Benefitsblog

Denial of Petition for Rehearing in the Deere Case

You can read about it here at the Fiduciary Guidebook.

One Way to Lower Health Costs: Pay People to Be Healthy

There is a very interesting study here from Wharton suggesting that better wellness programs could be created by employers to encourage workforce health and lower health insurance costs. The article suggests that offering employees a discount in their health insurance premiums at the end of the year is less effective than smaller incremental incentives of cash or lottery tickets given throughout the year. However, the article notes the following negatives with such programs:

Pauly pointed out that there are other issues that incentive programs must overcome, such as regulatory and legal barriers, employer reluctance to invest in programs that might not pay off until years later when many workers will be at different companies, and the resistance from employees themselves, who may see such incentive-based programs as overly paternalistic. It will also be tricky for employers to establish incentive-based programs without creating resentment among workers who don't have any bad health habits to kick.

ABC/Washington Post Poll on Health Care Reform. . .

Indicates wide-spread concern. Excerpt:

• An overwhelming 70 percent oppose taxing benefits worth over $17,000 a year, a funding mechanism under discussion.
• Fifty-eight percent don't buy President Obama's pledge that reform can occur without forcing people to make undesired changes in their current coverage.
• The public splits about evenly, 49-47 percent, on another basic element, requiring all Americans to have health insurance. That varies widely, though as high as 70 percent support, as low as 44 percent depending on the terms of such a requirement.
• About eight in 10 are concerned that reform may reduce their quality, coverage and choice of care, and increase their costs, government bureaucracy and the federal deficit, with anywhere from 51 to 62 percent very worried about each of these.

More at Freedom Project here.

Tax-Exempt Governmental Plans Guidebook

Another Guidebook is in the works: The Tax-Exempt/Governmental Plans Guidebook. . .

The SEC and Treasury on Executive Compensation Practices

TheCorporateCounsel.net Blog has a good summary here of the SEC's and Treasury's proposed changes to the executive compensation arena.

Also, Gene Sperling, Counselor to the Secretary of the Treausry, made the following statement:

. . . [T]here is substantial evidence that "firms use retirement benefits to provide executives with substantial amounts of `stealth compensation' -- compensation not transparent to shareholders that is largely decoupled from performance."

Article on 401(k) Loans

Great article here on 401(k) plan loans. The article actually discusses the effect 401(k) plan loans have on individuals contemplating bankruptcy.

Canadian Employer Cutting Retiree Perq

As I read this account of Molson Canada's decision to no longer supply its retirees with a certain beverage, I could not help pondering whether such a practice in the U.S. might be deemed to be an "ERISA plan." While I won't go into all the nuances of an argument like that, I will leave you with a link to a previous post--Benefits in Kind--Could They Be Subject to ERISA--in which I discussed how one court found (and the Fifth Circuit agreed) that a promise of grocery vouchers to retirees constituted a benefit protected by ERISA.

Eighth Circuit Instructs District Courts on Attorneys' Fees

This recent Eight Circuit case--Pendleton v. QuickTrip Corporation--is an ERISA 510 case that did not make it past a Motion for Summary Judgement. However, the case is noteworthy for the court's discussion of attorneys' fees:

The district court's decision to deny attorney fees in this case was entered on the docket as ordered denied without authority. This statement could be interpreted as a determination that QuikTrip had not made a sufficient showing of factors in its favor to authorize an award of fees, but it is not free of ambiguity. Trial courts have many demands on their time, but nonetheless a district court should state the factors it is relying on in deciding an ERISA fee motion. See e.g. Toy v. Plumbers & Pipefitters Local Union No. 74 Pension Plan, 2009 WL 692398, *2 (3d Cir. 2009); Riley v. Admr of Supersaver 401K Capital Accumulation Plan for Employees of Participating AMR Corp. Subsidiaries, 209 F.3d 780, 782 (5th Cir. 2000).

Understanding the Proposed House Democrats' Health Care Bill

From Keith Hennessey.com:

Here is a three-page outline of Key Features of the Tri-Committee Health Reform Draft Proposal in the House of Representatives, dated yesterday (June 8, 2009). . .

ScotusBlog Following the Indiana Pension Funds' Supreme Court Challenge to the Chrysler Sale

Read ScotusBlog if you want to find out what is happening in the Supreme Court Chrysler sale challenge. Excerpt:

The case of In re Chrysler LLC, Debtor has the potential to produce the most significant Supreme Court ruling on the government's power to deal with economic crisis since the Court struck down major parts of President Franklin Roosevelt's New Deal, in Schechter Poultry Corp. v. U.S. in 1935 and U.S. v. Butler in 1936. But the Supreme Court will not actually rule on any of the basic legal challenges unless it first puts the Chrysler sale on hold, and then agrees to hear and decide the case itself. It has no legal obligation to do either. Two challenges have now been filed. UPDATE: A third challenge has been filed. . .

Read the Application filed in the case here.

UPDATE: Supreme Court Grants a Temporary Stay. Access the Order here.

UPDATE: The stay was lifted. You can access the two-page order here.

Glitch in the 409A Regulations Created by EESA

The Treasury could not have foreseen that it would have to carve out an exception under the 409A change in control rules for the federal government acquiring interests in financial institutions. Hence the issuance of Notice 2009-49 announcing future changes to the 409A regulations:

Questions have arisen whether the Federal government's acquisition of an equity interest in a financial institution or other entity in connection with a Treasury EESA Equity Acquisition Transaction constitutes a change in control event and accordingly a permissible § 409A payment event. . .

Treating a Treasury EESA Equity Acquisition Transaction as a change in control event and, therefore, a permissible payment event, would be inconsistent with the purposes of EESA and § 409A, and would be contrary to the public interest. For example, payment of nonqualified deferred compensation amounts as a result of a Treasury EESA Equity Acquisition Transaction could reduce the liquidity of the financial institution or other entity, which is directly contrary to the purpose of a Treasury EESA Equity Acquisition Transaction.

Public Plan Fiduciaries Battling the Federal Government

From a Press Release:

Indiana Treasurer Richard Mourdock announced that two state pension funds have filed with the US Bankruptcy Court presiding over Chryslers Chapter 11 case objecting to the proposed sale of substantially all of Chryslers assets and seeking the appointment of a trustee to protect their security interests and property rights. Indiana was the sole creditor to file objections with the court. . .

"As fiduciaries, we can't allow our retired police officers and teachers to be ripped off. . . "

You can view the documents filed in the case here.

See also this article from Bloomberg: "Chrysler Sale Appeal Will Bypass a Court to Save Time."

[While these plans are governmental plans not subject to ERISA, if Indiana has laws which would impose fiduciary responsibility on fiduciaries of government plans similar to ERISA (as many states do), then these fiduciaries would have no choice but to file their objections if their plans' rights are not being protected in accordance with the law.]

Interesting Preemption Case Cites Glenn

Don't miss this Sixth Circuit case--American Council of Life Insurers v. Ross--holding that ERISA does not preempt a Michigan state law which prohibits insurers from including the Firestone discretionary language in insurance policies. The case is particularly noteworthy because the court cites the Glenn case in support of its decision that the state law should not be preempted:

Finally, we observe that Glenn provides further support for holding that Michigan's law is not preempted by ERISA. There, the Court reiterated that a conflict of interest exists when the same insurer is responsible for examining and paying a benefits claim. Glenn, 128 S. Ct. at 2348. In view of that conflict, Glenn determined that courts, in reviewing a benefits decision by an insurer who has discretion over assessing and paying benefits, may consider that conflict as a factor in deciding whether the plan administrators decision amounts to an abuse of discretion. Id. at 2351. If, as Glenn reaffirms, there is a conflict of interest when the same plan administrator decides the merits of a benefits plan and pays that claim, and if, as Glenn also holds, it is consistent with ERISA to account for that conflict of interest in reviewing a plan administrator's decision, it is difficult to understand why a State should not be allowed to eliminate the potential for such a conflict of interest by prohibiting discretionary clauses in the first place.

Read about the Glenn case in previous posts which you can access here.

New Executive Compensation Model Being Advocated

From Knowledge Wharton--"Incentives for the Long Run: An Executive Compensation Plan That Looks Beyond the Next Quarter." Excerpt:

In a working paper titled, "Dynamic Incentive Accounts," Edmans, along with Xavier Gabaix and Tomasz Sadzik of New York University, and Yuliy Sannikov of Princeton University, outline a system that escrows compensation for a set period of years stretching into the executive's retirement. The longer time frame is designed to prevent the executive from taking short-term actions that may enrich the manager at the expense of the firm's future profits. The plan also provides a rebalancing mechanism to maintain a constant percentage of compensation in cash and stock, so that the executive always has sufficient equity in the firm to provide performance incentives -- even if the stock price falls.

The Mind-Numbing Aspects of ERISA Drove Justice Souter to Retire?

I am sorry to have missed this one, but am grateful to xtremERISA for pointing it out:

The following is from an article in The Wall Street Journal on May 1, 2009, discussing possible bases for Justice Souter's impending retirement:

. . . Justice Souter has complained about life in Washington and even about aspects of the court's work, such as the numbingly technical cases involving applications of pension or benefits law.

IRS Provides Copy of Internal Controls Questionnaire Online

At the Joint Meeting of the Pension Liaison Councils held earlier this year, the IRS in several presentations to practitioners discussed how, in an examination of a qualified plan, the examiner's primary focus initially will be on the "internal controls" that a plan sponsor has in place to ensure that the plan is being run in accordance with its terms and the law. If the IRS finds that the "internal controls" are not in place, officials indicated that this will lead to further examination and inquiries into the plan's practices and may lead to sanctions if issues are uncovered.

So, just what questions will the IRS be asking in order to found out what "internal controls" the plan sponsor has in place? You can now view the questionnaires online at this link here. (You can also find the links in this recent IRS newsletter here.)

The posting of these questionnaires is helpful to plan sponsors because they now have a "heads up" as to what to anticipate in an IRS examination and can use these questionnaires to be better prepared. Please note that, while the IRS has stated informally that it no longer asks for a copy of formal or informal self-audits conducted by the plan sponsor, some of the questions that the IRS asks in its questionnaires does appear to be aimed at extracting information that would normally be obtained from such audits, i.e. "Do you know of any operation or form failures with the plan" and "What are the failures and how many years did it occur?" In the past, practitioners were critical of any attempts by IRS to obtain copies of formal self-audits for several reasons, one of which was the attorney/client privilege, and another of which was the "chilling effect" this would have on self-audits, as plan sponsors would be hesitant to perform their own audits if they thought IRS was going to ask for the results in an examination. My guess is that practitioners will likely be critical of these particular questions in the Internal Controls Questionnaire for some of the same reasons.

Sixth Circuit: Anti-Cutback Rule Does Not Apply to Ad Hoc Post-Retirement Benefit Increases

The "anti-cutback rule" under ERISA and the Internal Revenue Code is well-known to benefits lawyers and involves the idea that, once benefits are promised under a qualified plan and participants vest in those benefits, those benefits cannot be taken away from the participant. However, in determining what "benefits" are protected by this rule, one must understand the definition of "accrued benefit" which was the focus of this recent Sixth Circuit opinion--Thornton v. Graphic Communications Conference of the International Brotherhood of Teamsters Supplemental Retirement and Disability Fund, et al. case.

The case involved a multi-employer plan that provided retirement benefits to employees in the graphic communications industry. The plan's Board of Trustees served as the plan's sponsor and administrator. Certain individuals retired and began receiving benefits under the plan. During their retirement, on several occasions and on what appears to be an ad hoc basis, the Board amended the plan to provide increases in benefits for all active and retired participants. However, five years later, the Board then voted to rescind those benefit increases due to a funding shortfall which threatened to jeopardize the plan's long term financial viability.

The retirees filed a class action, claiming an improper cut-back of accrued benefits in violation of the anti-cutback rule under ERISA and a breach of fiduciary duty by the Board in passing the amendment. The district court ruled that the action by the Board of rescinding the increase did not violate the ERISA anti-cutback rule because the plan amendment granting the increase was adopted after the individuals retired, and that the Board did not breach their fiduciary duty.

In affirming the decision of the district court, the Sixth Circuit provides a classic 15-page discussion on the definition of "accrued benefit" under ERISA and the Code that is a 'must-read' for benefits lawyers (IMHO).

Some key points of the decision:

(1) The court agreed with the Fourth Circuit that "Congress did not consider a post-retirement increase in pension benefits to be an 'accrued benefit'":

We believe the Fourth Circuit's thorough analysis of the text and context of IRC § 411(a)(7)(A)(i) demonstrates that Congress did not consider a post-retirement increase in pension benefits to be an accrued benefit. Section 411's repeated emphasis on the accrual of benefits during service makes plain that the terms of pension plan document(s) in effect while a participant worked for a covered employer dictate his or her accrued benefits. We do not find, and Thornton has not offered, any indication in the language of § 411(a)(7)(A)(i), or statutory construction thereof, that even remotely suggests that a given participant may amass accrued benefits after he or she permanently separates from covered employment. Consequently, we hold that a postretirement increase in benefits does not create an accrued benefit for a given participant under IRC § 411(a)(7)(A)(i) unless it is in accordance with the plan in effect while the employee works in the service of the employer. . .

(2) The most interesting aspect of the opinion, however, is the discussion by the court of the Code's parallel anti-cutback provisions contained in Section 411(d)(6) of the Code and the Treasury's resulting regulatory guidance regarding the definition of "accrued benefit" for purposes of the anti-cutback rule. The court notes that the Treasury's 2005 Regulation Section 1.411(d)-3 interprets the definition of "accrued benefit" to include post-retirement increases, which Regulation states in part:

The protection of section 411(d)(6) [anti-cutback rule] applies to a participant's entire accrued benefit under the plan as of the applicable amendment date, without regard to whether the entire accrued benefit was accrued before a participant's severance from employment or whether any portion was the result of an increase in the accrued benefit of the participant pursuant to a plan amendment adopted after the participant's severance from employment.

However, the court refused to consider the Regulation as determinative of the outcome because of the Regulation's effective date, which stated that the Regulation was only effective as to amendments "adopted on or after August 12, 2005", and the Board's adoption of the amendment rescinding the benefit increase took place before the amendment became effective. The court also rejected the plaintiffs' argument that the Regulation reflected Treasury's long-standing position on the issue. After a very long discussion of the Treasury's treatment of this issue, the outcome appears to have boiled down to an IRS letter contained in the record on appeal, dated December 5, 2008 (unrelated to the plan at issue):

The record on appeal includes a recent IRS letter, dated December 5, 2008, discussing the agency's audit of the Graphic Artists Industry Joint Pension Trust Plan (JPT), a multi-employer pension benefits plan entirely separate from the Defendant in this case. Letter from Monika A. Templeman, Director Employee Plans (EP) Examinations, Internal Revenue Service, to Graphic Arts Industry Joint Pension Plan Trust (Dec. 8, 2008). The letter indicates the IRS had initially considered a JPT amendment to eliminate a COLA benefit, previously granted to retirees, to be a violation of the anti-cutback rule under the 2005 Regulation, consistent with its litigation position in Sheet Metal Workers. Id. But the letter goes on to state that the IRS abandoned this position after realizing JPTs amendment occurred prior to August 12, 2005, the effective date of the 2005 Regulation. As a result, the IRS advised JPT that rescinding the COLA previously granted to plan participants who were already retired at the time the COLA was introduced did not violate the anti-cutback rule:

However, the Service recognizes, in light of the 2005 final section 411(d)(6) regulations, the plan should not be considered as failing to satisfy [the anti-cutback rule of IRC § 411(d)(6)] as a result of the amendments eliminating the retirees benefit increases, because the amendments were adopted before the effective date of the final regulations.

Id. (emphasis added). We can logically deduce from this declaration that the IRS did not consider the post-retirement COLA an accrued benefit under the 2002 Regulation, which was unquestionably applicable prior to August 12, 2005. This position is diametrically opposed to Treasury's proffered interpretation in Sheet Metal Workers.

Because Treasury has abandoned the litigation position it took in that case, the Court is relieved of any obligation to defer to it under Auer. Cf. Rust v. Sullivan, 500 U.S. 173, 186-87 (1991) (holding that a longstanding agency interpretation was no longer entitled to Chevron deference given that the agency had changed its position on the issue).

(3) There was also a very interesting discussion of the "Pattern Regulation" which says:

if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, such benefits will be treated as provided under the terms of the plan, without regard to the limited periods of time, to the extent necessary to carry out the purposes of [the anti-cutback rule].

The plaintiffs tried to argue that the increases were protected under this Pattern Regulation, but the court rejected the argument because the increases occurred on a post-retirement basis.

(4) Finally, the court also takes note of the defendants' argument that when they had submitted the plan document for IRS review, they had clearly indicated in the application that they had amended the plan to rescind the benefits increase and the IRS issued a favorable determination letter. However, the court said the Determination letter did not "carry any weight" for two reasons:

First, it is not clear that Treasury in fact endorsed the December 2002 Amendment in light of the anti-cutback rule. The letter merely provides a summary conclusion regarding the Plans tax-exempt status and does not make any specific findings regarding the anti-cutback rule. See Hickey, 980 F.2d at 469 (citing the informal nature of [IRS determination] letters, the express limitations included in the IRS letter, and the absence of any reasoning in refusing to accord a favorable IRS tax-exempt status determination letter any weight in interpreting the anti-cutback rule). Second, even if we assume Treasury found that the December 2002 Amendment complied with the anti-cutback rule, the absence of a rationale explaining how the agency arrived at this conclusion militates against granting deference under Mead. See 533 U.S. at 228. Thus, the IRS Determination letter lacks the power to persuade this Court in our construction of the statutory definition of accrued benefit and the corresponding scope of the anti-cutback rule.

Conclusion: Employers faced with difficult decisions in this economy may find themselves evaluating their options and will most certainly look to this Sixth Circuit decision as important in their decision-making. Certainly, for benefits increases granted before the effective date of Treasury's 2005 regulations, the result is more clear than for benefits increase granted after the effective date.

Employee Benefits Research Tips and Techniques

You can access a copy of the outline I prepared for a presentation given to the Louisville Employee Benefits Council on March 10, 2009 here.

Announcing a New Blog. . .

For some time now, I have had a great interest in starting a website devoted to following legal developments related to ERISA fiduciary law as the whole area seems to be exploding with developments and it is difficult to cover them all at this site. The new site can be found at www.fiduciaryguidebook.com and is called "The Fiduciary Guidebook." It is, of course, a work in progress. . .

White House Memo on Preemption

The White House has issued a general Memo here to "Heads of Executive Departments and Agencies" relating to the issue of federal preemption of state law. ERISA lawyers will want to read it and reflect on how the policy might or might not impact an already complicated and tangled ERISA preemption regime. Excerpt from the Memo:

1. Heads of departments and agencies should not include in regulatory preambles statements that the department or agency intends to preempt State law through the regulation except where preemption provisions are also included in the codified regulation.

2. Heads of departments and agencies should not include preemption provisions in codified regulations except where such provisions would be justified under legal principles governing preemption, including the principles outlined in Executive Order 13132.

3. Heads of departments and agencies should review regulations issued within the past 10 years that contain statements in regulatory preambles or codified provisions intended by the department or agency to preempt State law, in order to decide whether such statements or provisions are justified under applicable legal principles governing preemption. Where the head of a department or agency determines that a regulatory statement of preemption or codified regulatory provision cannot be so justified, the head of that department or agency should initiate appropriate action, which may include amendment of the relevant regulation.

PBGC Deficit at $33.5 Billion

At a hearing today before the Senate Special Committee on Aging, the PBGC Acting Director Vince Snowbarger will speak about how the PBGC will post a $33.5 billion deficit for the first half of fiscal year 2009. The Hearing is entitled "No Guarantees: As Pension Plans Crumble, Can PBGC Deliver?"

More from this press release here about his testimony:

The increase in the PBGCs deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses, Snowbarger states in his written testimony. The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.

Supreme Court Issues Decision in AT&T Corp. v. Hulteen case

The Supreme Court has issued its opinion in the case of AT & T Corp. v. Hulteen. The case focuses on calculation of pension accruals under the Pregnancy Discrimination Act.

The district court decision, which had been affirmed by the Ninth Circuit and held for the employee, is reversed in a 7-2 opinion by Justice Souter. Justice Stevens filed a concurring opinion. Justice Ginsburg filed a dissenting opinion, joined by Justice Breyer.

IRS Proposes Rules Allowing Employers to Suspend or Reduce Safe Harbor Nonelective Contributions

The IRS has come up with some new rules to "ease the pain" of these dire economic conditions and has issued some proposed regulations allowing employers to reduce or suspend their 401(k) or 403(b) safe harbor nonelective contributions mid-year in the case of a "substantial business hardship described in section 412(c) [of the Internal Revenue Code]." The IRS notes in the preamble to the proposed regulations (in today's Federal Register) that the new rules will "provide an employer an alternative to the option of terminating the employer's safe harbor plan in such a situation" (i.e. better to ease the rules a bit, than have employers ditch the plans altogether in an attempt to get rid of the mandatory contribution). There is a 30-day advance notice requirement and a requirement that employees be allowed to change their salary deferral elections in order to take advantage of the new rules.

Please note the following regarding the proposed effective date of the new rules:

These regulations are proposed to be effective for amendments adopted after May 18, 2009. Taxpayers may rely on these proposed regulations for guidance pending the issuance of final regulations. If, and to the extent, the final regulations are more restrictive than the guidance in these proposed regulations, those provisions of the final regulations will be applied without retroactive effect.

IRS Begins Internship Program in Employee Plans Division

The National Law Journal reports that the Employee Plans Division of the Internal Revenue Service has started an internship program for law students. This is a great opportunity for law students to break into the employee benefits arena and receive law school credit at the same time. However, the bad news is that the positions appear to be unpaid--not an uncommon scenario in this economy.

Reporting of COBRA Subsidy

RIA indicates:

Joseph Tiberio, IRS Program Manager, Employment Tax Policy, has confirmed that the IRS will not require COBRA subsidy payments to be reported on Form W-2 or Form 1099. Tiberio made his comments on the May 12th IRS Tax Talk Today webcast entitled Specialty Taxes: Estate and Gift, and Employment Taxes.

When asked how a tax practitioner would know that some or all of the subsidy should be reported on a personal income tax return if the "Assistance Eligible Individual" does not receive a Form W-2 or Form 1099, Tiberio advised practitioners "to ask their clients about the subsidy before the practitioner begins preparation of the return."

Seventh Circuit Discusses IMEs in a Footnote

The Seventh Circuit did not feel that the new Glenn standard made a difference in the outcome of this long-term disability case--Jenkins v. Price Waterhouse Long Term Disability Plan. However, the court did, in a footnote, issue a warning about "independent medical examinations":

. . . [W]e don't want the phrase independent medical examination to pass without a comment. IMEs are designed to turn a spotlight on claims that are exaggerated or downright fraudulent. They are advertised as, and often passed off as, completely neutral examinations by disinterested medical professionals. But that is not always the case, especially when the professionals bill is paid by an insurance company (or a self-insured employer) with an interest in receiving a report that minimizes, or discounts, a disability claim. How much an IME professional is paid, and how often he or she is used, are certainly important considerations that bear on what weight should be attached to their reports.

Ninth Circuit Addresses Retiree Claims Under Bankrupt Employer's Self-Funded Medical Plan

With bankruptcy filings soaring during this economic downturn, it is always of great interest to benefits practitioners to learn how bankruptcy courts are dealing with the unmet employee benefit obligations that get thrown in the mix. The Ninth Circuit in the case of Consolidated Freightways Corp. v. Aetna, Inc. dealt a blow to retirees (and the insurer who had advanced amounts in payment of retiree claims) by ruling that the retirees' claims for benefits under a self-funded retiree medical portion of the employer's health plan were not entitled to "priority" in determining the number of employees under Section 507(a)(5) of the Bankruptcy Code, even though active employees' claims were so entitled. The court looked at the history of the Bankruptcy Code and determined the outcome based upon what the court determined to be the intent of Congress:

The next question is: For purposes of this priority, what is meant by employees and arising from services rendered? While at first blush there may be some ambiguity in that regard, we think that a consideration of § 507(a)(5) in the context of the statute renders the answer quite clear. . .

Considering, then, the provisions as a whole, and giving similar language similar meaning,we find the intent of Congress and the purpose of the provisions to be far from opaque; rather they are hyaline. In general, the scope of services rendered is those services performed by persons employed by the debtor during the 180-day period preceding bankruptcy.

Alternatives to Lay-Offs

One CEO reveals: "How to Keep Your Staff and Your Bottom Line Intact." (And your benefits.)

The Workforce Prof Blog raises concerns about FLSA here.

Agencies Post More Information on COBRA Subsidy

The IRS has posted its fourth installment of Q & A's concerning the ARRA COBRA Subsidy.

See also these links from the Department of Health and Human Services ("HHS"):

HHS's webpage on the COBRA Subsidy here.

Helpful Information About State Continuation Coverage (Mini-COBRA Programs) and the American Recovery and Reinvestment Act of 2009 (ARRA)

COBRA Helpful Tips

The DOL has posted a draft of the new Application which it will use to review private employer group health plan denials of the COBRA subsidy. The applications have apparently been submitted to the federal Office of Management and Budget for approval by May 15, 2009. In this DOL Supporting Statement here, the DOL provides this estimate of how many applications the agency expects to receive:

The Department estimates that approximately 40.8 million individuals will initially file for Unemployment Insurance between September 1, 2008 and December 31, 2009 from the private-sector. Of these, 11.4 million will be eligible for a COBRA subsidy due to the following factors: their enrollment in employer sponsored insurance (ESI); their employment by a firm of 20 or more employees; and their lack of other options for health insurance coverage. Of those, 50 percent or 5.7 million are expected to actually apply for the subsidy and enroll in COBRA. National Unemployment Insurance data reported a 5.8 percent appeal rate of initial claims in 2008. The Department assumed that roughly half that share, or 3 percent, of those that applied for the subsidy would contact the Department to appeal a denial, or 172,000. Of these, it was assumed that 45 percent, or 77,000, would involve an initial call to an EBSA benefits advisor who would be able to resolve the issue without going through a formal appeal. The remaining 55 percent, or 95,000, would go through a formal appeal.

The Supporting Statement also indicates:

The information provided on the Application will be used by EBSA to make a determination regarding the applicant’s eligibility for premium assistance with[in] the 15-business day time frame required under the legislation. EBSA’s determination upon review of the denial will be de novo and serve as the final determination of the Secretary. A reviewing court is required to grant deference to the Secretary’s determination. . .

CMS has provided a similar draft Application here to be used "under COBRA laws applicable to Federal, State and local government employees and comparable State laws."

Delay of Enforcement Date for Red Flags Rule

The FTC has announced that it will delay enforcement of the Red Flags Rule (discussed in previous post here) until August 1, 2009. Access the FTC's press release here.

Senate Finance Committee Hearing on Health Care Reform

Today the Senate Finance Committee held a Roundtable Discussion on Financing Comprehensive Health Care Reform. The Wall Street Journal Health Blog reports here on how single-payer advocates apparently staged a protest at the meeting.

Q & A With Rep. Miller on H.R. 1984, The 401(k) Fair Disclosure for Retirement Security Act of 2009.

In this Q & A discussing The 401(k) Fair Disclosure for Retirement Secutiry Act of 2009, George Miller, Chairman of the House Education and Labor Committee, spoke about the status of H.R. 1984:

We've had hearings and we hope to schedule a markup on the bill in the near future. As far as when it might come to the House floor, we'll have to discuss that with the leadership.

WSJ: 401(k)s Hit by Withdrawal Freezes

The Wall Street Journal today highlights one of the issues facing plans sponsors of 401(k) plans in this current economic downturn: "401(k)s Hit by Withdrawal Freezes." Excerpt:

Investors in the Principal U.S. Property Separate Account said they understood the risk of losses, but didn't think their money could be locked up for months or years. Most participants in the 15,000 plans holding the fund haven't been able to make any withdrawals or transfers since late September.

"To sell property at inappropriately low prices in order to generate cash for a few would hurt the majority of investors and violate our fiduciary obligations," said Terri Hale, spokeswoman for Principal Financial Group Inc., the parent of the fund's manager. The fund, which had $4.3 billion in net assets at the end of April, still is making distributions for death, disability, hardship and retirement at normal retirement age.

As of April 28, redemption requests that had yet to be honored totaled nearly $1.1 billion, or roughly 26% of the fund's net assets. Principal doesn't anticipate that it will make any distributions to investors who have requested redemptions until late 2009 or beyond, Ms. Hale said. Meanwhile, the fund continues to fall, declining 25% in the 12 months ending April 30.

See also yesterday's WSJ article entitled: "When Safe Places No Longer Feel So Safe."

Glenn Is Turning Point in Decade-Long Battle Over Disability Benefits

The Eighth Circuit applied the Supreme Court's MetLife v. Glenn conflicts analysis and turned the tables for a disabled participant's decade-long quest for disability benefits in the case of Chronister v. Unum Life Insurance Company of America (posted at Plan Sponsor), holding that the insurer had abused its discretion in terminating the participant's disability benefits. While the Eighth Circuit noted the insurer's "history of biased claims administration" as one factor that the court must consider in determining whether there was an abuse of discretion, the court considered the insurer's "failure to follow its own claims-handling procedures" with respect to how it dealt with the Social Security's determination that the participant was disabled to be "most egregious."

Specifically, the court noted the insurer's failure to consider the SSA's disability determination ("It appears from the denial letter that [the insurer] did not consider the SSA's disability determination at all") and its failure to articulate in its denial letter to the participant as to why the insurer was disregarding the SSA disability determination. The court noted that the insurer's own claims procedures required the insurer to accord "significant weight" to the SSA's disability determination and that any denial letter should articulate the reasoning and analysis for disregarding the determination as the claims manual required.

In the end, the court cut to the chase and bypassed a remand for further proceedings by entering judgment in the participant's favor "given that her benefits claims have been pending for more than a decade."

UPDATE: By the way, the CDC said last week that 1 in 5 Americans are living with at least one disability.

Iowa Moving Towards Mandated Health Insurance Coverage for Children

Roth CPA.com has some info regarding recently-passed Iowa legislation that indicates taxpayers will be required in 2010 to report on their state tax returns whether or not dependent children have health insurance coverage. If they don't, the taxpayer is required to submit an application for such coverage within 90 days.

Employers Preparing for the A(H1N1) Virus: Benefits Preparedness

Some employers appear to be nervous and bracing for the worst with the World Health Organization having raised the influenza pandemic alert from a phase 4 to a 5 due to an outbreak of swine flu (which we are now being asked to call the "A(H1N1) Virus"). The CDC is providing interim guidance daily regarding the status of the outbreak. While some are downplaying the outbreak, others appear to be taking the warnings more seriously. With many large employers having already developed extensive Pandemic Plans, labor and employment law firms are churning out notices to their clients, urging them to activate their plans and take necessary precautions in the workplace.

In the benefits arena, employers whose employees and family members are impacted by the malicious bug would need to gear up for the fact that benefit plans such as employer-provided health plans and flexible spending accounts will likely get a work-out. Short-term disability programs which are often self-funded by the employer would get significant use as well in addition to paid-time off policies and employee assistance plans. Since most or all of these programs may be considered to be ERISA-covered plans and have either named or functional ERISA fiduciaries who are responsible for overseeing these plans, such individuals should, with the assistance of legal counsel, seriously consider taking steps now to determine whether their providers are prepared for a pandemic.

The CDC currently has a Workplace Planning webpage which may provide large and small employers with needed assistance. Included in their materials is a "Health Insurer Pandemic Influenza Planning Checklist." See also this section entitled "Workplace Benefits Questions."

In light of all of this, here are some steps for employers to consider taking in regards to benefits pandemic preparedness:

(1) Identify fiduciaries of benefit plans that might receive heavy usage in the case of a pandemic.

(2) Identify steps their fiduciaries need to take to communicate with insurers and providers about their preparedness to meet increased demand for their services. Document such steps when they are taken. Consider sending a questionnaire to providers, using the CDC's checklist as a starting place.

(3) Even though EBSA has not as yet released anything in writing about steps fiduciaries need to take in preparing for a pandemic, guidance issued by EBSA many years ago to assist plan administrators in preparing for Y2K might offer some analogous clues as to what the agency might expect of plan fiduciaries if faced with a pandemic.

(4) Fiduciaries should work through, with their advisors, how a pandemic might affect their benefit plans and consider preparing now a benefits communications document regarding pandemic issues.

(5) Make sure that Summary Plan Descriptions and benefits booklets are up-to-date so that employees and their dependents can access accurate information that they might need in case of a pandemic.

Agencies Request Comments on the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008

The Departments of Labor, Health and Human Services and the Treasury are inviting public comment "in advance of future rulemaking" regarding the MHPAEA enacted on October 3, 2009. Comments must be submitted on or before May 28, 2009. There are a number of methods for making comments as indicated in the Notice here.

How Does the Red Flags Rule Impact Employee Benefit Plans?

Benefits lawyers are trying to determine how new identity theft rules labeled the "Red Flags Rule" will impact employee benefit plans. To get familiar with the rules generally, you can go to the Federal Trade Commission's Red Flags website here. There are published articles which you can access here entitled "What Health Care Providers Need to Know About Complying with New Requirements for Fighting Identity Theft," as well as similar ones for telecom companies and utility companies, but nothing yet regarding employee benefit plans.

A number of law firms have posted analysis of how the rules impact employee benefit plans, including this one by Pillsbury here. However, White & Case has had some ongoing discussions with the FTC and has posted its findings here and here.

Regardless of what the FTC has to say about this, many practitioners would argue that plan fiduciaries generally have duties to protect participant information under ERISA's fiduciary rules. Thus, the FTC's rules might serve as a starting place for fiduciaries to assist in building some processes and procedures into their current systems to protect plan participants and beneficiaries against identity theft.

Debate Over the Fiduciary Duty to Collect Delinquent Employer Contributions

With the economy in a tail-spin, it is likely that employers who are in financial difficulties may find themselves struggling to meet their contribution promises under their ERISA plans. A recent federal district court case in Massachusetts puts the spotlight on this whole issue and should garner some concern for those who serve in the fiduciary function for a troubled plan.

In the case of Hilda Solis v. Plan Benefit Services, Inc.("PBS") (posted by McKay Hochman), the district court dealt with the following factual scenario:

The DOL had sued a construction company and Master Plan sponsor alleging violations of fiduciary duty. The DOL had investigated the Master Plan due to the failure of the construction company to make certain promised contributions to the Master Plan for work performed by its employees. On a motion for summary judgment, the DOL asked the court to rule on two claims: (1) That the Master Plan sponsor had violated its fiduciary duties under ERISA because it had "relieved the Trustee of responsibilities for collection of employee contributions" and (2) that a plan provision written into the Master Plan document relieving the Trustee of responsibility for collection of employee contributions was "void as against public policy pursuant to [ERISA] Section 410."

The DOL had relied on Field Assistance Bulletin No. 2008-01 (which the defendant in the case argued the DOL had issued targeting the facts of the case at hand). In the FAB, the DOL answered the following question: "What are the responsibilities of named fiduciaries and trustees of ERISA-covered plans for the collection of delinquent employer and employee contributions?" The answer given by the DOL in a nutshell was that, when contributions are "due and owing to the plan under the documents and instruments governing the plan but have not been transmitted to the plan in a timely manner," the plan has a claim against the employer for the contribution and the claim becomes an "asset of the plan" which the appropriate fiduciary is bound under ERISA to collect. The FAB also provides that, if the documents are "fuzzy" about who has this responsibility to collect delinquent contributions, then the responsibility under the DOL's view ultimately gets pinned on the fiduciary who has "the authority to hire and monitor trustees."

The federal district court agreed with the DOL in the PBS case that "plan assets include the right to collect unpaid employer contributions" relying on a Tenth Circuit case--In re Luna, 406 F.3d 1192 (10th Cir. 2005) and a Second Circuit case--United States v. LaBarbara, 129 F.3d 81 (2d Cir. 1997). While the Master Plan sponsor had argued that these cases were not pertinent since they were Taft-Hartley plans subject to collective bargaining agreements, the court disagreed and, in light of its ruling, that "due and owing" unpaid employer contributions are "plan assets", the court then held that the Master Plan's provisions eliminating Trustee responsibility for the collection of the employer contributions did not comply with ERISA and therefore were "void as against public policy."

However, the court declined to go so far as saying that the Master Plan sponsor had violated its fiduciary duty in relieving the Trustees of responsibility for collection of employer contributions through the adoption of the violative language.

The court appears to have departed from the DOL's views established under the FAB that fiduciaries who have authority to hire and monitor trustees under an ERISA plan have the ultimate responsibility for overseeing the collection of unpaid employer contributions. Even though in the PBS case, PBS had the power "to appoint and to remove the Trustee," Judge Woodlock who wrote the opinion concluded:

I have found no case that addresses whether under these circumstances, based on its power to remove the Trustee, PBS is acting in its fiduciary capacity and is therefore subject to fiduciary liability. Nor am I persuaded that the power to remove the Trustee is sufficiently tied to a decision regarding Trustee responsibilities such that PBS is acting as a fiduciary when it designs the plan structure in this way. I therefore conclude that PBS's fiduciary liability, if it exists, cannot be based on its power of Trustee appointment and removal.

Conclusion: It is likely that there are quite a number of documents out there that will be found to have the same exculpatory language noted in the PBS case. Trustees and fiduciaries of ERISA plans should review their plans and consult with their advisors as to whether such provisions should be removed and, if faced with the dilemma of delinquent employer contributions, determine what action is appropriate in light of the DOL's views expressed in its FAB as well as recent governing case law.

Insta-Poll on Health Care Reform

Do you want law remaking the U.S health care system passed with minimal public deliberation by Congress? Answer the poll here.

401(k) Fair Disclosure for Retirement Security Act of 2009

The Health, Employment, Labor, and Pensions Subcommittee of the House Education and Labor Committee held a hearing yesterday to discussed proposed legislation entitled the 401(k) Fair Disclosure for Retirement Security Act of 2009.

Text of the proposed legislation is here.

View the testimony given here.

Website for Savings Recovery Act of 2009

House Republican Leader John Boehner and others have put together a website supporting the Savings Recovery Act of 2009 which was introduced yesterday as H.R. 2021. According to this press release here, this is what the bill will accomplish:

Make it easier for Americans to save more for their retirement by increasing the contribution and catch-up limits for individuals and families.

Restore college savings by extending the existing SAVERs Credit to contributions made to 529 college savings accounts.

Increase retirement income by doubling the Social Security earnings limit from $14,160 to $28,320 and allowing more Americans to increase their income without being hit by the Social Security earnings penalty.

Provide tax relief for investors and seniors by immediately suspending the capital gains tax on newly acquired assets for the next two years, raise and index to inflation the amount of capital losses allowed against ordinary income to $10,000, and suspend taxes on dividend income through 2011.

Stabilize worker pensions and helping employers invest in the future by temporarily providing an increased glide path for recognizing losses and two additional years to resolve pension funding shortfalls.

Preserve employee-controlled 401(k)s by blocking efforts to wipe out 401(k)s entirely and replace them with government-run accounts.

. . . [A]ccording to a March 2009 National Public Radio (NPR) survey conducted by Public Opinion Strategies/Greenberg Quinlan Rosner, Americans concern about decline in the stock market and investment losses trumps even concerns about losing their jobs. But instead of taking action to help Americans rebuild their savings as quickly as possible, Washington is pursuing policies that are causing Americans savings to evaporate even more quickly. Some are even proposing to wipe out 401(k)s entirely, replacing them with government-run accounts that put bureaucrats in charge of savings decisions instead of families.

Impact of Recession on Benefit Plans: Most Employers Staying the Course

Towers Perrin has published an interesting report on the impact of the current recession on benefit plans--Benefits in Crisis - Weathering Economic Climate Change:

Some companies, of course, have already taken steps to reduce benefits, including suspending contributions to 401(k) plans. But in contrast to media attention on the most severe cutbacks, most companies in the Towers Perrin survey are staying the course in the benefits arena, with very few taking precipitous action right now in terms of dramatic reductions or outright elimination of current plans. In part, this is because many have actively managed their programs over the past decade, particularly in terms of limiting new participation in traditional pension plans and increasing employee cost sharing for both active and retiree health benefits.

(1) Nearly 40% of respondents are making or increasing investments in financial education for employees. A similar percentage have changed or plan to change the investment options in DC plans.

(2) Just over half (51%) of respondents have taken or plan to take steps to reduce or eliminate subsidized coverage for future retirees, compared with only about a quarter taking or considering such action for current retirees. 59% do not intend to cut back on or eliminate subsidized coverage for current retirees at all.

(3) While a third of respondents already have health savings accounts built into their plans, a roughly similar number are planning to introduce such features over the next two years or are considering doing so.

Eighth Circuit Reverses District Court on Vesting Issue

The recent Eighth Circuit case of Halbach v. Great-West Life & Annuity Insurance Company involves another controversy over the issue of vesting in regards to medical benefits. The Eighth Circuit overturned the district court on two issues:

(1) Whether there was a valid plan amendment eliminating medical benefits for long-term disability recipients; and

(2) Whether the disability recipients were vested in their medical benefits prior to the plan amendment.

The lower court said there was no valid amendment and that the disability recipients were indeed vested. However, the Eighth Circuit reversed the district court and ruled there was a valid amendment, but held that whether or not the disability recipients were vested presented a genuine issue of material fact that needed to be resolved at trial.

While there appears to have been a plan document for the plan, the document which the plan sponsor claimed was the plan amendment terminating benefits and which gave rise to the controversy consisted of a letter to the disability recipients notifying them of the cessation of their benefits. The letter referenced an attached SPD-type document which summarized the changes that were being made. Because the plan document indicated that the plan could be amended by a "written instrument signed by an officer of the Company," the Eighth Circuit felt that the letter to the disability recipients qualified as a plan amendment.

While the conclusion reached by the Eighth Circuit might have gotten the plan sponsor to the result they wanted in the case, sometimes a loose interpretation of what constitutes a plan amendment can go the other way. Remember the Fifth Circuit Halliburton case holding that a Merger Agreement acted as a plan amendment?

Last Minute Filing Tips

Great advice from Joe Kristan: E-File, Use Certified Mail or Roll the Dice.

Third Circuit: No More "Sliding Scale" Standard of Review

The Third Circuit has officially opined in the case of Schwing v. Lilly Health Plan (3rd Cir 04/14/2009) that MetLife v. Glenn overruled the "sliding scale" standard of review previously adopted by the Third Circuit in reviewing decisions of ERISA fiduciaries: 

. . . [W]e find that, in light of Glenn, our sliding scale approach is no longer valid. Instead, courts reviewing the decisions of ERISA plan administrators or fiduciaries in civil enforcement actions brought pursuant to 29 U.S.C. § 1132(a)(1)(B) should apply a deferential abuse of discretion standard of review across the board and consider any conflict of interest as one of several factors in considering whether the administrator or the fiduciary abused its discretion.

The Schwing case resolves a post-Glenn conflict created by differences of opinion on the issue among district courts in the Third Circuit.

Benefits lawyers will also want to note the Third Circuit's disagreement with the district court over its finding of a conflict of interest created by the benefits lawyer's dual representation of both the plan fiduciaries (the Employee Benefits Committee) and the plan sponsor: 

Here, and in broad summary, the District Court applied a heightened standard of review based on its finding of a conflict of interest involving the EBC’s attorney, who was also an attorney for Lilly. The Court concluded that the conflict of interest tainted the deliberations to such a degree as to render the EBC’s decision arbitrary and capricious. In the alternative, the Court concluded that, even ignoring the conflict of interest, the EBC’s decision was arbitrary and capricious largely because the EBC failed to undertake a full investigation of Schwing’s claim.

We disagree with the District Court and find that the EBC did not abuse its discretion when it denied Schwing’s claim for severance benefits, even considering, as factors, the attorney’s conflict of interest and the conflict of interest inherent in the fact that Lilly funds and administers the plan. The attorney’s role visa-vis the EBC was advisory only and her conduct, although criticized by the Court, was altogether appropriate. We note that ERISA fiduciaries are not required to engage independent counsel to aid in their interpretation and administration of an ERISA plan. . .

While the Third Circuit ruled that the dual representation was "altogether appropriate," there are many reasons why separate representation of plan fiduciaries might be preferable.

Announcement of the 403(b) Prototype Program

The IRS has issued Announcement 2009-34 which provides details regarding a new program for the pre-approval of prototype plans under Section 403(b) of the Internal Revenue Code.  The announcement includes a draft revenue procedure that contains the Service’s proposed procedures for issuing opinion letters on 403(b) prototype documents.  The Service is simultaneously posting draft sample plan language on their website for use in drafting the prototypes.

The Service is seeking feedback before finalizing the procedures and sample plan language, and invites interested persons to comment. 

Latest on EFCA

Campaign Diaries appears to have the latest tally regarding the Employee Free Choice Act here. One senator cites the looming health care debate as one reason why he has concerns about EFCA in its present form, i.e. if supporters of the bill splinter relationships over EFCA, there might not be enough supporters left for the current administration's proposed health care agenda.

Retiree Medical Legislation Introduced

Employers and their advisors will want to keep an eye on some legislation that has been introduced and referred to Committee called the "Emergency Retiree Health Benefits Protection Act of 2009" (H.R. 1322). The bill would effectively prevent employers from terminating or reducing retiree medical after participants retire, or even passing additional costs of the coverage along to retired participants. In other words, the legislation would attempt to "vest" retirees in their retiree medical benefits upon retirement, regardless of any provisions in the Plan documents to the contrary.

Here is a portion of the language in the legislation:

Notwithstanding that a group health plan described in subsection (b) may contain a provision reserving the general power to amend or terminate the plan or a provision specifically authorizing the plan to make post-retirement reductions in retiree health benefits, it shall be prohibited for any group health plan, whether through amendment or otherwise, to reduce the benefits provided to a retired participant or his or her beneficiary under the terms of the plan if such reduction of benefits occurs after the date the participant retired for purposes of the plan and reduces benefits that were provided to the participant, or his or her beneficiary, as of the date the participant retired. Any group health plan provision which purports to authorize the reduction of benefits in a manner inconsistent with the foregoing prohibition shall be void as against public policy.

The American Benefits Council, SHRM, and ERIC and others have expressed their concern over the legislation in a letter.

The concern, of course, is that employers will jettison these programs if the legislation is passed (retirees would be vested under the legislation, but employers would likely be able prevent future vesting for active employees by terminating the programs.)

Cuts in Jobs, Pay and Benefits Spur Fears of Unionization

With many employers weathering the economic slump by cutting jobs, pay and/or benefits, employers also fear the repercussions that could come from such actions. Particularly, the Wall Street Journal today notes that employers are gearing up for how such actions might make them vulnerable to workers seeking to unionize:

U.S. businesses, fearful of rising union influence and a crackdown by the Obama administration on workplace practices, are scrambling for legal advice and training. . .

Labor consultants and lawyers are . . briefing companies large and small on a range of matters such as complying with current and recently enacted legislation, and how to detect union organizing and prevent it without breaking the law. Another pressing issue is whether companies have opened themselves to union organizing drives because they have cut jobs, pay or benefits to weather the economic slump.

House Passes H.R. 1253, the Health Insurance Restrictions and Limitations Clarification Act of 2009

Yesterday, the House passed (422 Ayes, 3 Nays) “H.R. 1253, the Health Insurance Restrictions and Limitations Clarification Act of 2009" which amends ERISA, the Code, and the Public Health Service Act to require that limitations and restrictions on coverage under group health plans be timely disclosed to group health plan sponsors and timely communicated to participants and beneficiaries under such plans in a form that is "clear and explicit."

To get a good understanding of what this bill is supposed to accomplish, I refer you to the floor speech given by Representative Michael Burgess [R-TX]:

Mr. Speaker, in January 2001, the Department of Labor, the Internal Revenue Service, and the Health Care Finance Administration issued a rule in accordance with the Health Insurance Portability and Accountability Act, better known as HIPAA, of 1996 that was designed to guard against discrimination in coverage in the group health market. While addressing the issue of discrimination based upon participation in certain activities, these rules allowed continued discrimination in the form of nonpayment based upon the source of the injury.

So, in other words, you could have an employer-sponsored health insurance, which many of us do, have your premiums deducted from your paycheck, and yet be responsible for paying your own medical treatment if you were harmed. Trip and fall at home, no problem. Trip and fall while skiing on vacation with the family, and you get the bill. This is simply unfair.

People are led to believe that care for a broken arm, for example, is the same regardless of how the injury happened, but in fact that is not the case.

The lack of clarity underlying these exclusions has created a confusing situation for individuals that may ride motorcycles, horses, snowmobiles, or participate in other activities that could result in an injury. Millions of American enjoy these activities safely every year within the framework of State laws and utilizing proper safety precautions. The bill we are voting on today will take away the ambiguity and make certain that people are aware of any such restrictions in their coverage.

Again, this is not a bill that would require anything new to be done other than people be told up front and in plain language if there are limitations on their health care policy.

We are going to stand up and shine the light on these exclusions so that Americans will not be caught off guard by exclusions buried deep within an insurance plan.

The legislation would retain HIPAA's provision of allowing group health plans to establish limitations or restrictions on the amount, level, extent, or nature of benefits or coverage provided, but would require that any limitations and restrictions:

(1) Be disclosed in writing to the plan sponsor in advance of the point of sale to the plan; and

(2) Be disclosed by the plan sponsor to participants and beneficiaries in a form "that is easily understandable" by such participants and beneficiaries.

The legislation also provides that the plan sponsor and the issuer of the coverage must provide such description to participants and beneficiaries "upon their enrollment under the plan at the earliest opportunity that other materials are provided."

IRS Provides Detailed Q & As Regarding COBRA Subsidy

The IRS has issued Notice 2009-27 addressing a lot of issues pertaining to the COBRA subsidy program under ARRA.

Please note that the Notice makes it clear about which entities are eligible to take the credit against payroll tax liabilities:

Under ARRA, the “person to whom premiums are payable” is based on the nature of the plan and which COBRA continuation coverage provisions apply. In the case of a group health plan that is a multiemployer plan, the multiemployer plan is allowed the credit. In the case of a group health plan subject to the Federal COBRA requirements or the temporary continuation coverage requirements under the FEHBP, or a group health plan under which some or all of the coverage is not provided by insurance, the employer maintaining the plan is allowed the credit. For any other group health plan subject to ARRA (generally, fully insured coverage subject to State continuation coverage requirements), the insurer providing coverage under the group health plan is allowed the credit. These are the exclusive rules for who may take the credit unless the Secretary provides otherwise pursuant to the authority in section 6432(b).

Also, Q & A 58 provides further coverage of this issue:

Q-58. In the case of an insured plan subject solely to State law requiring the insurer to provide continuation coverage, if the employer collects the reduced premiums from assistance eligible individuals and pays the full premium to the insurer, is the employer eligible to take the payroll credit directly?

A-58. No. Under section 6432(b)(3), in the case of an insured plan subject solely to State law with respect to the requirement to provide continuation coverage, the only person entitled to be reimbursed for the premium reduction through the payroll credit (unless and until provided otherwise in future guidance) is the insurer providing the coverage under the group health plan.

The Notice also provides helpful guidance regarding what constitutes an involuntary termination of employment, for purposes of determining whether a terminated employee is entitled to the COBRA subsidy. Included is a statement that an "involuntary termination" does not include a reduction in hours, but that an employee’s voluntary termination in response to an employer-imposed reduction in hours "may be an involuntary termination if the reduction in hours is a material negative change in the employment relationship for the employee."

So, it appears from this statement, that an employer might, due to economic conditions, reduce an employee's hours, causing them to lose health care coverage, but the affected employee would not be entitled to the subsidy unless he or she went ahead and voluntarily terminated.

Finally, the Notice makes it clear that an employer may allow an eligible individual to elect coverage different from the coverage under the plan in which such individual was enrolled prior to the involuntary termination, but that the premium for coverage offered under this option cannot exceed the premium for the coverage the individual had prior to the involuntary termination.

Stable Value Funds Discussed

From the Wall Street Journal: 'Stable' Funds in your 401(k) May Not Be. The article discusses how fiduciaries are reviewing their stable-value fund offerings and "looking to move retirement-plan assets out of certain stable-value funds because of performance concerns" but "finding it's not always easy to do so."

More:

In a recent report, David Merkel, chief economist and director of research at brokerage firm Finacorp Securities, advised clients who use stable-value funds to "consider moving funds out if the market value is unlikely to be able to support the book value."

"I would not be surprised to see a stable-value fund fail in 2009," Mr. Merkel later said in an interview.

The Stable Value Investment Association's Ms. Mitchell replies: "It's got to be a cataclysmic event for that to happen. I'm not saying it can't happen, but it would be the perfect storm."

DOL Issues COBRA Subsidy Model Notices

The DOL has posted on their website model notices to be used in complying with ARRA's COBRA subsidy provisions. Please note that there are different notices available for the different groups of qualified beneficiaries that are required to receive notices about the premium reduction pursuant to ARRA. The notices must be provided by April 18, 2009 which leaves very little time for employers to act.

Majority of Employers Continue 401(k) Match

A survey released by WorldatWork and the American Benefits Council indicates that the majority of employers are continuing to offer a 401(k) match:

A full 74 percent of employers reported no change in the employer matching contribution; 15 percent have either increased or are considering increasing the employer match; eight percent have either decreased or are considering decreasing the 401(k) match, and three percent reported eliminating the match.

According to the survey, more than nine out of ten U.S. companies offer an employee 401(k) plan. In addition, despite the widely reported drop in account balances, two-thirds (66 percent) of organizations indicated that at least 70 percent of eligible employees participated in those 401(k) plans in 2008.

The survey was conducted in December of 2008 by WorldatWork, sampling 4,938 U.S. WorldatWork members. A total of 505 members responded to the survey.

Contrast that survey with this one by Sun Life on the Social Security System which indicates that 48% of Americans would prefer to stop paying into the Social Security system, knowing that they would not receive any benefits if they did. All of this may have to do with the lack of confidence in the government's ability to continue to fund these programs as the survey indicates:

70% of workers in their 30s and 66% in their 40s do not believe Social Security will be available when they are 67.

More on this survey from Plan Sponsor here.

Pension Bills to Surge Nationwide

From the Wall Street Journal: "Pension Bills to Surge Nationwide: Many States and Cities Face Hard Choices Because of Market Declines. Excerpt:

Many state and city governments reeling from financial woes are about to get whacked again, this time by an unforeseen increase in their pension bill thanks to market declines.

In an effort to stave off tax increases, New Jersey lawmakers on Monday will consider a bill that would allow municipalities to defer payment of half their annual pension bill, due April 1, for one year. Those towns, counties and schools that opt to defer would face a higher pension bill for years to come.

Other states and municipalities are facing similarly difficult choices. In Pennsylvania, the state employees and public teachers pension funds both have warned that employer contribution rates could surge seven-fold from about 4% of payroll to 28%, starting in 2012. The Detroit police and fire pension plan might have to double employer contribution rates to 50% of payroll by 2011, according to the fund's outside actuary.

Read here how the Governor of Illinois is considering a 50% state income tax increase to assist with his state's pension funding issues (discussed here.)

Thoughts on the Employee Free Choice Act

Michael Fox over at Jottings By an Employment Lawyer has some great thoughts on the Employee Free Choice Act recently introduced into Congress, including these remarks:

I think the opponents of EFCA are making a mistake focusing so much on card check. How a union is formed is important, and my belief is that the secret ballot is far superior to card check. However, in my view the most radical change contained in EFCA is binding arbitration for the first contract. The current national policy, which as mentioned above, is that collective bargaining is the preferred way of organizing the workplace, also is founded on the principle that an employer while required to bargain in good faith, was never forced to concede or agree to any point. To "force" concessions, unions have the economic power to withhold their labor, strike. If EFCA is passed as introduced, for first contracts this would no longer be true. If agreement is not reached, a solution will be imposed, which will require an employer (and employees) to be bound for two years. It represents a total reversal of the current policy, and so far is getting relatively little attention. If that continues, what will happen is that a "compromise" will be reached that retains secret ballot elections (albeit it with major changes designed to make it easier for unions to organize) but keeping binding arbitration for first contract. That would mean that one of the underlying principles of our current system will have been changed, with little discussion or my guess, is little understanding that it is even happening.

More from this Fulbright & Jaworski article on EFCA:

Some have argued that this provision of EFCA would constitute an unconstitutional taking of an employer’s property without due process, and we anticipate years of litigation concerning the issue if this provision of EFCA becomes law. Reportedly, the unions may be willing to compromise on other aspects of the bill if they cannot otherwise muster the necessary votes to kill a filibuster (such as substituting “instant” elections for card check), but view this outrageous change in the law as non-negotiable. Ironically, for years when unions had more strength than they now have, they vehemently opposed compulsory arbitration as the antithesis of free collective bargaining.

Query as to how this would impact benefits, as benefits are often part of the bargaining process.

How Large Employers View Health Care Proposals

Watson Wyatt's survey of 489 large U.S. employers about health care produced some interesting results about how employers view the recent health care proposals floating around in Congress:

The survey found that employers do not support most of the commonly prescribed solutions to the issues that plague the health care system. More than two-thirds (68 percent) are very or somewhat supportive of reforms that advance the consumer-oriented model and emphasize greater individual responsibility. Respondents are least in favor of tax policy changes that remove tax deductibility of employer premium contributions, with only 12 percent supporting those proposals.

Also, regarding the use of health savings accounts:

Health savings accounts (HSAs) are currently offered by 34 percent of companies. By 2010, that number is expected to increase to 43 percent. Health reimbursement accounts (HRAs) are offered by 21 percent today, and only 3 percent plan to add one next year.

Workforce Management reports on the survey here.

Health, Employment, Labor, and Pension Subcommittee Hearing

Yesterday, the Health, Employment, Labor and Pensions Subcommittee of the House Education and Labor Committee held a hearing to "examine ways to increase health care insurance coverage for Americans through their employer." Access the testimony given at the hearing here.

Also, did you know that the House Education and Labor Committee now posts video excerpts of testimony on YouTube which you can access here?

UPDATE: More from KaiserNetwork.org on the hearing here.

Is Health Care a "Right"?

Professor Bainbridge gives his views on the subject here. Excerpt:

As the analysis thus far suggests, private property and freedom of contract are at the center of the debate over positive and negative rights. You cannot achieve positive rights without infringing on someone's negative rights to private property and/or freedom of contract. Health care "reform," for example, will inevitably affect -- almost certainly adversely -- my contractual relationship with my doctor.

Here, as elsewhere, achieving a system of positive rights will come at a very high cost not only to individuals but also to society as a whole. . .

When we infringe on private property and freedom of contract in the name of creating positive rights, we thus infringe on the very engine of democracy. As Russell Kirk observed, "freedom and property are closely linked: separate property from private possession, and Leviathan becomes master of all."

So, no, health care is not a "right" -- at least not the kind that advances liberty.

Blogs from the U.S. Government

You can access a list of blogs maintained by the government at this link here. There do not appear to be any benefits-related blogs yet in the line-up.

See also this post here from the Biddleblog, a blog from the University of Pennsylvania Law School, which discusses the emergence of government blogs:

Governmental web sites are usually one of the first places people go for official government information. Few of us, however, know that government blogs exist as a possible source of information. It may surprise many to learn that the federal government maintains a web page entitled "Blogs from the U.S. Government," which lists active and archived government blogs.

While governments have been slow to embrace Web 2.0 technology, it has nevertheless begun to do so. . .

There are those who will seriously question the veracity, value and reliability of information found on government blogs, as indeed should be the case. Regardless, government blogs remain a potential resource which may provide invaluable information and insight.

Pictorial View of the Great Recession

Via the New York Times here. (Click on the map in the upper left-hand corner.)

ERISA Statute of Limitations Case Relating to a Ponzi Scheme

A Fourth Circuit decision (unpublished) which you can access here provides an interesting discussion of the statute of limitations issues that can arise with respect to bringing suit under ERISA for plan losses resulting from a Ponzi scheme. The case provides a summary of the various Courts of Appeals' positions on the issue of what constitutes "actual knowledge of the breach or violation" under Section 413 of ERISA.

In addition, as Eleanor Roosevelt once said: "Learn from the mistakes of others. You can’t live long enough to make them all yourself." Fiduciaries and those who represent fiduciaries may want to read the case with that adage in mind.

Government Links Pertaining to ARRA's COBRA Subsidy

Here are some helpful links I have run across pertaining to the new COBRA Subsidy:

IRS Website Links

News Release

COBRA Health Insurance Continuation Premium Subsidy

Answers for Employers

Form 941 for 2009: Employer's Quarterly Federal Tax Return

Instructions for Form 941

DOL Website Links

General Webpage on the COBRA Subsidy

Text of ARRA Pertaining to COBRA Subsidy

COBRA Premium Reduction Fact Sheet

Job Loss Poster

New FAQs for Employees

Obama Proposing Tax Increases to Fund Health Reform

From the Wall Street Journal:

President Barack Obama will propose a combined $634 billion in upper-income tax increases and cuts to government health spending over 10 years to fund a new program aimed at getting health coverage to all Americans, a senior administration official said Wednesday.

The spending cuts are aimed not just at raising money for the new program but also at curbing health-care spending overall, something that the president and many experts believe is critical to the nation's long-term financial health. The cuts would affect a range of interests, including managed care companies, prescription drug manufacturers and hospitals.

The proposed tax change would limit the deductions available to people in the highest income tax brackets.

Article Advocates Going After Personal Injury Attorneys as ERISA Fiduciaries

Please note this article: "Can You Recover Under ERISA When The Settlement Money Is Spent?- ERISA Recovery in a Post Sereboff World." At the end of the article, there is a discussion of how health plans and administrators should try to pursue the personal injury attorney as an ERISA fiduciary, once the personal injury attorney has been paid settlement funds on behalf of his or her client. It is apparently an old theory of recovery advocated in the 1990s, but, according to the author of the article, could be given new life by the post-Sereboff caselaw which is developing.

Hearings on Retirement Security

You can access testimony in yesterday's hearing on Retirement Security conducted by the House Education and Labor Committee in this link here. More here.

Plan Sponsor has a good summary of some of the testimony here: "House Committee Advised Not to Scare Participants."

Madoff-related ERISA Litigation Case Filed

Kevin Lacroix of D & O Diary is keeping track of the Madoff-related litigation here. He writes a post here about a new ERISA case filed in the Eastern District of Pennsylvania. Excerpt:

There are a number of interesting things about this lawsuit. The first is that it seeks relief under ERISA. So far as I am aware, this is the first Madoff-related lawsuit asserting claims under ERISA. The interesting thing about an ERISA class action, as opposed to a securities class action, is that the ERISA action is not subject to the PSLRA’s discovery stay and other procedural requirements. So the ERISA plaintiff is free to conduct discovery even while the dismissal motion is pending.

The opportunity under ERISA to avoid some of the challenges of litigating under the federal securities laws clearly was one of the plaintiffs’ attorney’s motivations in bringing the action. The Law.com article linked above quote the attorney as saying that ERISA provides "an easier and quicker route in repairing the damage."

Additional excerpt:

The final interesting thing about this lawsuit is what it says about just how broad the pool of Madoff-related defendants has become. The plaintiff pension fund in this lawsuit did not invest with Madoff. It did not even invest with a Madoff feeder fund. Instead, it invested with an investment advisor that invested with a feeder fund that in turn invested with Madoff. (Got that?) The sheer span of these increasingly remote connections required to establish the Madoff-related link underscores just how widespread the Madoff litigation may yet become.

You can access the complaint here and a copy of the press release here from the law firm bringing the case.

The plaintiff, a pension fund, is alleging breach of fiduciary duty under ERISA for failure "to sufficiently investigate the Madoff-related funds to insure that they were a safe, prudent, honest and suitable investment for employee pension benefit plans and their participants and beneficiaries" and for failure "to locate or give sufficient attention to warning signs about the unreliability of Madoff-related funds as investment vehicles."

Summary of ARRA 's Tax Provisions

Iowa State's Center for Agricultural Law and Taxation has posted a great summary of ARRA's tax provisions here. (Hat Tip: Tax Update Blog)

Reporting and Disclosure Guide for Employee Benefit Plans

Did you know that the DOL has posted an updated "Reporting and Disclosure Guide for Employee Benefit Plans"? It was updated as of October of last year. With the passage of ARRA and CHIPRA, it will now need to be further updated.

IRS Issues Final Regulations Governing QACAs and EACAs

The IRS has issued final regulations (copy via Benefitslink.com) relating to automatic contribution arrangements. The regulations affect 401(k) plans and other eligible plans that include an automatic contribution arrangement.

Effective Dates: The regulations have a general effective date of February 24, 2009. However, except as provided in §§1.401(k)-3(j)(1)(i) and 1.401(m)-2(a)(6)(ii), the final regulations relating to qualified automatic contribution arrangements ("QACAs") apply to plan years beginning on or after January 1, 2008. The regulations relating to eligible automatic contribution arrangements ("EACAs") apply for plan years beginning on or after January 1, 2010.

The regulations go on to provide that, for plan years that begin in 2008, a plan must operate in accordance with a good faith interpretation of Internal Revenue Code Section 414(w). The regulations state that , for this purpose, a plan that operates in accordance with the proposed regulations under §1.414(w)-1 or these final regulations will be treated as operating in accordance with a good faith interpretation of Code Section 414(w).

Participants of Retirement Plans Resilient

This article here from Vanguard reports on participant behavior in 2008. Despite the extreme volatility of the markets in 2008, the study conducted by the Vanguard Center for Retirement Research indicated that the overwhelming majority of participants "stayed the course."

House Education & Labor Committee Will Hold Hearings on Retirement Security

On Tuesday, February 24th, the House Education and Labor Committee will begin a series of hearings "to explore the shortcomings of our nation’s retirement system and look at solutions to ensure that Americans can enjoy a safe and secure retirement after a lifetime of hard work." According to the announcement, the purpose of the first hearing on Tuesday is to "examine how the current economic crisis has highlighted existing weaknesses in the 401(k) retirement savings system." You can listen to the hearings live via the link on this page.

Plan Adviser has more here.

See also this article from the Washington Post: "Senate Weighing New Rules for Retirement Funds."

Salon Offers 401(k) Discount: Only My Hairdresser Knows For Sure. . .

A barber giving $3 haircuts to the unemployed, a doctor giving 50% discounts to patients, and a salon giving discounts for 401(k) losses. From Kare11: The 401(k) Haircut: Uptown Salon Offers Deal for Tough Times. Excerpt:

A Twin Cities hair salon owner has his own economic stimulus plan for building growth.

John Charles, who owns 'The John Charles Salon' in Minneapolis' Uptown, and his business partner, Craig Weitz, came up with the idea.

Here's the deal: New customers will get to trim their salon bill by using their 401K statement.

They'll get to cut the percentage lost in their retirement fund for haircutting or coloring services.

Customers can take off up to 50 percent from their bill.

All you need to do is bring proof of the 401K percentage loss and show it to the Salon's cashier.

It will be deducted from your bill... no questions asked.

More here.

It is doubtful that folks will want to drag out their 401(k) statements and take them into the salon to get this discount, or that they would even want to divulge this info to their hairdresser (Only my hairdresser knows for sure. . . remember that adage?) However, it does present some wonderful food for thought about how we might all work together to get through this.

And, if perchance, this is a marketing ploy (as salons appear to be hurting in this downturn), what a great one:

(1) It enables the salon to gain a "competitive edge" in this environment.

(2) It will give the salon free marketing for days to come.

(3) And, by offering services at a discount and keeping stylists busy, it will enable the salon to meet its overhead.

(Hat Tip: Plan Sponsor.com)

Health and Retirement Benefits After Job Loss

The DOL has created a webpage for employers and employees providing information about what happens to health and retirement benefits in a job loss.

Employers Face New Health Plan Obligations under CHIPRA and ARRA

With the passage of The American Recovery and Reinvestment Act of 2009 ("ARRA"), H.R. 1 (signed today by the President) and The Children’s Health Insurance Program Reauthorization Act of 2009 ("CHIPRA"), H.R. 2 (signed February 4, 2009 by the President), employers who are now burdened with keeping their businesses afloat in these difficult economic times, are faced with meeting new obligations under these bills. Both bills together constitute a new complex set of rules governing health plans. The requirements imposed are enough to discourage many small employers from maintaining these plans so that some employers may feel the need to drop their health care programs for employees altogether.

CHIPRA

The first set of new obligations flow from the H.R. 2 Children's Health Insurance Program Reauthorization Act of 2009 ("CHIPRA"). Under these new rules, employers with health plans will have the following additional responsibilities:

(1) To provide employees with notice of enrollment rights for their eligible participants and beneficiaries under CHIPRA.

(2) To decide whether they will "opt out" of the premium assistance program whereby the states may make direct payments to the employer for eligible employees and their children. If they opt out, the premium assistance subsidy will be paid directly to the employee.

(3) To provide special enrollment rights in their health plans for employees that lose Medicaid or CHIPRA coverage.

Also, group health plan administrators are required to disclose to states, upon request, information about their group health plans that will enable the state to make a determination about the cost-effectiveness of providing premium assistance for the purchase of coverage under the plan for plan participants and beneficiaries eligible for the program.

There are civil penalties of up to $100 a day for failure to comply with the new notice and disclosure requirements. The effective date for the premium assistance and special enrollment provision is April 1, 2009.

ARRA

There is a second set of new obligations for employers in maintaining their health plans pertaining to the COBRA subsidy instituted by ARRA (HR 1). Under ARRA, individuals who incur an "involuntarily termination from employment" between September 1, 2008 and December 31, 2009 will be entitled to a government subsidy of 65% of the premium, if the individual wants to elect COBRA. These new rules are effective for coverage periods following the date of enactment.

Under these rules, employers will have to identify which former employees are required to receive notice about the subsidy and the new special enrollment right. Only “assistance eligible individuals” (“AEIs”) are entitled to the subsidy. AEIs are those individuals who are eligible for COBRA continuation coverage between September 1, 2008 and December 31, 2009 resulting from their involuntary termination of employment. There are subsidy "phase outs" for AEIs whose federal modified adjusted gross income exceeds $125,000 ($250,000 for joint filers).

Employers will have new notice requirements under the rules as well as reporting requirements. Employers will need to work with vendors and payroll systems to make sure they are able to comply with the new rules. And, of course, to add to this burden, all health plan documents, SPDs, and cafeteria plan documents will have to be amended to comply with the requirements.

Finally, there will also likely be a whole truckload of guidance and regulations needed to interpret and answer questions that practitioners have regarding the implementation of all of the above.

Commentary on the Deere Case

In the days to come, there will likely be a lot of commentary on the Deere case issued last week by the Seventh Circuit and noted in a previous post here. A couple of commentaries posted already:

Stimulus Passes the House and the Senate

From Read the Stimulus:

Yesterday, both the House and Senate passed the stimulus package. The White House is now soliciting comments on the bill, and we encourage everyone to --- politely --- share their feedback.

Access the final bill here. It is still full of hand-written annotations and markups.

Good Quote for Our Times

"It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood." The Federalist no. 62 (1788)

Seventh Circuit Delivers Victory for Plan Sponsor in Case Alleging Excessive Fees

From the Seventh Circuit: Hecker v. Deere & Company, et al.. More on this later. . .

House Passes Stimulus Bill

Vote was 246 to 183.

Stimulus Bill Links

You can find links to the 1400+ pages of the American Recovery and Reinvestment Act here. The Bill Text is divided into two portions labeled "Division A" and "Division B."

Also, please see this new website--Read the Stimulus--and this post particularly: 48 Hour Review Period After Conference? Apparently, the House voted to abstain from approval "unless the text of [the] agreement becomes available to the managers in an electronic, searchable, and downloadable form for at least 48 hours. . . "

UPDATE: Debate going on in the House here now.

More on the COBRA Provisions. . .

From this Full Summary of Provisions of the American Recovery and Reinvestment Act of 2009:

Premium Subsidies for COBRA Continuation Coverage for Unemployed Workers. Recession-related job loss threatens health coverage for many families. To help people maintain coverage, the bill provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers. With COBRA premiums averaging more than $1000 a month, this assistance is vitally important. To qualify for premium assistance, a worker must be involuntarily terminated between September 1, 2008 and December 31, 2009. The subsidy would terminate upon offer of any new employer-sponsored health care coverage or Medicare eligibility. Workers who were involuntarily terminated between September 1, 2008 and enactment, but failed to initially elect COBRA because it was unaffordable, would be given an additional 60 days to elect COBRA and receive the subsidy. To ensure that this assistance is targeted at workers who are most in need, participants must attest that their same year income will not exceed $125,000 for individuals and $250,000 for families. The Joint Committee on Taxation estimates that this provision would help 7 million people maintain their health insurance by providing a vital bridge for workers who have been forced out of their jobs in this recession. This provision is estimated to cost $24.7 billion.

True Cost of the Stimulus Bill to Taxpayers?

From the Heritage Foundation: $3.27 Trillion.

Also, the bill is apparently now 1,434 pages long.

IRS Releases Final Report on Hospital Study

Internal Revenue Service officials have released the final report on its tax-exempt hospital project. The purpose of the project was so that "IRS and other stakeholders could better understand nonprofit hospitals and their community benefit and executive compensation practices and reporting."

The report is based on the responses to questionnaires the IRS sent to a sample of more than 500 nonprofit hospitals. As part of the study, the IRS also examined 20 nonprofit hospitals regarding their executive compensation practices.

Here is what the report had to say about the IRS's findings on executive compensation:

In general, the hospitals reported widespread compliance with key indicators of sound compensation practices, including use of formal written compensation policies, use of comparability data, approval in advance by persons without a conflict of interest, and setting compensation within the range of comparability data. This pattern was reported consistently across the community types and revenue size categories, and was confirmed in the examinations of the 20 hospitals.

Conference Agreement COBRA Provisions

The American Benefits Council has published a summary of provisions in the Conference Agreement for the American Recovery and Reinvestment Act of 2009. The Summary indicates what the COBRA provisions contained in the bill will look like:

The COBRA subsidy for eligible workers would be equal to 65% of the COBRA premium for a period of 9 months.

The COBRA subsidy would be administered by Treasury through a mechanism that allows employers to receive a credit against payroll taxes.

Individuals with annual incomes above $125,000 (single) or $250,000 (couples) would not be eligible for the COBRA subsidy.

More on the Health Care Provisions in the Stimulus Bill

The website STEWARD which stands for "Stimulate The Economy Without Accumulating Record Debt" has more on the health care controversy stemming from the Senate Stimulus Package here. The website was started by an Obama donor who opposes the Stimulus Bill.

Congress Strikes $789 Billion Stimulus Deal

From the Wall Street Journal:

Congress and the White House reached accord on a $789.5 billion economic-recovery package that would shower hundreds of billions of dollars in tax relief on individuals and businesses and spark an infrastructure building boom from the nation's ports and waterways to its schools and military bases. The deal all but clinches passage of one of the largest economic rescues since Franklin Roosevelt launched the New Deal. . .

The compromise preserves $1.1 billion for a national "comparative effectiveness" study of health-care practices to try to determine the best treatments, devices and procedures for almost any ailment or disease. That information would then be disseminated to physicians nationally, perhaps on new medical computer systems also being funded.

Advocates of the study, including the president, say it will improve health care in all corners of the country and bring more uniformity to treatments. But conservative opponents have warned that it's the first step toward a government prescription to doctors of what they can and cannot do for their patients.

Trojan Horse Universal Health Care Provision in Stimulus Bill?

From Bloomberg:

Republican Senators are questioning whether President Barack Obama’s stimulus bill contains the right mix of tax breaks and cash infusions to jump-start the economy.

Tragically, no one from either party is objecting to the health provisions slipped in without discussion. . .

Senate Passes the American Recovery and Reinvestment Act of 2009

By a vote of 61 to 37, the Senate has passed its version of H.R. 1, the American Recovery and Reinvestment Act of 2009. Now the Senate's bill and the version of the bill passed by the House of Representatives on January 28 will have to be reconciled before it can be passed by Congress and become law.

Watch the Senate Debate on the Stimulus Bill on C-SPAN

You can watch the debate going on in the Senate over the Stimulus legislation here. A vote is expected this afternoon.

Joint Meeting of Pension Liaison Councils

Last week, I attended the Joint Meeting of the Mid-Atlantic Pension Liaison Group, the Great Lakes Area TE/GE Council, the Gulf Coast TE/GE Liaison Council, and the Pacific Coast Area TE/GE Council. The joint meeting was held on the campus of the University of Baltimore. Practitioners from all over the country and representatives from the Internal Revenue Service were in attendance and conducted some lively discussion on key issues. While there were presentations on many areas, I would have to say that many of the questions raised by practitioners centered around the impact of the economy on retirement plans. I hope to write about some of the discussions in the next week. . .

PBGC Guidance to Pension Plans regarding Madoff Losses

The PBGC has added their "two cents" to the DOL's guidance (highlighted in a previous post) in this Notice to Defined Benefit Plans Concerning Funds Invested With Bernard L. Madoff Investment Securities LLC:

If the losses of a single-employer plan are sufficient to render the plan unable to pay benefits when due, the plan administrator or sponsor is required by section 4043 of ERISA to notify PBGC of this event within 30 days of knowing or having reason to know that this reportable event has occurred. The plan administrator must notify PBGC of a reportable event by filing PBGC Form 10. . . "

The PBGC also urges plan sponsors to "consult a qualified advisor concerning recovery of funds invested directly or indirectly with Madoff Securities."

Plan Sponsor.com has a detailed article on related developments here which includes a link to the Bankruptcy Trustee's list of Madoff victims. According to the list, there were many profit sharing and pension plans impacted (which Plan Sponsor refers to as "Madoff-maimed plans").

DOL Provides Guidance for Fiduciaries Concerning Madoff Losses

From a press release:

The department is providing guidance to fiduciaries, investment managers and other investment service providers to plans who believe they may have exposure to losses on investments with entities related to the Madoff firm. The guidance also provides steps that can be taken to assess and protect the interests of plans, participants and beneficiaries under the Employee Retirement Income Security Act (ERISA).

The main theme of the guidance here is to remind fiduciaries that they are required under ERISA to take "appropriate steps. . . to assess and protect the interests of the plan and its participants and beneficiaries." The DOL provides a list of recommended steps, but indicates through the language "may include" that fiduciaries may need to take other steps as they deem appropriate. The list of steps provided by the DOL are as follows:

Request disclosures from investment managers, fund managers, and other investment intermediaries regarding the plan’s potential exposure to Madoff-related losses;

Seek advice regarding the likelihood of losses due to investments that may be at risk;

Make appropriate disclosures to other plan fiduciaries and plan participants and beneficiaries; and

Consider whether the plan has claims that are reasonably likely to lead to recovery of Madoff-related losses that should be asserted against responsible fiduciaries or other intermediaries who placed plan assets with Madoff entities, as well as claims against the Madoff bankruptcy estate.

The DOL warns fiduciaries to make sure that "claims are filed in accordance with applicable filing deadlines such as those applicable to bankruptcy claims and for coverage by the Securities Investor Protection Corporation (SIPC)."

Plan Advisor.com has more info on the deadlines for claims here.

Treasury Announces New Restrictions On Executive Compensation

From the Press Release:

Today, the Treasury Department is issuing a new set of guidelines on executive pay for financial institutions that are receiving government assistance to address our current financial crisis. . .

As part of President Obama's efforts to promote systemic regulatory reform, the standards today mark the beginning of a long-term effort to examine both the degree that executive compensation structures at financial institutions contributed to our current financial crisis and how corporate governance and compensation rules can be reformed to better promote long-term value and growth for shareholders, companies, workers and the economy at large and to prevent such financial crises from occurring again.

Lessons for Fiduciaries from an Employer Stock Divestment Case

Most practitioners are aware of the prodigious amount of stock-drop cases which have been brought against fiduciaries involving ERISA plans containing employer stock. The bulk of these cases have involved situations where the stock has plummeted in value due to various circumstances and the fiduciaries have been accused of violating their fiduciary duty for allowing the plan to hold on to the stock or for continuing to offer the stock as an investment of the plan. The case of Bunch v. W.R. Grace & Co. Savings and Investment Plan, an employer stock case recently decided by the First Circuit in favor of the fiduciaries, involves an interesting variation on this theme: the plaintiffs are complaining because the fiduciaries did not hold on to the stock. The stock was sold after it declined in value, but right before there was an upturn in value due to a third party who wanted to purchase the stock.

The case is good news for employers for the following reasons:

(1) For employers who are going through difficult times financially and have retirement plans holding employer stock, the case acts as a sort of "roadmap" for the fiduciaries of the plan on the "prudent process and procedures" fiduciaries should adhere to in managing the employer stock as an investment of the plan. The court particularly noted the following as being "prudent processes":

The recognition by the appointed fiduciaries of the "potential conflict of interest" which they had in making the decision about whether the stock remained a prudent investment;

The resulting appointment of an independent fiduciary to make the decision;

The hiring of legal counsel and a financial advisor to assist the independent fiduciary in making its decision;

The independent fiduciary's request for additional information from the financial advisor even after the financial advisor presented its findings;

The independent fiduciary's documentation of its reason for determining that selling the stock was "the best course";

Communication to participants that it was proceeding to divest the stock and that it would monitor the situation and might decide to end the sales effort if circumstances required it.

This paragraph of the opinion sums it up:

There can be little doubt on this record that the state of Grace's corporate health was thoroughly studied by experts who debated and considered ad nauseam the pros and cons of retaining or selling the stock held in the Plan's portfolio. The unanimous conclusion of those charged with making the decision was that divestment of this stock was the only action consistent with the prudence required of a responsible fiduciary under ERISA. Without question, State Street engaged in a substantively sound, reasonable analysis of all relevant circumstances appropriate to the decision to sell the Grace stock. We cannot say that the district court's approval of these actions was in error.

Please note that the case only analyzes whether the fiduciaries fulfilled their duties during the period between the time that the stock had dropped in price through the time that it was later sold. Another case involving a separate group of participants (noted below) may involve an analysis of the time frame involved when the stock was declining in value.

(2) Even for employers who do not have employer stock in their plans, the case demonstrates that "prudent processes and procedures" win the day. Fiduciaries need not be right in predicting what the market will do, but are only asked to employ prudent processes in making decisions. As the court stated:

Although hindsight is 20/20, as we have already stated, that is not the lens by which we view a fiduciary's actions under ERISA. . . The district court ruled that the test was not whether the best possible action was taken by State Street, but whether it had considered all relevant factors at the time of the divestment decision.

Further notes:

Sixth Circuit Holds Retirees Not Vested in No-Cost Retiree Medical

One of the unfortunate results of this economic crisis is that employers are cutting benefits, i.e. the 401(k) match, pension benefits, retiree medical, etc. Thus, the outcome of this Sixth Circuit case--Winnett, et al v. Caterpillar, Inc.--is very relevant because it deals with the issue of whether retiree medical benefits had "vested." While qualified plans are subject to formal vesting rules under ERISA, retiree medical plans are not. Therefore, many times the outcome of litigation over retiree medical benefits will depend upon the plan language and collective bargaining agreements involved. That is exactly what happened in the Winnett case.

An interesting twist to the case was the fact that the plaintiffs had retired between the time that a 1988 collective bargaining agreement ("CBA") had expired and before the time that the employer and the UAW had agreed to a successor agreement. Therefore, because they had retired after the expiration of the CBA, the only way the plaintiffs could prevail was to argue that their right to no-cost retiree medical benefits had "vested" when they became eligible to retiree, even though they did not actually enter retirement until after the CBA had expired.

The District Court had concluded that the right to the retiree medical benefits “vested when the employees attained retirement or pension eligibility,” even for those who continued working after becoming retirement-eligible. Winnett v. Caterpillar, 496 F. Supp. 2d 904, 922 (M.D. Tenn. 2007). However, the Sixth Circuit overturned the District Court, saying that the earlier Sixth Circuit cases which the District Court had relied on had involved cases where contract language linked retiree medical benefits to pension eligibility and where the plaintiffs had actually retired under such contract language. Here the Court emphasized that the retirees had not retired until after the expiration of the CBA.

Generally, when retiree medical benefits are offered, they are often referenced in a number of documents involving benefits. Here there was (1) a collective bargaining agreement (2) a summary plan description, and a (3) Group Insurance Plan with scant language really describing the extent of the benefits being offered. Interestingly enough, the document a court would normally look to for such answers--the retiree medical plan document itself--was apparently non-existent. While ERISA would generally require that a retiree medical plan be evidenced by plan documents, courts will generally look to whatever documents they can find for trying to determine the intent of the parties.

Employers who wish to avoid litigation in this area should make sure that the terms of their retiree medical plans are set forth in plan documents and that the right to terminate, amend or change the terms of such benefits is clearly stated in the plan document, the summary plan description, and in any written communications to retirees. Employers should not assume that a benefits booklet supplied by a health insurance provider will contain the language which is necessary to protect the employer from costly litigation.

Senate Finance Committee Version of Stimulus Legislation Released

You can access the Senate Finance Committee's version of the stimulus bill here. The text of the bill was released today.

Lilly Ledbetter Fair Pay Act of 2009 Passes: Benefits Impacted

The Lilly Ledbetter Fair Pay Act of 2009 has passed the House, and the President says he will sign it.

Here is language from the bill:

`(3)(A) For purposes of this section, an unlawful employment practice occurs, with respect to discrimination in compensation in violation of this title, when a discriminatory compensation decision or other practice is adopted, when an individual becomes subject to a discriminatory compensation decision or other practice, or when an individual is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits or other compensation is paid, resulting in whole or in part from such a decision or other practice.

This language applies in cases of discrimination in compensation because of race, color, religion, gender, national origin or age.

Scotusblog has a post about the legislation here. Excerpt:

The key provision says that “an unlawful employment practice occurs” not only when a compensation policy or practice is adopted, but also when a worker becomes subject to the policy, or when the policy is applied to any worker “each time wages, benefits, or other compensation is paid,” resulting from the discriminatory policy.

In referring to benefits, as well as wages, the new Act might be interpreted to mean that a workers’ entitlement to something other than wages or salary may be covered, so long as it is tied to the discriminatory pay scale. Thus, pension benefits linked to wage or salary levels perhaps also are covered.

The bill has a retroactive effective date of May 28, 2007.

Query as to whether benefits were always really protected under Title VII of the Civil Rights Act of 1964 and whether this new law will simply mean that the payment of a benefit can extend the time frame for filing a claim under the Act. Since pension plans and retiree medical plans many times pay benefits long after a person retires, does this language mean that claims could still be filed based upon the payment of these pension or retiree medical benefits? That is a scary thought for employers, and one that would likely contribute to the further demise of these plans.

UPDATE: The Heritage Foundation discusses the legislation here. Excerpt:

The bill would adopt [Supreme Court Justice] Ginsburg's view, amending a variety of anti-discrimination laws to the effect that a violation occurs "each time wages, benefits, or other compensation is paid" that is affected by any discriminatory practice. In this way, the law would simply eliminate the limitations period as applied to many cases.

Under the Ledbetter Act, employees could sue at any time after alleged discrimination occurred, so long as they have received any compensation affected by it in the preceding 180 days. While this would certainly reverse Ledbetter, it goes much further by removing any time limitation on suing in pay-related cases, even limitations relating to the employee's learning of the discrimination--an approach that is known in other contexts, such as fraud, as a "discovery rule." This new rule is also broader in that it would apply to any (alleged) discrimination that has had an (alleged) effect on pay, such as an adverse promotion decision. In addition, retirees could bring suits alleging pay-related discrimination that occurred decades ago if they are presently receiving benefits, such as pensions or health care, arguably effected by the long-ago discrimination.

Additional query as to what this legislation will do to releases that employees are often asked to sign upon receiving severance pay.

UPDATE: The President has now signed the bill.

IRS Penalties Come Under Scrutiny

From the Wall Street Journal:

Federal officials are considering easing a 2004 law that requires the IRS to set mandatory heavy penalties on companies and individuals who purchase certain illegal tax shelters.

The law imposes penalties for making use of so-called listed tax shelters, or ones the Internal Revenue Service places on a list of the most-abusive transactions. Currently, there are 34 different types of tax shelters on the IRS list. . .

Robert Mathew, who owns a small Indiana asphalt-paving company. . . purchased a type of life-insurance policy known as a "springing cash value" plan as an alternative to a straightforward pension plan for his employees. Two years later, the IRS added this type of plan to its list of abusive tax shelters, and Mr. Mathew should have disclosed his purchase to the IRS. But he says the financial adviser who sold him the insurance plan at no point told him he needed to make such a disclosure.

Now, Mr. Mathew says, the IRS is demanding taxes and interest totaling $60,000. On top of that, the IRS has set penalties in the amount of $600,000, but has so far granted him several extensions, he says.

"I trusted people, my adviser, to take care of this. Then the IRS came and said, 'Here's $600,000 you're going to have to pay.' If I had to pay these fees, I would actually have to go bankrupt," Mr. Mathew said. . .

You can view the IRS's list of Abusive Tax Shelters and Transactions here. A number of them involve benefits-related transactions. You can access a benefits-related list here.

See also: Abusive Transactions That Affect Availability of Programs under EPCRS.

(These links are helpful for practitioners whose clients unfortunately meander into these types of transactions.)

Notes from Senate Banking Committee Hearing on Madoff

From Bruce Carton at Compliance Week: Notes from Today's Senate Banking Committee Madoff Hearing.

Interesting excerpts:

Thomsen–Ponzis hard to detect because nobody complains until money stops flowing out. Hard to detect before it stops.

Harbeck–Experts say Lehman Bros. and Madoff are cases that should occur every 5,000 years and they occurred in a one year period.

Thomsen–we have huge amounts of information. Need to find best ways to mine it.

Thomsen says SEC gets 100,000 unsolicited tips/complaints per year.

Prof. Coffee say no mutual fund has ever failed because of a Ponzi scheme because an independent custodian holds funds.

A link to Hearing testimony is here.

Supreme Court Issues Opinion in Dupont Case

The Supreme Court released its opinion today in the case of Kennedy v. Plan Administrators for Dupont Savings (07-636). Justice Souter wrote the opinion for a unanimous Court. The opinion is available here.

The Hoboken Revolt

The Tax Foundation writes about the City of Hoboken's 47% property tax hike here. Hoboken homeowners are outraged and have organized a taxpayer advocacy group calling it the Hoboken Revolt.

Ways and Means Passes H.R. 598

Last Thursday, the House Committee on Ways and Means voted to support the "economic recovery" package contained in H.R. 598. The legislation passed "by a party-line vote of 24 to 13." The legislation will now be combined with other components of the recovery package from other House Committees into H.R. 1, the American Recovery and Reinvestment Act for consideration by the full House of Representatives this coming week.

The Tax Prof Blog has all the relevant links here, including:

Text of the Bill
Joint Committee on Taxation Description of Bill
Joint Committee on Taxation description of Chairman's Amendment

White House Memo Regarding Regulations

The White House has asked in a Memo that any new or pending regulation "should not be sent to the Federal Register for publication unless and until it has been reviewed and approved by a department or agency head appointed or designated by the President. . ." The White House has also indicated that all "proposed or final regulations that have not been published in the Federal Register" be withdrawn until review. Finally, for the regulations that have been published, but that have not taken effect (which would include these regulations), the White House is urging extension of the effective date for another 60 days.

Senate Passes Lilly Ledbetter Fair Pay Act of 2009

Yesterday, the Senate passed the Lilly Ledbetter Fair Pay Act of 2009. It is a bill to "amend Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act of 1967, and to modify the operation of the Americans with Disabilities Act of 1990 and the Rehabilitation Act of 1973, to clarify that a discriminatory compensation decision or other practice that is unlawful under such Acts occurs each time compensation is paid pursuant to the discriminatory compensation decision or other practice, and for other purposes."

From this article here:

The Lilly Ledbetter Fair Pay Act reverses a 2007 Supreme Court ruling that had narrowed to 180 days the time period during which an employee can file a claim of wage discrimination after the original pay-setting decision.

Under the proposed legislation, employees would have 180 days from receiving a discriminatory paycheck to file their claim. . .

The House of Representatives approved the bill on January 9 during the first week of the new session of Congress, along with other labor rights legislation. The bill must return to the House for a second approval because the House had combined the bill with a measure the Senate did not consider.

On another front, what is the status of the Employee Free Choice Act? Some speculation going on here.

DOL's Final Investment Advice Regulations in Today's Federal Register

The DOL has issued their final regulations relating to the provision of investment advice by a fiduciary adviser to participants and beneficiaries in participant-directed individual account plans, such as 401(k) plans, and beneficiaries of individual retirement accounts (and certain similar plans). Read about the controversy surrounding these regulations here.

Section 409A is the Winner

The Tax Update Blog has the results of its polling of this question: What was the worst newly-enacted Bush-era tax provision? Section 409A won hands down. View the results here.

Second Circuit Reinstates Age Discrimination Case

This is an important age discrimination case for the times we are in: Carras v. MGS 782 Lex, Inc.. The Second Circuit Civil Rights Blog writes about it here.

In this previous post here, I have written about how targeting for layoff those employees who are costing the company more when it comes to health care costs or pension costs is unlawful under ERISA Section 510. The Carras case, however, involved targeting for layoff an older employee who was costing the company more when it came to his salary. (Benefits were not discussed.) Unfortunately, the case involves what is probably a likely scenario in our day: an older higly-paid worker being replaced by a younger less-experienced worker for "cost-cutting" reasons. Excerpt from the case:

Although the record shows that MGS was in a difficult financial position and was attempting to cut costs, the District Court’s repeated references to the company’s financial situation reflect, in our view, an impermissible weighing of the evidence. For example, although the District Court acknowledged plaintiff’s offer to work for a reduced salary, the Court concluded that “even a $60,000 salary would have presented a substantial [financial] issue.” (Opinion 14.) However, a jury could have determined, based on plaintiff’s offer to work for less than what was paid to Winegard, that the employer’s motivation for firing him was not cost cutting but was rather discrimination against his age.

Bottomline: Employers need to tread carefully as they contemplate cost-cutting measures. Engaging a good employment lawyer who can guide the employer through the process is a good first step in avoiding unwanted litigation. However, employers also need to consider the long-term impact of losing the wealth of knowledge and experience that older, albeit more experienced workers bring to the table. While the economics of our times will likely drive many employers to take some drastic measures, they should remember that when things turn around, it may be difficult to find experienced workers as the demographics of our society play out. Employers will likely see more competition in the future in terms of filling their employee ranks when it comes to highly skilled workers. And, of course, benefits will play a big part in how employers fare in that competition.

The American Economic Recovery and Reinvestment Plan

You can now access the text of the proposed American Economic Recovery and Reinvestment Plan. A large portion of the bill with its own separate title--the Health Insurance Assistance for the Unemployed Act of 2009--contains provisions which would greatly impact employers and provide a massive expansion of the current COBRA program. The proposal includes three components pertaining to health insurance for the unemployed:

1. A government-provided COBRA subsidy for those involuntarily terminated from employment. The subsidy provided would be equal to 65 percent of the COBRA continuation premiums for up to 12 months for workers who have been involuntarily terminated (and their families). The subsidy would apparently also apply to health care continuation coverage if required by states for small employers.

2. Medicaid provisions providing states the option of offering coverage to unemployed workers via their Medicaid programs with the federal government matching 100 percent of the costs of the benefits and administration.

3. An extension of COBRA for older and tenured workers. The benefits provided by this portion of the legislation would be separate from the short-term subsidy for involuntarily terminated workers. COBRA-eligible workers who are 55 and older, or have worked for an employer for 10 or more years, would be able to retain COBRA coverage, at their own expense, until they become Medicare eligible at age 65 or secure coverage through a subsequent employer.

Access the Ways and Means summary here. More links here.

Workforce Management in its article here notes:

Currently, only about 20 percent of those eligible for COBRA enroll, a low acceptance due in part to the high cost of coverage. Under law, employers can charge beneficiaries a rate equal to 102 percent of the cost of coverage offered to employees.

With a higher take-up rate, employer costs would rise since beneficiaries opting for COBRA on average use more medical services than other health plan enrollees, surveys have found.

House Democrats estimate the subsidy would cost the government a total of $30.3 billion.

Fi360: A Fiduciary Look at the Madoff Scandel

Good post here from Fi360 containing tips for fiduciaries. Excerpt:

Acting as his own custodian and avoiding any kind of transparency looks to be a huge part of how he managed to get away with it for so long, but also the most prominent red flag that should preclude an investment fiduciary from choosing this type of investment. Both an ABC News article and a Kiplinger’s column look at how acting as his own custodian should have been the first and clearest sign that something wasn’t right.

Battle Brewing Over DOL Investment Advice Final Regulations

Before the new regulations are even formally published, Congressman George Miller (D-California), the chairman of the House Education and Labor Committee, and Congressman Rob Andrews (D-New Jersey) in a statement here have indicated that they will use every tool at their disposal to block their implementation. The regulations being referred to in the statement are the final regulations issued in connection with the Pension Protection Act's prohibited transaction exemption for investment advice provided to participants. (Proposed regulations are here. Comments to the proposed regulations are here.)

Plan Adviser reports on the controversy: Miller, Andrews Threaten to Block Advice Regulation

Treasury Issues Additional Executive Compensation Rules Under TARP

From the Press Release:

The U.S. Department of the Treasury today issued interim final rules for reporting and recordkeeping requirements under the executive compensation standards of the TARP Capital Purchase Program (CPP).

The new rule issued today requires the CEO to certify annually within 135 days after the financial institution's fiscal year end that the financial institution and its compensation committee have complied with the executive compensation standards. In addition, within 120 days of the closing date of the Securities Purchase Agreement between the financial institution and the Treasury, the CEO is required to certify that the compensation committee has reviewed the senior executives' incentive compensation arrangements with the senior risk officers to ensure that these arrangements do not encourage senior executives to take unnecessary and excessive risks that could threaten the value of the financial institution.

The CEO must provide the 120-day and annual certifications to the TARP Chief Compliance Officer.

Interim Final Rule
Revised Notice 2008-PSSFI
Executive Compensation FAQ

Twitter Making News in US Airways' Miracle 'Landing' on the Hudson

U.S. Airways Crash Rescue Picture: Citizen Journalism, Twitter At Work

For those who aren't familiar with Twitter, view this previous post here.

(If you read the comments to the photo, some folks want to know if the Christians are walking on water, and if only those flying in First Class got the rafts.)

Economic Stimulus Proposal

From Ways and Means:

Ways and Means Committee Chairman Charles B. Rangel (D-NY) today released details of the economic recovery package falling under the jurisdiction of the Committee. This groundbreaking plan will provide critical tax, health and job-training benefits to American families, incentives for businesses to grow and create jobs and assistance for those who have lost their jobs or are economically disadvantaged.

“The critical state of our economy calls for swift, comprehensive action and this package will provide relief to all communities and all sectors of the American economy,” said Chairman Charles B. Rangel (D-NY). “This recovery package will provide tremendous tax relief, health care and job training benefits for families struggling to make ends meet, while also giving businesses the boost they need to create new jobs. We have also designed specific provisions to help State and local governments fund critical infrastructure projects to improve our roads, schools, bridges and airports, while also maintaining and creating good-paying jobs for working families. This package was developed with strong coordination between the House and Senate leaders, President-elect Obama and his economic team. I look forward to working with all parties involved toward a swift passage.”

The Recovery legislation will be formally introduced in the coming days, and is expected to receive consideration in the Ways and Means Committee next week.

There are indications that the bill will include provisions governing COBRA for the unemployed.

UPDATE: Outline of the Legislation includes:

Judge Posner's Thoughts on Class Action Litigation

From How Appealing:

"This case is finito." So ends an opinion that Seventh Circuit Judge Richard A. Posner issued today in typescript form on behalf of a unanimous three-judge panel of that court.

While this is not a benefits-related case, it is interesting as it reveals Judge Posner's frustration with the "pathalogy" of class action litigation in general, and as yesterday's post reveals, class action litigation in the ERISA arena is increasing. Excerpt:

We are disheartened that the litigation by the information-sharing class has been allowed to drag on for eight years, when it had no merit—and that as a matter of law, without need to take evidence. It is an example of the typical pathology of class action litigation, which is riven with conflicts of interest, as we discussed recently in Thorogood v. Sears, Roebuck & Co., supra, 547 F.3d at 744–46. The lawyers for the class could not concede the utter worthlessness of their claim because they wanted an award of attorneys’ fees. The lawyers for Fleet were reluctant to argue the utter worthlessness of the claim because they were able to negotiate a settlement that cost their client virtually nothing—provided they did not take such a strong stand that it jeopardized the class lawyers’ shot at a generous award of attorneys’ fees, and hence the settlement. And the objectors were motivated to exaggerate the value of the claim of the information- sharing class so that they could get a generous award of attorneys’ fees.

The Effects of Cutting the 401(k) Match

From the Mercury News.com: "401(k) change may create new lost generation." Excerpt:

. . . Sears, which recently announced the suspension of its match, contributed $91 million to its employees' 401(k) funds in 2007 on a profit of $825 million. With 2009 expected to be one of the most challenging years for retailers, the company will cease the match Jan. 31, even though it will finish 2008 with a profit that is forecast to be around $300 million at best. My read between these numbers is the match could threaten Sears' profit in 2009.

Multiply what is happening at Sears a thousand times over. Quickly you can see that billions of dollars will be absent from not just 401(k) accounts but the financial markets as well. That takes away capital from equity markets, which is supposed to fuel our future corporate growth.

At some point, companies such as Sears will reintroduce the matching funds. But the longer it takes, the more confidence will erode from this retirement savings model, and more people will develop empty gaps in their retirement savings time line.

Without companies leading the push for workers to save, the 401(k) model is in trouble. . .

From the WSJ: Marshals Hunt and Capture Financial Adviser

In reading this story, it sounds like it could have been an episode of 24. From the Wall Street Journal: Adviser Who Made Daring Getaway Is in Police Custody. The adviser allegedly faked his own death by parachuting from a plane and leaving the plane to fly on autopilot. One of the many allegations reportedly being made in the case is that money was moved from a retirement account into a deferred annuity without the client's knowledge, incurring large penalties.

More here from Fox News.

Report Indicates ERISA Class Action Suits Taking "Center Stage" In Workplace Litigation

Seyfarth Shaw’s Fifth Annual Workplace Class Action Litigation Report (a 665-page report) provides some discouraging news for employers on the ERISA front. The report analyzes the "foremost class action and collective action decisions of 2008 involving claims against employers in federal and state courts" and concludes that there is "an explosion in class action and collective action litigation involving workpace issues." The report also predicts that the "present downturn in the economic climate is likely to fuel even more lawsuits, and the financial risks in this type of employment litigation can be enormous."

Regarding ERISA litigation specifically, the report indicates:

The plaintiffs’ bar increased the pace of ERISA class action filings seeking recovery for 401(k) losses; and

The lawsuits resulted in a series of "massive settlements" in ERISA class action resolutions.

The report includes in its analysis a review of the “top ten” class action and collective action settlements during 2008. The report concludes that, "[a]s compared to 2007, settlement totals decreased for the top ten employment discrimination and wage and hour class action settlements, but increased for the top ten ERISA class action settlements":

For ERISA class actions, the monetary value of top ten private plaintiff settlements entered into or paid in 2008 totaled $17.7 billion. By comparison, the top ten settlements in 2007 totaled $1.8 billion.

The report provides confirmation about what most practitioners know already--that there has been a surge of excessive fee cases involving 401(k) plans as well as "stock drop" suits from the plaintiffs' bar. The report concludes that "given the enormous financial stakes, pro-active planning and legal compliance programs—to get ahead of class action risks—are of paramount importance to companies in 2009."

More on what employers can and should be doing in posts to come. . .

Social Security Ready to Enroll 10,000 Baby Boomers a Day for 20 Years Online

Patty Duke is helping to promote Social Security's new online enrollment process. From the SeniorJournal.com:

Facing the deluge of 10,000 Baby Boomers joining Social Security and Medicare every day for the next 20 years, Social Security has decided the monumental enrollment task is best handled online. The agency, with some promotion help by “Patty Duke,” has launched the Retire Online campaign.

Featuring cousins Patty and Cathy Lane from the hit 1960’s sitcom, “The Patty Duke Show,” the campaign will let Americans know that it’s now easier than ever to retire online.

“Social Security’s new online retirement application can be completed in as little as 15 minutes from the comfort of your home or office,” said Michael J. Astrue, Commissioner of Social Security.

Access Ms. Duke's five videos on Social Security enrollment here.

IRS Notice 2009-9 Encourages Financial Institutions To Notify IRA Owners

As a followup to this previous post here, please note that the IRS has issued Notice 2009-9 providing more of the details regarding reporting requirements for financial institutions pertaining to the RMD 2009 waiver. In that Notice, the IRS hopes to ward off some of the confusion that will likely occur as a result of the change in the rules for 2009 by encouraging financial institutions to provide some clear communications to seniors:

The IRS encourages all financial institutions to inform IRA owners who delayed taking their 2008 RMD until April 1, 2009, that they are still required to take that distribution.

Benefitsblog's 2000th Post

That last post was my 2000th post: http://www.benefitscounsel.com/archives/002000.html. Thanks to Congress, the IRS, the DOL, the PBGC, and courts for providing all of the great material. Some think that benefits and ERISA topics are "mundane" or even "dreary", but some of us find it to be very interesting stuff. :-)

IRS Provides Some Needed Clarity for 2009 RMD Waiver Rules

In the IRS's Special Edition of its Employee Plan News:

On December 23, 2008, the President signed the Worker, Retiree and Employer Recovery Act of 2008 (the Act) into law. Section 201 of the Act waives any required minimum distribution (RMD) for 2009 from retirement plans that hold each participant’s benefit in an individual account, such as 401(k) plans and 403(b) plans, and certain 457(b) plans. The Act also waives any RMDs for 2009 from an Individual Retirement Arrangement (IRA). This means that most participants and beneficiaries otherwise required to take minimum distributions from these types of accounts are not required to withdraw any amount in 2009. If they do make a withdrawal in 2009 (that is not a RMD for 2008), they might be able to roll over the withdrawn amount into other eligible retirement plans. Of course, they must still include any previously untaxed portion of the withdrawal that they do not roll over in their gross income. . .

The Act does not waive any 2008 RMDs, even for individuals who were eligible and chose to delay taking their 2008 RMD until April 1, 2009 (e.g., retired employees and IRA owners who turned 70½ in 2008). These individuals must still take their full 2008 RMD by April 1, 2009, or they might face a 50% excise tax on the amount not withdrawn. The 2009 RMD waiver under the Act does apply to individuals who may be eligible to postpone taking their 2009 RMD until April 1, 2010 (generally, retired employees and IRA owners who attain age 70½ in 2009). However, the Act does not waive any RMDs for 2010.

If a beneficiary is receiving distributions over a 5-year period, he or she can now waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period.

Bottom-line then is this:

If you have a 2008 required minimum distribution that is payable in 2009 (before April 1st of 2009) because you turned 70½ in 2008, you must go ahead and make the payment in 2009 or you could end up paying the IRS a very nasty 50% excise tax on the amount not withdrawn--a catastrophic result when combined with the losses already incurred in 2008 from the stock market.

But if you turn 70½ in 2009 and would have had until April 1, 2010 to make the payment under normal rules, your 2009 RMD is waived even though it could have been made in 2010.

Comments on Pension Underfunding and the Beleaguered 401(k) Plan

Great op-ed from Dr. Arnold Kling at the Library of Economics and Liberty: Managing Retirement Accounts. (Thanks to RothCPA.com for the link.) Excerpt:

The only difference between amateur management and professional management is that the professionals get bailed out. Corporations will have to plow more earnings into pension funds--or else default on their obligations, in which case taxpayers will do the bailout through the Pension Benefit Guaranty Corporation. And state and local pension plans, which also lost money, are going to be bailed out by taxpayers.

I fully expect to pay more in taxes to bail out other people' retirement losses than I lost myself in the market.

If anybody else is afraid to manage their own retirement money and wants the government to do it for them, they are welcome to do so. I would prefer to suffer for my own mistakes.

Obama Eyeing Cuts in Medicare/Social Security Entitlements

From Kaisernetwork.org:

During a speech in Washington, D.C., on Wednesday, President-elect Barack Obama said overhauling entitlement programs such as Medicare and Social Security will be "a central part" of his administration's efforts to curb federal spending, the New York Times reports (Zeleny/Harwood, New York Times, 1/8). Obama said, "We are beginning consultations with members of Congress around how we expect to approach the deficit," adding, "We expect that discussion around entitlements will be a part, a central part, of those plans" (Montgomery, Washington Post, 1/8). Obama said, "If we do nothing, then we will continue to see red ink as far as the eye can see," and "at the same time, we have an economic situation that is dire, and we're going to have to jump-start this economy with my economic recovery plan, creating three million jobs. That's going to cost some money" (Weisman/Meckler, Wall Street Journal, 1/8). Obama said he plans to unveil more details about his approach to rein in entitlement spending when he releases his budget next month, the Times reports.

Posted by B. Janell Grenier at 10:19 PM[Permalink]

Fully-Insured Benefit Plans in NY Must Recognize Out-of-State Same-Gender Marriages

Article from Proskauer Rose LLP: Fully-Insured Benefit Plans in New York Must Recognize Out-of-State Same-[Gender] Marriages. Excerpt:

The New York State Insurance Department issued a Circular Letter on November 21, 2008 (the “Circular Letter”) stating that it expects all New York insurers to recognize the marriages of same-[gender] couples legally performed in other jurisdictions for purposes of providing the same level of insurance coverage as is provided to opposite-[gender] spouses.

Also:

In general, the Employment Retirement Income Security Act of 1974, as amended (“ERISA”) preempts state laws that relate to employee benefit plans. However, state insurance laws are excepted from ERISA’s broad preemption provision. Accordingly, it seems clear that the Insurance Department’s pronouncement would apply to employee benefit plans that are provided under insurance policies issued in New York because the insurance companies will have to recognize same-[gender] spouses under their policies. Employers (and other plan sponsors) that provide insured benefits will therefore be required to offer the same benefits to both same-[gender] spouses and opposite-[gender] spouses.

Self-insured plans would be exempt from the requirement per the "deemer clause" of ERISA.

WSJ Article Reports on the State of the 401(k)

From the Wall Street Journal today: Big Slide in 401(k)s Spurs Calls for Change. Excerpt:

Many 401(k) providers have long argued that participants just need more education to make appropriate investment decisions. Some in the industry are giving up on that notion. "Let's face it, participant education has been an abject failure," says Mr. Bramlett of 401(k) record-keeping firm BenefitStreet. . .

Even if workers follow the golden rules of 401(k) investing -- saving early and diligently, holding a broadly diversified investment mix, never tapping their savings until retirement -- their success can still depend largely on the luck of the stock-market draw.

Boston College's retirement-research center recently ran scenarios that assumed workers had contributed 6% of pay to a plan for 40 years, had invested in a target-date fund, had never touched their savings until retiring and had annuitized the assets at retirement. The chunk of preretirement income these savers could replace in retirement varied dramatically depending on when they retired. Those retiring in 1948 could replace just 19%; those retiring in 1999, 51%; and 2008 retirees, 28%.

"Alarming Deterioration" of Pension Funds Will Impact the Bottom-Line

From Mercer:

Pension plan deficit hits record $409 billion for S&P 1500 companies; pension expense may rise to $70 billion in 2009, a significant drain on corporate earnings:

2008 year-end funded status for S&P 1500 drops to 75 percent compared to 104 percent at the end of 2007

Pension expense likely to increase from $10 billion in 2008 to $70 billion in 2009, Mercer says

Weakened corporate balance sheets could reduce capital spending, affect loan covenants and credit ratings

Posted by B. Janell Grenier at 10:44 PM[Permalink]

Massachusetts: New Rules For Taxation of 401(k) Contributions on Behalf of Partners/Self-Employed Individuals

From Boston.com:

During 2008, the Massachusetts Department of Revenue (DOR) issued a directive which disallows partners and other self employed individuals a deduction for contributions made to their 401(k) plans. This directive is a clarification of an existing Massachusetts law that had not been enforced by the DOR for years. This directive does not apply to the employees of said businesses, just the owners. This will effectively increase the taxes of an individual contributing $15,500 to their 401(k) plan by $820.

View Directive 08-3 here (which indicates matching contributions are also taxed?). Excerpt:

For taxable years beginning on or after January 1, 2008, this Directive clarifies and prescribes the Massachusetts personal income tax treatment of contributions made on behalf of partners and other self-employed individuals under a so-called 401(k) plan. As explained in this Directive, under G.L. c. 62, § 2(d)(1)(D), partners and other self-employed individuals are denied any deduction for contributions to their 401(k) plans, irrespective of whether the contributions are elective contributions or matching contributions made on their behalf. This Directive supersedes or modifies all other DOR public written statements to the extent that they may appear to be inconsistent with it.

Financial Services Committee Holds Hearing on Madoff Scheme

You can access testimony in the Financial Servicess Committee Hearing on the Madoff Scheme on the Committee's webpage for the Hearing here: Assessing the Madoff Ponzi Scheme and the Need for Regulatory Reform. You can also access a link to a video of the Hearing on the webpage for the Hearing. (The video contains a discussion over whether the Hearing is really an "official" Hearing due to the fact that the 110th Congress had official concluded and the new Congress had not been sworn in yet.)

Read the testimony of one IRA investor's nightmare here.

Also, don't miss Leon M. Metzger's testimony here. In his testimony, Mr. Metzger, an adjunct faculty member at Columbia University, Cornell University, New York University, and Yale University, provides a list of items he "might study" to understand better a proposed investment's "operational controls." (pg. 5) Mr. Metzger who teaches "hedge-fund management courses" notes the following in his testimony:

On Opening Day of the semester, I ask the students, "Imagine that the only information you have about a fund I am offering to you is its 20-year track record and that the investment has been audited by a Big Four accounting firm since its inception. How many of you would invest in it if, over the last twenty years, its annualized return, net of fees, is 40 percent? With this example, [my] aim is to illustrate that investment risk is commensurate with reward--investment fraud is not even a consideration. Typically, almost everyone in the class raises his or her hand. My objective as a teacher is to chip away at that outcome so that when I repeat that question at the last class, there is no hand in the air.

ERISA Litigation: "Important Component of the Subprime Litigation"

A very interesting paper--"Legal and Economic Issues in Litigation Arising from the 2007-2008 Credit Crisis"--notes how "ERISA litigation represents an important component of the subprime litigation" due to the fact that ERISA provides "legal advantages" to plaintiffs over the securities laws:

First, plaintiffs do not need to establish scienter, as is the case under Rule 10b-5. Rather, liability is based on a defendant breaching its fiduciary duty. Second, the damages resulting from a breach of a fiduciary duty under ERISA have tended to be quite generous, at least as reflected by the terms on which ERISA lawsuits were settled pre-Dura Pharmaceuticals.

Harvard Law Professor Allen Ferrell, a co-author of the paper, discusses the paper at the Harvard Law School Corporate Governance Blog.

DOL Issues Final Regulations Governing Assessment of Civil Penalties for Violations of PPA Disclosure Provisions

The Pension Protection Act of 2006 established new disclosure provisions relating to funding-based limits on benefit accruals and certain forms of benefit distributions, plan actuarial and financial reports, withdrawal liability of contributing employers, and participants' rights and obligations under automatic contribution arrangements. The PPA gave the DOL authority to assess civil monetary penalties of up to $1,000 per day per violation against plan administrators for violations of the new disclosure requirements. The DOL has now issued final regulation setting forth the administrative procedures for assessing and contesting such penalties, but the new regulations do not address the substantive provisions of the new disclosure requirements.

Links:

Final regulations
News release

Something New for 2009

I have decided to take a stab at Twitter and have provided a link in the sidebar entitled "Benefits Twitter." I hope to use it to provide brief statements and comments on what is going on in the benefits world.

View a list of lawyers participating in the Twitter venture here at JDScoop. See also the following links to learn more about the interaction between Twitter and the legal field:

Sixteen Reasons to Tweet on Twitter
Twitter for Lawyers 101
Legal Documents on Twitter
Lawyer News Feeds on Twitter
Steve Matthews on Twitter

You can become a "follower" of Benefits Twitter here.

See also this interesting use of Twitter: Man Tweets From Plane Crash.

Words Cannot Adequately Express. . .

How I feel about this case: McCauley v. First Unum Life Insurance Company. Justice at last. . . sorrow that one of my fellow tax attorneys had to fight such a legal battle for over 13 long years when he should have been able to focus on fighting the disease that was ravaging his body. . .gratefulness that the Second Circuit was able to finally deliver a proper result with a little help from MetLife v. Glenn.

As usual, Roy Harmon has provided a summary of the legal arguments of the case in his wonderful style here. However, besides the obvious importance of the case in its post-Glenn analysis, I have the following comments:

(1) The McCauley case is a perfect example of what the Supreme Court had in mind when it said this in the Glenn case:

We believe that Firestone means what the word “factor” implies, namely, that when judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is one. . . In such instances, any one factor will act as a tiebreaker when the other factors are closely balanced, the degree of closeness necessary depending upon the tiebreaking factor’s inherent or case-specific importance. The conflict of interest at issue here, for example, should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision, including, but not limited to, cases where an insurance company administrator has a history of biased claims administration. See Langbein, supra, at 1317–1321 (detailing such a history for one large insurer). . .

Interesting to note is the fact that the Second Circuit, in a discussion of the insurer's "history of deception and abusive tactics", refers to episodes of "60 Minutes" and "Dateline" as being indicative of such history.

(2) Although Glenn will at least provide some help to employees seeking to perfect claims under their employer-based disability policies, employers may still want to consider structuring their disability programs for employees as non-ERISA plans in order to ensure a greater possibility of recovery. Read more about this quagmire in the law in this previous post here: Voluntary Benefits Becoming a Catch 22 for Employers.

Making Matters Worse. . .

From the Washington Times: "States set to impose bevy of new taxes: Likely to prolong recession, critics say." Excerpt:

One of the most sweeping revenue packages comes out of New York, where Democratic Gov. David A. Paterson wants to raise $4 billion with 137 new or increased taxes and fees in the budget, including an 18 percent so-called "anti-obesity tax" on non-diet soft drinks. Satellite TV, cigars and professional licensing fees also are targets.

Of course, many states will likely feel pressure to impose taxes to shore up underfunded public pensions, which have taken a hit in the recent economic crisis, and to fund post-retirement health care for public workers.

Resource for Retirement Plans Impacted by Madoff Scheme

For those looking for some good info to assist with recovery for retirement plans and IRAs impacted by the Madoff Ponzi scheme, Proskauer Rose has posted a Transcript which contains some helpful information. Excerpt:

As Ed mentioned earlier, SIPC has said that the Madoff firm records are not in good order. Therefore, it is essential you gather your own documentation and be sure that it is in order and complete. . . You should gather all of your records relating to receipt, that you received from the Madoff firm of your deposits. This could be extremely important as proof of what entity it is that your money was deposited into. SIPC insurance, as you heard earlier, applies to the Madoff broker/dealer, which was called Bernard Madoff Investment Securities, LLC. But SIPC does not apply to any funds deposited with other entities Madoff may have been operating. Therefore, if your money was deposited into an entity different from the broker/dealer, your deposit may not be covered by SIPC insurance. An opinion about SIPC coverage for you would require a full evaluation of your individual documents.

More. . .

. . . [F]or the institutional contacts, where assets are invested through asset managers, advisors, fiduciaries, feeder funds, and the like, it is likely that those institutional holders also have their own insurance coverage, their own investment management coverage, their own fiduciary liability coverage, their ERISA bonds, their fidelity bonds, that should be endorsed in a way to provide coverage for the activities of off-site managers that commit fraudulent and dishonest conduct that results in a loss of the investment. So, to the extent assets are held in those areas, there should be additional sources of policies, often with very substantial limits and very broad coverage to allow for recovery of additional losses. And so, really, the overriding point here is to look at insurance with an open mind and, most importantly, look at it early, because otherwise the potential avenues of recovery might well be forfeited.

(Also, the transcript answers a question many lawyers are being asked these days: Can the SEC be sued for this mess? Answer: pg. 18 of the Transcript)

Source: A Taxing Matter

President Bush Signs WRERA

On Tuesday, December 23, 2008, the President signed H.R. 7327, the "Worker, Retiree, and Employer Recovery Act of 2008" into law.

A Very Handy List

Wow, a Christmas present for benefits lawyers: A Chronological Summary of all the Major Benefits Legislation enacted since ERISA. (from Hewitt)

(Also, a great illustration of why benefits lawyers continue to be in demand--even in an economic meltdown--and why benefit plan documents tend to be so complicated.)

RMDs for 2008 - No Relief

For those waiting to take their Require Minimum Distributions ("RMDs") for 2008, hoping that relief might come from the IRS, please note that the latest news is that the Treasury has declined to provide such relief (2009 RMDs have received relief under WRERA). From the Washington Post: IRS, Treasury Keep Rule Requiring Retirees to Withdraw Their Savings:

The Treasury Department and Internal Revenue Service decided not to change a rule that requires seniors to withdraw money from their individual retirement accounts and 401(k) plans by the end of the year. . .

We are disappointed that the Treasury Department declined to act to help those seniors forced to take withdrawals from their depleted retirement accounts," said Aaron Albright, press secretary for the House Education and Labor Committee. "Congress acted to provide relief for seniors in 2009 with the understanding that Treasury was actively working on a solution for this tax year."

In a letter to Congress, Kevin I. Fromer, the Treasury's assistant secretary for legislative affairs, said "the scope of Treasury's ability to make administrative changes has constraints. Thus, any steps Treasury could take would be substantially more limited than the relief enacted by Congress and could not be made available uniformly to all individuals subject to required minimum distributions."

He also wrote that making any changes this year would be "complicated and confusing for individuals and plan sponsors."

Many seniors have already taken their required minimum distribution for this year. One of the main concerns with suspending the rule was the difficulty in determining how to deal with those who had already complied with it.

Update: Access the text of the Treasury's letter to Congress indicating the Treasury will not provide any relief for 2008 RMD's here.

Listen to Pandora While Reading. . .

I have provided some of my Pandora stations in the sidebar on the right. I highly recommend the White Christmas Radio station if you like Christmas music. And if you haven't discovered Pandora yet, well. . . you are in for a treat!

Cycle C Determination Letter Deadline is Groundhog Day

For those who end up waiting until the last minute to file a Cycle C determination letter application, the IRS has these words in their latest Employee Plan Newsletter:

The Cycle C deadline for submitting determination letter applications for individually designed plans under Revenue Procedure 2007-44 ends January 31, 2009. A question has been raised as to whether the deadline is extended to Monday, February 2, 2009, since January 31, 2009 is a Saturday. Although this does not generally fall within the rules of Code §7503, the IRS will accept an application for a Cycle C determination letter if it is submitted no later than February 2, 2009. Please note that although February 2 is Groundhog Day, this does not give applicants unlimited do-overs as in the movie by the same name.

409A Affecting NFL Players

Even though 409A has been around now for three years, employers continue to be surprised at the implications, as evidenced by this story:

NFL agents were sent an urgent memo this week from the NFLPA, requiring immediate attention to Federal Tax Code 409A. This provision, originally aimed at bloated executive compensation packages, potentially calls for a full tax burden on signing bonuses and future guaranteed money in the year the package is negotiated, even if the money is deferred over several years. This would have dramatic ramifications.

Virtually every signing bonus of any significance in an NFL contract is paid out over a period of at least a couple of years. For instance, if an NFL player signed a contract in March 2008 with an $8M bonus, payment terms of that bonus might have looked something like this:

$2M upon execution of the contract;
$2M in October 2008;
$1M in both March and October 2009;
$1M in both March and October 2010.

Some teams have more deferrals than others, but the amount of deferral is usually not a sticking point in negotiations with agents, as the money is guaranteed. . .

The NFLPA was clear about the importance of this provision in its memo to all agents: “This memorandum identifies an extremely important tax issue that may affect your player-clients and requires your immediate attention. The NFL has just informed the NFLPA that NFL clubs did not draft or amend many NFL player contracts in order to bring them into compliance with Section 409A of the Internal Revenue Code. As a result, many player contracts that include certain deferred compensation arrangements may not comply with the new tax provisions, thereby resulting in accelerated taxable income and/or an additional 20% tax, imposed on the player-client, unless the contracts are amended on or before December 31, 2008.”

H.R. 7327 Passes

Links for The Worker, Retiree, and Employer Recovery Act of 2008 which passed the Senate on December 11, 2008:

403(b) Plans Get a Reprieve

While I was picking up my daughter at college in Ohio, the IRS issued the notice everyone was waiting for, extending the deadline for the written plan document requirement for 403(b)s. From a news release:

The IRS issued a notice today announcing relief for certain retirement plans that do not have a written plan in place by January 1, 2009. The new guidance is for retirement plans covering employees at public schools, colleges and universities, and other tax exempt organizations. These retirement plans are often referred to as 403(b) plans after the relevant section in the tax code.

The IRS is extending the deadline for plan sponsors to adopt new written plans or amend existing plans to satisfy the requirement of the final 403(b) regulations because of difficulties expressed by numerous plan administrators in meeting the current deadline of January 1, 2009. This extension will give plan sponsors additional time to put their plan documents in place.

The IRS will treat these plans as meeting the requirements of 403(b) and the regulations during the 2009 calendar year if:

By December 31, 2009, the plan sponsor of the plan has adopted a written 403(b) plan that is intended to satisfy the requirements of 403(b) and the regulations.

During 2009, the plan sponsor operates the plan in accordance with a reasonable interpretation of 403(b) and the related regulations.

By the end of 2009, the plan sponsor makes its best effort to retroactively correct any operational failure during the 2009 calendar year to conform to the written plan.

The IRS plans to issue further guidance on 403(b) plans, including a revenue procedure establishing programs for 403(b) plans to obtain IRS approval of the plan document and allowing these plans to make remedial amendments to retroactively fix plan provisions under rules that similar to those that apply for 401(a) qualified plans.

Notice 2009-3 has all the official details.

Will Congress Act on Pension Relief?

Many groups are sounding the alarm and asking Congress to act:

ERIC Warns Congress about Inaction on Pension Funding Relief

American Benefits Council Webpage Urging Legislators to Act

ASPPA Urges Practitioners to Contact U.S. Senators Urging Passage of PPA Corrections, Pension Funding and Minimum Distribution Relief

Loosen Pension-Funding Rules, Consultants Ask Congress

In Support of Health Savings Accounts

Many are predicting that health savings accounts will not fare very well in the upcoming administration. However, this recent Congressional Research Service Report indicates why we should keep them alive:

Whether moving to higher insurance cost sharing would reduce health care spending is not at issue; notwithstanding measurement difficulties, economic theory, actuarial experience, and empirical studies all indicate that it does. Probably the most frequently cited research demonstrating this point is the RAND Health Insurance Experiment (HIE), a carefully designed study of nearly 6,000 people between 1974 and 1982. Among other things, the study showed that per capita expenses for patients with a 95% coinsurance requirement for outpatient services were 31% lower than those for patients without cost-sharing. Reductions were also present but somewhat smaller for patients with lower coinsurance requirements, as they were for those with deductible policies. Reductions occurred for a broad range of conditions, especially for ambulatory care but also for hospitalization.

More debatable is what effect reductions in spending have on individuals’ health, which could affect measures of the welfare loss. A common reading of the RAND HIE is that the health outcomes of those with high cost sharing were not different from those having conventional coverage, with several exceptions. (The exceptions included high blood pressure and vision imperfections in adults and anemia in children.) Although more health problems might have arisen for the high cost sharing group had the experiment continued longer, there is no way to prove or disprove this now.

Also, this article here notes:

More than 12 million lives are now covered by a health plan that either includes a health reimbursement arrangement (HRA) or is compatible with an HSA. And with more employers than ever offering such plans to employees during this fall's open-enrollment period, that number is expected to jump on Jan. 1. Plus, banks collectively now hold more than $4 billion in HSA assets.

And finally this from the article:

Jay Savan, an employee benefits consultant in the St. Louis office of Towers Perrin, says the potential for account-based health coverage actually remains as bright as ever. The exclusion of employer contributions for health coverage now is uncapped and is the Treasury Dept.'s third-largest tax expenditure. Savan contends that the tax break will need to be capped at some point, "particularly if Obama intends to have any money left to pay for an expanded [State Children's Health Insurance Program] or other federal subsidies that ensure children have health coverage, as he's maintained as part of his platform."

And if a cap is placed on the amount of pretax dollars employees can contribute to their health coverage, employers will be pressed by their employees to offer options that don't exceed the tax cap. Low-premium, account-based plans might be an attractive option, Savan says.

Ramthun says he's encouraged that HSA-based health plans remained available in Massachusetts after the state enacted its landmark health reform efforts. "That is a likely model given the [Sen. Ted Kennedy] connections to Obama. I don't believe Kennedy will go farther than where Massachusetts has gone.

Impact of Massachusetts' Health Care Reform

Now that Massachusetts requires state residents to be covered by health insurance, apparently there are not enough primary care physicians to go around. From this NPR article:

The law, passed in 2006, requires most state residents to be covered either through a state-subsidized plan, an employer-sponsored plan or an individual policy. Jacqueline Spain, medical director for Holyoke Health Center, said, "It's entirely reasonable for somebody who's now got insurance and maybe has a whole list of things that's worried them and troubled them" to "expect that they should be able to go out in the market and get all of that care. There just aren't enough [primary care physicians] to give it to them." She said about 1,600 people currently are on the facility's waiting list and patients must wait an average of four months to be seen.

Some Year-End Deadlines

In its Fall 2008 Retirement News for Employers, the IRS reminds employers of the following deadlines:

Dec. 2: Deadline to provide safe harbor notice for Safe Harbor 401(k) plans for 2009 plan year.

Dec. 2: Deadline to give eligible employees Automatic Enrollment Notice.

Dec. 31: Deadline for: making 2008 required minimum distributions; and distributing 2007 401(k) excess contributions (including income or losses) without jeopardizing a plan’s tax-qualified status.

In Cutting Costs, Employers, Beware of ERISA Section 510

This article from Wharton--"As Layoffs Spread, Innovative Alternatives May Soften the Blow"--indicates companies are looking at creative alternatives to layoffs "such as voluntary retirements or salary cuts, hiring freezes, reductions in hours, or the cancellation of business trips and/or costly perquisites." The article also notes the trend of cutting "benefit packages and matching contributions to 401(k) plans."

Whatever the alternatives contemplated, employers need to beware of the minefield of Section 510 of ERISA. For those not familiar with ERISA section 510, it provides as follows:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan. . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan. . .

For instance, targeting for layoff those employees who are costing the company more when it comes to health care costs or pension costs is unlawful under Section 510. Some may recall the well-known Millsap et al. v. McDonnell Douglas Corporation case in which the company was accused of seeking to maximize their pension plan's surplus by selecting for layoff or plant closing its older, more senior employees. You can read about the millions that were recovered in that case by the plaintiffs here, here, and here.

Also, outsourcing or reclassifying employees to cut benefits costs can give rise to ERISA Section 510 claims. Read more about that topic here, here, and here.

Memo to Lawyers: How Not to "Retire and Teach"

For anyone considering a career jump from legal practitioner to law professor, I highly recommend Jeffrey Lipshaw's piece entitled "Memo to Lawyers: How Not to "Retire and Teach." Abstract:

Many long-time practitioners muse about what it might be like to retire and teach, not realizing there is no more galvanizing phrase to their counterparts who have long toiled in the academy, nor one less likely to enhance the prospects of the unfortunate seasoned applicant who utters the phrase. I intend this essay not for law professors (though it may either amuse or irritate them), but for those in the practice who aspire, after all these years, to return to the academy. With a good deal of humility acquired along the way, I offer some realistic advice to job seekers, concluding that wistful phrase is precisely the opposite of the true sine qua non of success: demonstrating the capability of, and commitment to, being a productive scholar

While I enjoyed the article, I found it humorous that Professor Lipshaw considers employee benefits to be "mundane":

It seems like the vast majority of young law professors want to talk and write about the burning constitutional, political, and rights issues of the day. It's an advantage to want to teach and write in a niche that may be considered more mundane (somebody has to think about employee benefits, for example). But merely writing in the niche is not enough; you need to have something scholarly to say about it.

Apparently, he hasn't been reading Benefitsblog. Who could possibly think this is mundane? Or even this?

IRS Issues 2008 Cumulative List

The IRS has published its 2008 Cumulative List. The 2008 Cumulative List informs plan sponsors of issues the Service has specifically identified for review in determining whether a plan filing in Cycle D has been properly updated. It also acts as an attorney's legal checklist for updating an individually designed plan that falls into the Cycle D Remedial Amendment Period.

In accordance with Rev. Proc. 2007-44, the Service will start accepting determination letter applications for Cycle D plans beginning on February 1, 2009. The 12-month submission period for Cycle D plans will end January 31, 2010.

Proposition 101 Likely Defeated in Arizona

It sounds like they might still be counting votes. However, the most recent report indicates that Proposition 101 in Arizona which would have attempted to block any government-run universal health plan in Arizona will be defeated. From The Arizona Republic: Health-care debate will rage on; However, universal plan in state appears unlikely. Excerpt:

The most recent count shows that 50.3 percent voted against the measure that backers said would prevent a government-run universal health plan in Arizona.

Dr. Eric Novack, chairman of Medical Choice for Arizona, said the close vote showed that Arizona voters are interested in blocking government-run health plans.

Read about the proposed legislation in previous posts here.

(The New York Times is gloating over the result.)

Impact of Economic Crisis on 401(k) Participants

From CFO.com: "Study Shows Workers Sticking with Retirement Plans." Excerpt:

U.S. employees seem to be resisting the temptation to save less in their retirement accounts, a Hewitt Associates survey shows.

Savings rates have barely dropped, from 8 percent in 2007 to 7.8 percent in 2008, although there is a predictably aggressive shifting of assets from equities to more other investments. What's more, just 4 percent of employees have terminated their 401(k) plan contributions altogether this year, according to the analysis by Hewitt, a global human resources consulting company.

So, how bad does the survey show 401(k) investors being hit? The analysis of 2.7 million U.S. employees measured the average 401(k) plan balance as falling 14 percent through 2008, to $68,000 from $79,000 in 2007. In the past two months alone, employees on average have lost nearly 18 percent of their 401(k) plan savings. Some have lost more than 30 percent.

The Worker, Retiree, and Employer Recovery Act of 2008

Senators Baucus, Grassley, Kennedy, and Enzi have joined together in proposing some year-end pension legislation. The name of the proposed legislation is : The Worker, Retiree, and Employer Recovery Act of 2008. Some links:

Press Release here.
Text of the Worker, Retiree, and Employer Recovery Act of 2008 ("WRERA?")
Staff Summary here.

Announcement from the SEC Regarding Mutual Fund Disclosures

SEC Improves Disclosure for Mutual Fund Investors:

The Securities and Exchange Commission today voted unanimously to improve mutual fund disclosure by requiring that funds provide investors with a concise summary — in plain English — of the key information they need to make informed investment decisions. The new summary prospectus will appear at the front of a fund’s prospectus.

The Commission also approved amendments to encourage funds to make greater use of the Internet so investors can receive more detailed information in a way that best suits their needs.

More on the change from Reuters--"U.S. SEC adopts rules to improve fund disclosures." Excerpt:

Almost half of the households in the United States use mutual funds to save for retirement or college tuition. But many consumers cannot understand the documents that fund firms such as Fidelity Investments or Vanguard are required to publish, detailing what will be done with their money.

Nor do retail investors generally take the time to wade through the prospectuses, which often run hundreds of pages long.

The SEC's rule requires mutual funds to include key information at the front of its statutory prospectus such as the fund's investment objectives, strategies, risks and costs.

The summary prospectus also needs to include brief information about the investment advisers and portfolio managers, as well as the fund's purchase and sale procedures and tax consequences.

The new SEC rules, which do not go into effect until 2010, will allow investors to access more detailed information via the Internet or from the traditional paper prospectus.

Episodic Employment Patterns These Days Adding to Mortgage Crisis

Great article from Professor Katherine V.W. Stone of UCLA: The deeper roots of the mortgage crisis: employment instability:

In the 1980s, adjustable mortgages became commonplace and most mortgages ceased imposing prepayment fees, so that homeowners gained flexibility to adjust their debt level as interest rates changed. But that flexibility did not address the deeper source of instability – the danger of joblessness.

The problem now is that few people have the kind of long-term job security that our housing policies take for granted. According to the Bureau of Labor Statistics, the median length of time a worker spends with a particular employer has decreased in every age group.Today people have a more episodic experience in the labor market, moving from employer to employer, with periods of employment often followed by periods of unemployment and transition. When unemployment strikes, mortgage payments that once had been manageable become impossible.

These episodic employment patterns can also impact benefits negatively as well: people may lose their health insurance, or never build up a very big retirement nest egg because they are always leaving an employer before vesting in the employer's retirement plan, etc.

Benefits-Related Provisions in the Final FMLA Regulations

Regarding the recently issued final FMLA Regulations issued by the DOL yesterday, here are the benefits-related sections of the regulations:

825.209 Maintenance of employee benefits.
825.210 Employee payment of group health benefit premiums.
825.211 Maintenance of benefits under multi-employer health plans.
825.212 Employee failure to pay health plan premium payments.
825.213 Employer recovery of benefit costs.

Besides these provisions, the final regulations also:

(1) Provide guidance regarding when PEOs will be considered joint employers for purposes of FMLA.

(2) Allow the employer and employee to agree to run paid leave concurrently with FMLA leave to supplement disability benefits.

(3) Allow an employer to deny an employee the payment of a bonus or other payment based on achievement of a specified job-related performance goal (such as attendance) where the employee has not met the goal due to being on FMLA leave, so long as this is done in a nondiscriminatory manner.

These final regulations have an effective date of January 16, 2009. For those employers who haven't updated their benefits booklets or plan documents to reflect these new rules, it is time to do so.

Also, here is what the DOL has to say in the preamble as to what, if any changes, were made to the benefits-related provisions in these final regulations:

Increase in the Use of Health Savings Accounts

The New York Tmes reports here an increase in the use of HSAs:

But this year, at more than 100 large companies and hundreds of smaller ones, the high-deductible plans are the employee’s single take-it-or-leave-it option.

One of those companies is the automaker Nissan, which is offering only high-deductible plans to its 15,000 United States employees for the coming year. Another is Delta Airlines.

Most large companies still do offer a choice between high-deductible plans and more conventional insurance, which means workers must try to decide which approach is best for them.

Regarding whether HSAs will survive the next administration, the article states that "the plans may not have a White House advocate." The article quotes an advisor to the President-elect as saying that "medical benefits that shift costs to employees" would not be consistent with the upcoming President's position on health care.

Update: The Tax Update Blog has a response to the comments quoted in the article. (Great benefits quote, by the way: "Benefits don't grow on magical benefits trees grown in HR Departments.")

Benefits in the News

You can access the complete text of Senator Baucus's health care proposals here. (Click on "Call to Action" Complete Text for the 98-pg White Paper.)

Plan Sponsor has a good summary of the proposal here. Excerpt:

According to the "Call to Action" report, the foundation of Baucus’ plan is the creation of a nationwide insurance pool called the Health Insurance Exchange - a marketplace where Americans could easily compare and purchase the plans of their choice. Private insurers offering coverage through the Exchange would be precluded from discrimination based on pre-existing conditions.

Premium subsidies would be available to qualifying families and small businesses. Baucus expects that the vast majority of American employers would continue to provide coverage as a competitive benefit to attract employees, so those who already have health coverage could choose to keep what they have.

Also, on the retirement plan front, the Wall Street Journal has this op-ed: "It's Time to Rethink Our Retirement Plans."

Tax Court: Deductions are a matter of "legislative grace"

"Deductions are a matter of 'legislative grace'", according to the Tax Court. Such grace was not extended to a piano teacher's claim for deductions in this Tax Court case: Langer v. Commissioner. Thanks to the Tax Update Blog for the link.

An Update on TARP

Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update, November 12, 2008

Professor Zelinksy Critiques the Ninth Circuit on Their ERISA Preemption Analysis

Professor Ed Zelinksy has posted this interesting piece on SSRN entitled "Employer Mandates and ERISA Preemption: A Critique of Golden Gate Restaurant Association v. San Francisco." In the paper, he predicts that, if the Ninth Circuit maintains its position in the case (which you can read about in a previous post here) the Supreme Court will likely overturn the decision. The Golden Gate Restaurant Association has filed a Petition for Rehearing En Banc asking the Ninth Circuit to consider an en banc review of the decision.

One of Zelinksy's arguments is as follows:

In sum, Golden Gate II concludes that an employer’s ongoing payments under the San Francisco ordinance do not give rise to an ERISA plan because the employer has neither significant administrative tasks nor discretion in connection with those payments. If so, an employer’s ongoing payments to a traditional insurer, HMO, PPO or HSA provider do not constitute an ERISA plan either, since those payments also entail the same, quite minimal administrative burdens and discretion for the employer. These providers, like San Francisco, perform the administrative tasks and execute the discretionary functions necessary to furnish medical care to employees.

The Ninth Circuit’s ERISA analysis of employers’ payments to San Francisco disregards the language of the statute and is a classic argument that proves too much. If correct, the Ninth Circuit’s analysis would radically reconfigure our understanding of ERISA by exempting from its coverage the many programs by which employers finance medical care for their employees through payments to insurers, HMOs and PPOs. It is more convincing to recognize that San Francisco under the ordinance acts like any other health care provider, including the exercise of administrative responsibilities and discretionary functions. Consequently, all ongoing payments to these equivalent health care providers, including the City of San Francisco, constitute employee benefit plans for ERISA purposes.

Please note that the DOL makes this same argument in their Amicus Brief filed in support of the Petition for Rehearing. Excerpt:

The Secretary [has] explained that when an employer chooses to fund health benefits for its employees by making payments to the City under the HAP program, the employer establishes an ERISA-covered plan for its employees, just as an employer establishes an ERISA-covered plan when it provides health benefits for its employees through the purchase of insurance. Id. at 13-14 (citing Qualls v. Blue Cross of Cal., 22 F.3d 839, 843 (9th Cir, 1994) (holding that an employer's purchase of insurance for its employees creates a plan because of the "complex ongoing relationship between the insureds and the insurer which require[s] the constant administrative attention by the insurer").

There is no relevant difference between an employer's decision to provide benefits through HAP or to provide benefits through the purchase of insurance – in both cases, the employees receive their benefits from a third party and the program is substantially administered by a third party. Nothing in the statute or the case law turns on whether the particular benefit arrangement relies upon a private insurer for the administration of benefits, rather than public employees or contractors hired by the City. Whether the employer provides benefits through private insurance or HAP, it has elected an arrangement for providing ERISA-covered benefits to its employees that meets the established test for determining whether a plan exists.

Great Link for Veterans Day

Here is a great link for those interested in the history of Veterans Day: "The History of Veterans Day." View a timeline of America's wars, examine conflict maps, and watch videos of veterans' experiences.

There are many veterans in my family to honor on this day:

Remarks of Douglas Shulman, Commissioner of Internal Revenue, before Independent Sector, Nov. 10, 2008

Excerpt from his speech:

I’m now seven months into my five-year term. It’s an honor and privilege to lead the IRS. And for each day I’ve been in office, I’ve been amazed by what an incredible organization the IRS is.

Just think about it for a minute. The IRS not only collects the approximately $3 trillion it takes to run the federal government but interacts every year with practically every American adult and business. We’re the face of government. And contrary to some opinion, it can be a most welcome face. This year, as of October 24th, we issued 106 million tax refund checks totaling $254 billion.

And, as you know, we work very closely with the non-profit community — whether it’s processing over 70,000 determination applications per year or applying oversight or audits when we detect a problem.

Now, in addition to the filing season, a lot has happened in these seven months. It’s not a time in my life I will easily forget. . .

More:

We’ve also began conducting studies of several of the largest taxpayer segments within the tax-exempt community by sending out comprehensive questionnaires that focus on an area of interest and then analyzing the responses. If necessary, we can follow up with an examination.

In fact, we’re about to release the hospital study report. Stay tuned, but I can say this much. I’m confident that the new hospital schedule for the Form 990 — the Schedule H — is the right tool to allow nonprofit hospitals, of all types and sizes, to report how they promote the health of their communities and to justify their tax exemption. And the Schedule H will give the IRS and the public better transparency into these important institutions.

We also recently launched a study of colleges and universities. In the spirit of collaboration and the recognition that we must be in dialogue with sectors with whom we engage, we did advance work with colleges and universities on the questionnaire. We wanted to understand how they talk about themselves, what kind of measures they use, and so forth. When we have agreement about what data means, we eliminate a lot of friction. I want to apply this lesson throughout the IRS, not just in Exempt Organizations.

House Ways and Means Contemplating Corporate Tax Cut Plan

From the Dow Jones Newswire: "House Ways and Means Re-Tool Corporate Tax Cut Plan." Excerpt:

House Ways and Means Committee Democrats and staff are retooling a proposal to overhaul the corporate tax code, with an eye toward introducing a new bill early next year.

The new legislation in the U.S. House of Representatives will be an updated version of a corporate tax code blueprint introduced by House Ways and Means Chairman Charles Rangel, D-N.Y., late last year, according to a Democratic House aide.

That bill would have cut the corporate rate from 35% to 30.5%. However, the new version will push that rate lower, people familiar with the effort told Dow Jones Newswires.

(From the Tax Prof Blog)

IRS Says: Beware of ROBS

With a lot of baby boomers nearing retirement, some may be looking for alternatives to the stock market for investing their accumulated retirement plan assets. Some may even be approached by promoters promising that they can use their funds in their 401K, IRA, profit-sharing, or annuity plans to open a business without paying taxes on the distribution. In its most recent newsletter here, the IRS has provided a lot of helpful information on the legal pitfalls pertaining to the design of these programs. The IRS is calling these programs "ROBS" which stands for "Rollovers as Business Startups."

The IRS outlines in this Memorandum issued October 1, 2008 how the programs typically work:

An individual establishes a shell corporation sponsoring an associated and purportedly qualified retirement plan. At this point, the corporation has no employees, assets or business operations, and may not even have a contribution to capital to create shareholder equity.

The plan document provides that all participants may invest the entirety of their account balances in employer stock. The individual becomes the only employee of the shell corporation and the only participant in the plan. Note that at this point there is still no ownership or shareholder equity interest.

The individual then executes a rollover or direct trustee-to-trustee transfer of available funds from a prior qualified plan or personal IRA into the newly created qualified plan. These available funds might be any assets previously accumulated under the individual's prior employer's qualified plan, or under a conduit IRA which itself was created from these amounts. Note that at this point, because assets have been moved from one tax-exempt accumulation vehicle to another, all assessable income or excise taxes otherwise applicable to the distribution have been avoided.

The sole participant in the plan then directs investment of his or her account balance into a purchase of employer stock. The employer stock is valued to reflect the amount of plan assets that the taxpayer wishes to access.

The individual then uses the transferred funds to purchase a franchise or begin some other form of business enterprise. Note that all otherwise assessable taxes on a distribution from the prior tax-deferred accumulation account are avoided.

After the business is established, the plan may be amended to prohibit further investments in employer stock. This amendment may be unnecessary, because all stock is fully allocated. As a result, only the original individual benefits from this investment option. Future employees and plan participants will not be entitled to invest in employer stock.

A portion of the proceeds of the stock transaction may be remitted back to the promoter, in the form of a professional fee. This may be either a direct payment from plan to promoter, or an indirect payment, where gross proceeds are transferred to the individual and some amount of his gross wealth is then returned to promoter.

The IRS notes that it has identified 9 promoters of these programs. Here are the main legal deficiencies being identified in the programs, according to the Memorandum:

We have examined a number of these plans - having opened a specific examination project on them based off referrals from our determination letter program - and found significant disqualifying operational defects in most. For example, employees in some arrangements have not been notified of the existence of the plan, do not enter the plan or receive contributions or allocable shares of employer stock. Additionally, we have identified that plan assets are either not valued or are valued with threadbare appraisals. Required annual reports for some plans have not been filed. In several situations, we have also found that the business entity created from the ROBS exchange has either not survived, or used the resultant assets on personal, nonbusiness purchases.

The IRS states that there are "two primary issues raised by ROBS arrangements": (1) violations of nondiscrimination requirements, in that benefits may not satisfy the benefits, rights and features test of Treas. Reg. § 1.401 (a)(4 )-4. and (2) prohibited transactions, due to deficient valuations of stock.

Many promoters will claim that they have IRS approval for their program, when in fact the IRS has only approved the form of the Plan document. The Memorandum notes that the violations that occur are typically operational and not document failures.

In the past, I have had clients ask me about these programs after being approached by promoters. It will be nice to be able to point folks to these resources as a "starting point" for further discussions.

UPDATE: More on this from Joe Kristan: "The dangers of ROBS-ing your retirement plan."

Status of Proposition 101 in Arizona?

What is happening with Proposition 101 in Arizona? One news report:

A scant 20 voting precincts remain unaccounted for out of 2,239 statewide, yet those votes could make the difference between whether or not Proposition 101 passes.

With the tallies at 50.1 percent against the proposition and 49.9 percent voting yes, the two sides are deadlocked until more ballots are counted.

Currently, votes in favor and opposed are separated by a margin of 2,124 out of over 1.7 million ballots cast.

The ballot initiative, backed by Medical Choice for Arizona, would guarantee that citizens would always have the right to choose and possibly pay for whichever health plan they wished, without interference, and that no law could incur a fine for opting out of or obtaining health care coverage.

Previous post here and here.

Update: More from the WSJ Health Blog here.

Sample of TARP/Executive Compensation Agreement

Footnoted.org has a link to this letter agreement provided to a TARP participant's executives by the participant/company's chief human resources officer under which the executive is to forego golden parachutes and other executive comp pursuant to the requirements of the TARP program. The Letter Agreement contains this language:

In addition, the Company is required to review its Benefit Plans to ensure that they do not encourage senior executive officers to take unnecessary and excessive risks that threaten the value of the Company. To the extent any such review requires revisions to any Benefit Plan with respect to you, you and the Company agree to negotiate such changes promptly and in good faith.

All of this is agreed to "in consideration of the benefits" that the executive will receive as a result of the Company’s participation in the government's Capital Purchase Program.

More on TARP in previous posts here.

60 Minutes Video on USERRA

Reservists' Rocky Return To Job Market. Excerpt:

With the Pentagon relying so heavily on the National Guard and Reserve to fight in Iraq and Afghanistan - 650,000 have been called for active duty since 9/11 - the least you'd expect is that after they serve, they get their old civilian jobs back.

There's a law, called USERRA (Uniformed Services Employment and Reemployment Rights Act), that says their employers have to take them back at the same pay.

But what 60 Minutes correspondent Lesley Stahl found is that despite the law, thousands of guards and reservists come home to find themselves demoted or penalized, or out of a job completely.

The Workforce Prof Blog has comments on the video:

A primary focus was on USERRA's costs to employers given the frequent and long tours of active duty that many Reservists now face in Iraq. There's the normal share of simply bad employers, but also an example of an employer that continually went beyond the call of duty in supporting its employees who were called up. That employer, while continuing that support, was frank about the growing burdens on losing its employees so frequently and for unknown periods of time. The employer argued that if the military wanted to ensure its personnel enjoyed employment benefits, it should help pay the costs. An interesting idea that would normally seem to be a stretch, but sounds more reasonable given what employers have had to face the last several years.

The story also emphasized that these costs to employers hurt military employees' opportunities. One commentator quoted a senior HR official who said point-blank that he wouldn't hire an active Reservist. When pointed out that such an action was illegal, the official said that he could also find a reason not to hire someone.

Supreme Court Justice Alito's Love for the Phillies

Being a Phillies fan myself, I enjoyed this story from Law.com about Supreme Court Justice Samuel AlitoJr.: "Sitting Down With Justice Alito, the Supreme Phillies Fan." Excerpt:

Supreme Court Justice Samuel Alito Jr. has turned his desk at the Court into a mini-shrine to the Philadelphia Phillies.

There's a Phillies towel, the front page of Thursday's Philadelphia Inquirer with a headline proclaiming "CHAMPS!" and a baseball hat marking the team's playoff win. The World Series hat, he says, "is on the way." . . .

He watched the Series games on television, but was "living and dying with every pitch." Does he yell at the television? "There's a lot of emotion, but I'm very quiet."

The Importance of the Health-Care Debate in Arizona

From the Wall Street Journal, "As Arizona Goes: A Proposition that could change the health-care debate." Excerpt:

On Tuesday Arizonans will vote on a ballot initiative that could resonate in the national debate over the future of health care. Proposition 101, the Freedom of Choice in Health Care Act, has set off a storm of opposition, though its language hardly seems controversial. It reads that "no law shall be passed that restricts a person's freedom of choice of private heath care systems or private plans of any type." Also: "No law shall interfere with a person's right to pay directly for lawful medical services . . ."

Proposition 101's fate is up in the air because its opponents, led by the Governor, are spending about four times more than supporters. They are doing so in the belief that if health-care choice passes in Arizona, it will spread to other states. It is ironic the groups opposing the rights of Arizona citizens to choose their own health care purport to back a "patient bill of rights." In what way is the freedom to choose one's care not a fundamental patient right?

More 401(k) Discussion

From Financial Week: 401(k) plans could be facing total revamp: Lawmakers, candidates calling for rethink of DC plans; die early, lose half your assets? Excerpt:

“It’s going to be difficult because people like their 401(k) plans,” said Bill Sweetnam, a partner with the Groom Law Group, Washington.

The prospects for Ms. Ghilarducci’s proposal are considered dim by some lobbyists. For starters, while the existing retirement system in the U.S. is voluntary for employers, Ms. Ghilarducci’s proposal would require participation. In addition, while investments under existing retirement plans are managed by private-sector money managers, investments in Ms. Ghilarducci’s plan would be managed by the federal government.

“It’s a non-starter,” Paul Schott Stevens, president and chief executive officer of the mutual fund industry’s Investment Company Institute, Washington, said of Ms. Ghilarducci’s plan. “It’s puzzling in the (financial) course we are in now that the committee would give currency to that proposal.”

“We believe the current employer-sponsored system is a good one that should be built on,” added Jan Jacobson, senior counsel, retirement policy, American Benefits Council, Washington.

“It (Ms. Ghilarducci’s proposal) is subsidized by workers who die early and forfeit their assets,” added Ed Ferrigno, vice president of Washington affairs, Profit Sharing/401(k) Council of America, Chicago. “I don’t think there’s any prospect for her exact version.

“There may be some elements in it that may end up being considered.”

“There isn’t anybody out there who is serious that is supporting that kind (Ms. Ghilarducci’s) of plan,” added Mark Ugoretz, president of the ERISA Industry Committee, a Washington-based group representing employers.

An Innovative Approach to Health Care

From Bloomberg.com: "Peabody Pays Mayo Clinic Prices to Save on Health-Care Costs." Excerpt:

Ferguson's wife, Shanna, had her colon removed last year because of chronic inflammatory disease. Foundation sent her 700 miles away to the top-ranked Mayo Clinic in Rochester, Minnesota. The company covered the $85,000 bill for the operation and follow-up reconstructive surgery and even paid for Ken's motel.

``I was at the best place with the best doctors possible,'' said Shanna, 50. ``And we saved money.''

So did Foundation. The coal producer says it has found an unconventional way to cut health costs: Seek out the nation's best care and give workers incentives to use it. About two-thirds of operations have proven to be cheaper at better-rated hospitals out of state. Even when the price was higher, the Linthicum Heights, Maryland-based company saved money by reducing misdiagnoses, complications and repeat procedures.

Foundation's experiment in Wyoming could be a model for politicians and insurers seeking to curb the growth in U.S. health-care spending, now $2.2 trillion a year, said Mark McClellan, who served under President George W. Bush as head of Medicare and the Food and Drug Administration.

More on this approach from the Connecticut Employment Law Blog here. See also this link to a book by Michael E. Porter & Elizabeth Olmsted Teisberg entitled "Redefining Health Care" which discusses the approach.

Federal Circuit Overrules Tax Strategy Patent Linchpin

From the Tax Prof:

The Federal Circuit today issued its long awaited decision in In re Bilski, No. 2007-1130 (Fed. Cir. Oct. 30, 2008), rejecting the patentability test (State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998)) which was the linchpin in the spate of tax strategy patents issued recently. . .

There has been a lot written about whether strategies could be patented in the ERISA arena. Those who are interested in this topic will want to take note.

Knowledge Poll About SPDs

The HR Lady (sorry, I just can't bring myself to call her "evil" as the name of her blog indicates) has an interesting poll going on at her sight: "I am an HR Professional and I know what a 'Summary Plan Description' is. . ."

It will be interesting to find out the results of this. If they aren't good, I guess we're in trouble.

(For those who might not be benefits or ERISA savvy, you can go here or here for the answer.)

FASB Increasing Pension Disclosure Requirements

According to this press release here, the Financial Accounting Standards Board has mandated that employers provide extensive information about the fair value of assets in pension plans, counter to a staff recommendation and over the objections of Chairman Robert Herz and member Leslie Seidman. See this FASB Summary of Board Decisions here.

The board decided Wednesday that the final staff position will be effective for fiscal years ending after Dec. 15, 2009, one year later than originally envisioned, with early application permitted.

See also these Handouts which were used in the meeting here.

Phillies Win the World Series!!!

Fightin’ Phils are World Series Champions

More here.

Massachusetts Independent Contractor Law

This article from McDermott Will & Emery--"For Massachusetts Employers: Distinguishing Between Independent Contractors and Employees"--discusses an Advisory issued by the Attorney General's Fair Labor Division last May in connection with Massachusetts' Independent Contractor Law. While the whole article is worth reading, here is an important excerpt:

The penalties for misclassifying an employee as an independent contractor can be very steep, and can include both civil and criminal penalties. For example, a willful misclassification is punishable under the law by a fine of up to $25,000 or up to one year in jail. Even a mistaken misclassification can result in a penalty of up to $10,000 or six months in jail for the first offense. Moreover, when an employer misclassifies an employee as an independent contractor, it also violates other Massachusetts and federal statutes, such as those that govern minimum wage and overtime, employer recordkeeping requirements, income tax withholding and workers’ compensation insurance. . .

Misclassifying employees as independent contractors under Massachusetts law could have federal law consequences as well. The attorney general’s office has indicated that, because employers do not pay taxes for independent contractors as they do for employees, it communicates the findings from its independent contractor investigations to the Internal Revenue Service (IRS). While the test for independent contractors in Massachusetts is not the same as the 20 Factor Test used by the IRS, information that an employer is misclassifying employees under the Massachusetts statute could prompt an independent investigation by the IRS that could have devastating financial consequences. For example, the IRS recently fined a large U.S. courier and freight company $319 million dollars for misclassifying employees as independent contractors.

As the article aptly points out, employers sometimes consider reclassifying employees when thinking about ways to cut costs in economic downturns. To read about the perils of such actions (other than the ones discussed above in Massachusetts), you can access previous posts here.

Family's 401(k) Is Herd Of Alpacas

Well, I guess if the 401(k) retirement system is eliminated, one can always raise a herd of alpacas.

Lessons from the Orth Case

There are some really great lessons for all from the District Court and the Circuit Court opinions in the Orth v. Wisconsin State Employees Union Council 24, et al. case discussed in this previous post here (in case you missed it):

(1) Statements in collective bargaining agreements can give rise to unintended ERISA plans. The district court opinion includes a discussion of this issue:

An ERISA “plan” is not an entity or a piece of paper, but a more inchoate group of rights, benefits and procedures (literally, a “plan”) set up by an employer to create pension or welfare benefits. See Pegram v. Herdrich, 530 U.S. 211, 223, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) (noting that a plan is merely a “scheme decided upon in advance” for the provision of benefits). The plan may be evidenced by a summary plan description (SPD) and any other documents, such as a CBA, that describe the rights of beneficiaries or such things as how the plan is administered, how premiums are collected, etc. In other words, the fact that the plaintiff's dispute may arise solely from a clause in a collective bargaining agreement does not mean that the dispute does not also implicate the terms of an ERISA plan. In fact, hybrid ERISA/LMRA claims are commonly asserted, even when the dispute is resolved by reference to a CBA rather than merely a plan–specific document.

(Read about another interesting case here which held that a merger agreement acted as a plan amendment to an ERISA retiree medical plan.)

(2) The clause that states "[p]ayment of premiums will be on the same basis as the benefit is currently paid for employees" or similar language occurs often in retiree medical plan language and should be promptly reviewed and revised, if necessary. Many times this language occurs in benefits booklets or SPDs prepared by insurance providers. Normally, such language is meant to portray exactly what the defendant's lawyers tried to argue in the case:

The defendant also suggests patent ambiguity because the clause refers to both benefits and premiums: “Payment of premiums will be on the same basis as the benefit is currently paid for employees.” In the defendant's reading, this means only that retirees will receive the same level of benefits as active employees–not that they will have their premiums paid at the same level.

However, with judges reading such language to mean that the employer, by making that statement, is committing to the same level of premiums for retirees as it has for active employees, employers should make sure that they review such language and clarify it to say exactly what they mean. Such language can be revised to make it more clear, but if the language is in a benefits booklet or SPD prepared by an insurance company, you may have more of a challenge getting it revised.

(3) These types of programs should be clearly communicated to active employees and retirees. When changes are made, those changes should also be communicated. One of the things that was sadly absent from the facts of the case, from an employer's standpoint as well as the employee's standpoint, was the communication aspect. Excerpt from the district court opinion:

WSEU is a small organization with little experience providing retirement benefits, and thus the issue only emerged from under the radar after Orth, who had no doubt thought he was set for life, found himself with no benefits. Rather than establishing some sort of clear understanding between the employees' union and the WSEU, the evidence only shows that the parties were not fully cognizant of what the CBA actually provided.

(Judge Posner authored the Orth opinion. You can access a number of links here at Benefitsblog which reference Judge Posner's court opinions impacting the benefits world.)

Pennsylvania's Prohibition on Excessive Overtime in Health Care Act

From the Pennsylvania Labor and Employment Blog: "Prohibition of Excessive Overtime in Health Care Act will Exacerbate Nursing Shortage." Excerpt:

A health care facility cannot compel a protected employee to work more than an agreed to, predetermined and regular daily shift exclusive of “on call” time, unless one of the following exceptions applies:

(1) the employee voluntarily agrees;

(2) there is an unforeseen emergent circumstance but as a “last resort”, after exhausting other staffing options and giving the employee one hour arrange for family care alternatives;

(3) the extended work is required to complete a patient care procedure already in progress, but only if the employee’s departure would have an adverse effect on the patient.

ATR's 401(k) Tax Calculator

From the Tax Prof Blog: "ATR Releases 2008 Election 401(k) Tax Calculator." Link to the calculator is here (see left-hand column). Press release is here.

The calculator asks a voter to input the curent value of his or her 401(k) account. Then, it recalculates what their 401(k) will be worth under four different tax scenarios:

Consent Order of Dismissal Entered in Well-Known Benefits Case

Professor Secunda over at the Workforce Prof Blog reports that Mr. LaRue has given up his claim in the LaRue v. DeWolff, Boberg & Associates case which made its way all the way up to the Supreme Court. View the Consent Order of Dismissal here. The reason for the change of heart apparently has to do with the statute of limitations.

Legal In-Sourcing Movement

From a new blog entitled Lawdable:

Given the state of the economy, it has been no surprise to find a host of recent articles concerning cost-cutting among corporate legal departments. Everything is on the table, including reductions in fees charged by outside counsel.

An Oct. 22 article (subscription) in Atlanta’s Fulton County Daily Report captured the ongoing discussion through quotes from several prominent GCs and legal department heads regarding various ways they are reducing costs. Almost every one of them mentioned “in-sourcing.” Robin H. Sangston, vice president and associate GC of Cox Communications Inc., offered a comment that many of the GCs echoed:

We have used a variety of approaches to controlling legal fees, including: bidding out 'commodity-type' work, moving work from higher-priced large firms to lower-priced smaller or boutique firms with lower overhead, using contract lawyers, implementing e-billing with our billing guidelines ... Given the state of the economy and the impact on almost all businesses, I would also expect that many companies will not entertain rate increases for next year.

More on Argentina's Private Pension Seizure Plan

From Bloomberg: "Argentines Decry State's `Disastrous' Record as Pensions Seized." Excerpt:

Fourteen years ago, Raul Zimmermann opted to contribute to one of Argentina's new private pension funds because he didn't trust in the state retirement system. Now he's outraged by government plans to seize his savings and take responsibility for paying his monthly benefit.

``The history of the pensions managed by the state is disastrous,'' said Zimmermann, 69, who started drawing a pension two years ago. ``It's not reasonable that they transfer my account without even asking me if I want to.''

On Oct. 21, President Cristina Fernandez de Kirchner announced plans to take over $29 billion of private pension accounts, saying a state-run system would protect retirees from fluctuations in financial markets. Roque Fernandez, an economy minister and central bank president in the 1990s, said the move is a ``confiscation'' of people's savings. . .

More links:

CNBC Interview with House Education and Labor Committee Chairman George Miller (D-CA)

Thanks to ERIC for this link to the CNBC interview with House Education and Labor Committee Chairman George Miller where he gives his view that the 401(k) plan system has failed and needs replacing.

Excerpt from the ERIC Press Release:

Using the current financial crisis as a starting point, the House Education and Labor Committee expressed concern over the retirement assets of American workers at an October 7 hearing. Although fewer than 10 Democrats and only one Republican member of the committee attended, the hearing garnered major media attention in national newspapers and on television and radio. While the intent of the hearing was to examine the effect of the financial crisis on retirement savings, the hearing ranged far afield as witnesses and Members called for significant reforms that would fundamentally change the vehicles in which employees can save for retirement.

At the end of the day, Committee Chairman George Miller (D-CA) made it clear that he did not believe that 401(k) plans were intended as a primary means to provide retirement security and, in fact, that they were not fulfilling that objective. Miller, who is also holding a second hearing in his home town of San Francisco on October 14, signaled his intention to open up the retirement debate next year on how best to provide retirement security.

Access previous posts on the subject here.

Seventh Circuit Holds Employer Accountable for Retiree Medical Muddle

Thanks to Roy Harmon for alerting me to this very interesting Seventh Circuit opinion written by Judge Posner : Orth v. Wisconsin State Employees Union Council 24, et al.

The facts as paraphrased from the first of the two lower District Court opinions (no link unfortunately):

The case involves a retiree who retired from a job with the Wisconsin State Employees Union (“WSEU”) Council 24, which was the union representing employees of the State of Wisconsin. The WSEU's employees were themselves represented by a union, called the Council Employees Union, or CEU. The CEU and WSEU were governed by a collective bargaining agreement (“CBA”). Since 1973 the CBA had provided that, upon retirement, an employee's unused sick leave would be used to pay insurance premiums: “At the time of retirement, any unused sick leave shall be used to pay Blue Cross–Blue Shield premiums for the employee and spouse and /or dependents.” It also provided that “[p]ayment of premiums will be on the same basis as the benefit is currently paid for employees.” 90% of employees' premiums were paid by the employer.

Between the time that this clause was added to the CBA and Orth's retirement in 1998, only two individuals retired from the WSEU. Each retiree had his full premiums paid for out of unused sick leave funds–that is, the WSEU did not cover any portion of the premiums. When Orth retired, the same happened. No one seemed to notice until 2006, when Orth received a letter from the WSEU informing him that his sick leave funds (which had totaled some $42,000) had dried up. If he wished to continue funding his health insurance, he would have to pay the monthly premium of $1109.44 out of pocket. After attempting to work out the dispute with his former employer, Orth brought a lawsuit alleging breach of the CBA, which he believed required the WSEU to pay 90% of his health insurance premiums after he retired.

The union tried to argue that there was either a latent or patent ambiguity in the terms of the CBA, or in the alternative, that there had been a modification of the CBA. However, both the District Court and the Seventh Circuit disagreed. (For those who enjoy the old 1864 Peerless case which you probably studied in law school, both the District Court opinion and the Seventh Circuit opinion include a discussion of this case.)

The result? The Seventh Circuit upheld the District Court's award of $36,000 restored to Mr. Orth’s sick leave account ($40,000 minus 10 percent) plus $7,200 in premium reimbursement, and upheld the defendant's payment of the plaintiff's attorneys fees in the amount of $41,000. In addition, Judge Posner chided the defendants and their lawyers:

The defendants challenge the district judge’s awarding attorneys’ fees to the plaintiffs. They argue that the judge was mistaken to think that there had been no reasonable basis (or, equivalently, as the Supreme Court noted in Pierce v. Underwood, 487 U.S. 552, 565-66 (1988), “substantial justification”) for the defendants’ position. . . The judge made no mistake. No careful lawyer could have thought this a case of latent ambiguity or valid modification. And for the defendants to use their deceptive conduct toward the retired employees as a basis for trying to duck liability was shabby. The only questionable aspect of the district judge’s opinion is his statement that the defendants were acting throughout in good faith.

There are some really great lessons for all from the District Court and the Circuit Court opinions:

Universal Health Care Plan In the Works

From the Washington Times: "Kennedy secretly crafts health care plan." Excerpt:

From his sickbed, Sen. Edward M. Kennedy has secretly been orchestrating meetings with lobbyists and lawmakers from both parties to craft legislation that would greet the new president with a plan to provide affordable medical coverage to all Americans, a measure he has called "the cause of my life." . . .

Among those who are receptive to a bipartisan plan and who have participated in the initial talks is Sen. Michael B. Enzi of Wyoming, the ranking Republican on the Senate health committee, which Mr. Kennedy leads. . .

Mr. Kennedy's goal, his aides say, is to introduce a universal health care bill as soon as the new Congress convenes next year and to push quickly for its passage - a much-accelerated timetable compared with the last time that a health care overhaul was on the agenda, at the start of the Clinton administration.

Second Hearing: Impact of the Financial Crisis on Workers' Retirement Security

Yesterday, in San Francisco, there was a second hearing of the House Education and Labor Committee entitled "The Impact of the Financial Crisis on Workers' Retirement Security." You can access the testimony here. As there was in the first hearing (discussed in a previous post here), there was testimony advocating a government take-over of the 401(k) system as well as a promise from Chairman Miller that the "Democratic Congress will continue to conduct this much-needed oversight on behalf of the American people."

A more rational approach was advocated by Tif Joyce:

First, after they calm down, people view the recent financial turmoil as the latest in an ongoing string of challenges that must be overcome. We need to fix our problems because we have no choice.

At times like this, both investors and government alike need to be concerned about overreaction and trying to create permanent solutions for temporary problems.

If you ask most voters what they think of “a new national defined benefit plan” I strongly believe they would say, “Please fix Social Security first.”

On October 7th, a witness testified before this committee stating that our nation’s pain and chronic financial anxiety is caused by the corrosive effects of 401k plans…

People understand that life is not always fair and they don’t expect government to legislate certainty. Let’s also keep in mind that huge numbers of people have successfully used retirement plans exactly as they were intended to be used.

Predictions of an Approaching Benefits Tsunami

Greenspan today testified before the House Committee of Government Oversight and Reform and called the recent economic crisis a "once-in-a century credit tsunami." The American Benefits Council has issued a warning, indicating a coming benefits tsunami:

The following is an internal report from the chief actuary of one defined benefit plan service provider:

“Our projections are showing DB plans due to get slaughtered in their next round of actuarial valuations. Lest we forget, asset smoothing has all but been eliminated so their unfunded liability will see a $1 for $1 increase for their investment losses this year….I haven’t heard this consistent level of concern from plan sponsors in 20 years. Just to throw a real example out there, a large [organization] has gone from 114% funded for the 1/1/2008 year down to restricted (i.e., below 80% funded) as of yesterday….You have to assume we’ll be doing a lot of freezing amendments next year.”

The benefits system has never seen this level of concern before. Unless something is done -- quickly -- massive funding obligations will trigger benefit freezes on an unprecedented scale. And freezing does not eliminate current funding shortfalls, so companies will be forced to direct huge resources to their plans, which will cost many jobs and prevent companies from making essential investments in their businesses.

Some evidence of this in today's news: "GM Suspending Benefits."

Third Circuit FMLA Decision

The Third Circuit Court of Appeals has issued a decision, in Sinacole v. iGate Capital which agrees with the 2d, 7th and 11th Circuits in invalidating a DOL regulation concerning FMLA leave. In the case (which has been deemed "Not Precedential"), the Third Circuit held that the Department of Labor regulation was invalid to the extent it deemed an employee "eligible" for FMLA leave even if the employee did not work at least "1250 hours in the past 12 months." Excerpt:

It is the sole province of the Congress to establish the scope of employees who have rights under the FMLA.

Boston's $3.2 Billion Benefits IOU

From the Boston Herald.com:

A staggering $3.2 billion IOU to pay off health and other benefits lavished on city worker unions has come due in Boston as the city grapples with a budget crisis that’s raising fears of massive layoffs and service cuts and even tax hikes for Hub residents and businesses.

The huge payout - much of it incurred during the 15-year tenure of Mayor Thomas M. Menino - is forcing the city to more than double its spending on benefits over the next five years, to $220 million, or roughly one-tenth of its current $2.4 billion budget. . .

The $3.2 billion covers the current cost of health care and life insurance benefits promised to present and future city retirees. The tab is high because health care costs are soaring, which caused the IOU to grow more than $500 million in the past two years.

How TARP May Impact All Executive Compensation Disclosures

From the CorporateCounsel.net Blog:

"At our "3rd Annual Proxy Disclosure Conference" yesterday, Corp Fin Director John White delivered an important speech - entitled "Executive Compensation Disclosure: Observations on Year Two and a Look Forward to the Changing Landscape for 2009" - during which John talked briefly about how the TARP's executive compensation provisions could potentially spill-over and impact the many companies not directly subject to TARP. Specifically, John addressed the TARP provision that requires participating financial institution's compensation committees to meet with the senior risk officers of the institution to ensure that the incentive compensation arrangements do not encourage the senior executive officers to take "unnecessary and excessive risks that threaten the value of the financial institution." Here is an excerpt from John's remarks on this topic:

Most of you are not from financial institutions, so let's talk for a moment about non-participating companies. This new Congressionally-mandated limitation on having compensation arrangements that could lead a financial institution's senior executive officers to take unnecessary and excessive risks that could threaten the value of the financial institution obviously applies on its face only to participants in the TARP.

But, consider the broader implications and ask yourself this question: Would it be prudent for compensation committees, when establishing targets and creating incentives, not only to discuss how hard or how easy it is to meet the incentives, but also to consider the particular risks an executive might be incentivized to take to meet the target — with risk, in this case, being viewed in the context of the enterprise as a whole? I'll let you think about what Congress might want. We know what our rules require. That is, to the extent that such considerations are or become a material part of a company's compensation policies or decisions, a company would be required to discuss them as part of its Compensation Disclosure and Analysis. So please consider this carefully as you prepare your next Compension Discosure and Analysis.

Also, more broadly speaking, I expect that current market events are already affecting many companies' compensation decisions and thus should be affecting the drafting of their upcoming Compensation Disclosure and Analysis. Regardless of whether your company participates in the TARP and consequently finds itself having to make new material disclosures, you should not merely be marking up last year's disclosure. Instead, you should be carefully considering if and how recent economic and financial events affect your company's compensation program.

For example, have you modified outstanding awards or plans, or implemented new ones? Have you reconsidered the structure of your program, or the relative weighting of various compensation elements? Have you waived any performance conditions, or set new ones using different standards? Have you changed your processes and procedures for determining executive and director pay, triggering disclosure under Item 407? These questions and more should be addressed as you consider disclosure for 2008."

A Brief Look at Canada's Universal Health Plan

For those who are interested in knowing what a government-run, universal health plan might do to health care in this country, one need only look across the border here.

Proposition 101 in Arizona

Some folks in Arizona want to make sure that no one takes away their freedom of choice when it comes to health care. On November 4th, Arizona will vote on Proposition 101. The measure, called the Freedom of Choice in Health Care Act, would amend the state constitution to include language restricting Arizona's ability to limit or dictate individual health-care choices, and to make government-mandated universal health care illegal. Here is the language of the Proposition:

Because all people should have the right to make decisions about their health care, no law shall be passed that restricts a person's freedom of choice of private health care systems or private plans of any type. No law shall interfere with a person's or entity's right to pay directly for lawful medical services, nor shall any law impose a penalty or fine, or any type, for choosing to obtain or decline health care coverage or for participation in any particular health care system or plan.

Read more about the initiative here.

Out of the Mouth of Babes. . .

From CNN's iReport (via Robert Bluey) here:

Informed Choice celebrates children speaking simply and more wisely than elders by recording their observations about one the most serious choices facing contemporary America - the Presidential Race.

In their wisdom and (unintentional) humor, stripped of partisanship and informed choice, the children lampoon the cult of popularity based solely on physical attributes. Their purity is a mirror reflecting the American voter's obsessions, boredom, judgments of race and age.

With only pictures of candidates McCain and Obama as their guide, the Informed Choice interviewees certainly surprise and amuse even the most strident viewer / voter, regardless of political affiliation.

Argentina's President Proposes Nationalization of Pension Fund

Apparently, Argentina's President Cristina Kirchner has signed a proposal nationalizing the country's private pension funds. The Wall Street Journal reports here that this is being seen as a "grab for cash and power amid the global economic crisis." Excerpt:

Argentine stocks fell by more than 11% in reaction to news that the government plans to nationalize private pension funds.

Details of the proposal -- which must be approved by the country's legislature -- were not immediately available. It was signed by Ms. Kirchner, along with Labor Minister Carlos Tomada and Amando Boudou, the head of the national social security system, ANSES. But an announcer during the televised signing ceremony described it as a project to "eliminate" the "capitalization system," a reference to the defined-contribution plans run by 10 private funds known as AFJPs.

In a speech following the signing ceremony, Mr. Boudou said the reform would "rescue Argentine retirees from uncertainty."

This Bloomberg article here indicates:

About 55 percent of the 94.4 billion pesos held by the country's 10 private pension fund managers are in government debt, according to the pension regulator's Web site. Nationalization would allow the Fernandez administration to write off the government bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.

More from this BBC article here:

Amado Boudou, head of the National Social Security Administration, which will take over the funds, said the "failed experiment" of private pensions was finished.

But the pension administrators defended the system, saying it had a "solid mechanism" that had seen an "almost constant growth trend in the 14 years of its existence".

Union leaders have welcomed the nationalisation move. The commissions on the pensions and the lack of a guaranteed minimum pension has made the private system unpopular with many Argentines.

All of this sounds a bit reminiscent of some of the comments being made about our country's retirement system and the push to have a universal pension as discussed here and here, a proposal which I wholeheartedly reject.

Some language from a proposal being advocated (the parallels seem obvious to me):

Short term, I propose that since 401(k) accounts and the like are financial institutions -- the bank about where 38% of the workforce can intend to save for their retirement -- Congress let workers trade their 401(k) and 401(k) - type plan assets (perhaps valued at mid-August prices) for a Guaranteed Retirement Account composed of government bonds (earning a 3% return, adjusted for inflation). When the worker collects Social Security, the Guaranteed Retirement Account will pay an inflation adjusted annuity, based on the accumulated funds.

How would this work? Take a 55 year old who had $50,000 in his 401(k) account in August and faces job loss and eroded assets because of the erosion of his retirement accounts. Let him swap out the $50,000 for a guarantee of $500 per month. The economy is probably in a recession, but a guaranteed income from his former 401(k) removes a source of financial anxiety, and -- this is not trivial – it end fruitless discussions with brokers and financial sales agents, who are also desperate for more fees and are often wrong about markets. . .

The sooner we admit that our 30 year experiment with 401(k) accounts has failed the sooner we can use these precious government subsidies efficiently and equitably.

An Overlooked Pension

From USA Today "Couple's retirement dream leaves materialism behind." Excerpt:

The Feudos say they probably wouldn't have mustered the moxie to strike out in a radically different direction had they not consulted Will Rogers, a financial adviser in Augusta, who devised their retirement plan in 2002.

In reviewing the couple's retirement assets, Rogers told them they needed to save more aggressively, pay down debt and consolidate accounts that were scattered in various financial institutions.

It was during this time that they and Rogers discovered an overlooked pension plan.

"When we researched their past employment, it turned out Bonnie only needed to work a few more days in her former school district to be vested," Rogers recalls.

Searching for a Lost Pension

View this video here on how "26,000 Americans have walked off and left $75 million in pension money from previous jobs."

Two websites to visit if you are looking for a lost pension:

Humor from the Tax Guru

Great cartoon from the Tax Guru here. It is also acts as a statement about all of the talk of replacing the current 401(k) with a government-run retirement system.

More on the Universal Pension Movement. . .

From Workforce Management: House Democrats Contemplate Abolishing 401(k) Tax Breaks. Excerpt:

Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute. . .

More:

This is a battle between liberalism and conservatism,” said Christopher Van Slyke, a partner in the La Jolla, California, advisory firm Trovena, which manages $400 million. “People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,” he said.

The Profit Sharing/401(k) Council of America in Chicago, which represents employers that sponsor defined-contribution plans, is “staunchly committed to keeping the employee benefit system in America voluntary,” said Ed Ferrigno, vice president in the Washington office.

“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,” he said.

No legislative proposals have been introduced and Congress is out of session until next year.

See also this article from the Wall Street Journal for what might be in store: A Liberal Supermajority: Get ready for 'change' we haven't seen since 1965, or 1933. Excerpt:

If the current polls hold, Barack Obama will win the White House on November 4 and Democrats will consolidate their Congressional majorities, probably with a filibuster-proof Senate or very close to it. Without the ability to filibuster, the Senate would become like the House, able to pass whatever the majority wants.

Access a previous post here which discusses the universal pension movement.

From EBSA in Today's Federal Register

Interpretive Bulletin Relating to Exercise of Shareholder Rights
Interpretive Bulletin Relating to Investing in Economically Targeted Investments

Social Security Taxable Maximum for 2009

The Social Security Administration ("SSA") has announced that the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $106,800 from $102,000.

See this press release and the SSA fact sheet for more information.

IRS Announces Pension Plan Limitations for 2009

The IRS has announced the 2009 cost-of-living adjustments to dollar limitations for pension plans and other items. The new 401(k) deferral limit will be increased from $15,500 to $16,500. The annual benefit under a defined benefit plan will be increased from $185,000 to $195,000 and the annual limitation for defined contribution plans will be increased from $46,000 to $49,000.

What's in Store for Large Employers Under the Obama Health Care Proposal

The Wall Street Journal today has an article today entitled: "McCain Presses Obama on Health-Plan Penalties." Excerpt:

As the presidential candidates push their competing health-care plans, Sen. John McCain regularly presses Sen. Barack Obama to tell voters how big a fine he would impose on companies that don't offer their workers health insurance. . .

He made the point again at Wednesday's presidential debate. "Senator Obama, I'd …still like to know what that fine's going to be."

Obama officials say the campaign has no plans to answer that question before Election Day on Nov. 4. Neera Tanden, a top Obama policy adviser, said the fine is intended to discourage employers from dropping coverage, not to raise significant revenue.

Here is what Senator Obama's website says about his proposals for health care as it pertains to employer contributions:

(4) EMPLOYER CONTRIBUTION. Large employers that do not offer meaningful coverage or make a meaningful contribution to the cost of quality health coverage for their employees will be required to contribute a percentage of payroll toward the costs of the national plan. Small businesses will be exempt from this requirement.

You can read about a similar requirement imposed now at the state level in Massachusetts in this article from McDermott Will & Emery: "The Massachusetts Health Care Reform Act–What Employers Need to Know."

My guess is that initially large employers might be required to pay a fee under Obama's plan similar to the ones currently adopted under laws such as the Massachusetts law, but that once the door is opened on this, the fees will be raised more and more because the costs of the program will require it. (Read about how this is already happening in Massachusetts here.)

An issue of real concern will be whether employers, once they are required to provide a minimum benefit, will then discard their more generous programs and that employees will end up footing more of the costs themselves. It is also ironic that the Obama proposal would target large employers when they are the ones typically providing more benefits to employees in the first place.

Another question is: what is a "large employer" under this plan? I do not find an answer anywhere, but if you use the Massachusetts model, employers with 11 or more employees were subjected to the "fair share" mandates. Certainly "Joe, the Plumber" would probably not be subjected to the mandate as discussed in the debates last night unless he became a "large employer" under the Democratic plan.

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 revenue-sharing 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 Co. 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: "401(k) Debit Cards: What You Might Not Know." See also this FINRA Alert as well: "401(k) Debit Cards—Think Before You Swipe."

More links:

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

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

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

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

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

Some Tax Humor. . .

From the TaxGuru here.

How Much Value Do Individuals Place On Health Insurance?

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

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

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

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

Some brief observations:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Impact of MetLife for Plan Sponsors

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

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

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

Notable quotes from the Opinion:

(1) Majority:

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

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

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

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

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

". . . Finally,