Jul 28, 2008

July 2008 Client Alert

Minimum Wage Increased

On July 24, 2008, the federal minimum wage increased 70 cents from $5.85 per hour to $6.55 per hour. The increase was the second stage of a three-phased increase of the federal minimum wage, implemented by legislation signed by President Bush in May 2007. Under the U.S. Department of Labor (DOL) regulations, all employers that hire workers subject to the minimum wage provision of the Fair Labor Standards Act must display posters explaining the wage increase. Employers can download and print DOL-approved notices for free from the DOL’s Wage and Hour Division web site ( Employers must post the notice in a conspicuous place where employees may readily read it.

Many states also have minimum wage laws and some state laws provide greater minimum wage rates. Employers in states where the minimum wage rate is higher than the federal rate are still required to post the DOL-approved notice.

July 31 Deadline for Many Annual Reports (Form 5500)

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (the HEART Act). Generally, the HEART Act contains changes to the Internal Revenue Code that affect benefits for members of the military and their families under retirement plans, cafeteria plans, and group health plans. The effective dates vary by provision and some are retroactive or take effect immediately. Therefore, prompt attention from employers and plan sponsors is necessary.

Retirement Plan Changes

Under the HEART Act, retirement plans must provide the survivors of participants who die while performing qualified military service with any additional benefits that they would have been entitled to had the participants died during active employment. This provision applies to deaths occurring on or after January 1, 2007, therefore plan sponsors should review their plans for compliance with this provision. The HEART Act makes permanent an exemption that allows for qualified reservists called or ordered to active military duty on or after December 31, 2007 to withdraw amounts from retirement plans without being subject to the 10% early withdrawal penalty.

Cafeteria Plan Changes

The Heart Act amends Code section 125 (related to cafeteria plans) — to allow health flexible spending arrangements (health FSAs) to provide qualified reservist distributions of all or a portion of the health FSA account balances of employees who are reservists called to active duty for more than 179 days, or for an indefinite period of time. These distributions allow reservists to avoid forfeitures of their health FSA account balances under the “use-it-or-lose-it” rule. Qualified reservist distributions may be made during the period beginning on the date that the employee was called to active duty and ending on the last date that reimbursements could otherwise be made for the plan year.

Wage Payments While on Military Duty

Under the HEART Act, differential wage payments — defined as employer payments to an individual serving on active duty for more than 30 days that represents wages the employee would have received if he or she were actively at work for the employer — are treated as wages for income tax purposes, and as compensation for retirement plan purposes. In other words, differential pay is now subject to withholding and employers are required to include the amount of differential pay as plan compensation and wages for 401(k) and other qualified plans. These changes apply to differential pay paid after December 31, 2008.

With respect to these provisions, employers and plan sponsors should review their retirement plans, cafeteria plans, and group health plans to ensure compliance with the HEART Act.

Introducing Glenn Gunnels

Glenn D. Gunnels has recently joined the firm as a partner in the Executive Compensation and Employee Benefits practice area. He has extensive experience in all areas of the practice while representing both public and private companies, and regularly consults on retirement, health and welfare, and 409A issues. He has particular expertise in advising clients with respect to ERISA fiduciary issues and in using leveraged ESOPs to purchase closely-held companies. Mr. Gunnels received his B.B.A. in Finance and an M.B.A. from the University of Memphis, before earning his J.D. from Northwestern University School of Law.

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