Revenue Ruling 2004-37

In this press release, the IRS announced the issuance of Revenue Ruling 2004-37. The Revenue Ruling is designed to “shut down an aggressive transaction involving the exercise of stock options by corporate insiders using debt financing provided by the corporation.” According to the press release, in these types of transactions corporate insiders exercise options they hold by giving the company a promissory note. If the value of the stock later falls below the face amount of the note, the company may agree to reduce the insider’s debt. Some individuals have tried to claim that this debt reduction does not result in taxable income.

The ruling provides that the reduction of debt in these circumstances does result in taxable income to the insider.The ruling also provides that a reduction in the interest rate under the note, or a change in the note so that the executive no longer has personal liability, also would result in compensation income.

The press release notes this statement from Acting Assistant Secretary for Tax Policy, Greg Jenner: “Once again, we have made it clear that everyone has to play by the same rules.”

More IRS Humor . . .

From the here.

401(k) Plans for Small Businesses: the DOL Provides Some Info

In a press release, the Department of Labor announced that the Employee Benefits Security Administration (EBSA) and the Internal Revenue Service (IRS) have released a new booklet, “401(k) Plans for Small Businesses,” as part of an ongoing effort to provide compliance assistance to small employers on retirement plan issues. You can access an extended version of the booklet on the DOL’s website here. The booklet actually provides a well-organized summary of the different types of 401(k) plans available and how to establish one. There is also some very basic information on fiduciary duties under ERISA and how to fulfill those responsibilities and duties.

The Significance of Health Savings Accounts

Henry Aaron of the Brookings Institution has this to say regarding the significance of health savings accounts:

“. . .[T]he claims that HSAs will lower medical cost inflation and the fears that they will undermine coverage are probably overstated. But the larger point is that the appeal of HSAs should not be considered within the confines of company-financed health insurance, but in the larger context of total labor compensation. The principle effect of the new HSA provisions is to break down the distinction between health and pension benefits. Much retirement saving is devoted to paying for health care. HSA balances that remain unused during an employee’s working years may be used under extremely favorable terms to pay for health care during retirement, and they may be used on terms identical to those of tax-sheltered savings plans to pay for general consumption. Those options mean that HSAs are just defined contribution pension plans, with particularly advantageous tax treatment and particularly generous rules for withdrawal.

Thanks to for the pointer.

The American Benefits Council has published its comments to the Internal Revenue Service regarding HSAs and Notice 2004-2.

A couple of helpful articles on HSAs:

U.S. Supreme Court Draws a Line in the Sand: Reverse Age Discrimination Claims Not Cognizable

The U.S. Supreme Court issued an opinion today in the case of General Dynamics Land Systems v. Cline, No. 02-1080. You can access the opinion here. In a 6-3 decision, the Court reversed the Sixth Circuit decision and held that reverse discrimination claims are not cognizable under the Age Discrimination in Employment Act. Justice Souter wrote the majority opinion. Justice Scalia authored a dissenting opinion, and Justice Thomas authored another dissenting opinion joined by Justice Kennedy. The opening statement of the majority opinion reads as follows:

The Age Discrimination in Employment Act of 1967 . . . forbids discriminatory preference for the young over the old. The question in this case is whether it also prohibits favoring the old over the young. We hold it does not.

The Facts of the Case: The company had entered into a collective-bargaining agreement with the union eliminating the company’s obligation to provide retiree health benefits, except for those then-current workers who were at least 50 years old. Employees who were at least 40 years of age, but under 50, brought an action under the ADEA. The EEOC supported the position of the employees based upon an EEOC regulation. A district court had dismissed the case, calling the federal claim one of “reverse age discrimination” upon which no court had ever granted relief under the ADEA. A divided panel of the Sixth Circuit reversed, reasoning that section 623(a)(1) of the ADEA prohibited discrimination on its face and that if Congress had meant to limit its coverage to protect only the older worker against the younger, it would have said so. The U.S. Supreme Court reversed the Sixth Circuit.

The regulation of the EEOC (29 CFR section 1625.2(a)) at issue read as follows:

It is unlawful in situations where this Act applies, for an employer to discriminate in hiring or in any other way by giving preference because of age between individuals 40 and over. Thus, if two people apply for the same position, and one is 42 and the other 52, the employer may not lawfully turn down either one on the basis of age, but must make such decision on the basis of some other factor.

What the Court Had to Say: The majority opinion argues that the history of the ADEA, its structure, purpose, history and relationship to other federal statutes, does not support a finding that the ADEA meant to stop an employer from favoring an older employee over a younger one. The opinion notes how a contrary ruling would create “discord” among the federal statutes on employee benefit plans. (Comment: “Discord” is an understatement. A contrary ruling would have been like a bombshell going off in the benefits world.) The Court explains this very important point in footnote 9:

An even wider contextual enquiry supports our conclusion, for the uniformity Cline and the EEOC claim for the uses of “age” within the ADEA itself would introduce unwelcome discord among the federal statutes on employee benefit plans. For example, the Tax Code requires an employer to allow certain employees who reach age 55 to diversify their stock ownership plans in part, 26 U.S.C. section 401(a)(28(B); removes a penalty on early distributions from retirement plans at age 59 and 1/2, section 72(t)(2)(A)(i); requires an employer to allow many employees to receive benefits immediately upon retiring at age 65, section 401(a)(14); and requires an employer to adjust upward an employee’s pension benefits if that employee continues to work past age 70 1/2, section 401(a)(9)(C)(iii). The Employee Retirement Income Security Act of 1974 makes similar provisions. See, e.g., 29 U.S.C. section 1002(24) (“normal retirement age” may come at age 65, although the plan specified later); section 1053(a) (a plan may pay full benefits to employees who retire at normal retirement age). Taken one at a time any of these statutory directives might be viewed as an exception Congress carved out of a generally recognized principle that employers may not give benefits to older employees that they withhold from younger ones. Viewed as a whole, however, they are incoherent with the alleged congressional belief that such a back-ground principle existed.

The Court also held that the EEOC was “clearly wrong” in its interpretation of the ADEA in regulation section 1625.2(a) (see above) noting as follows:

When the EEOC adopted section 1625.2(a) in 1981, shortly after assuming administrative responsibility for the ADEA, it gave no reasons for the view expressed, beyond noting that the provision was carried forward from an earlier Department of Labor regulations. . . In Edelman v. Lynchburg College, 535 U.S. 106, 114 (2002), we found no need to choose between Skidmore and Chevron, or even to defer, because the EEOC was clearly right; today, we neither defer nor settle on any degree of deference because the Commission is clearly wrong.

Other notable quotes from the opinion:

(1) ” . . .[T]he testimony, reports, and congressional findings simply confirm that Congress used the phrase “discriminat[ion] . . .because of [an] individual’s age” the same way that ordinary people in common usage might speak of age discrimination any day of the week. One common place conception of American society in recent decades is its character as a “youth culture,” and in a world where younger is better, talk about discrimination because of age is naturally understood to refer to discrimination against the older. . . If Congress had been worrying about protecting the younger against the older , it would not likely have ignored everyone under 40. The youthful deficiencies of inexperience and unsteadiness invite stereotypical and discriminatory thinking about those a lot younger than 40, and prejudice suffered by a 40-year-old is not typically owing to youth, as 40-year-olds sadly tend to find out. The enemy of 40 is 30, not 50.”

(2) “The Courts of Appeals and the District Courts have read the law the same way, and prior to this case have enjoyed virtually unanimous accord in understanding the ADEA to forbid only discrimination preferring young to old. So the Seventh Circuit held in Hamilton, and the First Circuit said in Schuler, and so the District Courts have ruled in cases too numerous for citation here in the text. The very strength of this consensus is enough to rule out any serious claim of ambiguity, and congressional silence after years of judicial interpretation supports adherence to the traditional view.”

News Reports: “Justices block reverse age discrimination cases.”
Dow Jones Newswires via “Supreme Court Rules for General Dynamics in Age-Bias Case.”
Reuters via the New York Times: “Supreme Court Rejects Reverse Age Bias Lawsuits.”
The Wall Street Journal: “High Court Rules For General Dynamics In Age Case.”

Previous posts on the case here and here.

Also, SCOTUSblog discusses the case here and Michael Fox at Jottings by an Employer’s Lawyer discusses it here.

Thanks to the Biddle Law Library . . .

The Biddle Law Library at the University of Pennsylvania Law School has a very nice page on their website devoted to blogs which you can access here. Here’s what they have to say about blogs:

A Blog is an online journal or chat-log that provides web users with information that is typically updated daily. A blog’s subject can range from the day to day happenings of individuals to news sources to the most recent events in the world. Writers of blogs are called bloggers and the writing act itself is called blogging.

The Internet is home to large numbers of blogs. . . Blawgs are web logs (blogs) that specifically pertain to the legal field. The Blawgs below generally tend to provide legal news and items of interest to scholars.

Thanks to the University of Pennsylvania Law Library for listing Benefitsblog in its Electronic Resources section entitled “Law on the Web.”

Thanks to the Retirement Hour . . .

Thanks to Matt Hutcheson and Rick Meigs for inviting me to be a guest on the Retirement Hour last night! I enjoyed it very much. They have a great show, by the way, and you can listen in here on the East Coast at 7:00 p.m. every Thursday by accessing a link here. I will add a permanent link for the Retirement Hour over in the right-hand column in the near future.

(Access a previous post on the Retirement Hour here.)

UPDATE: Thanks to Carolyn Elefant at for her kind comments here.

FASB and IASB Developments

In a previous post here, I discussed how, in FASB’s meeting on Wednesday, February 11, 2004, it was decided that “companies should book the amount of federal subsidy they expect to receive under the Medicare Act as a reduction of future benefit costs — instead of as a stream of income from continuing operations.” A friend who understands more than I do all of what is really going on in the accounting world with all of these recent developments has written:

Minor observation on the FASB meeting on Wednesday: I’m not sure that it yet has any practical effect. In January FASB had decided (FAS 106-1) that employers could elect either immediate implementation of accounting for the Medicare Part D special subsidy or else await the final conclusions of FASB’s project to determine the correct accounting for that element. Any employer that elected immediate implementation must of course know that when FASB concludes its current project, then reversal or adjustment of the earlier accounting might be required; but I’m not sure FASB intends that an employer who moved with early adoption must change anything based on interim decisions within that FASB project. Thus, if an employer elected early adoption, then even if the employer and its accountant felt (as some may have) that the subsidy was outside the scope of SFAS 106, the most that this first step in FASB’s follow-through project would do would be to put the employer on early alert of a change that will be necessary upon completion of the FASB project, which might not occur for another year or so.

Also, this from “FASB Sets New Rules for Cash-Balance Benefits.” As stated in the article, last week FASB also adopted a definition for cash-benefit pension plans:

A cash-balance pension plan is a defined-benefit pension plan (as defined in the Glossary of Statement 87) that defines the promised employee benefit by reference to a notional account balance. An employees’ notional account balance is increased with periodic notional principal credits and notional fixed or variable interest or investment credits, and may be increased for other notional ad hoc credits. Upon separation of employment, for any reason, by a fully vested employee, the employee is entitled to the notional account balance as either a lump sum or an actuarially equivalent annuity either immediately or at a future date. Subject to the terms of the pan or regulatory requirements, an employee may be entitled to a settlement amount greater than the notional account balance due to the crediting of future interest (or investment) credits that are not conditioned upon future service.

FASB is formally reviewing rules governing the way companies measure cash-balance benefits.

Also, businesses that follow international accounting standards will have to start treating stock options as an expense, under a new rule issued today by the International Accounting Standards Board. You can access the press release issued by the IASB here entitled “IASB Issues Standard on Share-based Payment.” Articles on the development:

(More on the stock option expensing debate here.)

Finally, Tech Central Station has this op-ed: “Green Eyeshade Killers.” James Glassman writes:

Candidates are obsessed with “outsourcing,” the alleged loss of tech jobs overseas. . . There’s a far, far more dangerous threat to our global preeminence in technology. It involves an accounting change. Don’t touch that dial! Accounting is boring, but this is important. Your job may depend on it.”

Thanks to the Retirement Hour . . .

Thanks to Matt Hutcheson and Rick Meigs for inviting me to be a guest on the Retirement Hour last night! I enjoyed it very much. They have a great show, by the way, and you can listen in here on the East Coast at 7:00 p.m. every Thursday by accessing a link here. I will add a permanent link for the Retirement Hour over in the right-hand column in the near future.

(Access a previous post on the Retirement Hour here.)

Two Press Releases of Interest

There are two press releases of great interest today:

  • One from the Department of Labor announcingGuidance on Fiduciary Duties in Response to Mutual Fund Abuses.” An important part of the guidance is as follows:
    In considering appropriate courses of action, plan sponsors and fiduciaries have raised questions as to the steps that can be taken at the plan level to address identified market-timing problems. In particular, questions have been raised as to whether a plan’s offering of mutual fund or similar investments that impose reasonable redemption fees on sales of their shares would, in and of itself, affect the availability of relief under section 404(c) of ERISA./1/ Similarly, questions have been raised as to whether reasonable plan or investment fund limits on the number of times a participant can move in and out of a particular investment within a particular period would, in and of itself, affect the availability of relief under section 404(c).

    Without expressing a view as to any particular plan or particular investment options, we believe that these two examples represent approaches to limiting market-timing that do not, in and of themselves, run afoul of the “volatility” and other requirements set forth in the Department’s regulation under section 404(c), provided that any such restrictions are allowed under the terms of the plan and clearly disclosed to the plan’s participants and beneficiaries. The imposition of trading restrictions that are not contemplated under the terms of the plan raises issues concerning the application of section 404(c), as well as issues as to whether such restrictions constitute the imposition of a “blackout period” requiring advance notice to affected participants and beneficiaries.

  • Another from the Foundation for Fiduciary Studies releasing a press guide to the SEC Proposed Repeal of 12b-1 Fees. The press release addresses the SEC’s proposal to repeal 12b-1 fees. (SEC Release 2004-16.)

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