Year-end workforce and human resources considerations

Compensation and benefits professionals can achieve increased stakeholder value by aligning people strategies with business objectives. Leaders focused on long-term success should understand critical compensation and benefits tax considerations, including key actions to undertake before Dec. 31.

The following planning opportunities are based on current law and may be subject to legislative changes.

Health and retirement benefits

Qualified plan corrections: Qualified retirement plans (e.g., 401(k) plans) must meet a vast array of complicated operational and written document requirements to remain “qualified,” and there are often minor and sometimes major failures to fully comply, potentially resulting in substantial penalties for the business. Congress recently expanded the program that allows businesses to correct failures without incurring penalties. Review your current plans to identify and correct plan failures under the expanded program.

SECURE 2.0 Changes for retirement plans: The SECURE 2.0 Act of 2022 made over 90 changes to the rules for qualified and other tax-favored retirement plans. Employers should determine whether any of the mandatory changes are required to be made to a company’s existing retirement plans, and then identify whether any optional changes should be considered to enhance the retirement benefits offered to employees.

Form 5500: Form 5500 (Annual Return/Report of Employee Benefit Plan) is an annual reporting obligation mandated by the Employee Retirement Income Security Act (ERISA) that has expanding regulatory requirements. Organizations should be diligent with the preparation and filing of Form 5500(s) in order to comply with current requirements. It is possible to face substantial penalties associated with late and/or inaccurate filings.

Withholding and reporting for taxable non-cash fringe benefits: An employer generally must treat, for employment tax withholding and reporting purposes, taxable non-cash fringe benefits as paid when the benefits are provided. Employers can also elect to treat the value of non-cash fringe benefits provided during the last two months of a calendar year as paid during the subsequent calendar year.

Vendor searches to limit fiduciary risk: Under the Consolidated Appropriations Act 2021 (CAA), plan sponsors are now required to assess the “reasonableness” of the fees paid by their health plan(s) to brokers and consultants, creating fiduciary risk and exposure to potential lawsuits for plan sponsors if the fees paid by their plan(s) are determined to be unreasonable. Conducting a managed request for proposal is important in determining the reasonableness of fees and managing fiduciary risk.

Affordable Care Act (ACA): Organizations should be diligent when preparing their annual ACA filings (e.g., Form 1094-C, Form 1095-C). These are due at the beginning of 2025 for the 2024 calendar year, and should be reviewed thoroughly to avoid any penalties. 

Payroll and employment tax

Year-end employment tax and information reporting filings: Organizations should determine if they are ready for the employment tax and information reporting (Forms 1099) filings generally due in January 2025. These reviews should include assessments of multi-state and remote workforce payroll tax configurations and calculations, payroll system reviews and Form W-2 and Form 1099 preparation and filings.

Mergers, acquisitions and reorganizations: With year-end being a common time for mergers, acquisitions and internal reorganizations, businesses should prepare for employment tax action items that will need to occur in conjunction with closing. This can include preparation of registration, transfer and closure forms for employment tax accounts at the federal, state and local levels.

Compensation

Profits interests: Will the new year start off with the entrance of new partners or members into your partnership or LLC? Profits interests (or carried interests) can be a tax efficient way of awarding a service provider ownership in the partnership or LLC, but the rules can be complicated and, if not met, the intended favorable tax treatment of a profits interest may be lost.

Accelerate tax deductions: Businesses may be able to take steps before the end of the tax year to accelerate tax deductions related to certain compensation arrangements, like annual bonus programs, to the current year, even if the compensation is paid next year.

Effectiveness of total rewards: Given continued increases in cost of labor and impacts of inflation on employee retention and employee well-being, employers should review their total compensation mix, including cost and value or employee benefit programs, cash compensation and other workforce investments.

Executive compensation: Organizations beginning to review their executive compensation program ahead of the new year should include benchmarking against peer groups, confirming if compensation plan metrics are aligned to the business strategy and reviewing long-term incentive vehicles, vesting periods and performance measures.