Tax – Page 2 – Law Ivy

Micro-captive Insurance Reportable Transactions and the Reporting Requirements

Certain micro-captive transactions are back to being reportable. On January 14, 2025, the Treasury Department and the Internal Revenue Service (“IRS”) published final regulations (the “Regulations”) that named some micro-captive insurance transactions as listed transactions and others as transactions of interest. See Internal Revenue Service, Treasury. “Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest. 90 Fed. Reg. 3534 (Jan. 14, 2025). These formal rules replace the reporting regime that developed first under IRS Notice 2016-66, which was voided for failure to comply with the Administrative Procedure Act.
A “Captive” elects 831(b) treatment and is at least 20% owned by an Insured-related party
The Regulations apply only to certain companies defined as “Captives.” A “Captive” is an entity that elects to be taxed under Section 831(b) of the Internal Revenue Code, issues or reinsures a contract that any party treats as insurance when filing federal taxes, and is at least 20 percent owned by an “Insured”, an “Owner” of an Insured, or a person related to an Insured or an Owner. The Regulations further define an “Insured” as any person who enters a contract with a Captive and treats amounts paid under the contract as insurance premiums for federal income tax purposes. An “Owner” is someone with a direct or indirect ownership interest in an Insured or its assets.
Reportability depends on loss ratio and related-party financing
The Regulations define the micro-captive listed transaction and the micro-captive transaction of interest based on two core ideas: loss ratio and related-party financing. The regulations calculate the loss ratio as:

The loss ratio is measured over a period of years, not just a single taxable year. For a transaction of interest, the loss ratio is measured over ten years or the life of the Captive, whichever is shorter. If the loss ratio is less than 60 percent over those years, then the Captive is a transaction of interest. For a listed transaction, the time period is the most recent ten years. So, a Captive must be at least ten years old to become a listed transaction. If the loss ratio over the most recent ten years is less than 30 percent, then the Captive may be a listed transaction.
The Regulations’ other focus is related-party financing. Related-party financing occurs when the Captive makes funds available to an Insured, an Owner, or some other related party through a non-taxable arrangement (e.g., a loan) and the amount made available is greater than the Captive’s cumulative after-tax earnings on investments. A Captive that has engaged in a related party financing in the last five years with an outstanding balance in effect at any point during an open tax year is a transaction of interest. If that Captive also has a loss ratio less than 30 percent over the most recent ten years, then the Captive is a listed transaction.
This interaction can be summarized in a convenient tabular format:

A transaction of interest is one where the IRS requires additional information to consider whether tax avoidance is present. A listed transaction is one where the IRS believes tax avoidance is present. Listed transactions are treated more consequentially than transactions of interest. Therefore, a Captive that meets both categories must file as a listed transaction.
“Seller’s Captives” and some employee-benefits captives are excluded
The Regulations offer two exceptions, both of which are excluded from the definition of a transaction of interest or listed transaction. First, Captives for which the U.S. Department of Labor has issued a Prohibited Transaction exception and that provide insurance for employee compensation or benefits are excluded.
Second, “Seller’s Captives” are also excluded. A “Seller” is an entity that sells products or services to customers and also sells those customers insurance contracts connected to the goods or services. A “Seller’s Captive” is a Captive related to a Seller, a Seller’s owner, or parties related to a Seller or owners of Sellers. To qualify for the exception, the Seller’s Captive’s only business must be to issue or reinsure insurance contracts in connection with the sales made by the Seller or its related persons, and at least 95 percent of the Seller’s Captive’s business in a year must be in connection to contracts purchased by customers unrelated to the Seller. If those conditions are met, then the Seller’s Captive has not engaged in a listed transaction or a transaction of interest.
Reporting requirements for participants in the transaction
The Regulations place reporting requirements on parties involved in any transaction covered by the Regulations (a “reportable transaction”). These reporting requirements apply to participants in the transaction and to “material advisors” to the transaction, both for the current year and for all years where the statute of limitations for assessing tax has not yet expired. The Regulations do not by themselves require the filing of amended tax returns. [NTD: This question of amended returns came up at WCF and with RMA.]
Captives, Owners, Insureds, and any other parties to a reportable transaction must file Form 8886, Reportable Transaction Disclosure Statement, with the IRS Office of Tax Shelter Analysis (“OTSA”). The filing must describe the transaction in sufficient detail, including the party’s involvement in the transaction and how the party learned about the transaction.
Captives and Insureds have additional reporting burdens. For every year that a Captive participated in a reportable transaction, it must also disclose the types of policies it provided, how much it received in premiums, how much it paid in claims, the contact information of those who helped determine premiums, and the names and ownership interest of anyone who meets a 20% ownership threshold in the Captive. An Insured must describe how much it paid in premiums for coverage by a Captive.
Participants have 90 days from the date the regulations were published, January 14, 2025, to file their initial reports. The initial filing should include all applicable open tax years and must be sent to OTSA. A copy of the initial filing, and all subsequent filings, should be included with the applicable tax return.
There are two ways that a taxpayer can avoid filing under the Regulations. If a taxpayer has finalized a settlement with the IRS regarding a reportable transaction that was in examination or litigation, that taxpayer is treated as having made a disclosure for the years covered by the settlement. A taxpayer engaged in a transaction of interest who has been diligent in filing under the now-defunct Notice 2016-66 regime has a reduced filing burden. The taxpayer’s previous transaction of interest filings count under the Regulations, so the taxpayer does not have to refile for those past years.
There are also two “safe harbor” provisions which allow a taxpayer to not file a Form 8886. The first relates specifically to Owners who only participate in reportable transactions due to their ownership interests. In that case, the Owner does not have to file if the Insured complies with its own filing obligation, acknowledges the obligation in writing to the Owner, and identifies the Owner on its own Form 8886 as the recipient of the acknowledgement. The other safe harbor arises when a Captive revokes its Section 831(b) election. If a Captive revokes its election, then the transaction ceases to be a reportable transaction for any years that the revocation is effective and none of the participating taxpayers will have been party to a reportable transaction. To facilitate revocations, the IRS also released Revenue Procedure 2025-13 (Rev. Proc. 2025-13), which provides a streamlined procedure to revoke a taxpayer’s Section 831(b) election.
Reporting requirements for material advisors to the transaction
Material advisors to reportable transactions must also file with the IRS. A “material advisor” is a person who makes a tax statement to a party that needs or will need to disclose the transaction and the advisor derives gross income from it that surpasses a threshold. The advisor’s gross income can be based on almost anything the advisor does related to the transaction. The threshold for income on a listed transaction is $10,000 when most of the transaction’s benefits go to natural persons and $25,000 in other cases. For a transaction of interest, the threshold is higher, at $50,000 when the transaction mostly benefits natural persons and $250,000 otherwise.
Material advisors must file Form 8918, Material Advisor Disclosure Statement, with OTSA. Form 8918 must be filed with OTSA by the last day of the month following the end of the calendar quarter when one becomes a material advisor. In this case, that means by April 30, 2025.
Under these Regulations, material advisors are required to report for tax statements up to six years before the date of publication, or January 14, 2019. Additionally, there is no exception in the Regulations for material advisors who filed previously.
Differences between the proposed and final regulations
While the IRS continues to look unfavorably upon micro-captives, there are some positive signs in the Regulations. In particular, the IRS received comments from the regulated community, considered those comments, and adjusted its final position based on those comments.
The result is that the final regulations are less burdensome than the proposed regulations. The proposed regulations would have treated any related-party financing as a listed transaction. They also would have treated any Captive with a loss ratio of less than 65 percent over 10 years as a listed transaction. Finally, they would have treated a Captive with a loss ratio of less than 65 percent over the preceding nine years or the Captive’s lifetime, whichever was shorter, as engaging in a transaction of interest. The final regulations dramatically reduced the loss ratio needed to escape being considered a listed transaction, required a listed transaction to meet both the funding and loss ratio criteria, and slightly lowered the threshold to escape transaction of interest status.
Seek guidance for comprehensive compliance
The Regulations were issued with a lengthy background discussion and include many definitions and references to other laws. This article highlights the key provisions of the Regulations. Taxpayers that may be subject to the Regulations should consult (consider consulting?) professional advisors for detailed review and guidance on potential reporting requirements.

What Every Multinational Company Should Know About … The New Steel and Aluminum Tariffs

What Has President Trump Announced?
On February 10, 2025, President Trump signed proclamations titled Adjusting Imports of Steel Into the United States and Adjusting Imports of Aluminum into the United States. The proclamations cover both steel and aluminum tariffs, which will be raised to a flat 25%. In particular, the steel and aluminum proclamations establish the following tariff principles:

The Section 232 aluminum tariffs, which the Trump administration imposed in his first administration, are raised from 10 percent to 25 percent.
The Section 232 steel tariffs, which already were set at 25 percent but which contained significant carveouts for most major sources of steel products, including steel from Brazil, Canada, and South Korea, will be implemented “without exceptions or exemptions.”
All product-specific exemptions that had been granted under the prior Section 232 tariffs are eliminated.
The steel and aluminum proclamations apply not only to products previously identified in Proclamation 9705 (2018) and Proclamation 9980 (2020) but also to additional derivative steel products and derivative aluminum products to be identified in forthcoming annexes to the proclamations.
The United States will set up a process to allow U.S. industry groups and U.S. producers of steel and aluminum to request that other derivative products be added to the annexes.
The steel and aluminum proclamations include exemptions only for derivative steel products “melted and poured” in the United States and derivative aluminum products “smelted and cast” in the United States, to curb imports of minimally processed metals from other countries that circumvent the prior tariffs. In other words, derivative products that are produced from steel and aluminum that originated in the United States, which then were processed abroad into a derivative product, would be exempt from the new 25 percent tariffs.

The full impact of these tariffs will take time to work through the market. Nonetheless, the announcements sent major shock waves through the manufacturing community. To help companies sort out the potential impact of these new tariffs, this article works through the top-of-mind questions for most major aluminum and steel importers. It then provides some strategies for companies looking to manage tariff-related risks, including by buttressing supply chains and building in contractual flexibility.
Our expectation is that these are the opening salvos in a likely international trade war, not the last shot. Notably, after the issuance of the steel and aluminum proclamations, a White House official confirmed these tariffs would “stack” on any other tariffs. For example, if the currently suspended 25% increase in tariffs for Canada and Mexico are implemented, then imports of Canadian and Mexican aluminum and steel would face new 50% tariffs.
What Are the Key Open Questions and Ambiguities in the Announcement?

What products are covered? The coverage of the presidential proclamation is broad, covering all basic forms of steel and aluminum. In addition to steel and aluminum products subject to previous Section 232 duties, the proclamations will include forthcoming annexes incorporating further derivative steel and aluminum products.
How far downstream does the proclamation extend? The coverage likely extends to numerous downstream products such as pipes, tubes, and aluminum extrusions. The full list of derivative products covered by the proclamations will be listed in yet-to-be-published annexes.

How does this interact with the prior Section 232 duties imposed in President Trump’s first term? The effect of the steel and aluminum proclamations is basically to replace the prior Section 232 duties — including all their exemptions and negotiated alternative quota arrangements — with new, uniform duties under the current proclamations, including to a potentially larger set of products to be covered in the forthcoming annexes. This has the effect of both broadening the scope of the prior duties and also extending them to countries that had negotiated alternative measures to the prior Section 232 tariffs, such as by imposing quotas for exports of steel and aluminum to the United States in exchange for having the tariffs dropped. The proclamations also eliminate all the product-specific exemptions granted under both the prior Trump and Biden administrations. Thus, the proclamations represent a level-setting of the prior Section 232 tariffs, bringing everything to a uniform 25% rate for all countries and for all products.

What about the Section 301 duties? The Section 301 duties applicable to Chinese-origin products remain fully in place. Because those tariffs (recently increased by an additional 10%) cover basically all imports from China, including aluminum and steel products, the new aluminum and steel tariffs ladder on top of the Section 301 duties. Thus, there can be duties as high as 60% for Chinese aluminum and steel, in addition to the normal Chapter 1–97 tariffs, of the Harmonized Tariff Schedule of the United States (HTSUS) that generally apply to imports from all countries.
What about all the antidumping and countervailing duty orders on various steel and aluminum products? In addition to Section 232, Section 301, and standard Chapter 1–97 duties, in situations where there are antidumping or countervailing duty orders on steel or aluminum products, these duties also would be added on. Because antidumping and countervailing duty orders are placed on products from a particular country or countries, the analysis of whether such additional duties are due for steel and aluminum imports would depend on the country at issue, as well as whether the product being imported falls within the written scope of the antidumping and countervailing duty orders. But because of the large number of antidumping and countervailing duty orders, an appreciable number of products will be covered by these tariffs as well. It accordingly is essential for steel and aluminum importers to be carefully scrutinizing the potential applicability of such orders to their steel and aluminum products.
Would the USMCA allow us to avoid these duties by importing first into Canada or Mexico? Merely transshipping products through a third country, such as Canada or Mexico, does not alter the tariffs to be paid on that product if it eventually comes into the U.S. customs territory. Further, the steel and aluminum proclamations impose a new U.S. melt-and-pour requirement for steel and a smelting requirement for aluminum in order to claim an exemption from the Section 232 tariffs.
Can we avoid the tariffs by doing a moderate amount of processing before importing the steel and aluminum? This would depend on whether the processing is sufficient to take the product out of the HTS classifications listed in the forthcoming annexes of derivative steel/aluminum products.
Are the trade courts likely to strike this measure down? The imposition under Section 232 of aluminum and steel tariffs in the first Trump administration was appealed to both the Court of International Trade and the Court of Appeals for the Federal Circuit. The end result was that the prior use of Section 232 to invoke national security grounds to impose tariffs to protect the U.S. aluminum and steel industries was upheld. While a challenge to the new proclamations is likely, these precedents will make it difficult for such a challenge to succeed.
Don’t these special tariffs violate the WTO Agreements? WTO agreements will not provide relief from these tariffs for steel and aluminum importers. Several countries have already brought a WTO challenge or indicated that they will be doing so soon. But the WTO’s dispute resolution process has been effectively brought to a standstill in recent years, as multiple U.S. administrations have blocked appointments of panelists to the WTO’s Appellate Body, which is the final stage of any dispute resolution. Also, WTO dispute resolution takes years to finish.
Will major importing countries negotiate a resolution to these tariffs? It is likely that they will try. Australia already has indicated it will seek to negotiate an alternative to the imposition of the tariffs. Australia is viewed as being better positioned than most countries for such a resolution because it maintains a trade deficit with the United States, whereas other major steel and aluminum exporters to the United States have trade surpluses. That said, it would not make sense to eliminate the prior settlements through the new imposition of aluminum and steel tariffs if the end goal were to put something similar back in place. Because the U.S. aluminum and steel industries were viewed as having their relief undermined by prior negotiated alternative provisions, as well as the grant of hundreds of product-specific exemptions, it is expected that negotiated alternatives to the tariffs will be much more difficult to achieve this time around.
How will we get clarity regarding the scope of these new tariffs? The new Section 232 tariffs are to go into effect on March 12, 2025. Additional information — including the publication of the annexes — will need to be provided so these tariffs can be applied. We expect that the publication of the proclamations in the Federal Register will provide at least some further clarification as to the scope of the measures — including the annexes — as well as subsequent guidance from U.S. Customs & Border Protection.
Are there any other trade- or tariff-related measures we need to be monitoring? Yes. Speaking from the Oval Office, President Trump said the steel and aluminum tariffs were “the first of many” to come. In particular, he said his international trade team would be meeting over the next four weeks to discuss potential new tariffs on cars, chips, pharmaceuticals, and other goods. He already has imposed 10-percent tariffs on Chinese-origin imports (on top of the existing Section 301 duties from the first Trump administration, which apply to around half of all goods imported from China and impose tariffs up to 25 percent). He has threatened tariffs of up to 25 percent on all goods from Canada and Mexico, which are currently suspended for 30 days to give negotiators time to work out an agreement to address unauthorized immigration and illegal trafficking in fentanyl and other drugs. And he has threatened reciprocal tariffs, which would raise U.S. tariff rates on any products from countries that impose higher tariffs on the same goods when exported from the United States. Finally, he also has vowed to raise U.S. tariffs still further on any country that retaliates against the U.S. tariffs.

What Should Our Company Do to Cope With These Potentially Costly New Duties?

Gather information on importing patterns to determine tariff-related vulnerability. Importers should gather information regarding their steel and aluminum products, and their importing patterns related to those products, to pinpoint tariff-related risks and vulnerabilities. Supply chain mapping, the process of documenting all suppliers and the flow of goods and products in a supply network, can be an important tool for importers looking to gain proper insight into their network. A clear picture of one’s supply chain allows importers to identify tariff-saving opportunities and to proactively address pressure-points creating vulnerabilities.
Gather contracts and determine tariff-related flexibility. Global trade dynamics necessitate flexible supply chain contracts for both suppliers and purchasers. The starting point is to identify goods facing high tariff rates and to gather all of your supply- and sell-side contracts and determine how they handle tariff-related risks for these goods. In general, when it comes to tariff-related risks, these contracts generally fall into two buckets: (1) ones that contain no provision relating to tariffs or that contain pricing-related provisions, which may indirectly allocate risks relating to tariffs but not provide any real flexibility to deal with unexpected tariff changes; and (2) ones that include clear tariff-related provisions. To the extent possible, in any situation where your company bears tariff-related risks (generally, where your company has agreed to act as the importer of record), you want to be in the posture of moving contracts toward the second scenario.
Look for ways to update supply-side contracts for supply chain flexibility and sharing of risk. Fixed-price contracts typically assign cost risk to the seller. If tariffs increase costs, suppliers cannot unilaterally demand price adjustments unless the contract allows for cost-sharing mechanisms. An example of price adjustment protection language would be as follows: Supplier reserves the right to adjust prices to reflect the impact of any tariffs, duties, or similar governmental charges imposed after the date of this proposal. These adjustments will be calculated to ensure fair allocation of the increased costs. Supplier will provide advance notice of any such adjustments along with documentation supporting the changes.
Look for ways to update sell-side contracts for allowing surcharges and pricing flexibility. Sellers wanting to protect themselves and to have added flexibility should seek to include price adjustment rights in their contracts. Some contracts tie prices to commodity indexes, mitigating the impact of sudden market changes. If a supplier anticipates tariff risks, an indexed pricing structure may provide some protection.
Incorporate procedures to regularly review new contracts and contracts coming up for renewal to incorporate tariff flexibility and tariff-sharing provisions. Regularly reviewing new contracts and contracts up for renewal allows companies the opportunity to amend their standard terms and conditions and to incorporate provisions that can lead to more flexibility and an equal tariff-sharing burden. An example of contract language to create flexibility in a tariff-changing environment would be: If new tariffs, duties, or similar government-imposed charges are introduced after contract execution, the parties will renegotiate pricing in good faith to reflect the impact of such charges.
Look for ways to create commercial leverage to share tariff-related risks. The imposition of additional tariffs can be just as devastating for sellers as it is for buyers. Look for contractual leverage points relating to contract renewals or potential expansion of purchasing patterns. Consider moving up contract renewals to combine term extensions with tariff-related risk sharing. By proactively addressing these issues in supply chain agreements, businesses can better navigate economic volatility while maintaining contractual clarity and financial stability.

Foley Automotive Update 19 February 2025

Foley is here to help you through all aspects of rethinking your long-term business strategies, investments, partnerships, and technology. Contact the authors, your Foley relationship partner, or our Automotive Team to discuss and learn more.
Key Developments

Automakers and suppliers are delaying certain investment decisions and considering a range of scenarios to adjust production and supply chains in response to President Trump’s tariff policies that include a 25% tariff on certain automobile and semiconductor imports that could be announced as soon as April 2, the potential for broader “reciprocal tariffs” on all countries that tax U.S. imports, 25% levies on steel and aluminum imports, and uncertainty over proposed 25% tariffs on all U.S. imports from Mexico and Canada that were paused for a “one month period” as of February 3.
Major automakers are reported to be increasing their lobbying efforts over concerns certain tariff and trade policies of the Trump administration will lead to higher manufacturing costs and job losses in the U.S.
Foley & Lardner partner Greg Husisian provided insights in Manufacturing Dive on the potential ramifications of President Trump’s 25% tariffs on steeland aluminum imports, as well as commentary in CNN here and here regarding the Trump administration’s proposed “reciprocal tariffs” on numerous trading partners. Visit Foley & Lardner’s 100 Days and Beyond: A Presidential Transition Hub for more updates on policy analysis and the business implications of the Trump administration across a range of areas.
Vehicle imports represented 53% of 2024 U.S. new light-vehicle sales, according to analysis from GlobalData featured in CNBC. The top three nations for U.S. vehicle imports last year were Mexico (16.2%), Korea (8.6%) and Japan (8.2%).
Canada accounts for roughly 20% of U.S. steel imports and 50% of aluminum imports. The U.S. exported over $16 billion of steel and aluminum products to Canada in 2024.
Environmental Protection Agency Administrator Lee Zeldin on February 14 announced plans to submit certain California emissions waivers for Congressional review. The action could result in a repeal of waivers approved under the Biden administration that supported California’s Advanced Clean Cars II, Advanced Clean Trucks, and Omnibus NOx rules. Earlier this month, the U.S. Supreme Court denied the Trump administration’s request to pause three cases so the EPA could reevaluate Biden-era regulations that include the decision to grant California a Clean Air Act waiver allowing the state to implement its own greenhouse gas emissions standards for vehicles.

OEMs/Suppliers

Ford informed suppliers it will delay the launch of its next-generation F-150 pickup truck, according to a report in Crain’s Detroit.
Ford reported 2024 net income of $5.9 billion on total revenue of $185 billion, representing year-over-year increases of 37% and 5%, respectively. The automaker projected its 2025 operating profit could decline by 17% to 31% YOY due to challenges that include pricing competitiveness, lower sales volumes, and the expectation for up to $5.5 billion in losses for its EV and software operations.
Private equity firm KKR and Taiwanese electronics giant Hon Hai Precision Industry (Foxconn) were reported to be considering investments in Nissan following the automaker’s breakdown of merger discussions with Honda.
GM laid off 79 hourly workers at its CAMI Assembly plant in Ingersoll, Ontario. The plant produces the BrightDrop electric commercial van.
Isuzu will invest $280 million to establish a commercial truck manufacturing plant in South Carolina.
GM intends to close a plant in Shenyang, China, as part of a broader restructuring in the nation in response to declines in market share, according to unnamed sources in Reuters.

Market Trends and Regulatory

The Wall Street Journal provided a breakdown of the U.S. market share and production of certain overseas automakers that could be affected by new import tariffs.
The Alliance for Automotive Innovation expressed its support for the nomination of Jonathan Morrison to serve as Administrator of the National Highway Traffic Safety Administration. Morrison most recently held a position at Apple, and he previously served as NHTSA’s Chief Counsel during the first Trump administration.
A Rhode Island federal judge ruled on February 10 that substantive effects have persisted for the now-rescinded January 27 Office of Management and Budget memorandum (M-25-13) that called for a freeze on certain federal grants, loans and other financial assistance. The judge also “rejected the administration’s argument that some funds — including assistance under the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) — have remained properly frozen in an effort to ‘root out fraud,’ writing that his order required all frozen funding to be restored.”
Automakers are among the entities lobbying the Trump administration to pursue a gradual phaseout of certain EV tax credits rather than an abrupt end.
A Massachusetts federal judge ruled against automakers that sought to block implementation of the state’s “right-to-repair” law. In the lawsuit filed in 2020, automakers had cited concerns that included cybersecurity risks and the potential for inconsistencies with certain federal laws.
Automotive News provided an overview of the manufacturing investments that could beat risk if the IRA or large portions of it are repealed.
Auto insurance costs may rise for consumers if vehicle repair costs are impacted by tariffs on auto parts.
A report in Automotive News predicts an increase in automotive plants with the flexibility to produce multiple propulsion systems.
BYD is reported to be pursuing discussions to sell European automakers carbon credits to help mitigate the effects of stricter emissions standards in the European Union. The European Commission could announce an action plan next month in response to automakers’ concerns over the compliance costs associated with 2025 CO2 emissions targets in the bloc.
The Trump administration agreed to pause additional layoffs at the U.S. Consumer Financial Protection Bureau, according to a February 14 court order. However, the future of the lending institutions’ regulator is currently unclear.

Autonomous Technologies and Vehicle Software

BYD will include advanced driver-assistance systems as a standard feature in many of its future models sold in China at no additional cost to buyers. Capabilities of BYD’s “God’s Eye” system will vary depending on the vehicle classification. The automaker is also developing plans to integrate software from Chinese AI startup DeepSeek.
GM announced a goal for its Super Cruise hands-free driver-assist system to reach $2 billion in annual revenue within five years.
Industry stakeholders at the 5g Automotive Association symposium emphasized the importance for automakers to invest in vehicle-to-everything (V2X) connectivity.
Lyft plans to debut driverless rides in Mobileye-powered robotaxis as soon as next year, beginning in Dallas.

Electric Vehicles and Low Emissions Technology

J.D. Power predicts 2025 U.S. EV market share will hold at 9.1%,to match last year’s sales levels of 1.2 million units.
Toyota plansto begin shipping batteries for North American electrified vehicles from its Battery Manufacturing North Carolina plant in April 2025. This is Toyota’s first in-house battery manufacturing plant outside Japan and it represents nearly a $14 billion investment.
Electric truck maker Nikola filed for Chapter 11 bankruptcy protection.
Automaker-backed EV charging company Ionna plans to continue adding infrastructure at pace without relying on NEVI funding, with a priority on hubs around cities to serve drivers that are not able to install a home charger.
Rivian’s electric van is now available for purchase by any entities with a fleet of commercial vehicles. The vehicles were previously exclusively sold to Amazon.
A group of Republican senators introduced legislation to establish a $1,000 tax on new EV purchases to fund federal road repairs.

Analysis by Julie Dautermann, Competitive Intelligence Analyst

Is the Chief of IRS Appeals Constitutionally Appointed?

Introduction
The United States Tax Court skillfully dodged answering the headline question with a holding on standing. The court decided, however, that IRS appeals officers and IRS appeals team managers are not officers of the United States and therefore do not need to be constitutionally appointed.
Officers of the United States, who exercise “significant authority,” must be appointed under Article II of the Constitution. Non-officer employees, on the other hand, need not be selected in compliance with the Constitution.
In Tooke v. Commissioner,[1] the petitioner (“Tooke”) moved for judgment on the pleadings on the theory that the IRS Independent Office of Appeals (“Appeals Office”) unlawfully determined the petitioner’s tax liability because the Appeals Office personnel who issued the determination were Officers who were not constitutionally appointed. The Tax Court disagreed and denied the taxpayer’s motions.
Constitutional and Statutory Background
The Constitution’s Appointment Clause and Removal Power: The Constitution requires the Senate to consent to the President’s nomination of a Department Head. The Appointment Clause also bestows Congress with the power to appoint other Officers of the United States by stating, “the Congress may by Law vest the appointment of such inferior Officers … in the President alone … or in the Heads of Departments.”[2]
Moreover, although the Constitution does not expressly grant the President the power to remove an Officer of the United States from their position, the Supreme Court has held that the Constitution gives the President power to remove those who assist him in carrying out his duties (the “Removal Power”). The executive power is vested in the President,[3] and without such Removal Power, the President could not be held fully accountable for discharging his own executive responsibilities.[4]
Statutory Creation of the Appeals Office: In 2019, Congress enacted the Taxpayer First Act, which restructured the IRS Office of Appeals and renamed it as the Internal Revenue Service Independent Office of Appeals.
Under the Act, the Appeals Office is now supervised and directed by the Chief of Appeals (“Chief”), who is appointed by the Commissioner of Internal Revenue. The Chief holds a statutory position, which is made without regard to the competitive civil service or the senior executive service.[5]
Two additional roles (appeals officer and appeals team chief) report to the Chief and do not hold statutory positions in the Appeals Office. They are employees hired pursuant to the hiring authority of the commissioner, as opposed to Officers who must be constitutionally appointed if they exercise “significant authority.”[6]
Factual Background
Appeals Office Hearing: Tooke failed to pay assessed income taxes, for which the IRS filed a federal tax lien on his property and issued a notice that it intended to levy on (seize) his property. Tooke requested a collection due process hearing in the Appeals Office, asking it to provide collection alternatives, for example, an agreement to pay the unpaid taxes in installments, in lieu of imposition of a lien and execution of a levy.
The hearing was conducted by an appeals officer. The taxpayer and appeals officer could not agree on a collection alternative, resulting in the issuance by the Appeals Office of a notice of determination of Tooke’s tax liability. The appeals officer prepared the determination, and the appeals team manager approved it.
Tax Court Proceeding: Tooke filed a petition in the Tax Court, arguing that the notice of determination issued by the Appeals Office was unconstitutional because the Chief, at the time of the determination, and the appeals officer and team manager, who issued and approved the determination, were unconstitutionally appointed in violation of the Appointments Clause and the Removal Power. He asked the Tax Court to remand his case to a panel that was constitutionally constituted.
Creation and Structure of the Appeals Office: The Appeals Office hears and determines taxpayer challenges to determinations by the IRS operating divisions, the collection division, and other operations. Taxpayers had expressed concern to Congress that determinations of the Appeals Office were subject to undue influence by the IRS operations that proposed them.
In response, Congress passed the Taxpayer First Act.[7] The Act clarifies that the duties of the Appeals Office are to fairly and impartially reach resolution with the taxpayer of federal tax controversies without litigation, promote consistent application and interpretation of the tax laws, and enhance public confidence in the integrity and efficiency of the IRS.
Standing
The first issue that the Tax Court discussed was whether Tooke had standing to challenge the constitutional authority of the Chief, appeals officer, and appeals team manager. The court held that Tooke had standing to challenge the appeals officer and the appeals team manager who participated in the collection due process hearing but did not have standing to challenge the Chief who did not participate.
Standing has three components: A plaintiff must show that they have a legally protected interest that is injured, that the defendant’s action is traceable to the injury, and that a court can fashion a remedy that redresses the plaintiff’s injury.[8]

Injury to Tooke:

The Tax Court readily found that the mere conduct of a collection due process hearing by the appeals officer and appeals team manager injured Tooke assuming that the appeals officer and team manager were not constitutionally appointed.
The Tax Court rejected what it characterized as dictum in Landry v. FDIC [9] that would have treated the Chief as also injuring Tooke. The theory in Landry is that an individual who is affected by a proceeding in a department the head of which is not constitutionally appointed is injured even if the department head is “radically attenuated.” Injury occurs because separation of powers in the Constitution is “structural,” that is, the power of each branch is expressed in a separate article and does not require specific evidence of injury. The Tax Court discussed a dozen cases to explain away the dictum, which might suggest that the Tax Court decision on this issue is disputable.

Tracing of the Injury:

The Tax Court had no difficulty in tracing Tooke’s injury to the appeals officer and team manager who participated in the collection due process hearing.
With respect to the Chief, Tooke argued the root-to-branch theory:
[B]ecause the Chief’s appointment was purportedly unconstitutional, the integrity of Mr. Tooke’s CDP hearing and the determination made thereon by the Appeals Officer and the Team Manager were necessarily marred.
The Tax Court rejected the theory, unwilling to treat the Chief as having injured the taxpayer when the Chief did not participate in the hearing.
The Supreme Court has not expressly addressed whether a plaintiff has standing to bring a Separation of Powers challenge against an official who did not participate in a plaintiff’s case.

Authority to Redress the Injury:

Solely for the purpose of its standing analysis, the Tax Court also found that, if it had to, it could redress Tooke’s injury by remanding the case to the Appeals Office with instruction to conduct the hearing with constitutionally appointed officers.
But because the Chief did not participate in Tooke’s hearing, the court found no redressable injury by the Chief.
Therefore, the Tax Court held that Tooke lacked standing to challenge either the appointment of the Chief or the restriction on the power to remove the Chief from his position.
To the contrary, the Tax Court found that Tooke had standing to challenge the authority of the appeals officer and appeals team manager who participated in the Appeals Office determination adverse to Tooke.
The issue of standing to challenge the constitutional authority of the Chief was a question of first impression.
Separation of Powers (Appointments Clause and Removal Power)
With the finding that Tooke had standing to challenge the authority of the appeals officer and appeals team manager who issued the adverse tax determination, the remaining question was whether they were officers of the United States.
The court held the appeals officer and appeals team manager were not “Officers of the United States.” Thus, neither the Appointments Clause nor the Removal Power apply to them.
The classification of the appeals officer and appeals team manager as non-United States officers follows a fourteen-year-old Tax Court precedent, Tucker v. Commissioner.[10] The Tax Court opined that the intervening enactment of the Taxpayer First Act[11] and subsequent court decisions relating to separation of powers of the three branches of the federal government[12] did not implicitly overrule Tucker.
Classification of Officers of the United States: In the context of conducting a hearing, an individual is an Officer of the United States if they have the tools and adjudicatory power of a federal district court judge.[13] The Tax Court special trial judges and the SEC administrative law judges are prime examples of administrators who have those tools and power. The Tax Court held that an appeals officer and appeals team manager simply do not because a collection due process hearing lacks the typical processes of a judicial proceeding. Their power was not “significant.”[14]
Conclusion and Comments
The Tax Court denied Tooke’s motions for judgment based on his Appointments Clause argument and his Removal Power argument.[15] It found that, although Tooke had standing against the appeals officer and appeals team manager, they were not officers of the United States and therefore did not require a constitutional appointment.
The Tax Court did not discuss whether the Chief was an Officer of the United States. It was able to avoid that question by denying standing for Tooke against the Chief. It would not be surprising if an appeal is filed, arguing that (i) the Chief is an Officer of the United States, (ii) Tooke’s standing to challenge the Chief should have been based on the Chief’s statutory position rather than his participation in the collection due process hearing, and (iii) the Chief was not appointed by the President, the head of a department, or a court of law, all of which voids a collection due process hearing on his watch. The merit of the argument remains to be seen.

[1] 164 T.C. No. 2 (Jan. 29, 2025).
[2] U.S. Const., Art. II, Sec. 2., cl. 2.
[3] U.S. Const., Art. II, Sec. 1, cl.1.
[4] Seila Law LLC v. Consumer Financial Protection Bureau, 591 U.S. 197, 204 (U.S., 2020). The constitutionality of a statute that restricts the President’s power to remove an officer of the United States is problematic. Tooke relied on 5 USC 7813(a), which provides that “an agency may take an action [including removal] covered by this subchapter against an employee only for such cause as will promote the efficiency of the service.” It is questionable whether 5 USC 7813(a) applies to the Chief’s position. The Tax Court did not discuss the question.
[5] IRC §7803(e).
[6] §7804(a); Buckley v. Valeo, 424 U.S. 1 (1976).
[7] Supra note 3.
[8] Tooke, No. 2, 164 T.C. at – .
[9] 204 F.3d 1125, 1128 (D.C. Cir. 2000).
[10] 679 F.3d 1129 (D.C. Cir. 2012, aff’g 139 T.C. 2010).
[11] Pub. Law 116-25 §1001(a), codified at IRC §7803(e) (effective July 1, 2019).
[12] Lucia v. Securities and Exchange Comm’n, 585 U.S. 237 (2018) (administrative law judge is Officer of the United States), United States v. Arthrex, Inc., 494 U.S. 131 (2021) (administrative patent judge is Officer of the United States).
[13] Lucia, 585 U.S. at 241; Arthrex, Inc., 594 U.S. at 13.
[14] Cf. Buckley v. Valeo, 424 U.S. 141-142 (1976) (“Yet each of these functions also represents the performance of a significant governmental duty exercised pursuant to a public law. …These administrative functions may therefore be exercised only by persons who are “Officers of the United States.”)
[15] Tooke, No.398-21L, order served Jan 30, 2025).

IRS Releases Latest Management Contract Private Letter Ruling

On February 7, 2025, the IRS released Private Letter Ruling No. 202506001 in which it concluded that a management contract providing an incentive fee equal to a percentage of gross revenues of a managed hotel and contingent on two metrics, one of which is a variant of net profits, did not constitute the sharing of net profits and so did not result in private business use.
Under the terms of the management contract at issue, the service provider receives a “base fee” and an “incentive fee” each equal to a percentage of gross revenues of the managed facility. This arrangement is not particularly notable. What is notable is that the incentive fee is triggered only if two conditions are met: (1) if revenue per room exceeds an industry average, and more interestingly, (2) if the annual excess of gross receipts over operating expenses of the hotel meets a specified percentage. In concluding that the incentive fee does not constitute sharing of net profits under the facts and circumstances, the IRS reasoned that any increases or decreases in net profits do not result in proportional increases or decreases in the incentive fee. The incentive fee (if there is one) is fixed and predetermined. The IRS also noted that the timing of the payment of the incentive fee does not take into account net profits in that it is paid annually from a regularly funded operating account. Finally, the IRS noted that the incentive fee is “further distanced from net profits” due to the existence of the second metric which is not based on net profits.
Private Letter Ruling 202506001 is reminiscent of Private Letter Ruling 201145005 which also considered a management contract with an incentive fee contingent on a variant of net profits. The IRS determined there that that management contract was outside the safe harbor of Revenue Procedure 1997-13 but that its incentive fee did not represent a sharing of net profits.

Big Law Redefined: Immigration Insights Episode 9 | The Ins and Outs of Obtaining Permanent Residency in Panama [Podcast]

In this episode, host Kate Kalmykov is joined by Albalira Montufar, Partner and Head of the Immigration Practice at Morgan and Morgan. They discuss what makes Panama unique for retirement and investment opportunities; the process of becoming a resident; restrictions and exceptions for foreign workers; and an overview on Panama’s tax system.

Streamlining Sustainable Finance: Simplification of the EU Taxonomy

On 5 February 2025, the EU Platform on Sustainable Finance (the ‘‘Platform’’) published a report with recommendations on how to simplify the EU Taxonomy (the ‘‘Report’’). The EU Taxonomy is the EU’s classification system for sustainable activities. The Report sets out key areas of improvement and simplification of taxonomy reporting by making the EU Taxonomy more efficient with the overall aim of enhancing sustainable finance.
The Report sets out five key recommendations to the European Commission for simplification of the EU Taxonomy. The Platform anticipates that its proposals could reduce the burden of reporting on non-financial companies by over a third. The Platform further believes that a materiality approach to EU Taxonomy reporting would increase the efficiency in reporting for both financial and non-financial companies. The Report also emphasises the importance of greater interoperability between the EU Taxonomy and taxonomies being introduced in other jurisdictions.
The Platform’s Proposals:
We set out some of the key proposals below.
1: Refine the‘‘Do No Significant Harm”(‘‘DNSH’’) assessment and reporting obligations through:

a review of all DNSH criteria in the delegated acts with a focus on increasing their usability for financial and non-financial companies. Until a comprehensive review of the DNSH criteria is complete, a temporary ‘‘comply or explain’’ approach should be introduced for DNSH assessment of the Turnover key performance indicator (‘‘KPI’’);
adoption of a lighter compliance assessment process; and
support international applicability by converting references to European legislation into alternative requirements, such as on quantitative or process-focused requirements based on international standards. This would be a welcome development and has been a real hurdle for EU Taxonomy alignment with non-EU assets.

2: Reducing the corporate reporting burden by more than a third by:

introducing a materiality threshold for calculating KPIs in non-financial company reporting and the combined KPIs of financial undertakings;
making the operational expenditure KPI a mandatory disclosure only for research and development costs;
enhancing alignment of materiality thresholds with existing financial reporting regulations; and
simplifying templates and reducing data points to limit reporting to only the information relevant to making business decisions.

3: Simplifying the Green Asset Ratio (‘‘GAR’’) that encourages green and transition lending by:

excluding assets in the numerator and denominator that cannot be measured against the EU Taxonomy;
simplifying retail exposure reporting and focusing on substantial contribution; and
allowing estimates and proxies to be used in reporting along with measures to protect against greenwashing allegations.

4: Defining clear guidelines for the use of estimates in reporting:

where estimates are used, methods of estimation must be consistently applied to the substantial contribution and DNSH criteria; and
companies must adopt estimation methods with sufficient governance, traceability, transparency, input coverage and input quality in place.

5: Supporting small and medium-sized enterprises (‘‘SMEs’’) in accessing sustainable finance by:

introducing a simplified approach to the EU Taxonomy for listed SMEs; and
adopting a voluntary approach for banks and investors’ exposures to unlisted SMEs.

While the European Commission is not formally bound by the Platform’s recommendations, the proposals set out in the Report have the potential to significantly streamline reporting burdens under the EU Taxonomy and therefore enhance access to sustainable finance.

Tariff Update: 25 Percent Tariff on Steel, Aluminum Imports and Other Imports Affected

The tariff dance continues, as the new administration on Feb. 10 imposed 25 percent tariffs on all steel and aluminum imports for national security purposes under Section 232, effective March 12, 2025. Although the detailed annexes of products subject to the tariffs were not immediately published on the White House website, they should be published soon in the Federal Register.
The proclamation states, among other things, that (i) a product inclusion process for derivative steel products will be established 90 days after the date of the proclamation, (ii) the product exclusion process will be revoked and no renewals or additional exclusion requests will be permitted (iii) classification of imported steel and derivative steel products will be a Customs and Border Protection priority and maximum penalties apply if importers misclassify products to evade tariffs, and (iv) duty drawbacks do not apply to these tariffs.
This action mirrors the tariffs initially imposed in January 2018 for national security reasons. However, during that period, certain exemptions were granted to key trading partners. This new proclamation reinstates the tariffs without exception or exemptions, signaling a renewed focus on protecting domestic steel and aluminum industries.
Far-Reaching Implications
The implications of these tariffs are far-reaching for U.S. businesses, particularly those in industries that rely on imported steel and aluminum for manufacturing. Companies in sectors such as automotive, construction, and manufacturing will face increased costs, potentially leading to higher prices for consumers and reduced competitiveness in global markets. U.S. businesses that rely on these materials for production could experience disruptions to supply chains and a push for diversification of sourcing to mitigate the impact of these tariffs.
Moreover, a Feb. 7, 2025, Executive Order again allows packages from China to qualify as duty-free under the de minimis program until “adequate systems are in place.” This action reverses a Feb. 1 Executive Order and applies to the program that handles millions of low-value shipments daily. The Executive Order’s instruction ”would require mail from China to go through the ‘formal entry’ process, rather than the less-burdensome informal option.”
The action imposing 10 percent tariffs on China on Feb. 1 also prohibited de minimis treatment for any shipments from China worth $800 or less. Similarly, the U.S. Postal Service announced a prohibition on all packages from China on Feb. 4 when the tariffs became effective, only to reverse the position the next morning.
According to media reports, additional tariffs are expected on semiconductors, pharmaceuticals, and other industries, as well as further reciprocal tariffs against China after imposing tariffs on U.S. goods in response to the Feb. 1 action. Trading partners, including the European Union and Canada, are expected to impose reciprocal tariffs against the latest U.S. steel and aluminum tariffs, based on media reports.

President Trump Directs US Trade Agencies to Formulate Reciprocal Tariffs

On 13 February 2025, President Trump announced that he is directing the US Commerce Secretary and US Trade Representative to report to him by 1 April 2025 on specific tariffs the United States should impose to address bilateral trade deficits with countries that maintain higher tariffs on US exports than the level of tariffs that the United States imposes on their products. These “reciprocal” tariffs are expected to be finalized soon after the Commerce and USTR reports are finalized, but the date on which they may be implemented has yet to be announced.
Key points to remember concerning this latest tariff announcement are:

There will be no additional tariffs immediately as a result of this latest announcement.
US trade agencies (primarily Commerce and USTR) are to study tariffs imposed by other countries on US exports and recommend whether the United States should impose comparable tariffs against US imports from those countries.
Value-Added Tax and other tax regimes that US trading partners use but the US does not are potentially going to be included in the tariff rate calculations for those countries. Also potentially addressed will be distortions in exchange rates caused by currency policies of some countries and “non-tariff barriers” such as regulatory requirements (e.g., country-specific product standards) that are found to restrict market access opportunities for US exporters.
The US trade agencies must provide their recommendations to the president by 1 April 2025, the same date as originally set in the “America First Trade Policy.”
Thereafter, the US trade agencies are to use their respective statutory authorities (e.g., Section 232, 301, etc.) to impose relevant and necessary remedies such as tariffs, quotas, or other measures. Such remedies are likely to be in addition to the 10% tariffs on imports from China and 25% tariffs on imports of steel and aluminum that President Trump announced earlier this month. They are also likely to include new Section 232 tariffs on semiconductors, autos, and pharmaceuticals.
On its face, the Executive Order applies to all countries, but we may see exemptions for some (e.g., Australia) with which the United States maintains relatively balanced trade in goods.

Overall, this latest trade action signals the form that eventual additional US trade measures may take – e.g., tariffs and quotas under existing statutory authorities – as well as, most importantly, that there will be a process and longer time horizon for interested parties to comment before such measures go into effect. Companies and investors with interests impacted by these issues should use this time to prepare data and other analyses and advocacy to support their interests.

Robert F. Kennedy, Jr. Confirmed as HHS Secretary

‘Fair and Reciprocal Plan’ Threatens Future Tariffs on All U.S. Trading Partners

On Feb. 13, 2025, President Trump announced his “Fair and Reciprocal Plan” to “reduce [the United States’] large and persistent annual trade deficit in goods and to address other unfair and unbalanced aspects of [U.S.] trade with foreign trading partners.” At this time, the White House has only released a memorandum and accompanying Fact Sheet addressing this new Plan for reciprocal tariffs. Below are a few key observations based on the limited information so far:

Unlike the tariffs recently imposed against China and currently deferred on Mexico and Canada under the International Emergency Economic Powers Act (IEEPA), reciprocal tariffs will not be imposed immediately. The memorandum states that the U.S. Department of Commerce and the U.S. Trade Representative, in consultation with other agencies, shall initiate and investigate any harm to the U.S. from non-reciprocal trade practices of other countries after submission of the specified reports due under the America First Trade Policy Memorandum. Most of these reports under the America First Trade Policy are due April 1, 2025.
All U.S. trading partners will presumably be subject to the Fair and Reciprocal Plan investigations, including World Trade Organization (WTO) members. Indeed, the White House Fact Sheet refers to “132 countries and more than 600,000 product lines” where U.S. exporters face higher tariffs more than two-thirds of the time. Interestingly, the Fact Sheet provides specific examples of non-reciprocal treatment by certain countries and in certain industries, such as the European Union (shellfish, cars), India (agriculture and motorcycles), and Brazil (ethanol). It is unclear if these named countries and industries will become prioritized targets for reciprocal tariffs. Ultimately, any new reciprocal tariffs imposed by the U.S. are likely to be challenged in the WTO.
The Commerce Department and USTR will be charged with investigating not only unbalanced tariff treatment by other countries, but also other nontariff barriers such as digital trade barriers, government procurement, lack of intellectual property protection, and export subsidies, among others. Thus, we may see the U.S. take action beyond imposing just reciprocal tariffs, e.g., digital service taxes.
The Fact Sheet uses the phrase “The Art of the International Deal,” which may suggest that the “Fair and Reciprocal Plan” is intended primarily as a negotiating tactic.

IRS Issues Proposed Regulations on Secure 2.0 Catch-Up Provisions

The IRS issued Proposed Regulations last month which provide helpful clarity for employers on how to implement and comply with two new SECURE 2.0 provisions relating to catch-up contributions. “Catch-up contributions” are permitted additional salary deferrals to 401(k), 403(b) and governmental 457(b) plans by participants age 50 and older in excess of the standard deferral limit. Prior to the SECURE 2.0 Act, catch-up contributions could be made on a traditional (pre-tax) or—if permitted by the plan—Roth (after-tax) basis, and the same annually indexed limit ($7,500 for 2025) applied to all catch-up eligible individuals.
Under the SECURE 2.0 Act:

Roth Catch-up Requirement. High earners (those with previous year FICA earnings exceeding $145,000, as indexed for inflation) may only make catch-up contributions on a Roth basis, while lower earners may choose to make either traditional or Roth contributions; and
Super Catch-Ups. Participants—both high and low earners—who attain ages 60 to 63 in a taxable year are eligible for an increased catch-up contribution limit equal to the greater of: (i) $10,000; or (ii) 150% of the regular catch-up amount for the year ($11,250 for 2025).

Super Catch-Up Limit for Participants Ages 60 to 63
Whether the super catch-up provision is mandatory change has been the subject of much debate. The proposed regulations clarify that this is an optional design plan feature. However, pursuant to the universal availability requirement that applies to catch-up contributions, if any plan maintained by an employer offers the super catch-ups, all plans maintained by that employer must offer super catch-ups. While not entirely clear from the proposed regulations, this requirement likely applies on a controlled group basis.
High Earners May Only Make Roth Catch-Up Contributions
Much of the focus in the Roth catch-up space has focused on the application of the wage threshold for determining who is subject to the rule. Consistent with Notice 2023-62 (see our previous alert here), the proposed regulations confirm that only FICA wages count toward the threshold. Therefore, individuals who do not receive any FICA wages (such as a K-1 partners and certain governmental employees) are not subject to the Roth requirement, regardless of their earnings. In addition, wages from different employers will not be aggregated for purposes of this threshold, even if those employers are in the same controlled group.
The proposed regulations also clarify that the wage threshold is not prorated for the first year of employment. A new hire’s first year wages must exceed the full FICA wage threshold for the participant to be subject to the mandatory Roth catch-up requirement the following year.
From an administrative standpoint, a plan may provide that high earners are deemed to have designated any catch-up election as a Roth election (a “deemed election”)—whether the plan uses separate catch-up elections or a spillover design—so long as such participants are provided an opportunity to make a new election that differs from the deemed election, such as electing to suspend catch-up contributions altogether. This clarification will be very helpful to employers.
One key issue has been whether plans that fail ADP testing can recharacterize certain excess deferrals as catch-up contributions (which is a common strategy to improve testing results) if the deferrals were originally made on a traditional basis and need to be recharacterized as Roth catch-ups (which generally wouldn’t occur until testing is conducted after the close of the plan year). The proposed regulations confirm that this is permissible and offer two correction methods:

If certain timing requirements are met, the adjustment can be made on Form W-2 and the converted amounts can be included in the participant’s income for the year of deferral.
Alternatively, the converted amounts can be treated as in-plan Roth conversions taxable in the year of conversion (presumably this method requires the plan to include an in-plan Roth conversion feature.)

If a plan does not offer a Roth contribution feature, it is not required to add that feature to its plan design to comply with the proposed regulations. Instead, it could permit lower earners to make catch-up contributions on a pre-tax basis, while high earners would be precluded from making any catch-up contributions at all. Given that higher earners are overwhelmingly the population that takes advantage of catch-up contributions, it seems likely that the practical effect of this rule will be to push more plans to implement Roth contributions.
Effective Date
The proposed regulations related to these new catch-up features generally apply to contributions in taxable years beginning after the date which is 6 months after the publication of final regulations. However, special delayed effective dates apply to collectively bargained plans. In addition, a plan is permitted to apply the rules in the proposed regulations applicable to Roth catch-up contributions for any tax year beginning after 2023, and the rules applicable to the increased super catch-up limit to any year beginning after 2024.
Recommended Actions
When deciding whether and how these features should be incorporated into a plan, plan sponsors should consider the practical implementation and administrative factors, such as coordination with payroll providers and recordkeepers.