Month: March 2004

My, times have changed! When I was in law school . . .Well, I won’t bore you with the details. Suffice it to say, that in visiting Professor Bainbridge‘s site today, I was a bit envious of what he provides for his law students here. Professor Bainbridge (a corporate law professor at UCLA) writes here that he “finally got to teach the Martha Stewart insider trading case in class today.” He provides links to an amazing PowerPoint presentation available for downloading here (look under Class Slides and then for Set BA 27).

I just returned from attending the SHRM (Society for Human Resource Management) 21st Annual Employment Law & Legislative Conference held in Washington, D.C. The highlight of the program was, in my opinion, hearing from Tammy McCutchen, Administrator of the DOL’s Wage & Hour Division, who has been largely responsible for leading the initiative regarding the DOL’s proposed changes to the regulations defining the “white collar” exemption from federal minimum wage and overtime requirements. The initial draft of the proposed regulations was issued March 31, 2003. Various speakers at the Conference indicated that the final regulations will likely be issued by the end of this month.

Here is what McCutchen had to say about the regulations:

(1) The DOL received over 75,000 comments to the proposed regulations, with 600 of those being substantive comments. It took a staff of 20-25 persons to read and digest the comments.

(2) McCutchen said there were three goals in promulgating the regulations: (i) to strengthen the overtime protections for workers; (ii) to provide clear-cut rules for the 21st century, and (3) to limit the economic impact of the changes for employers and employees. She said that it was a difficult task, but not impossible (although she did say it was the hardest thing she’d ever done in her professional career), and that she felt that the final regulations which would be coming out have “successfully addressed all major concerns.” She also said that “[w]hat employers need are clarity and certainty so that they don’t end up in court after doing the best job possible.” She gave a brief history of the regulations and discussed how a revision of the rules has been on the agenda for years, during both Democratic and Republican administrations.

(3) Although she said that she was not permitted to divulge any of the changes being made in the final regulations to be issued soon, she did state that there would be a number of changes made in response to substantive comments. She stated that the proposed regulations have been forwarded to the Office of Management and Budget for review and approval, and that once they are issued, she hopes that final regulations will withstand any attempts to challenge the regulations under the Congressional Review Act.

(4) She recommended that the issuance of the final regulations might present a good time for employers to conduct a self-audit, and look at their classifications and pay practices to determine if they are in order.

For those of you who are members of SHRM, you can access a more detailed summary of her remarks here at the SHRM website: “McCutchen: Final overtime rules will address all major concerns.“

“Additional Questions and Answers To Clarify and Provide a Common Interpretation of the Uniform Guidelines on Employee Selection Procedures (“UGESP”) as They Relate to the Internet and Related Technologies” have been issued jointly by the DOJ, DOL, EEOC, and OPM which you can access from the Federal Register here. An easier-to-read version of the Q & As can be found here. The EEOC issued a press release here. SHRM issued a press release in connection with the guidance, commenting as follows:

Currently, any individual who sends a resume to an employer could be considered an “applicant” and the company could be required to retain the material sent for up to two years. However, since resume spamming is so easily accomplished by job seekers, organizations find themselves with thousands or even millions of resumes and other application materials regardless of their specific job openings.

“Due to the technological ease of sending resumes, an HR professional may literally be swimming in applications from job seekers who have no knowledge of the business and may not be aware their resume was even sent to the particular organization,” said SHRM President and CEO, Susan R. Meisinger, SPHR. “The government has taken a good step in clarifying the term ‘applicant’ and has acknowledged that the regulation needs to keep up with the reality of the modern workplace.”

The proposed regulations suggest three criteria for an individual using the Internet for job seeking purposes to be considered an “applicant”: the employer has acted to fill a particular position, the individual has followed the employer’s standard procedures for submitting applications, and the individual has indicated an interest in the particular position.

Sherwin Simmons has written a great article discussing the impact of same-gender marriages in the benefits arena. You can access the article here at the PSCA.org site. (Free registration required.)

The same-gender marriage debate has certainly been dominating the news lately:

• The Philadelphia Inquirer is reporting that the Montgomery County District Attorney is threatening to arrest anyone who is associated with a same-gender marriage in his county.
• Eliot Spitzer has weighed in on the subject here, as reported by the Associated Press here.

Also, MSNBC.com is reporting on the United States Senate Committee on the Judiciary hearing today: “Senators wrangle over marriage.” You can access information about the hearing entitled “”Judicial Activism vs. Democracy: What are the National Implications of the Massachusetts Goodridge Decision and the Judicial Invalidation of Traditional Marriage Laws?” here as well as testimony given at the hearing. Articles about the hearing:

• The Hill
• Reuters
• The Washington Post

And, yet with all of this, the real story is in France where one can legally marry, in certain instances, those who have departed this world. You can read the story here: “In France, dead can still get married.”

Finally, I would be remiss if I did not mention Joe Kristan’s discussion at Roth CPA.com here discussing a tax case involving a couple who tried to say they weren’t married for federal income tax purposes. The couple argued that they ‘mistakenly’ represented that they were married on their tax return and that their marriage ceremony in Fiji was merely “to adopt the form of marriage, while negating the substance.” As Joe reports, “[i]t’s a bad sign for you when the judge has this to say about your case”:

Plaintiffs engage in a complex and protracted analysis of cases which might be analogous if their marriage were indeed void, as well as an interesting, diligently researched, and totally irrelevant exploration of inapplicable precedents for determining when a marriage is void due to mistake.

How about a new word for the day? Floccinaucinihilipilification. Some judicial linguistic gymnastics are being reported by How Appealing here and here.

The US Senate Committee on Banking, Housing, and Urban Affairs held a hearing yesterday, entitled “Review of Current Investigations and Regulatory Actions Regarding the Mutual Fund Industry: Fund Operations and Governance.” You can access Senator Richard Shelby’s remarks here as well as other testimony here.

Also, an article regarding a recent study of mutual fund fees: “True costs of mutual funds difficult to determine.”

In the News:

• “Benefits of 401(k) Plans May Be Lost on New ‘Millennial’ Generation; CIGNA Survey Finds 401(k)s Fail to Engage America’s Youngest Workers”
• “Who Offers the Best 529 College Savings Plans?“

The Wall Street Journal (subscription required) today has a couple of noteworthy articles:

• “Bogus Offerings By Health Insurers Are on the Rise“: “In a report to be sent to Congress Wednesday, the GAO found that 144 companies had improperly sold insurance to 15,000 employers in 2000 to 2002, and that the number of sham entities uncovered had doubled to 60 in a two-year period. Individual policyholders, as well as companies, were also victims.”

• “401(k)s May Use This Key: Simple! Younger Workers Display Reluctance to Participate; Plans’ Complexity Is Cited.“: “. . .[C}ompanies are adopting simplified 401(k) enrollment forms that allow employees to get into the plan with a check of the box.” According to the article, one company sends out postcards with a picture of a camera on it, exhorting employees to “Picture Your Future” which allows employees, with a single check mark, to participate in the savings plan at 2% of pay. Employees, of course, can check other boxes if they want a different contribution rate. The campaign has reportedly yielded 100 new employees enrolled in the plan as well as increased deferrals by an average of 9.3%. (The company is–you guessed it!–a photo film company.)

The Sixth Circuit seems to have been in the limelight lately for its controversial bankruptcy decisions involving retirement plans. As you may recall, at the end of last year, the Sixth Circuit issued a surprising decision involving 403(b) plans and bankruptcy which was the focus of a previous discussion here at Benefitsblog–“403(b) Plans Take a Turn for the Worst in the Sixth Circuit.” The Sixth Circuit was at the helm again in another controversial bankruptcy case involving a retirement plan which has been reversed by the U.S. Supreme Court. The case is Yates v. Hendon, No. 02-458. You can access the case here.

The question presented in Yates was whether a working owner of a business is an ERISA plan “participant” and thus has the right to enforce the plan’s anti-alienation provisions against a bankruptcy trustee. The Sixth Circuit had said no to this question in this 2002 decision. The Supreme Court issued an opinion today that said yes (in a 9-0 decision) so long as the plan covers one or more employees other than the business owner and his or her spouse.

Under the facts of the case, a debtor in bankruptcy–a physician–was the sole owner of a professional corporation which maintained a profit sharing/pension plan. The plan had four participants, one of which was the physician. The debtor-physician borrowed $20,000 from the plan at 11 percent interest in 1989, was supposed to make monthly payments, but failed to. In June of 1992, the term of the loan was extended for five years. Still no monthly installments were paid. In mid-November of 1996, however, at a time when the physician was apparently insolvent, the physician used proceeds of a house sale to make payments to the plan in amounts totaling $50,467.46. This figure represented repayment of the loan in full, with accrued interest.

On December 2, 1996 – three weeks after the repayment – an involuntary bankruptcy petition was filed against the physician under Chapter 7, Title 11, of the United States Code. Eight months later the trustee in bankruptcy commenced an adversary proceeding against the plan and its trustee, asking the court to (a) set the repayment aside as a preferential transfer and (b) order that the money be paid over to the bankruptcy trustee. According to the Court, it was undisputed that the $50,467.46 transfer made to the plan in November, 1996, qualified as a preference under 11 U.S.C. ? 547. The Bankruptcy Court, in holding that the Bankruptcy Trustee could recover this money, held that the profit sharing plan’s spendthrift provision did not prevent the recovery since the debtor was sole shareholder of the business, and “must be considered an employer and not an employee of the business for purposes of ERISA.” The Sixth Circuit had affirmed.

The U.S. Supreme Court, in reversing the Sixth Circuit, based its decision upon a thorough analysis of the provisions of ERISA, after which it concluded that “Congress intended working owners to qualify as plan participants” but noted that plans covering only sole shareholders and their spouses fall outside the Title I domain. (The Yates case involved a sole shareholder and a plan which covered 4 employees, including the shareholder and his spouse.) Justice Ginsburg wrote the opinion. Justice Scalia and Thomas wrote concurring opinions which you can access here and here. Justice Scalia states that the Court has used a “sledgehammer to kill a knat” and would have deferred to the guidance provided by the Department of Labor without conducting an extensive statutory analysis. Justice Thomas would have remanded and directed the Court of Appeals to address whether the common-law understanding of the term “employee,” as used in ERISA, would have included the business owner.

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), Congress enacted a provision requiring a plan to roll over the accounts of participants that exceed $1,000 (but do not exceed $5,000) and are distributable, if the participant does not elect to roll over the account directly or to receive the distribution. This EGTRRA provision, however, was not effective until the DOL issued guidance, and EGTRRA required the DOL to issue this guidance by June 7, 2004. In accordance with its directive, the DOL has issued proposed regulations providing this guidance and establishing a safe harbor pursuant to which a fiduciary of a pension plan subject to Title I of ERISA will be deemed to have satisfied his or her fiduciary responsibilities in connection with the provisions. Also, the DOL has issued a notice of proposed class exemption permitting a fiduciary of a plan, who is also the employer maintaining the plan, to establish, on behalf of its separated employees, an individual retirement plan at a financial institution which is the employer or an affiliate.

While there will be more on this later, a few observations are as follows:

(1) On January 7, 2003, the DOL published a notice requesting information on a variety of issues relating to the development of this safe harbor. In response, the DOL received 17 comment letters which you can access here.

(2) With respect to requirements of the USA Patriot Act (“Act”), commenters had pointed out that the customer identification and verification provisions (“CIP”) of the Act might preclude banks and other financial institutions from establishing individual retirement plans without the participation of the participant or beneficiary on whose behalf the fiduciary is required to make an automatic rollover. This is because in most of the situations where a fiduciary is required to make an automatic rollover to an individual retirement plan, the participant or beneficiary is unable to be located or is otherwise not communicating with the plan concerning the distribution of plan benefits.

However, the proposed regulation notes that, in response to these issues, Treasury staff, along with staff of the other Federal functional regulators, have advised the DOL that they interpret the CIP requirements of section 326 of the Act and implementing regulations to require that banks and other financial institutions implement their CIP compliance program with respect to an account, including an individual retirement plan, established by an employee benefit plan in the name of a former participant (or beneficiary) of such plan, only at the time the former participant or beneficiary first contacts such institution to assert ownership or exercise control over the account. The proposed regulation states that “CIP compliance will not be required at the time an employee benefit plan establishes an account and transfers the funds to a bank or other financial institution for purposes of a distribution of benefits from the plan to a separated employee.”

In January of this year, Treasury staff, along with staff of the other Federal functional regulators, issued guidance on this matter in the form of a question and answer, published in a set of “FAQs: Final CIP Rule,” which you can access here and here. The FAQs provide:

. . .[I]n light of the requirements imposed on the plan administrator under EGTRRA, as well as the requirements in connection with plan terminations, the former employee will not be deemed to have “opened a new account” for purposes of the CIP rule until he or she contacts the bank to assert an ownership interest over the funds, at which time a bank will be required to implement its CIP with respect to the former employee.

This interpretation applies only to (1) transfers of funds as required under section 547(c) of EGTRRA, and (2) transfers to banks by administrators of terminated plans in the name of participants that they have been unable to locate, or who have been notified of termination but have not responded, and should not be construed to apply to any other transfer of funds that may constitute opening an account.

(3) Commenters had raised issues concerning state escheat laws which would apply since ERISA does not govern IRA’s and thus would not preempt state escheat laws which could apply. The proposed regulation states that “[i]ssues raised by commenters concerning the possible application of state laws are beyond the scope of this regulation.”

(4) Many had hoped that the safe harbor would also apply to rollovers of amounts less than or equal to $1,000. (EGTRRA limited the automatic rollover provision to amounts in excess of $1,000 but less than $5,000.) The DOL declined to extend the safe harbor to distributions less than or equal to $1,000, stating that “[w]hile the Department agrees with the commenter that similar considerations may be relevant to such rollovers, the Department did not adopt this suggestion in light of Congress’ direction to provide a safe harbor for automatic rollovers of mandatory distributions described in section 401(a)(31)(B) of the Code.”

(5) The proposed regulations dictate that the mandatory distribution be invested in an “investment product designed to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity” and that the investment product’s fees meet certain requirements. The DOL in its preamble notes that such safe harbor investment products would typically include money market funds, interest-bearing savings accounts, certificates of deposits, and “stable value products.” The DOL rejected suggestions made by commenters that the participant’s investment in the plan should be “mapped.”

(5) Please note that one of the conditions required to be satisfied in order to meet the safe harbor proposed in the regulations is that participants have to have been furnished with a summary plan description or summary of material modification that describes the plan’s automatic rollover provisions, including an explanation that (1) the mandatory distribution will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity, as well as (2) a statement indicating how fees and expenses attendant to the individual retirement plan will be allocated, and (3) the name, address and phone number of a plan contact (to the extent not otherwise provided in the summary plan description or summary) for further information concerning the plan’s automatic rollover provisions, the individual retirement plan provider and the fees and expenses attended to the individual retirement plan. In other words, if the Summary Plan Description has not been updated or an SMM issued containing this information, the safe harbor requirements would not be met.

(Some background regarding the EGTRRA provision: EGTRRA amended section 401(a)(31) of the Code to require that, absent an affirmative election by the participant, certain mandatory distributions from a tax-qualified retirement plan be directly transferred to an individual retirement plan of a designated trustee or issuer. Specifically, section 657(a) of EGTRRA added a new section 401(a)(31)(B)(i) to the Code to provide that, in the case of a trust that is part of an eligible plan, the trust will not constitute a qualified trust unless the plan of which the trust is a part provides that if a mandatory distribution of more than $1,000 is to be made and the participant does not elect to have such distribution paid directly to an eligible retirement plan or to receive the distribution directly, the plan administrator must transfer such distribution to an individual retirement plan. Section 657(a) of EGTRRA also added a notice requirement in section 401(a)(31)(B)(i) of the Code requiring the plan administrator to notify the participant in writing, either separately or as part of the notice required under section 402(f) of the Code, that the participant may transfer the distribution to another individual retirement plan.)