Antarctica and the Internal Revenue Code

In all of my years of practicing law and researching various benefits and tax issues, I must admit that I have never had to research the issue of “whether Antarctica is a foreign country for purposes of the Internal Revenue Code.” See how the Tax Court resolved the issue in this interesting case: Arnett v. IRS. (Source: RothCPA.com.)

IRS Issues More Regulations Pertaining to Designated Roth Accounts

Hot off the press–proposed regulations providing “comprehensive guidance on the taxation of distributions from designated Roth accounts under section 401(k) and section 403(b) plans.” The provisions of the final section 401(k) regulations regarding designated Roth contributions which were issued on January 3, 2006, did not address the taxability of distributions from designated Roth accounts or the reporting requirements that apply to contributions of designated Roth contributions or distributions from the accounts. These proposed regulations address those issues. In addition, they also provide guidance with respect to designated Roth contributions under section 403(b) plans by amending the proposed section 403(b) regulations issued in 2004 to reflect the provisions of section 402A.

Update: SEC's Focus on Pension Consultants

What actions have pension consultants taken after the SEC’s release last year of its “Staff Report Concerning Examinations of Select Pension Consultants” as well as its “Tips for Plan Fiduciaries“? Lori Richards, Director, Office of Compliance Inspections and Examinations, for the SEC gave a speech December 5, 2005 (access it here) in which she provided some insight into how pension consultants have responded. Excerpt:

Since we issued our examination Report and the “Tips for Plan Fiduciaries” in May, we’ve sought to determine how pension consultants were reacting to the recommendations in the Report — we wanted to see what steps they had taken to address the conflicts of interest and the disclosure issues we had raised. We asked a number of the firms we had examined what steps they were taking in response to the Report.

In general, we found that most pension consulting firms we examined have taken positive steps to reevaluate, revise, and implement changes to their policies and procedures. . . .

Here’s what many pension consultants said that they were doing in light of our three recommendations, which were:

  • To insulate the consultant’s advisory activities from its other business activities to eliminate or mitigate conflicts of interest;
  • To disclose all conflicts of interest to prospective and existing clients to fulfill fiduciary duties; and
  • To implement policies and procedures to prevent conflicts of interest or disclose material conflicts of interest, especially concerning brokerage, gifts, donations, contributions and other financial benefits.

Richards then goes through a laundry-list of specific actions pension consultants have taken in implementing these three goals. While the speech is preceded by the disclaimer that the “speaker’s views are her own, and do not necessarily reflect those of the Commission, the Commissioners, or other members of the staff,” it does provide some insight into what actions the SEC might deem acceptable in addressing the concerns in the Staff Report. Plan fiduciaries will likely find this information somewhat useful in selecting, monitoring, and evaluating the pension consultants who assist them.

For instance on the obligation of disclosing conflicts, here are some of the “positive” actions being taken by pension consultants that she listed in her speech:

  • All consultants use Part II of Form ADV or a separate brochure to disclose conflicts of interest, and most strengthened their disclosures.
  • In addition to Form ADV, several consultants also provide clients with a separate conflict of interest document that includes discussions about the consultant’s business relationships with money managers and how the consultant manages potential conflicts.
  • A consultant provides specific disclosure to individual clients about conflicts it has with particular money managers it recommends to its clients.
  • A consultant adopted new procedures under which advisory clients can request specific financial information related to the consultant’s business relationships with individual managers.
  • Some consultants advised that they have distributed their own responses to the SEC Staff Report and the DOL/SEC “Tips” to individual clients.

In regards to the implementation of policies and procedures to prevent conflicts of interest, Richards gave the following advice to plan fiduciaries:

On a less encouraging note, it did not appear to us that all pension consultants had implemented policies governing the payment of their fees with directed brokerage. And, more than a handful of consultants failed to offer to provide a copy of the firm’s Code of Ethics to clients in Part II of Form ADV, as required. Plan trustees may find that reviewing a pension consultant’s Code of Ethics may help in answering some of the questions outlined in the SEC/DOL “Tips for Plan Fiduciaries.”

Read previous posts about the SEC/DOL focus on pension consultants here.

Actions of Pension Consultants in the Wake of SEC Focus

What actions have pension consultants taken after the SEC’s release last year of its “Staff Report Concerning Examinations of Select Pension Consultants” as well as the “Tips for Plan Fiduciaries.” Lori Richards, Director, Office of Compliance Inspections and Examinations, for the SEC gave a speech December 5, 2005, in which she provided some insight into how pension consultants have responded. Excerpt:

Since we issued our examination Report and the “Tips for Plan Fiduciaries” in May, we’ve sought to determine how pension consultants were reacting to the recommendations in the Report — we wanted to see what steps they had taken to address the conflicts of interest and the disclosure issues we had raised. We asked a number of the firms we had examined what steps they were taking in response to the Report.

In general, we found that most pension consulting firms we examined have taken positive steps to reevaluate, revise, and implement changes to their policies and procedures. . . .

Here’s what many pension consultants said that they were doing in light of our three recommendations, which were:

  • To insulate the consultant’s advisory activities from its other business activities to eliminate or mitigate conflicts of interest;
  • To disclose all conflicts of interest to prospective and existing clients to fulfill fiduciary duties; and
  • To implement policies and procedures to prevent conflicts of interest or disclose material conflicts of interest, especially concerning brokerage, gifts, donations, contributions and other financial benefits.

Richards then goes through a laundry-list of specific actions pension consultants have taken in implementing these three goals. While the speech is preceded by the disclaimer that the “speaker’s views are her own, and do not necessarily reflect those of the Commission, the Commissioners, or other members of the staff,” it does provide some insight into what actions the SEC might deem acceptable in addressing the concerns in the Staff Report. Plan fiduciaries will likely find this information somewhat useful in selecting, monitoring, and evaluating the pension consultants who assist them.

For instance on the obligation of disclosing conflicts, here are some of the “positive” actions being taken by pension consultants that she listed in her speech:

  • All consultants use Part II of Form ADV or a separate brochure to disclose conflicts of interest, and most strengthened their disclosures.
  • In addition to Form ADV, several consultants also provide clients with a separate conflict of interest document that includes discussions about the consultant’s business relationships with money managers and how the consultant manages potential conflicts.
  • A consultant provides specific disclosure to individual clients about conflicts it has with particular money managers it recommends to its clients.
  • A consultant adopted new procedures under which advisory clients can request specific financial information related to the consultant’s business relationships with individual managers.
  • Some consultants advised that they have distributed their own responses to the SEC Staff Report and the DOL/SEC “Tips” to individual clients.

In regards to the implementation of policies and procedures to prevent conflicts of interest, Richards gave the following advice to plan fiduciaries:

On a less encouraging note, it did not appear to us that all pension consultants had implemented policies governing the payment of their fees with directed brokerage. And, more than a handful of consultants failed to offer to provide a copy of the firm’s Code of Ethics to clients in Part II of Form ADV, as required. Plan trustees may find that reviewing a pension consultant’s Code of Ethics may help in answering some of the questions outlined in the SEC/DOL “Tips for Plan Fiduciaries.”

Sanitizing Documents

The Federation of American Scientists has published on its website the National Security Agency’s Redacting with Confidence: How to Safely Publish Sanitized Reports Converted From Word to PDF. The article points out that “merely converting an MS Word document to PDF does not remove all metadata automatically.” It also warns against relying on Word’s “Remove Hidden Data” feature.

(Hat Tip: Tax & Business Law Commentary.)

More Lessons On "What A Retirement Plan Is Not"

Remember the cartoons here and here posted by the TaxGuru not too long ago on the topic of “what a retirement plan is not”? A recent survey co-sponsored by the Consumer Federation of America (CFA) and the Financial Planning Association (FPA) reports:

A surprisingly high percentage of Americans think that the most practical way for them to accumulate several hundred thousand dollars is to win the lottery. When asked about the most practical way for them personally to accumulate several hundred thousand dollars, over half (55%) said “save something each month for many years.” Yet, more than one-fifth (21%) said “win the lottery,” and among the least affluent and those over 55 years of age, these percentages were much higher — 38% and 31% respectively. When asked about very important wealth-building strategies for all Americans, 16% said “win the lottery.” Those without high school degrees were much more likely to select this option than were those with college degrees — 30% vs. 8%.

The Tax Foundation is attempting to put that myth to rest in this article: “Lottery Taxes Divert Income from Retirement Savings“:

[A] person who spends $100 per month on the lottery—slightly less than the average resident of Rhode Island spends on the lottery (see Table 2)—over a forty-year period would be $144,000 richer if he instead invested that money. A lottery player who spends $50 per month—slightly less than the average resident of Massachusetts—would have an additional $72,201 if he instead invested his money, and the average New Yorker, who spends about $25 a month on the lottery, could be over $36,000 richer by retirement age if he instead invested in the stock market.

For the highest-spending lottery players, the difference is even more dramatic. A person who spends $300 a month on the lottery could instead earn nearly half a million dollars in the stock market—$433,208 more than he would win playing the lottery.

The article goes on to report that “there are five states where per capita annual lottery spending exceeds $500 (Rhode island, South Dakota, Delaware, West Virginia and Massachusetts).”

(I guess that is one more reason for Congress to pass the “automatic enrollment” legislation which both the House and the Senate have agreed to in different bills, i.e. take it out of the paycheck before it is spent on the lottery!)

(Hat Tip: TaxProf Blog)

WSJ Reporting that Bush Will Propose Increasing HSA Tax Breaks

From the Wall Street Journal today–“Bush to Seek Bigger Health-Savings Tax Break“:

President Bush is expected to propose sweetening the tax breaks associated with health savings accounts, part of an effort to persuade more people to save for their own medical expenses, administration officials said.

The proposal under discussion would let people deposit more money into their tax-free HSAs each year and use that tax-free money to pay health-insurance premiums. The proposal is part of a broader array of changes in the health-care system that the president is expected to propose in his State of the Union address Jan. 31.

Also, from this week’s radio address:

For the sake of America’s small businesses, workers, and families, we must also make health care more affordable and accessible. A new product known as Health Savings Accounts helps control costs by allowing businesses or workers to buy low-cost insurance policies for catastrophic events and then save, tax-free, for routine medical expenses. This year, I will ask Congress to take steps to make these accounts more available, more affordable, and more portable. Congress also needs to pass Association Health Plans, which allow small businesses across the country to join together and pool risk so they can buy insurance at the same discounts big companies get.

Dealing with the PBGC

Harold J. Ashner who previously served as Assistant General Counsel for Legislation and Regulations at the PBGC has written a great article for the Tax Management Compensation Planning Journal entitled “Dealing with the Pension Benefit Guaranty Corporation.” The article contains a lot of practical information which practitioners may find useful in representing clients who have PBGC-related issues.

Excerpt from the section entitled “Researching PBGC Issues”:

When researching PBGC issues, it is important to go beyond the obvious sources of statutes, regulations, case law, and PBGC opinion letters. A great deal of important guidance can be found in other sources. One key source that is well-known in the actuarial community but not nearly as familiar in the legal community is the PBGC ‘‘Blue Book.’’ The Blue Book, which is analogous to the IRS ‘‘Gray Book’’ and is prepared annually in conjunction with the Enrolled Actuaries Meeting, consists of a summary of questions asked by the Enrolled Actuaries Program Committee and the answers provided by PBGC staff.

Ashner also mentions Technical Updates, FAQs, and Preambles to the proposed and final regulations (find the regulations here) as good resources for researching PBGC issues. (FAQs, I gather, are scattered throughout the PBGC’s website when you look up various topics.)

SEC Votes to Propose Changes to Disclosure Requirements Concerning Executive Compensation and Related Matters

From the SEC’s press release here:

The Securities and Exchange Commission today voted to publish for comment proposed rules that would amend disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters, and security ownership of officers and directors. The proposed rules would affect disclosure in proxy statements, annual reports and registration statements. The proposals would require most of this disclosure to be provided in plain English. The proposals also would modify the current reporting requirements of Form 8-K regarding compensation arrangements.

Under the proposal, executive compensation disclosure would be organized into three broad categories: (1) compensation over the last three years; (2) holdings of outstanding equity-related interests received as compensation that are the source of future gains; and (3) retirement plans and other post-employment payments and benefits.

Highlights of the proposal:

  • A reorganized Summary Compensation Table would be the principal vehicle for showing three-year compensation. The Table would include additional information, such as a new column reporting total compensation, a dollar value showing all stock-based awards, including stock and stock options measured at grant date fair value, and an “All Other Compensation” column showing “the aggregate increase in actuarial value of pension plans accrued during the year and all earnings on deferred compensation that is not tax-qualified.”
  • The threshold for disclosing perquisites would be reduced to $10,000 and interpretive guidance is provided for determining what is a perquisite. Two supplemental tables would report Grants of Performance-Based Awards and Grants of All Other Equity Awards.
  • Regarding the retirement plan disclosures, the press release indicates that “retirement plan and post-employment disclosure” would be required to include (1) a “Retirement Plan Potential Annual Payments and Benefits Table” which would disclose annual benefits payable to each named executive officer; (2) a “Nonqualified Defined Contribution and Other Deferred Compensation Plans Table” which would disclose year-end balance, and executive contributions, company contributions, earnings and withdrawals for the year; and (3) “disclosure of payments and benefits (including perquisites) payable on termination or change in control, including quantification of these potential payments and benefits.”

Also, here are some excerpts from Chairman Cox’s comments in his Opening Statement yesterday:

(1) “. . . Our purpose here today is to help investors keep an eye on how much of their money is being paid to the top executives who work for them. Today’s open meeting marks the first time in 14 years that the Commission has undertaken significant revisions of its rules for executive compensation. Simply put, our rules are out of date. It’s high time we updated the rules on executive compensation. To that end, the staff of the Division of Corporation Finance is recommending proposed changes to the current regime of executive and director compensation disclosure to do just that. . .

(2) “. . . We want investors to have better information, including one number-a single bottom line figure-for total annual compensation. That single figure will include a more accurate representation of perquisites. Currently, companies are required to report a lump sum if an executive’s perks are more than $50,000, or 10 % of his or her salary and bonus. And under current rules, an individual perk has to be reported only if it represents more than 25% of all the perks that an executive receives. Under the proposal, perquisites must be itemized if they total $10,000 or more.. . ”

(3) “. . . The proposed new rules would also improve the disclosure of retirement benefits. New tables would outline the defined-benefit and defined-contribution retirement plans of top officers. There would also be detailed descriptions of payments that could be made if an executive is terminated. Those disclosures aren’t required under our current rules.. . “

Broc Romanek at CorporateCounsel.net Blog has comments regarding the proposals. Also, Michelle Leder at Footnoted.org attended the open meeting and has a Fact Sheet summarizing the proposals which is posted here.

Debate over ERISA Preemption with Maryland's Passage of the "Fair Share Health Care Fund Act"

From the Wall Street Journal–“Maryland Votes To Override Veto Of Wal-Mart Bill“:

Maryland legislators voted to become the first state to enact a law forcing large employers — namely Wal-Mart Stores Inc. — to pay a penalty if they fail to spend a certain amount of their payrolls in the state on health insurance for their workers.

The Senate voted 30-17 to override Republican Gov. Robert Ehrlich’s veto of the bill last year. The Maryland House followed suit last night with an 88-50 vote for the override.

The bill proposed requiring employers with more than 10,000 workers in Maryland to pay a penalty to the state’s health-insurance program if they fall short of paying an amount equal to 8% of their payroll in the state for health insurance for those employees. . .

The debate could continue in the courts. The Maryland Chamber of Commerce has argued that the potential new law will conflict with federal employment law, namely the Employee Retirement Income Security Act. Supporters counter that it isn’t pre-empted by ERISA.

Access a summary of the bill here and the text of the bill itself here.

Important links regarding the debate:

This article from CNNMoney.com–“Maryland bill a big blow for Wal-Mart? Other states also considering bills that penalize companies for falling short on healthcare plans“-gives a run-down of the states that have tried to pass similar legislation:

Although the efforts failed in Arizona, California, Connecticut, New Hampshire and Tennessee, and was vetoed by Maryland’s and Vermont’s governors, the measure is still alive in five other states.

They include New York, Massachusetts, Minnesota, Oregon, Pennsylvania and Washington.