Benefitsblog

Census Report on Health Insurance

From the U.S. Census Bureau Report issued yesterday:

Both the percentage and number of people without health insurance decreased in 2007. The percentage without health insurance was 15.3 percent in 2007, down from 15.8 percent in 2006, and the number of uninsured was 45.7 million, down from 47.0 million.

The number of people with health insurance increased to 253.4 million in 2007 (up from 249.8 million in 2006). The number of people covered by private health insurance (202.0 million) in 2007 was not statistically different from 2006, while the number of people covered by government health insurance increased to 83.0 million, up from 80.3 million in 2006.

The percentage of people covered by private health insurance was 67.5 percent, down from 67.9 percent in 2006. The percentage of people covered by employment-based health insurance decreased to 59.3 in 2007 from 59.7 percent in 2006. The number of people covered by employment-based health insurance, 177.4 million, was not statistically different from 2006.

Press Release is here.

From Plan Sponsor's article on the report here:

Rates for 2005-2007 using a three-year average show that Texas (24.4%) had the highest percentage of uninsured, the report said. At 8.3%, Massachusetts and Hawaii had the lowest point estimates for uninsured rates, but they were not statistically different from Minnesota (8.5%), Wisconsin (8.8%) and Iowa (9.4%). In addition, Hawaii was not statistically different from Maine (9.5%).

Interesting Search Tool

You might want to try a search with Viewzi. PCMagazine has this to say about it:

Viewzi aggregates search results from Google, Yahoo!, YouTube, and more, and lets you pick how you want them presented. Do you want just the text from the Web pages? Just the photos? Video previews (shown here)? Searching with Viewzi is fun and, depending on your search term, can actually be more convenient than a simple Google search.

When you search "benefits blogs" with the term (try it here), Benefitslink's Benefits Buzz comes up as the top site. (Benefitsblog comes up second.)

Employer Loses Battle with IRS Over Employment Classification

According to a federal district court in Iowa, an employer mischaracterized its sales team as "independent contractors." The Tax Update Blog discusses the case here. The IRS held against the employer in spite of the following:

. . . The salesmen testified they were provided with no health benefits or other typical employee benefits.

Updated 409A Links

I have updated my Section 409A links section in the side-bar to include all of the IRS Notices which have been issued since 2005. (If I missed one, please let me know.)

IRS Ruling Prevents Certain Pension Transfers

The Treasury Department today issued Revenue Ruling 2008-45, which answers this question: Is the exclusive benefit rule of § 401(a) of the Internal Revenue Code violated if the sponsorship of a qualified retirement plan is transferred from an employer to an unrelated taxpayer and the transfer of the sponsorship of the plan is not in connection with a transfer of business assets, operations, or employees from the employer to the unrelated taxpayer? The IRS answers "yes" in the ruling. However, in conjunction with the ruling, they have announced that, with the help of the PBGC, the DOL, and the Commerce Department, they have put together "a legislative framework of principles" that are intended to guide the development of legislation that would permit such transactions for "frozen" plans. See the Announcement here for the legislative framework they are recommending. (Apparently, this effort is intended to address situations such as those described in this article here.)

Joint Committee on Employee Benefits Posts 2008 Agency Q & As

JCEB has posted its 2008 Agency Q & As:

• IRS Q & As
• DOL Q & As
• PBGC Q & As
• CMS Q & As

Many readers will be interested in DOL Q & A 19 in which the DOL appears to take issue with what many practitioners had thought might be a viable structure for insulating corporate boards of directors from the ongoing fiduciary duty to monitor:

Question 19: A corporation and its directors and officers are aware of the view that a person who or that has a discretionary power to appoint a fiduciary is, to the extent of that power, a fiduciary – with some responsibility to monitor his, her, or its appointee’s performance to the extent needed in evaluating whether to remove the appointee. In establishing a new pension plan, the corporation, by its governing board, adopts a plan document that specifies that a particular named person is the plan’s administrator, trustee, and named fiduciary. Although the plan document includes an amendment provision, that provision states that an amendment that purports to change or remove the administrator, trustee, or named fiduciary is void. The plan document also provides that no person other than a court can remove the plan’s administrator, trustee, or named fiduciary, and that any such purported removal is void. Is it clear that the corporation and its directors and officers need not monitor the fiduciary’s performance?

Proposed Answer 19: Yes. A person can’t have a duty to consider whether to perform an act that would be void.

DOL Answer 19: The DOL staff disagrees with the proposed answer. The selection of plan fiduciaries, such as a plan’s administrator, trustee, or named fiduciary, is a fiduciary function and those who appoint the fiduciaries remain responsible for monitoring those whom they have selected, regardless of any plan language to the contrary. Any amendment that would purport to eliminate a plan fiduciary’s responsibility to monitor, and, if need be, change or remove the plan's administrator, trustee, or named fiduciary would be contrary to ERISA. See also ERISA section 404(a)(1)(D) – A plan fiduciary shall discharge his duties with respect to a plan in accordance with the documents and instruments governing the plan insofar as such documents are consistent with the provisions of Title I and title IV. See also 29 C.F.R. § 2509.75-8, Q D-4, Amicus Brief of DOL in Tittle v. Enron, In the United States District Court for the Southern District of Texas, Houston Division, Civil Action No. H-01-3913 and Consolidated Cases, Aug. 30, 2002.

The traditional disclaimer stated on the JCEB website applies:

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. Reports on each of the discussions are prepared by a designated JCEB representative, based on the notes and recollections of the JCEB representatives at the meeting, and may be reviewed by agency personnel. The questions are submitted in advance to the agency, and it is understood that these reports will be made available to the public.

SEC Posts Advisory Alert Regarding 401(k) Debit Cards

If you read my previous post here discussing a recent Tax Court case illustrating the perils of borrowing from a 401(k) plan, you will also want to read this Advisory Alert just posted on the SEC's website regarding 401(k) plan debit cards: "401(k) Debit Cards: What You Might Not Know." See also this FINRA Alert as well: "401(k) Debit Cards—Think Before You Swipe."

More links:

• Read about recent attempts by legislators to ban 401(k) debit cards here: "Schumer, Kohl Offer Legislation to Ban Debit Cards That Raid Retirement Accounts." The lawmakers are arguing that the average American should not be allowed such easy access to funds in their 401(k) when they are saving too little already.
• Read an article about the 401(k) debit card generally: "Retirement debit cards sound like a nightmare, but have some benefits."

401(k) Plan Loan and Termination of Employment Create the Perfect Storm

There has been a great deal written about why borrowing from your 401(k) plan is a bad idea. If you want to read a good case in point that illustrates how things can go awry when it comes to a 401(k) plan loan, read the recent Tax Court case of Tilley v. Commissioner. The participant in that case had borrowed from her 401(k) account to purchase a home, but when she was terminated, couldn't pay the loan off. Even though the participant received a Form 1099R indicating that the unpaid loan balance was taxable, the participant failed to pay any additional tax on the distribution. The IRS ended up assessing tax on the loan balance, a 10% early distribution penalty as well as a 20% negligence penalty. After trying to allege that a call center representative for the provider had indicated that the distribution was not taxable, the Tax Court stated that it was not reasonable for the taxpayer "to rely on a. . . call-center representative for tax advice." The participant was also hoping to obtain a waiver of the 60-day rollover requirement from the Tax Court, offering to put the money in an IRA, but the Tax Court declined:

Four years later, petitioners urge the Court to grant them a waiver of the 60-day requirement. See sec. 408(d)(3)(I). They argue that [the provider] made a mistake sending them the check and that they would now be willing to put the money into [the participant's] IRA. On these facts we decline to grant the waiver, and we do so without offense to equity or good conscience.

(The case was brought before the Tax Court under Internal Revenue Code section 7463 pertaining to amounts in controversy of $50,000 or less. That is why the opinion states that the case is not precedential.)

Some Tax Humor. . .

From the TaxGuru here.

How Much Value Do Individuals Place On Health Insurance?

How much is the benefit of health insurance worth to employees? According to a study at the Center for Retirement Research at Boston College, forty-seven percent (47%) of individuals with health insurance said they would not be willing to forego health insurance, even if offered a 30-percent raise.

Observations on DOL's Proposed Regulations Governing Disclosure Requirements for Participant-Directed Individual Account Plans

The DOL has issued its new fiduciary disclosure requirements for participant-directed individual account plans. You can access the following regarding the regulations:

News Release
Fact Sheet
Preamble and Prop. DOL Reg. Secs. 2550.404a-5 and 2550.404c-1
Model Comparative Chart

Some brief observations:

(1) The regulations have a proposed effective date of January 1, 2009 and would apply to all participant-directed plans, regardless of whether or not they have sought to comply with ERISA section 404(c).

(2) The DOL states its legal basis for issuing the regulations in the preamble:

The Department believes, as an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose on fiduciaries of all participant-directed individual account plans a duty to furnish participants and beneficiaries information necessary to carry out their account management and investment responsibilities in an informed manner. In the case of plans that elected to comply with section 404(c) before finalization of this proposal, the requirements of section 404(a)(1)(A) and (B) typically would have been satisfied by compliance with the disclosure requirements set forth at 29 CFR § 2550.404c–1(b)(2)(i)(B). However, the Department expresses no view with respect to plans that did not comply with section 404(c) and the regulations thereunder as to the specific information that should have been furnished to participants and beneficiaries in any time period before this regulation is finalized.

(Query regarding that last statement and how it might impact current fee litigation.)

(3) The proposed regulation would amend the regulation under ERISA section 404(c), 29 CFR 2550.404c–1, to make the disclosure requirements for section 404(c) compliant plans consistent with those that would apply to all participant-directed individual account plans generally.

(4) The Department estimates that approximately 437,000 participant directed individual account plans covering 65,269,000 participants would be affected by the proposed regulation. Of these plans, 275,000 plans, covering 49,212,000 participants and beneficiaries are reported to comply with ERISA section 404(c), and the remaining 162,000 plans covering 16,057,000 participants and beneficiaries are not.

(5) The Department assumes that in the year of implementation, all 437,000 affected plans will conduct a legal review to verify their compliance with the proposed regulation and prepare the required disclosures. The Department estimates that the review would, on average, take one-half hour of a legal professional’s time at an (in-house) hourly rate of $113 resulting in a total aggregate estimate of approximately 218,000 legal hours at an equivalent cost of approximately $24,628,000.

(Doubtful that it will only take one-half hour.)

(6) Regarding the required investment-related information, it is interesting what the DOL has to say about risk:

. . . [T]he Department attempted to define the most essential information about available investment options that should be automatically furnished in a comparative format to participants and beneficiaries, and included that information in the proposal. That information includes historical and benchmark performance, and fees and expenses. In addition, the Department considered including information on risk, but believes that risk information is not easily translated into a simple uniform comparative format that can be described in a regulatory standard. The Department notes that in most cases more detailed information, including information on risk is readily available to participants and beneficiaries through Internet Web sites, should they decide to review such information in assessing the various investment options available under their plan.

(7) Written comments on the proposed regulation should be received by the Department of Labor on or before September 8, 2008. You can make your comments here. (Click on "Add Comments.")

Ways and Means Discussess How to Encourage Small Business Owners To Offer Retirement Savings Vehicles

You can access the testimony presented at the Ways and Means Committee Hearing on Individual Retirement Accounts (IRAs) and their role in our retirement system here. The focus of the hearing was a recently issued GAO Report: Individual Retirement Accounts, Government Actions Could Encourage More Employers to Offer IRAs to Employees. If you want to read a good summary about the current law relating to IRAs as well as about all of the state and federal proposals to expand the IRA concept, read the Joint Committee of Taxation's Report entitled, "Present Law and Analysis Relating to Individual Retirement Arrangements," which was released in connection with the hearing.

The bottom-line, of course, is that people generally aren't saving enough, small employers are not offering retirement plan vehicles for their employees, and Congress is looking at ways to encourage savings. It is no surprise that the GAO Report indicates IRAs are being used primarily as a "parking spot" for individual rollovers from employer-sponsored retirement plans, rather than as a savings vehicle. However, mandating that small employers must offer some type of automatic IRA program, as discussed in the hearing, is definitely not the answer. Perhaps, permitting small employers to offer an automatic IRA program might help, but then again that would be adding another option to the expanding plethora of retirement vehicles already available for the small employer (SIMPLE IRA, SEP IRA, payroll deduction IRA--traditional or Roth, and qualified plans). Having that many options, unfortunately, tends to confuse them into inaction.

The IRS has taken great steps in the last few years to help alleviate this confusion by providing on their website some helpful materials for small business owners (which Tom Reeder, IRS Benefits Tax Counsel, describes here in his testimony). You can access some of their materials here: Retirement Plan Product Navigator, the IRA Online Resource Guide - Information for Business Owners, Check-Up for Your SIMPLE IRA, SEP or Similar Plan, Publication 3998, Choosing A Retirement Solution for Your Small Business, and the 2008 Small Business Resource Guide.

Impact of MetLife for Plan Sponsors

For years, practitioners have been wondering when the U.S. Supreme Court might re-visit the Firestone decision in light of the Circuit Court of Appeals' decisions going different ways on the issue of how a plan administrator's conflict of interest should affect a court's standard of review in a benefit denial case. However, after reviewing the recent MetLife v. Glenn decision (read about the case and its facts here), it doesn't appear that the opinion has brought much clarity, except to say that perhaps those Circuits which have appeared to have been opposed to recognizing the "structural" conflict of interest in the plan administration context may now be brought more in line with the other Circuits. You can read about the differences in the Circuits in this law review article: Barbara C. Long, Conflict of Interest and the Standard of Review in ERISA Cases: The Seventh Circuit’s Refusal to Acknowledge What Other Circuits Already Know, 1 Seventh Circuit Rev. 152 (2006). However, one of the most interesting aspects about the recent Supreme Court decision is the fact that there are now appear to be about as many differences of opinion among the Supreme Court Justices as to how the issue should be resolved as there are differences among the Circuits. (See Notable Quotes below to view the disparity in views over the issue.)

What is the impact of the decision for plan sponsors? As noted below, Justices Scalia and Thomas emphasize that the Majority's holding is mere dictum when it is applied to employers who administer their own ERISA-governed plans in determining whether or not they are "conflicted" as the insurance company was deemed conflicted in the Majority's holding. However, it is uncertain how courts may or may not rely on this dictum, when grappling with how to align themselves under the Supreme Court's Majority opinion. (If you recall, there was a humorous moment related to dictum in the oral arguments portion of this case which you can read about here.) Certainly, Justices Scalia and Thomas have pointed out in their concurring opinion how the Majority opinion appeared to take what they called "throwaway dictum" in the Firestone case and built a "castle" upon it. Therefore, it seems naive to minimize the impact of this case based upon the theory that the language relating to plan sponsors is mere dictum.

To be cautious, employers may wish to consider the language espoused by the Majority and Justice Kennedy of taking "active steps to reduce potential bias and to promote accuracy" in whatever ways they and their benefits lawyers may deem advisable in the claims review process. This may or may not involve a re-evaluation of the types of employees or officers who are selected to serve on plan committees which review benefits claims. However, it seems hard to believe that employers would go so far as to hire "independent fiduciaries" to make those determinations in light of this decision. At a minimum though, plan committees who make these determinations should continue to ensure that their practices and procedures regarding benefits claims comply with DOL claims procedure regulations, and that their decisions are well-reasoned, documented, and properly communicated to claimants.

Notable quotes from the Opinion:

(1) Majority:

"The first question asks whether the fact that a plan administrator both evaluates claims for benefits and pays benefits claims creates the kind of “conflict of interest” to which Firestone’s fourth principle refers. In our view, it does. . . "

". . . [A] legal rule that treats insurance company administrators and employers alike in respect to the existence of a conflict can nonetheless take account of the circumstances to which MetLife points so far as it treats those, or similar, circumstances as diminishing the significance or severity of the conflict in individual cases. See Part IV, infra. . . "

"We turn to the question of “how” the conflict we have just identified should “be taken into account on judicial review of a discretionary benefit determination."

"In doing so, we elucidate what this Court set forth in Firestone, namely, that a conflict should “be weighed as a ‘factor in determining whether there is an abuse of discretion.’ ” 489 U. S., at 115 (quoting Restatement §187, Comment d; alteration omitted). We do not believe that Firestone’s statement implies a change in the standard of review, say, from deferential to de novo review. . . Nor would we overturn Firestone by adopting a rule that in practice could bring about near universal review by judges de novo—i.e., without deference—of the lion’s share of ERISA plan claims denials. . . Neither do we believe it necessary or desirable for courts to create special burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly upon the evaluator/payor conflict. In principle, as we have said, conflicts are but one factor among many that a reviewing judge must take into account. Benefits decisions arise in too many contexts, concern too many circumstances, and can relate in too many different ways to conflicts—which themselves vary in kind and in degree of seriousness—for us to come up with a one-size-fits-all procedural system that is likely to promote fair and accurate review. Indeed, special procedural rules would create further complexity, adding time and expense to a process that may already be too costly for many of those who seek redress. We believe that Firestone means what the word “factor” implies, namely, that when judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is one."

". . . [A]ny one factor will act as a tiebreaker when the other factors are closely balanced, the degree of closeness necessary depending upon the tiebreaking factor’s inherent or case-specific importance. The conflict of interest at issue here, for example, should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision, including, but not limited to, cases where an insurance company administrator has a history of biased claims administration. . . It should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits."

". . . Finally, we note that our elucidation of Firestone’s standard does not consist of a detailed set of instructions. . . In this respect, we find pertinent this Court’s comments made in a somewhat different context, the context of court review of agency factfinding. See Universal Camera Corp., supra. In explaining how a reviewing court should take account of the agency’s reversal of its own examiner’s factual findings, this Court did not lay down a detailed set of instructions. It simply held that the reviewing judge should take account of that circumstance as a factor in determining the ultimate adequacy of the record’s support for the agency’s own factual conclusion. Id., at 492–497. In so holding, the Court noted that it had not enunciated a precise standard. See, e.g., id., at 493. But it warned against creating formulas that will “falsif[y] the actual process of judging” or serve as “instrument[s] of futile casuistry.” Id., at 489. The Court added that there “are no talismanic words that can avoid the process of judgment."

(2) Chief Justice Roberts, concurring in part and concurring in the judgment:

"I agree that a third-party insurer’s dual role as a claims administrator and plan funder gives rise to a conflict of interest that is pertinent in reviewing claims decisions. I part ways with the majority, however, when it comes to how such a conflict should matter. . . I would instead consider the conflict of interest on review only where there is evidence that the benefits denial was motivated or affected by the administrator’s conflict. No such evidence was presented in this case."

"The Court leaves the law more uncertain, more unpredictable than it found it. . . "

". . . [A] conflict of interest can support a finding that an administrator abused its discretion only where the evidence demonstrates that the conflict actually motivated or influenced the claims decision. Such evidence may take many forms. . . The mere existence of a conflict, however, is not justification for heightening the level of scrutiny, either on its own or by enhancing the significance of other factors. The majority’s application of its approach confirms its overbroad reach and indeterminate nature."

"In fact, there is no indication that the Sixth Circuit viewed the deficiencies in MetLife’s decision as a product of its conflict of interest. Apart from remarking on the conflict at the outset and the conclusion of its opinion, . . the court never again mentioned MetLife’s inconsistent obligations in the course of reversing the administrator’s decision. . . "

"In these circumstances, the Court of Appeals was justified in finding an abuse of discretion wholly apart from MetLife’s conflict of interest. I would therefore affirm the judgment below. . . "

(3) Justice Kennedy, concurring in part and dissenting in part:

"There are two ways to read the Court’s opinion. The Court devotes so much of its discussion to the weight to be given to a conflict of interest that one should conclude this has considerable relevance to the conclusion that MetLife wrongfully terminated respondent’s disability payments. This interpretation is the one consistent with the question the Court should address and with the way the case was presented to us. A second reading is that the Court concludes MetLife’s conduct was so egregious that it was an abuse of discretion even if there were no conflict at all; but if that is so then the first 11 pages of the Court’s opinion is unnecessary to its disposition."

"The linchpin. . . is the Court’s recognition that a structural conflict “should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits."

(4) Justice Scalia, with whom Justice Thomas joins, dissenting:

"I agree with the Court that petitioner Metropolitan Life Insurance Company (hereinafter petitioner) has a conflict of interest. A third-party insurance company that administers an ERISA-governed disability plan and that pays for benefits out of its own coffers profits with each benefits claim it rejects. I see no reason why the Court must volunteer, however, that an employer who administers its own ERISA-governed plan “clear[ly]” has a conflict of interest. See ante, at 5. At least one Court of Appeals has thought that while the insurance-company administrator has a conflict, the employer-administrator does not. See Colucci v. Agfa Corp. Severance Pay Plan, 431 F. 3d 170, 179 (CA4 2005). I would not resolve this question until it has been presented and argued, and the Court’s unnecessary and uninvited resolution must be regarded as dictum."

"Even if the choice were mine as a policy matter, I would not adopt the Court’s totality-of-the-circumstances (so-called) “test,” in which the existence of a conflict is to be put into the mix and given some (unspecified) “weight.” . . . [A] fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision."

". . . [I]n sheer dictum quoting a portion of one comment of the Restatement, our opinion said, “[o]f course, if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a ‘facto[r] in determining whether there is an abuse of discretion.’ ” 489 U. S., at 115 (quoting Restatement (Second) of Trusts §187, Comment d). The Court takes that throwaway dictum literally and builds a castle upon it. . . "

"The opinion is painfully opaque, despite its promise of elucidation. . . In the final analysis, the Court seems to advance a gestalt reasonableness standard (a “combination-of-factors method of review,” the opinion calls it, ante, at 11), by which a reviewing court, mindful of being deferential, should nonetheless consider all the circumstances, weigh them as it thinks best, then divine whether a fiduciary’s discretionary decision should be overturned. . . Notwithstanding the Court’s assurances to the contrary, ante, at 9, that is nothing but de novo review in sheep’s clothing."

HEART Act Signed Into Law

The Heroes Earnings Assistance and Relief Tax Act of 2008 was signed into law by President Bush yesterday as announced here. Read about the Act in this previous post.

H.R. 6081: Heroes Earnings Assistance and Relief Tax Act of 2008

On May 22, 2008, Congress passed the Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act or HEART Act) which will now go to the President for his signature. A lot of great links here on the Act. Benefits-related provisions are as follows (as taken directly from the Congressional Research Service Summary):

Section 104 - Requires tax-qualified pension plans to entitle survivors of plan participants who die while on active military duty to additional benefits and benefit accruals provided under such plans for participants who resume and then terminate employment due to death. Effective Date: applies to deaths and disabilities occurring on or after January 1, 2007. Amendments required on or before the last day of the first plan year beginning on or after January 1, 2010 (2012 for governmental plans).

Section 105 - Treats differential wage payments to an employee as a payment of wages for income tax purposes. Defines "differential wage payment" as any employer payment to an individual serving on active duty in the uniformed services for more than 30 days that represents wages such individual would have received if such individual were performing services for the employer. Treats an individual receiving differential wage payments as an employee and treats such payments as compensation for retirement plan purposes. Effective Date: Years beginning after December 31, 2008. Amendments required on or before the last day of the first plan year beginning on or after January 1, 2010 (2012 for governmental plans).

Section 107 - Makes permanent the penalty exemption for premature withdrawals from retirement plans for individuals called or ordered to active military duty on or after December 31, 2007. Effective Date: Amendment applies to individuals ordered or called to active duty on or after December 31, 2007.

Section 109 - Allows a tax-free rollover of any military death gratuity and any group life insurance payment to a survivor's Roth individual retirement account (Roth IRA) or to an education savings account. Effective Date: The provision is generally effective with respect to payments made on account of deaths from injuries occurring on or after the date of enactment. In addition, the provision permits the contribution to a Roth IRA or a Coverdell education savings account of a military death gratuity or SGLI payment received by an individual with respect to a death from injury occurring on or after October 7, 2001, and before the date of enactment of the provision if the individual makes the contribution to the account no later than one year after the date of enactment of the provision.

Section 114 - Allows a tax-free distribution of unused benefits in a health flexible spending arrangement to any member of an Armed Forces reserve component who is ordered or called to active duty. Effective Date: Applies to distributions made after the date of the enactment.

Title IV - Parity in the Application of Certain Limits to Mental Health Benefits Amends the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act to extend through 2008 parity requirements applicable to mental health benefits offered by group health plans.

(Within the Act, there are also some complicated rules for taxation of expatriates who have benefits under qualified and nonqualified plans which are not summarized here.)

Comments by Senator Grassley (R-IA) regarding passage of the Act:

"Mr. President, the Heroes Earnings Assistance and Relief Tax Act of 2008, the HEART Act, which passed the Senate by unanimous consent today, was a bipartisan effort that incorporates most of the provisions in the Defenders of Freedom Tax Relief Act of 2007, which passed the Senate last December. The HEART Act also makes permanent and expands upon some of the tax relief measures that I coauthored with Senator Baucus in 2003, while chairman of the Senate Finance Committee.

Our men and women who serve in the military make tremendous sacrifices to keep this great Nation safe and strong. Oftentimes, this very service makes taxes complicated and sometimes unfair. It is only right that these honorable men and women get treated fairly under the Federal Tax Code. The Federal Tax Code shouldn't penalize people for serving their country. . . "

You can access the Joint Committee on Taxation Summary here.

Once the Act is signed by the President, benefits lawyers can add the items above to their lengthy plan amendment lists. . .

Pictures from Mars. . .

Image of the Day from NASA
Phoenix Mars Mission Official Website
Visit also NASA's Phoenix Section and NASA's Jet Propulsion Laboratory for more images, multimedia and news.

Tax Court Case Upholding IRS's Disallowance of Deductions for Contributions To Faulty SEP

In this previous post back in 2003 here, I noted how the IRS was targeting Simplified Employee Pensions in a compliance initiative. Joe Kristan in The Roth & Company, P.C. Tax Update Blog discusses a recent Tax Court case in which the IRS disallowed deductions for SEP contributions because the small business owner who established the SEP for employees failed to make contributions for his wife. Brown v. Commissioner, T.C. Summary Opinion 2008-56.

Know how the attribution rules under Section 318 of the Internal Revenue Code can sometimes wreak havoc for employers under the controlled group provisions? The taxpayer here tried to apply his "creative" interpretation of the attribution rules by arguing that it didn't matter that contributions were not made for the wife because the SEP contributions made on behalf of the husband should be "attributed" to the wife. It is no surprise that the Tax Court didn't buy that argument.

Third Circuit Opines That Rousey Overruled Clark

Many will remember how, close on the heels of the U.S. Supreme Court’s 2005 decision in Rousey v. Jacoway, 125 S.Ct. 1561 (2005), the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA”) was signed into law, providing IRAs with greater bankruptcy protection. (Read more about Rousey and BAPCPA in previous posts which you can access here.) A recent Third Circuit Court case, In Re: Krebs, finally puts to rest some confusion going on in the Third Circuit about the impact of Rousey as it pertains to pre-BAPCPA bankruptcy cases.

To give a little history, before Rousey and BAPCPA, there had been differences among the Circuits regarding whether section 522(d)(10)(E) of the Bankruptcy Code protected IRAs from creditors claims in bankruptcy. (You can read about the confusion among the Circuits in this article: Rousey and the New Retirement Funds Exemption by John Hennigan.) The Third Circuit, had in the case of Clark v. O'Neill (In re Clark), 711 F.2d 21 (3d Cir. 1983) held that money deposited in a Keogh retirement plan did not qualify for the Section 522(d)(1)(E) exemption because at the time the bankruptcy proceedings were initiated the debtor, then 43 years old, was not eligible to withdraw funds from the account without paying a ten percent penalty. Bankruptcy courts in the Third Circuit had followed this line of reasoning pre-Rousey and pre-BAPCPA, refusing to exempt amounts in an IRA when the debtor was not presently entitled to receive payments without penalty.

After Rousey in which the Supreme Court held that assets in an IRA did qualify for the exemption under section 552(d)(10)(E) as long as the amounts in question were reasonably necessary for support of the debtor and his or her dependents, bankruptcy judges in the Third Circuit continued to disagree on whether Rousey had overruled Clark, i.e. whether an IRA had to be in pay status in order to be exemptible in bankruptcy. In the recent case of In Re: Krebs (pertaining to a petition in bankruptcy filed one month before BAPCPA's effective date), the Third Circuit settled the dispute once and for all by holding that Rousey did indeed overrule Clark and that IRAs may be exempted from the bankruptcy estate regardless of whether or not they are in pay status.

Here is what the Third Circuit had to say:

Several of our sister courts of appeals have decided the exemption issue contrary to Clark. However, we lack authority to overrule it on that basis. Nor can we overrule it because we are no longer persuaded by its reasoning. The basis that permits us to do so is the Supreme Court’s 2005 decision in Rousey, in which the Court held that the right to receive IRA payments “can be exempted from the bankruptcy estate pursuant to § 522(d)(10)(E).” 544 U.S. at 326. . .

Although the precise holding in Rousey covers only the first and second requirements of § 522(d)(10)(E), the facts in Rousey cast doubt on Clark’s interpretation of the third requirement. That interpretation, i.e., the per se rule we established, is wrong because the Rouseys had not yet reached 59 ½ years of age when they filed their bankruptcy petition, so they were not yet receiving payments (without penalty) from the IRA they sought to exempt. The pertinent part of the Rouseys’ merits brief before the Supreme Court states:

“When they filed for bankruptcy, Richard Rousey was fifty-seven years old and petitioner Betty Jo Rousey was fifty-three. Their ability to replace those funds, a substantial part of which had been accumulated through their employer-sponsored pension plan, and through the compounding of funds held for many years, is non-existent. Nothing in the language, structure, or purpose of Section 522(d)(10)(E) suggests any reason why the fortuity that they filed for bankruptcy in 2001 rather than the year in which they would be 59 ½ years old should determine the eligibility of their IRAs for exemption.”

Brief for Petitioners, Rousey, 2004 WL 1900505, at *35-36; see also Rousey v. Jacoway, 275 B.R. 307, 309, 311 (Bankr. W.D. Ark. 2002) (stating that the Rouseys would face a 10% tax penalty if they withdrew from their IRAs at that time). Moreover, it is the Rouseys’ age at time of petition filing that matters because the bankruptcy estate is created at the “commencement” of the bankruptcy case. See 11 U.S.C. §§ 301 & 541(a). The Supreme Court’s holding that IRAs may be exempted under § 522(d)(10)(E) therefore applies squarely to those debtors who have not yet reached 59 ½ years of age. Our contrary interpretation of the third requirement of § 522(d)(10)(E) in Clark thus ends up appending a sort of fourth requirement that finds no support in the statutory text and that Rousey forecloses by its facts.

See also this interesting language in footnote 3 discussing an issue that was the subject of this article: "May It Please the Court": If I Had Been at Oral Argument in Rousey v. Jacoway: Part II by Scott Pryor:

The parties have not argued, so we do not decide, that there is a difference between exempting the right to receive payment from an IRA versus exempting the IRA itself. The Supreme Court does not appear to perceive any difference of significance. Compare Rousey, 544 U.S. at 325 (“the right to receive payment may be exempted”), with id. at 326 (“IRAs can be exempted”). Hence, we, too, will assume the semantic interchangeability and refer to exempting both in this opinion.

New IRS Governmental Plan Compliance Initiative

For years, the governmental plans segment of the benefits industry has been plagued with misinformation about the need for governmental plans to comply with the Internal Revenue Code. On April 22 of this year, the IRS hosted a governmental plans roundtable as part of an initiative to raise awareness about the need for compliance. Today's Special Edition of the Employee Plan News summarizes what went on at the meeting and announces the IRS's future plans for ensuring that the governmental plans segment is not left out from all of the compliance "fun" that the rest of the benefits world is experiencing. IRS officials at the meeting admitted that the the IRS has "very little history examining governmental plans" even though "one out of five employees in the United States is a government employee and that governmental plans hold $3.5 trillion in funded pension plan assets."

So what is in store for governmental plans? The IRS announced the following at the meeting:

Representatives from EP Examinations included Monika Templeman, Director, EP Examinations, and the EP Compliance Unit (EPCU), who explained that EPCU intends to send a survey questionnaire to a small sample of governmental plans in an initial effort to obtain information about the current status of governmental plans. She assured the audience that responding to the survey would not result in an examination, but if issues were identified, the taxpayer would be directed to an IRS web site with information needed to achieve compliance. If the survey questionnaire is not returned, EP Examinations will conduct compliance activity, which could eventually result in an examination of the taxpayer.

Here are some of the issues raised by practitioners at the meeting that seem to be prevalent for governmental plans:

A plan may not have filed for a determination letter in a very long time, maybe as long as 40 to 50 years, and the plan is concerned about the consequences if the IRS finds a problem with the plan.

Uncertainty as to what documentation a plan sponsor should submit to the IRS when requesting a determination letter where the plan document may be made up of a number of statutory provisions, ordinances, etc.

During the determination letter process, IRS may require amendments to the plan. The state or local legislative body that adopts the amendments may only meet a limited number of times during a year (or may not even meet on an annual basis). The time to adopt the IRS required amendments may not be sufficient for governmental plans.

States are subject to Freedom of Information Act laws, which may force the government entity to disclose information submitted to the IRS that could be misrepresented or misunderstood by plan participants or the public.

Potential conflicts between state constitutional protections for certain public sector retirement benefits and federal tax law may arise.

The IRS has also announced its new website devoted to governmental plans which you can access here. Posted there are the roundtable presentations. Also, the IRS has provided an email address established for the purpose of allowing the governmental plans community to ask questions of the IRS: governmentalplansdialogue@irs.gov.

This all reminds me of similar compliance efforts targeting educational institutions which have been in the news recently. (Read about the 403(b) universal availability compliance initiative here.) Also, read about compliance efforts focused on IRA-based retirement plans in this previous post "Plan Audits or Pre-Audit Preparation Packs."

Advisory Council’s Working Group Issues Its Report on Revenue Sharing

ERISA practitioners will want to note this recent DOL posting of the Report on the 2007 ERISA Advisory Council’s Working Group on Fiduciary Responsibilities and Revenue Sharing Practices. While the Report carries a disclaimer that its contents "do not represent the position of the Department of Labor," the report (as well as other Working Group Reports which you can access here) have a lot of good information in them regarding the current thinking of practitioners as well as the DOL on certain "hot" issues. Regarding revenue-sharing, the Working Group came up with these recommendations:

(1) The DOL should develop definitions of revenue sharing-related terms designed to assist benefit plan sponsors, fiduciaries, service providers, and participants.

(2) The DOL should issue guidance clarifying that revenue sharing is not a plan asset under ERISA unless and until it is credited to the plan in accordance with the documents governing the revenue sharing.

(3) The DOL should issue guidance regarding the treatment of revenue sharing received by a plan. Specifically, there should be guidance patterned after Field Assistance Bulletins 2003-03 and 2006-01 regarding the allocation of revenue sharing received by a plan. Consistent with the approach taken in those FABs, such guidance would confirm that there is not a single permissible method of allocation because cost, efficiency and other factors may enter into the fiduciary’s allocation decision. Such guidance should be coordinated with the U.S. Department of Treasury in order to address any possible tax consequences.

It is interesting to note that the Working Group urges the DOL to issue guidance clarifying that revenue sharing monies do not constitute "plan assets" under ERISA in order to avoid confusion in the courts over the issue. The Report notes:

Concern in this area is amplified in the considerable recent case law. For instance, a recent decision of the U.S. District Court for the District of Connecticut in Haddock v. Nationwide Financial Services, 419 F. Supp. 2d, 156 (D. Conn. 2007) held that fees, such as revenue sharing payments received from mutual funds and their affiliates by companies providing services to ERISA covered employee benefit plans, could be characterized as "plan assets" of those plans for purposes of the fiduciary responsibility requirements of ERISA. Other cases have held to the contrary. As one witness opined, the state of litigation and the "law in this arena remains uncertain at this time." Other witnesses suggested that the failure by the DOL to issue regulations or provide clear guidance might well result in conflicting Court decisions and inconsistent requirements for plan sponsors and service providers.

See also the comments of Louis Campagna (Chief of the Division of Fiduciary Interpretations, Office of Regulations and Interpretations, EBSA) regarding revenue sharing:

Mr. Campagna next addressed his second topic that of Revenue Sharing payments with offsets. He testified that there is no inherent violation of ERISA involving revenue sharing with one exception which he would discuss. Nor is there any requirement under ERISA to allocate these payments to participants.

He testified that the DOL view is that revenue sharing may be good, in that it reduces overall plan costs and provides the plans, especially small ones, with services and benefits which might not be affordable.

He then discussed the exception which could result in a violation. He described a situation where a plan fiduciary through its discretion causes payments to itself or an affiliate or other interested party. He testified that this transaction could result in an act of self dealing under the prohibited transaction rules unless the revenue sharing payments are given to the plan or used to offset the plan’s obligation to that advisor with any excess above that amount returned to the plan. He indicated that this offset could best be handled in the negotiation process with the service provider.

Mr. Campagna followed this testimony with a discussion of ERISA’s requirement to allocate revenue sharing payments back to participants. He stated that if revenue sharing payments are returned to the plan, they are plan assets subject to all of ERISA’s fiduciary and prohibited transaction rules. However, he further indicated that nothing in ERISA addresses the proper allocation of these payments to participants or describes the process by which such allocations are made. He stated that in the absence of statutory guidance, allocation decision must be made taking into account the terms of the plan and the obligations of [plan fiduciaries to act prudently and in the sole interest of the participants and beneficiaries. He stated that plan sponsors have considerable discretion as a matter of plan design how revenue sharing proceeds will be allocated to and among plan participants.

He discussed that the principles set forth in Field Assistance Bulletin 2003-03 and FAB 2006-01 can lay the foundation for a proper allocation among participants. He said the principles in these FABs provide the fiduciaries three options; they can (i) be used to reduce overall expenses, (ii) be allocated among all participants on a pro rata or per capita basis, or (iii) they can be allocated to particular participants and beneficiaries accounts who generated the revenue sharing. He further testified that when a plan is silent or ambiguous on how proceeds might be allocated, fiduciaries must be prudent in their selection of an allocation method. This means that the fiduciary using a rational basis must weigh the competing interests of the various classes of participants and the effects of the allocation method on each group. He also addressed a need to consider the cost and benefit to the plan and participants in implementing any allocation method.

Posted by B. Janell Grenier at 10:09 PM[Permalink]

Economic Stimulus Payments to IRAs/Health Savings Accounts Can Be Withdrawn

Taxpayers may be unaware that by choosing the direct deposit option for their 2007 tax refund, they were also choosing to have their Economic Stimulus Payments directly deposited as well. Without IRS relief, taxpayers then might be unable to access those funds without incurring a penalty. However, the IRS has come up with a fix for this "problem." According to Announcement 2008-44, if the taxpayer withdraws the payment "no later than the time for filing the taxpayer’s income tax return for 2008, plus extensions," the amount withdrawn will be treated as "neither contributed to nor distributed from the account." Therefore, according to the IRS, "the amount withdrawn will not be subject to regular federal income tax nor to any additional tax or penalty under the Code."

The wrinkle in all of this, however, is that as the IRS states in their Announcement, "financial institutions may not be able to distinguish these contributions and distributions from others that may occur." The IRS states in the Announcement that financial institutions should go ahead and "report the deposit and distribution in the usual manner." The IRS then promises to take care of this wrinkle in the instructions to Form 1040 next year.

Want to know what that ES payment might be worth if left in your IRA? You can find an assortment of various savings calculators at Choose to Save.org (here) or at this link here if you want to calculate it.

Read more about the Economic Stimulus Payments at the IRS's Economic Stimulus Payments Information Center.

Report on DOL Audit Activity

I have always thought that it would be a great idea if someone could keep track of practitioners' "war stories" about DOL and IRS audit activity in order to keep plan sponsors apprised of developments. Ilene Ferenczy has provided some great information about DOL audit activity going on in the Atlanta region in this email update entitled "DOL Working Hard in the Atlanta Area to Ferret out Fiduciary Breaches." She notes in her article that the DOL examinations she has been involved with recently happen to be targeting small employers (3 - 5 employees) rather than large employers. In one case where the owner of the company was the trustee, she discusses how the DOL had taken issue with the fact that there were no investment policies and procedures in place.

Where can you learn more about the ERISA requirements for investment policy statements? Actually, there is no specific ERISA provision that mandates that a plan have an investment policy statement. However, the DOL has said the following in Interpretative Bulletin 94-2:

The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA section 404(a)(1)(A) and (B).

Also, at least one federal district court has gone farther than that and held that a failure to have an investment policy statement under the facts of the case before the court constituted a breach of fiduciary duty. Liss v. Smith, 991 F.Supp. 278 (S.D.N.Y. 1998). (Sorry, no link to the case that I can find.)

(By the way, Ilene is well-known in the benefits world for her treatise: "Employee Benefits in Merger and Acquisitions.")

Tax Freedom Day Song

Today was apparently the first day in 2008 to be working for yourself rather than the federal government according to the Tax Policy Blog:

Most people have heard of Tax Freedom Day by now. For the few who haven't, Tax Freedom Day is the day on which Americans have earned enough money to pay all their federal, state and local taxes for the year. On Tax Freedom Day, we have earned enough to pay the government and we can finally start keeping our paychecks for ourselves and our families. It's a great way to illustrate how much the nation as a whole pays in taxes. We also calculate a Tax Freedom Day for each state.

How did Tax Freedom Day come about? According to this Special Report:

Tax Freedom Day was conceived by Florida businessman Dallas Hostetler in 1948. He performed the calculation himself and promoted his copyrighted concept until his retirement in 1971. He deeded the intellectual property to the Tax Foundation, and since then the Tax Foundation has used historical data to calculate Tax Freedom Day back to the beginning of the 20th century, and in 1990 sufficient data became available to calculate a separate Tax Freedom Day for each state.

Listen to the Tax Freedom Day song here.

(Complements of the Tax Prof Blog and RothCPA.com.)

Transcript for Oral Arguments in MetLife v. Glenn

You won't want to miss reading the transcript for oral arguments in the case of MetLife v. Glenn argued before the Supreme Court this morning. Access it here. I liked this exchange regarding reference to the Supreme Court's previous decision in the Firestone case:

MR. ROSENKRANZ: Mr. Chief Justice, and may it please the Court: This Court got it right in Firestone when it said, of course a conflict must be weighed. There's no reason for this Court to override its well-reasoned and unanimous conclusion which -
JUSTICE SCALIA: Dictum.
MR. ROSENKRANZ: It was dictum, Your Honor, but it was very well-considered dictum because -(Laughter.)
MR. ROSENKRANZ: -- the only issue before the Court so far as the parties thought was what is the effect of this dual role that Firestone had? And this Court did not answer that question, but that's what the parties were arguing about. So this Court correctly discerned the rule from trust law. It correctly discerned and balanced ERISA's policies and, if anything -
JUSTICE SCALIA: What I don't like about the dictum is I don't know what it means.
MR. ROSENKRANZ: Your Honor -
JUSTICE SCALIA: I think it's lovely to say weigh it as a factor, it gets the case off our docket and it's fine. But what does it mean?

Read more about the case in a post here by Roy Harmon and a post here by Stephen Rosenberg.

UPDATE: Paul Secunda has some good analysis and commentary here on today's oral arguments.

Independent Contractor Status Under the Microscope

I don't know about you, but I always worry about employers and their benefit plans when I see articles like this one in the LA Times: "Independent Contractor Status Scrutinized." That is because misclassification issues can create problems with employee benefits plans. (Read about it in previous posts here and here.) The article reports that the state of California is cracking down on "businesses that wrongly claim employees are independent contractors and, as a result, not subject to a slew of taxes and labor laws." While obviously such action is intended to uncover those employers who might be abusing the system by improper classification of their workforce, there are other employers who aren't involved with such abuse, but who will find this worrisome due to the difficult issues that arise in deciding whether to classify individuals as "employees" or "independent contractors." Sometimes it is not so clear whether an individual is an "employee" or "independent contractor" because the individual may have characteristics of both in his or her relationship with a company or firm. And as this site of the California Industrial Relations Board here indicates: "[I]t is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law."

You can read more about worker classification under IRS rules here. See also this post discussing another state's scrutiny of worker misclassifications here.

A Must-Read for Benefits Lawyers

All benefits lawyers who do plan drafting or review plan documents will want to carefully read and digest this opinion written by Seventh Circuit Judge Richard Posner: "Call, et al. v. American Management Pension Plan." It seems to me that the results of the case hinged on the questionable placement of the phrase "except as otherwise permitted by law and applicable regulations" in an anti-cutback provision of the plan document.

To learn more about the anti-cutback language IRS requires to be included in a plan which was the focus of the lawsuit and the opinion, see the Alert Guidelines Form 5623:

If the early retirement benefits or other optional retirement benefits are changed by an amendment, are the benefits with respect to the benefits accrued to the date of the amendment not reduced for any employee who at any time on or after the amendment satisfied the pre-amendment conditions for the benefit except as provided under the regulations?

Also, the Plan Administrator's Firestone-related discretionary authority did not "save the day" because Judge Posner said in the opinion that there was no ambiguity in plan language which would have triggered the use of such discretion:

Just as unambiguous terms of a statute leave no room for the agency that administers the statute to exercise interpretive discretion, National Cable & Telecommunications Ass?n v. Brand X Internet Services, 125 S. Ct. 2688, 2700 (2005), so unambiguous terms of a pension plan leave no room for the exercise of interpretive discretion by the plan?s administrator, or at least not enough to carry the day for the administrator in this case.

New York District Court Allows Age Discrimination Claim Involving Cash Balance Plan to Proceed

Benefitslink.com has this link here to a recent case in the Southern District of New York, in which Judge Harold Baer denied a motion to dismiss on an age discrimination claim involving a cash balance plan. Judge Baer disagreed with the conclusions reached by the Seventh Circuit in the IBM case:

Part of the Seventh Circuit’s decision relied on a finding that “‘benefit accrual’ (for defined-benefit plans) and ‘allocation’ (for defined-contribution plans) both refer to the employer’s contribution.” Id. at 639. Defendants in this case make a similar argument and they argue that Congress was saying the same thing when they used the term “allocation” in one provision and “rate of benefit accrual” in the other. The fact is accrual, using its dictionary meaning and in line with the structure of defined benefit plans, refers to what the employee accumulates (the outputs from the plan) whereas allocation, using its dictionary definition and in line with the structure of defined contribution plans, refers to what an employer puts into the account. As this Circuit has observed, “[w]hen Congress uses particular language in one section of a statute and different language in another, we presume its word choice was intentional.” U.S. v. Peterson, 394 F.3d 98, 107 (2d Cir. 2005). . .

Although it appears that this ruling may make it more difficult for companies to construct a cash balance plan that comports with ERISA requirements, Congress, not the Courts, is the place to turn for redress. The Second Circuit said as much in Esden¸ “[t]he issue is whether the Plan’s terms complied with the law. They did not.” Id. at 172.

Further, the age discrimination arises because this is a defined benefit plan and older workers accrue their retirement benefits at a slower rate than similarly situated younger workers. As directed by the Supreme Court, my role “is to apply the text, not to improve upon it.” Pavelic & LeFlore v. Marvel Entm’t Group, 493 U.S. 120, 126 (1989). That is the province of Congress, and it addressed some of the tensions that arise when the binary statutory framework is applied to cash balance plans at the time they passed the Pension Protection Act of 2006 this summer.

New York State Judge Orders Repayment of Millions under Supplemental Executive Retirement Plans

The Corporate Counsel.net. Blog has the latest here on yesterday's decision issued by New York State Justice Ramos in Spitzer v. Grasso. (Access the opinion here.) This opinion is a must-read for every benefits lawyer who drafts or advises clients on nonqualified deferred compensation plans. There are pages and pages of discussion regarding the NYSE SESP's and SERP's terms.

Also, excerpt from this Wall Street Journal article here:

Jim Barrall, head of the global executive-compensation and benefits practice at Latham & Watkins LLP in Los Angeles, described the findings as "stunning." "I have never heard of a court decision finding a breach of fiduciary duty based on the failure to disclose all the numbers" about the size of a supplemental pension.

At a minimum, Mr. Barrall suggested, corporate CEOs will have to make sure "the board understands the numbers and all the elements of the [leader's] pay package and how they work together." At many companies, the size of an executive's supplemental pension swells along with the magnitude of bonuses and equity awards.

Legal experts expressed surprise that the justice would make such a ruling before the case went to trial. "It's really extraordinary," said Christopher Clark, a former assistant U.S. attorney who is now an attorney at LeBoeuf, Lamb, Greene & MacRae LLP. "I'm not used to seeing cases with this many facts and this many depositions decided without a trial."

More links:

• AG's press release
• Findlaw's compilation of links, including a link to the actual employment agreement discussed in the case (an argument was made that the employment agreement constituted an amendment to the SESP, amending the SESP to allow for an in-service distribution. The argument was rejected.)

The Confusing World of ERISA Preemption

Many of us will fondly recall the discussion by Third Circuit Judge Edward Becker (1933-2006) on ERISA preemption in the case of DeFelice v. Aetna (which was eventually decided by the U.S. Supreme Court - read about it here and here). In that case Judge Becker discusses how trying to understand ERISA preemption is like a "descent into a Serbonian bog wherein judges are forced to don logical blinders and split the linguistic atom to decide even the most routine cases." (I discussed Judge Becker's opinion here.) While not related to the same issues as were decided in the DeFelice case, I was reminded of Judge Becker's discussion when I saw that the Fifth Circuit had recently withdrawn its opinion pertaining to ERISA preemption in the case of Bank of Louisiana v. Aetna. You can access the prior opinion here and the latest opinion issued October 18, 2006 here. The case is interesting because it shows how, even in trying to resolve contract claims between employers and insurers, the whole tangled mess of ERISA preemption can be a real challenge.

(Also, it is rare to find folks arguing that they are ERISA fiduciaries, but that is exactly what happened in the Bank of Louisiana case where the insurer was trying to claim that ERISA preemption applied. See page 9 of the October 18th opinion.)

Pension Protection Act Resource Center

I thought it would be a good idea to keep track of all the governmental agency promulgations and news items relating to the Pension Protection Act of 2006 in one central location. Therefore, I have created the Pension Protection Act Resource Center for Potter Anderson & Corroon LLP. (Please note that the text of the Pension Protection Act is indexed.)

(Many thanks to Frank Gribbin in Potter Anderson's IS department for helping to put this together.)

IRS Extends Compliance Deadline for Section 409A

As predicted, IRS has issued a Notice extending the deadline for complying with many aspects of Internal Revenue Code section 409A from January 1, 2007 to January 1, 2008. See Notice 2006-79 accompanied by a press release. Full compliance with the operational and documentary requirements of section 409A is delayed until January 1, 2008 to give taxpayers and practitioners sufficient time to digest and comply with the final regulations (which the press release states will be issued by the end of this year.) The Notice also extends certain transition relief provided for in the preamble to the proposed regulations (except with respect to certain discounted stock rights) and provides additional transition relief for payment elections in linked plans and collective bargaining arrangements.

Items to Note in IRS's Fall 2006 Edition of Employee Plans News

In IRS's Fall 2006 Edition of the Employee Plans News:

1. Michael Julianelle (Director, EP Examinations) talks about how EP examinations will generally take place at the employer's place of business. However, exceptions will be made if:

• The agent's presence would disrupt the business operations or
• There is a lack of office space to perform the audit.

Practitioners have generally objected to this practice of IRS coming to the office for an EP examination for a number of reasons, two of which the IRS has noted it will make an exception for. However, there are other concerns (such as HIPAA privacy in a health-related business, as one example) and IRS goes on to note in the Newsletter that:

If it makes better business sense to conduct the examination at a location other than the taxpayer's place of business (for example, if the agent's presence would disrupt the business operations), then the taxpayer or their authorized representative may submit a request outlining the reasons. If this is approved, the agent will request an opportunity to conduct a walk-through of the business premises and an opportunity to direct questions to the taxpayer to resolve questions regarding business operations.

2. Employers will want to note the IRS's Top Ten Tips to Prepare for an Efficient Audit. (Employers can use this as a sort of quick "check-up" even if they are not under audit.)

3. IRS notes that it has posted two new Quality Assurance Bulletins:

• Caveats under the Staggered Remedial Amendment Period for Individually Designed Plans
• EGTRRA Staggered Remedial Amendment Period and Remedial Amendment Cycle for Individually Designed Plans
  Posted by B. Janell Grenier at 09:55 PM[Permalink]

SEC's Chief Accountant Issues Guidance on Option Backdating

From the CorporateCounsel.net Blog:

. . . [T]he SEC's Chief Accountant issued guidance - in the form of this letter - on determining measurement dates for option grants under APB 25. As stated in the SEC's press release, the letter discusses the accounting consequences under APB 25 of dating an option award to predate the actual award date; option grants with administrative delays; uncertainty as to the validity of prior grants; among other related circumstances.

Here is one member's reaction to the new guidance: Is it my imagination, or is this letter incredibly helpful and long overdue? If only we could get the IRS to give similar guidance for ISO/409A/162(m) purposes. I think these two excerpts from the SEC Staff's letter alone resolve 90% of the options nonsense problems (without whitewashing the true back-dating situations).

Senate Hearing on Health Savings Accounts

The Subcommittee on Health Care of the Senate Finance Committee held a hearing today on Health Savings Accounts: The Experience So Far. In connection with the hearing, the Joint Committee on Taxation has released Present Law and Analysis Relating to the Tax Treatment of Health Savings Accounts and Other Health Expenses (JCX-45-06).

(Hat Tip: TaxProf Blog)

New Benefits Acronym: QDIA

What is a QDIA? A "qualified default investment alternative" as described in soon-to-be-issued proposed regulations from the Department of Labor which are referenced in this News Release here and outlined in this Fact Sheet here. The News Release states that the "proposed rule [will be] the first major regulation resulting from the Pension Protection Act signed into law by President Bush on August 17, 2006."

The Pension Protection Act of 2006 provides a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. EBSA will be proposing the regulations to implement "the default investment amendments made to ERISA by the Pension Protection Act."

The proposed regulation deems a participant to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a QDIA. According to the Fact Sheet, investments that would qualify as QDIAs would be:

• Life-cycle or targeted-retirement-date funds;
• Balanced funds; or
• Professionally managed accounts.

For more benefits acronyms, see the Benefits Acronym Lexicon.

UPDATE: The Proposed Regulation has now been issued. Access it here.

IRS Reveals Plans for Cash Balance Plans In Limbo

At the recent ALI-ABA seminar on Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers, IRS officials stated that, due to the recent changes brought about by the Pension Protection Act of 2006, the IRS plans to start moving cash balance plans out of what the IRS referred to as "cash balance plan jail." "Cash balance plan jail" is the whimsical name given to the status of numerous cash balance plans (around 1200 plans) which have been submitted to the IRS for a determination letter over the past number of years, and which remain in a holding pattern, since the IRS had suspended the issuance of determination letters on all cash balance plans that had been converted from traditional defined benefit plans. The IRS said at the conference that one of its "high priorities" is to close out the cash balance plans waiting for a determination letter within a year from now (with governmental and nonelecting church plans not subject to section 411 of the Internal Revenue Code at the forefront of the movement). While this is good news for many, there was some bad news mixed in: officials said "some may not get a favorable determination letter."

New Benefits-Related Blog

A hearty welcome to Nell Hennessy who is blogging over at BNA's new Pension & Benefits Blog. Nell writes here about comments recently made by Bill Bortz, Associates Benefits Tax Counsel for the Treasury, on the Pension Protection Act of 2006.

(Looks like BNA is cautiously dipping its toe into the blogosphere with its logo unconspicuosly located in the upper left hand corner and its name in tiny print under "Notice to Subscribers.")

Governmental Employees Can Be Held Liable under FMLA

Don't miss Michael Fox's coverage here of a recent 5th Circuit case holding that a governmental employee can be held individually liable under the FMLA.

GAO Health Savings Account Report

For employers interested in learning more about Health Savings Accounts and what experiences people are having with them, see the GAO's "Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans." Excerpt:

Just over half of all HSA-eligible plan enrollees and most employers contributed to HSAs, and account holders used their HSA funds to pay for current medical care and to accumulate savings. About 55 percent of HSA-eligible plan enrollees reported HSA contributions to IRS in 2004. Tax filers claimed an average deduction of about $2,100 for their HSA contributions in 2004, and the average amount increased with income. About two-thirds of employers offering HSA-eligible plans contributed to their employees’ HSAs, and the average employer HSA contribution was about $1,064 in 2004. About 45 percent of tax filers reporting 2004 HSA contributions also reported that they withdrew funds in 2004, and 90 percent of these funds were withdrawn for qualified medical expenses. The other 55 percent of those reporting HSA contributions in 2004 did not withdraw any funds from their HSA in 2004.

KaiserNetwork.org reports on the study here.

409A Final Regulations: Effective Date Likely Delayed

At the recent ALI-ABA Conference entitled "Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers," Dan Hogans, Office of Benefits Tax Counsel, U.S. Department of the Treasury, gave a presentation on Internal Revenue Code section 409A and remarked that the IRS is "moving forward" with preparation of final regulations to be issued "this fall." He remarked that due to the delay in the issuance of final regulations, the targeted effective date of January 1, 2007 as stated in the proposed regulations will likely be delayed as well. He noted that the final regulations will reflect many changes due to useful comments received by IRS regarding the proposed regulations. He went on to say that practitioners will need time to digest the content of the regulations and that is why the effective date will likely be moved to a later date.