Federal Judge Puts New FLSA Overtime Rules in Timeout

dol-logoOn November 22, 2016, U.S. District Judge Amos L. Mazzant granted a nationwide preliminary injunction in favor of the 21 states and more than 50 business groups that sued to enjoin the new Fair Labor and Standards Act (“FLSA”) overtime rule that would increase the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $921 per week ($47,982 annually). The new rule, issued under an executive order of the President, had an effective date of December 1, 2016 and would have required employers to pay overtime to employees who worked more 40 hours per week and were salaried at less than $921 per week or $47,982 annually. Those rules will not go into effect because of this order.

The Court found that the Plaintiffs’ stood a significant chance of success on the merits and would suffer irreparable financial harm if the rule was put into effect as scheduled on Dec. 1, 2016. The Court granted the injunction across the country because the scope of the alleged injury extends nationwide. The judgment stops enforcement of the new overtime rules until and unless the government is successful with an appeal from the Fifth Circuit Court of Appeals.

The rules apply to “white collar” exempt employees, which includes workers that perform administrative, executive or professional duties. CPAs, EAs and other tax return preparers are directly affected by this rule. Many of those employers hire exempt employees on weekly salaries for administrative and professional purposes during the tax filing season. Before the injunction, those seasonal tax workers would have been eligible for overtime unless their weekly salary was in excess of $921/week. Unless the government is successful with an appeal, those rules will not go into effect for the upcoming tax season.

Read the full opinion here: Nevada v. United States Department of Labor, Docket No. 00731

IRS Places Micro Captive Insurance Companies under the Microscope

microscopeOn November 1, 2016, the IRS issued Notice 2016-66 imposing reporting requirements on certain transactions by small captive insurance companies. The notice places heightened scrutiny on micro-captives by describing them as “transactions of interest.” That designation subjects them to additional reporting requirements for 2016 returns as well as earlier years.

Generally, captive insurance companies are corporations that are formed to insure related businesses. The related business (the insured) pays premiums to the captive insurance company in exchange for property and casualty-type insurance coverage. These arrangements are often established to provide coverages that might not otherwise be available commercially. Under section 831(b) of the Code, so-called small or “micro” captives can elect to exclude up to $1.2 million of premiums received from income and only pay tax on investment income. The premiums exclusion is set to go up to $2.2 million beginning in 2017. The premiums paid by the related business that set up the captive also may be deducted as a business expense under section 162.

IRS Notice 2016-66 identifies certain small captives, and substantially similar transactions, as a “transaction of interest.” The new “transaction of interest” designation throws small captive insurance company transactions, and their advisors, into a tax reporting regime that can potentially lead to penalties and examinations. The notice applies the “transaction of interest” tag to small captives that (1) have liabilities for covered losses and expenses in an amount less than 70 percent of the total premiums earned, or (2) provide premium payments as financing to an insured or related party in a transaction nontaxable to the recipient (e.g., loans).

Taxpayers will have to report the small captive “transaction of interest” annually by filing a Form 8886 with their tax returns beginning with the 2016 tax year. The disclosure information suggested by the notice includes (1) whether liabilities incurred are less than 70 percent of premiums (minus certain dividends and loans); (2) whether any loan or other financing arrangement has occurred between the captive and related parties; (3) the captive’s jurisdiction; (4) a description of the types of coverage(s); (5) how the premium(s) was/were determined, including the names and contact information for any actuary or underwriter involved; (6) a description of the claims paid; and (7) a description of the captive’s assets.

Taxpayers may also have to report separate Forms 8886 for each prior year. The Notice requires retroactive reporting for described captives that were formed on or after November 2, 2006, the date the “transaction of interest” regulations first went into effect. Under existing regulations, those prior year disclosures may be due by January 30, 2017.

Each unfiled or late-filed Form 8886 is subject to a penalty in the amount of $50,000, or $10,000 for natural persons, under section 6707A. Material advisors must also file Form 8918 and are subject to additional list maintenance requirements. Under section 6707, an unfiled or late-filed Form 8918 is subject to a penalty in the amount of $50,000 and further potential penalties.