Author: jfortenberry@fortenberrylaw.com

From NewJersey.com: “Retirees facing tax shock.” Excerpt:

Retirees who earn more than $100,000 may be in for a shock next year: A little-noticed law enacted in July could mean a state income tax increase of as much as 67 percent.

The law, which is expected to generate $45 million, eliminates the “pension exclusion” for taxpayers earning more than $100,000. And unlike other sections of the state’s graduated income tax, this law does not provide any phase-in for those whose incomes are just over the $100,000 threshold.

That means a retired couple earning $100,001 could end up paying $1,105, or 67 percent more income tax than a couple making $99,999 because the second couple can continue to exclude up to $20,000 from taxable pensions, IRAs or 401(k)s and the first couple cannot.

The article notes that about 15,600 households will likely be affected.

(Source: Benefitslink.com)

I received this news from a listserve (Professor Bainbridge has also posted the same email here):

Think of this…

5,000 – 6,000 lawyers (1/3 of the lawyers in Louisiana) have lost their offices, their libraries, their computers with all information thereon, their client files – possibly their clients, as one attorney who e-mailed me noted. As I mentioned before, they are scattered from Florida to Arizona and have nothing to return to. Their children’s schools are gone and, optimistically, the school systems in 8 parishes/counties won’t be re-opened until after December. They must re-locate their lives.

Our state supreme court is under some water – with all appellate files and evidence folders/boxes along with it. The 5th Circuit Court of Appeals building is under some water – with the same effect. Right now there may only be 3-4 feet of standing water but, if you think about it, most files are kept in the basements or lower floors of courthouses. What effect will that have on the lives of citizens and lawyers throughout this state and this area of the country? And on the law?

The city and district courts in as many as 8 parishes/counties are under water, as well as 3 of our circuit courts – with evidence/files at each of them ruined. The law enforcement offices in those areas are under water – again, with evidence ruined. 6,000 prisoners in 2 prisons and one juvenile facility are having to be securely relocated. We already have over-crowding at most Louisiana prisons and juvenile facilities. What effect will this have? And what happens when the evidence in their cases has been destroyed? Will the guilty be released upon the communities? Will the innocent not be able to prove their innocence?

Our state bar offices are under water. Our state disciplinary offices are under water – again with evidence ruined. Of particular interest to you…our state disciplinary offices are located on Veteran’s Blvd. in Metairie. Those of you who have been watching the news, they continue to show Veteran’s Blvd. It’s the shot with the destroyed Target store and shopping center under water and that looks like a long canal. Our Committee on Bar Admissions is located there and would have been housing the bar exams which have been turned in from the recent July bar exam (this is one time I’ll pray the examiners were late in turning them in – we were set to meet in 2 weeks to go over the results). Will all of those new graduates have to retake the bar exam?

The Fifth Circuit has instructions here concerning the catastrophe.

RothCPA.com reports on the Katrina Relief provided by the IRS. The IRS has automatically extended all September 15th and October 15th return due dates to October 31st for areas affected by the storm.

By the way, you can read about one attorney’s experiences in New Orleans here.

In a recent case–DiGiacomo v. Teamsters Pension Trust Fund of Philadelphia and Vicinity, the Third Circuit grappled with the nuances of the vesting and accrual requirements of ERISA, and added its voice to an issue which has split the Circuit Courts. The court framed the issue before the court as follows:

In deciding this appeal, we must therefore examine the relationship between the vesting (§ 203) and accrual of benefit (§ 204) provisions of ERISA. As discussed more fully below, Congress in enacting these provisions has left us with a conundrum: § 203 specifically includes language permitting plans or employers to disregard pre-ERISA service time rendered before a break-in-service with regard to vested benefits; § 204, by contrast, contains no such language with regard to accrued benefits. While this appeal involves the accrual of benefits, as distinct from vesting, the Fund nonetheless urges us to read the relevant language in § 203 (allowing the disregard of service time prior to ERISA and prior to a break-in-service for vesting purposes) into the text of § 204 (lacking similar language for accrual of benefit purposes).

The District Court had granted the Fund’s motion to dismiss, holding that ERISA permitted the Fund to disregard DiGiacomo’s service time preceding his break-in-service, which occurred before ERISA’s effective date. However, the Third Circuit rejected the Fund’s argument, relying on the express language of the statute and held that the Fund was required to credit DiGiacomo with all years of credited service for benefit accrual purposes. In reaching its holding, the court acknowledged the split in the Circuits over the issue and rejected the Seventh Circuit’s stance in Jones v. UOP, 16 F.3d 141, 143 (7th Cir. 1994), siding then with the Second Circuit in McDonald v. Pension Plan of the NYSA-ILA Pension Trust Fund, 320 F.3d 151, 153 (2d Cir. 2003).

In his dissent, Third Circuit Judge Samuel A. Alito, Jr., provides us with this memorable benefits quote:

Observing that ERISA’s minimum standards for vesting and accrual differ, the majority concludes that “the Fund was required to credit DiGiacomo with ‘all years of service’ in computing his accrued pension benefits.” Maj. Op. at [[9]]. The majority seems to assume that ERISA also required the Plan to include all of his accrued benefits in the calculation of his pension, but ERISA says nothing of the kind. As the Supreme Court explained in Central Laborers’ Pension Fund v. Heinz, accrual is simply “the rate at which an employee earns benefits to put in his pension account.” 541 U.S. 739, 749 (2004). Accrued benefits, in other words, are like chalk marks beside the employee’s name. They are conditional rights that do not become “irrevocably his property” until they vest. Id. Only then do they become “legally enforceable against the plan.” ERISA § 3(19), 29 U.S.C. § 1002(19). Prior to vesting, accrued benefits can be, and in this case were, forfeited under the terms of a participant’s plan.

In a footnote, the majority directly responded to Alito’s analogy to “chalk marks” and stated:

To borrow Judge Alito’s helpful analogy, see dissenting opinion at 2, DiGiacomo’s 10.5 years of accrued benefit credit might be equated to chalk marks beside the employee’s name, but they are not necessarily erased merely because related marks in a separate category for vested benefit credits have been lost due to a break-in-service.

This article from Law.com—ERISA Bars Pension Plan’s ‘Break-in-Service’ Exclusion–also discusses the case.

Interesting article from the Wall Street Journal last week on how pension plans for the self-employed (the more well-to-do self-employed) are increasing in popularity: “Self-Employed Embrace Pensions.” Excerpt:

Generous pension plans may be going the way of the buggy whip at big businesses, but they’re gaining in popularity among the smallest of companies: sole proprietorships. . .

Defined-benefit plans for individuals are beginning to enter the mainstream, with a handful of financial firms now offering the service. Traci Siegel, vice president of retirement services and products at Charles Schwab Corp. in San Francisco, says the number of accounts in Schwab’s Personal Defined Benefit Plan jumped 30% this year from 2004, with the average plan participant making annual contributions of $113,000. Most clients earn $225,000 or more a year, she says.

See also this article (which contains one of those handy tables that I love) describing the various plans available for the self-employed: “IRAs and 401(k)s: How to Pick the Best Plan.”

Just watching Katrina and hurting and praying for the folks in New Orleans and surrounding areas . . .

I received a copy of the Order (access it here [pdf]) denying the defendants’ motion to dismiss in the cash balance plan litigation involving the Gannett Retirement Plan. The Order is too sparse in its analysis to provide any meaningful discussion here other than to say that the opinion seems to disagree with Eaton v. Onan Corp., 117 F. Supp. 2d 812, 817 (S.D. Ind. 2000) and Tootle v. ARINC, Inc., et al. (discussed here) on whether 29 U.S.C. section 1054(b)(1)(H) applies to employees who have not yet reached normal retirement age. That provision prohibits the reduction of the rate of a participant’s benefit accrual because of age and reads as follows:

. . .[A] defined benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee’s benefit accrual is ceased, or the rate of an employee’s benefit accrual is reduced, because of the attainment of any age.

Read more about cash balance plan litigation and legislative developments at this link here.

In 2004, a district court in New Jersey held that certain plaintiffs could not recover damages for defendants’ alleged breaches of fiduciary duty because such recovery was really for individual participants rather than the plan. In re Schering-Plough Corp. ERISA Litig., 2004 WL 1774760 at 6 (D.N.J. June 28, 2004). The Third Circuit has now reversed and remanded the case in a landmark decision which you can access here. The opinion written by Third Circuit Judge Alarcon states the issue and holding as follows:

We must decide in this matter whether, under the Employee Retirement Income Security Act of 1974 (“ERISA”), the District Court erred in ruling that former employees, who were participants in a defined contribution plan, may not prosecute a derivative action on behalf of an employees’ savings plan to recover losses sustained by the savings plan because of alleged breaches of fiduciary duty. We conclude that the Plaintiffs may seek money damages on behalf of the fund, notwithstanding the fact the alleged fiduciary violations affected only a subset of the saving plan’s participants.

The defendants in the case had sought to rely on the Milofsky case, but the court distinguished Milofsky from the case at hand:

In a letter to this Court filed pursuant to Rule 28(j) of the Federal Rules of Appellate Procedure, the Defendants cited a recent decision of the Fifth Circuit, Milofsky v. American Airlines, Inc., 404 F.3d 338 (5th Cir. 2005) reh’g en banc granted, No. 03-11087, 2005 U.S. App. LEXIS 15122, (5th Cir. July 19, 2005) in support of their argument that a participant lacks standing to bring an action on behalf of an individual account pension plan if he or she does not seek plan-wide relief. . . The facts in Milofsky are clearly distinguishable from those in the matter sub judice. In Milofsky, the plaintiffs alleged that the value of their investments in the BEX plan decreased because of the failure of the defendants to transfer the funds to the American Eagle 401(k) plan. Id. at 351. Thus, this alleged loss occurred prior to the transfer of the BEX plan participants’ investments to the American Eagle 401(k) plan. In Milofsky, the plaintiffs sought damages on behalf of the BEX plan members, and did not seek to restore assets of the American Eagle 401(k) fund. Here, the Plaintiffs seek damages from the fiduciaries for their violation of their duty to a subclass which had transferred its funds to the trustee of the Savings Fund.

The DOL had filed an amicus brief in the case which you can access here. DOL had argued in the case that a breach of fiduciary duty did not need to harm the entire plan to give rise to liability under § 1109 and that holding so would have the effect of insulating fiduciaries who breach their duty so long as the breach did not harm all of a plan’s participants. The DOL went on to note that “[s]uch a result clearly would contravene ERISA’s imposition of a fiduciary duty that has been characterized as ‘the highest known to law.'”

Update: More on the case from Law.com here.