Month: April 2004

Benefitsblog celebrates its one-year anniversary this week! It’s a good time to express some appreciation to so many. Thanks to all of the readers, colleagues, and fellow bloggers who have made this such an enriching experience. Thanks to readers and bloggers for their kind comments and for all of the excellent material that has been sent to me from time to time. And thanks to all those who have linked to me and sent readers my way. Many blessings to you!

(By the way, you can go back in time and view an earlier version of Benefitsblog on June 15, 2003 at the WayBack Machine here. In the “about” section of the WayBack Machine, it states that the site “was founded to build an ?Internet library,? with the purpose of offering permanent access for researchers, historians, and scholars to historical collections that exist in digital format” and “to preserve society?s cultural artifacts.” It is nice to know that, regardless of the future of Benefitsblog, at least it has made it into a “historical collection” and perhaps has become a “cultural artifact.”)

Another “whipsaw” cash balance plan case to add to your reading list–West v. AK Steel Corporation Retirement Accumulation Plan, USDC So Ohio, 1:02cv0001. (No link available.) The issue presented in the case was whether the lump sum payments to plaintiffs complied with ERISA. The plan was paying out lump sum distributions equal to the hypothetical account balance. Plaintiffs contended that they should have been paid a higher amount equal to the actuarial equivalent of the annual benefit to which plaintiffs would have been entitled if they had remained in the plan until age 65.

The court held that the plan’s payment of lump sum distributions did not comply with ERISA and reiterated the positions espoused in other cases, upholding the resulting “whipsaw” effect. (The Treasury Department has defined this whole “whipsaw” problem in its recent cash balance plan proposals, issued in February of this year:

Three federal appellate courts have addressed the calculation of lump sum distributions under cash balance plans. Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); Lyons v. Georgia-Pacific Salaried Employees Retirement Plan, 221 F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 (2001). All three courts held that a participant’s hypothetical account balance must be projected to normal retirement age using the plan’s interest crediting rate, converted to an annuity, and then discounted to a lump sum using the section 417(e) interest rate. If the plan’s interest crediting rate is the section 417(e) rate, the present value of the normal retirement age annuity will be the same as the hypothetical account balance. However, if the plan’s interest crediting rate is higher than the section 417(e) rate, the present value of the normal retirement age annuity – and the amount of any lump sum distribution – will be greater than the hypothetical account balance. This result is sometimes referred to as “whipsaw.”

These federal court decisions have followed an analysis set out in IRS Notice 96-8. Many plan sponsors have responded to whipsaw by limiting the interest crediting rate to the section 417(e) rate (or a deemed equivalent). This response effectively makes the section 417(e) rate a ceiling on plan interest credits.

While the West case is not a court of appeals decision, arguments which were rejected in the case are particularly noteworthy. (At one point in the opinion, the court goes so far as to call the defendant’s arguments as “creative.”) Of interest is the fact that the defendants in the case tried to argue that the “accrued benefit” under the plan was the hypothetical account balance, but the court noted that the plan document clearly defined it as a “single life annuity commencing at normal retirement age.” The court did indicate in dicta, however, that “[i]f the plan drafters had intended otherwise. . . they could have indicated that intent in the language of the Plan.”

The court went on to reject the defendant’s argument that, when projecting the benefit forward to an annuity at age 65 (for purposes of discounting back for the lump sum amount) the interest to be utilized should be governed by section 204(c)(3) of ERISA. Instead, the court held that the rate which should be utilized for projecting the benefit forward to an annuity at age 65 was the rate at which future interest credits would be calculated under the terms of the plan.

As far as the discount rate to be utilized in determining the lump sum benefit, the court relied on IRS Notice 96-8, Regulation section 1.411(a)-11(d), and previous cases which had upheld the Notice and Regulation, and rejected the defendant’s argument that Regulation section 1.411(a)-11(d) was invalidated when ERISA section 203(e) of ERISA was amended in 1994.

Please note that under the Bush administration’s cash balance plan proposals, whipsaw would be eliminated prospectively, as indicated in the 2004 Blue Book entitled “General Explanations of the Administration’s Fiscal Year 2005 Revenue Proposals.” :

The proposal would eliminate whipsaw, providing that a cash balance plan may distribute a participant’s account balance as a lump sum distribution as long as the plan does not credit interest in excess of a market rate of return. The Secretary would be authorized to provide safe harbors for what constitutes a market rate of return and to prescribe appropriate conditions regarding the calculation of plan distributions. This would permit plan sponsors to give higher interest credits to participants, resulting in larger retirement accumulations.

More cash balance plan reading:

An article by Dallas L. Salisbury, president and CEO of the Employee Benefit Research Institute from BenefitNews.com–“Will cash balance plans survive?“

From the New York Times, “A Broker’s Empty Promise, a Retiree’s Shattered Dream.”

From WebCPA.com, “DOJ Files Suit Against Audit Defense Firm“:

The Justice Department asked a federal court in Las Vegas to issue a temporary restraining order against a Las Vegas-based telemarketing firm that it alleges sold fraudulent tax schemes that have bilked the Treasury out of an estimated $324 million.

Ever feel like this after completing your tax return? (From the TaxGuru.net.)

This is a great website, by the way–CrossingtheBar.com. The website provides good information regarding the statutes, rules and regulations that relate to the multijurisdictional practice of law. For instance, this page provides admission information regarding the different states.

Another good website here–HSA Insider–with info regarding health savings accounts. (Thanks to Benefitslink for the pointer.)

Finally, from Law.com, “Update: The Tax Man’s Travails.”

Thanks to Benefitslink.com for the pointer to this press release: “HEALTH PLANS FAIL TO DISCLOSE REQUIRED COVERAGE INFORMATION: New Report Shows HMOs Do Not Adequately Comply with State Law.” According to the press release, Attorney General Eliot Spitzer today released a report with a survey showing that health plans in New York State are failing to disclose required information that could help consumers obtain coverage for medically necessary treatments. Apparently, members of Spitzer’s staff posed as prospective enrollees of a health plan and wrote five letters to each of 22 health plans requesting information on the standards used to determine whether or not a treatment for five different conditions was medically necessary and therefore covered by insurance. Spitzer’s staff analyzed the responses from the health plans and assigned grades to the plans based on the number of satisfactory responses:

Out of 22 plans studied, half (11) received an “F” for compliance, seven plans received a “D,” three plans received a “C,” and only one plan got a “B.” No plan received an “A.” Twenty-six percent of the 110 letters received no response from the plans at all.

Spitzer has said that “when health plans fail to respond to such information requests they may discourage chronically ill New Yorkers from enrolling in their plans and thwart the state’s commitment to making insurance accessible to all without regard to health status.”

The Attorney General’s office has sent letters to each of the plans surveyed detailing particular violations and requesting that each plan take immediate measures to comply with the law and set a meeting date to discuss permanent compliance measures. The press release indicates that plans that repeatedly fail to comply with the law could face legal action.

In a previous post, I talked about how IRS officials had indicated that the IRS was leaning towards a staggered remedial amendment period approach with respect to keeping individually designed plans current with the law. This has now been confirmed in Announcement 2004-32 which provides an update as to the future of the EP determination letter program. According to the Announcement, the staggered remedial amendment period system would establish regular five-year cycles for plan amendment and determination letter renewal. The cycles, which would be based on taxpayer identification numbers, would ensure that employers would not have to request determination letter applications more frequently than every five years.

In addition, Announcement 2004-33 contains a draft IRS Revenue Procedure governing the issuance of opinion letters with respect to master and prototype (M&P) plans and volume submitter (VS) plans. The guidance announces that a new approach for keeping pre-approved plans up-to-date would establish regular six-year amendment/approval cycles for all pre-approved plans, beginning with the submission of these plans for EGTRRA opinion and advisory letters. The way it would work is as follows (according to Announcement 2004-32):

In year one, all pre-approved defined contribution plans would be required to be updated and submitted for approval based on the law in effect at that time. The Service would process these applications in years two and three. Adopting employers would then have a fixed date by which to adopt the approved plans (for example, by the end of year five). Meanwhile, in year three, all pre-approved defined benefit plans would be required to be updated and submitted for approval based on the law in effect at that time. The Service would process these applications in years four and five and adopting employers would have to adopt the approved plans by the end of year seven. The cycle would begin again in year seven; that is, in year seven, all pre-approved defined contribution plans would again be required to be updated and submitted for approval based on the law in effect at that time.

The IRS states in the Announcement that good faith plan amendments would still need to be adopted sooner than the end of a plan’s cycle, when appropriate. In addition, while the cycle is “fixed,” there would be flexibility built into the system to “allow the cycle to be modified when appropriate, particularly in response to the changing needs of plan sponsors.”

Additional changes to pre-approved plan procedures are as follows:

• Cross-testing provisions could be included as a design feature in nonstandardized defined contribution M & P plans.
• Volume submitter plans could be written to contain a provision that allows the practitioner to amend the plan on behalf of adopting employers for changes in the Internal Revenue Code.

Interested persons are invited to comment on the new procedures.

With the issuance of applicable federal rates for May, 2004, I have decided to add a section over on the right which will provide links to the Revenue Rulings tracking changes to the applicable federal rates each month. (I know, very dull and boring, but very handy for some. . . )

Forbes.com has a Special Report entitled “Best Blogs.” Unfortunately, law or tax blogs just didn’t make it into the report at all.

Also, more on blogs in this article: “Blogs: Here to stay – with changes.”

Law firm articles and newsletters recently published:

• Gardner Carton & Douglas: “HSAs Take Center Stage[pdf].”
• Groom Law Group: “Memo to Clients: Legislative Update.”
• Hodgson Russ LLP: “Employee Benefits Developments.”
• Kutak Rock LLP: “Defined Contribution Plan Update: Charging Only the Accounts of Former Employees for Administrative Expenses.”
• Proskauer Rose: “Temporary Funding Relief for Defined Benefit Pension Plans.”
• Reish Luftman Reicher & Cohen: “404(c) Issues:Mapping, Blackouts, Disclosure, Annuities vs. Registered Issues (Powerpoint Presentation).”
• Vedder Price: “Employee Benefits Briefing[pdf].”