Author: jfortenberry@fortenberrylaw.com

The Department of Labor has issued Field Assistance Bulletin 2004-1 (“FAB”), providing some important guidance pertaining to the application of Title I of ERISA to health savings accounts (“HSAs”). Here is what the DOL had to say in the FAB:

Congress, in enacting the Medicare Modernization Act, recognized that HSAs would be established in conjunction with employment-based health plans and specifically provided for employer contributions. However, neither the Medicare Modernization Act nor section 223 of the Code specifically address the application of Title I of ERISA to HSAs. Based on our review of Title I, and taking into account the provisions of the Code as amended by the Medicare Modernization Act, we believe that HSAs generally will not constitute employee welfare benefit plans established or maintained by an employer where employer involvement with the HSA is limited, whether or not the employee’s HDHP [High Deductible Health Plan] is sponsored by an employer or obtained as individual coverage.

Again, the issue is employer involvement (as discussed in a previous post) and whether the particular benefit offered meets the exception under 29 C.F.R. § 2510.3-1(j)(1)-(4). Here is how the DOL decided to define employer involvement with respect to HSAs, as noted in their FAB:

Specifically, HSAs meeting the conditions of the safe harbor for group or group-type insurance programs at 29 C.F.R. § 2510.3-1(j)(1)-(4) would not be employee welfare benefit plans within the meaning of section 3(1) of ERISA. . . [W]e would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA.

This just in from Forbes.com–“US Senate’s Daschle won’t block pension bill vote“:

The leader of U.S. Senate Democrats said on Wednesday he would not try to stop a vote on a massive pension relief bill this week, although he opposed the measure. . .

Also, from Quicken.com–“Pension Bill Filibuster Threat Dropped In US Senate“:

The chief opponent of the measure, Sen. Edward Kennedy, D-Mass., had said last week he could stop the bill from passing the Senate. But a lopsided 336-to-69 vote for the bill in the House and mounting pressure from businesses has made that assertion hard to sustain.

The IRS is reporting “IRS, Justice Department Note Increase in Tax Enforcement: Civil and Criminal Enforcement against Tax Cheats On the Rise.” According to the press release, in 2003 the IRS used civil injunctions to stop the following illegal tax schemes:

• Using an employee-leasing company to evade employment taxes;
• Using a ?warehouse bank? to commingle and conceal assets;
• Establishing a ?corporation sole? whereby customers ?donate? assets and income to a sham corporation, then fraudulently claim charitable donations;
• Using abusive trusts to shift assets out of a taxpayer?s name but retain control;
• Claiming personal housing and living expenses as business expenses;
• Claiming non-existent tax credits, such as reparations;
• Failing to withhold, report and pay payroll and income taxes;
• Filing tax returns reporting ?zero income?;
• Claiming that only income from foreign sources is taxable.

Also, this article from the WashingtonPost.com–“IRS, Justice Dept. Promise Vigilance in Tax Enforcement“–notes that, in addition to stepping up prosecutions and seeking a budget increase, the IRS is “[s]tudying a sample of 46,000 returns to upgrade its understanding of which taxpayers are more likely to cheat and how they go about it.”

Also, this from The Hill.com–“In Pig Book, lawmakers go hog wild“:

Amid cries from politicians of all stripes that too much or too little money went to tax cuts, education, the military and other priorities, Congress earmarked more pork-barrel spending in appropriations bills passed last year than ever before. . . CAGW notes that pork projects in the 13 spending bills passed in 2003 for spending this year exceeded previous levels in both number and cost.

From Forbes.com, “Dissidents to sue to get Disney voting results“:

Dissident Walt Disney Co. shareholders Roy Disney and Stanley Gold said on Wednesday they would sue the company to get results for the March 3 shareholder vote on Chief Executive Michael Eisner’s reelection to the board. . . The company did not immediately comment on the latest letter from Roy Disney and Stanley Gold’s attorney accusing it of trying to “delay and obfuscate” the release of voting results, particularly the employees’ pension plan, which Disney and Gold see as a proxy for employee support of Eisner.” (View the letter here.)

From the WashingtonPost.com, “Rolling Out Automatic 401(k) Enrollments“:

In a guidance letter requested by J. Mark Iwry, a former Treasury official now associated with the Brookings Institution, the IRS says that employers may, if they wish, adopt plans that enroll new employees at an automatic contribution level higher than 3 percent. Or, they may begin with a modest rate that rises in regular increments for a period of time.

For some fun, calculate it here at this wonderful website chock full of great financial tools and tips–Choosetosave.org:

Choose to Save® provides Internet tools . . . to help consumers plan all aspects of their financial security, and includes the award-winning Ballpark Estimate Retirement Planning Worksheet to estimate how much they need to save for retirement. Additional Choose to Save® materials include a series of booklets, such as The Power to Choose, as well as brochures such as The Top Ten Ways To Save for Retirement, from partners like the U.S. Department of Labor (call 800-998-7542). Many other informational brochures are also available. Choose to Save® was created by the nonprofit, nonpartisan Employee Benefit Research Institute (EBRI) and its American Savings Education Council (ASEC).

Also, you can take this very interesting Retirement Income Quiz here.

This has to be one of the most artfully written (IMHO) tax articles I have ever read–“Taxation of Attorneys’ Fees in Employment Cases: Supreme Court Agrees to Resolve Hotly Contested Issue.” (While the article is from Nixon Peabody LLP, if you dig a little, you can find the attorney who wrote the article.) It starts out: “Here’s a horror story to accompany tax filing season . . .”

This is a great article worth reading from CFO.com discussing the pitfalls of offering voluntary benefit programs–“The Doubt of the Benefit: Voluntary benefits may seem like a win-win. Here’s why they could be a lose-lose“:

Corporate benefits packages may be shrinking, but voluntary benefits are skyrocketing. According to a recent survey, 6 of every 10 companies now offer at least one voluntary, or supplemental, benefit. Employees buy such products—most often some form of life, health, disability, or dental insurance—directly from vendors, usually through a payroll deduction. It’s easy to see the appeal of voluntary benefits: they cost employers next to nothing, yet boost employee morale.

(Thanks to Benefitslink.com for the pointer to the article.)

The article quotes Joseph Belth, professor emeritus of insurance at Indiana University, as stating that employees are “being taken to the cleaners” on these policies:

[S]ome critics claim insurers are more inclined to dispute claims made on group policies purchased at work than those bought by customers on their own. Says Indiana University’s Belth: “It’s quite clear that an insurer is more likely to deny a claim if it’s ERISA than if it’s not under ERISA.” Few workers know this. Neither are they aware that if they sue, and their policy is deemed to fall under ERISA, the odds are stacked in favor of the insurers.

The article mentions how one insurance company allegedly noted in a memorandum that out of 12 claim situations in which the insurer had settled for $7.8 million in the aggregate, if the 12 cases had been covered by ERISA, total liability would have been no more than $500,000. (Read more about the denial of coverage problem in an article at Workforce Management called “Nasty Business.” )

Particularly inciteful in the CFO.com article are the ERISA-avoidance techniques compiled on the last page of the article here. (Scroll down to the bottom of the page.) However, the article correctly notes that if coverage is denied by an insurer, and the employee later brings suit, the employer could be at risk for liability under state law if the plan is deemed to be a non-ERISA plan. So, while trying to be a non-ERISA plan could achieve better results for the employee, this could, in the end, be a Catch 22 for the employer if things go sour.

(By way of reminder, generally “employee welfare benefit plans” are covered under ERISA. An “employee welfare benefit plan” is defined as a “plan, fund, or program” whose purpose is to provide its participants or their beneficiaries with certain nonpension benefits, or “welfare” benefits. “Welfare” benefits are defined under ERISA to include medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability, death, or unemployment, or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, or prepaid legal services, holiday, severance, or similar benefits, or financial assistance for employee housing. The benefits may be provided for by the purchase of insurance or otherwise.

DOL regulation section 2510.3-1(j) provides an exception from ERISA for certain group or group-type insurance programs if, under the program, four conditions are met: (1) no contributions are made by the employer; (2) participation is completely voluntary for employees; (3) the sole functions of the employer with regard to the insurance program are—without endorsing the program—to permit the insurer to publicize the arrangement to the employees and to collect premiums from the employees through payroll deductions and remit them to the insurance carrier; and (4) the employer receives no consideration in connection with the program except reasonable expenses.)

Generally, these voluntary benefit plans are ERISA plans, unless they fall within the exception of DOL regulation section 2510.3-1(j) (just described), and it is this exception under ERISA, and the interpretation of the term “employer endorsement,” around which this whole controversy lies.

In closing, it does appear that these types of programs offer a great deal of risk to employers and employees, and that if employers do decide to offer them, it is better (although not foolproof) to structure them as non-ERISA plans with profuse “buy-at-your-own-risk” and “we-are-not-endorsing-this-program”-type disclaimers figured prominently in the offering.

From Bloomberg.com, “Is Your Retirement Plan Gouging You on Fees?”

If lawmakers and the U.S. Securities and Exchange Commission want to know how mutual fund costs are hurting future retirees, they should talk to Adrian Nenu. . . Nenu wanted to be informed on his retirement options, so he started calculating what various plan choices were costing him. . . “I felt a sense of outrage when I found out how much I was being charged, especially when the total fees charged by the four vendors were nearly identical and there was no low-fee vendor to escape to,” Nenu said.

From Reuters via Forbes.com, “US Senate’s Frist wants pension bill this week“:

The majority leader of the U.S. Senate wants to pass pension legislation this week that would save U.S. companies more than $80 billion over two years and has already cleared the House of Representatives. “I want to act on the pension bill this week,” Sen. Bill Frist, a Tennessee Republican, told the Senate on Monday. . . Republicans think Kennedy would have trouble rallying the votes he needs to defeat the measure. Many senators of both parties have companies in their states who want the billions of dollars of aid in the bill.

Kerry Kerstetter at the TaxGuru.net has been faithfully bringing us some wonderful tax humor to lighten the load during tax season. Another great comic here.

At the ALI-ABA Annual Spring Employee Benefits Law and Practice Update held last week, Louis Campagna, Jr., Chief of the Division of Interpretations, from EBSA, discussed the recent mutual fund investigations and reiterated what has already been set forth in the DOL’s statement issued in February, 2004. Mr. Campagna stated that after the mutual fund scandals broke, the DOL was flooded with questions from plan fiduciaries wanting guidance regarding their duties under ERISA with respect to the investigations. Mr. Campagna discussed how statements made by the DOL in speeches (here and here) and in the statement issued in February are designed to reinforce that fiduciaries should not panic, but can take applicable steps to fulfill their duties under ERISA as follows:

(1) First and foremost is the requirement that plan fiduciaries be informed. He stated that prudence requires that, if fiduciaries are not informed, they are not exercising prudence as required under ERISA. If plans are invested in funds with providers under investigation, fiduciaries have a duty to contact the fund directly in an effort to obtain specific information about the nature of any alleged abuses. If the funds have been involved in market timing or late trading, fiduciaries have a duty to investigate the possible economic impact of the abuses on plan investments and perform an evaluation regarding such impact, as well as evaluate the steps being taken by the funds to limit the potential for such abuses in the future.

(2) Fiduciaries should take appropriate action where necessary. The guiding principle for fiduciaries, as stated in their guidance, is to to ensure that appropriate efforts are being made to act reasonably, prudently and solely in the interests of participants and beneficiaries, and that actions taken are fully documented.

(3) Plan fiduciaries should consider any steps available to make the plan participants whole, such as participating in lawsuits. However, fiduciaries should weigh the costs to the plan against the potential for recovery in such lawsuits before participating.

(4) Plan fiduciaries should consider other plan assets, not just mutual fund investments, which could also involve similar abuses and take additional action with respect to such investments, such as pooled separate accounts and collective trusts. Mr. Campagna mentioned that the DOL is currently investigating these type of investments for possible abuses.

(Comment: Please note that in remarks of Assistant Secretary Ann L. Combs To the Washington Forum of the U.S. Institute on March 8, 2004, Ms. Combs mentioned this investigation by the DOL and stated as follows:

EBSA is currently conducting its own review of practices by mutual funds and other pooled investment vehicles, such as bank collective trusts, as well as service providers and so-called “intermediaries” to such funds, to determine whether there have been any violations of ERISA. We are examining a sample of mutual fund and other financial service providers to see whether activities such as market timing or illegal late trading may have harmed retirement plan beneficiaries. Under ERISA, a mutual fund affiliate or other retirement plan fiduciary that engages in or facilitates market timing or late trading, causing losses to an ERISA covered plan, is liable to restore losses to the plan.

We are focusing on investment companies and banks that offer 401(k) services to plans more than employers who run their own retirement plans. We are looking for improper payments for directed investments, and whether retirement accounts have been used to facilitate market timing or late trading for clients.

I should note that this review is exploratory and not the result of specific evidence that investment professionals serving as fiduciaries have engaged in improper or illegal activity. We don’t know yet if there are any real problems here but we have an obligation to look.)

(5) Mr. Campagna discussed how plan fiduciaries have been very concerned about whether they can take any steps to address market-timing by plan participants. Fiduciaries have been particularly concerned with the impact these restrictions on market-timing might have on ERISA section 404(c) safe harbor protection. In an effort to address these concerns, the DOL stated in its guidance that imposing reasonable redemption fees on sales of mutual fund shares and/or placing restrictions on the number of times a participant can move in and out of a particular investment within a particular period would not affect the safe harbor protection of section 404(c). Mr. Campagna also emphasized that any such restrictions must be clearly disclosed to the plan’s participants and beneficiaries.

Pam Perdue, attorney with Summers, Compton, Wells & Hamburg and a panelist, emphasized the importance of disclosure. If the plan fiduciaries receive a statement from the provider regarding alleged abuses, her position is that the plan fiduciaries should make this information available to participants and beneficiaries. She also noted that courts have upheld the validity of market-timing restrictions on plan investments where there was adequate and prior disclosure of such restrictions to plan participants.

Panelists noted that fiduciaries should beware of targeting certain plan participants with market-timing restrictions since this could run afoul of the 3-day advance notice requirements for blackout periods under Sarbanes-Oxley.

(What is being referred to here are the requirements that apply to so-called “black-out periods” in participant-directed retirement plans under Sarbanes-Oxley. Black-out periods occur when the ability of plan participants (or of a plan participant) to take certain actions is temporarily suspended. Under Sarbanes-Oxley, participants must receive advance written notice of certain black-out periods, and corporate insiders are restricted in trading in employer securities during such black-out periods. The DOL and the SEC have issued final rules implementing the new requirements. Substantial penalties may be imposed for non-compliance with the black-out notice requirement or the insider trading prohibition under Sarbanes-Oxley.)

The DOL also emphasized this point in its guidance, stating that “[t]he imposition of trading restrictions that are not contemplated under the terms of the plan raises issues concerning the application of section 404(c), as well as issues as to whether such restrictions constitute the imposition of a “blackout period” requiring advance notice to affected participants and beneficiaries.”

(6) In the Q & A portion of the seminar, a question was asked as to whether or not the mutual fund guidance issued by the DOL applies to self-directed brokerage accounts. Mr. Campagna remarked that under SEC rules, the plan is the customer which buys the mutual fund product. Therefore, if information regarding funds targeted in an investigation is in the possession of the fiduciary, the plan fiduciaries would likely have fiduciary responsibility regarding the investment, and therefore the guidance would be applicable.