"Leased Employees" and Plan Administration

This article by Reish, Luftman, McDaniel & Reicher highlights one of the problem areas for plan administration: “What Difference Does It Make If I Hire a Former “Leased” Employee?” Hiring “leased” employees can lead to plan compliance violations since employers are required by IRS rules to credit service for purposes of eligibility and vesting back to the date the “leased” employee began work for the employer as a “leased” employee, i.e. you cannot begin crediting service as of the date of hire as a “regular employee.” One of the problems with this requirement is the record-keeping involved. Many employers simply do not keep records of service for their “leased” employees, rather the vendors have these records, which are often difficult to obtain. If an employer is audited by the IRS where this problem is discovered, the employer would likely be required to give the affected employees the benefits (adjusted for earnings) and vesting credit they would have received if they had been correctly credited with their service as “leased” employees. The employer would have to reconstruct records as far as possible and provide the service crediting that is required under the rules.

In the case highlighted in the article, the employer, with the help of legal counsel, most likely utilized the IRS’s Employee Plans Compliance Resolution System (under which an employer can voluntarily submit a plan to the IRS which has compliance violations, correct those violations, pay a minimum sanction, and obtain approval for the correction from the IRS) and was able to come up with what could be termed an “educated guesstimate” which satisfied the IRS, even though the employer did not have records for the service.

Today's News

Today’s Federal Register.

The IRS issued Revenue Ruling 2003-98 which provides guidance concerning the application of section 83 of the Internal Revenue Code where stock options are granted and the company granting the options is later acquired.

The University of Pennsylvania’s Wharton School Newsletter has published this article of interest: “Underfunded Pensions: Causes, Cures and Questions.”

Our pension mess could be worse.”: the article by Janet McFarland for Globe and Mail talks about how the Canadian “pension plan mess” is better off than the U.S. “pension plan mess.” The article highlights how Canadian companies seem to be using more realistic assumptions for future investment returns than U.S. companies.

USA Today reports: “Stock options showdown will affect future of U.S. economy.” The article talks about research by economist Stephen Bryant and his colleagues, published in The Journal of Business in October 2000, which found that, unlike options, “restricted stock, due to its linear payoffs, is relatively inefficient in inducing risk-averse CEOs to accept risky, value-increasing investment projects.”

Financial Professionals Being Asked to Subcertify for purposes of SOX

PlanSponsor.com reports: “Companies Asking Financial Professionals to ‘Subcertify’ Financial Data.” The article refers to a survey by the Association for Financial Professionals which reports that “approximately a third of corporate financial professionals are now being asked to “subcertify” data used in Securities and Exchange Commission (SEC) reports, as senior financial executives look for added Sarbanes-Oxley reporting assurances.” You can access the actual AFP survey here: “Sarbanes-Oxley One Year Later: Sign-Offs on Financials “Trickle Down” to Other Finance Staff: AFP survey reveals widespread practice of ‘subcertification.‘” The survey found the following areas were the most common areas where financial professionals were being asked to subcertify:

  • specific disclosures in Management’s Discussion and Analysis or footnotes
  • specific account balances
  • compliance with company policies and procedures
  • adequacy of internal controls in their department/area
  • compliance with company code of conduct

(If you recall, there has been a great deal of discussion here over the certification requirements in relation to the Form 11-K filings for employee benefits plans. You can access the previous postings on that subject here.)

UPDATE: Mike O’Sulllivan for CorpLawBlog also reports on the survey here.

More on US Airways Pension Fund termination. . .

Also, regarding another article in the Wall Street Journal reported on here–“Most Workers Are in Dark on Health of Their Pensions: US Airways Killed a Plan That Pilots Had No Inkling Was in Financial Danger” (a change in the title has occurred since the article was published–the article is now entitled “Firms Had a Hand in Pension Plight”), today’s Wall Street Journal carries a response from David N. Siegel, President and CEO of US Airways: “The Pension Fund War at US Airways.” (Subscription required.) The hard copy edition of today’s Wall Street Journal also carries an additional comment from a retired US Airways pilot.

News Update

Today’s Federal Register.

Cigna is selling its $2 billion pension business as reported by Bloomberg.com: “Cigna Hires Goldman to Sell Pension Unit, People Say.”

Norman Cohen for FT.com reports: “Arcane actuarial science widens political divide over pensions.” The article quotes Steven Kandarian, the chief executive of the PBGC, who in a speech last week, outlined four choices for policymakers considering the future of the PBGC:

The first option, he says, is to do nothing. The second and third options, increasing substantially the premiums paid by healthy employers or significantly increasing company contributions, are likely to be aggressively opposed by employers. The fourth, diplomatically described as “general revenue transfer” – a bailout by the taxpayer – is unlikely to win the support of the Bush administration.

Fox News is carrying this article regarding William Donaldson’s interview with the Associated Press yesterday: “SEC Chief: Crackdown Calming Investors.” Regarding the pension funding issue, the article quotes Donaldson, chairman of the SEC, as saying in the interview that “[s]ome corporations have made overly optimistic projections of their future earnings, allowing them to boost short-term profits with money that otherwise should have gone to shore up pension funds.” With respect to stock options, the article quotes Donaldson as saying that “some companies still ‘haven’t gotten the message’ when it comes to lavishing pay packages and stock options on executives.”

In the meantime, Sun Microsystems Inc. is granting stock options to a number of senior executives as reported by Reuters: “Sun grants stock options to CEO, other executives.” The article reports that the news came even after “shares of Sun fell 19 percent after it reported quarterly earnings below Wall Street expectations and analysts wondered when it might recover from the technology spending downturn.”

On the other hand, today’s edition of the Wall Street Journal is reporting: “Companies Get Stingy With Stock Options: Many Employees Will Find Their Awards Sharply Reduced; When to Cash In Old Ones.” (Subscription required.)

More on Justice Holmes' Famous Quotation . . .

David Giacalone at Ethical Esq. provides us with a lively discussion of the famous tax quote by Justice Holmes (discussed previously in a post here) and its implication for “tax whiners.”

A Blogger Who is Out of this World

Did you know that Expedition 7 NASA ISS Science Officer Ed Lu is writing (blogging?) about his experiences while living aboard the International Space Station? You can read Ed’s Musings from Space and view some awesome pictures as well.

More on Robinson v. U.S. . .

RIA has published this article discussing Robinson v. U.S., a decision from the United States Court of Appeals for the Federal Circuit which ruled on certain aspects of Internal Revenue Code section 83. The decision was discussed in great detail in a separate post here and also by Stuart Levine in his Tax and Business Law Commentary here. The RIA article states that the IRS has recently mounted a multi-pronged attack against employees who attempt to defer income recognition by transferring nonstatutory compensatory stock options to related parties for long-term notes. The article goes on to say that for “companies with employees who used this type of scheme, the Federal Circuit’s decision may make it possible for the companies to gain deductions before the final tax treatment to the employees is ultimately resolved by a court or by agreement with IRS.”

Phased Retirement or DROP Arrangements

Gabriel, Roder, Smith & Company has a very good article on the issues facing phased retirement and DROP arrangements for private sector employers: “Phased Retirement Arrangements and Deferred Retirement Option Plans.” You can also access the American Academy of Actuaries December 30, 2002 letter to the IRS encouraging the IRS to adopt rules facilitating phased retirement.

More on DROP Plans:

From Carol V. Calhoun: “Deferred Retirement Option Plans (“DROP Plans”)

From the Society of Actuaries: “Design and Actuarial Aspects of Deferred Retirement Option Programs” (article continued here)

GAO Report: Participants Need Information on Risks

The Government Accounting Office has issued this 72-page report: “Private Pensions: Participants Need Information on Risks They Face in Managing Pension Assets at and during Retirement.” The report makes this statement:

GAO is not recommending executive action. However, to improve public awareness and understanding of important considerations related to managing pension and retirement assets in retirement, the Congress may wish to consider amending the Employee Retirement Income Security Act to require plan sponsors to provide participants with a notice on risks that individuals face in managing their income and expenditures at and during retirement. The Congress could consider stipulating that this notice must be provided at certain key milestones.

A focus of the article seems to be the concern that retirees could outlive their assets when they choose a lump sum, due to the fact that people are living longer. The article states that “retirees need to be aware of the risk of outliving one’s assets in retirement and the financial risks individuals face in retirement.” The panel noted that providing information on such risks is very or extremely effective in helping retiring participants make decisions about managing their pension assets.

(The report reminds us that the number of defined benefit plans maintained by employers has decreased from 139,000 in 1979 to 56,000 in 1998. I would love to know what those figures are for 2003.)