Unraveling Benefits Tax: Forms, Rules, and Withholding Procedures

1. Compensation and benefits tax: benefits tax

2. BENEFITS TAXBENEFIT PLANSTypes - 401(k) I.R.C. § 401(k)(2): A qualified cash or deferred arrangement that is part of a profit-sharing or stock bonus plan under which a covered employee may elect to have employer make payments as contributions to a trust under the plan on behalf of the employee Features: • Distributions cannot occur until severance from employment, death, or disability • In the case of a 401(k) profit-sharing or stock bonus plan, distributions cannot be made until the attainment of age 59.5 or upon hardship of the employee

3. BENEFITS TAXBENEFIT PLANSTypes - 401(k) Features cont…. • Permits higher level of salary deferrals by employees than other retirement plans • Employer contributions are permissible, but not required • The maximum annual contribution in 2012 for employee deferrals is $17,000 (excluding Catch-up contributions of $5,500 for age 50+). Combined employee and employer may not exceed the lesser of $50,000 or 100% of compensation subject to nondiscrimination testing • Must start receiving distributions by April 1, following the later of year of retirement or turning 70.5 • Early withdrawals are subject to 10% additional tax • Rollovers permitted • An employee's elective deferral contributions are immediately 100% vested; employer contributions may vest over time according to plan terms

4. BENEFITS TAXFORM 1099-RReporting – The Fundamentals File Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for each person who received a distribution of $10 or more from the following: • Profit-sharing or retirement plans • IRAs • Annuities (including commercial) • Pensions • Insurance contracts • Survivor income benefit plans • Permanent and total disability payments

5. BENEFITS TAXFORM 1099-RReporting – Unusual Circumstances and Rules • Report distributions of I.R.C. § 404(k) dividends from an Employee Stock Ownership Plan (ESOP) to individuals who are not participants or the participants' beneficiaries • Report I.R.C. § 404(k) dividends paid directly from the corporation to participants or the participants' beneficiaries on Form 1099-DIV • If cash or capital gain property is donated in exchange for a charitable gift annuity, report distributions from the charitable gift annuity • Need to file only one Form 1099-R for distributions from all investments under one plan, paid in one year, to one recipient, UNLESS you have to enter different codes in Box 7 • In other words, you do not have to file a separate Form 1099-R for each distribution under the plan, assuming there has been more than one

6. BENEFITS TAXFORM 1099-RDirect Rollover of an Eligible Rollover Distribution Report a direct rollover of an eligible rollover distribution • Direct rollover is direct payment from a qualified plan • An eligible rollover distribution is any distribution of all or any portion of a balance in one account to another account under a qualified plan • Report a direct rollover in Box 1 and a "0" in Box 2a • Enter Code G in box 7 unless the rollover is a direct rollover from a designated Roth account to a Roth IRA Note: Prepare the form using the name and social security number (SSN) of the person for whose benefit the funds were rolled over (generally the participant), not those of the trustee or administrator of the plan to which the funds were rolled

7. BENEFITS TAXFORM 1099-RFederal Income Tax Withholding Special rules for withholding I.R.C. § 3405(b) – For non-periodic distributions from a retirement plan, must withhold 10% I.R.C. § 3405(c) – Eligible Rollover Distributions are subject to a 20% withholding tax So what does this mean?

8. BENEFITS TAXFORM 1099-RFederal Income Tax Withholding Test The IRS provides a test to figure out whether FITW is required and what amount to withhold: • First, determine whether the distribution is an eligible rollover (discussed above)? • If yes, then 20%; If no, next step • If not an eligible rollover, is it a non-periodic distribution (i.e., a distribution outside of a time the participant is supposed to receive one)? • If yes, then 10%; If no, next step • The distribution is a periodic distribution (when participant is supposed to receive one), withhold at normal FITW rate for that employee's wages. • Percentage to withhold depends on the withholding procedure of the company, wage bracket, etc. Note: the eligible rollover withholding rules do not apply to IRA distributions

9. BENEFITS TAXFORM 1099-R Box 7 – Codes • Code 1: When the employee/taxpayer has not reached age 59.5 and no other exception applies *Certain exceptions exist for distributions that qualify for Code 2 (too many to list here - please refer to the instructions); Code 3 exceptions are for distributions due to disability; and Code 4 exceptions are for distributions due to death • Code 7: Normal distributions • Code B: Designated Roth Account distributions • Code G: Direct rollover and rollover contributions

10. BENEFITS TAXFORM 1099-R Box 7 – Codes • Code 5: When reporting a prohibited transaction • Code 8: When reporting excess contributions plus earnings/excess deferrals taxable in 2012 • Code F: When reporting a Charitable Gift Annuity • Code P: When reporting excess contributions plus earnings/excess deferrals taxable in 2011 • Code U: When reporting dividend distributions from an ESOP under I.R.C. § 404(k)