Category: Benefits

48-50. That was the vote today by the Senate on a cloture motion to proceed with a constitutional amendment on marriage. Supporters would have had to obtain 60 votes to advance the measure. Read about the vote here in an article from the Wall Street Journal (subscription required).

Also, two very interesting items related to the topic:

Benefitslink.com has posted a Technical Information Release 04-17 from the Massachusetts Department of Revenue entitled “Massachusetts Tax Issues Associated with Same-[Gender] Marriages.”

Veritude.com has this article–“The Ripple Effect of Same-Gender Marriages in Massachusetts“–which discusses the benefits implications of recent developments and also provides a link to a white paper by the law firm of Posternak Blankstein & Lund LLP in Boston discussing a potentially new area of legal exposure relating to benefits.

In this article from the Washington Post (free registration required) here discussing Maryland’s constitutional battle over same-gender marriage, you will find a partial list of the “rights, benefits and obligations” accompanying a valid marriage license:

• The right to visit a spouse in the hospital
• The right to make medical decisions for a sick spouse
• The right to make funeral arrangements for a deceased spouse
• Access to family courts for dissolution of relationships
• Death benefits for surviving spouses of firefighters and police officers
• Mutual responsibility for debts
• Joint assessment of income for determining eligibility for state government assistance programs
• Ability to sponsor a spouse from another country for a green card
• Community property ownership protections
• Child custody, visitation, and duties of financial support to children
• Eligibility for health benefits (without taxation) and COBRA benefits through an employer
• Ability to take leave to care for a sick spouse under the Family and Medical Leave Act
• Right to inherit a spouse’s pension
• Entitlement to inherit social security and disability benefits upon the death of a spouse
• Ability to inherit jointly owned property without incurring tax penalties
• Right to file joint income taxes
• Ability to put a spouse on the deed to a home without incurring tax penalties
• Access to “family memberships”
• Domestic violence protections
• Immunity from testifying against a spouse
• Right to sue for wrongful death of a spouse

As many of you know, the Senate is expected to vote Wednesday on the Federal Marriage Amendment, which would define marriage as the union of a man and a woman and apparently block courts from ruling otherwise. Read about the scheduled vote here in an article from the Associated Press. Leading the chorus of support for an amendment, President Bush said in his radio address Saturday that legalizing same-gender marriage would redefine the most fundamental institution of civilization. “If courts create their own arbitrary definition of marriage as a mere legal contract and cut marriage off from its cultural, religious and natural roots then the meaning of marriage is lost and the institution is weakened,” he said. “We are ready to rock and roll on the debate on this,” said Sen. Harry Reid, D-Nev.

All of this will, of course, continue to have significant repercussions in the benefits world.

Last week the Committee on Education and the Workforce held a hearing entitled “Examining Cash Balance Pension Plans: Separating Myth from Fact.” Plan Sponsor has an excellent summary of the hearing here.

For those who don’t have time to read all of the testimony at the hearing, here are some important excerpts:

Opening Statement by Rep. John Boehner (R-OH), Chairman:

The recent wave of litigation surrounding cash balance plans has raised concerns from employers, workers, and policymakers alike. One well-documented court case involves IBM, but the initial ruling runs counter to existing law and a large body of other court decisions. In this case, the judge found the cash balance plan design inherently age discriminatory because equal pay credits for younger workers have a longer period of time to earn interest and accrue benefits before retirement than the same pay credits for older workers. This interpretation essentially means it would be age discriminatory to make equal contributions on behalf of workers with different ages. This is inconsistent with every other pension design and this logic would make a basic savings account, 401(k) plans, and even Social Security benefits automatically age discriminatory. We’re not here to debate the IBM case, but we also need to make sure cash balance plans aren’t forced into extinction at the expense of the interests of workers.

Most courts have ruled no age discrimination occurs with cash balance plans if the pay and interest credits given to older employee accounts are equal to or greater than those of younger employees. The most recent ruling on this topic, issued just last month in the Tootle case, agrees that cash balance plans are not inherently age discriminatory.

Testimony of James M. Delaplane, Jr., Partner, the Benefits Group of Davis & Harman LLP, Special Counsel, American Benefits Council:

Disregarding the interpretation contained in the proposed regulations and other legal authorities, one federal district court judge dramatically shifted the focus of the debate surrounding hybrid plans by declaring in July 2003 in the case of Cooper v. IBM that hybrid plan designs were inherently age discriminatory. According to the court’s flawed logic, simple compound interest is illegal in the context of defined benefit pension plans. Under the Cooper court’s reasoning, a pension design is discriminatory even if the employer makes equal contributions to the plan on behalf of all its workers and, ironically, even in many instances where the design provides greater contributions for older workers. Such a conclusion flies in the face of common sense. It would hold all 1,200 plus hybrid pension plans, regardless of whether adopted as new plans or through conversion from traditional plans, to be in violation of the pension age discrimination laws.

The conclusion that all hybrid plan designs are inherently age discriminatory begs the question why the Internal Revenue Service issued favorable determination letters for fifteen years blessing hybrid plan designs and issued proposed regulations providing that the cash balance plan design is not inherently age discriminatory. It is surprising, at a minimum, that the Cooper decision completely ignored this history. .

Testimony of Ellen Collier, Director of Benefits, Eaton Corporation, on behalf of the Coalition to Preserve the Defined Benefit System:

If Congress does not move quickly to provide legal certainty for hybrid plans, many Americans may soon lose valuable retirement benefits. The current legal landscape is ominous. One rogue judicial decision has made the threat of age discrimination class action litigation a very real concern for employers. Potential damage awards from such suits could reach astronomical figures — into the hundreds of millions or even billions of dollars – and the potential amounts of these awards continue to grow the longer the plans remain in effect. In Eaton’s case, the cost to modify our plan for alleged “age discrimination” in its design could curtail our ability to commit funds for other important functions, such as for research and development – and this is for a plan that has not yet been in existence for 3 years!

Testimony of Robert L. Clark, Professor, College of Management, North Carolina State University:

. . [P]olicy makers must remember that the pension system is voluntary and employers have many choices. A key concern is what is the appropriate counterfactual if conversions to cash balance plans are not allowed. If cash balance plans are not an option, firms my terminate their defined benefit plans and have no new plan, they might terminate their defined benefit plans and establish a new defined contribution plan, or they may retain the current plan but change the benefit formulas to reduce or eliminate the early retirement subsidies. Would the opponents of cash balance plans prefer one of these options? With this caveat in mind, regulations that are only aimed at preventing cash balance conversions would seem unwise and unlikely to achieve the desired result.

Testimoy of Robert F. Hill, Esq.:

. . . Congress has enacted very specific and very different legal frameworks for defined benefit plans and defined contribution plans. These rules were designed—with a recognition that taxpayers pay hundreds of millions of dollars to subsidize the private tax-qualified pension system–to assure that employees were treated fairly and to avoid abusive practices that undermine the promises made to employees and the employees’ reasonable expectations. The Joint Committee on Taxation has estimated that in 2004 taxpayers will pay about $89 billion in foregone taxes to subsidize the private tax-qualified pension system. It is only right and proper that Congress assure that the taxpayers’ monies provide a system that is fair to all workers, including older workers.

Testimony of Nancy M. Pfotenhauer, President, Independent Women’s Forum:

We believe the emergence of hybrid plans is encouraging news for many and a cause for particular hope among women. In fact, one benchmark study done in 1998 by the Society of Actuaries found that an amazing 77% of women do better under a cash balance approach. They are better off under a cash balance system because they move in and out of the workforce in order to balance family needs and because they cannot afford to take early retirement. Despite this promise, it is clear that controversy exists about how firms should transition to hybrid plans. Many have questioned the fairness of changing pension approaches for employees over 40 years of age.

An alternative perspective, and one that IWF believes has credence, is that any adoption of restrictions that effectively limit the ability of companies to transition to hybrid plans places the financial well-being of the relatively few employees who have had the luxury of staying with one company for a long period of time (decades), have the luxury of taking early retirement, and have the luxury of taking their pension benefit in the form of an annuity rather than as a lump sum, ahead of all of the employees who do not have these options.

Yesterday’s Wall Street Journal (subscription required) contained this article–“Following the Money:401(k) Fees Get a Look.” The article discusses the recent SEC inquiries into what payments mutual-fund companies or investment advisors make to employers to ensure that the mutual fund company funds are included in a line-up of 401(k) plan options (so-called “pay-to-play” arrangements). (Read about it here.) The article highlights some of the problem areas in 401(k) fee disclosure:

Lori Richards, director of the SEC’s office of compliance inspections and examinations, said earlier this week that the agency wants “to make sure investors, however they invest in mutual funds, understand exactly what their money is paying for.”

Currently, though, investors who hold funds in 401(k) accounts may not see much in the way of routine fee disclosure. While 401(k) participants get a prospectus or more limited fund profile when they first invest in a fund, they may not receive the annual and semiannual reports that provide updates on fund performance and fees. That is the case despite a general requirement that funds supply those reports to shareholders.

How can that be? Because under securities law, the retirement plan — and not the individual plan participant — is considered the investor in the fund, says John Heine, an SEC spokesman. “The plan gets whatever [information] goes to any other shareholder,” he says. The Labor Department doesn’t require 401(k) plans to supply those fund reports to plan participants, although some plans voluntarily do so.

The article quotes Ann Combs, assistant secretary of Labor, as saying that, after the SEC completes its review, the DOL will reconsider its 401(k) rules, “including what sorts of information should be provided to workers in retirement plans automatically.”

Another article on the topic from CFO.com: “SEC Eyes Pay-to-Play for 401(k)s.”

And don’t miss this op-ed by Kathleen Pender from SFGate.com: “SEC shines light on 401(k) fees.”

This is a great op-ed by Jerry Heaster for the Kansas City Star on the benefits of Health Savings Accounts–“A healthy method of saving“:

The advent of health savings accounts brings not only a new wrinkle to the health care insurance mix but also another nest-egg-building opportunity for retirement. In fact, as the potential of this product for retirement savings becomes more appreciated, it’s reasonable to expect the concept leading to sweeping evolutionary changes in how America finances health care coverage.

The Wall Street Journal today (subscription required) contains this article: “401(k) Payoffs: Are They Legit?“:

Federal securities regulators, expanding their scrutiny of the mutual-fund industry, are examining whether some funds are paying retirement plans to be included in their lineup of available funds. Officials are concerned that the payments aren’t being disclosed and may result in retirement plans offering funds that aren’t in the best interest of investors. The Securities and Exchange Commission said it wants to know why mutual funds and their investment advisers make certain payments to 401(k) plans, what the money is used for and whether it creates an incentive for retirement plans to favor certain funds over others.

Also, from the New York Times: “S.E.C. Inquiry to Encompass 401(k) Plans.”

And from The McHenry Group, this alert: “SEC Launches Sweep Examination of Mutual Fund 401(k) Payments.” The alert inclues the list of twenty-five questions sent to mutual fund companies by the SEC over the past several weeks.

(Obviously, whatever the SEC finds here would also interest the DOL since, under ERISA, fiduciaries are obligated to select plan investment options under the ERISA standard of “solely in the interest of participants amd beneficiaries.”)

From Bloomberg.com, “MCI, WorldCom’s Ebbers Settle 401K Suit for $51 Mln.” According to the article, former executives of WorldCom have agreed to pay about $51 million to settle a class action suit by employees involving the 401(k) plan. The pact must be approved by U.S. District Judge Denise Cote and apparently leaves the 401(k) fund directed trustee as the only active defendant.

Read more about the lawsuit here.

The New York Times has an interesting article here discussing how United Airlines may have to take drastic steps regarding its pension plans in the near future. According to the article, the airline just a few weeks ago said in a bankruptcy court filing that it viewed its pension plans “as untouchable unless there was no other choice.” However, the article states that many now are predicting that United will have to “gut the pension plans” and that there is no other way for United to survive.

The article goes on to make predictions regarding the airline industry as a whole:

Whatever United does will be closely watched by the other major airlines and their employees, who have substantial pensions of their own to worry about. If United ultimately revives itself by terminating one or more of its pension plans, other airlines may also try to shed pension debt, to remain competitive.

This would not happen overnight. Pension terminations are difficult and costly. But over time, the industry could find itself in a long, slow race to the bottom – a succession of bankruptcies and pension defaults similar to those in the steel industry over the last quarter of a century. Steel maker after steel maker went bankrupt, and the only ones to bounce back were those that scuttled their pension plans.

Read about another airline’s pension funding woes here.

Thanks to the 401khelpcenter.com for the pointer to this article–“Crossing the Line: Managing Fiduciary Responsibilities of Financial Advisors and Avoiding Prohibited Transactions.” The article from GoldK provides some good information for brokers and financial advisors on the topic of how they can inadvertently become ERISA fiduciaries when they advise 401(k) plans regarding investments. The article notes that “few financial advisors have understood their potential status as plan fiduciaries, and the risks they run as a result.”

For all those involved with qualified plan administration in some way, add this to your to-do list: print out or bookmark recently issued Private Letter Ruling 200426027 [pdf] and place it in your files for future reference. The PLR expresses the IRS’s views regarding many of the questions practitioners have had in connection with a recent phenomena in the benefits world–that of U.S. attorneys seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1990 (“FDCPA”). Read about it in a previous post–U.S. Attorneys Seeking To Levy Against Qualified Plan Assets Under the FDCPA. In the previous post, I mentioned that Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS had remarked at an ALI-ABA Annual Fall Employee Benefits Law and Practice Update that there were “still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA.” The IRS has answered many of these “unanswered questions” in this PLR.

The IRS makes it clear in the PLR (courts could differ, I suppose) that the U.S. Government cannot garnishee or otherwise collect against a plan participant’s or beneficiary’s benefit until the participant or beneficiary has a right to a distribution under the terms of the plan at issue. In addition, the IRS states that the U.S. Government steps into the shoes of either the participant or beneficiary and can make an election on his or her behalf when such person is eligible for a distribution but has not elected the same. The government is also subject to the qualified joint and survivor annuity rules and other plan provisions to the same extent as either the participant or beneficiary.

Other nuggets of information in the PLR:

(1) Payments made pursuant to the garnishment are not subject to the 10-percent additional income tax imposed under section 72(t) of the Internal Revenue Code.

(2) Lump sum payments made pursuant to orders of garnishment obtained under the Act constitute eligible rollover distributions and are subject to the mandatory 20-percent tax withholding. If payments are in the form of periodic distributions, they are not eligible rollover distributions and are not subject to mandatory withholding.