Author: jfortenberry@fortenberrylaw.com

According to this article at NJ.com–“Retirees’ benefits under scrutiny: Politicians help ex-Steel workers address state’s problems with plan“–the Pennsylvania State Insurance Department is claiming a health plan for retirees under age 65 is not in compliance with state insurance law and puts consumers at risk. “The Retired Employees’ Benefits Coalition Inc., a Bethlehem-based organization which represents salaried Steel retirees, obtained the health benefits plan through the National Employees Benefit Cos. Inc. of Warwick, R.I., after Bethlehem Steel was taken over by International Steel Group of Cleveland earlier this year,” the article states. The benefits are provided through a VEBA which NEBCO is claiming is subject to ERISA, and therefore exempt from regulation by state insurance laws.

Albert Crenshaw for the Washington Post reports on the pension funding crises: “Pension-Liability Shortfall Said to Rise: Total Could Exceed $80 Billion This Month, Federal Agency Estimates.”

The Wall Street Journal also reports: “Warning of Pension-Plan Shortfall Raises Pressure for Financial Fix.” The article points out that some experts are saying that the PBGC is exaggerating the pension funding crises and that much of the current funding woes are due to temporary factors such as low interest rates and stock-market setbacks that have lowered the value of pension-plan assets. However, the article refers to testimony by Steven Kandarian, executive director for the PBGC, before the House Committee on Education and the Workforce Thursday, which shows that companies’ public disclosures often understate the dimensions of their problems because of lax reporting rules:

As the agency has taken over troubled plans in the steel, airline and retail sectors in the past year, officials have noted that many have turned out to be much more severely underfunded than the companies had publicly reported. Bethlehem Steel, for example, reported its pension fund was 84% funded — a relatively healthy condition. But when the agency took over the plan, it found it was actually 45% funded, with a shortfall totaling $4.3 billion . . .

Another report by the Wall Street Journal—Payrolls Drop by 93,000 Jobs As Unemployment Rate Declines–states that “employers cut jobs for a seventh consecutive month in August” even though the “economy grew at a solid 3.1% annual rate in the second quarter, and forecasters are betting third-quarter growth will be at least 5%.” The article states what I think is the one of the most pressing concerns for our country:

Some economists harbor concerns about long-term structural problems in the economy, such as a flood of U.S. jobs going overseas. “We have simply seen the tip of the iceberg,” said Sung Won Sohn, chief economist at Wells Fargo. “I think it will get worse, not better.” Some reports estimate 5 million jobs — many high-paying — will be lost to other countries by 2015. The economy is growing, but demand is being filled from overseas, Mr. Sohn said.

Another Wall Street Journal article yesterday reports that “A Popular Stock Perk Faces Some Cutbacks.” The article notes that companies are cutting back their employee stock purchase plans. In a typical plan, employees may elect to have a set amount of money deducted from their paychecks which is then used to buy shares of the employer’s stock at a price that is usually somewhere around 15% below the price of the shares at the beginning or end of the offering period, whichever is lower. The article reports that some companies have reduced the discount from 15% to 5% while others have sharply cut the maximum amount that an employee can contribute to the plan. The reason? Anticipation of proposed changes by FASB to expense stock options which you can read about in many previous posts here.

“Get Tax-Cut Benefits This Year“: the Wall Street Journal explains how the Jobs and Growth Tax Relief Reconciliation Act of 2003 may cause a reduction in the amount of estimated taxes you owe on September 15th of this year.

Yesterday’s post which you can access here discussed the IRS’s recent ruling, Revenue Ruling 2003-102, which provides that over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts (“FSA’s”) and that employer reimbursements for nonprescription drugs by an employer health plan are excluded from income. I had been wondering about the effective date of this ruling since the language of the ruling is not clear on the subject and had called the IRS to request clarification. This article mentioned yesterday at SFGate.com—“Feds approve using pretax cash for OTC drugs”–states:

The Internal Revenue Service and the Treasury Department, in a joint press release Wednesday, said, “Over-the-counter drugs can be paid for with pretax dollars through health care flexible spending accounts,” retroactive to the beginning of the plan year.

It was not clear from the ruling whether or not this statement about the changes being retroactive to the beginning of the plan year was necessarily accurate.

In informal discussions with the IRS today (with Barbara Pie who is mentioned in the ruling), it was clarified that whether or not an employer may utilize the ruling retroactively to the beginning of the plan year depends upon the wording of the plan documents. For plans with documents already drafted broadly enough to permit reimbursement of such expenses (e.g., the plan does not limit reimbursement to prescription drugs), it would be possible to permit reimbursement of expenses that were incurred since the beginning of the plan year without a plan amendment, as long as the expenses could be substantiated. For plans that must be amended to allow reimbursement of the cost of over-the-counter drugs, the amendment may only be effective prospectively once the plan is amended. The IRS emphasized, however, that even though an employer may amend the plan mid-year to permit reimbursement of the cost of over-the-counter drugs, participants are, of course, not permitted to change their elections mid-year as a result of the plan amendment. However, for those who have failed to use up their FSA accounts for the year, a mid-year amendment just might help employees to use up their accounts before the use-it-or-lose-it rule comes into play.

The EBIA Weekly newsletter which came today also confirms the same result on the effective date issue. The newsletter provides some helpful information regarding substantiation of expenses for non-prescription drugs:

Our informal discussions with an IRS official indicate that the name of the drug and the date it was purchased would be needed on the pharmacy receipt (but not the consumer’s name, so long as the participant certification in that respect is adequate).

UPDATE: Another article on the new ruling–“Flexible spending accounts take bite out of tax bill“–at Bankrate.com.

SHRM has a great article in this month’s issue of the HR Magazine: “Fiduciary Fitness.” (Unfortunately, only members can access the article.) The article would be very helpful to those HR professionals and executives seeking to attain a good overview of the complex area of ERISA fiduciary compliance. The article reports:

Interest in fiduciary education is running strong because fiduciaries increasingly want to be sure they’re complying with ERISA’s complex requirements, particularly in the tense environment created by the dozens of lawsuits against companies-Enron Corp., WorldCom Inc. and R.J. Reynolds Tobacco Co., to name a few-alleging breaches of fiduciary responsibility.

The article emphasizes a point made here quite often at Benefitsblog:

As many human resource managers know, ERISA compliance is a complex, time-consuming process that requires close, continuous attention, the expertise of a team of specialists and, above all, prudent behavior. Although the meaning of prudence varies with the situation, experts generally maintain that a fiduciary who creates, follows and documents processes and procedures to make informed decisions is doing the right thing.

“Pension Shortfalls at Troubled U.S. Firms Double“: Reuters reports. According to the article, pension underfunding at “troubled” U.S. companies has doubled this fiscal year and could exceed $80 billion, with airlines accounting for nearly a third of the shortfall. This from PBGC Executive Director Steven Kandarian who is calling for reforms to pension rules, telling the House Education and the Workforce Committee today that the cost of current pension problems would otherwise have to be met through reduced benefits, higher premium payments by companies to the agency or a taxpayer bailout. House Education and Workforce Committee Chairman John Boehner, R-Ohio, said that it appears that the PBGC “has enough resources to make benefit payments for the near future.” But Boehner also is reported to have said, “There is a serious question of whether a taxpayer bailout of the PBGC would be necessary if the financial condition of the agency continues to deteriorate.”

Others reporting on the PBGC’s prepared testimony before the House Education and the Workforce Committee today:

The Seattle Times : “Deficit hits $5.7B at federal pension co.”
The Kansas City Star: “Troubled federal pension’s deficit soars.”

On a related subject, FT.com has this interesting article via Yahoo! News: “UBS tells pension funds to avoid equities.” According to the article, “[p]ension funds should consider not investing in equities at all” based on a controversial report from highly rated analysts at UBS, the investment bank. The advice apparently contradicts the conventional wisdom followed by most US and UK pension funds over the past 40 years. The article makes this point:

The analysts argue that pension liabilities are simply another form of corporate borrowings, in this case borrowings from employees to pay shareholders. If a company were to borrow money in the bond market and use the proceeds to buy a basket of equities, the effect would be the same, although more tax-efficient. Even if investing in equities brings in higher cash flows than would come from bonds, “the resulting increase in risk negates this benefit and does not actually increase the value of the company”, they conclude.

“Top-paid US CEOs are at firms with most worker layoffs, pension woes: survey:” AFP via Yahoo! News reports. The article states that, based upon a report by the Institute for Policy Studies and United for a Fair Economy, the “typical chief executive of a major US company earned 3.7 million dollars last year, with the largest paychecks going to those whose firms had the most worker layoffs, under-funded pensions and tax breaks.”

Regarding planning for retirement and health care, the Motley Fool via Yahoo! News had this article yesterday: “Health Care: Retirement’s Fourth Leg.“

In this post, it was reported that the IRS would be issuing guidance soon on “whether non-prescription drugs (e.g., aspirin) can be reimbursed by health FSAs, HRAs and other self-insured insured medical reimbursement plans under Code Section 105.” Yesterday, the IRS issued that guidance which you can access here in a press release and also here in Revenue Ruling 2003-102. The ruling provides that over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts (“FSA’s”) and that employer reimbursements for nonprescription drugs by an employer health plan are excluded from income. However, the ruling goes on to say that amounts paid by an employee for dietary supplements that are merely beneficial to the general health of the employee are not reimbursable or excludable from gross income.

The ruling gives an example which demonstrates the advantages of the new ruling: Suppose an employee purchases an “antacid, an allergy medicine, a pain reliever, and a cold medicine from a pharmacy.” None of the items are purchased with a physician’s prescription and are purchased for personal use–to alleviate or treat personal injuries or sickness. The employee also purchases dietary supplements (e.g., vitamins) without a physician’s prescription to maintain the general health of the employee. The employee submits substantiated claims for all of these expenses, which have been incurred during the current plan year, to his employer’s health FSA for reimbursement.

Under the ruling, the “antacid, allergy medicine, pain reliever, and cold medicine” would be reimbursable by the FSA and excludable from income. However, the dietary supplements would not be reimbursable or excludable from income.

Comment: Please note that Revenue Ruling 2003-102 distinguishes Revenue Ruling 2003-58 which had held that non-prescription drugs were not deductible under section 213 of the Internal Revenue Code (the “Code). The reason that non-prescription drugs were not deductible under section 213 is that section 213(b) only permits an amount paid for a medicine or drug to be deductible if the medicine or drug is a prescribed drug or insulin. The IRS contrasts section 105(b) (which governs FSA’s) as only requiring that expenses be incurred “by the taxpayer for . . . medical care,” i.e. there is no requirement that the medicine or drug be prescribed or that such expenses must qualify for the deduction for medical care under Code section 213.

Additional Comment: The changes brought about by this new ruling may not automatically apply. An employer may have to amend its plan documents governing the FSA before implementing the changes brought about by the ruling. However, some plan documents may state that participants are permitted to seek reimbursement for any expense the IRS allows in which case the plan document would not have to be amended. Employers will want to have their plan documents reviewed by an attorney to determine if the plan needs to be amended. In addition, some employers may want to look into the cost of implementing the change due to the paperwork involved for the substantiation of these charges.

SFGate.com has a great article on the ruling: “Feds approve using pretax cash for OTC drugs.” The article quotes Treasury spokeswoman Tara Bradshaw as saying that treatments for acne such as Clearasil would qualify for reimbursement, even though the wording of the ruling is not “clear” on the subject.

The Wall Street Journal also reports: “OTC Drugs Can Be Purchased With Tax-Advantaged Savings.” (Subscription required.)