Benefits Counsel

Many of us will fondly recall the discussion by Third Circuit Judge Edward Becker (1933-2006) on ERISA preemption in the case of DeFelice v. Aetna (which was eventually decided by the U.S. Supreme Court – read about it here and here). In that case Judge Becker discusses how trying to understand ERISA preemption is like a “descent into a Serbonian bog wherein judges are forced to don logical blinders and split the linguistic atom to decide even the most routine cases.” (I discussed Judge Becker’s opinion here.) While not related to the same issues as were decided in the DeFelice case, I was reminded of Judge Becker’s discussion when I saw that the Fifth Circuit had recently withdrawn its opinion pertaining to ERISA preemption in the case of Bank of Louisiana v. Aetna. You can access the prior opinion here and the latest opinion issued October 18, 2006 here. The case is interesting because it shows how, even in trying to resolve contract claims between employers and insurers, the whole tangled mess of ERISA preemption can be a real challenge.

(Also, it is rare to find folks arguing that they are ERISA fiduciaries, but that is exactly what happened in the Bank of Louisiana case where the insurer was trying to claim that ERISA preemption applied. See page 9 of the October 18th opinion.)

I thought it would be a good idea to keep track of all the governmental agency promulgations and news items relating to the Pension Protection Act of 2006 in one central location. Therefore, I have created the Pension Protection Act Resource Center for Potter Anderson & Corroon LLP. (Please note that the text of the Pension Protection Act is indexed.)

(Many thanks to Frank Gribbin in Potter Anderson’s IS department for helping to put this together.)

As predicted, IRS has issued a Notice extending the deadline for complying with many aspects of Internal Revenue Code section 409A from January 1, 2007 to January 1, 2008. See Notice 2006-79 accompanied by a press release. Full compliance with the operational and documentary requirements of section 409A is delayed until January 1, 2008 to give taxpayers and practitioners sufficient time to digest and comply with the final regulations (which the press release states will be issued by the end of this year.) The Notice also extends certain transition relief provided for in the preamble to the proposed regulations (except with respect to certain discounted stock rights) and provides additional transition relief for payment elections in linked plans and collective bargaining arrangements.

In IRS’s Fall 2006 Edition of the Employee Plans News:

1. Michael Julianelle (Director, EP Examinations) talks about how EP examinations will generally take place at the employer’s place of business. However, exceptions will be made if:

• The agent’s presence would disrupt the business operations or
• There is a lack of office space to perform the audit.

Practitioners have generally objected to this practice of IRS coming to the office for an EP examination for a number of reasons, two of which the IRS has noted it will make an exception for. However, there are other concerns (such as HIPAA privacy in a health-related business, as one example) and IRS goes on to note in the Newsletter that:

If it makes better business sense to conduct the examination at a location other than the taxpayer’s place of business (for example, if the agent’s presence would disrupt the business operations), then the taxpayer or their authorized representative may submit a request outlining the reasons. If this is approved, the agent will request an opportunity to conduct a walk-through of the business premises and an opportunity to direct questions to the taxpayer to resolve questions regarding business operations.

2. Employers will want to note the IRS’s Top Ten Tips to Prepare for an Efficient Audit. (Employers can use this as a sort of quick “check-up” even if they are not under audit.)

3. IRS notes that it has posted two new Quality Assurance Bulletins:

• Caveats under the Staggered Remedial Amendment Period for Individually Designed Plans
• EGTRRA Staggered Remedial Amendment Period and Remedial Amendment Cycle for Individually Designed Plans

From the CorporateCounsel.net Blog:

. . . [T]he SEC’s Chief Accountant issued guidance – in the form of this letter – on determining measurement dates for option grants under APB 25. As stated in the SEC’s press release, the letter discusses the accounting consequences under APB 25 of dating an option award to predate the actual award date; option grants with administrative delays; uncertainty as to the validity of prior grants; among other related circumstances.

Here is one member’s reaction to the new guidance: Is it my imagination, or is this letter incredibly helpful and long overdue? If only we could get the IRS to give similar guidance for ISO/409A/162(m) purposes. I think these two excerpts from the SEC Staff’s letter alone resolve 90% of the options nonsense problems (without whitewashing the true back-dating situations).

The Subcommittee on Health Care of the Senate Finance Committee held a hearing today on Health Savings Accounts: The Experience So Far. In connection with the hearing, the Joint Committee on Taxation has released Present Law and Analysis Relating to the Tax Treatment of Health Savings Accounts and Other Health Expenses (JCX-45-06).

(Hat Tip: TaxProf Blog)

What is a QDIA? A “qualified default investment alternative” as described in soon-to-be-issued proposed regulations from the Department of Labor which are referenced in this News Release here and outlined in this Fact Sheet here. The News Release states that the “proposed rule [will be] the first major regulation resulting from the Pension Protection Act signed into law by President Bush on August 17, 2006.”

The Pension Protection Act of 2006 provides a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. EBSA will be proposing the regulations to implement “the default investment amendments made to ERISA by the Pension Protection Act.”

The proposed regulation deems a participant to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a QDIA. According to the Fact Sheet, investments that would qualify as QDIAs would be:

• Life-cycle or targeted-retirement-date funds;
• Balanced funds; or
• Professionally managed accounts.

(See the Fact Sheet for additional conditions that QDIAs must meet.)

For more benefits acronyms, see the Benefits Acronym Lexicon.

UPDATE: The Proposed Regulation has now been issued. Access it here.