Author: jfortenberry@fortenberrylaw.com

Additional thoughts on Rousey v. Jacoway:

To meet the federal bankruptcy exemption under § 522(d)(10)(E) which was the focus of the Rousey decision, a debtor’s right to receive payments from an IRA must constitute a:

“a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” (11 USCS 522(d)(10)(E))

Commentators have been emphasizing that the “reasonably necessary” requirement of the bankruptcy exemption will lessen the benefits of the Supreme Court’s Rousey opinion for IRA holders with large amounts in their IRAs. They go on to note that qualified plans subject to ERISA will likely offer more protection for such debtors under the Patterson v. Shumate case than IRAs offer for debtors under the Rousey v. Jacoway case. (In other words, parking all of one’s qualified retirement plan money in an IRA might not be the wisest choice for wealthy individuals, when it comes to to the issue of protecting assets from bankruptcy.)

Other issues that have been raised by commentators:

(1) Would Rousey protect Roth IRAs? Maybe not.

(2) The effects of Rousey would depend on state law, since under the Bankruptcy Code, states can opt out of the federal exemptions and provide their own exemption, give debtors the choice between the federal exemptions or the state exemption, or limit debtors to the federal exemption.

(3) RIA reports on recent bankruptcy legislation:

“Sec. 224(e) of S. 256, the Senate-passed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, would provide a comprehensive set of rules for retirement plans, IRAs, and Roth IRAs. In particular, it would exempt IRAs (other than SEPs and SIMPLE plans) and Roth IRAs to the extent that their aggregate value, without regard to amounts attributable to rollover contributions under Code Sec. 402(c) , Code Sec. 402(e)(6) , Code Sec. 403(a)(4) , Code Sec. 403(a)(5) , and Code Sec. 403(b)(8) , and earnings thereon, does “not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require.”

Article on the implications of Rousey:

Reish Luftman Reicher & Cohen: Rousey v. Jacoway: The Supreme Court Extends Bankruptcy Protection to IRAs, or Does It? (via Benefitslink.com)

As usual, in spite of the hectic tax season, Joe Kristan of RothCPA.com has continued to write on the blog without losing his sanity and has posted some helpful last-minute information about filing extensions here, including this link to a new IRS web page devoted to extensions here.

Get your copy of:

Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (PDF 76K).

Here is a list of recent IRS promulgations and news pertaining to benefits:

Issuance of Rev. Rul. 2005-24 which provides guidance on health reimbursement arrangements. The Ruling discusses an HRA plan design involving an employer contribution for unused vacation and sick leave.

Issuance of Rev. Proc. 2005-25 providing guidance on how to determine the fair market value of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection for purposes of applying the rules of §§ 79, 83 and 402 of the Internal Revenue Code.

Issuance of LRMs for 401(k) plans and defined contribution plans.

A Special Edition of Employee Plan News noting that the TE/GE division of IRS is going through another restructuring. View the new area map here. The EP Examination field structure has been realigned from six areas into five:

• Northeast Area
• Mid-Atlantic Area
• Great Lakes Area
• Gulf Coast Area
• Pacific Coast Area

Apparently, the Mid-Atlantic Area no longer covers New Jersey, but now covers Ohio and West Virginia. Tennessee and Florida are now under the Gulf Coast umbrella.

(Source for Revenue Ruling and Revenue Procedure: Benefitslink.com.)

Tax Analysts is reporting:

Flying in the face of those who believe the current tax reform movement will produce little more than incremental reform of the current tax system, Treasury Secretary John Snow said April 4 that he expects to be making a hard push for “far-reaching” reform legislation by next year.

However, not wanting to step on the toes of the presidentially appointed commission currently considering reform alternatives, Snow declined to speculate on the specifics of the package he might be pushing.

“Knowing this president — who doesn’t like doing little things, he likes doing big things — if we come up to him with a little tax package, he’s probably going to send us back to the drawing board,” said Snow, appearing at a gathering of the Tax Executives Institute in Washington.

(Source: RothCPA.com.)

There has been a great deal of discussion here about legal issues that can arise under ERISA and other areas of the law when employers try to reclassify employees as “independent contractors” to avoid various costs connected with the employment relationship, such as benefits costs. Such actions can give rise to employee lawsuits and claims under section 510 of ERISA. (See related posts on the topic: ERISA Temporary Worker Lawsuit Settles and Outsourcing: Traps for the Unwary.)

One state–the state of Hawaii– is apparently “cracking down” on employers who misclassify workers as “independent contractors.” According to an article from Pacific Business News (Honolulu)–“State looks hard at ‘independent contractors’“–the state is seeking to reduce the number of individuals who are without health insurance. (Source for the article: Jottings by an Employer’s Lawyer in an April 4, 2005 post.) According to the article, a study by the Hawaii Institute for Public Affairs found that 1 out of 4 of the uninsured are actually eligible for insurance if they were not misclassified by their employers.

As indicated in this article here, the history behind the development is as follows:

Under the state’s Prepaid Health Care Act, companies are required to provide health insurance for employers working at least 20 hours a week for four consecutive weeks. Union and government workers are exempt; the government arranges to insure its own workers, while unions negotiate coverage in labor contracts.

Hawaii is the only state that has such a law. The Prepaid Health Care Act came into being in 1974, shortly before the federal Employee Retirement Income Security Act, or ERISA, which set uniform standards for employee benefits. ERISA does not require healthcare insurance for employees. Hawaii asked Congress for, and secured, an exemption to ERISA.

The penalty for not complying with the Prepaid Health Care Act is a maximum of $1 per employee per day of violation, plus medical costs incurred by workers who should have been covered, said Nelson Befitel, director of the state Department of Labor and Industrial Relations.

According to the Pacific News article, starting this month, the state will check businesses at random to see if they are providing benefits to workers who qualify. The article states that the “names of businesses are to be randomly generated by a computer” and the “department is looking especially hard at companies that are state contractors.”

The Pacific News article reports that a ruling in February by the Department of Labor and Industrial Relations ordered one company, a disability services provider, to classify its workers as “employees”, not “independent contractors”, and ordered the company to provide benefits such as workers’ compensation, health-care and temporary disability insurance for the employees. The action apparently “shook the approximately 50 companies that provide services for the elderly and disabled in Hawaii, many of whom have relied on temporary or on-call workers who can work flexible schedules.”

More on the development in an article from the Honolulu Advertiser.com: “Health insurance audits begin on local businesses.”

(What would be the effect of such action on an employer’s retirement plans, such as a 401(k) plan? Workers who are reclassified by the agency as “employees” could end up being inadvertently covered by the employer’s qualified retirement plans on a retroactive basis. But see also this article from Milliman: “IRS Permits Plan Exclusion upon Employee Reclassification.”)

This week EBSA announced that it was amending and restating the Voluntary Fiduciary Correction Program (“VFC”) which permits ERISA fiduciaries to correct certain violations that occur under ERISA. Generally, under the program, applicants are required to fully correct any violations, restore to the plan any losses or profits with interest, and distribute any supplemental benefits owed to eligible participants and beneficiaries. A “no action” letter is given to plan officials who properly correct violations.

Proposed amendments include:

• Three new eligible transactions dealing with delinquent participant loan repayments, illiquid plan assets sold to interested parties, and participant loans that violate certain plan restrictions on such loans;
• Simpler methods and an online calculator for figuring out the amount to be restored to plans;
• Streamlined documentation and clarified eligibility requirements, and
• A model application form.

Access the following:

DOL’s Press Release announcing expansion and simplification of the VFC program
Voluntary Fiduciary Correction Program; Notice 70 Fed. Reg. 17515 (Apr. 6, 2005)]
EBSA’s Fact Sheet
Proposed Amendment to Prohibited Transaction Exemption 2002–51 (PTE 2002–51) To Permit Certain Transactions Identified in the Voluntary Fiduciary Correction Program

Please note that the program only allows correction for certain enumerated violations (new ones added by the Notice are underlined):

• Delinquent participant contributions and participant loan repayments to pension plans
• Delinquent participant contributions to insured welfare plans
• Delinquent participant contributions to welfare plan trusts
• Loans at fair market interest rate to a party in interest with respect to the plan
• Loans at below-market interest rate to a party in interest with respect to the plan
• Loans at below-market interest rate to a person who is not a party in interest with respect to the plan
• Loans at below-market interest rate solely due to a delay in perfecting the plan’s security interest
• Participant loans in excess of plan limitations
• Participant loans with duration in excess of plan limitations
• Purchase of an asset (including real property) by a plan from a party in interest
• Sale of an asset (including real property) by a plan to a party in interest
• Sale and leaseback of real property to the employer
• Purchase of an asset (including real property) by a plan from a person who is not a party in interest with respect to the plan at a price other than fair market value
• Sale of an asset (including real property) by a plan to a person who is not a party in interest with respect to the plan at a price other than fair market value
• Holding of an illiquid asset previously purchased by a plan
• Payment of benefits without properly valuing plan assets on which payment is based
• Duplication, excessive, or unnecessary compensation paid by a plan
• Payment of dual compensation to a plan fiduciary.

Also, with respect to the correction of delinquent participant contributions or loan repayments, the documentation requirements of the program have been simplified for breaches involving amounts below $50,000, or amounts greater than $50,000 that were remitted within 180 calendar days after receipt by the employer. Here’s what the Notice has to say about this simplified documentation requirement:

EBSA believes that introducing more simplified documentation requirements in certain cases rather than the detailed information and copies of accounting and payroll records required under the original VFC Program will streamline the application process, increase the efficiencey of EBSA’s reviewers, and be less burdensome for applicants making smaller corrections. Based on EBSA’s experience to date, the majority of VFC Program applicants, under the revised Program, would be able to avail themselves of this reduced documentation requirements.