Month: November 2003

I enjoyed Alvin Lurie’s article posted at Benefitslink.com entitled: “What Will Judge Posner Do Next? Balm or Bomb for Cash Balance Plans?” For those who do not know, the IBM case, Cooper et al. v. The IBM Personal Pension Plan et al., will go to the same court on appeal (the 7th Circuit) that decided the Xerox case, Berger et al. v. Xerox Corporation Retirement Income Guarantee Plan, with Judge Richard Posner being the likely author of any opinion in the IBM appeal. The article addresses the speculation that is running rampant that Judge Posner will not overturn the lower court decision which ruled that the IBM cash balance plan violated ERISA. Mr. Lurie calls the speculation “unwarranted” and predicts that “IBM has a fair chance of prevailing in his court, if the judge has his way.” The article distinguishes the Xerox case in which Judge Posner ruled in favor of employees’ claims:

But the point of this piece is not to criticize Xerox, but rather to describe it sufficiently to delineate its difference from the “rate of accrual” issue, as relates to the statutory test for age discrimination, which is the focus of the IBM litigation. . . It is immediately apparent that the matter decided in Xerox has no bearing on the discrimination issue in IBM, save that the decisions in both cases are heavily influenced by the “frontloaded” cash balance formats at issue, that is, “interest adjustments to a hypothetical (pay-based) allocation . . . provided through normal retirement age, even though the employee terminates employment . . . before that age.” (Treas. Reg. Sec 1.401(a)(4)-8(c)(3)(iv).) Neither the issue of the proper discount rate that so dominated the Xerox decision nor the matter of the effect of pre-retirement cashouts has pertinence to IBM.”

Please note that Judge Posner will be the featured judge for Howard Bashman’s “20 questions for the appellate judge” in December.

Also, a previous post here at Benefitsblog notes that, in a CNBC interview with Judge Posner entitled “Richard Posner discusses his position on law, pragmatism and democracy” on July 28, 2003 (prior to the issuance of the opinion in the Xerox case) Mario Bartiromo for CNBC asked Judge Posner about his views regarding employees suing pension funds over reduced payments. His response was that with all of the litigation and all of the “detailed regulations of pension funds,” Congress might have to “step in at some point and change the rules.”

Unfortunately, Congress has not changed the rules, but suspended the rules (which you can read about here, here and here), creating a great deal of further legal uncertainty for these types of plans.

Fiduciary Liability: Expensive But Threadbare“: Treasury and Risk Management

Fees may be next on fund investigators’ list: Philadelphia Inquirer</a

Surviving the fund scandal, Part I: Boston GlobeI

Articles by law firms:

Gardner Carton & Douglas: DOL Urges Review of Funds Named in Probe

The Price of Everything and the Value of Nothing: Contemplating the Costs of Not Considering Costs: Reish Luftman Reicher & Cohen

As discussed in previous posts, last week Congressional conferees completed their reconciliation of the House and Senate versions of the Treasury/Transportation appropriations legislation which included controversial language pertaining to cash balance plans. According to the American Benefits Council, the final report includes the following language:

Within one hundred and eighty days of enactment, the Secretary of the Treasury shall present to the Congress a proposal for legislation which would provide transition relief for older and longer-service participants affected by conversions of their employers’ traditional pension plans to cash balance pension plans: Provided, that none of the funds made available in this Act may be used by the Secretary of the Treasury or his designee to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, or any amendments reaching results similar to such proposed amendments.

Thus, according to this language, the Treasury Department would be precluded from promulgating regulations on age discrimination in defined benefit plans ? including hybrid plans ? during the 2004 fiscal year that ends September 30, 2004.

The U.S. Chamber of Commerce’s response to the proposed language is here. (Link via Benefitslink.com.)

Now that the GUST determination letter program is winding down, there is much discussion about the IRS gearing up to focus its attention on examinations of qualified retirement plans. This reminds me of a talk given by Preston Butcher, Director of Employee Plans Examinations. In an outline provided with the talk, Mr. Butcher lists items of information on IRS Form 5500 (Annual Return/Report for Employee Benefit Plan) which may trigger an examination and the possible compliance problems or issues that could be raised by the item (i.e. what could get a plan in trouble with the IRS). For those who have an interest as to what those items are (including the top 5 most common invitations for audit), you may continue reading:

5500 Information Item	Possible Compliance Issue
Low percentage of participants compared to number of employees	Coverage problem
Large percentage of loans to participants compared to total assets or large dollar amounts of loans	Prohibited Transaction and/or section 72(t) early distribution penalty tax issue
Large loss on income statement when it excludes distributions to participants	Bad investments
Funding deficiency on the Schedule B–defined benefit plan	Underfunded plan and excise tax payment
Funding deficiency on the 5500 form – defined contribution plan	Underfunded plan and excise tax payment
Date of most recent amendment	Did not amend for GUST or TRA 86
A “yes” answer to the question, “Did any amendment during the current year result in the retroactive reduction of accrued benefits for any participant	Reduction in plan benefits
when comparing multiple years, there is a large drop in number of plan participants	Partial plan termination
when comparing multiple years, there is a large change in assets	Reason for large fluctuation
Large amounts of administrative expenses	Valid plan expenses
Large amounts of assets in real estate	Unrelated business taxable income
Large amounts of liabilities	Reason for plan liabilities
An adverse accountant’s opinion letter	Reason for adverse opinion letter
Where the return indicates the plan terminated a long time ago but the distribution has not yet taken place	Distribution must occur as soon as administratively possible, usually within one year
*Large number of separated participants during the year with less than 100% vesting	Vesting issue
*Large percentage of assets classified as “Other Assets” on balance sheet	Questionable assets
Large percentage of plan assets in any one investment, e.g. mortgages	Diversity of assets
Compare end of the year assets to subsequent years beginning of the year assets	Should be the same
Compare end of the year plan participants to subsequent year beginning of the year participants	Subsequent year should be the same or greater
Terminated plan where the date of the most recent amendment is old	Terminated plans must be amended for the current law prior to termination
Large decrease in plan participants from beginning of year to end of year	Partial termination
*Large distributions on income statement	Proper vesting and determine if the participant picked up distribution in income and paid early distribution tax, if applicable
Small ESOP plans – less than 10 participants.	Closely held stock – stock valuation questions
*Top-heavy 401(k) Plans	Providing top-heavy minimums for non-highly compensated employees who don’t receive employer contributions and treatment of matches used to meet top-heavy minimum
*Top-heavy plans covering self-employed individual	Top-heavy issues: Does plan provide for top-heavy minimums? Does plan use a top-heavy vesting schedule? (Self-employed issue: An owner employee must adjust their earned income by the contribution allocated on their behalf when determining their proper allocation as well as deduction. This is a circular calculation which is complicated and often incorrectly done.

*Indicates the top 5 most common occurrences

Some humor here with a good message about the Ten Commandments legal battles going on all over the country. By the way, if you want to keep track of all that is happening in this war-torn legal arena, How Appealing provides coverage almost daily.

The New York Times is reporting that Xerox has reached a settlement with former plan participants of the Xerox cash balance plan in the amount of $239 million: “Xerox Settles Pension Suit With Retirees.”

The proposed settlement is contingent on court approval and involves former plan participants who left Xerox’s employ between the years 1990 and 2000 and elected to take a lump sum when they left in lieu of a pension commencing when they reached age 65. According to the article, Xerox said it would not have to contribute additional money to the plan to cover the payout until at least 2005.

Quote of Note: “Xerox had said it might appeal the case to the Supreme Court but acknowledged with the settlement that it had abandoned that idea. A spokeswoman, Christa Carone, said the company wanted ‘to avoid any further uncertainty or legal expenses” stemming from the dispute.'”

You can access the press release from Xerox here.

If you would like to learn more about the case, Berger et al. v. Xerox Corporation Retirement Income Guarantee Plan, you can access some links to articles discussing the case under “Cash Balance Plan Litigation Links” over on the right. (Scroll down some.)

Today’s Washington Post has this interesting article on blogs: “Add ‘Blog’ To the Campaign Lexicon.”