Benefitsblog

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.

Fifth Circuit Holds Merger Agreement Can Act as a Plan Amendment

It is fairly uncommon to see Circuit Court of Appeals cases where mergers and acquisition issues and benefits issues intersect. That is what happened in this recent Fifth Circuit case of Halliburton Company Benefits Committee v. Graves et al. which is a must-read for benefits lawyers who are involved in transactional work. The case holds that a merger agreement can act as a plan amendment of a benefit plan, even though it is not labeled as a plan amendment. The case also holds that the "no-third-party-beneficiary" clause which is standard in these types of agreements will not protect the surviving company from claims of participants since those claims are protected under ERISA.

IRS Announces Delay in Effective Date for Regulations

Announcement from the IRS:

The Internal Revenue Service announced today that the general effective date for the regulations regarding section 403(b) arrangements that were proposed in 2004 (including the related controlled group regulations under section 414(c)) will be extended.

In order to provide employers, employees, insurance carriers, and mutual funds involved in section 403(b) arrangements a reasonable advance period before the regulations go into effect, the final regulations generally will not be effective earlier than January 1, 2008.

Regarding Patient Advocate Services in Health Plans

See this article from KaiserNetwork.org--"More U.S. Companies Offering Patient Advocate Services in Their Health Care Plans--and this one from the Philadelphia Inquirer on Sunday--"They've got your back - and heart, head, feet...Advocates guide patients through medical morass."

Tax Humor

Some great tax humor from the TaxGuru here and here.

Eleventh Circuit Relies on Sereboff in Two Plan Reimbursement Cases

What type of subrogation provision in a health plan can be enforced against a plan participant under the Supreme Court's recent ruling in Sereboff? (Read about Sereboff here.) The Eleventh Circuit in two recent cases--Popowski v. Parrott and BlueCross BlueShield v. Carillo (combined into one opinion)--interpreted Sereboff and held that one type of reimbursement/subrogation provision could be enforced while another could not.

The court upheld the plan's right to reimbursement in the Popowski case, but rejected the plan's right to reimbursement under the BlueCross BlueShield ("BCBS") case. What was the difference in the results? Plan language. Excerpt from the Popowski opinion:

The subrogation and reimbursement provision in the United Distributors Plan claims a lien “on any amount recovered by the Covered Person whether or not designated as payment for medical expenses.” PR1-1, Exh. G at 63. It further clarifies that “[t]he Covered Person . . . must repay to the Plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer.” Id. (emphasis added). Thus, language essentially identical to the Supreme Court’s characterization of the plan language in Sereboff, specifies both the fund (recovery from the third party or insurer) out of which reimbursement is due to the plan and the portion due the plan (benefits paid by the plan on behalf of the defendant). Unlike in Knudson, a significant portion of the funds specified went directly into the Parrotts’ bank account and, thereby, was in their possession for purposes of this case. Thus, at the time they filed their suit, Popowski and the Commerce Group sought “not to impose personal liability on [Parrott], but to restore to the plaintiff[s] particular funds or property in [Parrott’s] possession.” See Knudson, 534 U.S. at 214, 122 S. Ct. at 714-15. Accordingly, we conclude that Popowski and the Commerce Group have stated a claim for “appropriate equitable relief” under § 1132(a)(3) and that the district court erred in dismissing the suit for lack of subject matter jurisdiction.

Contrast that with the court's decision in the BCBS case:

The subrogation and reimbursement provision in the Mohawk Plan, unlike that of the United Distributors Plan, claims a right to reimbursement “in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness,” but does not specify that that reimbursement be made out of any particular fund, as distinct from the beneficiary’s general assets. BCBS Letter Br., Exh. B; BR1-1 at 3. Instead, it makes receipt of “a settlement, judgment, or other payment relating to the accidental injury or illness” a trigger for the general reimbursement obligation. Id. Further, in requiring reimbursement “in full”, it fails to limit recovery to a specific portion of a particular fund. Accordingly, we conclude that, because the Mohawk plan fails to specify that recovery come from any identifiable fund or to limit that recovery to any portion thereof, it fails to meet the requirements outlined in Sereboff for the assertion of an equitable lien for the purposes of 29 U.S.C. § 1132(a)(3). For this reason, we conclude that it was not error to dismiss BCBS’s claims.

The case illustrates how those representing employers and/or health plans should review the plan document language and SPD language to ensure that it tracks the language of Sereboff in order to better ensure that the Plan will be in a position of recovering under the principles laid out in Sereboff.

It is interesting to note that in 2005 the DOL had filed an Amicus Brief in the BCBS case which you can access here.

D.C. Circuit Holds Internal Revenue Code Section 104(a)(2) Unconstitutional As Applied

From How Appealing:

D.C. Circuit declares a provision of the federal tax code unconstitutional as applied: Today's ruling, by a unanimous three-judge panel, holds that "insofar as §104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional." You can access the complete ruling at this link.

According to today's opinion, written by Chief Judge Douglas H. Ginsburg, "The Sixteenth Amendment simply does not authorize the Congress to tax as 'incomes' every sort of revenue a taxpayer may receive."

The opinion goes on to explain:

As we have seen, it is clear from the record that the damages were awarded to make Murphy emotionally and reputationally "whole" and not to compensate her for lost wages or taxable earnings of any kind. The emotional well-being and good reputation she enjoyed before they were diminished by her former employer were not taxable as income. Under this analysis, therefore, the compensation she received in lieu of what she lost cannot be considered income and, hence, it would appear the Sixteenth Amendment does not empower the Congress to tax her award.

And the opinion concludes:

In sum, every indication is that damages received solely in compensation for a personal injury are not income within the meaning of that term in the Sixteenth Amendment. First, as compensation for the loss of a personal attribute, such as well-being or a good reputation, the damages are not received in lieu of income. Second, the framers of the Sixteenth Amendment would not have understood compensation for a personal injury -- including a nonphysical injury -- to be income. Therefore, we hold §104(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.

(The Sixteenth Amendment states:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.)

Summary from the TaxProf Blog:

The D.C. Circuit held today, in Murphy v. United States, No. 03cv02414 (D.C. Cir. 9/22/06), that § 104(a)(2) is unconstitutional under the 16th Amendment as applied to a recovery for a non-physical personal injury (emotional distress and loss of reputation) unrelated to lost wages or earnings. Murphy received $70,000 from New York State for anxiety suffered and injury to her reputation as a result of being "blacklisted" after becoming a whistleblower against her employer (the New York Air National Guard).

RothCPA.com has comments and a good compilation of links as to what people are saying about the case here.

President Bush Signs H.R. 4

From the White House: "President Bush Signs H.R. 4, the Pension Protection Act of 2006." Some comments from the President at the signing:

In a few moments, I will have the honor of signing the most sweeping reform of America's pension laws in over 30 years, the Pension Protection Act of 2006. . .

Americans who spend a lifetime working hard should be confident that their pensions will be there when they retire. Last year I asked Congress to strengthen protections for the pensions of our workers. Members of both parties came together to pass a good bill that will improve our pension system, while expanding opportunities. .

Today, we've taken an important step toward ensuring greater retirement security for millions of American workers. I want to thank the House and the Senate for their good work on this vital legislation. It's been hard work. It took a lot of pages to write that bill, as you can see. (Laughter.)

You can view a video of the signing by clicking here or a photo of the signing here. See also this Fact Sheet on the Pension Protection Act of 2006 here.

SEC Posts Release Pertaining to New Executive Compensation Disclosure Requirements

From the CorporateCounsel.net Blog:

On Friday, the SEC posted the 436-page adopting release for its executive compensation disclosure rules. The compliance dates appear on page 2 - but you should also read pages 195-197 for more information about those important dates, including transition details.

EEOC Issues Regulations Reflecting Supreme Court's Ruling in General Dynamics Case

Pension & Benefits Weblog notes that EEOC regulations were recently issued, reflecting the Supreme Court's ruling in the General Dynamics case here (the case was discussed previously here.) Here is the EEOC's explanation of the changes to the regulations:

Section 1625.2 is being revised as follows. The caption will be changed from ``Discrimination between individuals protected by the Act'' to ``Discrimination prohibited by the Act'' to reflect the Supreme Court's holding that the ADEA permits employers to make age-based employment decisions that favor relatively older employees. The text of the regulation will be similarly revised, and Sec. 1625.2(b), which explicitly permits employers to give older employees preferential benefits in some circumstances, will be removed as redundant. Thus, the new regulation will not have paragraphs (a) and (b), and will simply be referred to as Sec. 1625.2. Other language changes in Sec. 1625.2 are made for the sake of clarity.

Section 1625.2 now reads:

Sec. 1625.2 Discrimination prohibited by the Act.

It is unlawful for an employer to discriminate against an individual in any aspect of employment because that individual is 40 years old or older, unless one of the statutory exceptions applies. Favoring an older individual over a younger individual because of age is not unlawful discrimination under the Act, even if the younger individual is at least 40 years old.

In the Blogosphere. . .

Someone is compiling articles and links related to the stock option backdating saga here. (It certainly would take a separate blog to keep up with all of them.)

RothCPA.com talks about changes in the law regarding COLI insurance and charitable deductions under the Pension Protection Act here.

Professor Paul Secunda points out a new article by Professor John H. Langbein in a post at the Workplace Prof Blog: Langbein on Judicial Review of Benefit Denials under ERISA. (Professor Langbein has been mentioned in previous posts which you can access here.)

Seventh Circuit Opines: IBM's Cash Balance Plan Not Age Discriminatory Under ERISA

A victory for IBM and cash balance plans in general: "Kathi Cooper v. IBM Personal Pension Plan and IBM Corporation."

Some readers may enjoy the more casual tone of this opinion written by Circuit Judge Frank Easterbrook. (Read more about Judge Easterbrook here from How Appealing.) Here are some notable quotes from the opinion:

(1) ". . . [The district court's] approach treats the time value of money as age discrimination. Yet the statute does not require that equation. Interest is not treated as age discrimination for a defined-contribution plan, and the fact that these subsections are so close in both function and expression implies that it should not be treated as discriminatory for a defined benefit plan either. The phrase “benefit accrual” reads most naturally as a reference to what the employer puts in (either in absolute terms or as a rate of change), while the defined phrase “accrued benefit” refers to outputs after compounding. That’s where this litigation went off the rails: a phrase dealing with inputs was misunderstood to refer to outputs.

(2) "Nothing in the language or background of §204(b)(1)(H)(i) suggests that Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus a greater opportunity to earn interest on each year’s retirement savings. Treating the time value of money as a form of discrimination is not sensible."

(3) "Our conclusion that “benefit accrual” (for defined-benefit plans) and “allocation” (for defined-contribution plans) both refer to the employer’s contribution rather than the time value of money between contribution and retirement has the support of regulations that the Treasury Department proposed. (Appropriations riders have prevented the Treasury from taking final action on the draft regulations, but they still help to inform our understanding of the statute.)"

(4) "As far as we can see, ours is the first appellate decision to address the status of cash-balance plans under §204(b)(1)(H)(i). The class directs our attention to two decisions from other circuits that it says supply helpful analysis. Miller v. Xerox Corp. Retirement Income Guarantee Plan, 447 F.3d 728 (9th Cir. 2006); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000). As the class reads them, these opinions stand for two important propositions. First, that an “accrued benefit” in a cash-balance plan is an annuity at normal retirement age. Second, that there is a “fundamental” distinction between defined-contribution and defined-benefit plans. Both of these propositions are correct, and both of them are irrelevant."

(5) ". . . [A] plaintiff alleging age discrimination must demonstrate that the complained-of effect is actually on account of age. One need only look at IBM’s formula to rule out a violation. It is age-neutral."

(6) "An employer is free to move from one legal plan to another legal plan, provided that it does not diminish vested interests—and this transition did not."

(7) "Litigation cannot compel an employer to make plans more attractive (employers can achieve equality more cheaply by reducing the highest benefits than by increasing the lower ones). It is possible, though, for litigation about pension plans to make everyone worse off. After the district court’s decision IBM eliminated the cash-balance option for new workers and confined them to pure defined-contribution plans. . . Whether that is good or bad (for employees or society as a whole) is not for us to say. What we can and do conclude, however, is that the decision may again be made freely, governed by private choice rather than legal constraint."

While the Pension Protection Act of 2006 passed by Congress last week (discussed here) contains some relief for cash balance plans, the relief is only prospective. Thus, this decision handed down by the Seventh Circuit is highly significant.

(Hat Tip: Benefitslink.com)

Compilation of Links Pertaining to the Pension Protection Act of 2006

The 907-page Pension Protection Act of 2006 passed last week by Congress is sure to keep benefits lawyers busy for years to come. I have compiled a collection of links pertaining to the Act, some of which I am hoping to house permanently over in a sidebar section on the right:

• Text of the Act
• Technical Explanation of H.R. 4, the "Pension Protection Act of 2006," prepared by the Joint Committee on Taxation
• From the White House: President Looks Forward to Signing Pension Reform Legislation
• U.S. Secretary of Labor and PBGC Board Chairman Elaine L. Chao's Statement regarding the Act
• House Ways & Means Committee Webpage devoted to the Act
• GovTrack.us's Webpage on the Act
• ERIC's Statement regarding the Act
• ASPPA's Summary of the Act
• CCH's Summary of the Act
• Deloitte's Summary of the Act
• Pension & Benefits Weblog's Linked Version of the PPA (still under construction)

See also the following articles from the Wall Street Journal:

• Pension Bill Clears After Estate-Tax Effort Fails
• The 401(k) of the Future
• Pension Measure To Enact Changes Over Several Years
• Pension Bill Bolsters 529s

Senate Passes Pension Protection Act of 2006

From Chairman Mike Enzi, "Senate Passes Bill to Reform Pensions, Secure Retirements of Millions of Americans."

More on this later . . .

More on the Pension Protection Act of 2006 . . .

From the Wall Street Journal:

• Bill to Aid 401(k) Investors Raises Bias Concern
• The Big Pension Bill: Is That All There Is?

Also, from Reuters:

• US senators expect to solve airline pension dispute

Finally, many thanks to the Pension & Benefits Weblogger for staying up most of the night to create this great effective date outline here (completed at 3:48 in the morning!) of the 907-page bill. See also this helpful commentary here on how the PPA will affect lump sum distributions. Excerpt:

Various provisions under the Pension Protection Act of 2006 (H.R. 4) affect the valuation and distribution of lump sum distribution of the value of a participant’s accrued benefits under a defined benefit pension plan. . .

. . . For a pension plan other than a hybrid pension plan, the amount of a lump sum distribution will be valued using the 3-segment yield curve introduced by PPA for pension funding. [PPA §302] For the lump sum valuation, the yield curve is based on the rates for the month before the distribution, rather than on the 24-month average used for the plan’s funding. Lump sum amounts should generally be lower under the new rates than under the pre-PPA determination, which is based on 30-year Treasury bond rates, with the largest cuts going to youngest employees. The new rates take effect during a 5-year transition period beginning in 2008.

Frist Comments on Pension Legislation

Thanks to the TaxProf Blog for this link to Senator Frist's recent comments on the proposed pension legislation (discussed in this previous post here). More on the ongoing battle over the legislation here.

Final Regulations: Comparability Requirements for Employer Contributions to Health Savings Accounts

In August of 2005, proposed regulations (REG-138647-04) pertaining to HSA comparability requirements were issued. The proposed regulations clarified and expanded upon the guidance regarding the comparability rules for HSAs published in IRS Notice 2004-2 and in Notice 2004-50 (2004-33 IRB 196), Q & A-46 through Q & A-54. Today, the IRS has issued final regulations (which you can access here) adopting the provisions of the proposed regulations with certain modifications.

One of the modifications is that the final regulations provide additional guidance on how employer HSA contributions are made through a cafeteria plan:

Specifically, the final regulations provide that employer contributions to employees' HSAs are made through the cafeteria plan if under the written cafeteria plan, the employees have the right to elect to receive cash or other taxable benefits in lieu of all or a portion of an HSA contribution (i.e., all or a portion of the HSA contributions are available as pre-tax salary reduction amounts), regardless of whether an employee actually elects to contribute any amount to the HSA by salary reduction. The final regulations also provide several examples that illustrate the application of the cafeteria plan exception to the comparability rules.

House passes Pension Protection Act of 2006

From the House Committee on Ways and Means, "Comprehensive Pension Bill Clears the House Bill to Bolster Retirement Security Now Moves to the Senate":

Today, the U.S. House of Representatives approved H.R. 4, the Pension Protection Act of 2006, by a vote of 279-131. This critical piece of legislation reflects months of negotiations between the House and Senate. . .

More links here.

See also this recent article from CCH: "House passes comprehensive pension reform bill."

UPDATE: A good summary of the legislation is here.

Article: Changes to Nonqualified Deferred Compensation Rules Applicable to Tax-Exempt Employers

I have added the following article to the 409A section in the sidebar on the right (scroll down): "Changes to Nonqualified Deferred Compensation Rules Applicable to Tax-Exempt Employers" by Gregory L. Needles and Kimberly A. Butlak, Morgan, Lewis & Bockius, LLP.

DOL's FAQs for Reservists Being Called To Active Duty

The DOL has posted a number of benefits-related questions and answers pertaining to reservists being called to active duty. You can access the FAQs here.

District Court Opines That ERISA Preempts Maryland's Fair Share Health Care Fund Act: Notable Quotes

The Retail Industry Leaders Association won a victory last week when a federal district court ruled that Maryland's Fair Share Health Care Fund Act was preempted by ERISA. Access the opinion here: Retail Industry Leaders Association v. James D. Fielder, Jr., Maryland Secretary of Labor, Licensing, and Regulation.

Notable quotes from the opinion written by Federal District Judge J. Frederick Motz:

1. "The fact that two local jurisdictions, New York City and Suffolk County, have enacted “fair share” legislation of their own highlights the uniformity problem. Unless such legislation is deemed to be preempted, nationwide employers potentially will face not only fifty different requirements imposed by the States, but also a virtually limitless number of requirements that local subdivisions in each State may enact." (From footnote 13).

2. "My finding that the Act is preempted is in accordance with long established Supreme Court law that state laws which impose employee health or welfare mandates on employers are invalid under ERISA. See, e.g., Greater Washington Bd. of Trade, 506 U.S. 125; Shaw, 463 U.S. 85. The Secretary contends, however, that these authorities are not controlling because a trilogy of cases, Travelers, 514 U.S. 645, Dillingham, 519 U.S. 316, and DeBuono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806 (1997), have “changed the landscape of ERISA preemption analysis.” The short answer to this contention, of course, is that this court has no authority to disregard Supreme Court precedent on the basis of the prediction that the Court would overrule its decisions. . . Moreover, the Secretary over-reads the cases upon which he relies."

3. "Although, as the Fourth Circuit noted in Coyne & Delany Co. v. Selman, 98 F.3d 1457, 1466-67, 1468 (4th Cir. 1996), the Supreme Court in Travelers “narrow[ed]” its "interpretation of the scope of ERISA preemption” and “adopted a pragmatic approach” to determining whether a state law “relate[s] to” an employee benefit plan, nothing in Travelers or its progeny suggests that the Court would now uphold a state statute or local ordinance mandating that an employer provide a certain type or monetary level of welfare benefits in an ERISA plan."

4. "Of course, I am expressing no opinion on whether legislative approaches taken by other States to the problems of health care delivery and its attendant costs would be preempted by ERISA. For example, the Commonwealth of Massachusetts has recently enacted legislation that addresses health care issues comprehensively and in a manner that arguably has only incidental effects upon ERISA plans. In light of what is generally perceived as a national health care crisis, it would seem that to the extent ERISA allows, it is strongly in the public interest to permit states to perform their traditional role of serving as laboratories for experiment in controlling the costs and increasing the quality of health care for all citizens." (From footnote 15)

4. "The Secretary’s third argument is that the Act by its terms does not require an employer to spend a certain amount on health care costs but rather simply provides that if the employer does not do so, it shall pay to the Secretary an amount equal to the difference between its actual health care expenditures and the required amount. Again, while this is theoretically true, it does not even approximate reality. If employers are faced with the choice of paying a sum of money to the State or offering an equal sum of money to their employees in the form of health care, no rational employer would choose to pay the State. While repeatedly emphasizing that employers have a “choice,” the Secretary does not offer a single reason why an employer would pay the State rather than generate good will with its work force by increasing its employees’ benefits. The “choice” here is a Hobson’s choice. See Travelers, 514 U.S. at 664 (noting that a Hobson’s choice “would be treated as imposing a substantive mandate”)."

5. "Second, the Secretary contends that an employee could comply with the Act by spending an amount equal to the requisite percentage of its payroll on first aid facilities. This contention is based upon 29 C.F.R. §2510.3-1(c)(2), which excepts from the definition of ERISA plans “[t]he maintenance on the premises of an employer of facilities for the treatment of minor injuries or illness or rendering first aid in case of accidents occurring during working hours.” While the Secretary’s argument may evidence the active imagination of his lawyers, it is utterly out of line with reality."

Previous posts on the legislation are here and here. See also Professor Paul Secunda's thoughtful post on the opinion here.

UPDATE: Excerpt from an article from Law.com--"Federal Judge Overturns Wal-Mart Health Care Spending Law":

Kevin Enright, a spokesman for the Maryland attorney general's office, said the state would appeal to the 4th U.S. Circuit Court of Appeals in Richmond, Va.

Enright said the state disagreed with Motz on several counts, particularly in finding that the law is pre-empted by ERISA.

"Supreme Court precedent makes it clear that this law does not impermissibly impact health benefit plans," Enright said. "Employers may choose to pay the tax or avoid paying the tax in several ways."

KaiserNetwork.org has more reaction to the opinion here.

409A Article from Tax Analysts

As part of the 409A section in the sidebar, I am adding a link to this article from Tax Analysts: "Vesting of Deferred Compensation: When Words Are More Taxing Than Deeds."

SEC to Conduct Seniors Summit

The SEC will be conducting the first-ever Seniors Summit on July 17, 2006, to examine how regulators and others can better coordinate efforts to protect older Americans from investment fraud and abusive sales practices.

See also this related article from MSNBC: "SEC steps up campaign against pension scams."

More Guidance on Debit/Credit Cards for FSAs/HRAs

The IRS has issued Notice 2006-69 providing guidance addressing these topics: (1) the use of debit cards, credit cards, and stored value cards to reimburse participants in flexible spending accounts and health reimbursement arrangements, (2) the substantiation requirements that apply to all medical reimbursement plans whether or not a card is used, and (3) the use of cards to reimburse participants in dependent care assistance programs, including dependent care flexible spending arrangements. The Notice builds on the previous guidance issued in Rev. Rul. 2003-43 which you can read about in a number of previous posts here.

JCEB 2006 Q & As Have Been Posted

Each year, the ABA's Joint Committee on Employee Benefits ("JCEB") meets with officials of federal agencies to discuss issues of interest to employee benefits practitioners. The JCEB then posts the question and answer transcripts on its website. The Q & A's have now been posted for 2006. You can access them here.

There is some really interesting info in these new Q & As. See Q & As 32 and 33 of the IRS session for some Q & As on section 409A. Also, Q & A 34 for the IRS session discusses the recent Quality Assurance Bulletin mentioned in this previous post here and anwers a question regarding exclusion of "on call," "per diem," and "temporary" employees from qualified plans.

Please note that the JCEB website provides the following disclaimer:

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

Access previous JCEB Q & As here.

More on the Outlook for Retiree Medical Benefits . . .

A recent study by Watson Wyatt--Retiree Health Benefits: Time to Resuscitate?--contains data regarding the future of retiree medical benefits:

Future retirees will shoulder substantially more — if not all — of the costs of their health care in retirement. Watson Wyatt estimates that the level of employer financial support will drop to less than 10 percent of total retiree medical expense by the year 2031, under plan provisions already adopted by many employers.

Also, a recent article on the topic from the National Law Journal: "Benefits as Burdens." (At the end of the article, there is a quote from this author.)

Notice 2006-64: Guidance on the Application of Section 409A to Accelerated Payments to Satisfy Federal Conflicts of Interest

The legislative history to section 409A provides that it was intended that the Secretary of Treasury would provide limited exceptions to the prohibition on acceleration of payments under 409A. The IRS has issued Notice 2006-64 to clarify that section 409A may permit acceleration of the time or schedule of payment as is necessary to satisfy requirements established pursuant to a written determination by the Office of Government Ethics that a divestiture of the financial interest or termination of the financial arrangement "is reasonably necessary to comply with any Federal conflict of interest statute, regulation, rule or executive order, or as is requested by a congressional committee as a condition of confirmation."

Kudos for Benefits Professionals

Sometimes those in the benefits field get discouraged about all of the arcane and highly complex rules which employers must wrestle with in offering retirement plans for employees. Despite all of the work and struggle involved, it is encouraging to read how such efforts are helping to pay off when it comes to assisting folks in being where they need to be at retirement, as this study by EBRI--Will More of Us Be Working Forever? The 2006 Retirement Confidence Survey-- indicates:

Employer-provided retirement savings plans, such as 401(k)s, perform an important role in encouraging retirement savings. Eligible workers are much more likely to save through a plan offered by their employer (82 percent) than workers are overall to have an individual retirement account (IRA) in which they have contributed (36 percent). In addition, employer-sponsored plans account for a significant proportion of workers’ retirement savings. Seven in 10 plan participants say that half or more of their household’s total retirement savings are in their current employer’s plan (70 percent).

Why Aren't More Lawyers Blogging?

Law.com explores the reasons why there aren't more bloggers among the 735,000 lawyers practicing law in this article: "Lawyer-Bloggers: Fact or Fiction?"

(Some other possible explanations: Maybe they want to have a life, maybe they want to spend time with family and friends, maybe they want to take a walk in the park and enjoy the beauty of a sunset, instead of sitting in front of a computer screen all day? . . . :-)

IRS Reminds Businesses to Classify Workers Correctly

I have written a lot here at Benefitsblog about how improper classification of workers as independent contractors/employees can sometimes wreak havoc with benefit plans. The IRS has issued a fact sheet - FS-2006-21 entitled "IRS Reminds Businesses to Classify Workers Correctly which provides helpful links and tips for those seeking to educate themselves on classifying workers properly. The fact sheet begins:

The rash of natural disasters that have hit the United States in the last several months have caused many businesses to hire additional workers to help them meet increased demand for their goods or services. These businesses must make sure they treat their workers properly to make sure everyone can meet their tax obligations.

Read more about how misclassifications affect benefit plans in previous posts here.

(Hat Tip: TaxProf Blog)

Speech by SEC Commissioner Cox Addresses Backdating of Stock Options

In an address to the New York Financial Writers Association (which you can access here), SEC Chairman Christopher Cox discusses upcoming rules for disclosure of executive compensation as well as what he sees on the horizon as far as addressing the current issue of back-dated options.

Regarding executive compensation disclosure:

The Commission's proposal to significantly improve the way executive compensation is reported to shareholders has received more than 20,000 comments. No issue in the 72 years of the Commission's history has generated such interest. Our basic approach is straightforward: We propose to tell Compensation Committees to release all material information regarding their decisions, and we mean all. . .

The principle here is simple: no shareholder should need a machete and a pith helmet to go hunting for what the CEO makes.

And we want shareholders to know how much the executives will get once they retire or leave for any other reason. One of the problems with the current regime for disclosing executive pay is that the shareholder doesn't get to know what the golden parachute looks like until the CEO floats cheerfully away from the mother ship.

The new executive compensation disclosure will deliver more than just clear and understandable numbers. We'll also be getting a plain English narrative that will give investors an insight into the Compensation Committee's thinking when it decides how to pay the CEO.

Today's Compensation Committee Report and Performance Graph - which have become little more than pro-forma and boilerplate - will be replaced with an explanation by management called Compensation Discussion and Analysis. We expect the new CD&A to be clearly written, so every investor can understand it.

Regarding back-dated options:

Our final rule will very likely address the issue of back-dated options, which is currently so much in the news. . .

While I can't comment on the SEC's ongoing investigations of specific companies, I can tell you what the Commission's position is. Back-dating must be fully disclosed. And the granting of back-dated options must be properly accounted for.

As one means of dealing with this problem, our proposed executive compensation rule will provide better and more useful disclosure of the backdating of options. It would require that a company clearly identify the portion of compensation that results from "in-the-money" option awards resulting from backdating.

The proposed rule will require the disclosure of the full value of an option based on the date the award was actually made. That means the added value from an option's being in-the-money at the time of grant would be clearly disclosed. It would specifically require a comparison of the exercise price of the option to the grant date market price of the option, whenever the exercise price is lower than market price. That way, investors could see the additional compensation that was immediately conferred on executives when the option was granted.

Just as important as these dates and numbers will be the plain English disclosure of just how the company determined when to make its option awards. . .

The Commission is even now considering further adjustments to our executive compensation proposal to deal with the issue of backdating options. Our staff in the Division of Corporation Finance are collating all of those thousands of comments and will make a recommendation to the Commission at an open meeting soon.

As part of that review process, we will consider the need not only for any changes to the rule, but also for additional guidance to address further the backdating of stock options. So stay tuned. We want this matter settled in time for next year's proxy season, and I have every reason to expect that it will be. . .

(Hat Tip: TheCorporateCounsel.net Blog)

Benefits-Related Articles from ALI-ABA

For a limited time, ALI-ABA has provided free access to the following articles:

• ERISA and the 401(k) Plan Fiduciary by Thomas Hoecker
• Tax Exempt Organizations Compensation Audits: 403(b) and 457(b) and (f) by Roger Siske (1944 -2006) and Pamela Baker
• Health Savings Accounts Under the New Medicare Laws by Roberta Casper Watson
• The Qualified Plan Potpourri; Considerations for Selecting the Appropriate Plan For a Specific Client by David Duff
• Proposed Roth Distribution Regulations by Pam Perdue

Clarification for Dependent Care Reimbursement Plans

Many employers offer dependent care reimbursement programs as a benefit for their employees. Under these programs, employees can estimate their dependent care expenses for the year, elect to have the money deducted from their pay, and then reimburse themselves on a tax-free basis from the money set aside in their accounts as they incur employment-related dependent care expenses throughout the year. The IRS has recently issued proposed regulations (Proposed Treasury Regulations Sections 1.21-1, 1.21-2, 1.21-3, and 1.21-4, which you can access here) shedding some light on what types of expenses can qualify as employment-related expenses for which an employee may obtain tax-free reimbursement under a dependent care reimbursement plan (officially known as a dependent care assistance program or "DCAP" under section 129 of the Internal Revenue Code).

For instance, the proposed regulations clarify that when it comes to school-related expenses, nursery school and preschool can qualify as employment-related expenses as well as before- and after-school care. The IRS goes on to note that a day camp will qualify even if the camp is a "specialty" camp, such as a camp devoted to just soccer or computer:

The IRS has received many inquiries about whether the cost of a day camp that specializes in a particular activity, such as soccer or computers, may be an employment-related expense. To provide certainty for taxpayers and enhance administrability, the proposed regulations provide that the full amount paid for a day camp or similar program may be for the care of a qualifying individual although the camp specializes in a particular activity.

However, what about kindergarten? The IRS says:

The proposed regulations clarify the existing rule that expenses for programs at the level of kindergarten and above, however, are primarily for education and, therefore, are not employment-related expenses.

A couple of good articles on the new regulations:

• Deloitte: IRS Proposed Regulations on Child Care Tax Credit Affect Dependent Care FSAs
• Segal: IRS Proposes Rules Clarifying Dependent Care Expenses Reimbursement

Article Detailing Employers' Experiences with HSAs

This is a good article providing some first-hand stories of how three different employers are faring with the implementation of health savings accounts: "Benefit Leaders Tout Consumer-Directed Care Success Despite Low Enrollment." For those who are curious about how health savings accounts would work in a law firm setting, the article describes the program started at Preston Gates & Ellis:

Despite a communication strategy that began more than a year before the HDHP went into effect, only about 6% of the company's employees enrolled for the 2005 plan year. Enrollment for 2006, however, nearly doubled to 11%, and 96% of those who enrolled in 2005 stuck with the plan.

The HDHP includes a $1,200 annual deductible for single coverage ($2,500 for family coverage) and an annual HSA contribution of $500 ($1,000 for family coverage). For employees with family coverage, the HDHP offers a 30% savings in premiums versus the more traditional PPO . . .

For the 2006 plan year, Preston Gates boosted the annual HSA contribution from $500 to $750.

Posted by B. Janell Grenier at 07:53 PM[Permalink]

Notable Benefits Quote

"The world has evil doers, but fewer than the IRS imagines in the pension world." From a good article/outline entitled "Phased Retirement" by Robert A. Blum prepared for the ALI-ABA Annual Spring Employee Benefits Law and Practice Update for 2003.

Health and Welfare Plan Compliance Resources

Here's a good start to a list of Health and Welfare Plan Compliance Resources which will be located over in the sidebar on the right:

• Claims Procedure Regulations
• Regulations Pertaining to Contents of an SPD
• Final USERRA Regulations
• FMLA Regulations (Pertaining to Benefits Requirements)
• Final IRS Regulations Pertaining to FMLA and Cafeteria Plans
• Final COBRA Regulations
• HIPAA Regulations
• DOL Health Plan Links
• DOL Compliance Assistance Links
  

(I intend to add more links as they come to mind. Suggestions are welcome.)

Sixth Circuit Disregards Choice of Law Provision in Pension Plan To Decide Surviving Spouse Issue

If you like to follow ERISA cases, you won't want to miss reading this interesting one here: Daimler-Chrysler v. Durden, 05-1662 (6th Cir., May 26, 2006). The case illustrates how the task of deciding who is the proper beneficiary of a pension, health or other benefit plan can sometimes be a tortuous process for the plan administrator as well as the courts. In this particular case, a participant named an individual (whom I will call "spouse #2") as a beneficiary under the employer's Pension Plan. After the participant's death, another individual ("spouse #1") appeared claiming that she was married to the participant and that her marriage to the participant had occurred prior to the alleged "marriage" of participant and spouse #2. Both spouses #1 and #2 claimed that they were the participant's surviving spouse, entitled to benefits under the employer's plans. There was quite a bit at stake, including a surviving spouse pension benefit, a life insurance benefit, and certain health care benefits.

The participant had named spouse #2 as beneficiary under the Pension Plan but had failed to list a beneficiary under the life insurance plan. Spouse #1 averred that the participant had never divorced her, and spouse #2 was unable to present any evidence that a divorce had occurred. The Pension Plan contained a typical choice of law provision which said that the Plan, in this case would be "construed, governed and administered in accordance with the laws of the State of Michigan except where otherwise required by Federal law.”

The lower court enforced the choice of law provision, and applied Michigan law in determing which marriage prevailed for purposes of identifying a surviving spouse under the Pension Plan, holding in favor of spouse #2. A divided Sixth Circuit reversed and applied Ohio law which was where the participant had lived during the existence of both relationships and where the participant was allegedly "married" to spouse #2. Holding in favor of spouse #1, the Sixth Circuit relied on the Restatement (Second) of Conflict of Laws, Section 187, in making its determination that it should disregard the choice of law provision contained in the Pension Plan.

Why was the choice of law so important in the case? Under Michigan law, there was a strong presumption of validity in favor of a later ceremonial marriage that was attacked on the ground that one of the parties was already married to another, and the presumption was particularly strong where there were children born of the later marriage. However, under Ohio law, Ohio placed the burden of proof on the second spouse to demonstrate that the first marriage was dissolved.

By the way, spouse #2 raised the ERISA preemption issue at the appellate level and the Sixth Circuit held that because the issue was never raised in the district court, it would not review the issue. However, the Sixth Circuit states in footnote 1:

Even if considered on the merits, Rita’s preemption claim would fail. ERISA provides that survivor’s benefits cannot be paid to someone named in a plan who is not a surviving spouse unless the surviving spouse has signed a written, notarized consent form. See 29 U.S.C. § 1055(a), (c)(2); Boggs v. Boggs, 520 U.S. 833, 843 (1997); Shields v. Reader’s Digest Ass’n, 331 F.3d 536, 542 (6th Cir 2003). There is no consent form in this case. Consequently, if Rita is not the surviving spouse, the Plan cannot effectively designate her as the beneficiary of survivor’s benefits. Therefore, the provisions of ERISA itself make it necessary to determine which claimant is the surviving spouse without reference to the Plan documents.

A dissent written by Circuit Judge Merritt calls the majority opinion's analysis "convoluted":

The Conflicts Restatement, relied on by my colleagues, does not take into account the overriding purpose and policy of uniformity behind the ERISA statute or behind the interpretation of ERISA benefits contracts. I, therefore, think that the Conflicts Restatement is of marginal value in the interpretation of this particular contract provision calling for the application of Michigan law. Moreover, the Conflicts Restatement provisions themselves are not entirely clear and are open to several interpretations leading to varying results in the resolution of this dispute. Instead of applying a uniform governing law to the ERISA benefits an employee and his family receive, the benefits will be distributed under the Court’s view according to a calculation based upon where the marriage occurred, marital domicile, etc. — a place that could be anywhere in the world for employees of a global automobile company. . . My colleague’s discussion of the various interests is interesting but I think overly complex and convoluted and seems to me to impair the explicit obligations concerning the governing law that the parties themselves wrote into their contract. Therefore, I would affirm the judgment of the district court.

(Who said ERISA cases are "dreary"?)

(Hat Tip: Decision of the Day, "Which Surviving Spouse Gets Bigamist's Pension?")

Pepper . . . and Salt Cartoon Collection

The Wall Street Journal Cartoon Collection is now online at Baker Library here. The Collection was donated to the library by Charles Preston. Mr. Preston is the founder and editor of the cartoon feature in The Wall Street Journal, which has appeared in the paper under the heading "Pepper...and Salt" since June 6, 1950. Read about the Collection in this Wall Street Journal article here: "A Visit With Charles Preston, Pepper ... and Salt's Man for All Season(ing)s."

(Check out the 1990's cartoon (item 2) where the man is answering the phone and responds to the caller: "But I'll certainly keep you in mind in case I ever take leave of my senses and decide to entrust all my savings to a complete stranger on the phone.")

The Signing of TIPRA

Picture of the signing of TIPRA (H.R. 4297, Tax Increase Prevention and Reconciliation Act of 2005) last week here. (The pink suit just really makes the picture, doesn't it? A lot of progress since this drab picture here.) Read more about the signing here.

More links:

The House Committee on Ways and Means online resource kit for TIPRA
Summary of TIPRA from the TaxBook
TaxProf Blog's Links

Previous posts on TIPRA here.

Prof Gives Chief Justice Roberts A+ for Opinion in the Sereboff Case

Read Colleen Medill's analysis of the recent U.S. Supreme Court opinion in Mid-Atlantic Medical Services v. Sereboff at the Workforce Prof Blog: "Sereboff and the Future of ERISA Remedies." Colleen is a Professor at the University of Nebraska College of Law.

The Sereboff case was mentioned previously at Benefitsblog here.