Category: Benefits

The IRS has issued a press release and Announcement 2004-58 (access both via Benefitslink.com) stating “there will be a delay in the effective date for recently issued regulations that set forth information required to be explained to pension plan participants regarding the optional forms of benefit offered by the plan.” The announcement warns, however, that the delay will not “apply to the extent a plan offers a lump sum payment that is less valuable than the qualified joint and survivor annuity offered by the plan.”

The press release goes on to say:

Participants who are eligible for a subsidized early retirement annuity and a lump sum payment that does not include that subsidy shouldn’t have to pay for professional advice to find out the value of the subsidy that is lost if the lump sum is elected,” said Greg Jenner, Treasury’s Acting Assistant Secretary for Tax Policy. “However, for plans offering lump sums that include this subsidy, we have delayed the effective date so that they may evaluate all of their optional forms. This should be done in coordination with rules we hope to finalize next year regarding burdensome and complex forms of payment that are of de minimis value to participants.”

The announcement also clarifies certain issues that have been raised about the new required disclosure, including that a plan will not fail to satisfy the spousal protection rules merely because the plan’s lump sum payment is calculated using the statutory required interest and mortality assumptions.

When is the effective date now? The announcement provides:

The regulations will generally be effective for QJSA explanations provided with respect to annuity starting dates beginning on or after February 1, 2006. In the interim, plans that do not comply with section 1.417(a)(3)-1 will be required to comply with prior guidance regarding disclosure of relative value and financial effect. See sections 1.401(a)-11(c)(3) and 1.401(a)-20, Q & A-36 as they appeared in the April 1, 2003 edition of the Code of Federal Regulations.

Congratulations to Paul Caron of the TaxProf Blog for making it to the Wall Street Journal. (He writes about it here.) A short article about the blog had this to say:

“TaxProf Blog” is a recently created Web site for tax professors (taxprof.typepad.com), set up by Paul L. Caron of the University of Cincinnati College of Law. Recent topics include a report of astronomical weekly pay for summer associates at major New York City law firms. … Why do our tax laws keep getting more and more complex? In Congress, tax-law simplification “is everyone’s second choice,” says Sheldon Cohen, a Washington lawyer and a former IRS Commissioner. “Their first choice is some tax benefit for a constituent.”

Paid subscribers can access the article here. The rest of the world can access it here [pdf].

Law.com has an interesting article on how the Ninth Circuit is faring on the Supreme Court docket–“9th Circuit Dominates Top Docket“:

Ninth Circuit appeals accounted for about one-third of the Supreme Court’s docket in the term that ended Tuesday — 25 of 78 cases. Hellman said about one-sixth of petitions for certiorari were from the 9th Circuit, meaning that the Supreme Court is “taking cases from the 9th Circuit at a much higher rate than you would expect.”

What is the reason for the abundance of Ninth Circuit cases under review? Legal scholars may differ, but according to Thomas Goldstein of Goldstein & Howe in Washington, D.C. “[t]he circuit is not going to be able to rid itself of its reputation. . . It has been tarred and feathered as being liberal in the extreme. The most it can hope for is being liberal in moderation.”

For a chart of Ninth Circuit cases reviewed by the Supreme Court and their outcomes, you can access “How the West was Reversed.”

Terminating or freezing a pension plan can evoke an enormous amount of emotion in employees as evidenced in this article–“HAL bankruptcy trustee kicked off plane by pilot“:

A Hawaiian Airlines pilot asked [a] bankruptcy trustee . . to get off a plane preparing for takeoff Thursday, saying he was angry about [the trustee’s] policies and could not safely fly the Boeing 767-300 with the trustee aboard. . . Hawaiian, which filed for bankruptcy in March 2003, is overdue in making $4.5 million worth of payments to the pilots’ pension plan. [The trustee] has proposed several options for handling the plan, including terminating it, converting it to a defined-contribution plan or freezing it and protecting the earned benefits. . .

According to the article, the pilot remarked that it was “strictly a matter of safety” and that he didn’t feel that he could function properly with the bankruptcy trustee on board.

Recently, the IRS issued Notice 2004-43 allowing individuals to utilize health savings accounts (until January 1, 2006) even though state law mandates might prevent the health plan being utilized from qualifying as a “high deductible health plan” as required under the HSA rules. (Previous posts on the subject are here and here.) An article from the New Jersey Star Ledger— “N.J. gets a break on federal health rule“–highlights the state law mandate issue as follows:

New Jersey is among fewer than a dozen states whose health insurance laws are at odds with the federal HSA rules, according to William Sweetnam, benefits tax council for the U.S. Department of Treasury.

In a meeting with small businesses yesterday in Paramus, Sweetnam said a Treasury ruling issued last Friday gives all these states until Jan. 1, 2006, to bring their laws into conformity with the federal rules on HSA.

New Jersey’s lead poisoning mandate can remain in place for the next year and half, Sweetnam said, without invalidating the HSA.

However, as the article notes, states may not be willing to give up their state law mandates (as contemplated by the Treasury) in order to take advantage of the HSA mechanism:

But changing New Jersey’s lead poisoning law may not be the answer, according to State Sen. Joseph Vitale (D-Woodbridge), chairman of the Senate Health and Human Services Committee.

Vitale said he is in favor of HSAs, which he said “could be an important tool for providing coverage to the uninsured.”

But rather than changing the New Jersey law, Vitale said the state might consider “whether New Jersey can appeal to the Treasury. New Jersey is being progressive, and we are trying to provide financial help to people who have been exposed to lead paint. I don’t see why the federal government would want us to revise our rules in order to take advantage of the HSA.”

Also, in Pennsylvania, an article here notes how “the House of Representatives will vote this week on legislation sponsored by Rep. John Payne, R-106th Dist., that would exempt from state income tax deposits and withdrawals from health savings accounts for qualifying medical expenses.”

Veritude, a Fidelity Investments company, has a new website entitled “Workforce Insights” which keeps readers abreast of the latest workforce management trends, research and thought leadership. The site provides links to a number of HR-related weblogs, including Benefitsblog.

The IRS today in a press release announced that it has issued proposed model documents that can be used as trust or custodial agreements for Health Savings Accounts (HSAs). These documents “are being released in proposed form in order to give the public the opportunity to comment on the content before being issued in final form.” The public comment period is 30 days.

The link to the model Health Savings Custodial Account is here [pdf] and the link to the model Health Savings Trust Account is here [pdf] .

IRS enforcement initiatives was the ongoing theme of Tuesday’s meeting in Philadelphia of the Mid-Atlantic Pension Liaison Group, a small group of practitioners and IRS officials who meet regularly to interface regarding current topics of interest in the employee benefits arena. (Posts about other Pension Liaison Group meetings are here and here.) IRS officials who spoke at the meeting were Peter J. Breslin (Senior Program Manager, Examination Programs & Review & Employee Plans Team Audit), Ron Itzkowitz (Employee Plans Agent, Employee Plans Team Audit & Multi-Employer Audit Program) and Mike Sanders (EP Group Manager, Philadelphia, Focus Audit and External Audit Guide). Cathy Jones (the Employee Plans (“EP”) Mid-Atlantic Area Manager) presided.

Peter Breslin and Ron Itzkowitz gave a presentation on the Employee Plans Team Audit Program (“EPTA”). This is the program started by the IRS within the last few years which sends agents out to specifically audit large plans, e.g. 2500+ participants (“Large Plans”). (A previous post here discusses the program.) According to Mr. Breslin and Mr. Itzkowitz, 4,500 qualified plans fall into this Large Plan category. Although Large Plans represent less than 1% of the total 690,000 qualified plans, Large Plans nevertheless affect about 60% of the total qualified plan participants and hold about 70% of the total qualified plan assets. Obviously, that is a major reason why the IRS is focusing its attention on them. (Oddly enough, prior to the IRS’s restructuring, Mr. Breslin noted that the IRS gave Large Plans very little attention.)

Some of the issues EPTA agents focus on: (1) Terminations/partial terminations (potential vesting and distributions issues); (2) Acquisition issues; (3) Deferral Percentage Testing; (4) Compensation issues; (5) Plan documentation; (6) Vesting; (7) Distributions and loans; (8) Assets; and (9) Lack of internal controls.

How are plans identified for audit under EPTA? Apparently, there is a very involved process which the IRS goes through to select plans with “a high degree of potential noncompliance.” The process includes assigning points to plans based on the number of participants and the amount of plan assets and contributions, and then weighting those points based on previous audit history, type of plan, compliance data from an IRS risk assessment program and reviews of whether there are issues affecting termination, merger or funding. This information is then reviewed by a case-selection committee which chooses which plans will be audited.

On another front, Mike Sanders gave a brief overview of the Focus Audit Program (also discussed in a previous post here). This is also a relatively new IRS audit program which targets specific industries, specific types of plans, and specific issues within those industries and plans (versus a broad scope audit where all aspects of the plan are under review). Here is a rundown of the groups and issues which will be targeted:

(1) Defined Benefit Plans/health care:

• Internal Revenue Code (“Code”) section 412 – Funding and Code section 404 deductions
• Eligibility and coverage
• Distributions under Code section 417(e) (including non-cash distributions and high 25 highly compensated employee restrictions)
• Plan document issues

(2) Money Purchase Plans/Manufacturing:

• Code section 412 funding issues
• Code section 404 deduction issues
• Nondiscrimination issues
• Plan document issues

(3) Profit Sharing/Manufacturing:

• Distributions (Joint and survivor annuity requirements)
• Code section 404 deduction issues
• Nondiscrimination issues
• Plan document issues

(4) Defined Benefit/Construction:

• Investments (Large/unusual/questionable assets, affectionately referred to by the IRS as “LUQ”)
• Distributions (Code section 417(e) and joint and survivor annuity requirements)
• Code section 412 funding issues
• Plan document issues

(5) 401(k)/Finance and Insurance:

• Investments (Loans, LUQ)
• Discrimination (ADP/ACP)
• Allocations
• Plan document issues

(6) Profit Sharing/Other services (e.g. finance/insurance/technical fields/health/social services):

• Investments (loans and LUQ)
• Allocations
• Code section 401(a)(4) issues
• Plan document issues

In all of these industries, the IRS noted that focus audits will examine a different set of issues for plans that have been terminated. Also, agents in all focus audits will examine the plan documents as to whether or not they have been kept up-to-date and compliant with the laws. Mr. Sanders stated that focus audits can be expanded into a full scope audit if problems are discovered, such as plan documents which are noncompliant.

Of great interest to practitioners is the use of “Internal Control Questionnaires” by agents on audits to determine what internal controls employers have put in place to aid them in administering their qualified plans properly. These questionnaires are scheduled to be issued to the general public by late September and will be a useful tool for practitioners in helping their clients to prepare for such audits. In the meantime, practitioners present at the meeting were given a “peak” at the questionnaires which will be utilized in the audit process.

Some additional highlights:

(1) Mr. Breslin noted that overall the IRS is trying to utilize statistics and data so as to identify “problem” plans and make their audit process more focused and effective. In the future, when taxpayers receive an audit letter, the idea is that they will know that the IRS has identified some aspect of the plan (through 5500’s or other data) that could be “suspect.”

(2) Also, the IRS is finding in their audits that many plans have not been amended properly for changes in the law, particularly GUST and EGTRRA.

The Foundation for Fiduciary Studies has issued this press release pertaining to recent news that the SEC had set forth new rules governing mutual fund boards: “Guide to SEC’s New Requirements for Mutual Fund Boards (PDF).”

Want to know how HR and benefits managers are responding to all of the recent same-gender marriage controversies? Aon has posted an interesting survey on how the issue is impacting benefit plan design. The survey is here. A press release about the survey is here.

“When considering the impact of the same-gender marriage decision in Massachusetts, the largest factor that seems to drive behavior for employers is how these plans are treated by the Internal Revenue Code,” notes Paul Sullivan, an assistant vice president with Aon Consulting’s Research & Technical Services (RTS) group in Newburyport, Mass. “Federally qualified retirement plans apparently do not want to run the risk of losing their ‘qualified’ status, and this is a distinct possibility if these plans recognize same-gender spouses in violation of the federal Defense of Marriage Act.”

Also:

The biggest issue may be the question surrounding the word “spouse” – and this is where HR leaders seem to be struggling the most. Among the survey respondents, 51 percent have not reviewed their benefit plans “to determine whether the term ‘spouse’ could include a same-gender spouse.”

(Word to the wise: Reviewing benefit plans to determine how the term ‘spouse’ is defined is critical and should not be put off.)

An article from MSNBC.com is here.