Benefitsblog

More Executive Compensation Guidance Under EESA

Notice 2008-TAAP: The Notice provides guidance on certain executive compensation provisions applicable to a financial institution from which the Treasury acquires troubled assets through an auction purchase. Section 111(c) of EESA prohibits such a financial institution from entering into entering into any new employment contract that provides a golden parachute to a senior executive officer ("SEO") in the event of the SEO’s involuntary termination, or in connection with the financial institution’s bankruptcy filing, insolvency, or receivership.

Notice 2008-PSSFI: The Notice provides guidance on certain executive compensation provisions applicable to a financial institution from which the Treasury acquires troubled assets through programs for systemically significant failing institutions.

Interim Final Rule on Treasury's Capital Purchase Program: The regulation provides guidance on the executive compensation provisions applicable to participants in the Troubled Assets Relief Program (TARP) Capital Purchase Program (CPP). It requires financial institutions from which the Treasury is purchasing troubled assets through direct purchases to meet appropriate standards for executive compensation and corporate governance, including a requirement for Compensation Committees to certify that they have completed review of the SEOs' incentive compensation arrangements in accordance with the new rules.

Notice 2008-94: Issued yesterday and discussed in this previous post here and here.

New Notice 2008-94: Trusts May Participate in the Government's Troubled Asset Auction Program?

Note Q & A-2 in new Notice 2008-94 issued today (and discussed in this previous post here) in connection with the Troubled Asset Auction Program ("TAAP"):

Q-2: Can a corporation that is not publicly traded, or an entity that is not a corporation, be an “applicable employer”?

A-2: (a) General rule. Yes. An applicable employer for purposes of § 162(m)(5) is not limited to a publicly traded corporation or even to the corporate business form. Thus, an entity, whether or not publicly traded, is an applicable employer if the entity is described in Q&A-1 of this notice regardless of whether the entity is a corporation, a partnership (or taxed as a partnership for federal tax purposes), or a trust.

There is a slight reference in EESA to pension plans being able to participate in the program which you can read about in this previous post here. Perhaps the reference to a "trust" in this Notice might be tied to this possibility? More on this somewhat confusing aspect of the legislation from the Groom Law Group here.

Treasury Begins Issuing Guidance on EESA's Executive Compensation Provisions

The Treasury today announced the development of three programs under the Emergency Economic Stabilization Act of 2008 ("EESA"): (1) the auction purchase of troubled assets; (2) the direct purchase program; and (3) interventions to prevent the impending failure of a systemically significant institution. In connection with these programs, the Treasury has issued guidance regarding the executive compensation and corporate governance standards which will apply to institutions who decide to take advantage of these programs. The standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers. Any firm participating in these programs will be required to adopt the standards.

Those standards were outlined in a press release as follows:

(1) Troubled Asset Auction Program- As prescribed by EESA, any financial institution that sells more than $300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. (See Notice 2008-TAAP regarding this restriction - No link yet.) Furthermore, under the Act, (1) the financial institution may not deduct for tax purposes executive compensation in excess of $500,000 for each senior executive, (2) the financial institution may not deduct certain golden parachute payments to its senior executives and (3) a 20-percent excise tax will be imposed on the senior executive for these golden parachute payments. (See Notice 2008-94 regarding these new tax rules.)

(2) Capital Purchase Program- Any financial institution participating in the Capital Purchase Program will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program. The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury will be issuing interim final rules for these executive compensation standards.

(3) Programs for Systemically Significant Failing Institutions- The Treasury Department is currently developing a third program to potentially provide direct assistance to certain failing firms on terms negotiated on a case-by-case basis. The Treasury will be issuing guidance for the executive compensation standards that will apply to the firms participating in such programs and their senior executives (Treasury Notice 2008-PSSFI). These standards will be similar in all respects to the Capital Purchase Programs executive compensation standards described above, with one significant difference. In situations where the Treasury provides assistance under the systemically significant failing institutions programs, golden parachutes will be defined more strictly to prohibit any payments to departing senior executives.

A Novel Health Care Solution

From Instapundit here.

I know there are truly a lot of folks who cannot get affordable health care, but it is good to remember the other side of the coin, i.e. that there are some who could get it, but simply choose not to.

How Do the Presidential Candidates’ Tax Plans Affect Taxpayers’ Marginal Tax Rates

Surprising results reported at the Tax Foundation here. Excerpt:

To the surprise of some, even though Senator Obama's tax plan lowers taxes for the bottom four quintiles, marginal tax rates would fall only for the very lowest-income couples. Taking both income and payroll taxes into account, those at the very bottom of the income distribution would see their effective marginal tax rates fall from 27.4 percent to minus 58.6 percent due to proposed changes to the earned income tax credit and Senator Obama's new "Making Work Pay" credit.

Most low- and moderate-income couples would see their effective marginal tax rates rise, in some cases, significantly. Indeed, some low- and moderate-income taxpayers will see their marginal rates rise to more than 50 percent.

High-income taxpayers can also expect their effective marginal tax rates to rise—to 47.2 percent-under Senator Obama's tax plan. This increase is caused by rolling back the 2001 and 2003 reductions in the top two tax rates, curtailing deductions and exemptions at high income levels, and potentially raising Social Security taxes.

Senator McCain's tax plan also changes marginal tax rates. His proposal to replace the exclusion for employer-based health insurance with a new health tax credit boosts taxpayers' taxable incomes by their health insurance premiums which generally pushes taxpayers into higher tax brackets, but not to as great an extent as Senator Obama's tax plan.

(It would be interesting to calculate how much overall tax a person would end up paying under the Obama plan considering the sum of the following: (1) federal tax owed under the highest income tax bracket, (2) state income tax, (3) local tax (which we pay here in the East), and (4) self-employment tax if you are self-employed. Also, add to that real estate taxes (also very high in the East) and sales tax.)

Recommendations for Improving The Retirement Plan System

At the recent Hearing before the U.S. House Committee on Education and Labor, entitled "The Impact of the Financial Crisis on Workers' Retirement Security," there was a lot of discussion about the dire state of the retirement security of Americans. And from that hearing came the remark that American workers have lost as much as $2 trillion in retirement savings over the last year and that the system is broken. You can access the testimony here (as well as the recommended fixes). While it is true that we need to be examining a number of areas involved here, I don't agree with those who are advocating that we need a universal pension system. I would say that there are ways to improve the current system and for starters would recommend the following:

(1) Congress should get rid of the oppressive excise tax (50%) imposed on surplus assets distributed to employers from overfunded defined benefit plans. This tax which was enacted in the 80's was the beginning of the decline of the defined benefit plan (IMHO). One of the reasons this tax is so unfair is that there is no way employers can adequately predict exactly how much money should go in to a defined benefit plan, i.e. actuaries can only make an educated guess at what the market is going to do and the mortality rates are going to be. Therefore, in the 80's there were a lot of plans that were overfunded. This enabled plans to ride out the down times in the market. However, now with this excise penalty tax in place, employers have been much more cautious about how much they put into these plans and therefore, when the plan hits rough times, many employers are forced to terminate or freeze them. Many such employers will then adopt a 401(k) plan in its place which unfortunately doesn't always compare with the rich benefits people have or used to have under the defined benefit plan system. Thus, Congress should repeal the Section 4980 excise tax so as to encourage employers to maintain defined benefit plans and perhaps encourage employers who have abandoned these plans to reinstate them.

(2) Congress should get rid of the 10% penalty tax on early distributions. It is enough of a disincentive for people to have to pay income tax on a distribution. They do not need an additional tax like the early distribution penalty to encourage them to keep their money in a retirement plan socked away for retirement. In fact, I would argue that this tax actually discourages people from saving. Whether or not Congress does something on a permanent basis, they need to at least get rid of this tax on a temporary basis for people affected by this economic crisis.

(3) Congress should get rid of the minimum distribution requirements. Older Americans are lulled into thinking that because they are taking a distribution and paying tax on it, they can then spend it and do not have to save it. So, when the stock market declines, they do not have enough money in their retirement plan to make up the difference. It also forces older Americans to have to liquidate their assets to pay a distribution.

Also, dittos on all of the efforts to reduce fees and make them more transparent. See also these comments from Jerry Bramlett who testified at the Hearing:

. . . I do not believe the 401(k) system is doing an adequate job of educating participants as to how they need to invest their account as they get closer to retirement. The practical impact of a substantial market decline on a 64-year old worker months away from retirement can be very different than the impact on a 50-year old 15 years from retirement. If the retirement account of the 64-year old is heavily invested in equities, the impact of a major market decline on retirement income expectations can be devastating. However, if that same account had been properly diversified with a greater emphasis on fixed income securities, the impact of a major market decline may very well be manageable. Although the advent of target-date investment funds based on a participant’s age has greatly helped in this regard we need to do more. I would recommend that Congress instruct the Department of Labor to develop educational materials specifically for 401(k) participants that have reached age 50 to assist them in better managing their account in preparation for retirement.

UPDATE: Apparently, McCain is advocating the repeal of the minimum distribution requirements as well. Read about it here- "McCain Calls for Suspending Rule on Retirement Accounts." The article notes that "[s]uspending that part of the tax code would benefit “high pension or high-net-worth individuals.” However, I have seen my 84-year-old widowed mother negatively impacted by these requirements and she is nowhere near being a "high-net-worth individual."

The DOL's Burst of Regulatory Activity Today

Press release is here:

Statutory Exemption for Cross-Trading of Securities

Selection of Annuity Providers--Safe Harbor for Individual Account Plans

Amendment to Interpretive Bulletin 95-1

Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries

Adoption of Amendment to Prohibited Transaction Exemption 2006- 06; (PTE 2006-06) For Services Provided in Connection With the Termination of Abandoned Individual Account Plans

Regarding the final regulation pertaining to the selection of annuity providers for individual account plans (a hot topic right now due to AIG's demise and bailout):

(1) The DOL has eliminated paragraph (c)(2) of the proposed regulation which provided additional guidance concerning what information a fiduciary should consider in meeting the requirements for the safe harbor. One of those factors was "[t]he annuity provider's ratings by insurance ratings services." However, the DOL states in the preamble to the final regulations:

Further, although an annuity provider's ratings by insurance ratings services are not part of the final safe harbor, in many instances, fiduciaries may want to consider them, particularly if the ratings raise questions regarding the provider's ability to make future payments under the annuity contract. The Department also believes that some information regarding additional protections that might be available through a state guaranty association for an annuity provider also would be useful information to a plan fiduciary, even if limited to that information which is generally available to the public and easily accessible through such associations, state insurance departments, or elsewhere.

(2) In addition, the DOL makes it clear that a fiduciary is not home free by meeting the safe harbor at the time the annuity provider is selected as a provider for the plan generally. The fiduciary has ongoing responsibilities of monitoring the provider to ensure the ability of the annuity provider to make all future payments under the annuity contract and that the costs (including fees and commissions) of the annuity contract are still appropriate. The fiduciary is required to consult an expert, if necessary.

Plan Expenses Attributable to Separated Vested Participants

When employees terminate employment or retire, some plans are written to allow former employees the flexibility of keeping their plan monies in their former employer's plan. Employers are asking whether such flexibility is desirable from an employer's standpoint. Yes, according to this article: Is Your Defined-Contribution Plan Leaking? No, according to one advisor as reported in this article: Advisers to make funds transparent to avoid suits.

However, something not really discussed in either article is the fact that the DOL now permits employers to allocate the administrative expenses associated with these former employee accounts to such accounts (i.e. active participants need not share in the expenses associated with these accounts). However, if employers want to take advantage of this rule, their plan documents will have to be amended accordingly. In addition, employers should make sure that the Summary Plan Description and any communication documents sent to participants and former participants are updated to reflect the use of the rule.

Excerpt from the DOL's Field Assistance Bulletin 2003-3 which addresses this practice:

Some plans, with respect to which the plan sponsor generally pays the administrative expenses of the plan, provide for the assessment of administrative expenses against participants who have separated from employment. In general, it is permissible to charge the reasonable expenses of administering a plan to the individual accounts of the plan’s participants and beneficiaries. Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses or only expenses on behalf of certain plan participants. In the latter case, such payments by a plan sponsor on behalf of certain plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, plans may charge vested separated participant accounts the account’s share (e.g., pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses and without regard to whether the vested separated participant was afforded the option of withdrawing the funds from his or her account or the option to roll the funds over to another plan or individual retirement account.

Something to consider. . .

Report on ERISA Revenue-Sharing Cases

Sutherland reports here on the opinion issued in the Caterpillar case last week and notes that it is the eleventh ERISA revenues case that a district court has declined to dismiss on the pleadings.

The Intergenerational Transfer of Public Pension Promises

Very interesting paper from the University of Chicago: The Intergenerational Transfer of Public Pension Promises. Abstract:

The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

IRS Lets Firms Tap Cash Overseas

From the Wall Street Journal:

The Internal Revenue Service significantly relaxed the rules governing how U.S. corporations can repatriate cash parked overseas, in yet another government move to ease the credit crisis.

The ruling, issued late Friday, allows companies to bring back money for months at a time without incurring the 35% corporate income tax they normally would owe.

More from the New York Times here.

From Bloomberg: U.S. Eases Tax Rule to Open Offshore Cash `Spigots'

See Notice 2008-91 for more info.

On the Tax Credits for Plug-In Cars Under EESA

AutoBlogGreen has some info about the credits here.

Instapundit asks: Do you get a credit if you do your own conversion to plug-in?

Incentive Stock Options and AMT

Joe Kristan has a good post on "How the refundable AMT credit works" in an example involving incentive stock options here. He discusses the dangers of ISOs and AMT in a volatile market:

The bottom line? Our reader has to do some thinking on whether the savings of having capital gain treatment of ISOs is worth both the market risk on his stock and the high possibility of having to wait until 2012 to recover taxes due in 2008 if he retains ISO treatment. If the stock goes to zero before he sells it, he has a $420,000 AMT liability and no cash.

More on the Benefits Provisions in the Emergency Economic Stabilization Act of 2008

(1) Executive Compensation Limitations for Troubled Asset Relief Program ("TARP") Participants:

Direct Purchases—Where the Secretary determines that the purposes of the Act are best met through direct purchases from an individual financial institution where no bidding process or market prices are available and the Secretary receives a meaningful equity or debt position in the financial institution as a result of the transaction, the Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance. The standards under this section shall be effective for the duration of the holding by the Secretary of the equity position.

Criteria for Standards:

1. General rule: Limits on compensation to exclude incentives for executive officers to take unnecessary and excessive risks that threaten franchise value during such participation.

2. Clawback: A provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains , or other criteria that are later proven to be materially inaccurate; and

3. Golden parachute: A prohibition on the financial institution making golden parachute payment to its senior executive officers.

For participants in TARP auctions who sell $300 million in assets, or whose combined assistance from direct purchases and auctions reaches $300 million, there will be limits on golden parachutes and the tax deductibility of executive compensation:

1. Limits on tax deductions. Executive compensation in excess of $500,000 is not deductible, and the definition of executive compensation is expanded to include performance pay and stock options.

2. Golden parachutes tax penalties. Current golden parachute tax regime are expanded to apply to existing employee contracts—a 20% excise tax applies to parachute payments a (normal 3 times salary rule) triggered by termination other than by retirement of the employee, including involuntary termination of the employee, change in control or bankruptcy of the company. The employer would lose the corresponding deduction on the parachute payment.

3. Golden parachutes prohibition. Golden parachutes will be prohibited prospectively for the top 5 executives in the case of termination, or in the case of bankruptcy, insolvency, or receivorship of the financial institution

(2) Extension and Modification of AMT Credit Allowance Against Incentive Stock Options (ISOs):

Many companies offer ISOs as compensation. Under the regular tax, ISOs are not taxed upon exercise. Under the AMT, however, a taxpayer must pay tax on the stock value when the option is exercised. The economic downturn in 2000 resulted in many individuals having to pay tax on “phantom income” because the stock prices dropped dramatically since the date of exercise. In 2006, Congress provided relief for these situations, but additional relief is needed to correct this problem. Under current law, an individual is allowed a refundable AMT credit amount that is the greater of (1) the lesser of $5,000 or the unused AMT credit amount or (2) 20 percent of the unused AMT tax credit. The AMT credit amount is reduced for those with adjusted gross income (AGI) above $150,000 (joint filers) and $100,000 (single filers). The bill allows 50% of long-term unused minimum tax credits to be refunded over each of two years instead of 20% over each of five years, eliminate the income phase-out, and abates any underpayment of tax outstanding on the date of enactment related to ISOs and the AMT including interest.

(3) IRA Rollover Provision:

The Pension Protection Act of 2006 (PPA) created a provision allowing taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations. This tax benefit expired on December 31, 2007. The bill would extend the provision through 2009. The bill is effective for distributions after December 31, 2007.

(4) Easing of Loan Limits for Qualified Plans in Midwestern Disaster Area:

The bill effectively doubles the limitation on loans from a 401(k), 403(b), or a governmental 457(b) plan by allowing participants located in a Midwestern disaster area and who sustained economic loss by reason of the tornadoes and floods giving rise to the designation of the area as a disaster area to receive loans up to the lesser of $100,000, or 100 percent of the vested accrued benefit for loans made after the date of enactment and before January 1, 2010. In addition, outstanding loan payments due on or after the applicable declaration date and before January 1, 2010 may be deferred an additional 12 months, with appropriate adjustments for interest.

(5) Current Inclusion of Deferred Compensation Paid by Certain Tax Indifferent Parties under new Section 457A:

Section 457A would impose significant restrictions on techniques commonly used by managers of offshore hedge funds to defer fee income. The restrictions would generally apply to deferred compensation attributable to services rendered after 2008. Read about the provision in this Akin Gump Tax Alert.

(6) Mental Health Parity Provisions:

The bill does not mandate group health plans to provide mental health coverage. However, if a plan does offer mental health coverage, then, it requires:

Equity in financial requirements, such as deductibles, co-payments, coinsurance, and out-of-pocket expenses.

Equity in treatment limits, such as caps on the frequency or number of visits, limits on days of coverage, or other similar limits on the scope and duration of treatment.

Equality in out-of-network coverage.

Effective Date: The provisions apply to group health plans for plan years beginning after the date that is 1 year after the date of enactment regardless of whether regulations have been issued to carry out the amendments by the effective date (except that the amendments made by subsections (a)(5), (b)(5), and (c)(5) of the Act relating to striking of certain sunset provisions are to take effect on January 1, 2009).

Some comments on the bill here and here.

Bailout of Money Market Funds

From MarketWatch: "Money funds struggled before Reserve fall: More than a dozen other funds needed rescue as credit crisis deepened." Excerpt:

When money market fund provider The Reserve announced on Sept. 16 that its flagship Primary Fund had "broken the buck" and was worth less than $1 a share, the shock was so great that within days investors had pulled more than $120 billion from money funds.

But what investors most likely didn't realize was that for the past year more than a dozen money funds have found themselves in similar situations, only to be rescued by their parent companies. . .

According to the SEC's Web site, there have been 18 requests in the past year to bail out troubled money market funds.

Valuing Alternative Investments

Good article here from Pension & Investments: "DOL: Plan fiduciaries must value alts accurately."

House Approves EESA

From the Wall Street Journal: "House Passes Bailout Bill."

UPDATE: Already signed into law by President Bush.

The Tax Prof Blog has all the links here.

Live Debate from the House on EESA

C-SPAN is streaming the debate online here. Also, there is a running blog on the debate here.

Using the "In Quotes" Feature from Google

From Google Labs, "The In Quotes feature allows you to find quotes from stories linked to from Google News." Suggested use: You can insert the word "retirement plans" or "health care" and find out what the candidates or other individuals had to say about such benefits-related topics. Read about the feature here.

(From Be Spacific)

List of Benefits-Related Provisions in EESA

Some of the benefits-related provisions in EESA passed by the Senate in addition to the executive compensation provisions discussed here (House bill and Senate bill provisions on executive compensation appear to be identical--see comparison here):

Extension and Modification of AMT credit allowance against Incentive Stock Options (ISOs).

Extension of IRA rollover provision allowing taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations.

Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 requiring private insurance plans that offer mental health benefits as part of the coverage to offer such benefits on par with the medical-surgical benefits.

Doubling of limitations on loans and deferral of loan payments from loans under qualified plans in Midwestern disaster area.

Nonqualified deferred compensation provisions for deferred compensation plans of "nonqualified entities"

More detail on these provisions in this Senate Finance Committee Summary.

See also this News Release.

Comparison of EESA Bills

GovTrack has posted a comparison of the EESA legislation which was passed last night by the Senate and the previous bills which were in circulation on the House side here. (More comparisons here.)

More on EESA. . .

From MarketWatch, "Senate approves $700 billion financial rescue plan." Excerpt:

Wednesday morning, groups representing large and small businesses and retired persons urged the Senate and House to approve the legislation and kick-start the flow of credit. Leaders of the Business Roundtable, the National Federation of Independent Business and the AARP said that businesses and retirement savings are at risk without passage of the rescue package.

"We need action now to protect jobs and homes and retirements," commented Bill Novelli, the AARP's chief executive. "People are calling in great fear because their 401(k)s are basically disappearing."

Senate Passes EESA

The Senate has just passed their version of the Emergency Economic Stabilization Act of 2008 ("EESA"). Access the text of the bill here. The Wall Street Journal covers the story here.

The bill appears to contain the same reference to retirement plans as did the House bill that was discussed in a previous post here.

Also, there appears to be this nice little Warren Buffett provision in the bill:-)

(3) PRIVATE SECTOR PARTICIPATION.—The Secretary shall encourage the private sector to participate in purchases of troubled assets, and to invest in financial institutions, consistent with the provisions of this section.

Selling Benefits

Great article from CFO.com entitled "Benefits: Adult Education." Excerpt:

By offering more and better education around benefits, companies not only help employees make the most of their perquisites, but also gain from increased retention, higher productivity, and related forms of goodwill.

"Benefits are probably the largest untapped potential retention tool that organizations have," says Steve Miranda, chief of human resources at the Society for Human Resource Management in Alexandria, Virginia. But all too often, he says, "they turn into nonperforming assets because they aren't being used to create 'stickiness.'" In other words, to tap the full benefit of benefits, companies should package them with more-useful instructions. "People are clamoring for more communication," says Miranda.

More:

To usefully address such questions, companies have learned to dole out data in small bursts — using E-mail blasts and podcasts, monthly intranet postings, or even animated characters online. (Ceridian, an HR services company, actually created online commercials featuring a superhero named Flexman, who saves people from financial binds by explaining the virtues of flexible-spending accounts.)

You can access one of the commercials featuring Flexman here.

Listen to the Senate Debate TARP

The Senate has begun debate on the Troubled Assets Relief Program ("TARP") as established under the Emergency Economic Stabilization Act of 2008 ("EESA"). You can access the text of the Senate version of the bill here (after you click on the link, scroll down for the bill) and listen to the debate live on C-SPAN here.

IRS Sends Pre-Audit Compliance Questionnaires to 400 Colleges and Universities

We have known for some time that the IRS was planning a compliance project targeting colleges and universities. In today's email was a press release from the IRS indicating that the compliance project is now upon us. Excerpt:

Approximately four hundred U.S. colleges and universities will begin receiving compliance questionnaires from the Internal Revenue Service in the next few days as part of the agency’s focused effort to study key areas in the tax-exempt community. The college and university questionnaire will focus on unrelated business income, endowments and executive compensation practices. The questionnaires are being sent to a cross-section of small, mid-sized and large private and public four-year colleges and institutions.

The Questionnaire is part of the Colleges and Universities Compliance Project. The IRS says in the press release that, after it receives responses, it will analyze the results of the compliance questionnaire and conduct examinations for a sample of the organizations (i.e. the lucky winners).

Please note that the Questionnaire compiles a lot of detailed information from colleges and universities about the benefits they provide to executives. Some of the items included are:

Ninth Circuit: San Francisco Health Care Security Ordinance Not Preempted by ERISA

Thanks to Benefitslink for the tip about a very important case, Golden Gate Restaurant Association v. City and County of San Francisco, et al., from the Ninth Circuit upholding the San Francisco mandatory healthcare expenditure law. A lot of folks weighed in on that case including the DOL, the American Benefits Council, the U.S. Chamber of Commerce, ERIC, and many others, knowing how important the result in the case would be due to the healthcare initiatives being proposed across the country. (You can read the DOL's Amicus Brief filed in the case here.)

In the Golden Gate case, the district court had enjoined the employer spending requirements of the San Francisco Health Care Security Ordinance, holding that ERISA preempted the spending requirement. The Ordinance requires all covered employers to make a certain level of health care expenditures on behalf of their covered employees. However, the Ninth Circuit reversed, holding that the Ordinance is not preempted by ERISA.

Many will probably think that this case now creates a split in the Circuits due to the Fourth Circuit opinion in the Retail Industry Leaders Association v. Fielder case (noted below). That case dealt with Maryland’s Fair Share Health Care Fund Act (discussed in previous posts which you can access here). However, the Ninth Circuit in its opinion distinguishes that case and states its belief that a split will not be created.

The Ninth Circuit's key holdings in the case:

(1) "The fact that an employer makes its payments to the City rather than to the employees confirms, if confirmation were needed, that the employer’s administrative obligations under the City-payment option do not create an ERISA plan. Under the Ordinance, an employer has no responsibility other than to make the required payments for covered employees, and to retain records to show that it has done so. The payments are made for a specific purpose, but the employer has no responsibility for ensuring that the payments are actually used for that purpose."

(2) "The HAP, administered by the City, is not an ERISA plan. Rather, the HAP is a government entitlement program available to low- and moderate-income residents of San Francisco, regardless of employment status."

(3) "The Ordinance in this case stands in stark contrast to the laws struck down in Egelhoff, Shaw and Agsalud. The Ordinance does not require any employer to adopt an ERISA plan or other health plan. Nor does it require any employer to provide specific benefits through an existing ERISA plan or other health plan. Any employer covered by the Ordinance may fully discharge its expenditure obligations by making the required level of employee health care expenditures, whether those expenditures are made in whole or in part to an ERISA plan, or in whole or in part to the City. The Ordinance thus preserves ERISA’s “uniform regulatory regime.” See Davila, 542 U.S. at 208. The Ordinance also has no effect on “the administrative practices of a benefit plan,” Fort Halifax Packing Co., 482 U.S. at 11, unless an employer voluntarily elects to change those practices."

(4) "There is a critical distinction between the ordinance in Greater Washington and the Ordinance in this case. Under the ordinance in Greater Washington, obligations were measured by reference to the level of benefits provided by the ERISA plan to the employee. Under the Ordinance in our case, by contrast, an employer’s obligations to the City are measured by reference to the payments provided by the employer to an ERISA plan or to another entity specified in the Ordinance, including the City. The employer calculates its required payments based on the hours worked by its employees, rather than on the value or nature of the benefits available to ERISA plan participants. Thus, unlike the ordinance in Greater Washington, the Ordinance in this case is not determined, in the words of § 514(a), by “reference to” an ERISA plan."

(5) "Finally, the Association contends that the Ordinance is preempted under the analysis set forth in Retail Industry Leaders Association v. Fielder, 475 F.3d 180, 183 (4th Cir. 2007). The Association contends that we will create a circuit split if we uphold the Ordinance. We disagree. We see no inconsistency between the Fourth Circuit’s holding in Fielder and our holding in this case."

The court held that the San Francisco ordinance was distinguishable from the Maryland statute in the Fielder case in that the Ordinance does not “effectively mandate that employers structure their employee healthcare plans to provide a certain level of benefits.”

(By the way, the court cites this article in their opinion: Preemption and Civic Democracy in the Battle Over Wal-Mart by Catherine Fisk, University of California, Irvine Law School, and Michael M. Oswalt.)

UPDATE: From the San Francisco Sentinel:

A restaurant association spokesman said today the group will appeal a federal circuit court ruling that upheld an employer spending mandate in the city of San Francisco’s universal health care program.

Kevin Westlye, executive director of the Golden Gate Restaurant Association, said, “We obviously disagree with the judges’ ruling.”

Westlye said the group hadn’t yet decided whether to appeal to an expanded 11-judge panel of the 9th U.S. Circuit Court of Appeals or to go directly to the U.S. Supreme Court.

Retiree Reaction to Economic Stabilization Legislation

Retirees are not surprisingly getting hammered in the recent economic downturn. And yet, this poll from Rasmussen indicates that "retirees, whose investments are being buffeted by the shifts in the stock market and generally have a more immediate need for that money, favor letting Wall Street and the financial sector work out its own problems by a 47% to 41% margin."

Tax Thermometer and other Tax Information

Ranking Member Charles Grassley delivered a detailed speech today on "Senators McCain and Obama's tax plans - Effects on Middle Class Taxpayers" and has posted a Tax Thermometer on the Senate Finance Committee website. More interesting links here.

(From the Tax Prof)

Details of Vote on EESA

Gov Track has the details of the vote on the Emergency Economic Stabilization Act here.

Two Important IRS Promulgations

Almost got missed in all of the economic upheaval:

Resources for Information About Treasury’s Temporary Guarantee Program for Money Market Funds

The Treasury has issued FAQs concerning the government's recently announced guarantee program for money market funds. Excerpt:

How will investors know if their money market fund participates in the program?

Investors should contact their money market fund directly to determine if it is participating in the program.

Also:

How much of an investor's money market fund is insured? What happens if the number of shares held in an investor's account increase above the level at the close of business on September 19, 2008? What happens if the number of shares held in an investor's account decreases below the level at the close of business on September 19, 2008?

The program provides a guarantee based on the number of shares held at the close of business on September 19, 2008. Any increase in the number of shares held in an account after the close of business on September 19, 2008 will not be guaranteed. If the number of shares held in an account fluctuates over the period, investors will be covered for either the number of shares held as of the close of business on September 19, 2008 or the current amount, whichever is less.

See also:

House of Representatives Votes No to Emergency Economic Stabilization Act

The vote was 205 for and 228 against. House rejects $700 billion financial bailout

Michelle's Law Passed by the Senate

The Senate has passed “Michelle's Law” (H.R. 2851) by unanimous consent on September 25, 2008. The bill would provide the extension of existing health insurance coverage to dependant college students for up to one year in the event of a medically necessary leave of absence by amending the Employee Retirement Income Security Act of 1974, the Public Health Service Act, and the Internal Revenue Code of 1986. The bill is expected to be signed by the President.

Effective Date: Plan years beginning on or after the date that is one year after the date of enactment and to medically necessary leaves of absence that begin during such plan years.

More from this press release from John Sununu (R-NH) here.

New Rescue Legislation Allows the Government to Buy Troubled Assets from Retirement Plans

A very interesting aspect of the Emergency Economic Stabilization Act of 2008 is that it would appear to allow the government to purchase troubled assets from "eligible retirement plans." Here is the language:

SEC. 103. CONSIDERATIONS. In exercising the authorities granted in this Act, the Secretary shall take into consideration—

. . . (8) protecting the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B) of the Internal Revenue Code of 1986, except that such authority shall not extend to any compensation arrangements subject to section 409A of such Code;. . .

Emergency Economic Stabilization Act of 2008: Executive Compensation Provisions

The House Financial Services Committee has released a draft of the proposed rescue legislation. The bill is now entitled the "Emergency Economic Stabilization Act of 2008" and contains much more lengthy executive compensation provisions than previously contemplated versions. (UPDATE: The Tax Prof has a good summary here.) The executive compensation provisions are as follows:

(a) APPLICABILITY.—Any financial institution that sells troubled assets to the Secretary under this Act shall be subject to the executive compensation requirements of subsections (b) and (c) and the provisions under the Internal Revenue Code of 1986, as provided under the amendment by section 302, as applicable.

(Click on the link that follows to continue reading the provisions.)

Continue reading "Emergency Economic Stabilization Act of 2008: Executive Compensation Provisions"

Posted by B. Janell Grenier at 09:15 PM[Permalink]

Side-by-Side Comparison of Rescue Legislation

Apparently, House Republican Roy Blunt's office has provided this outline describing the bailout proposal which inclues a brief description of the executive compensation provisions. (From the DC Examiner)

Negotiations on Bailout Legislation

Business Week has the full text of the memo that staffers presented to the Congressional leaders for the final round of negotiations in the bailout legislation here.

Retirement Plans and Company Stock Woes

From the Wall Street Journal, "Wall Street Lays Egg With Its Nest Eggs: Retirement Lessons of the Dumb Moves by 'Smart Money'"

In the past week, Merrill Lynch's Web site still displayed an article, "Understanding Your Entire Portfolio," full of sensible advice. If shares in your employer's stock are "a significant portion of your investments," it said, "you'll want to consider the potential impact of a falling stock price on your portfolio."

Physician, heal thyself.

At the end of 2006, Merrill employees had 27% of all their retirement money in Merrill shares. In 2007, Merrill employees lost $669.8 million on their holdings of Merrill, and so far this year, probably at least $400 million.

Over at Morgan Stanley, employees lost some $500 million on their 401(k) holdings of company stock in 2007 and appear to be down at least that much this year. At Lehman Brothers Holdings, employees saving for retirement lost "only" about $200 million on their own shares in the past year and a half.

The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008

Congress has passed the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 which amends section 712 of the Employee Retirement Income Security Act of 1974, section 2705 of the Public Health Service Act, and section 9812 of the Internal Revenue Code of 1986 to require equity in the provision of mental health and substance-related disorder benefits under group health plans.

From the Wall Street Journal Health Blog:

The legislation exempts businesses with fewer than 50 employees. That’s one of several compromises that won the bill broad support from the business community and the Bush administration.

The House passed the language as a stand-alone bill (online here), while the Senate included it in another measure. So they’ll have to come to a joint agreement about what form the measure will take to be sent off to the White House for the president’s signature.

Read more about it here and here.

Benefits News Related to Recent Economic Turmoil

From the Wall Street Journal:

Drafts of Bailout Legislation

The Corporate Counsel.net Blog has links to what he hopes are the most recent versions of drafts of the bailout legislation:

The latest version of the House "bailout" legislation includes provisions for a "say on pay" vote, limits on severance, clawbacks and shareholder access to the proxy for those companies involved in the bailout. See Section 9 on pages 11-13. The Senate version of a bailout bill contains the executive compensation provisions (see Section 17 on pages 30-31), but not the shareholder access one.

Bear in mind that both of these are just drafts and that they likely are just the Democratic versions of a bill. Media reports indicate that the bailout plans changes from hour to hour. In fact, I can't even be sure I have linked to the latest drafts...

Here are the executive comp provisions taken from the draft Senate version (referred to above):

SEC. 17. EXECUTIVE COMPENSATION. The Secretary shall require that all entities seeking to sell assets through a program established under this Act meet appropriate standards for executive compensation and shareholder disclosure in order to be eligible, which standards shall include—

(1) limits on compensation to exclude incentives for executives to take risks that the Secretary deems to be inappropriate or excessive;

(2) a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate; and

(3) such limitations on the entity paying severance compensation to its senior executives as are determined to be appropriate in the public interest in light of the assistance being given to the entity.

List of ERISA Lawsuits

Over at the D & O Diary, Kevin M. LaCroix has been keeping track of all the ERISA lawsuits filed in connection with sub-prime lending (which you can access here).

He also writes about the litigation stemming from the most recent economic turmoil here:

The economic crisis that began as the subprime meltdown has clearly entered a dark new phase. And just as the prior stages of the crisis generated waves of related litigation, this new phase already has produced its own distinctive round of lawsuits. Like the underlying economic circumstances, the new litigation phase also seems darker and more threatening. . .

Articles of Interest

From the WSJ:

Links Updated in SideBar

I have been working for some time at updating the links in the sidebar. Many were broken and out-of-date, but have now been updated.

(If you had emailed me in the last few months about adding a link to your blog, please do so again as I may have missed some.)

Plan Fiduciaries: Navigating the Rough Waters of the Recent Economic Turbulence

Last week's economic developments created some of the roughest waters yet that plan fiduciaries and their advisors have had to navigate. For those looking for some general fiduciary guidelines, there has been a lot written here about the duties of ERISA plan fiduciaries during the last five years that this blog has been in existence. To find those posts, you can search the archives by entering the word "fiduciaries" in the search tool in the side-bar (or simply click here) and read a collection of posts on various fiduciary topics. However, if you only have time for a couple, I would recommend this post here (having to do with the mutual fund scandals) because the general principles discussed there continue to be useful information for what is happening in the market today. See also this post here which refers to the very important Unisys case (which you can access here) discussed last week in Cynthia Van Bogaert's Q & A at Benefitslink.com.

Note: As always, please read the disclaimer in the sidebar. The information provided here should never be construed as legal advice. Any legal issues that you have should be reviewed by your legal counsel to apply the law to the particular facts of your situation.

Treasury Provides Further Clarity For Guaranty Program for Money Market Funds

In a press release here.

One Way for Employers to Reduce Health Insurance Cost

Is to install a treadmill at each desk. Read about it in this article--"I Put In 5 Miles at the Office. Excerpt:

Terri Krivosh, a partner at a Minneapolis law firm, logs three miles each workday on a treadmill without leaving her desk. She finds it easier to exercise while she types than to attend aerobics classes at the crack of dawn.

More here (Recommendation: watch the Good Morning America segment listed there):

Dr. James Levine of the Mayo Clinic came up with the idea of a "Treadmill Desk". The idea is to slowly walk on a treadmill while working at a desk built around the treadmill...a Treadmill Desk.

Dr Levine's research revealed that on the average his subjects burned 100 extra calories every hour while walking slowly -- at 1 mile per hour -- than while sitting in a chair.

Dr. Levine believes that if individuals were to replace 8 hours a day of sitting at their "normal" desk with a Treadmill Desk, and if other components of energy balance were constant, a weight loss of 57 pounds a year could occur.

More about it here.

Sometimes a Little Humor Helps

From the TaxGuru here.

Ninth Circuit Opinion Holds Structural Conflict Exists Where Employer Pays Benefits Out of a Trust

The Ninth Circuit, in the case of Burke v. Pitney Bowes Inc. Long-Term Disability Plan, weighed in on the interpretation of MetLife v. Glenn in another disability case, appearing to disagree (but not citing) one of the holdings in the recent Eleventh Circuit opinion of Frankie White v. Coca-Cola Bottling Co. (an unpublished decision) discussed here. (Rather, the court stated it disagreed with the pre-MetLife decision of Gilley v. Monsanto Co., Inc., 490 F.3d 848, 856 (11th Cir. 2007) relied upon by the Eleventh Circuit in the White case.) These are important cases because there has been much uncertainty regarding how the recent U.S. Supreme Court MetLife decision will impact the Firestone discretionary authority given to plan fiduciaries in administering benefit plans. These Circuit Court opinions provide some important guidance regarding how the MetLife decision will be interpreted and applied.

In the Burke decision, an employee was seeking benefits under the employer's disability plan which was administrated by a benefits committee. Benefits paid out by the Plan came from the Plan's Trust, which was funded in part by the employer and in part by employee contributions. The trust was a VEBA and the committee had the authority to determine the amounts of employer and employee contributions to be made to the trust each year. (The court mentioned that it was unclear from the record what portion of the Trust was funded by employees and what part was funded by the employer. )

The court held that, even though there was a trust so that there was no "direct financial impact on [the employer] resulting from the distribution of benefits", that a structural conflict of interest existed "that must be considered as a factor in determining whether there was an abuse of discretion" in line with the MetLife decision:

We reach this conclusion because, even though benefits are not paid directly by [the employer], [the employer] obviously still has a financial incentive to keep claims’ experience under the Plan as low as possible — the less the Trust pays out as benefits, the less [the employer] will ultimately need to contribute to the Trust to maintain its solvency. Thus, although the impact may be less direct, there is nonetheless a close relationship between benefits paid by the Trust and the money [the employer] must provide from its general assets to fund the Trust.

The court went on to state that the fact that employees made some contribution to the Trust tended "to lessen the structural conflict of interest", but because the Plan was administered by the employer, rather than an insurer, this aspect of the Plan tended "to increase the Plan’s structural conflict of interest in comparison to the plan at issue in MetLife." The court then vacated the district court’s ruling and remanded the case for further proceedings.

As in many cases, the footnotes contain some interesting tidbits. Footnote 1 mentions that the record does not disclose the Committee’s makeup, but that the parties argued the case on the assumption that it was a “management” committee controlled by the employer. The court then states in footnote 12:

We must obviously leave for another day the effect of a plan that is jointly-administered by the employer and employee representatives.

In other words, the court is leaving open the answer to this question: Would a committee comprised of management employees as well as non-management employees avoid a conflict of interest holding?

UPDATE: Outline of Key Elements in MetLife, White, and Burke cases:

See this previous post on the MetLife decision here.

Free Podcast: ALI-ABA Legislative Update

There is a free podcast taken from the recent ALI-ABA conference on Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers which you can access here. (Button is on the upper right-hand column in the side-bar.) The podcast discusses the legislative outlook in the benefits arena.

(It is unclear how long the podcast will be offered free so you might want to listen in fairly quickly. Even though the conference was September 4-6, the dynamics of the recent market turmoil would likely impact some of the areas discussed.)

President Bush's Speech on the Economy This Morning

You can access the transcript here and the video here.

Excerpt from the speech (mentions retirement plans):

The actions I just outlined reflect the considered judgment of Secretary Paulson, Chairman Bernanke, and Chairman Cox. We believe that this decisive government action is needed to preserve America's financial system and sustain America's overall economy. These measures will require us to put a significant amount of taxpayer dollars on the line. This action does entail risk. But we expect that this money will eventually be paid back. The vast majority of assets the government is planning to purchase have good value over time, because the vast majority of homeowners continue to pay their mortgages. And the risk of not acting would be far higher. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, and further erode housing values, as well as dry up loans for new homes and cars and college tuitions. These are risks that America cannot afford to take.

(A humorous note here.)

Governmental Plans Guidance

The IRS has posted on its website: Retirement Plan FAQs regarding Governmental Plan Determination Letters. The FAQs are an attempt by the Service to answer some of the ongoing concerns practitioners have had in the governmental plans determination letter process. One of these areas of concerns has to do with plan documentation which is discussed by the Service in this paragraph:

The Service recognizes that governmental plans may have no single cohesive plan document available. The Service is willing to work with a plan sponsor whose plan document consists of documents from various sources and who is unable to submit a restated plan, provided that the sponsor can submit selected material in an organized manner so that Service reviewers can readily determine the applicable plan language.

See also Q & A 3:

What if the plan has not been timely amended and has never received a determination letter or received one a long time ago in the 1970’s?

Answer: If a plan has been timely amended, it can submit a request for a determination letter without proof of all amendments since its inception, see Q & A 2. above. However, if a plan has not made amendments timely, it should be submitted under the VCP program. . .

See also this previous post here regarding governmental plans.

From the SEC. . .

The SEC has issued this Statement Regarding Recent Market Events and Lehman Brothers (Updated). Excerpt:

. . . [T]he SEC is focused on ensuring that customers of the U.S. broker-dealer, which is not part of the bankruptcy filing, remain protected through, among other means, enforcing continued compliance with the SEC net capital and customer asset protection rules, and with SEC requirements that the U.S. broker-dealer conduct its affairs so as to minimize the effect of the holding company’s bankruptcy on customers, and that it ensure access to customer cash and securities.

Annual KPMG Survey

From the Tax Policy Blog:

The accounting firm KPMG has released its annual survey of corporate and indirect tax rates for 2008 and what it says about America's tax competitiveness is not good. The survey shows that the U.S. continues to have one of the highest overall corporate tax rates in the world. Of the 106 countries surveyed, only The United Arab Emirates (55 percent, Kuwait (55 percent), and Japan (40.69 percent) impose a higher corporate tax rate than the combined rate of 40 percent in the U.S.

According to the KPMG report:

...the most remarkable result of our 2008 survey is that we have found no country anywhere that has raised its rate since last year. The global average is, once again, down nearly a full point to 25.9 percent with the EU average down to 23.2 percent, the Latin American rate down half a point to 26.6 percent, and the Asia Pacific rate down 0.8 percent to 28.4 percent.

The survey indicates that 23 countries have lowered their corporate tax rates this year including Canada, China, Columbia, the Czech Republic, Denmark, Germany, Hong Kong, Israel, Italy, Malaysia, New Zealand, Singapore, South Africa, Spain, Switzerland, and the United Kingdom.

More on Getting People To Save. . .

There is an interesting article in the Wall Street Journal entitled "How To Sell The Savings Habit To Americans." The basic theme of the article is that "images of beautiful retirees sailing on expensive yachts in fancy destinations" does not inspire people to save. In other words, the article notes that "Americans are inclined to save more when shown negative images (impoverished families eating cat food in retirement, for example) than when shown positive and rational images (happy, beautiful people in retirement)."

Hidden in the article though is a brief remark about a new website called "StickK" which is a sort of "online commitment store" (still in beta form) designed to help people set goals and keep them.

Link to ABA Materials

Thanks to the Connecticut Employment Law Blog for providing this link here to the ABA's 2nd Annual Labor and Employment Law Conference materials online which include some great employee benefits materials. My favorite is entitled "The Future of Retiree Health Benefits."

Great ERISA Quote

From Judge Edward E. Carnes of the Eleventh Circuit in the case of Gilley v. Monsanto Co., Inc., 490 F.3d 848, 856 (11th Cir. 2007) mentioned in my previous post here:

Throughout his judicial career Holmes relished challenging cases. While on Massachusetts’ highest court he confessed to a friend that although none of the cases he had handled that year had been of universal interest, “there is always the pleasure of unraveling a difficulty.” A decade and a half later, while on the Supreme Court, he told the same friend that he had few cases of general interest that term, but “[t]here is always the fun of untying a knot and trying to do it in good compact form.” It is a pity that Holmes did not live to see ERISA cases.

Highlights of Recent Eleventh Circuit Case Citing MetLife v. Glenn

For those interested in the impact of MetLife v. Glenn, don't miss this unpublished Eleventh Circuit opinion issued September 10th in the case of Frankie White vs. the Coca-Cola Bottling Company. In that case, the court dealt with the issue of whether the Benefits Committee which was the plan administrator for the long-term disability plan was operating under a conflict of interest. The Committee had been given the important Firestone discretionary authority to interpret plan provisions and there was a provision in the plan which the court held created a conflict with other provisions of the plan, requiring interpretation or resolution of the conflict. The court held that the Benefits Committee was not operating under a conflict of interest in interpreting the plan provision and resolving the conflict since benefits were being paid from a trust that was funded through periodic contributions so that the company incurred "no immediate expense as a result of paying benefits." The court cited the case of Gilley v. Monsanto Co., Inc., 490 F.3d 848, 856 (11th Cir. 2007) as authority, in which the court had stated that a company is not under a conflict of interest in such cases even though the company "is responsible for replenishing the funds of the trust."

While the case is important for a number of reasons (which I could spend all morning discussing, but unfortunately do not have time for), please note this very important language which provides support for the importance of engaging counsel in assisting plan fiduciaries who are given the important task of interpreting plan language:

The committee reasonably interpreted the proviso clause to make it consistent with the summary plan description, . . past practices. . . and the other provisions of the plan. The summary plan description clearly explains the reduction of benefits if a participant receives benefits from other sources and provides an arithmetical example of the offset. The committee determined that it had been the established practice. . .to permit an offset below 60 percent of a participant’s average compensation. . There is no requirement that an administrator. . seek independent counsel in interpreting and administering an ERISA plan,” but seeking counsel establishes the “evenhandedness of [the] decision-making process” because it contributes to “informed and knowledgeable decisions . . . in interpreting the Plan.” Thiokol, 231 F.3d at 835. The committee retained and followed the advice of outside counsel regarding both the offset and recoupment provisions.

(By the way, unpublished opinions can now be cited as authority in federal courts. Read about the Supreme Court's adoption of amendments to the Federal Rules of Appellate Procedure here, here and here.)

Update: Roy Harmon discusses the case in detail here.

Summary Plan Descriptions Under Scrutiny

Most Summary Plan Descriptions ("SPDs") contain disclaimer language stating that in case of conflict between the SPD and the Plan documents, the Plan documents will always govern. In fact, sometimes SPDs are given less attention than we benefits lawyers recommend, usually due to cost or other factors and because people often believe that the disclaimer language will protect them. However, whatever the reason, it appears that the courts are not always willing to enforce provisions of a Plan document that are not disclosed in the SPD, despite the disclaimer language.

One such case occurred less than a year ago--Burgett v. MEBA Medical and Benefits Plan. The case involved a health plan which refused to process the medical expenses of a dependent of a participant unless the participant signed a subrogation agreement. The court looked at two "plan documents" to determine what was the proper result under the Plan--one was called the Plan Rules and Regulations (which the court referred to as the Plan document ) and the other was the SPD. Both contained subrogation language. However, the requirement that the participant sign a subrogation agreement before becoming entitled to reimbursement of medical expenses was contained only in the Plan Rules and Regulations and not in the SPD. The SPD also contained disclaimer language stating that the Plan Rules and Regulations controlled.

Despite the presence of subrogation language in both documents and despite the disclaimer language in the SPD, the court held:

The governing statute and regulations require the SPD to inform the participants and beneficiaries of the circumstances that might result in the denial of or the loss of benefits. The requirement to execute a subrogation agreement was not a condition listed in the SPD, although it was arguably included in the Plan Rules and Regulations. When the formal plan documents conflict with an SPD, the SPD controls. . . Because the SPD is the controlling plan document and contains no requirement that the participants or beneficiaries execute a subrogation agreement as a condition to receiving benefits, the administrator was legally incorrect when it imposed that requirement.

Another more recent case of Solien v. Raytheon Long Term Disability Plan is even more worrisome. In that case, the court refused to uphold a one-year limitations period for challenging benefit claims in court where the limitations period was stated in the SPD, but was not stated in a place in the SPD that the court felt would put the participant on notice about the limitations period. (In other words, not only do you have to make sure the appropriate language is in the SPD, but it is also important as to where the information is placed in the SPD--according to the Arizona district court in the Solien case.)

Blog on Subrogation

Adam Russo shares some interesting perspectives on the Supreme Court's MetLife v. Glenn decision as it relates to administration of health plan claims here in his blog Passion for Subro.

(Check out some of his great links in the blog's side-bar as well.)

Citizens of Heaven Required to Pay Taxes Too While Here on Earth

Not a surprising position for the IRS to take:

Man indicted for allegedly seeking heavenly tax refund

(From the Roth & Company, P.C. Tax Update Blog.)

(Supported by scripture as well.)

Opinion Addressing Taxation of Demutualization Proceeds

Here is a link to a Court of Federal Claims opinion, issued August 6, 2008, on the income taxation of demutualization proceeds: Fisher v. U.S. Not only will the opinion be very helpful to the many taxpayers who receive such proceeds, but the story behind the opinion which you can read about here is heart-warming. No indication yet whether the case will be appealed.

(From the TaxGuru)

UPDATE: Read more about the case here and here.

Study on Personal Savings Behavior

Most people do better with short-term goals than long-term goals. That is the conclusion reached by a recent study from Rice University on saving entitled "The Effects of Time Frames on Personal Savings Estimates, Savings Behavior and Financial Decision Making." Excerpt from a press release: "Americans need to save paycheck to paycheck":

For example, in one study, those saving for next month estimated they would save $287 but actually saved $440. On the other hand, participants who were asked to estimate how much they would save in a specific month in the future indicated a much higher value -- $946 -- but ended up saving far less -- only $123.

Another argument, I guess, for the automatic enrollment proponents since saving from paycheck to paycheck doesn't always lend itself very well to the qualified plan world.

Early Retirees Struggling

Informative article on how those who have taken early retirement are coping with the difficulties of dealing with the economy: "Some early retirees have second thoughts." Obtaining health care benefits appears to be the biggest concern. Praise goes to those companies who are able to provide health-care benefits for part-time workers, which according to the article is only about one-quarter of the companies that provide health care benefits.

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.

(Try searching "benefits blogs" with the term here.)

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: "