, Atlanta, +1 404 572 4609, 

On January 2 , 2013, President Obama signed the American Taxpayer Relief Act of 2012 (H.R. 8) (the “Relief Act”) into law. While the principal intention of the Relief Act was to avert the key elements of the “fiscal cliff” by staving off widespread tax increases and sizeable spending cuts, the Relief Act contains a significant change regarding Roth conversions within Section 401(k) and certain other retirement plans and other provisions that affect employee benefits, including education and adoption assistance, dependent care assistance, transit commuting and parking benefits and the employer tax credit for child care assistance. The Relief Act also revived a popular charitable distribution alternative for individual retirement accounts. Lastly, the Relief Act raised tax rates for certain highly compensated individuals and couples. Each of these provisions is described in greater detail below.

Expanded Roth Conversions for Retirement Plans

Section 402A of the Internal Revenue Code of 1986, as amended (the “Code”), provides that participants in Section 401(k), 403(b) or 457(b) plans may make “Roth” contributions to the plan. Participants are taxed on such contributions, but if those contributions satisfy certain requirements, including restrictions on the timing of distributions, both the contributions and earnings are distributed tax-free.

Section 402A also permits participants to convert non-Roth accounts to Roth accounts, which subjects the taxable amount converted to income tax at the time of conversion.  Prior to the Relief Act, only amounts that were otherwise distributable from the pre-tax account (for example, if the participant was age 59 ½ or older) could be converted to Roth accounts. Participants under 59 ½ were ineligible to make an “in-plan” conversion due to the fact that their accounts were not yet “distributable.”

The Relief Act amends Section 402A to allow any participant to make an “in-plan” Roth conversion, regardless of whether the amount is otherwise distributable. This suggests that all amounts can be converted to a Roth account, including deferrals, matching contributions and nonelective employer matching contributions. The provision is effective for conversions occurring after December 31, 2012.

The Congressional intent in expanding Section 402A was to create a revenue offset, as individuals who make “in-plan” Roth conversions will pay income tax on the amount converted when they choose to convert such amounts. Whether this will actually result in additional revenue in the long term is up for debate, however. While the government will certainly increase revenue in the short term as a result of conversions that otherwise would not have occurred, the lost tax revenue on the earnings that would have accumulated over the course of an participant’s career could result in a net loss for the government over the long term.

Insight: In order to allow participants to take advantage of the expanded opportunity to make Roth conversions, plan sponsors must add this discretionary feature to their plans. Plan sponsors desiring to make this feature available must amend their plan by the end of the plan year in which the expanded “in-plan” conversions will first be effective. For example, if the plan offers in-plan conversions in 2013, the plan must be amended by December 31, 2013.

Education Assistance Programs

Section 127 of the Code allows employees to exclude up to $5,250 from their gross income in conjunction with employer-provided educational assistance programs.

Certain provisions of Section 127 (including the exclusion limit of $5,250 and a provision that allows the exclusion to apply to graduate school education assistance) were set to expire at the end of 2012, but the Relief Act extends those provisions permanently.

Adoption Assistance Programs

Section 137 of the Code provides for an exclusion from gross income of up to $12,970 per year for employer-provided adoption assistance.

The adoption assistance exclusion was set to expire at the end of 2012, but the Relief Act extends the exclusion permanently.

Dependent Care Assistance Programs

Section 129 of the Code allows employees to exclude up to $5,000 from their gross income for amounts received in conjunction with employer-provided dependent care assistance programs. This exclusion phases out depending on the lower level of income of either the employee or his/her spouse. If the spouse is a student or incapable of caring for himself or herself, the spouse is “deemed” to have income of $250 per month (or $500 per month if the couple has two or more qualifying dependents).

The “deemed income” provision was set to expire at the end of 2012, but the Relief Act extends this provision permanently.

Transit Commuting and Parking Benefits

Section 132(f) of the Code allows employees to make pre-tax contributions (or employers to provide the same amount as a tax-free subsidy) for employer-provided commuting vehicles or transit passes  (“transit commuting benefits”) or work-related parking expenses. From 2010 through 2011, the limit on the two benefits (transit and parking) was the same.  However, in 2012 the limits shifted to $125 per month for transit commuting benefits and $240 per month for work-related parking expenses.

The Relief Act re-establishes parity between the two transportation benefits for 2012 (retroactively) and 2013.   The IRS recently issued guidance as to how employers may correct the over-withholding of FICA tax on transit benefits. Employers must repay or reimburse their employees the “overcollected” FICA tax on the excess transit benefits for all four quarters of 2012.   Employers who act before the deadline for filing Form 941 for the fourth quarter of 2012 may follow a special procedure to obtain a refund of the employer’s share of the FICA overpayment or, if not, file a Form 941-X for each 2012 quarter to make an adjustment on FICA taxes paid or to request a refund.

The 2013 limit for both transit commuting benefits and work-related parking benefits is $245 per month. This tax-free benefit will expire on December 31, 2013.

Employer Expenses for Child Care Assistance

The Relief Act extends the child care assistance credit of $150,000 per year for qualified childcare facilities permanently.

Distributions from Individual Retirement Accounts for Charitable Purposes

Section 408(d)(8) of the Code permitted taxpayers 70 ½ and older to make tax-free distributions from individual retirement accounts (IRAs) for charitable purposes through 2011.

The Relief Act reinstates this charitable distribution alternative through 2013. The Relief Act provides a transition period to make up for missed opportunities in 2012 by allowing individuals to make qualified charitable distributions from IRAs during January 2013 that will be treated as made on December 31, 2012 (counting as a 2012 tax-free distribution). The Relief Act also allows qualified IRA owners who received an IRA distribution during December 2012 to contribute the amount to a charity, and have the contribution treated as a tax-free distribution. This charitable distribution option will expire again on December 31, 2013.

Tax Rate Increases May Increase Need for Deferred Compensation

The top income tax rate will increase from 35% to 39.6% for single filers with taxable incomes above $400,000 and joint filers with taxable incomes above $450,000.  We expect this tax rate increase will result in employees within the top income tax bracket seeking options by which to defer compensation, with the hope that the top tax rate will eventually decline. Employers may want to consider expanding their deferred compensation alternatives for this top-paid group of employees.

King & Spalding is happy to assist you make amendments to allow expanded Roth conversions, to establish or modify deferred compensation arrangements, or to answer any questions you may have regarding the Relief Act.

New Rules Coming into Effect Affect Retirement Plans Entering into Swaps

Authors, Eleanor Banister, Atlanta, +1 404 572 2755, 4930, and Donna Edwards, Atlanta, +1 404 572 2701,

New rules affecting ERISA-covered retirement plans entering into swap transactions will come into effect in May 2013.  These rules, known as the “Business Conduct Standards,” implement certain provisions of the Dodd-Frank Act.   We reported on the Dodd-Frank Act provisions affecting retirement plans entering into swaps in our July 2010 Compensation and Benefits Insights.  This article supplements our July 2010 article by highlighting the provisions in the Business Conduct Standards that are of particular interest to retirement plans.

Safe Harbors to Avoid Advisor Status

As we reported in our July 2010 article, the extent of restrictions placed on a swap transaction with a retirement plan depends on whether the swap dealer is acting as a “counterparty” or as an “advisor” to the plan.  The rules applicable to a swap dealer acting as an advisor to a plan are more onerous than those applicable to swap dealer acting as a counterparty to the plan.  However, the Business Conduct Standards set forth two alternative safe harbors for a swap dealer to avoid acting as an advisor to a plan.  The first safe harbor is satisfied if: 

  • the plan represents in writing that it has a fiduciary responsible for representing it in connection with the swap transaction,
  • the fiduciary represents in writing that it will not rely on recommendations provided by the swap dealer, and
  • the plan represents in writing either that (i) it will comply in good faith with written policies and procedures reasonably designed to ensure that any recommendation the plan receives from the swap dealer materially affecting a swap transaction will be evaluated by a fiduciary before the transaction occurs or (ii) any recommendation it receives from the swap dealer materially affecting a swap transaction will be evaluated by a fiduciary before the transaction occurs.

Under the second safe harbor, a swap dealer will not be treated as an advisor to a plan if it refrains from expressing an opinion on whether the plan should engage in a transaction tailored to the plan’s needs, discloses that it is not undertaking to act in the plan’s best interests, and obtains assurances that the plan will rely on advice from a qualified “independent” representative (as defined in the Business Conduct Standards) rather than rely on the swap dealer’s recommendation.

Clarification of Counterparty Rules

As we reported in our July 2010 article, there has been some confusion over the requirements applicable under the Dodd-Frank Act to a swap dealer acting as a counterparty to a retirement plan.  The Business Conduct Standards clarify that the requirements applicable to a swap dealer acting as a counterparty to a plan are as follows:

  • before the initiation of the transaction, the swap dealer must disclose to the plan in writing the capacity in which the swap dealer is acting (and if the swap dealer engages in business with the plan in more than one capacity, the swap dealer must disclose the material differences between such capacities), and
  • the swap dealer must have a reasonable basis to believe the plan is represented by a fiduciary.  This condition is deemed met if the plan provides in writing to the swap dealer the fiduciary’s name and contact information and represents in writing that the representative is a fiduciary.

New Compliance Dates

Just a few weeks ago, the CFTC approved interim final rules delaying until May 1, 2013 the date by which swap dealers acting as a counterparty or an advisor to a retirement plan must comply with the provisions of the Business Conduct Standards.  Previously, the compliance date was January 1, 2013.  

Fiduciary Issue

Finally, some practitioners have expressed concerns that a swap dealer complying with the Business Conduct Standards with respect to a retirement plan would be required to perform activities that would cause the swap dealer to be an ERISA fiduciary to the plan.  In a letter attached to the Business Conduct Standards, the DOL   clarified that the Business Conduct Standards do not require swap dealers to engage in activities that would make them a fiduciary under current law.      

Takeaway for Retirement Plan Fiduciaries and Sponsors

A retirement plan fiduciary entering into a swap transaction likely will be asked to provide certain representations and acknowledgements to the swap dealer to permit the swap dealer to comply with the Business Conduct Standards, and the plan fiduciary will need to make sure that any representation or acknowledgement made in connection with such a swap transaction is accurate and appropriate for the plan and the transaction.  King & Spalding would be pleased to assist plan fiduciaries in the review of those representations and acknowledgements and to assist plan sponsors and fiduciaries in understanding all of the implications of the Business Conduct Standards.

District Court Declines to Hold Private Equity Funds Liable for Portfolio Company Withdrawal Liability

Authors, Kenneth A. Raskin, New York, +1 212 556 2162, and  Emily Meyer, New York, +1 212 556 2312,

In Sun Capital Partners III, LP  v. New England Teamsters and Trucking Industry Pension Fund, a U.S. district court in Massachusetts held that investment funds managed by private equity firm Sun Capital Advisors, Inc. (“Sun Capital”) were not liable for a portfolio company’s withdrawal liability with respect to a multiemployer pension plan.  The court rejected as unpersuasive a 2007 Pension Benefit Guaranty Corporation (“PBGC”) Appeals Board finding that a private equity fund was a “trade or business” under common control with its portfolio company and therefore was liable for the funding shortfall of the company’s terminated defined benefit plan.  The Sun Capital decision, which is on appeal to the First Circuit, strengthens the argument that private equity funds are not liable for the multiemployer and defined benefit pension plan liabilities of their portfolio companies.


The Employee Retirement Income Security Act of 1974 (“ERISA”) imposes joint and several liability for various liabilities, including withdrawal liability under a multiemployer pension plan, on each “trade or business” under common control with the employer sponsoring the pension plan.  The PBGC has interpreted this aspect of ERISA broadly.  In 2007, the PBGC Appeals Board ruled that a private equity fund was a trade or business and was therefore liable to the PBGC for the funding shortfall of its portfolio company’s terminated defined benefit plan.  (The fund had acknowledged that it was under common control with the portfolio company.) 

In Board of Trustees, Sheet Metal Workers’ National Pension Fund v. Palladium Equity Partners, LLC, a 2010 case with a fact pattern similar to that of Sun Capital, a U.S. district court in Michigan rejected the defendant private equity investment funds’ motion for summary judgment.  In finding that the facts could support a conclusion that the private equity funds were engaged in a trade or business, the court cited the 2007 PBGC Appeals Board decision and stated that it found the PBGC’s reasoning persuasive.  The court also found that the facts could support a conclusion that the three investment funds, none of which had a controlling interest in the portfolio company, should be treated as a single entity for purposes of the common control test.

In 2006, two of Sun Capital’s investment funds (the “Sun Funds”) acquired Scott Brass, Inc. (“Scott Brass”), a manufacturing company, through Sun Scott Brass, LLC, a limited liability company that was treated as a partnership for federal tax purposes.  The ownership of Sun Scott Brass, LLC was split 70 percent / 30 percent between the Sun Funds.  In 2008, Scott Brass withdrew from the New England Teamsters and Trucking Industry Pension Fund (the “Pension Fund”) shortly before entering bankruptcy proceedings.  The Pension Fund then sought to recover approximately $4.5 million in withdrawal liability from the Sun Funds.

Joint and Several Liability Claims

“Trade or Business” Status

In Sun Capital, the Pension Fund’s primary claim was that the Sun Funds were trades or businesses under common control with Scott Brass and therefore were jointly and severally liable under ERISA for Scott Brass’s withdrawal liability.  The court held that each Sun Fund was a passive investor rather than a “trade or business.”  In finding that neither of the Sun Funds engaged in activity sufficient to constitute a “trade or business,” the court cited the following factors:

  • The Sun Funds did not have any employees, own any office space, or make or sell any goods;
  • Each of the Sun Funds had made a single investment; and
  • The tax returns for each of the Sun Funds listed only investment income in the form of dividends and capital gains.

In analyzing the extent of the Sun Funds’ management and oversight activities, the court refused to impute to the Sun Funds the activities of either their management companies or general partners.  The court found that the Sun Funds’ election of board members of Scott Brass was not an example of active management because it was undertaken in the funds’ capacity as shareholders.  The court also found that, because the management and consulting fees received by the general partners were paid through a contractual arrangement that did not involve the Sun Funds, they could not be characterized as non-investment income to the Sun Funds.

The court declared the 2007 PBGC Appeals Board opinion letter unpersuasive and therefore not entitled to deference.  The court found that the Appeals Board had incorrectly attributed to the investment fund the activity of the investment fund’s general partner and had misinterpreted Supreme Court precedent regarding the “trade or business” status of investment activity.  The court disagreed with the Appeals Board’s finding that the holdings in Higgins v. Commissioner and Whipple v. Commissionerthat investing is not a trade or business are limited to individual investors.  The court also disagreed with the Appeals Board’s conclusion that the “continuity and regularity” prong of the test established by Commissioner v. Groetzinger can be satisfied based solely on the size or profitability of an investment.  (The Groetzinger court found that a taxpayer, to be engaged in a “trade or business,” must be involved in an activity with “continuity and regularity” and must engage in the activity for the primary purpose of income or profit.)

Because it had found that the Sun Funds were not trades or businesses, the court did not address whether the Sun Funds and Scott Brass were under common control.

Treatment as Partnership or Corporation

The Pension Fund also argued that the Sun Funds were jointly and severally liable for Scott Brass’s withdrawal liability as partners of Sun Scott Brass, LLC.  The court rejected this argument, finding that it was proper to treat Sun Scott Brass, LLC as a limited liability company (the liabilities of which did not extend to its partners) for corporate liability purposes despite the fact it was treated as a partnership for federal tax purposes.

“Evade or Avoid” Withdrawal Liability Claim

The Pension Fund also contended that the Sun Funds were liable for Scott Brass’s withdrawal liability under ERISA Section 4212(c), which provides that “[i]f a principal purpose of any transaction is to evade or avoid [withdrawal liability], this part shall be applied (and liability shall be determined and collected) without regard to such transaction.”  The Pension Fund argued that the Sun Funds decision to divide the ownership of Scott Brass using a 70 percent / 30 percent structure had a “principal purpose” of “evading or avoiding” withdrawal liability.  After reviewing the legislative history and analyzing the wording of ERISA Section 4212(c), the court concluded that the provision was intended to apply to employer-sellers, not outside investors such as the Sun Funds.  The court also found that, even if the provision could be applied to the Sun Funds’ acquisition of Scott Brass, the only available remedy for a violation of ERISA Section 4212(c) is to ignore the transaction in determining liability, which would have meant holding the original (and now bankrupt) owner of Scott Brass liable, not the Sun Funds. 


Having found that the Sun Funds could not be held liable for Scott Brass’s withdrawal liability under ERISA or as partners of Sun Scott Brass, LLC, the court granted the Sun Funds’ motion for summary judgment.


The Sun Capital decision strengthens the argument that private equity funds are not liable for the multiemployer and defined benefit pension liabilities of their portfolio companies.  The law is far from settled, however.  Private equity firms should continue to evaluate targets’ pension plan liabilities and, when investing in companies with such liabilities, should (if possible) use a structure in which the investment funds are passive investment vehicles none of which controls 80 percent or more of the target company.

King & Spalding would be pleased to answer any questions you have about the impact of the Sun Capital decision on portfolio company investments.

Filing and Notice Deadlines for Qualified Retirement and Health and Welfare Plans

, Ryan Gorman, Atlanta, +1 404 572 4609,

Employers and plan sponsors must comply with numerous filing and notice deadlines for their retirement and health and welfare plans. Failure to comply with these deadlines can result in costly penalties and excise taxes.  To avoid such penalties and excise taxes, employers must remain informed with respect to the filing and notice deadlines associated with their plans.

The filing and notice deadline table below provides key filing and notice deadlines common to calendar year plans for the next two months. Please note that the deadlines will be different if your plan year is not the calendar year. Please also note that the table does not include all applicable filing and notice deadlines, just the most common ones. King & Spalding is happy to assist you with any questions you may have regarding compliance with the filing and notice requirements for your employee benefit plans. 





Affected Plans

January 31


IRS Form 945


Deadline for employer to file IRS Form 945 to report income tax withheld from qualified plan distributions made during the prior plan year. However, the deadline may be extended to February 11 if taxes were timely deposited during the prior plan year.



Qualified Retirement Plans*

IRS Form 1099-R

Deadline for employer to distribute IRS Form 1099-R to participants and beneficiaries who received a distribution (including a direct rollover) during the prior plan year. This includes a direct rollover from a Qualified Retirement Plan.



Qualified Retirement Plans

IRS Form W-2

Deadline for employers to distribute Form W-2, which must reflect aggregate value of employer-provided benefits (e.g., imputed income for group-term life insurance, employer Health Savings Account Contributions, etc.) for tax years beginning on or after January 1, 2012 (i.e., the first W-2 affected will be the W-2 issued in January 2013).


Health and Welfare Plans

Cycle B Determination Letter Applications

Deadline for employers having Taxpayer Identification Numbers ending in 2 or 7 to apply for an IRS determination letter with respect to their Qualified Retirement Plans.


Qualified Retirement Plans

February 14 (within 45 days after the close of the fourth quarter of previous plan year)

Quarterly Benefit Statements for Participant-Directed Plans

Deadline for plan administrator to send quarterly benefit statement for the fourth quarter of previous plan year to participants in participant-directed defined contribution plans.



Defined Contribution Plans that allow participants to direct investments

Quarterly Fee Disclosure

Deadline for plan administrator to disclose fees and administrative expenses deducted from participant accounts during the fourth quarter of the previous plan year. Note that the quarterly fee disclosure may be included in the quarterly benefit statement or as a stand-alone document.


February 28 (if filing paper forms)



IRS Form 1099-R

Deadline for employer to file IRS Form 1099-R. If the form is filed electronically, the deadline can be extended until April 1.



Qualified Retirement Plans

February 28 (end of the 2nd month of the plan year)

Pension Benefit Guaranty Corporation (PBGC) Form 1-ES

Deadline for plan administrator with 500 or more participants on the last day of the plan year preceding the PBGC premium payment to file Form 1-ES and pay an amount equal to at least 90% of the flat rate premium paid in the prior plan year.



Defined Benefit Plans

March 1

(60 days after the beginning of the plan year)

Medicare Part D Creditable Coverage Disclosure

Deadline for employers that provide prescription drug coverage to Medicare Part D eligible individuals to disclose to the Centers for Medicaid and Medicare Services (CMS) whether the coverage is “creditable prescription drug coverage” by completing the Online Disclosure to CMS Form at



Health and Welfare Plans that provide prescription drug coverage to Medicare Part D eligible individuals

March 15

(2 ½ months after the plan year)

Excess Contributions

Deadline for plan administrator to distribute any excess contributions and earnings from the prior year to avoid 10% excise tax on employer (other than eligible automatic contribution arrangements (EACAs)).


401(k) Plans Other Than EACAs

March 31

(last day of 3rd month following the end of the prior plan year)

Certification of Adjusted Funding Target Attainment Percentage (AFTAP)

Deadline for actuary to certify AFTAP to avoid presumption that AFTAP is 10 points less than prior year AFTAP.


Defined Benefit Plans


See §902 of the Relief Act.

IRS guidance on the prior “in-plan” Roth conversion limited conversions to the vested portion of the account. See IRS Notice 2010-84. We assume that the IRS will issue similar guidance for the expanded Roth conversions made available under the Relief Act, but that remains to be seen.

See §101 of the Relief Act.

4 Id.


See §203 of the Relief Act.

Note that excess income tax withholding cannot be reimbursed or repaid to the employee. See IRS Notice 2013-8.

See §101 of the Relief Act.

See §208 of the Relief Act.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The Business Conduct Standards were adopted in January 2012 by the U.S. Commodity Futures Trading Commission.

U.S. Commodity Futures Trading Commission.

U.S. Department of Labor.

* Qualified Retirement Plans include all defined benefit and defined contribution plans that are intended to satisfy Code §401(a).      

The contents of this newsletter and any attachments are not intended to be and should not be relied upon as legal advice. If you are not currently on our Employee Benefits & Executive Compensation Practice mailing list under your own name, and you would like to join to receive our monthly Compensation & Benefits Insights publication and to receive notices of future programs and occasional commentaries on new legal developments in the industry, you can make that request by submitting your full contact information to

>> Back to Top


New York