The Internal Revenue Service (IRS) says it’ll finally launch its National Research Program (NRP) in February — three months after it was originally scheduled to begin.

The NPR is an intense audit process, where examiners will go line-by-line through tax returns to gather info on the impact of employment tax noncompliance on the tax gap.

How many employers will be hit? Nearly 2,000 will be randomly selected for audits each of the next three years, according to the IRS.

Should your company be one of the unlucky ones chosen for an audit, here are some of the typical targets you’ll have to provide records for:

• fringe benefits
• company officers’ compensation
• expense reimbursements, and
• worker classification.

While there’s no doubt wellness programs have their benefits, little has been made of their drawbacks and hidden costs.

Three pitfalls to watch out for in wellness programs:

1. You get what you pay for

By and large, the cost savings from a wellness program will be driven by how much you’re willing to spend. Generally, you get what you put into them — both in time and money.

In addition, the program has to be tailored to your specific needs. What works for one company may not be right for you.

2. Tough to administer in-house

Many employers find it’s more effective to outsource wellness. Two reasons:

• Employee trust. Many employees are more cooperative with a wellness program if they don’t fear their employer is watching their every move.
• Legal protection. Outsourcing helps insulate you from later claims that the company discriminated against or fired an employee specifically because of his or her health risks.

3. Tax trouble

Some of the most popular incentives offered to employees for living healthier lifestyles (e.g., partially paid gym memberships) are taxable as compensation.

If you offer wellness participants discounts on their health premiums, the Internal Revenue Service caps the incentive at 20% of the total cost of coverage. Anything beyond that has to be considered taxable income.

Here are three pitfalls to watch out for:

1. You get what you pay for

By and large, the cost savings from a wellness program will be driven by how much you’re willing to spend. Generally, you get what you put into them — both in time and money.

In addition, the program has to be tailored to your specific needs. What works at another company may be a giant flop with your workforce.

2. Tough to administer alone

Most employers find that it’s more effective to outsource wellness. Three reasons:

• Experience. Outsourced vendors have the expertise. They’ve been there, done that — and vendors that’ve been around for a while know how get results.
• Employees’ trust. Many employees are more involved in wellness programs when there’s no fear their employer is looking over their shoulders.
• Legal protection. Outsourcing helps insulate you from later claims that the company fired an employee because of his or her health risks.

3. Tax problems

Some of the most popular incentives offered to employees in wellness plans (think subsidized gym memberships) are taxable as compensation.

If you offer wellness participants discounts on their premiums, the Internal Revenue Service (IRS) caps the incentive at 20% of the total cost of coverage. Beyond that, Payroll has to withhold taxes or you could run afoul of the IRS.

Contribution limits for defined-benefit and defined-contribution plans will not change for 2010.

Limits are adjusted each year using a formula based on inflation.

And because recent inflation has been minimal, these limits will remain:

• $16,500 for 401(k), 403(b) and 457 plans (plus an additional $5,500 for those 50 or older by the end of 2009)
• $11,500 for SIMPLE plans (plus an additional $2,500 for those 50 or older by the end of 2007)
• $5,000 for traditional and ROTH IRAs (plus an additional $1,000 for those 50 or older by the end of 2009)
• $49,000 for defined-contribution KEOGH plans, and
• $195,000 for defined-benefit pension plans.

1. Standard deductions and personal exemption. For 2010, these standard deductions are unchanged, at:

• Married couples filing jointly (or surviving spouses) – $11,400
• Single taxpayers, and those married but filing separately – $5,700

The standard deduction for heads of households increases to $8,400 (up from $8,350 in 2009).

The personal exemption for 2010 is unchanged from 2009, at $3,650.

2. Qualified transportation fringes. For 2010, Payroll may exclude from an employee’s income:

• $230 per month for qualified parking benefits, and
• $230 per month for transit and vanpooling expenses combined (unchanged from limits set for Mar. – Dec. 2009. In Jan. and Feb., the limit was $120).

These amounts are unchanged from 2009.

3. Adoption credit. The most Payroll may exclude from an employee’s gross income under an employer-provided adoption assistance program is $12,170 ($12,150 in 2009). The same threshold applies to an adoption of a child with special needs. The exclusion begins phasing out for employees with a modified adjusted gross income (AGI) greater than $182,520 and disappears for those with a modified AGI of $222,520. or more. Those limits are $340 higher than in 2009.

4. Medical Savings Accounts (MSAs). For 2010, a high-deductible health plan is one with the following annual deductibles:

• Individual coverage – $2,000 – $3,000 (unchanged from 20009), with an out-of-pocket maximum of $4,050 (up from $4,000 in 2009), and
• Family coverage – $4,050 – $6,050 (also unchanged), with an out-of-pocket maximum of $7,400 (up from $7,350).

5. Earned income credit. For 2010, the earned income credit (EIC) is for:

• one qualifying dependent child – a maximum of $3,050 (that’s 34% of the first $8,970). The max was $3,043 in 2009).
• two or more qualifying children – a max of $5,036 (40% of the first $12,590 of earned income. The max was $5,028 in 2009.
• no qualifying children – a max of $457 (7.65% of the first $5,970). This is unchanged from 2009.

Married couples filing jointly and earning less than $40,545 in 2010 (or $35,535 for single employees) and who have at least one qualifying child may receive advance EIC payments of up to $1,830 ($1,826 in 2009). Payroll should divide this amount by the number of pay periods in a year. Like other benefits, this credit begins phasing out above certain incomes.

6. Long-term care benefits. Under long-term care insurance plans that make per diem benefit payments, here’s what you can exclude from income in 2010:

• $290 per day ($280 in 2009), or
• $105,850 annually ($102,200 in 2009).

7. Foreign earned income exclusion. The maximum foreign earned income exclusion is $91,500 in 2010, up from $91,400 in 2009. [IRC Sec. 911(d)(2)(D)(i).] The max foreign housing cost exclusion in 2010 will be $12,810, up from $12,796 in 2009. [IRC Sec. 911(c)(2).]

Good news: The feds are eliminating paperwork associated with one common fringe benefit — company-provided cell phones.

The Internal Revenue Service (IRS) ruffled employers’ feathers this summer when it decided to unearth a seldom-used, 20-year-old law requiring companies to tax employee’s cell phones.

Many employers paid little attention to the old rules — which said personal calls on employer-provided cell phones were taxable — until the IRS announced it would simplify the rules for how these phones would be taxed.

No matter what the new rules would be, Benefits pros were almost certainly looking at added paperwork.

Imagine constantly having to determine which calls employees make — say to a friend in the office, for example — are personal (and taxable) and which aren’t.

It’d be a huge headache.

Well now employers don’t have to worry about it.

After reviewing the proposed new rules, the IRS backed off its stance and has decided to halt taxation on personal calls altogether.

IRS Commissioner Doug Shulman recently issued this statement: “Although some of the proposed changes would add clarity, the current law will inevitably leave widespread confusion among employees and businesses. Therefore, Secretary Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers. The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete.”

The IRS just announced it will launch a major employment tax audit initiative.

It’s planning 6,000 random audits in the next three years, starting this November.

3 areas to check

As for which bases you want covered, there are three specific targets the IRS has identified:

• employee fringe benefits
• executive pay, and
• independent contractor classifications.

You still have a few months before the audits begin.

Now’s the time to make sure your company is not only in compliance, but has the proper paper trail to support all decisions.

It couldn’t hurt to perform a “mock audit” of these areas to see if your company’s vulnerable.

That can save you from having to open your wallet too wide if the IRS does pay you a visit.

Those trying to boost their retirement savings can’t seem to catch a break. First the market freefalls, and now Uncle Sam may put the squeeze on how much you’re allowed to contribute. 

Lower 2009 inflation is likely to require employers to make changes in next year’s 401(k) plans, according to a report released by Mercer.

On Oct. 15 the Internal Revenue Service (IRS) is expected to announce changes required to 2010 retirement plan contributions.

Changes may include:

• A $500 cut in the maximum amount employees can contribute, and
• A $5,000 slice off the maximum income eligible for an employer contribution.

The limits for defined-contribution and defined-benefit plans — including the amount employees can sock away in 401(k)s — are adjusted each year using a formula based on inflation. And as a result of negative inflation this year, 401(k) contribution limits for 2010 may not get a cost-of-living increase.

Although it’s not entirely clear whether the IRS would actually go through with lowering contribution limits based on the formula, should it do so, this would be the first time limits have been adjusted downward.

Currently, employees can contribute up to $16,500 in their 401(k)s on a pre-tax basis or $22,000 if they’re 50 or older. But that amount could be reduced by $500, down to $16,000.

What employers will have to do

If lower contribution limits are set, plan sponsors will need to alter forms and warn workers to cut back if they will max out.

Workers will also have to be notified if lower limits affect benefit accruals in pension plans.

2 ways to ease the pain

Should lower limits get established, some employees are bound to be upset.

Two ways to ease the blow:

• Check whether your 401(k) plan allows after-tax contributions, or
• Encourage employees to set money aside in an IRA, or some other tax-efficient investment.

If you haven’t heard of the Internal Revenue Service’s  “6720C” penalty, you will soon — and so will ex-employees who don’t follow the rules when accepting COBRA.

And it’s something you’ll want to be sure you mention to ex-employees who are taking COBRA.

In a conference call with reporters, the IRS just announced that — under the 6720C provision –  terminated employees who accept a COBRA subsidy will end up paying a price if they don’t adhere to strict eligibility rules.

Not only will they lose their health insurance, but they’ll also face a penalty for 110% of the subsidy if they’re later offered insurance coverage from another company or plan, and fail to inform their former employer.

The penalty was designed to help recapture subsidy payments (and then some) from people who accept the help but don’t qualify, IRS’ Joe Tiberio said in the  conference call.

To illustrate how it works:

• Let’s say former employee Fred gets laid off and accepts a COBRA subsidy valued at $5,000 to continue his insurance.
• Six months later, he’s offered coverage from a new employer but decides to keep his current policy intact because it’s less expensive.
• His former employer finds out about the insurance  and contacts IRS.
• Fred not only can lose his insurance, he must pay $5,500 — $5,000 to repay the subsidy amount plus the $500 additional penalty.

While Tiberio admits IRS doesn’t expect to frequently apply this penalty, it’s good news for struggling companies still carrying a lot of former workers on their insurance plans. By letting terminated employees know about the potential penalty when they sign up for coverage, you’ll not only save your company’s resources, but maybe also help employees already down on their luck resist the temptation of insurance fraud.

Always an exception
It’s important to note that not everyone who accepts the subsidy but isn’t eligible will be penalized. For example, the subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, don’t qualify for the subsidy at all. In these cases, the subsidy amounts will be recaptured when the former employee files a personal tax return (Form 1040).

“[T]here will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers,” he said in statement posted on IRS’ Web site.

He adds that the current law, which requires employers to include in employees’ gross income the value of the personal use of employer-provided cell phones, is “burdensome, poorly understood by taxpayers and difficult for the IRS to administer correctly.”

He’s asked Congress to take action because the “passage of time, advances in technology and the nature of communication in the modern workplace have rendered this law obsolete.”

What else is new
Meanwhile, just days before Schulman’s announcement, IRS issued a notice asking for comments on several proposals that would simplify the substantiation procedures on an employee’s business use of employer-provided cell phones.

Some believe that the IRS notice was intended to draw attention to the administrative difficulties raised by the current law, which could be resolved by Congressional action.

Here are the three methods IRS suggests in its notice:

1. Minimal Personal Use Method – Employers would count all of an employee’s cell phone usage as business related. There are two different ideas being tossed around:

• Companies could count the entire amount as business use if the employee provides the employer with records establishing that he or she has a personal (nonemployer-provided) cell phone for personal use during work hours, or
• An employer could disregard a specified amount or type of “minimal” personal use to determine the amount of personal use. For example, “minimal” might be defined by a particular number of minutes or use for certain personal purposes.

2. Safe Harbor Substantiation Method – Companies could treat a certain percentage of each employee’s use as business usage. The remaining percentage would be counted as personal purposes. IRS and the Treasury Department are proposing a business use of 75%.

3. Statistical Sampling Method – Employers could use IRS-approved statistical sampling techniques to measure personal use. The company would multiply a percentage times the value of each employee’s total usage to determine personal use. The remaining portion of the employee’s usage would be counted for business purposes.

Of course there always has to be some fine print. The IRS Notice adds that employers using a simplified cell phone substantiation method will be required to:

• implement a written policy that: a) requires employees to carry and use the phones for work purposes, and b) prohibits personal use of the phones, except for “minimal personal use” (similar to the requirements applicable to employer-provided automobiles in Internal Revenue Code Section 1.274-6T), and
• reasonably believe that the cell phone is not used for personal purposes, except for minimal personal use.

Employers have until September to send IRS comments on its proposals. It’s unclear, though, whether Congress will respond to Shulman’s request and take any action. We’ll keep you posted.