Category: Benefits

Under the heading “Newswatch,” I will in the future be posting titles of articles and links to them for readers without much explanation. (In the manner of some of my fellow bloggers.) I do not always have the time to write commentary on what I read, but would like to provide links to some noteworthy articles. There is a selfish reason here too, I’m afraid. I would like to go back and refer to some of these from time to time and this will provide the means to do so. I have tried Furl, and think it is great, but unfortunately cannot seem to work it into my schedule.

Some articles for today:

• Kiss your taxless Net goodbye
• Redemption fee could trap small investors
• Cash balance pensions plans continue to lose in court
• Pension Uncertainties Vex Retirees
• Pension fight nearly settled: Electro-Jet workers, lawyers to share $14.3M
• Extra Day for Leap Year Can Cause Confusion with Paychecks, Retirement Plans
  
• From CFO.com: This Year’s Leap: Expensing Options

USAToday.com posted an interview with Eliot Spitzer which you can access here. What he had to say about mutual fund fees:

Government has no place setting the fees. But disclosure needs to be improved dramatically. Nobody knows what they are paying. Every prospectus should have the sort of chart you see on a can of soup: three servings, X calories, this much fat, this much carbs. It should be reduced to this sort of simple, comparative basis. Right now, you read a prospectus, who knows what it means?

For those of you following the Medicare Part D Accounting issue closely, FASB has posted its February 18, 2004 Board minutes here and an Action Alert here summarizing what they have decided. You can access previous posts on the subject here.

Also, an accounting friend has provided the following insight regarding these developments:

In past two board meetings, FASB has pretty much settled where it’s headed on Medicare Part D accounting. Within next several weeks, a dreaft staff position paper will be published, with a 30-day comment period. If FASB stays on schedule, the key effective date will involve fiscal quarters beginning after June 15, 2004, with a delayed effective date of measurement dates after September 15, 2004, for non-public companies with small plans. Three main actions will be necessary: (1) Employers must determine if their retiree health programs provide prescription drug coverage that is actuarially equivalent to the Medicare Part D coverage, in which instance the employer would be eligible for the special subsidy from the federal government; (2) If the employer determines that their retiree health plan is actuarially equivalent, then the effect of the subsidy payments must be measured and the accounting treatment to be prescribed in the forthcoming staff position paper must be calculated; and (3) Appropriate footnote disclosures for financial statements must be prepared. Any plan amendments (e.g., to make a plan actuarially equivalent) may involve additional actions and calculations for the accounting effects.

For more of this commentary on the developments, continue reading . . .

If an employer determines that its retiree health plan’s prescription drug coverage is not at least actuarially equivalent to Part D and if no amendment is made to the plan to bring it to an actuarially equivalent level, then no action need be taken. If the employer cannot yet determine if its plan is actuarially equivalent (e.g., due to absence of regulatory guidance on that issue), then a disclosure should be made to that effect in financial statement footnotes.

For employers with plans that are determined to be actuarially equivalent, the underlying accounting methodology to recognize the effect of the special subsidy involves reduction of costs under SFAS 106. The cost reductions attributable to future years of service are recognized as reductions in the service cost for each year that the subsidy is attributable. Any reduction in cost attributable to benefits earned to date is treated as a reduction in the accumulated postretirement benefit obligation (APBO). Reduction in APBO is not recognized immediately in the year of implementation, but rather is treated as an actuarial gain, to be recognized over future service periods under the rules of SFAS 106. If a plan amendment is made concurrent with accounting implementation (e.g., to make the plan actuarially equivalent), then the accounting treatment will essentially combine the gain from reduction of APBO for the subsidy with the increase in APBO from the amendment, amortizing any net gain according to the rules for gain/loss recognition and any net increase in APBO as an amendment.

Transition then depends largely upon whether or not the employer had elected immediate implementation versus delayed implementation under FAS 106-1 issued in January. If early implementation had been elected, and if the employer’s methodology differed from the methodology now being set forth by FASB, then an adjustment for the cumulative effect of the change must be recognized in the first quarter of implementation under the new guidance, with reference back to the point of the immediate recognition. If the employer had deferred implementation, yet can reasonably determine its retiree prescription drug coverage to be actuarially equivalent, then a similar cumulative adjustment applies, but only back to the beginning of the first quarter that starts after December 8, 2003.

In this press release, the IRS announced the issuance of Revenue Ruling 2004-37. The Revenue Ruling is designed to “shut down an aggressive transaction involving the exercise of stock options by corporate insiders using debt financing provided by the corporation.” According to the press release, in these types of transactions corporate insiders exercise options they hold by giving the company a promissory note. If the value of the stock later falls below the face amount of the note, the company may agree to reduce the insider’s debt. Some individuals have tried to claim that this debt reduction does not result in taxable income.

The ruling provides that the reduction of debt in these circumstances does result in taxable income to the insider.The ruling also provides that a reduction in the interest rate under the note, or a change in the note so that the executive no longer has personal liability, also would result in compensation income.

The press release notes this statement from Acting Assistant Secretary for Tax Policy, Greg Jenner: “Once again, we have made it clear that everyone has to play by the same rules.”

From the TaxGuru.com here.

In a press release, the Department of Labor announced that the Employee Benefits Security Administration (EBSA) and the Internal Revenue Service (IRS) have released a new booklet, “401(k) Plans for Small Businesses,” as part of an ongoing effort to provide compliance assistance to small employers on retirement plan issues. You can access an extended version of the booklet on the DOL’s website here. The booklet actually provides a well-organized summary of the different types of 401(k) plans available and how to establish one. There is also some very basic information on fiduciary duties under ERISA and how to fulfill those responsibilities and duties.

Henry Aaron of the Brookings Institution has this to say regarding the significance of health savings accounts:

“. . .[T]he claims that HSAs will lower medical cost inflation and the fears that they will undermine coverage are probably overstated. But the larger point is that the appeal of HSAs should not be considered within the confines of company-financed health insurance, but in the larger context of total labor compensation. The principle effect of the new HSA provisions is to break down the distinction between health and pension benefits. Much retirement saving is devoted to paying for health care. HSA balances that remain unused during an employee’s working years may be used under extremely favorable terms to pay for health care during retirement, and they may be used on terms identical to those of tax-sheltered savings plans to pay for general consumption. Those options mean that HSAs are just defined contribution pension plans, with particularly advantageous tax treatment and particularly generous rules for withdrawal.

Thanks to RothCPA.com for the pointer.

The American Benefits Council has published its comments to the Internal Revenue Service regarding HSAs and Notice 2004-2.

A couple of helpful articles on HSAs:

• Sutherland, Asbill & Brennan LLP: “Legal Alert: Health Savings Accounts.”
• SHPS: “Health Savings Accounts (HSAs) and their Impact on Health Care Benefits.“

The U.S. Supreme Court issued an opinion today in the case of General Dynamics Land Systems v. Cline, No. 02-1080. You can access the opinion here. In a 6-3 decision, the Court reversed the Sixth Circuit decision and held that reverse discrimination claims are not cognizable under the Age Discrimination in Employment Act. Justice Souter wrote the majority opinion. Justice Scalia authored a dissenting opinion, and Justice Thomas authored another dissenting opinion joined by Justice Kennedy. The opening statement of the majority opinion reads as follows:

The Age Discrimination in Employment Act of 1967 . . . forbids discriminatory preference for the young over the old. The question in this case is whether it also prohibits favoring the old over the young. We hold it does not.

The Facts of the Case: The company had entered into a collective-bargaining agreement with the union eliminating the company’s obligation to provide retiree health benefits, except for those then-current workers who were at least 50 years old. Employees who were at least 40 years of age, but under 50, brought an action under the ADEA. The EEOC supported the position of the employees based upon an EEOC regulation. A district court had dismissed the case, calling the federal claim one of “reverse age discrimination” upon which no court had ever granted relief under the ADEA. A divided panel of the Sixth Circuit reversed, reasoning that section 623(a)(1) of the ADEA prohibited discrimination on its face and that if Congress had meant to limit its coverage to protect only the older worker against the younger, it would have said so. The U.S. Supreme Court reversed the Sixth Circuit.

The regulation of the EEOC (29 CFR section 1625.2(a)) at issue read as follows:

It is unlawful in situations where this Act applies, for an employer to discriminate in hiring or in any other way by giving preference because of age between individuals 40 and over. Thus, if two people apply for the same position, and one is 42 and the other 52, the employer may not lawfully turn down either one on the basis of age, but must make such decision on the basis of some other factor.

What the Court Had to Say: The majority opinion argues that the history of the ADEA, its structure, purpose, history and relationship to other federal statutes, does not support a finding that the ADEA meant to stop an employer from favoring an older employee over a younger one. The opinion notes how a contrary ruling would create “discord” among the federal statutes on employee benefit plans. (Comment: “Discord” is an understatement. A contrary ruling would have been like a bombshell going off in the benefits world.) The Court explains this very important point in footnote 9:

An even wider contextual enquiry supports our conclusion, for the uniformity Cline and the EEOC claim for the uses of “age” within the ADEA itself would introduce unwelcome discord among the federal statutes on employee benefit plans. For example, the Tax Code requires an employer to allow certain employees who reach age 55 to diversify their stock ownership plans in part, 26 U.S.C. section 401(a)(28(B); removes a penalty on early distributions from retirement plans at age 59 and 1/2, section 72(t)(2)(A)(i); requires an employer to allow many employees to receive benefits immediately upon retiring at age 65, section 401(a)(14); and requires an employer to adjust upward an employee’s pension benefits if that employee continues to work past age 70 1/2, section 401(a)(9)(C)(iii). The Employee Retirement Income Security Act of 1974 makes similar provisions. See, e.g., 29 U.S.C. section 1002(24) (“normal retirement age” may come at age 65, although the plan specified later); section 1053(a) (a plan may pay full benefits to employees who retire at normal retirement age). Taken one at a time any of these statutory directives might be viewed as an exception Congress carved out of a generally recognized principle that employers may not give benefits to older employees that they withhold from younger ones. Viewed as a whole, however, they are incoherent with the alleged congressional belief that such a back-ground principle existed.

The Court also held that the EEOC was “clearly wrong” in its interpretation of the ADEA in regulation section 1625.2(a) (see above) noting as follows:

When the EEOC adopted section 1625.2(a) in 1981, shortly after assuming administrative responsibility for the ADEA, it gave no reasons for the view expressed, beyond noting that the provision was carried forward from an earlier Department of Labor regulations. . . In Edelman v. Lynchburg College, 535 U.S. 106, 114 (2002), we found no need to choose between Skidmore and Chevron, or even to defer, because the EEOC was clearly right; today, we neither defer nor settle on any degree of deference because the Commission is clearly wrong.

Other notable quotes from the opinion:

(1) ” . . .[T]he testimony, reports, and congressional findings simply confirm that Congress used the phrase “discriminat[ion] . . .because of [an] individual’s age” the same way that ordinary people in common usage might speak of age discrimination any day of the week. One common place conception of American society in recent decades is its character as a “youth culture,” and in a world where younger is better, talk about discrimination because of age is naturally understood to refer to discrimination against the older. . . If Congress had been worrying about protecting the younger against the older , it would not likely have ignored everyone under 40. The youthful deficiencies of inexperience and unsteadiness invite stereotypical and discriminatory thinking about those a lot younger than 40, and prejudice suffered by a 40-year-old is not typically owing to youth, as 40-year-olds sadly tend to find out. The enemy of 40 is 30, not 50.”

(2) “The Courts of Appeals and the District Courts have read the law the same way, and prior to this case have enjoyed virtually unanimous accord in understanding the ADEA to forbid only discrimination preferring young to old. So the Seventh Circuit held in Hamilton, and the First Circuit said in Schuler, and so the District Courts have ruled in cases too numerous for citation here in the text. The very strength of this consensus is enough to rule out any serious claim of ambiguity, and congressional silence after years of judicial interpretation supports adherence to the traditional view.”

News Reports:

USAToday.com: “Justices block reverse age discrimination cases.”
Dow Jones Newswires via Quicken.com: “Supreme Court Rules for General Dynamics in Age-Bias Case.”
Reuters via the New York Times: “Supreme Court Rejects Reverse Age Bias Lawsuits.”
The Wall Street Journal: “High Court Rules For General Dynamics In Age Case.”

Previous posts on the case here and here.

Also, SCOTUSblog discusses the case here and Michael Fox at Jottings by an Employer’s Lawyer discusses it here.

The Biddle Law Library at the University of Pennsylvania Law School has a very nice page on their website devoted to blogs which you can access here. Here’s what they have to say about blogs:

A Blog is an online journal or chat-log that provides web users with information that is typically updated daily. A blog’s subject can range from the day to day happenings of individuals to news sources to the most recent events in the world. Writers of blogs are called bloggers and the writing act itself is called blogging.

The Internet is home to large numbers of blogs. . . Blawgs are web logs (blogs) that specifically pertain to the legal field. The Blawgs below generally tend to provide legal news and items of interest to scholars.

Thanks to the University of Pennsylvania Law Library for listing Benefitsblog in its Electronic Resources section entitled “Law on the Web.”

Thanks to Matt Hutcheson and Rick Meigs for inviting me to be a guest on the Retirement Hour last night! I enjoyed it very much. They have a great show, by the way, and you can listen in here on the East Coast at 7:00 p.m. every Thursday by accessing a link here. I will add a permanent link for the Retirement Hour over in the right-hand column in the near future.

(Access a previous post on the Retirement Hour here.)

UPDATE: Thanks to Carolyn Elefant at MyShingle.com for her kind comments here.

In a previous post here, I discussed how, in FASB’s meeting on Wednesday, February 11, 2004, it was decided that “companies should book the amount of federal subsidy they expect to receive under the Medicare Act as a reduction of future benefit costs — instead of as a stream of income from continuing operations.” A friend who understands more than I do all of what is really going on in the accounting world with all of these recent developments has written:

Minor observation on the FASB meeting on Wednesday: I’m not sure that it yet has any practical effect. In January FASB had decided (FAS 106-1) that employers could elect either immediate implementation of accounting for the Medicare Part D special subsidy or else await the final conclusions of FASB’s project to determine the correct accounting for that element. Any employer that elected immediate implementation must of course know that when FASB concludes its current project, then reversal or adjustment of the earlier accounting might be required; but I’m not sure FASB intends that an employer who moved with early adoption must change anything based on interim decisions within that FASB project. Thus, if an employer elected early adoption, then even if the employer and its accountant felt (as some may have) that the subsidy was outside the scope of SFAS 106, the most that this first step in FASB’s follow-through project would do would be to put the employer on early alert of a change that will be necessary upon completion of the FASB project, which might not occur for another year or so.

Also, this from AccountingWeb.com: “FASB Sets New Rules for Cash-Balance Benefits.” As stated in the article, last week FASB also adopted a definition for cash-benefit pension plans:

A cash-balance pension plan is a defined-benefit pension plan (as defined in the Glossary of Statement 87) that defines the promised employee benefit by reference to a notional account balance. An employees’ notional account balance is increased with periodic notional principal credits and notional fixed or variable interest or investment credits, and may be increased for other notional ad hoc credits. Upon separation of employment, for any reason, by a fully vested employee, the employee is entitled to the notional account balance as either a lump sum or an actuarially equivalent annuity either immediately or at a future date. Subject to the terms of the pan or regulatory requirements, an employee may be entitled to a settlement amount greater than the notional account balance due to the crediting of future interest (or investment) credits that are not conditioned upon future service.

FASB is formally reviewing rules governing the way companies measure cash-balance benefits.

Also, businesses that follow international accounting standards will have to start treating stock options as an expense, under a new rule issued today by the International Accounting Standards Board. You can access the press release issued by the IASB here entitled “IASB Issues Standard on Share-based Payment.” Articles on the development:

• SFGate.com: “Accounting body requires firms to treat stock options as an expense.”
• Mercury News: “Global Rules Set for Stock Options.”

(More on the stock option expensing debate here.)

Finally, Tech Central Station has this op-ed: “Green Eyeshade Killers.” James Glassman writes:

Candidates are obsessed with “outsourcing,” the alleged loss of tech jobs overseas. . . There’s a far, far more dangerous threat to our global preeminence in technology. It involves an accounting change. Don’t touch that dial! Accounting is boring, but this is important. Your job may depend on it.”