‘One Big Beautiful Bill Act’: Senate Version Caps Section 899 ‘Revenge Tax’ at 15% and Carves Out ‘Portfolio Interest’
On June 16, 2025, the Senate Finance Committee released its own version (Senate Version) of the tax provisions of H.R. 1, entitled the “One Big Beautiful Bill Act,” which the U.S. House of Representatives passed on May 22, 2025.
The Senate Version introduces several important changes and clarifications to the proposed new Section 899 of the Internal Revenue Code (Code), “Enforcement of Remedies Against Unfair Foreign Taxes” that was included in the bill that was passed by the House (commonly referred to as the Revenge Tax). If enacted as proposed in the Senate Version, Section 899 would increase by up to 15 percentage points a range of U.S. federal tax rates, including both U.S. withholding tax rates (such as those on interest, dividends, and other fixed or determinable annual or periodical income paid to foreign persons) and certain other U.S. income tax rates (such as the regular tax rates applicable to nonresident individuals and foreign corporations, branch profits tax, and tax on private foundations), on income derived by taxpayers who are resident in, or otherwise connected to, jurisdictions the U.S. government designates as “offending foreign countries.”
The Senate Version includes a specific exception from the tax increase under Section 899 for “portfolio interest,” as well as a cap of 15% on the additional tax under Section 899 (as opposed to 20% cap the House proposed, determined without regard to any rate applicable in lieu of the statutory rate). The Senate Version also delays the implementation of the proposed Section 899, generally until Jan. 1, 2027 (compared to the effective date of Jan. 1, 2026, under the House version).
This GT Alert summarizes the most significant substantive changes and explains their potential impact.
Click here to continue reading the full GT Alert.
Why Online Retailers Can’t Afford to Ignore Sales Tax Compliance in 2025
It’s never been easier to run an online business. With a few clicks, you can launch a store, market to customers worldwide, and scale like never before. But as digital storefronts multiply, so do the rules — and one area where things are tightening fast is sales tax compliance. Whether you’re selling handmade jewelry from […]
Florida Legislature Repeals Sales Tax on Commercial Leases
The Florida legislature passed HB 7031, which, if signed by Gov. DeSantis, would eliminate the state’s sales tax on commercial real property leases. Florida sales tax rates on commercial leases have been reduced over the last several years to a current state level tax rate of 2% (as opposed to the general 6% tax rate for sales tax on other items). When combined with local option tax rates (generally 1% – 1.5%), the current combined state and local tax rate is 3% – 3.5%. HB 7031 would eliminate the tax, i.e., both the state level tax and the local option tax, rather than merely reduce the tax rate further. This GT Alert provides details on the elimination of the sales tax on commercial leases.
Effective Date
The change is set to take effect Oct. 1, 2025. Note that the tax applies to the period of occupancy, so if rent for October or any later period is prepaid before Oct. 1, 2025, sales tax would not be due.
Some Real Property Rentals Are Still Taxable
Short-term residential rentals and vehicle parking, boat docking, and aircraft hangar rentals would still be subject to tax because the budget agreement only repeals section 212.031 of the Florida statutes, not the separate statute under which short-term residential rentals and parking, docking, and aircraft storage space are taxed (found in Sec. 212.03). Short-term residential rentals refer to any use of residential property unless under a written lease for a period of longer than six months. The sales tax on aircraft storage rentals would include a hangar rental.
Tax Still Due for Occupancy Periods Prior to the Oct. 1, 2025, Effective Date
The tax on commercial rentals would still be due on rental payments for occupancy periods prior to the tax repeal’s Oct. 1 effective date. For example, if a tenant is two months behind in their rent and pays their August and September rent on or after Oct. 1, sales tax would still be due. The same situation would be true for rental adjustments. For example, assume a tenant is required to pay additional rent attributable to pre-Oct. 1, 2025, occupancy periods because the lessor was required to pay additional property taxes after not prevailing in a controversy over the assessed value of the real property. When the lessor charges the tenant for its share of the additional property taxes, sales tax would be charged because the payment relates to an occupancy period prior to the effective date of the repeal.
Successor Liability Still an Issue
Even though no further sales tax would be due for occupancies after Oct. 1, the purchaser of commercial real property would still need to be concerned with potential successor liability for the sales tax obligations of the seller. This is because the Department of Revenue has three years from the time a sales tax return was filed to audit and assess a deficiency for taxes that should have been paid but were not. A purchaser could be relieved of this successor liability if the seller obtained a certificate of compliance from the Department of Revenue.
Consequently, purchasers should continue to require a certificate of compliance for post-Oct. 1 commercial property deals. However, if the seller stops filing sales tax returns, the Department of Revenue might not issue a certificate of compliance. For this reason, commercial property owners should consider continuing to file sales tax returns after Oct. 1, even if there is no sales tax due (a “zero return”) so they would still be able to request a certificate of compliance.
Equipment Rentals Still Subject to Tax
If the owner of real property leases equipment to a tenant, the rental would still be subject to sales tax on the rental of tangible personal property. For example, if the lease of a warehouse includes a provision for separate rental charge for a forklift, the equipment rental charge would be subject to sales tax.
Healthcare Preview for the Week of: June 23, 2025 [Podcast]
Reconciliation Byrd Rulings and Potential Floor Vote
This week will be busy as Republicans race to try to get the reconciliation package to President Trump’s desk by July 4. Last week, the Senate Finance Committee, which has jurisdiction over the most provisions of the package, including Medicaid, the Affordable Care Act, and taxes, released its version of text. The Finance Committee made substantive changes to key House-passed Medicaid and tax policies and has been met with criticism by multiple Republican Senators, such as Sen. Hawley (R-MO), along with moderate House Republicans who oppose certain tax policy changes.
Senate and House passage will be an uphill battle, but the current package is already changing as negotiations for votes and the Byrd rule process continue. Due to concerns over the Medicaid provider tax policy modified by the Senate, Senate Republicans are floating the idea of adding a rural hospital fund to help those hospitals financially and try to then win the support of concerned senators. Other policies put forth in the Senate Finance package may have been placeholders to gauge support and may continue to change as well.
The Senate parliamentarian has already ruled that certain provisions, including some related to the Supplemental Nutrition Assistance Program, do not comply with the Byrd rule and must be struck to allow for Senate passage by a simple majority. Some of the struck provisions were major savers and could cause Republicans to add or modify policies to fill those gaps. We also await a Congressional Budget Office (CBO) score of the Senate bill. The parliamentarian is expected to rule on health provisions as early as Monday. It is anticipated that the Senate will release an updated package after the Byrd process concludes and before a Senate floor vote, scheduled for later this week. That vote could get pushed back if there is continued opposition from more than three Republican senators, since that is the most they can lose on the floor vote. If the Senate vote is pushed back, the timeline of getting the bill to President Trump by July 4 could also get pushed back, as the House needs to pass the Senate-passed bill as well. As of now, both chambers are scheduled to be out of session next week.
Amid all this Senate action, the House will consider several health bills on the floor under suspension of the rules today. They include H.R. 1082, the Shandra Eisenga Human Cell and Tissue Product Safety Act, which would require HHS to increase awareness of the potential risks and benefits of human cell and tissue transplants, and H.R. 1520, the Charlotte Woodward Organ Transplant Discrimination Prevention Act, which would prohibit providers from denying an organ transplant based solely on an individual’s disability. Both bills passed out of the Energy and Commerce Committee earlier this year with bipartisan support.
There will also be action at the committee level this week, with significant House and Senate hearings. The Senate Health, Education, Labor, and Pensions Committee will consider the nomination of Susan Monarez, PhD to be Centers for Disease Control and Prevention (CDC) director. She is currently acting CDC director and was nominated to officially serve as director after the White House abruptly withdrew the nomination of former Representative Dave Weldon, MD. US Department of Health and Human Services (HHS) Secretary Kennedy will testify at the House Energy and Commerce Committee on the fiscal year (FY) 2026 budget request, where attention will likely also focus on how the agency is or is not spending FY 2025 appropriated funds and on vaccine policy.
Today’s Podcast
In this week’s Healthcare Preview, Debbie Curtis and Rodney Whitlock join Julia Grabo to discuss where the Senate is on reconciliation ahead of the quickly approaching, self-imposed July 4th deadline.
New Rhode Island Tax on Non-Owner-Occupied Properties Assessed at $1 Million or More
Rhode Island’s 2026 budget bill contains a “Non-Owner-Occupied Property Tax Act,” which is popularly referred to as the “Taylor Swift Tax.” This law imposes a new statewide tax on non-owner-occupied residential properties with assessed values of $1 million or more.
The tax applies to owners of residential properties that meet the following criteria:
The property must have an assessed value of $1 million or more as of December 31 of the tax year
The property must not serve as the owner’s primary residence
The owner must not occupy the property for a majority of days during the tax year.
The tax rate is set at $2.50 for each $500 of assessed value above $1 million. For example, a property assessed at $1.2 million would incur an annual tax of $1,000, while a property assessed at $2 million would face a $5,000 annual tax, and a $3 million property would be subject to $10,000 annually.
Beginning July 1, 2027, the $1 million threshold will be adjusted annually based on the Consumer Price Index for All Urban Consumers (CPI-U), with adjustments compounded annually and rounded up to the nearest $5 increment, though the threshold can never decrease from the prior year.
There are important exemptions that property owners should carefully consider. For instance, the tax does not apply to properties that are rented for more than 183 days during the prior tax year and are subject to Rhode Island’s landlord-tenant law. Property owners will have certain appeal rights and procedures available to challenge the tax.
The legislation also imposes significant record-keeping requirements on property owners. Property owners must maintain records necessary to determine tax liability for three years following the filing of any required return or until any litigation or prosecution is resolved.
Required records include rental agreements, rent payments, bank statements for residential expenses, utility bills, and any other records establishing residency or non-residency. These records must be made available for inspection by the tax administrator or authorized agents upon demand during reasonable business hours.
This law represents a significant development in Rhode Island property taxation and will substantially impact investment property owners, vacation homeowners, and others holding non-owner-occupied residential real estate. Property owners should consult with legal and tax professionals to assess the specific impact on their holdings and develop appropriate compliance and planning strategies.
One Big Beautiful Bill Act – Senate Proposal Would Limit Applicability of House’s 3.5% Remittance Tax on Fund Transfers Abroad
On June 16, 2025, the Senate Finance Committee released its own version (Senate Proposal) of the tax provisions of H.R. 1, entitled the “One Big Beautiful Bill Act” (Bill) which the U.S. House of Representatives passed on May 22, 2025. The full U.S. Senate is expected to debate the Senate Proposal in the days ahead, where additional changes may be made.
The Bill passed by the House includes a proposal to impose a 3.5% excise tax on “remittance transfers” after Dec. 31, 2025 (Remittance Tax), subject to certain exceptions for transfers made by U.S. citizens and nationals.
Key Exceptions in the Senate Proposal
Presumably addressing significant concerns raised by U.S. financial institutions and business associations, the Senate Proposal significantly limits the applicability of the Remittance Tax by providing an exception for remittance transfers made through accounts held by certain financial institutions subject to the Bank Secrecy Act (and that are therefore subject to anti-money laundering (AML) recordkeeping and reporting requirements). More specifically, funds withdrawn from an account held in or by the following types of financial institutions are excepted from the Remittance Tax: (i) an insured bank; (ii) a commercial bank or trust company; (iii) a private banker; (iv) an agency or branch of a foreign bank in the United States; (v) a credit union; (vi) a broker or dealer registered with the Securities and Exchange Commission; and (vii) a broker or dealer in securities or commodities. The Senate Proposal also makes an exception for remittance transfers that are funded with a debit or credit card issued in the United States. In parallel, the Senate Proposal affirmatively applies the Remittance Tax to any remittance transfer for which the sender provides cash, a money order, a cashier’s check, or any other similar instrument (as determined by the Secretary of the Treasury).
The Remittance Tax, if enacted as proposed in the Senate Proposal, would be imposed on the sender at a rate of 3.5% on certain fund remittance transfers conducted primarily for personal, family, or household purposes after Dec. 31, 2025, to accounts or recipients outside the United States, which are not made through accounts held in or by the expressly enumerated financial institutions or funded with a debit card or a credit card issued in the United States. Unlike the House proposal, the Remittance Tax under the Senate Proposal would also apply to U.S. citizens and nationals. When applicable, the Remittance Tax will be imposed on the sender, but the remittance transfer provider will be required to collect and remit the tax to the IRS on a quarterly basis and will have secondary liability for any tax that is not paid at the time the transfer is made. The proposed provisions also provide for a refundable tax credit for any Remittance Tax paid by or on behalf of U.S. citizens and nationals, green card holders, and other holders of work-eligible visas who are issued social-security numbers. The remittance transfer providers that are not excluded under the Senate Proposal would also be required to file returns with the Secretary of Treasury detailing the amount of Remittance Tax collected and paid by the remittance transfer provider, as well as the name, address, and social-security number of any senders who certified an intent to claim the remittance tax credit.
Notably, the Senate Proposal does not carve out an express exception for Money Services Businesses (MSBs), registered investment advisors, or corporations organized under Section 25A of the Federal Reserve Act (i.e., Edge corporations).1 As a result, such companies (and others not expressly excepted from the Remittance Tax requirements) should consider assessing whether the funds being transferred are “withdrawn from an account held in or by” one of the enumerated financial institutions or funded by a debit or credit card issued in the United States to fall under an exception.
Financial institutions should monitor the upcoming Senate debate and the process for resolving differences between the two bills, and assess their current procedures for handling cross-border remittances to determine what adjustments need to be made to collect the required information and tax in order to comply with the Remittance Tax requirements.
1 While not expressly carved out, there is an argument that Edge corporations may be subject to the exception under the “commercial bank” category. Nonetheless, obtaining clarity on this point as the Bill evolves will be critical for the banking industry. Additionally, it is unclear whether virtual currency transfers are subject to the Remittance Tax. The Senate Proposal, like the House Bill, incorporates definitions from the Electronic Funds Transfer Act (15 U.S.C. §§ 1693 et seq.) (EFTA), specifically regarding “remittance transfer,” “remittance transfer provider,” and “sender.” A “remittance transfer” by definition requires there be an electronic transfer of “funds.” The term “funds” is not defined under the EFTA or Regulation E (12 C.F.R. Part 1005), although the CFPB, in one of the final acts under the Biden administration, proposed an interpretive rule to expand the “funds” definition under the EFTA to include stablecoins and “other similarly-situated fungible assets that either operate as a medium of exchange or as a means of paying for goods or services.” 90 Fed. Reg. 3723 at 3726. Nevertheless, absent a final effective interpretive rule or other established definition of “funds” to capture virtual currency products, the Remittance Tax arguably would not apply to virtual currency and crypto-related asset transfers.
Christina Guerrero-Gomez contributed to this article
Beltway Buzz, June 20, 2025
The Beltway Buzz™ is a weekly update summarizing labor and employment news from inside the Beltway and clarifying how what’s happening in Washington, D.C., could impact your business.
Senate Continues Work on “Big Beautiful Bill.” Republicans in the U.S. Senate continued to move forward this week with their version of the “Big Beautiful Bill.” They face significant—and complicated—procedural and political hurdles if they are to meet their goal of advancing a bill to President Donald Trump’s desk by July 4. Republican leaders are expected to bring the bill to the floor next week and begin the lengthy “vote-a-rama” amendment process. As of now, the Senate bill—just like the version in the U.S. House of Representatives—includes provisions to limit taxes on income earned via tips or while working overtime.
Trump Administration Supports PLAs. On June 12, 2025, Russell T. Vought, director of the White House’s Office of Management and Budget, issued a memorandum of the administration’s policy on project labor agreements (PLAs). Director Vought writes, “For clarity, the Trump Administration supports the use of PLAs when those agreements are practicable and cost effective, and blanket deviations prohibiting the use of PLAs are precluded.” The memorandum further notes that President Joe Biden’s Executive Order 14063, which requires the use of project labor agreements on federal construction projects valued at $35 million or more, remains in effect. However, the memorandum clarifies that an exception to this requirement would apply where there is only one bid on a project or where there are two or more bids “but prices are expected to be higher than the government’s budget by more than 10 percent due to the PLA requirement.” The memo is further evidence of the administration’s willingness to pursue policies favored by organized labor.
EEOC, DOL Nominees on the Move. On June 18, 2025, the Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing on the nominations of Andrea Lucas to be a member (for a second term) of the U.S. Equal Employment Opportunity Commission (EEOC), Jonathan Berry to be solicitor of labor, and Andrew Rogers to be administrator of the U.S. Department of Labor’s (DOL) Wage and Hour Division. Republican senators tended to focus their questions on the role DOL can play in addressing human trafficking, unlawful child labor, and anti-American national origin discrimination cases at the EEOC. Democrats, on the other hand, focused on staffing cuts at DOL and sought pledges from Berry and Rogers to enforce laws such as the Davis-Bacon Act. But most Democrats directed their question to Lucas, probing her for her thoughts on the independent nature of the Commission (she stated that the EEOC is an executive branch agency operating under the direction of the president), questioning her role in EEOC litigation decisions and her vote against the Pregnant Workers Fairness Act’s (PWFA) implementing regulations. Under questioning, Lucas stated the Supreme Court of the United States’ 2020 decision in Bostock v. Clayton County, Georgiaprotects individuals who are terminated from employment based on their transgender status.
Senator Introduces Bill Reinforcing President Trump’s “Gender Ideology” EO. Perhaps timed to coincide with Acting Chair Lucas’s appearance before the Senate HELP Committee, Senator Jim Banks (a member of the Committee) recently introduced the Restoring Biological Truth to the Workplace Act. The bill would amend Title VII of the Civil Rights Act of 1964 to make it unlawful for an employer to take action against an employee who “engages in covered expression, that describes, asserts, or reinforces the binary or biological nature of sex” or because “an employee requests or uses a single-sex area that is a bathroom, changing area, or other area where physical privacy is desirable.” The bill comes against the backdrop of President Trump’s January 20, 2025, executive order, “Defending Women From Gender Ideology Extremism and Restoring Biological Truth to the Federal Government.”
State Department Sets Guidelines for Student Visa Social Media Vetting. Several weeks after U.S. consulates abroad hit the pause button on student visa interviews, the State Department has reportedly followed up with instructions on how officials should be vetting student visa applicants’ online footprints. Specifically, the State Department is ordering consulates to look for “any indications of hostility towards the citizens, culture, government, institutions or founding principles of the United States” and/or “advocacy for, aid or support for foreign terrorists and other threats to U.S. national security.” According to media reports, evidence of these activities is not automatically disqualifying, but would prompt additional scrutiny.
Remembering Alice Robertson. On June 20, 1921, Representative Alice Robertson, a Republican from Oklahoma, became the first woman to preside over the U.S. House of Representatives. Born to Presbyterian missionaries in the Creek Nation Indian Territory (in current Oklahoma) in 1854, Robertson graduated from Elmira College in Elmira, New York, before beginning her career in public service at the Bureau of Indian Affairs in Washington, D.C. After Robertson returned to Oklahoma, President Theodore Roosevelt appointed her postmaster of Muskogee, Oklahoma, where she served from 1905 to 1913. In 1920, Robertson defeated three-term incumbent U.S. Representative William Wirt Hastings to become the second woman to win a seat in Congress. During her one term in Congress (she lost to Hastings in a 1922 rematch), Robertson served on the Committee on Indian Affairs, where she introduced a failed bill that would have reimbursed Cherokee descendants who were forcibly removed to Oklahoma. Robertson’s history-making moment of presiding over a session of the House of Representatives came during a vote to provide funding for a U.S. delegation to Peru.
Client Alert: Delaware Franchise Taxes
Everyone told you to incorporate in Delaware. Podcast hosts, industry blogs, your co-founder, your lawyer, your college roommate, your dogwalker – they all said that when it comes to incorporating your startup, Delaware is the place to be. Now, you’re staring at a notice saying that your company owes tens of thousands of dollars in state franchise taxes, and you’re ready to reach for the panic button. Sound familiar?
Don’t worry – you’re not alone. Every year, countless new business owners receive notices from Delaware informing them of an upcoming franchise tax payment that seems impossibly huge. Luckily, there is an easy solution available.
What are franchise taxes, and how are they calculated?
Franchise taxes are required to be paid on an annual basis by all Delaware corporations. Payment of franchise taxes entitles the payor to do business in Delaware and to utilize the Delaware state court system. The amount of franchise tax assessed for a given company is intended to be proportional to the size and complexity of the company – this means that for most early-stage companies, the amount assessed will be the state minimum for corporations: $400. So, what’s going on with this crazy estimate?
There are two basic methodologies for calculating Delaware Franchise Tax: the Authorized Shares Method, and the Assumed Par Value Capital Method. The Authorized Shares Method is based on the number of shares that your company is authorized to issue pursuant to its Certificate of Incorporation. Since startups generally authorize a large number of shares at formation (ten million is typical) in order to accommodate founder share issuances and equity incentive plans, using the Authorized Shares Method to calculate franchise tax can result in an assessment that is wildly excessive in light of the actual size and complexity of the business.
The Assumed Par Value Capital Method, on the other hand, calculates franchise tax based on the par value of the company’s shares (usually a fraction of a cent per share), the ratio of shares actually issued vs. authorized, and the company’s actual assets. This method paints a clearer picture of the size and complexity of the company, and therefore allows for a far more precise calculation of the franchise tax owed.
The Authorized Shares Method is the default calculation for purposes of these notices because at the time the notice is generated, Delaware has no idea what your assets are. But the important thing to remember is: it’s just an estimate. You’re not stuck with it.
What do I do?
Recalculate! Head over to the Delaware Secretary of State’s franchise tax filing page. Log in using your Business Entity File Number, and click “File Annual Report”. Scroll down to the Stock Information section, and fill in your company’s total Issued Shares, Gross Assets, and Asset Date (the last day of the year you are filing taxes for). Click “Recalculate Tax”, and boom! You should see a drastic reduction in your Amount Due.
Proceed thrugh the remaining steps in the online form, fill in your company’s payment information, and submit. Congratulations! You are now done filing your annual franchise taxes.
Senate Finance Committee Proposes Updated and Permanent Qualified Opportunity Zones Text for the ‘One, Big, Beautiful Bill’
On June 16, 2025, the Senate Committee on Finance released its initial version of revisions to the “One, Big, Beautiful Bill” the House of Representatives passed last month. Included in this proposed language (the Senate Proposal) are amendments regarding Qualified Opportunity Zone (QOZ) investments.
Background
Under current law, taxpayers can obtain the income tax benefits of the QOZ provisions by timely investing capital gain realized on or before Dec. 31, 2026, into a qualified opportunity fund (QOF). The window for making a timely investment is 180 days from (i) the day that a taxpayer (or a passthrough entity in which the taxpayer holds an interest and thereby is entitled to an allocation on Schedule K-1) realizes capital gain, (ii) the last day of such passthrough entity’s taxable year if such passthrough entity itself does not make an investment of such capital gain in a QOF, or (iii) the due date (excluding extensions) of such passthrough entity’s due date for filing its annual federal tax return (the Investment Period).
Effective Dates
The new deferral and permanency provisions in the Senate Proposal would take effect for amounts invested in QOFs on or after Jan. 1, 2027. This effective date may create concerns for current QOF sponsors with respect to fundraising efforts between the date of the Senate Proposal (June 16, 2025) and Jan. 1, 2027. This effective date is consistent with the legislation the House passed on May 22, 2025 (the House Version).
States may designate new QOZs beginning on July 1, 2026. This designation date is six months earlier than the Jan. 1, 2027, QOZ designation date provided in the House Version (thus eliminating a potential 90-day period (or 120 days, if extended) during which no new QOZs would exist). A new designation period would commence every 10 years, on July 1.
The Senate Proposal would keep both existing and future QOZs designated for a period of 10 years commencing on Jan. 1 following the date the Treasury Department certifies the QOZ. This provision would allow all current QOZs to retain their QOZ status until Dec. 31, 2028 (as opposed to the end of 2026, per the House Version).
Operative Provisions
The Senate Proposal would make the QOZ incentive permanent under the Internal Revenue Code.
Under the Senate Proposal, capital gains (including capital gains realized by taxpayers in 2026 that are subject to an Investment Period that ends in 2027) may be invested in QOFs starting Jan. 1, 2027, benefitting from the any changes made by the amended Senate Proposal.
The Senate Proposal requires recognition of gains realized and deferred under the QOZ regime after 2026 upon the earlier of (a) a taxpayer’s disposition of its QOF investment or (b) Dec. 31, 2033, with the latter date resetting every 10 years for gains a taxpayer realizes and defers after such date.
In addition to deferral of invested gain, taxpayers would receive:
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an annual incremental step-up in the tax basis of their QOF investment over the first six years they hold their investment in the QOF up to a maximum step-up in the tax basis in their investment of 10%, and
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ultimate exclusion of gain by investors upon exit.
The Senate Proposal provides a special rule for investments held at least 30 years. If the investment is sold on or after 30 years, the taxpayer’s tax basis in the investment is stepped-up to the fair market value of the investment as of the 30th anniversary of the investment. As a result, any further appreciation in value after the 30th anniversary would be subject to tax at the time of sale.
The Senate Proposal maintains the House Version’s increased limitations of statewide area income for eligible census tracts for QOZ designation to 70% from the 80% in current law, but the Senate Proposal does not require the House Version’s 30% rural QOZ set aside. The overall reduction in state median income requirements from 80% to 70% may reduce the number of census tracts that are eligible for designation as compared to current law.
The Senate Proposal would repeal special disaster relief for QOZs in Puerto Rico for Hurricane Maria.
The Senate Proposal does not provide for the automatic deferral of any interim gain from an investment sold within an investor’s 10-year hold period, even if the proceeds are reinvested in another QOZ project within 12 months of the sale (however, the current law that allows for investors that are allocated interim gain to make a new deferral election and investment in a QOF with a new 10-year investment clock remains in effect).
The Senate Proposal does not provide for a “fund of funds” concept among QOFs, nor a similar concept for Qualified Opportunity Zone Business (QOZB) investments in other QOZBs.
The Senate Proposal does not contain any QOZ modifications to incentivize affordable or workforce housing. Such provisions may be a priority in additional discussions in the Senate.
The Senate Proposal does not follow the House Version in allowing a limited investment of ordinary income or after-tax income into QOFs. The House Version capped such investments at an aggregate $10,000 for each investor.
The Senate Proposal closely mirrors the House Version in allowing for Rural Qualified Opportunity Fund enhancements, including a 300% increase in the basis step-ups discussed herein (30% maximum total) and a reduction of the substantial improvement requirement for QOZB property from 100% to 50% for rural investments.
The Senate Proposal closely mirrors the House Version in providing reporting requirements for QOFs and QOZBs, including penalties for failure to report. The Senate Proposal makes such reporting mandatory upon the legislation’s enactment and provides the IRS with $15 million of funding to enact reporting requirements.
Next Steps
The tax provisions of the “One, Big, Beautiful Bill” will be subject to further discussions among Senate Republicans, and the Senate Parliamentarian will also review the bill to assure compliance with the Senate “Byrd Rule.” Once that process concludes, the language (potentially modified) will be included in a broader substitute amendment to the House-passed bill for debate on the Senate floor. The substitute amendment is subject to further amendments during the Senate floor debate. If the Act is passed by a majority of the Senate, it will then be subject to debate by a House-Senate Conference Committee to resolve any differences between the two bills, further debate by the House of Representatives to consider additional potential changes, or agreement by the House of Representatives to the Senate language without amendment.
Laura Hendee Siman contributed to this article
FMC’s New Demurrage and Detention Invoicing Rules: What NVOCCs Must Do Now
On May 28, 2024, the Federal Maritime Commission’s (FMC) final rule on demurrage and detention (D&D) billing practices went into effect. This rule represents a significant regulatory development aimed at increasing transparency, accountability, and fairness in how D&D charges are assessed and disputed. The new rules implement the requirements provided in the Ocean Shipping Reform Act of 2022.
The new regulations — codified at 46 C.F.R. Part 541 — directly impact the invoicing processes for ocean common carriers, marine terminal operators, and non-vessel-operating common carriers (NVOCCs). Entities that fail to comply with these invoicing requirements risk losing the right to collect D&D charges altogether.
Overview of the Final Rule
The rule establishes:
Minimum required invoice content, including bill of lading and container numbers, dates related to free time and availability, rates, contact information for disputes, and required certifications.
Strict invoicing time frames with invoices required to be issued within 30 calendar days of the last date charges were incurred.
Limitations on who may be billed, ensuring that only the party with a direct contractual relationship or the consignee may be invoiced (note that the rules define “consignee” as the “ultimate recipient of the cargo” and not as merely the entity listed in the consignee box on the bill of lading).
Dispute resolution procedures, mandating that billing parties allow at least 30 days for dispute submissions and respond within 30 days.
A penalty for noncompliance, providing that invoices missing any required information are deemed invalid and unenforceable.
Three Action Items for NVOCCs
1. Update Your Rules Tariff To Preserve Your Rights
The new regulations require precise alignment between a party’s tariff provisions and its invoicing practices. NVOCCs must ensure that their rules tariffs:
Specify how and when D&D charges may be passed through to customers.
Reference the FMC-compliant dispute resolution process.
Ensure that outlays and refunds of D&D can be paid and received from their customers.
Failure to include these provisions may compromise your ability to enforce payment or recover costs.
2. Review and Modify Your Invoicing Procedures if You Issue Your Own D&D Invoices
For NVOCCs that are not simply passing through D&D invoices, your internal billing systems must now:
Track the 30-day invoicing window accurately.
Populate invoices with all required data points, including the container availability date, free time periods, specific D&D charge dates, and certifications of compliance.
Enable digital dispute channels and include direct contact information for handling invoice questions.
3. Prepare To Handle Disputes Strategically
The rules offer a structured dispute process: billed parties have 30 days to challenge charges, and billing parties must respond within 30 days. This creates a tight timeline that requires NVOCCs to:
Develop or revise dispute workflows.
Train staff on how to flag improperly issued invoices to ensure improper invoices are not paid (e.g., issued to the wrong party or missing required elements).
Inform billing parties when charges are under dispute, triggering the additional 30-day resolution window under § 541.7(c).
Benefits Basics – When an Employee Becomes Disabled: A Resource Guide for HR & Benefits Professionals
When an employee becomes disabled, a variety of questions arise regarding that employee’s entitlement to compensation and benefits. As a member of your company’s human resources or employee benefits department, employees and their families will often look to you to help them understand the impact of disability on the employee’s benefits and compensation during what is often a stressful time for them. This guide provides a high-level reference resource, in a plan-by-plan format, on how to approach each type of compensation or benefit arrangement when an employee becomes disabled and offers up some practical tips on employee benefits issues that may come up as you manage your company’s compensation and benefit administration for a disabled employee.
The information given in this guide is general in nature and is not intended to address every benefit or tax issue that may come up when dealing with a disabled employee or other nuances that may arise when considering the disabled employee or the specifics of your company’s benefit plans. In addition, any tax or other rules described in this guide are current as of the date of this guide, and do not infer that the rules described are the only rules (tax or otherwise) that may apply and are subject to change. As a result, we always recommend that you engage your in-house or external legal counsel or other tax or employee benefits advisors when working through compensation and benefits issues related to employee disability.
This guide is part of Foley’s Employee Benefits & Executive Compensation Practice “Benefits Basics” resource series—please see our resource guide for important benefits considerations when an employee dies.
An Overview of the Meaning of Disability
Before we dive into discussing issues for administering your company’s compensation and benefit plans, one critical thing to be aware of is that not all disabilities are defined equally. For example, the Employee Retirement Income Security Act of 1974 (ERISA) does not apply a single definition of disability to be used for all ERISA plans. Depending on the particular plan, policy or program at issue, you might find that there are multiple definitions of disability in your documents. Here’s an overview:
Effect of the Disability
Legally-Required Definition of Disability
Source of Definition
Ability to take a 401(k)-plan withdrawal due to disability
None
Governed by plan terms, but may want to align with the definition for exemption from excise tax (described below)
Exemption from 10% early distribution excise tax on distributions from qualified retirement plans
Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration
IRC § 72(m)(7)
IRC § 409A plan distribution and deferral purposes
Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months OR By reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the service provider’s employer
Treas. Reg. § 1.409A – 3(i)(4)
Ability to stop 409A deferrals (exception to irrevocability rule)
Medically determinable physical or mental impairment resulting in the service provider’s inability to perform the duties of his or her position or any substantially similar position, where such impairment can be expected to result in death or can be expected to last for a continuous period of not less than six months
Treas. Reg. § 1.409A- 3(j)(4)(xii)
COBRA extension to 29 months
Social Security Administration (SSA) determination of disability
IRC § 4980B(f)(2)(B)(i)(VIII)
Incentive stock option exercise period extended from three months after termination of employment to one year
Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months
IRC § 422(c)(6); cross-references to IRC § 22(e)(3)
All other, e.g., vesting of retirement benefits, short-term disability (STD) and long-term disability (LTD) plans, employment agreements, bonus entitlement, etc.
No specific definition
Governed by plan or agreement terms
Wow! As you can see, there are several definitions of disability, all of which vary in one way or another. What this means is that if someone is disabled, you will have to review the definition of disability in each and every plan or individual agreement to determine whether the employee qualifies for all, or just some of, the disability provisions of that plan or agreement.
A best practice is to consider harmonizing definitions across plans and agreements as much as possible (except where a legally required definition just will not allow that). This will streamline administration significantly.
Finally, to the extent you are able, consider defining disability in a way so that you, the employer, can rely on a third party’s determination of disability so that you will not actually have to make the determination yourself, which can be very tricky. For example, if you can define disability by reference to whether someone is entitled to long-term disability insurance benefits or has received a SSA determination of disability, then you need only rely on that third party’s determination and do not have to undertake your own review of an employee’s medical and occupational records.
A Quick Note on ERISA vs. NON-ERISA Plans
Determining whether a benefit plan is covered by ERISA can be complicated. While your company’s most common broad-based retirement and welfare benefit plans, such as 401(k) plans, pension plans, and medical, dental, vision or other welfare benefits, will most likely be governed by ERISA, there are many nuances in the rules that exempt certain benefit plans depending on how the plan is structured. This issue commonly comes up with certain disability or severance benefits or policies. Bonus programs, deferred compensation plans or other voluntary benefits or payroll practices (discussed in more detail under “Short-Term Disability” below) are usually not subject to the ERISA preemption rules. However, due to the complexity of these rules, if you are unsure whether a benefit program is an ERISA or non-ERISA plan, consult with your benefit plan advisors when deciding whether to allow beneficiary designations.
Practical Steps to Take When an Employee Becomes Disabled
Who You Should Involve
Most employee disabilities begin with an employee requesting a leave of absence. In that case, you simply follow your normal leave of absence process, whether that involves working with internal HR or directing the employee to a third-party leave vendor. If, however, the employee is incapacitated and you receive the initial call about an employee’s disability from a family member, it is imperative that you promptly contact the following individuals within your organization: the head of HR for the employee’s business unit (who should, in turn, contact the employee’s manager) and all relevant members of the employee benefits team. From there, you should follow the same leave of absence procedures that you would follow in a non-emergency situation, except that the family member may be acting on the employee’s behalf in completing paperwork and providing any needed information to apply for a leave of absence and any available short-term disability benefits, and to communicate payment arrangements for any health and other benefits that continue during the leave period.
If the employee’s disability is expected to be more than temporary and your retirement plans permit disability distributions or disability commencement, then you may need to provide disability information to your plan’s recordkeeper so that the employee can be permitted to commence benefits under the plan.
The Information You Need
An employee’s disability will often begin with a request for leave of absence due to injury, illness, or a medical condition. In those instances, you should follow your company’s normal leave of absence policy, whether that is an internal process or run by a third party that administers leave and/or STD benefits. This will typically involve the employee completing an application and, where needed, providing documentation supporting the application, such as medical records and a letter from the employee’s physician. If the employee’s disability begins with more of an emergency situation, such as an accident or sudden illness, then you may need to work with an employee’s family member to process a leave or STD benefits request and gather needed information.
You or your leave vendor will also need to communicate the impact of the leave on employee benefits. As discussed in more detail below, you must offer the employee the opportunity to continue group health plan benefits such as medical, dental, vision, and medical flexible spending account benefits during a Family Medical Leave Act (FMLA)-covered leave. For other types of leave and types of benefits, benefits continuation will depend on the terms of the applicable policy or plan document. If you offer the employee the opportunity to cancel all or some of their benefit elections during leave, then you will need to collect those elections from the employee, through election forms or an online system. If the leave will be paid, then benefit deductions can typically continue from the leave pay. If the leave will be unpaid (e.g., no STD or other leave pay) and the employee desires to continue medical and other benefits during leave, then you will also need to provide the employee with information on how to pay for those benefits should the employee choose to continue them. If you follow a direct pay approach (as opposed to, for example, a pay when you return to work approach), then you or your vendor will need to verify the address or email address for billing statements and obtain ACH information where electronic payment is offered or required, and provide that information to payroll.
You will also need to figure out which benefit plans or programs the employee was enrolled in or otherwise had an accrued benefit under, and whether the employee had any individual agreements in effect with the company (such as equity awards, employment agreements, employee loans, etc.) and make sure you have copies of all of those documents. This information may come from internal HR records or from third-party benefit plan administrators or vendors. You will also want to determine whether any of these plans require you to make a determination of disability or whether that determination is made by a third party.
As discussed in more detail below, if the employee’s disability continues beyond a STD period (generally, six months maximum depending on the terms of your STD program), then you may be receiving a disability determination from a long-term disability insurer or the Social Security Administration and to follow company policy in terminating the employee’s employment at the appropriate time.
A Quick Note About HIPAA
We often hear from clients who are concerned about HIPAA during the leave of absence process, either because they are concerned that they are not allowed to collect or store the information needed to process and approve a leave or STD benefits request or because the employee or employee’s family members are pointing to a HIPAA concern with providing the requested information. HIPAA does not apply to leave or STD benefits programs, nor does it apply when an employee is providing medical information to you, whether directly or via an authorization for a health care provider to send you the employee’s medical information. However, and regardless of whether HIPAA applies, you should always limit access to an employee’s medical information to only members of HR or benefits who must have access to such information to process a leave or STD application and always securely store such information. If you are using a third-party vendor to process leave or STD benefits, then you should ensure that your contract with that vendor obligates them to protect the employee’s information.
Cash and Equity Arrangements
Overview
When an employee becomes disabled, a variety of different compensation programs have to be considered. First, it is important that you survey all of the cash and equity compensation that is or may be due with respect to the disabled employee. For example:
Is the employee covered by an annual or long-term cash bonus plan?
Is the employee in a commission program?
Does the employee have an employment agreement in effect?
Does the disabled employee have equity awards, such as stock options or restricted stock units?
Second, after identifying all of the agreements, policies, and arrangements under which cash or equity compensation may be due, determine whether there are any special provisions applicable to a disabled employee, paying close attention to whether the rights arise due solely because the person has become disabled, or only upon a termination of employment due to that disability.
Typical Provisions (including One Gotcha):
Entitlement to Bonuses and Equity Awards. For cash bonus programs, you’ll need to review the terms of the documents to determine what happens on a disability. Bonus plans often will either payout automatically at target upon a disability (or termination due to disability) or may provide for payout to occur at the end of the performance period based on the level of achievement of actual performance, and either on a pro-rated basis or in full.
For all types of equity awards, the governing plan document or the award agreements will specify what happens to the awards upon the employee’s disability. Similar to cash bonus plans, equity awards will either vest automatically upon a disability (or termination due to disability) or on a pro-rated basis. For equity awards subject to performance goals, the award may provide that performance is deemed met at the target level, or may provide for payout to occur at the end of the performance period based on the level of achievement of actual performance, and either on a pro-rated basis or in full. Finally, for stock options, it’s very typical for an employee to get an extended period to exercise their options following a termination due to disability.
If the disabled employee has an “incentive stock option” (also referred to as an ISO), which is a type of option that may provide beneficial tax treatment to the employee, for a normal termination of employment, an employee must exercise an ISO within three months after termination as one requirement to obtaining favorable tax treatment. For a termination due to disability, however, the Internal Revenue Code extends this time period to one year following the termination. (What are the other requirements to obtain favorable tax treatment? – The employee has to hold the stock acquired upon exercise of the ISO for one year from the date of exercise and two years from the grant date. This holding period requirement does not change for disabled employees.)
Sometimes, an employment agreement might also describe what happens to bonuses or equity awards upon a disability, or termination due to disability, so those should be reviewed as well.
There is one “gotcha” that often comes up in these types of arrangements. Whenever a pro-rated bonus or award is at issue, the pro-ration often runs through termination of employment due to disability, and not through the commencement date of the disability leave. This often surprises employers, especially those employers that don’t have a robust process in place under the American with Disabilities Act (the ADA) to engage in an interactive process to determine when a termination of employment is appropriate.[1] We find that such employers often leave disabled employees as “employees” for a very long period of time. So, when it comes to pro-rating a bonus or award, the employee gets the benefit of a very-long pro-ration period, often with the result that they end up getting the entire award because their termination does not occur at all during the bonus or equity award vesting or performance period. When this comes to light, we have found that most employers like the idea of pro-rating through the end of the employee’s STD leave, which normally runs for no more than six months. This rule doesn’t “punish” an employee who needs to take a short-term leave but also does not create a windfall for employees who have a more serious disability and end up never being able to come back to work. There is a downside to this type of pro-ration provision – many employers do not have systems in place to automatically measure when STD ends. So, whatever pro-ration rules you adopt, it is important to consider whether your HRIS is set up to handle the rules you implement or if some manual review and implementation process will be necessary.
Entitlement to Severance. Often, an executive’s employment agreement will provide for severance pay if termination of employment is due to disability. Pay careful attention to these types of provisions, because occasionally they will require a certain process to be completed for the company to be able to terminate the executive’s employment, e.g., the full board of directors needs to make the determination of disability, or the disability has to be based on the conclusion of an outside physician. And if your agreements have these provisions, check whether your long-term disability insurance policy has any type of offset for these payments so you can warn the terminating executive about the impact the severance pay will have on their LTD benefits.
Benefit Plans
Qualified Retirement Plans
401(k) and Other Types of Defined Contribution Plans. 401(k) plans are the most common employer-provided retirement benefit offered to employees. While not required, 401(k) plans often permit an employee to take a distribution of some or all of his or her vested account balance upon a disability. We recommend including these types of provisions in plans sponsored by employers who, as mentioned above, tend to never take action to terminate the employment of a disabled employee. By allowing the disability withdrawal, the employee is able to access their account balance when they need it, even if the employer has not terminated their employment.
Other issues to consider in 401(k) plans are:
What types of disability compensation may an employee defer? For example, if the plan defines compensation as all W-2 compensation of the employee, that works fine as long as disability compensation is being paid from the employer’s payroll. But when the compensation is being paid by a third-party, such as an STD administrator or an LTD insurance carrier, how will that work in practice? In such a case, either the plan’s definition needs to be revised to clarify that it is only compensation paid directly by the employer, or the employer and the third-party will need to discuss the coordination and sharing of compensation information to figure out how an employee remains able to defer STD or LTD payments into the 401(k) plan.
Does your plan provide for full vesting upon a termination due to disability? While this is not legally required, we find that it is almost always the case.
If your plan requires an employee to be employed on the last day of the plan year or to have completed 1,000 hours of service as a requirement to receive an employer contribution for the year, is there an exception to those rules for a disabled employee? Typically, that would be the case, but it is not legally required.
Pension Plans. While pension plans are getting scarcer as each year goes by, many employers still maintain them, even though the benefits under them have almost all been frozen at this point.
If a disabled employee who is terminated from employment participates in a pension plan, the first issue to consider is whether the employee is vested in their plan benefit, and if not, whether the plan provides for full vesting in that circumstance. Similar to 401(k) plans, we find that pension plans will often fully vest a participant who terminates employment due to a disability. Even if the plan does not provide for full vesting in this circumstance, check the plan’s terms to see when vesting service stops being counted. Occasionally, a pension plan might provide for favorable service-crediting rules during disability leaves.
The second issue to consider is whether the plan provides for a disability retirement benefit. This is not legally required so many plans do not have a disability retirement provision. A disability retirement typically allows a terminated employee to commence their pension benefits right away upon a termination of employment, even if the employee has not yet reached early or normal retirement age, when benefits would normally be able to commence. A disability retirement might also provide for some sort of enhanced benefit, such as a full pension with no reduction for starting early. If a disabled employee may be eligible for a disability retirement, you should let them know so they can apply for the benefit if they wish.
ERISA Claims and Appeals Regulations. ERISA has specific claims and appeals regulations for disability plans that impose a host of requirements for plan administrators. Importantly, these regulations also apply to retirement plans where some sort of disability provision exists, and the plan states that the administrator must make its own determination of disability, rather than relying on a third-party, such as the SSA or an LTD insurance carrier. To avoid these requirements, which many plan administrators find to be onerous, you should consider amending your retirement plans to eliminate any concept of a plan administrator-determined disability, keeping the following issues in mind:
For all qualified plans, the new definition of disability cannot affect the vesting rules in a manner adverse to participants. In other words, if the plan provides for vesting upon a termination due to disability, the new disability definition cannot be stricter than the prior one.
For 401(k) and other defined contribution plans, the new amendment cannot result in the cut-back of a protected benefit, right or feature. For example, if the plan permits a withdrawal upon a disability, the new disability definition should not be stricter than the prior one so that the individual’s right to the withdrawal is not impaired.
For defined benefit pension plans, a disability retirement benefit is typically not considered a part of the accrued benefit, which means that you are permitted to amend a defined benefit pension plan to eliminate disability retirement altogether if you wanted. Because of that, you are also free to change the criteria to be eligible for a disability retirement, such as by redefining disability to require an SSA determination.
Of course, for all of the above, if the plan covers union employees, you’ll also need to consider whether these changes require bargaining with the union.
Welfare Plans
Short-Term Disability. Most short-term disability plans are payroll practices, in which the employer simply continues paying all or a portion of the employee’s salary or hourly wage rate while the employee is on a disability leave, typically lasting from 90 days to six months. Of course, ensuring that an employee (or a family member who is assisting in their care) understands their rights to STD plan benefits is one of the critical things you need to ensure happens.
You should consider how state laws will impact the design and operation of the STD program. For example, a Wisconsin law permits an employee who takes an unpaid maternity or paternity leave to “substitute” paid leave otherwise available to them for other reasons for such unpaid leave. In other words, the employee can use their STD paid leave to provide for salary continuation payments during their maternity or paternity leave, even if the person is not otherwise considered disabled. See Wis. Stat. 103.10(5)(b). In addition, many states and even local governments have mandatory paid disability leave. If you have employees in those locations, you’ll need to consider how to coordinate these mandatory leave provisions with your STD program. For example, if you are paying into a state disability fund in New York, then you may wish to exclude New York employees from your STD program to the extent the law allows.
It is important to note that payroll-practice STD programs are not subject to ERISA, meaning they don’t enjoy some of the protections that ERISA provides, such as requiring an employee to exhaust the plan’s claims and appeals procedures prior to bringing a lawsuit, and limiting damages to the plan’s benefits and, in some cases, the employee’s attorneys’ fees. On the flip side, fully-insured STD plans are subject to ERISA and so get the benefits that ERISA provides, as well as the obligations, such as the requirement to issue a summary plan description.
Long-Term Disability. LTD programs are typically fully-insured, which means that the employer’s sole obligation is to ensure that the employee, if covered by the program, knows how to apply for insurance, and to provide whatever information the LTD insurance carrier requests to make its determination of disability and to determine the amount of the benefits owed under the terms of the policy.
The “gotcha” with this type of program is when employers, in the guise of being helpful, either do not permit the participant to apply for benefits, or actively discourage such application. An employer should never do this, even when they feel very certain that the insurance carrier will deny the application. ERISA gives employees who are covered by an insurance policy the right to apply for benefits. While it is okay for an employer to set the employee’s expectations, an employer should never preclude a plan participant from applying for benefits under any ERISA plan.
The tax treatment of long-term disability benefits depends on how the premiums for the coverage were taxed to the employee:
To the extent the employee paid his or her insurance premiums for LTD coverage with after-tax dollars, or the employer’s contribution towards those premiums were included as compensation income on the employee’s Form W-2 and taxed accordingly, then the LTD benefits are non-taxable.
To the extent the employee paid his or her insurance premiums for LTD coverage with pre-tax dollars, or the employer’s contribution towards those premiums were not included as compensation income to the employee, then the LTD benefits are taxable.
Opinions vary about which approach is best. Some employers like the first approach so that the benefits, which are typically often a reduced percentage of compensation, such as 60%, are not further reduced for taxes. Others like the second approach which saves all employees current tax dollars and may be the most valuable to the group as a whole given that very few employees will actually utilize the LTD benefits. And some employers who don’t want to make that judgment call allow their employees to choose the tax treatment of their premiums.
Group Health Plans. You should check the terms of the plan (or summary plan description) to determine what happens to an employee’s eligibility for coverage when the employee takes a disability leave. Some plans will continue coverage, at the active employee rates, during the period of STD leave, but that is not legally required. If the disability leave is also a leave covered by the federal Family Medical Leave Act (FMLA), however, then the employee must be allowed to continue participating in the plan during that FMLA leave on the same terms as active employees (e.g., at active employee rates). If the employee does not return to employment following the FMLA leave, the plan may terminate participation at that time, although COBRA (which is discussed in the next paragraph) would then be offered.[2]
If you are subject to federal COBRA rules (generally, employers with at least 20 employees are subject to federal COBRA), and if the employee loses coverage due to the disability leave, which is a “reduction in hours” in COBRA parlance, then you generally must notify the COBRA administrator of the employee’s loss of coverage within 30 days from the date of the loss of coverage. The COBRA administrator then has 14 days to send out the COBRA election packet to the participant and his or her enrolled dependents. If you administer COBRA internally, then you have a total of 44 days to send out the COBRA election packet. Note that an employee who is on an FMLA leave can never have a COBRA event until after the expiration of the leave, and COBRA must be offered following the expiration of the leave even if the employee chose not to continue coverage during some or all of the FMLA leave period.
Remember that COBRA continuation coverage can last for up to 18 months when the loss of coverage is due to a reduction in hours (such as the taking of a disability leave) or a termination of employment. However, that 18 months can be extended for up to a total of 29 months if:
The SSA makes a determination that the employee’s disability began at any point up until the first 60 days of the COBRA continuation coverage.
The employee (or a family member) provides the COBRA administrator with a copy of that SSA determination no later than the end of the first 18 months of COBRA coverage. In addition, the SSA determination must be provided within 60 days after the later of (i) the date of issuance of the SSA determination letter and (ii) the date on which the qualifying event occurs or, if later, the date coverage would have otherwise been lost due to such event. These time frames assume the employee has been provided proper notice of his or her right to extend COBRA coverage due to an SSA disability; if not, the period to provide notice of the SSA determination extends until 60 days after the employee becomes aware of this right.
The premiums for COBRA coverage are permitted to be 102% of the full premium amount (both the employer and employee portions) for the first 18 months of coverage. If the disability extension applies, then following the end of the first 18 months of COBRA, the premium can be increased to 150% of the full premium amount.
If you are a small employer not subject to the federal COBRA rules, there still may be similar requirements under a state “mini COBRA” law of which you should be aware. You should not assume that the insurance carrier will administer your insurance policy’s mini COBRA provisions; often, insurance policies impose certain administrative obligations on the employer, such as notice obligations.
Flexible Spending Accounts (FSAs). Most health FSA and dependent care FSAs will provide that participation ends when the employee is no longer receiving compensation, although health FSAs must permit the employee to continue participation during an FMLA leave.
For the health FSA, COBRA coverage must be offered when the employee ceases to be eligible due to either a reduction in hours (such as due to taking a disability leave) or termination of employment. Most health FSAs qualify for a limited COBRA obligation that permits an employer to only offer COBRA coverage to the participant when the participant’s account is underspent (generally, more money has been contributed as of the date of the COBRA qualifying event than has been reimbursed) and only for the remainder of the plan year.
For dependent care FSAs, a typical question is whether childcare expenses incurred while the employee is on disability leave are eligible for reimbursement from the FSA. Because the dependent care FSA is intended to pay for eligible dependent care expenses to allow the employee to work, day care expenses incurred while the employee is not working cannot be reimbursed from the account. Therefore, the employee cannot be reimbursed for daycare expenses incurred while on a leave of absence. This is frustrating for both employers and employees because an employee who is unable to work due to a disability is often also unable to care for their children at home.
Nonqualified Deferred Compensation Plans
Like pension plans and 401(k) plans, the first issue to consider is whether the individual was vested in their plan benefit or account at the time of disability, and if not, whether the plan provides for full vesting upon either a disability or upon a termination due to disability. If any portion of the account balance or benefit is unvested, it should be forfeited in accordance with the terms of the plan.
Assuming there is a vested balance, you should check to see whether the plan provides for a distribution upon a disability. A disability is a permissible payment event under Internal Revenue Code Section 409A, which governs most types of nonqualified deferred compensation plans. Alternatively, the plan may provide for a payment to begin (or commence) upon a separation from service. A separation from service generally means the date when the employee’s level of service decreases to less than 20% of his or her prior level of services over the preceding 36 months. But, there is a special rule in Section 409A that says an employee on a sick leave does not experience a separation from service for the first six months of the leave (or such longer period of employment for which the employee has the right to return to employment by law or contract), provided the employee is reasonably expected to return to work before the end of such period. When the individual is disabled within the meaning of Section 409A (see the section “Overview of the Meaning of Disability” above), however, then the plan may provide that the separation from service is delayed until the end of 29 months of leave, even if the employee is not expected to return to work. Many nonqualified deferred compensation plans utilize this 29-month leave rule, but employers are often ill-equipped to track it from an HRIS perspective.
If employee deferrals are being made to the plan, you should also check whether the plan permits the employee to cease making deferrals upon commencement of the disability. This is one of the limited exceptions to the normal rule in Section 409A that provides that deferral elections must be irrevocable for the entire plan year.
Other Issues to Consider
Form 8-K Requirement. Generally, the termination of a CEO, CFO, COO, chief accounting officer or any named executive officer of a publicly traded company triggers the need to file a current report on Form 8-K with the Securities and Exchange Commission (SEC). This requirement is triggered when one of the listed officers’ employment is terminated as a result of disability. However, it can be more difficult to determine whether disclosure is required in the case of disability or illness that limits or incapacitates an officer but does not result in immediate termination of employment. The SEC Staff has not provided specific guidance for this situation, saying only that a “termination” includes situations where the officer “has had his or her duties and responsibilities removed such that he or she no longer functions in the position of that officer.” As a result, any disability that results in the removal or reduction of an officer’s duties should lead to an evaluation of whether the officer is continuing to function in his or her officer role and of the materiality of the change to the Company’s investors.
Section 16 Reporting. The disability of an executive or the termination of the executive’s employment due to disability generally will trigger a Form 4 filing only to the extent the event triggers a forfeiture of an equity award, accelerated vesting or settlement of a unit-based award (e.g., restricted stock units or performance share units) or a tax withholding obligation that is covered by withholding or selling shares. In addition, any transaction with respect to the company’s stock that is initiated after the executive’s disability but while the executive’s employment continues (such as, for example, the exercise of an option by the executive’s guardian) would be reportable in the same manner as a transaction initiated by the executive. Any transaction that is initiated after the executive’s employment is terminated due to disability, by contrast, would not be reportable unless it were “matchable” against an earlier opposite-way transaction (i.e., a sale if the transaction is a purchase, or a purchase if the transaction is a sale) that had occurred while the executive was still employed and within six months of the second transaction. In addition, if the disabled executive (or his or her guardian) initiated a transaction prior to the executive’s termination of employment that had not yet been reported on a Form 4 or Form 5 (for example, if the disabled executive sold stock the day before his or her termination of employment or gifted stock earlier in the year), then there is an obligation to report on a timely basis such transactions that occurred prior to the executive’s termination of employment. The disabled executive’s reports can be signed and filed with the SEC by the executive’s guardian. Regardless of who signs and executes the report, the disabled executive should be named as the reporting person in Box 1 of the report, and the person executing the report on the disabled executive’s behalf should sign the report in their own name, indicating the capacity in which they are signing.
Powers of Attorney
When a disabled employee is unable to care for their personal or financial affairs the employee may designate another person (called the “agent”) through the use of a Power of Attorney (a POA). The agent is permitted to take action on the employee’s behalf to the extent permitted by the terms of the POA. If you receive a POA, it is important to check state law to determine whether (a) the POA is valid, and (b) the POA permits the action that the agent wishes to take. For example, some state laws may prohibit an agent from changing a beneficiary designation unless the POA explicitly gives the agent that right. If you determine that a POA is valid, then you are permitted to take direction from the agent with respect to compensation and benefit plan matters that are within the scope of the authority granted by the POA.
[1] The requirements of the American with Disabilities Act are beyond the scope of this article.
[2] The rules on benefit elections and payment options during an FMLA leave are complex, and when digging into these rules (which are beyond the scope of this article), many employers find that their approach is not fully compliant with those rules.
Update on the SHIPS for America Act
The Shipbuilding and Harbor Infrastructure for Prosperity and Security for America Act (SHIPS for America Act) that was originally introduced in Congress in 2024 has been reintroduced in the Senate of the 119th Congress as S. 1541, with Sens. Mark Kelly, D‑Ariz., Todd Young, R-Ind., Lisa Murkowski, R-Alaska, Tammy Baldwin, D-Wis., Rick Scott, R-Fla., and John Fetterman, D-Pa., as its cosponsors. Sens. Richard Blumenthal, D-Conn., and Dan Sullivan, R-Alaska, subsequently joined as cosponsors as well. The bill has been initially referred to the Senate Committee on Commerce, Science, and Transportation.
A companion bill of the same name has been introduced as H.R. 3151 in the House of Representatives by Rep. Trent Kelly, R-Miss., on behalf of himself and 37 cosponsors — 21 Republicans and 16 Democrats. The House bill was referred to 12 different committees for consideration within their respective subject matter jurisdictions.
The numerous House committees to which the bill has been referred reflects the comprehensive scope of the bill’s proposals for revitalizing the United States as a maritime nation. While the SHIPS for America Act contains many specific legislative proposals, the principal policy objective of the SHIPS for America Act is to enhance US national security by increasing the involvement of US-built, US-flag vessels in international trade and in particular to compete with China more strategically in that trade. The provisions of the SHIPS for America Act are designed to achieve this overall policy objective in several ways.
First, the SHIPS for America Act contains provisions to establish national oversight and consistent funding for the US maritime industry. If passed, the SHIPS for America Act would create a White House-level position of Maritime Security Advisor, who in turn would lead an interagency Maritime Security Board tasked with making whole-of-government decisions to implement a national maritime strategy.
The SHIPS for America Act would also establish a Maritime Security Trust Fund similar to the dedicated trust funds for other modes of transportation that are supported by user fees, such as the Highway Trust Fund. The purpose of the Maritime Security Trust Fund would be to provide funding for federal programs that support US maritime transportation independent of the annual appropriations process, funded by duties, fees, penalties, taxes, and tariffs collected by US Customs and Border Protection.
To increase the number of US‑built, US-flag vessels engaged in international trade, the SHIPS for America Act would create a new program, the Strategic Commercial Fleet Program, with the goal of establishing a fleet of 250 privately owned US-built, US-flag, US-crewed vessels in international trade by 2030 that are also capable of serving national defense interests. The program would provide annual support payments to cover the difference in capital costs and operating costs associated with constructing and operating a US-built, US-flag vessel as compared with a fair and reasonable estimate of the costs of constructing and operating that type of vessel in a foreign shipyard or under a foreign flag.
The SHIPS for America Act would also establish a shipbuilding financial incentive program that allows the US Maritime Administration (MARAD) to aid in the construction of US-built, US-flag vessels that are not part of the Strategic Commercial Fleet, or to make investments in US shipyards and facilities that produce critical components for shipyards. The SHIPS for America Act would also make changes to MARAD’s Title XI, Capital Reserve Fund, Capital Construction Fund, and Small Shipyards Grants programs designed to encourage the construction of new vessels.
An investment tax credit of 33% would be available for investments to construct, repower, or reconstruct eligible oceangoing vessels in the United States and a 25% investment tax credit for investments in a qualified shipyard in the United States.
The SHIPS for America Act includes several provisions designed to help ensure that there will be cargo for the new vessels to carry. Among them would be an increase in the percentage of US government cargo required to be carried on US-flag vessels from 50% to 100%. Within 15 years, 10% of all cargo imported from the People’s Republic of China would be required to be carried on US-flag vessels. US-built vessels would be required to carry 10% of total seaborne crude oil exports by 2035 and 15% of total seaborne liquefied natural gas exports by 2043.
Finally, the SHIPS for America Act addresses the need for a sufficient shipyard workforce to build these new vessels and for enough mariners to crew them once they are built. Incentives for recruiting and retaining mariners and shipyard workers would include public service loan forgiveness, educational assistance under the GI Bill, and preference when applying for federal employment.
There has been commentary suggesting that some of the different ways in which the SHIPS for America Act seeks to achieve its policy objectives — direct financial support, investment tax credits, cargo preference, and workforce development, among others — could eventually be incorporated into separate bills in order to facilitate their consideration and passage. The projected costs of each of the various incentives will need to be tallied, and funding for them will need to be provided. In any event, the renewed recognition of maritime transportation’s vital role in our nation’s security is likely to provide favorable prospects for the SHIPS for America Act and similar legislative initiatives.