Benefits Counsel

I have written a lot here at Benefitsblog about how improper classification of workers as independent contractors/employees can sometimes wreak havoc with benefit plans. The IRS has issued a fact sheet – FS-2006-21 entitled “IRS Reminds Businesses to Classify Workers Correctly which provides helpful links and tips for those seeking to educate themselves on classifying workers properly. The fact sheet begins:

The rash of natural disasters that have hit the United States in the last several months have caused many businesses to hire additional workers to help them meet increased demand for their goods or services. These businesses must make sure they treat their workers properly to make sure everyone can meet their tax obligations.

Read more about how misclassifications affect benefit plans in previous posts here.

(Hat Tip: TaxProf Blog)

In an address to the New York Financial Writers Association (which you can access here), SEC Chairman Christopher Cox discusses upcoming rules for disclosure of executive compensation as well as what he sees on the horizon as far as addressing the current issue of back-dated options.

Regarding executive compensation disclosure:

The Commission’s proposal to significantly improve the way executive compensation is reported to shareholders has received more than 20,000 comments. No issue in the 72 years of the Commission’s history has generated such interest. Our basic approach is straightforward: We propose to tell Compensation Committees to release all material information regarding their decisions, and we mean all. . .

The principle here is simple: no shareholder should need a machete and a pith helmet to go hunting for what the CEO makes.

And we want shareholders to know how much the executives will get once they retire or leave for any other reason. One of the problems with the current regime for disclosing executive pay is that the shareholder doesn’t get to know what the golden parachute looks like until the CEO floats cheerfully away from the mother ship.

The new executive compensation disclosure will deliver more than just clear and understandable numbers. We’ll also be getting a plain English narrative that will give investors an insight into the Compensation Committee’s thinking when it decides how to pay the CEO.

Today’s Compensation Committee Report and Performance Graph – which have become little more than pro-forma and boilerplate – will be replaced with an explanation by management called Compensation Discussion and Analysis. We expect the new CD&A to be clearly written, so every investor can understand it.

Regarding back-dated options:

Our final rule will very likely address the issue of back-dated options, which is currently so much in the news. . .

While I can’t comment on the SEC’s ongoing investigations of specific companies, I can tell you what the Commission’s position is. Back-dating must be fully disclosed. And the granting of back-dated options must be properly accounted for.

As one means of dealing with this problem, our proposed executive compensation rule will provide better and more useful disclosure of the backdating of options. It would require that a company clearly identify the portion of compensation that results from “in-the-money” option awards resulting from backdating.

The proposed rule will require the disclosure of the full value of an option based on the date the award was actually made. That means the added value from an option’s being in-the-money at the time of grant would be clearly disclosed. It would specifically require a comparison of the exercise price of the option to the grant date market price of the option, whenever the exercise price is lower than market price. That way, investors could see the additional compensation that was immediately conferred on executives when the option was granted.

Just as important as these dates and numbers will be the plain English disclosure of just how the company determined when to make its option awards. . .

The Commission is even now considering further adjustments to our executive compensation proposal to deal with the issue of backdating options. Our staff in the Division of Corporation Finance are collating all of those thousands of comments and will make a recommendation to the Commission at an open meeting soon.

As part of that review process, we will consider the need not only for any changes to the rule, but also for additional guidance to address further the backdating of stock options. So stay tuned. We want this matter settled in time for next year’s proxy season, and I have every reason to expect that it will be. . .

(Hat Tip: TheCorporateCounsel.net Blog)

For a limited time, ALI-ABA has provided free access to the following articles:

• ERISA and the 401(k) Plan Fiduciary by Thomas Hoecker
• Tax Exempt Organizations Compensation Audits: 403(b) and 457(b) and (f) by Roger Siske (1944 -2006) and Pamela Baker
• Health Savings Accounts Under the New Medicare Laws by Roberta Casper Watson
• The Qualified Plan Potpourri; Considerations for Selecting the Appropriate Plan For a Specific Client by David Duff
• Proposed Roth Distribution Regulations by Pam Perdue

Many employers offer dependent care reimbursement programs as a benefit for their employees. Under these programs, employees can estimate their dependent care expenses for the year, elect to have the money deducted from their pay, and then reimburse themselves on a tax-free basis from the money set aside in their accounts as they incur employment-related dependent care expenses throughout the year. The IRS has recently issued proposed regulations (Proposed Treasury Regulations Sections 1.21-1, 1.21-2, 1.21-3, and 1.21-4, which you can access here) shedding some light on what types of expenses can qualify as employment-related expenses for which an employee may obtain tax-free reimbursement under a dependent care reimbursement plan (officially known as a dependent care assistance program or “DCAP” under section 129 of the Internal Revenue Code).

For instance, the proposed regulations clarify that when it comes to school-related expenses, nursery school and preschool can qualify as employment-related expenses as well as before- and after-school care. The IRS goes on to note that a day camp will qualify even if the camp is a “specialty” camp, such as a camp devoted to just soccer or computer:

The IRS has received many inquiries about whether the cost of a day camp that specializes in a particular activity, such as soccer or computers, may be an employment-related expense. To provide certainty for taxpayers and enhance administrability, the proposed regulations provide that the full amount paid for a day camp or similar program may be for the care of a qualifying individual although the camp specializes in a particular activity.

However, what about kindergarten? The IRS says:

The proposed regulations clarify the existing rule that expenses for programs at the level of kindergarten and above, however, are primarily for education and, therefore, are not employment-related expenses.

A couple of good articles on the new regulations:

• Deloitte: IRS Proposed Regulations on Child Care Tax Credit Affect Dependent Care FSAs
• Segal: IRS Proposes Rules Clarifying Dependent Care Expenses Reimbursement

This is a good article providing some first-hand stories of how three different employers are faring with the implementation of health savings accounts: “Benefit Leaders Tout Consumer-Directed Care Success Despite Low Enrollment.” For those who are curious about how health savings accounts would work in a law firm setting, the article describes the program started at Preston Gates & Ellis:

Despite a communication strategy that began more than a year before the HDHP went into effect, only about 6% of the company’s employees enrolled for the 2005 plan year. Enrollment for 2006, however, nearly doubled to 11%, and 96% of those who enrolled in 2005 stuck with the plan.

The HDHP includes a $1,200 annual deductible for single coverage ($2,500 for family coverage) and an annual HSA contribution of $500 ($1,000 for family coverage). For employees with family coverage, the HDHP offers a 30% savings in premiums versus the more traditional PPO . . .

For the 2006 plan year, Preston Gates boosted the annual HSA contribution from $500 to $750.</blockquote.

“The world has evil doers, but fewer than the IRS imagines in the pension world.” From a good article/outline entitled “Phased Retirement” by Robert A. Blum prepared for the ALI-ABA Annual Spring Employee Benefits Law and Practice Update for 2003.

Here’s a good start to a list of Health and Welfare Plan Compliance Resources which will be located over in the sidebar on the right:

• Claims Procedure Regulations
• Regulations Pertaining to Contents of an SPD
• Final USERRA Regulations
• FMLA Regulations (Pertaining to Benefits Requirements)
• Final IRS Regulations Pertaining to FMLA and Cafeteria Plans
• Final COBRA Regulations
• HIPAA Regulations
• DOL Health Plan Links
• DOL Compliance Assistance Links

(I intend to add more links as they come to mind. Suggestions are welcome.)

If you like to follow ERISA cases, you won’t want to miss reading this interesting one here: Daimler-Chrysler v. Durden, 05-1662 (6th Cir., May 26, 2006). The case illustrates how the task of deciding who is the proper beneficiary of a pension, health or other benefit plan can sometimes be a tortuous process for the plan administrator as well as the courts. In this particular case, a participant named an individual (whom I will call “spouse #2”) as a beneficiary under the employer’s Pension Plan. After the participant’s death, another individual (“spouse #1”) appeared claiming that she was married to the participant and that her marriage to the participant had occurred prior to the alleged “marriage” of participant and spouse #2. Both spouses #1 and #2 claimed that they were the participant’s surviving spouse, entitled to benefits under the employer’s plans. There was quite a bit at stake, including a surviving spouse pension benefit, a life insurance benefit, and certain health care benefits.

The participant had named spouse #2 as beneficiary under the Pension Plan but had failed to list a beneficiary under the life insurance plan. Spouse #1 averred that the participant had never divorced her, and spouse #2 was unable to present any evidence that a divorce had occurred. The Pension Plan contained a typical choice of law provision which said that the Plan, in this case would be “construed, governed and administered in accordance with the laws of the State of Michigan except where otherwise required by Federal law.”

The lower court enforced the choice of law provision, and applied Michigan law in determing which marriage prevailed for purposes of identifying a surviving spouse under the Pension Plan, holding in favor of spouse #2. A divided Sixth Circuit reversed and applied Ohio law which was where the participant had lived during the existence of both relationships and where the participant was allegedly “married” to spouse #2. Holding in favor of spouse #1, the Sixth Circuit relied on the Restatement (Second) of Conflict of Laws, Section 187, in making its determination that it should disregard the choice of law provision contained in the Pension Plan.

Why was the choice of law so important in the case? Under Michigan law, there was a strong presumption of validity in favor of a later ceremonial marriage that was attacked on the ground that one of the parties was already married to another, and the presumption was particularly strong where there were children born of the later marriage. However, under Ohio law, Ohio placed the burden of proof on the second spouse to demonstrate that the first marriage was dissolved.

By the way, spouse #2 raised the ERISA preemption issue at the appellate level and the Sixth Circuit held that because the issue was never raised in the district court, it would not review the issue. However, the Sixth Circuit states in footnote 1:

Even if considered on the merits, Rita’s preemption claim would fail. ERISA provides that survivor’s benefits cannot be paid to someone named in a plan who is not a surviving spouse unless the surviving spouse has signed a written, notarized consent form. See 29 U.S.C. § 1055(a), (c)(2); Boggs v. Boggs, 520 U.S. 833, 843 (1997); Shields v. Reader’s Digest Ass’n, 331 F.3d 536, 542 (6th Cir 2003). There is no consent form in this case. Consequently, if Rita is not the surviving spouse, the Plan cannot effectively designate her as the beneficiary of survivor’s benefits. Therefore, the provisions of ERISA itself make it necessary to determine which claimant is the surviving spouse without reference to the Plan documents.

A dissent written by Circuit Judge Merritt calls the majority opinion’s analysis “convoluted”:

The Conflicts Restatement, relied on by my colleagues, does not take into account the overriding purpose and policy of uniformity behind the ERISA statute or behind the interpretation of ERISA benefits contracts. I, therefore, think that the Conflicts Restatement is of marginal value in the interpretation of this particular contract provision calling for the application of Michigan law. Moreover, the Conflicts Restatement provisions themselves are not entirely clear and are open to several interpretations leading to varying results in the resolution of this dispute. Instead of applying a uniform governing law to the ERISA benefits an employee and his family receive, the benefits will be distributed under the Court’s view according to a calculation based upon where the marriage occurred, marital domicile, etc. — a place that could be anywhere in the world for employees of a global automobile company. . . My colleague’s discussion of the various interests is interesting but I think overly complex and convoluted and seems to me to impair the explicit obligations concerning the governing law that the parties themselves wrote into their contract. Therefore, I would affirm the judgment of the district court.

(Who said ERISA cases are “dreary“?)

(Hat Tip: Decision of the Day, “Which Surviving Spouse Gets Bigamist’s Pension?“)

The Wall Street Journal Cartoon Collection is now online at Baker Library here. The Collection was donated to the library by Charles Preston. Mr. Preston is the founder and editor of the cartoon feature in The Wall Street Journal, which has appeared in the paper under the heading “Pepper…and Salt” since June 6, 1950. Read about the Collection in this Wall Street Journal article here: “A Visit With Charles Preston, Pepper … and Salt’s Man for All Season(ing)s.”

(Check out the 1990’s cartoon (item 2) where the man is answering the phone and responds to the caller: “But I’ll certainly keep you in mind in case I ever take leave of my senses and decide to entrust all my savings to a complete stranger on the phone.”)