Each year the Supreme Court weighs in on only a limited number of cases. Two cases this year are of interest to small businesses.
Monitoring 401(k) fees
If your business has a 401(k) plan, you have to routinely check on the fees charged by the funds offered to plan participants. If you fail to do this, employees participating in your plan can sue you. That’s what the Court said in Tibble v. Edison. The case involved a plan that had a menu of 40 mutual funds, but six of them were a retail share class that had higher fees than those for an institutional share class. The participants said the failure to offer only the institutional share class of funds was a breach in the fiduciary duty to offer only prudent investments. (There was a technical aspect related to the six-year statute of limitations for a breach of fiduciary duty.) The Court said that merely considering the initial fund selection was insufficient without considering the “contours of the alleged breach of fiduciary duty” (i.e., the fees for the funds selected).
Impact: Fund performance alone is not the determination of a prudent investment; it includes the fees charged by the fund. So how often should you be looking at your menu of investment options? Is an annual review sufficient? Should you do a review quarterly? Who knows?
State income tax credits
Operating in more than one state is not uncommon these days. Take the case of an S corporation whose owners resided in Maryland that operated in 39 states. They had to file tax returns and pay nonresident income taxes in other states on the share of income in those other states. Maryland, their home state, taxed them on their out-of-state income, granting them a tax credit for income taxes paid to other states. However, there was also a county tax for which no credit or other offset was allowed. In Maryland v. Wynne, the Court concluded that Maryland’s tax scheme was a burden on interstate commerce in violation of the U.S. Constitution. (In legal parlance this is known as the dormant Commerce Clause, which precludes states from “discriminat[ing] between transactions on the basis of some interstate element.) In effect, Maryland residents paid double tax (in the form of county tax) on income earned in other states.
Impact: The case goes a long way in ensuring that owners of pass-through businesses with multi-state operations won’t be taxed twice on the same income. The impact of the decision is not limited to Maryland. For example, Illinois has a law that prevents a resident who is an employee from taking a credit for taxes paid to another state if the resident’s employer is in Illinois. Former baseball player Sammy Sosa challenged this Illinois law and may now be vindicated. Who knows? Business owners and employees who find themselves in similar positions may want to file refund claims (as long as they are not barred by the statute of limitations). Discuss your situation with a tax professional.
