Month: February 2004

There are some good ideas in this article for 401(k) plan design: “The (K)oncept Plan – 2004 Model.” (Article by Steve Lansing via the 401khelpcenter.com.) Quote of Note:

Employers should see their role as being a partner with the employees to help them achieve financial security in retirement. . . .There are many heuristic tools (short cuts) that can be employed to finesse participants into actions they acknowledge are desirable but seem unwilling to take. Accepting this premise is to understand that most people are not risk adverse investors (rational economic agents) but are loss adverse savers. Indeed, a recent EBRI study labels certain people as “strugglers, impulsives and deniers” when it comes to planning their financial future.”

Some additional food for thought here: “Chill descends as boomers rethink retirement plans.”

Finally, from Jagadeesh Gokhale at the Cato Institute: “The Future of Retirement in the United States.” The article offers a unique perspective on 401(k)’s:

A recent study that I co-authored analyzes the potential lifetime gains from participating in 401(k) plans and Roth IRAs. These plans are almost universally recommended for households as a way of saving on their lifetime taxes. However, the study’s surprising result is that low-earners who make substantial contributions to their 401(k) accounts and receive moderate to high rates of return on those contributions, could end up paying more in taxes on a lifetime basis. . . .

How many U.S. households actually face this jeopardy? I am currently co-writing a study on this issue using survey data from the Board of Governors of the Federal Reserve. A preliminary result from this study suggests that roughly 10 percent of participating households may suffer an increase in lifetime taxes (and a reduction in lifetime consumption) as a result of continued participation at their current levels in 401(k) plans.

Thanks to the 10b-5 Daily.com for the pointer to this interesting article: “Parmalat document order a waste of time – judge.” The law firm which represents a pension fund suing Parmalat executives and their advisers, requested a special order forbidding Parmalat from destroying documents. U.S. District Judge Lewis Kaplan said any document destruction was a criminal offense and an additional order from him would be redundant. “If anyone wants to file papers on this, God bless them,” he said. “But don’t waste my time.”

A word to the wise: “Recent Cases Confirm That Bad Tax Planning = Bad Tax Results.”

Quote of Note from the article:

In late 2003, the Tax Court issued four opinions, in sequence, all addressing the same employee fringe benefit issues with respect to four family-owned farm corporations. These four farm corporations all had essentially the same fact pattern because they were all designed by an attorney who also served as their tax preparer, as well as the taxpayers’ counsel in the Tax Court litigation. . . [t]he taxpayer losses can be explained by the poor design of these farm corporations. This means that the outcome of these cases should present little problem to the traditionally operated family farm corporation. Nevertheless, some important planning points can be gleaned from these cases.”

The four Tax Court cases are as follows: Weeldreyer v. Comm., TC Memo 2003-324; Schmidt v. Comm., TC Memo 2003-325; Tschetter v. Comm., TC Memo 2003-326; and Waterfall Farms, Inc. v. Comm. , TC Memo 2003-327.

Thanks to a reader who left a comment yesterday in this previous post and alerted me to this development: “Federal court dissolves ‘any will provider’ injunction.” In the previous post, I noted how an Arkansas any willing provider law (“AWP law”) had been barred from being enforced after a federal appeals court in 1998 issued an injunction, concluding that the law ran contrary to ERISA. However, as many of you know, the U.S. Supreme Court case of Kentucky Association of Health Plans v. Miller, decided back in April of last year, held that Kentucky’s AWP law was not preempted by ERISA (discussed in previous posts which you can access here.) After the Miller case, Arkansas Blue Cross and Blue Shield filed suit in federal court back in August asking for “a judicial determination” on how the Miller case impacted the Arkansas AWP law. Certain providers had been writing Blue Cross, demanding access to the plans’ network and citing the Supreme Court case as authority for the proposition that the Arkansas law should be enforced.

According to this recent article, the injunction has now been lifted by a federal district court in Arkansas and “Blue Cross and Blue Shield of Arkansas may soon have to open up its massive statewide managed care network to “any willing provider,” or any provider willing to abide by its network rules.”

Thanks to Joe Kristan at Roth CPA.com for the following discussion regarding the IRS’s modernization of its tax compliance and enforcement sytems:

The IRS yesterday shut out its prime systems modernization contractor from new projects worth approximately $40 million. The contractor, Computer Science Corporation, recently disclosed that it will miss an April deadline for a critical part of the $15 billion project.

The project has been plagued with overruns and delays from the start.

. . .The contractor accepted responsibility in testimony before the Ways and Means Committee yesterday. The IRS also has some responsibility; at one point, according to the contractor, the IRS had 1100 change orders in ongoing projects. The sheer difficulty of upgrading a 1960’s tape-based system to a 21st century database has also delayed the project.

“Frustrated IRS to Seek New Technology Contractors“: the Associated Press via the Washington Post has the story. (Another report here from Washington Technology.)

Jottings by an Employment Lawyer provides the following discussion of the case of Cruthis v. Metropolitan Life (7th Cir. 2/2/04) [pdf]:

MetLife was no doubt shocked when it removed a claim for disability benefits under an employee benefit plan to federal court on the basis of a federal question and had it remanded to state court. The district court relied on language in the STATEMENT OF ERISA RIGHTS which provides in part, “If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court.” Interpreting this as a contractual forum selection clause, the court held that MetLife was bound by an agreement that the case could be heard in state court. Since MetLife had copied a model form provided by the DOL for compliance with ERISA, it was less than pleased. Fortunately, the 7th Circuit had jurisdiction to hear the appeal of the remand since it was based on a choice of forum clause rather than a lack of jurisdiction.

On appeal, the 7th Circuit held that the statement was not a contractual agreement, but just a statement of rights, and sent the case back to the district court for a ruling on the merits, stating as follows:

We conclude that MetLife’s statement clearly was made to comply with ERISA’s disclosure requirements. Significantly, MetLife copied the model statement quoted above verbatim. Moreover, there is no evidence that the statement was intended to be part of the contract between the parties. The clause began with the capitalized title “STATEMENT OF ERISA RIGHTS” and the first sentence states that “[t]he following statement is required by federal law and regulation.” The statement further specified that “[u]nder ERISA there are steps you can take to enforce the above rights.” Thus, the plain language of the statement indicates that it is a disclosure of applicable law rather than a substantive contract provision.

Michael Fox notes the time, expense and attorneys fees caused by the erroneous opinion. While there is very little about the facts of the case in the opinion, it is interesting to note that this is one of those many “denial of disability benefits” cases which is making its way through the courts as discussed in this Workforce Management article.

Also, regarding the ERISA rights statement, remember this case? Prescott v. Little Six, Inc., 2003 U.S. Dist. LEXIS 17484 (D. Minn. 2003)? According to the court in Prescott, an Indian tribal government entity waived its tribal sovereign immunity from lawsuits in federal court based upon language in the model statement of ERISA rights. In deciding that the tribal entity had waived its immunity, the court relied in part on several plans’ SPDs, each of which contained language from the model statement. The court keyed in on this language that a plan participant “may file suit in a federal court” if a benefit claim was denied, in holding that the tribal entity had waived its sovereign immunity.

The IRS is putting a halt to abusive 412(i) plans as announced in this press release: “Treasury and IRS shut down abusive Life Insurance Policies in Retirement Plans.” According to the press release, Assistant Secretary for Tax Policy Pam Olson says that “[t]here are many legitimate section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements.”

The guidance issued is as follows:

1. New proposed regulations state that any life insurance contract transferred from an employer or a tax-qualified plan to an employee must be taxed at its full fair market value. (The regulations make changes to Treas. regulations 1.79-1, 1.83-3, and 1.402(a)-1.)

According to the press release, some firms have promoted an arrangement whereby the employer establishes a section 412(i) plan under which the contributions made to the plan, which are deducted by the employer, are used to purchase a specially designed life insurance contract, made available only to highly compensated employees. The insurance contract is designed so that the cash surrender value is temporarily depressed, so that it is significantly below the premiums paid. The contract is then distributed or sold to the employee for the amount of the current cash surrender value during the period the cash surrender value is depressed. However, the contract is structured so that the cash surrender value increases significantly after it is transferred to the employee.

According to the IRS, use of this “springing cash value life insurance” gives employers tax deductions for amounts far in excess of what the employee recognizes in income. The regulations are designed to prevent taxpayers from artificially understating the value of these contracts.

2. Revenue Procedure 2004-16 issued today along with the proposed regulations provides a temporary safe harbor for determining fair market value.

3. Revenue Ruling 2004-20 states that an employer cannot buy excessive life insurance (i.e., insurance contracts where the death benefits exceed the death benefits provided to the employee’s beneficiaries under the terms of the plan, with the balance of the proceeds reverting to the plan as a return on investment) in order to claim large tax deductions. These arrangements generally will be listed transactions for tax-shelter reporting purposes.

4. Revenue Ruling 2004-21 states that a qualified plan funded with life insurance contracts which discriminate in favor of highly paid employees will not meet the requirements of section 401(a)(4) of the Internal Revenue Code and the benefits, rights, and features provisions of Treas. regulation section 1.401(a)(4)-1(b)(3) and section 1.401(a)(4)-4(a).