Month: July 2005

I have added numerous links to Tax blogs and HR-related blogs (including some newly created ones) over in the right-hand column.

The Arkansas Insurance Department has issued a directive in connection with an Eigth Circuit ERISA preemption case discussed in a previous post here. Read about it in this article from the Insurance Journal: “Arkansas Clarifies Changes to Any Willing Provider Law.”

Pennsylvania legislators have effectively overturned the controversial Commonwealth Court decision in Ignatz v. Commonwealth of Pennsylvania, 2004 WL 1057453 (Pa. Commw. May 12, 2004) through enactment of House Bill No. 176. (You can read the text of the bill here.) The bill was approved by Governor Rendell on July 7, 2005. Buchanon Ingersoll has a great summary of the development here.

Also, legislation was passed in Pennsylvania removing a state law mandate which was a barrier to insurers offering high deductible health plans in connection with health savings accounts. The legislation, House Bill 107, was approved by the Governor on July 14, 2005. (Access the text of the legislation here.) The bill also provides that the following shall be exempt from taxation in Pennsylvania:

(1) any income of a health savings account;
(2) any amount paid or distributed out of a health savings account that is used exclusively to pay the qualified medical expenses of the account beneficiary; and
(3) any amount paid or distributed out of a health savings account that is used exclusively to reimburse an account beneficiary for qualified medical expenses.

Please note that individual or employer contributions to health savings accounts unfortunately do not appear to be exempt from state income tax in Pennsylvania. This article here reports that “[u]nder the original legislation, contributions to HSAs by employers and employees would not have been taxable for state income tax purposes.” The article goes on to explain that “under pressure and threat of veto from the Rendell administration, the tax exclusion language for contributions was stripped from the bill immediately prior to its passage.”

Read more about the impact of state law mandates on health savings accounts in this previous post here.

The District Court for the Eastern District of Texas recently rejected a settlement submitted to the Court for approval in the case of In Re Electronic Data Systems Corp. ERISA Litigation. You can access the Memorandum Opinion and Order of the Court rejecting the settlement here [pdf]. The plaintiff-participants had sued EDS and its officers and directors for various fiduciary breaches and alleged, in general, violations of ERISA pursuant to a “stock-drop” scenario.

You can read about the important procedural issues which have developed in this case in a previous post here. The Fifth Circuit had granted the defendants’ petition for interlocutory appeal under Rule 23(f) of the Federal Rules of Civil Procedure. However, after presenting oral arguments to the Fifth Circuit in April of 2005, the parties apparently engaged in a “day-long mediation session” that resulted in a proposed settlement. However, the Court rejected the settlement, stating as follows:

The Court concludes that this settlement is not in the best interests of the proposed class members. Under the proposed settlement the class members would only receive two or three cents on the dollar of their losses. For example, a plan participant who had a $10,000 loss under the settlement proposal would receive only $200 to $300, a mere pittance of his or her actual loss. The Court is of the opinion that such a plaintiff would consider the risk of an adverse ruling by the Fifth Circuit to be a risk worth taking in comparison with the small benefit to be received from the settlement. This is particularly true in the present case, given that a class member would not be much worse off losing the appeal and receiving nothing than he would be receiving the de minimis recovery that each Plan participant would receive under the proposed settlement. This may be a good settlement for Plaintiffs’ counsel in that they would recoup 100% of their $5.0 million in attorneys’ fees and expenses, and it may be a good settlement for EDS in that for a relatively nominal sum it would remove whatever risk it has, but it is not a fair settlement for the Plaintiff class who would only be receiving a few pennies on the dollar. Given the Court’s skepticism that class members would ultimately find the proposed settlement to be fair to them, the Court believes issuing a notice and holding a final fairness hearing would be an expensive and unjustifiable effort.

Although not a factor in determining whether the proposed settlement is fair, reasonable, and adequate, the Court is also of the opinion that broader interests of justice would be served by denying preliminary approval. There is a vacuum of precedent on 502(a)(2) issues in the Fifth Circuit, as well as other circuits. The Fifth Circuit recognized this in Milofsky and, implicitly, in taking the unusual step of granting an interlocutory appeal under Rule 23(f). See Milofsky v. Am. Airlines, Inc., 404 F.3d 338, 345 (5th Cir. 2005) (refusing to “speculate on every possible situation” yet to be answered). In light of the de minimis settlement before the Court, it is therefore in the interests of justice to push forward in this dispute, so issues can be resolved by the Fifth Circuit and procedural clarity can be brought to ERISA litigation surrounding defined contribution plans.

Furthermore, approving this settlement could send the wrong message to the United States Department of Labor, the administrative agency charged with overseeing and enforcing pension plans. The United States Department of Labor is presently investigating this Plan and has clearly stated its position in its amicus curiae brief at the Fifth Circuit. The Court believes that investigation should run its due course and not be prematurely influenced by the Court approving what it has found to be an unfair de minimis settlement to the class members.

You can access the following amicus briefs filed in the appeal:

• DOL Amicus Brief
• Brief of ERIC, the American Benefits Council, and the ESOP Association as Amici Curiae

For Your Benefit has comments on the case here.

UPDATE: See also this recent article from the Washington Legal Foundation entitled “ERISA-Related Securities Litigation Imposes Undue Burden on Pension Plans and Participants.”

The Joint Committee on Employee Benefits (JCEB) of the American Bar Association has posted transcripts of the 2005 Q & A Sessions with the following governmental agencies:

• Centers for Medicare and Medicaid Services (CMS)
• Equal Employment Opportunity Commission (EEOC)
• Health and Human Services (HHS)
• Internal Revenue Service & U.S. Department of Treasury (IRS)
• Pension Benefit Guaranty Corporation (PBGC)

Highlights of the IRS session include Q & As discussing Internal Revenue Code section 409A, health savings accounts, and automatic rollover provisions.

Note also this excerpt from the Health and Human Services session:

Question 5: Is a Health Savings Account (HSA) subject to the HIPAA privacy rules? If the answer is yes, who has the responsibility for ensuring that the HIPAA privacy requirements are met, the individual account owner, the custodian or trustee of the HSA, or an employer who maintains the related High Deductible Health Plan?

Proposed Answer 5: The privacy rules apply to “covered entities,” which include health plans, health care clearinghouses, and health care providers. The definition of health plan includes individual and group plans that provide or pay for the cost of medical care.

Although the definition of health plan is broad enough to include HSAs established by an individual with no involvement on the part of the individual’s employer, the privacy rules were not intended to apply in this context. The privacy rules serve, in part, to assure that individuals’ health information is properly protected while allowing the flow of health information needed to provide and promote high quality health care and to protect the public’s health and well being. As the Department of Labor noted in Field Assistance Bulletin 2004-1, “HSAs are personal health care savings vehicles rather than a form of group health insurance.” Furthermore, funds held in an HSA need not be used exclusively for the payment of medical care (although they may lose certain tax benefits if they are used for other purposes). HSAs were introduced as a means of promoting savings and assisting individuals with the high cost of health care. Subjecting HSAs to the burden of HIPAA compliance would discourage rather than promote savings because it would discourage trustees and custodians from offering such accounts and would add to the costs of maintaining them. In balancing the promotion of health care savings with the need to protect individuals’ health information, we believe the better approach is not to subject individual HSA accounts, nor the custodians or trustees that sponsor them, to the HIPAA privacy rules where there is no involvement by employers in the establishment or maintenance of the account.

Answer: HHS stated that it is coming to the conclusion that HSAs are not health plans and therefore are exempt from the HIPAA privacy rule. HHS is trying to distinguish between HSAs, which function more like individual savings accounts, and group health plans. HHS may issue further guidance on this issue in fall 2005.

Please note that the JCEB website provides the following disclaimer:

The questions are submitted by ABA members and the responses are given at a meeting of JCEB and government representatives. The responses reflect the unofficial, individual views of the government participants as of the time of the discussion, and do not necessarily represent agency policy.

You can access previous year Q & A sessions here as well.

The Treasury and IRS have issued proposed regulations entitled “Use of Electronic Technologies for Providing Employee Benefit Notices and Transmitting Employee Benefit Elections and Consents.” The press release summarizes the regulations as follows:

The Treasury Department and IRS issued proposed regulations today regarding the use of electronic media to provide notices to employee benefit plan participants and beneficiaries and to transmit elections or consents from participants and beneficiaries to employee benefit plans.

These regulations coordinate the rules in existing guidance for using electronic media for these purposes with the requirements of the E-SIGN statute (the Electronic Signatures in Global and National Commerce Act, Public Law 106-229). The regulations would allow a plan to use electronic media either under the E-SIGN consumer consent rules or under an alternative that is similar to the retirement plan rules for electronic transmission of plan information that were in effect before E-SIGN and that are both less burdensome on employers and as least as protective for participants.

Comments about the proposed regulations in general:

According to the preamble, the standards set forth in these proposed regulations would apply to any “notice, election, or similar communication” made to or by a participant or beneficiary under the following types of plans:

• a qualified plan
• a 403(b) plan
• a SEP
• a simple IRA plan under section 408(p)
• an eligible governmental plan under section 457(b)
• an accident and health plan under section 104(a)(3) or 105
• a cafeteria plan under section 125
• an educational assistance program under section 127
• a qualified transportation fringe benefit program under section 132
• an Archer Medical Savings Account under section 220
• or a health savings account under section 223.

The regulations state that they are meant to constitute the “exclusive rules relating to the use of electronic media” to satisfy a requirement under the Code that a communication be in written form, but would also act as “safe harbor” with respect to any communication that is not required to be in written form. The preamble states specifically that these proposed regulations would apply to section 402(f) notices, section 411(a)(11) notices, and section 204(h) notices.

What notices or communications are not covered by the new rules? The preamble states that they would not apply to any notice, election, consent, or disclosure required under the provisions of Title I or IV of ERISA over which the DOL or the PBGC has interpretative and regulatory authority. For example, the preamble states that the rules provided in 29 C.F.R. 2520.104b-1 of the Labor Regulations (which require an employee benefit plan to furnish disclosure documents, such as summary plan descriptions or summary annual reports) would continue to apply. They go on to note that the proposed regulations would also not apply to the following:

• Code section 411(a)(3)(B) (relating to suspension of benefits)
• Code section 4980B(f)(6) (relating to an individual’s COBRA rights)
• “or any other Code provision over which DOL and the PBGC have similar interpretative authority”
• “other requirements under the Code such as requirements related to tax reporting, tax records, or substantiation of expenses”

As to the effective date for the new rules, the regulations state that they are to apply “prospectively” and will apply “no earlier than the date of the publication of the Treasury decision adopting these rules as final regulations in the Federal Register.” The regulations make it clear that they “cannot be relied upon prior to their issuance as final regulations.”

RIA is reporting today that at a recent ALI-ABA session on Executive Compensation, Catherine Livingston Fernandez, Esq., Chief, Executive Compensation Branch in the IRS’s Office of the Associate Chief Counsel and Keith Jones, Director, Field Specialists, Large and Mid-Size Business Division (LMSB) revealed that IRS agents are already receiving training in section 409A of the Internal Revenue Code, with the first wave of audits likely to begin in 2007. Excerpt:

Since it takes about two years for returns to be filed and audits to be initiated, the first wave of Code Sec. 409A audits would begin in 2007. Mr. Jones said that IRS agents plan to audit the 2005 transition year for compliance with Code Sec. 409A . In response to an audience question, Mr. Jones said that, despite suggestions from IRS that it would go easy in the transition year, issues on which the law was clear and regulatory guidance wasn’t needed would be subject to audit for 2005.

The article goes on to note that another compliance focus for the IRS is the “failure-to-deposit penalty” having to do with the one-day rule for depositing employment taxes. According to the article, Mr. Jones is quoted as saying that “penalties amounting to tens of millions of dollars will be imposed, particularly in connection with unpaid unemployment taxes on stock options.” Other focuses of compliance include high-income taxpayers (income of $100,000 and above), travel and entertainment, and reasonable compensation.

Read more about nonqualified deferred compensation rules under new section 409A of the Code in previous posts which you can access here.