Solutions for the Pension Funding Crises?

The Financial Times today (from Benefitslink.com) has an article–“Washington put on pensions alert“–reporting on an interview with Bradley Belt, executive director of the PBGC, who discusses the administration’s concerns over the pension funding crises. Here is a part of what he had to say when asked about whether U.S. taxpayers might eventually be required to pick up the bill for employers’ abandoned pension funding commitments:

“The challenges are multi-faceted and profound,” he said in an interview with the Financial Times. “They go from the narrow role of administering the insurance [program], to the future of the defined benefits system as a whole, to the wider issue of retirement security.”

He called for the rules to be tightened for weak companies with underfunded plans and simplified for those that are healthy to encourage them to stay in the system. There also needed to be a change to the premium structure that funds the PBGC.

“The level received by the PBGC is simply inadequate to cover financial claims. The deficit will get larger.”

Mr. Belt wants to strengthen the agency’s status in bankruptcies, to “enhance our ability to recover on our claims, so we are looking at our current priority and how we might classify pension contributions as administrative expenses”.

Health and Welfare Plans Lacking in Compliance

ASPA has posted on their website some very interesting testimony presented to the 2004 ERISA Advisory Council on Employee Welfare and Pension Benefit Plans Working Group on Health and Welfare Form 5500 Requirements. The testimony was given by Janice M. Wegesin, President of JMW Consulting. Dittos on this statement from her testimony regarding how many employers fail to meet ERISA documentation requirements pertaining to their medical, dental, and life plans:

Engagement of my firm often starts with a compliance review. The client delivers to me all of the benefits communication materials that are normally provided to its new employees and, from that, a list of plans subject to ERISA is developed. The next step in the review involves collection of the plan documents, summary plan descriptions, and Form 5500 filings for those plans. A client typically has no difficulty presenting the documentation and filings relating to its qualified retirement plans; however, it is frequently an entirely different story for its welfare benefit plans. Although a §125 cafeteria plan document may exist, the “documents” for the medical, dental, and life plans may consist solely of the employee booklet issued by the insurance carrier. For some benefits, the only “document” may be the information presented in the employee handbook.

Besides the documentation probems, she goes on to note how, in addition, few clients fulfill ERISA filing requirements with respect to such plans:

Many tax form preparers do not have the skills necessary to properly advise the plan sponsor about welfare plan reporting, so merely continue to prepare only those Form 5500 filings that the plan sponsor has historically filed. Large employers often prepare Form 5500 filings for welfare plans (but not qualified retirement plans) in-house and, again, the SALY (same as last year) principal applies. No thought is given to changing circumstances and benefit structures and the impact on Form 5500 reporting.

Health and Welfare Plans Lacking in Compliance

ASPA has posted on their website some very interesting testimony presented to the 2004 ERISA Advisory Council on Employee Welfare and Pension Benefit Plans Working Group on Health and Welfare Form 5500 Requirements. The testimony was given by Janice M. Wegesin, President of JMW Consulting. Dittos on this statement from her testimony:

Engagement of my firm often starts with a compliance review. The client delivers to me all of the benefits communication materials that are normally provided to its new employees and, from that, a list of plans subject to ERISA is developed. The next step in the review involves collection of the plan documents, summary plan descriptions, and Form 5500 filings for those plans. A client typically has no difficulty presenting the documentation and filings relating to its qualified retirement plans; however, it is frequently an entirely different story for its welfare benefit plans. Although a §125 cafeteria plan document may exist, the “documents” for the medical, dental, and life plans may consist solely of the employee booklet issued by the insurance carrier. For some benefits, the only “document” may be the information presented in the employee handbook.

Besides the documentation probems, she goes on to note how few clients fulfill ERISA filing requirements either with respect to such plans:

Many tax form preparers do not have the skills necessary to properly advise the plan sponsor about welfare plan reporting, so merely continue to prepare only those Form 5500 filings that the plan sponsor has historically filed. Large employers often prepare Form 5500 filings for welfare plans (but not qualified retirement plans) in-house and, again, the SALY (same as last year) principal applies. No thought is given to changing circumstances and benefit structures and the impact on Form 5500 reporting.

New Overtime Reg.'s Effective

Labor and employment lawyers are having a fun time, I’m sure, trying to educate clients on the new FLSA regulations which went into effect today. Michael Fox has found the cheat sheet for understanding the new regulations. Congrats to Ogletree Deakins for attempting to simplify something that appears so complicated. (Hey, I didn’t think lawyers could boil anything down to a “yes” and “no” answer. Where’s the “It depends” answer?)

Who's blogging? Judge Richard Posner

For a real treat, visit Lawrence Lessig’s blog–lessig blog–and read posts by Judge Richard Posner who is featured as a guest blogger for the week. As many of you may recall, it was predicted that Judge Posner might end up being one of the judges who will decide the appeal in Cooper et al. v. IBM Personal Pension Plan et al. since the case will go to the Seventh Circuit on appeal. (Read about it here and here.) While his blogging will focus on the “social and legal impact of technology,” he also tells what his favorite movie is.

<![CDATA[Rhiel v. Adams Developments]]>

After the Sixth Circuit’s decision in Rhiel v. Adams rocked the benefits and bankruptcy world late last year, most of us figured that it was a far-gone conclusion that participants’ interests in 403(b) plans would, for the most part, be henceforth included in the bankruptcy estate, at least in states governed by the Sixth Circuit (i.e. Michigan, Ohio, Kentucky and Tennessee), unless the case were somehow overturned by the Supreme Court. (You can read about the case in this previous post–403(b) Plans Take a Turn for the Worst in the Sixth Circuit and More on the Sixth Circuit’s Bankruptcy Decision.) However, there is some disturbing,albeit predictable, news from the bankruptcy trenches—I have received word from bankruptcy attorneys that, even in states not governed by the Sixth Circuit, bankruptcy trustees are taking the Rhiel v. Adams decision to heart and trying to rely on the Rhiel case to include 403(b) plan assets as part of the bankruptcy estate. As you may recall, the Rhiel case held that a husband and wife’s interests in 403(b) plans were included in the bankruptcy estate and not exempt under section 542(c)(2) of the Bankruptcy Code. The case was a departure from the general rule that participants can exclude their interests in “ERISA qualified plans” from the bankruptcy estate in a bankruptcy proceeding.

<![CDATA[Rhiel v. Adams Developments]]>

After the Sixth Circuit’s decision in Rhiel v. Adams rocked the benefits and bankruptcy world late last year, most of us figured that it was a far-gone conclusion that 403(b) plans would, for the most part, be henceforth included in the bankruptcy estate, at least in states governed by the Sixth Circuit (i.e. Michigan, Ohio, Kentucky and Tennessee), unless the case were somehow overturned by the Supreme Court. (You can read about the case in this previous post–403(b) Plans Take a Turn for the Worst in the Sixth Circuit and More on the Sixth Circuit’s Bankruptcy Decision.) However, there is some disturbing albeit predictable news from the bankruptcy trenches—I have received word from bankruptcy attorneys that, even in states not governed by the Sixth Circuit, bankruptcy trustees are taking the Rhiel v. Adams decision to heart and trying to rely on the Rhiel case to include 403(b) plan assets as part of the bankruptcy estate. As you may recall, the Rhiel case held that a husband and wife’s interests in 403(b) plans were included in the bankruptcy estate and not exempt under section 542(c)(2) of the Bankruptcy Code. The case was a departure from the general rule that participants can exclude their interests in “ERISA qualified plans” from the bankruptcy estate in a bankruptcy proceeding.

Financial Accounting Blog

I know some readers will be delighted to know that there is a new blog called the “Financial Accounting Blog.” (Pointer came from RothCPA.com here.) I hope that the author keeps it up as the topic is one that could really use some coverage and would likely garner a large readership over time.

Have you . . .?

. . . heard of DivestTerror.org? It is an organization that seeks to play a pivotal role in winning the War on Terror by discouraging public and private pensions plans, college endowments, individual retirement account managers, 401(k) plans, and other investment vehicles from investments in publicly traded companies that operate in terrorist-sponsoring states. The organization has published a report entitled “Terrorism Investments of the 50 States.” According to the report, “on average, America’s Top 100 pension systems invest between 15 and 23 percent of their portfolio in companies that do business in terrorist-sponsoring states.”

. . . read the Motley Fool’s article today by Bill Mann–“Is United Taking Aim at Retirees?“–in which he discusses United’s plans to sidestep its pension obligations.

. . . heard about ftwilliam.com? It is a website established by a former colleague of mine, Tim McCutcheon, which provides on-line document and forms software for the employee benefits professional for a fee. The site offers access to 401(k), profit sharing, money purchase, and target benefit plans in various formats, as well as IRS and PBGC forms. Tim tells me that one of the unique features of his forms software is that it generates all of the required bar codes upon completion of the forms. Check it out.

Employers Utilizing More Temp and Part-time Employees: Be Wary of Qualified Plan Issues

Two articles this week have commented on health care costs as being a big factor in the sluggish job market. This article from the New York Times–“Rising Cost of Health Benefits Cited as Factor in Slump of Jobs“–notes how temporary employment is up, largely due to the health care cost factor:

The lagging job market has contributed to brisk growth in the temporary employment industry, where jobs may or may not include health benefits. In July, 2.4 million people were working for temporary agencies, according to the Bureau of Labor Statistics. That was a 9 percent increase from a year earlier, compared with an overall increase in the labor force of 1 percent, to 131.2 million.

In addition, this article from the Philadelphia Inquirer–“Fueling job growth? Part-timers” describes how “[e]ven as the unemployment rate has declined in 2004 and economic output is expanding, the growth in the U.S. labor market is coming from part-timers – workers who clock less than 35 hours a week and typically are not offered health benefits.” According to the article, the cost of benefits in general are discouraging employers from committing to additional full-time employees:

Economists say several forces are behind the trend [of a surge in part-time jobs]: “Businesses are getting better at figuring out how to structure work so it is most beneficial to them,” Reamer said. That means, for example, that a company concerned about the soaring cost of health-care benefits and also uncertain about the economy might offer overtime to an existing employee and hire a part-time employee to get additional work accomplished. This allows the company to avoid the extra health-care-benefit costs of full-time workers.

Mark Zandi, chief economist with Economy.com in West Chester, said some growth in part-time workers reflected lifestyle choices of an aging workforce: Some people do not want to put in 40 hours a week. But the main story, he said, is business confidence. Companies are not willing to make the commitment to add full-time employees.

Zandi and others say rising oil prices and the cost of employee benefits, in particular health-care coverage, are making companies think hard about adding full-time staff.

Employers should be careful about the impact part-timers and temporary employees can have on their qualified retirement plans. It is important to note, that part-timers must be allowed to participate in qualified retirement plans, such as 401(k)’s and profit sharing plans, if they have at least 1,000 hours of service during a year and meet the other eligibility requirements for the plan. A part-timer will often meet this 1,000 hour threshold. (Some plans may automatically include part-time employees, without the 1,000 hour threshold, i.e. plans that are based on an elapsed time method of crediting service. You can read this article written by Kirk Maldonado on the subject here.)

A failure to allow part-time employees who earn 1,000 hours during the year and who otherwise qualify to participate in a plan can have unpleasant consequences for employers if they are ever audited by the Internal Revenue Service. The correction method prescribed by the IRS for such errors is contained in Rev. Proc. 2003-44:

.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years. The permitted correction method is to make a contribution to the plan on behalf of the employees excluded from a defined contribution plan or to provide benefit accruals for the employees excluded from a defined benefit plan. If the employee should have been eligible to make an elective contribution under a cash or deferred arrangement, the employer must make a QNC (as defined in § 1.401(k)-1(g)(13)(ii)) to the plan on behalf of the employee that is equal to the actual deferral percentage for the employee’s group (either highly compensated or nonhighly compensated). If the employee should have been eligible to make employee contributions or for matching contributions (on either elective contributions or employee contributions), the employer must make a QNC to the plan on behalf of the employee that is equal to the actual contribution percentage for the employee’s group (either highly compensated or nonhighly compensated). Contributing the actual deferral or contribution percentage for such employees eliminates the need to rerun the ADP or ACP test to account for the previously excluded employees. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in § 1.410(b)-6(b)(3)) in order to reduce the amount of QNCs. Likewise, restructuring the plan into component plans under § 1.401(k)-1(h)(3)(iii) is not permitted in order to reduce the amount of QNCs.

In other words, the mandated form of correction is for the employer to (1) include the employee as a participant in the plan and (2) put the participant in the same position as if he or she had not been excluded. For instance, if the employer maintains a profit sharing plan and fails to include an eligible employee, the correction is making up contributions the employer would have had to put in for the employee if the employee had not been improperly excluded, plus earnings. For a defined benefit plan, the plan must provide benefit accruals for the excluded employee.

However, in a 401(k) plan, the correction under IRS rules is for the employer to make the 401(k) contribution to the plan on behalf of the employee and to make up the match as well, plus earnings. (The 401(k) contribution amount that the employer must put in for the employee is equal to the average deferral percentage for the employee’s group, i.e. either nonhighly compensated or highly compensated group, as applicable.) Sounds like a windfall to the employee, doesn’t it? The IRS’s thinking in this is that the employee shouldn’t be required to make up 401(k) contributions that it would have made in the past if it had been correctly allowed to participate.

In addition, in a IRS Field Directive issued Nov. 22, 1994, the IRS made it clear that excluding “part-time employees” as a classification is improper under a plan since it would impose an “indirect service requirement on plan participation that could exceed one year of service.”