Category: Benefits

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.

The U.S. Supreme Court issued an opinion today in Rousey v. Jacoway, reversing the Eight Circuit Court of Appeals, in a unanimous decision holding that IRAs can be shielded from creditors in bankruptcy proceedings, so long as the requirements of ?522(d)(10)(E) of the Bankruptcy Code are met. The opinion written by Justice Thomas begins as follows:

The Bankruptcy Code permits debtors to exempt certain property from the bankruptcy estate, allowing them to retain those assets rather than divide them among their creditors. 11 U. S. C. §522. The question in this case is whether debtors can exempt assets in their Individual Retirement Accounts (IRAs) from the bankruptcy estate pursuant to §522(d)(10)(E). We hold that IRAs can be so exempted.

Background of the case from the Duke Law website here:

Debtors Richard and Betty Rousey filed for bankruptcy under Chapter 7 of the United States bankruptcy code. Included in the couple’s assets were two individual retirement annuities (“IRAs”) valued at $42,915.32 and $12,118.16. The Rouseys claimed exemptions for a large portion of the IRAs from the bankruptcy estate under 11 U.S.C. § 522(d)(10)(E). The bankruptcy trustee filed an objection to the exemptions.

The Bankruptcy Court of the Western District of Arkansas and the Bankruptcy Appellate Panel for the Eight Circuit found that the IRAs were not exempt under 11 U.S.C. § 522(d)(10)(E). The Eight Circuit Court of Appeals affirmed.

More on the history of the case here from USAToday.com.

Recent news articles:

• AP article from the Boston Globe: “Supreme Court: Creditors can’t seize IRAs.”
• Reuters: “Supreme Court: IRAs Are Shielded from Creditors.”

UPDATE: From Law.com, “Justices Rule IRAs Protected in Bankruptcies.” Excerpt:

“It is not unusual in these economic times for people to change jobs — voluntarily or otherwise — several times over the course of their careers. By protecting IRAs from creditors in bankruptcy, this decision allows workers to preserve retirement savings when, after a job change, their circumstances force them into bankruptcy,” said Jean Constantine-Davis, a lawyer for the AARP, which sided with the Rouseys in the case. “Had the decision gone the other way, many thousands of people in circumstances similar to the Rouseys’ would have lost retirement savings simply because they switched jobs.”

Hunting for information about taxation issues pertaining to incentive stock options, such as AMT? Try Michael Gray’s Incentive Stock Option Frequently Asked Questions. You can also access archives for his newsletter here which he describes as “[a]n irregular newsletter for employees with tax issues relating to employee stock options.”

More on AMT from an article published by the Journal of Financial Planning: “The AMT: Pitfalls and Solutions.” The article discusses AMT issues related to incentive stock options, including this summary of a “worst-case” scenario:

The absolute worst-case scenario is when the stock plummets during the holding period, as it did for many high-tech employees in 2000, 2001, and 2002. For example, take an executive with incentive stock options whose strike price is $500,000 but whose market price has tripled to $1.5 million. Under the AMT, the $1 million bargain element would result in a tax of $280,000. But instead of dropping to a point still above the strike price, the price drops precipitously and the stock becomes worthless, or too low to sell (emotionally). The client is unaware that a disqualifying disposition would negate the AMT. Thus, the stock is not sold and there is no AMT credit. In this tragic case, the executive experiences a double-whammy: the out-of-pocket cost to exercise the ISOs ($500,000) and the AMT tax ($280,000). Make that a triple- or quadruple-whammy, since the stock is worthless and the executive is out of a job. Can it get any worse? Yes—the executive borrowed the $500,000 to exercise the ISOs and now cannot repay.

And finally, the National Center for Employee Ownership also has an article entitled “Stock Options and the Alternative Minimum Tax (AMT).“

UPDATE: Kerry Kerstetter, who writes the TaxGuru-Ker$tetter Letter, reminded me about the Reform AMT website which is dedicated to correcting “an injustice created by the way in which the Alternative Minimum Tax (AMT) is inappropriately and unjustly imposed upon owners of incentive stock options.” There is a great deal of good information there about pending legislation.

FURTHER UPDATE: Joe Kristan of RothCPA.com also reminded me about the recent Tax Court case of Ronald J. Speltz, et ux. v. Commissioner , 124 T.C. No. 9 in which ISOs and AMT were the focus of the case. More on AMT from RothCPA.com at this link, including a letter from the taxpayer’s attorney in the Speltz case.

In an article entitled “Find What Workers Want” from SHRM’s HR Magazine, benefits is listed at the top of a list of job-satisfaction factors for employees, followed by compensation, feeling safe in the work environment, job security and flexibility to balance work/life issues.

The subject of health care and the trend in providing consumers with information regarding quality of care dominated a recent SHRM conference which I attended in D.C. The topic is in the news this week with the announcement that the Department of Health & Human Services has launched a new web site–called “Hospital Compare”–devoted to providing information on how well hospitals are caring for their adult patients with certain medical conditions. You can access a Wall Street Journal article here (subscription only) discussing the web site as well as the Kaisernetwork.org‘s summary of the development here.

Excerpt from the WSJ article:

Consumers, employers and insurance companies have been calling for public disclosure of hospital-quality information, especially clinical data that are already collected by government agencies and regulatory bodies. The Bush administration is pushing for changes in health coverage, such as health savings accounts, that would require patients to make more decisions about when and where to go for care and how much to pay for it.

But making wise choices is difficult without good information: Consumers today can get more information about buying a car or a TV set than they can about hospitals or doctors. . .

Also, along those same lines, there’s another article worth reading from the Wall Street Journal this week: “Doctors Criticize Health Insurer Over Provider-Ratings Program.” Excerpt from that article:

In 13 states, Minnetonka, Minn.-based UnitedHealth Group Inc.’s UnitedHealthcare has analyzed two years’ of claims data to designate physicians who provide higher-quality, lower-cost care, according to the program’s criteria. In the areas where the UnitedHealth Performance Designation Program is in place, on average about 25% of doctors in the company’s network are on the list, the company says.

Three large companies — General Motors Corp., DaimlerChrysler AG’s Chrysler Group unit and United Parcel Service Inc. — have adjusted some of their health benefits so that some employees have incentives, such as lower co-payments, to go to these doctors.

Don’t miss Derrin Watson‘s Question 274 at Benefitslink.com: “79.9″ Isn’t 80%; But Wait– There’s More!.” He’s the only one I know who can discuss the maze of controlled group and affiliated service group rules of the Internal Revenue Code without putting readers to sleep!

You can access more of his Q & A’s here and his helpful website here.

The Associated Press is reporting that U.S. District Judge Anita B. Brody for the Eastern District of Pennsylvania has issued a ruling in the case of AARP v. EEOC (discussed in previous posts which you can access here). The court granted AARP’s motion for summary judgment, holding that “[t]he challenged regulation, originally published at 68 Fed. Reg. 41542, is contrary to law and violates the clear intent of Congress in passing and amending the ADEA, as articulated in Erie County, 220 F.3d 193.” The court permanently enjoined EEOC from publishing or otherwise implementing the challenged regulation.

According to the AP, EEOC chairwoman Cari M. Dominguez has said she plans to ask the Justice Department to appeal the ruling.

From the New York Times: “Judge Blocks Rule Allowing Companies to Cut Benefits When Retirees Reach Medicare Age.”

From SCOTUSblog this morning:

The Supreme Court, in a major legal victory for older workers, ruled 5-3 Wednesday that employees need not show intentional discrimination against them based on age in order to win a case under federal law. They can prevail on a theory that an employer’s job practice had a more negative impact on older than younger workers.

Resolving a conflict among lower courts on the coverage of the Age Discrimination in Employment Act, the Court said that proof of discriminatory intent is not required. But, it said, the scope of ADEA’s protection in disparate impact cases is narrower than under another anti-discrimination law, Title VII of federal civil rights law.

You can access the syllabus for the opinion here–Smith v. City of Jackson.

Also, the Supreme Court issued another important decision yesterday in a Title IX case which you can read about here. The case is Jackson v. Board of Birmingham Board of Education. More on the case here in an article from the Washington Times.

UPDATE: You can access the principal opinion written by Justice Stevens in the Smith case here. SCOTUSblog reports that Justice Scalia concurred in part and concurred in the judgment, and that Justice O’Connor, joined by Justices Kennedy and Thomas, concurred in the judgment, but in effect dissented on the central disparate-impact question.