Wednesday, December 30, 2009

Extension and Expansion of Rules for NOL Carrybacks

As we reported in our September 8th blog post, under the American Recovery and Reinvestment Act (ARRA) enacted in February, many small businesses that had expenses exceeding their income for 2008 could choose to carry the resulting loss back for up to five years, instead of the usual two. Under the ARRA, this option was available for an eligible small business (ESB) that had no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the net operating loss (NOL). Pursuant to the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) enacted last month, this carryback option is no longer limited to ESBs. Additionally, the WHBAA extended the carryback option to include NOLs that arise in tax years beginning in 2009. Thus, businesses averaging gross receipts in excess of $15 million can now take advantage of these carryback rules and will have an option of carrying back losses for any one tax year beginning before January 1, 2010 and ending after December 31, 2007.

As under the ARRA, the election to carryback NOLs can generally only be made for one tax year. Thus, for a calendar year taxpayer, the business can elect to carryback 2008 or 2009 losses, but not both. However, an ESB that made or makes an election under the rules of the ARRA may make the election for two tax years instead of one. An ESB that has losses in both 2008 and 2009 could potentially carryback the 2008 losses under the ARRA rules and the 2009 losses under the WHBAA rules.

The WHBAA does limit the amount of the NOL that can be carried back to the 5th tax year before the loss year to 50% of the business’s taxable income for that year. This limitation is not applicable to a 2008 NOL of an ESB that makes an election under the ARRA. Additionally, the WHBAA includes a separate, similar set of NOL carryback rules for life insurance companies.

Businesses that have large losses in 2008 and/or 2009 should consult with their tax advisors regarding these carryback rules as they may be able to offset income earned in up to five prior tax years and be eligible for a refund.

Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact either Nancy C. Pohl or Richard C. Smith.

Nancy C. Pohl is an Associate attorney practicing in the Estate Planning and Probate, Tax and Corporate Securities and Finance Departments. Her practice focuses on corporate and partnership tax planning, estate planning, tax-exempt organizations, general business planning and federal and state tax litigation. She also regularly advises clients on estate planning and probate matters. Contact Ms. Pohl at or 602.262.5927.

Richard C. Smith is a Member of the Tax, Estate Planning & Probate Departments and represents clients in all aspects of tax, corporate and business planning. His practice has a particular emphasis in the employee benefits area including the design, implementation and other aspects of pension, profit sharing and other qualified plans. He also advises clients in estate planning matters, including estate plans, wills, trust and family partnership agreements. Contact Mr. Smith at or 602.262.5972.

Upcoming Changes Regarding Roth IRA Rollovers/Conversions

After 2009, you will be able to roll over amounts from qualified employer sponsored retirement plans, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs, regardless of your adjusted gross income (AGI). Currently, individuals with more than $100,000 of adjusted gross income as specially modified are barred from making such rollovers.

What's so attractive about a Roth IRA? In summary:

  • Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
  • Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA are not taxed if some relatively liberal conditions are satisfied.
  • A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs. (For 2009, there's a moratorium on RMDs.)
  • Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.
The cost is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that was not taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you'll owe $28,000 of federal tax. So you'll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.

Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:

  • You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you'll have less money building up tax-free within the account.
  • You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
  • You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
  • You intend to convert an existing IRA account in which you have assets with substantially reduced values that you expect to substantially increase in the future.
  • You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.
You also should know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you will owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Why would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012. Absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to the higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will be hit by higher rates. In addition, there are health reform proposals before Congress right now that would help finance healthcare reform with a surtax on higher-income individuals. So if you believe there's a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.

Here are some ways individuals can prepare now for next year's rollover opportunity.

  • Non-high-income individuals who are able to make deductible IRA contributions this year should do so. They'll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won't have to pay back the tax savings until 2011 and 2012.
  • Individuals who have never opened a traditional IRA because they weren't able to make deductible contributions (and who never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA this year and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA next year they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. In 2010 and later years, they could continue to make nondeductible contributions to a traditional IRA and then roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.
  • Some high-income individuals may plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These individuals should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion in 2010. These individuals should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.
Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact Richard C. Smith.

Richard C. Smith is a Member of the Tax, Estate Planning & Probate Departments and represents clients in all aspects of tax, corporate and business planning. His practice has a particular emphasis in the employee benefits area including the design, implementation and other aspects of pension, profit sharing and other qualified plans. He also advises clients in estate planning matters, including estate plans, wills, trust and family partnership agreements. Contact Mr. Smith at or 602.262.5972.

Wednesday, December 9, 2009

Employment Alert: Changes to "GINA" are now in Effect

Summary: This Client Alert will provide an overview of the Genetic Information Nondiscrimination Act of 2008 (GINA), including examples of what is considered genetic information, and what changes were recently put into effect. Employers will learn how these changes affect their business and what actions they should to take to ensure that they are complying with the recent changes. Employees will learn how their genetic information is protected by GINA.

The most notable new anti-discrimination law in twenty years, the Genetic Information Nondiscrimination Act of 2008 (GINA), went into effect for health insurers in May of this year, and for employers on November 21, 2009. GINA protects Americans from being treated unfairly by health insurers and employers because of differences in their DNA that may affect their health.

GINA prohibits employers and health insurers, with some exceptions, from asking employees to provide their family medical histories. Also, insurers cannot require such testing or use genetic information to deny coverage or set premiums or deductibles. These recent changes also prohibit any employment decisions being made based on an employee’s genetics. Health plans will also be prohibited from rewarding their members for giving family medical histories when completing health risk questionnaires.

What is Genetic Information?
Genetic information does not include information about a person’s current health status. However, genetic information does include:
  • A person’s genetic tests;
  • Genetic tests of family members;
  • The manifestation of a disease or disorder in a family member;
  • Participation of a person or family member in research that includes genetic testing, counseling or education.

What Will GINA Do?
GINA was enacted to enable individuals to take advantage of genetic testing that may reduce the chance of contracting certain disorders, without suffering any adverse employment or insurance related consequences. Some of these developments include tests for breast or colon cancer mutations, classifications of genetic properties of existing tumors to help determine a course of treatment, tests for Huntington’s disease, as well as carrier screenings for fragile X syndrome, spinal muscular atrophy, and cystic fibrosis. GINA's purpose is to ensure that anyone who requests a genetic test for cancer will not be charged a higher rate for health insurance due to the presence of a positive genetic predictor for cancer, nor will their employment status be adversely affected by this type of health decision. The law also enables people to take part in research studies without fear that their DNA information might be used against them in health insurance or the workplace.

The bill may have only a small effect on what we do today, but its impact may grow with advances in biotechnology. It is comprehensive, requiring amendments to portions of the Title VII of the Civil Rights Act, the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA), the Internal Revenue Code, the Public Health Service Act and Title XVIII of the Social Security Act (Medicare). It is intended to be a federal baseline for discrimination, and does not preempt stricter state laws that may already be in effect.

What Won't GINA Do?
Although fairly broad in reach, GINA does not:
  • Prohibit the use of genetic information to make payment determinations, such as reimbursement for additional testing covered for those participants at a higher risk of a disease or disorder;
  • Prohibit health care providers from recommending genetic tests to their patients;
  • Mandate coverage for particular tests or treatments;
  • Affect underwriting based on current health status;
  • Prohibit certain types of research by insurers or employers.

What Actions Should Employers Take?
Employers should immediately post the mandatory "EEO is the Law" poster supplement next to their current version of the "EEO Is the Law" poster. A copy of the poster supplement may be obtained at the EEOC website.

We also recommend employers update their policies, handbooks and training to reflect these new changes. We are available to assist you with these updates and can provide additional counsel on the effects these rules may have on your business practices.

About the Author
Valerie J. Walker is an Associate attorney focusing her practice on litigation, and labor and employment. She has previously worked as a law clerk for both the Cook County Public Defender and the National Labor Relations Board in New York City. For more detailed information regarding these changes, please contact Valerie Walker at or via telephone at 602.262.5844.

John J. Egbert is Chair of the firm’s Labor & Employment Department. Mr. Egbert’s practice focuses in the areas of discrimination, wrongful discharge, and wage and hour litigation. He represents both private and public clients in federal and state court litigation, as well as before the various administrative agencies. He frequently advises clients on employment policies and procedures and represents employers in labor arbitration. Mr. Egbert also practices extensively before the state and federal appellate courts. Contact John Egbert at or 602.262.5994.