Month: April 2004

Law firm articles and newsletters recently published:

Cooley Godward LLP: “Update Regarding Stock Option Accounting: What the Proposed New Rules mean to you and what you can do about it.”

Faegre & Benson LLP: “IRS Issues Additional Guidance on Health Savings Accounts.”

Gardner Carton & Douglas: “Retirement Plan Update.”

Groom Law Group: “IRS Provides Preventive Care Safe Harbor and Helpful Transition Relief for HSAs.”

Hodgson Russ LLP: “Employee Benefits Developments 3/8 to 3/19 2004.”

Ice Miller LLP: “New Health Savings Account Guidance Issued.”

Kilpatrick Stockton LLP: “Health Savings Account Fever: A Blistering Pace for HSA Guidance Continues.”

Kirkpatrick & Lockhart LLP: “Department of Labor Proposes Regulations and Prohibited Transaction Class Exemption Regarding Automatic IRA Rollovers for Cashout Distributions.”

McDermott, Will & Emery: “A Primer on Health Savings Accounts and Recent Guidance.”

Morgan Lewis & Bockius LLP: “IRS Regulations on Retroactive Payment of Pension Benefits.”

Nixon Peabody LLP: “Fiduciaries under attack — An Enron antidote [PDF File].”

Pepper Hamilton LLP: “Withdrawal Liability in Multiemployer Plans: It’s Baaack!”

Seyfarth Shaw LLP: “Additional Guidance on Health Savings Accounts: A Beginning.”

From Reuters, “Congress Gives Companies Pension Break“:

Legislation expected to save U.S. companies over $80 billion in pension contributions over two years was passed on Thursday by the U.S. Congress and now goes to President Bush for his expected signature into law. Final action came with approval by the Senate, 78 to 19.

The Department of Labor has issued Field Assistance Bulletin 2004-1 (“FAB”), providing some important guidance pertaining to the application of Title I of ERISA to health savings accounts (“HSAs”). Here is what the DOL had to say in the FAB:

Congress, in enacting the Medicare Modernization Act, recognized that HSAs would be established in conjunction with employment-based health plans and specifically provided for employer contributions. However, neither the Medicare Modernization Act nor section 223 of the Code specifically address the application of Title I of ERISA to HSAs. Based on our review of Title I, and taking into account the provisions of the Code as amended by the Medicare Modernization Act, we believe that HSAs generally will not constitute employee welfare benefit plans established or maintained by an employer where employer involvement with the HSA is limited, whether or not the employee’s HDHP [High Deductible Health Plan] is sponsored by an employer or obtained as individual coverage.

Again, the issue is employer involvement (as discussed in a previous post) and whether the particular benefit offered meets the exception under 29 C.F.R. § 2510.3-1(j)(1)-(4). Here is how the DOL decided to define employer involvement with respect to HSAs, as noted in their FAB:

Specifically, HSAs meeting the conditions of the safe harbor for group or group-type insurance programs at 29 C.F.R. § 2510.3-1(j)(1)-(4) would not be employee welfare benefit plans within the meaning of section 3(1) of ERISA. . . [W]e would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA.

This just in from Forbes.com–“US Senate’s Daschle won’t block pension bill vote“:

The leader of U.S. Senate Democrats said on Wednesday he would not try to stop a vote on a massive pension relief bill this week, although he opposed the measure. . .

Also, from Quicken.com–“Pension Bill Filibuster Threat Dropped In US Senate“:

The chief opponent of the measure, Sen. Edward Kennedy, D-Mass., had said last week he could stop the bill from passing the Senate. But a lopsided 336-to-69 vote for the bill in the House and mounting pressure from businesses has made that assertion hard to sustain.

The IRS is reporting “IRS, Justice Department Note Increase in Tax Enforcement: Civil and Criminal Enforcement against Tax Cheats On the Rise.” According to the press release, in 2003 the IRS used civil injunctions to stop the following illegal tax schemes:

• Using an employee-leasing company to evade employment taxes;
• Using a ?warehouse bank? to commingle and conceal assets;
• Establishing a ?corporation sole? whereby customers ?donate? assets and income to a sham corporation, then fraudulently claim charitable donations;
• Using abusive trusts to shift assets out of a taxpayer?s name but retain control;
• Claiming personal housing and living expenses as business expenses;
• Claiming non-existent tax credits, such as reparations;
• Failing to withhold, report and pay payroll and income taxes;
• Filing tax returns reporting ?zero income?;
• Claiming that only income from foreign sources is taxable.

Also, this article from the WashingtonPost.com–“IRS, Justice Dept. Promise Vigilance in Tax Enforcement“–notes that, in addition to stepping up prosecutions and seeking a budget increase, the IRS is “[s]tudying a sample of 46,000 returns to upgrade its understanding of which taxpayers are more likely to cheat and how they go about it.”

Also, this from The Hill.com–“In Pig Book, lawmakers go hog wild“:

Amid cries from politicians of all stripes that too much or too little money went to tax cuts, education, the military and other priorities, Congress earmarked more pork-barrel spending in appropriations bills passed last year than ever before. . . CAGW notes that pork projects in the 13 spending bills passed in 2003 for spending this year exceeded previous levels in both number and cost.

From Forbes.com, “Dissidents to sue to get Disney voting results“:

Dissident Walt Disney Co. shareholders Roy Disney and Stanley Gold said on Wednesday they would sue the company to get results for the March 3 shareholder vote on Chief Executive Michael Eisner’s reelection to the board. . . The company did not immediately comment on the latest letter from Roy Disney and Stanley Gold’s attorney accusing it of trying to “delay and obfuscate” the release of voting results, particularly the employees’ pension plan, which Disney and Gold see as a proxy for employee support of Eisner.” (View the letter here.)

From the WashingtonPost.com, “Rolling Out Automatic 401(k) Enrollments“:

In a guidance letter requested by J. Mark Iwry, a former Treasury official now associated with the Brookings Institution, the IRS says that employers may, if they wish, adopt plans that enroll new employees at an automatic contribution level higher than 3 percent. Or, they may begin with a modest rate that rises in regular increments for a period of time.

For some fun, calculate it here at this wonderful website chock full of great financial tools and tips–Choosetosave.org:

Choose to Save® provides Internet tools . . . to help consumers plan all aspects of their financial security, and includes the award-winning Ballpark Estimate Retirement Planning Worksheet to estimate how much they need to save for retirement. Additional Choose to Save® materials include a series of booklets, such as The Power to Choose, as well as brochures such as The Top Ten Ways To Save for Retirement, from partners like the U.S. Department of Labor (call 800-998-7542). Many other informational brochures are also available. Choose to Save® was created by the nonprofit, nonpartisan Employee Benefit Research Institute (EBRI) and its American Savings Education Council (ASEC).

Also, you can take this very interesting Retirement Income Quiz here.

This has to be one of the most artfully written (IMHO) tax articles I have ever read–“Taxation of Attorneys’ Fees in Employment Cases: Supreme Court Agrees to Resolve Hotly Contested Issue.” (While the article is from Nixon Peabody LLP, if you dig a little, you can find the attorney who wrote the article.) It starts out: “Here’s a horror story to accompany tax filing season . . .”

This is a great article worth reading from CFO.com discussing the pitfalls of offering voluntary benefit programs–“The Doubt of the Benefit: Voluntary benefits may seem like a win-win. Here’s why they could be a lose-lose“:

Corporate benefits packages may be shrinking, but voluntary benefits are skyrocketing. According to a recent survey, 6 of every 10 companies now offer at least one voluntary, or supplemental, benefit. Employees buy such products—most often some form of life, health, disability, or dental insurance—directly from vendors, usually through a payroll deduction. It’s easy to see the appeal of voluntary benefits: they cost employers next to nothing, yet boost employee morale.

(Thanks to Benefitslink.com for the pointer to the article.)

The article quotes Joseph Belth, professor emeritus of insurance at Indiana University, as stating that employees are “being taken to the cleaners” on these policies:

[S]ome critics claim insurers are more inclined to dispute claims made on group policies purchased at work than those bought by customers on their own. Says Indiana University’s Belth: “It’s quite clear that an insurer is more likely to deny a claim if it’s ERISA than if it’s not under ERISA.” Few workers know this. Neither are they aware that if they sue, and their policy is deemed to fall under ERISA, the odds are stacked in favor of the insurers.

The article mentions how one insurance company allegedly noted in a memorandum that out of 12 claim situations in which the insurer had settled for $7.8 million in the aggregate, if the 12 cases had been covered by ERISA, total liability would have been no more than $500,000. (Read more about the denial of coverage problem in an article at Workforce Management called “Nasty Business.” )

Particularly inciteful in the CFO.com article are the ERISA-avoidance techniques compiled on the last page of the article here. (Scroll down to the bottom of the page.) However, the article correctly notes that if coverage is denied by an insurer, and the employee later brings suit, the employer could be at risk for liability under state law if the plan is deemed to be a non-ERISA plan. So, while trying to be a non-ERISA plan could achieve better results for the employee, this could, in the end, be a Catch 22 for the employer if things go sour.

(By way of reminder, generally “employee welfare benefit plans” are covered under ERISA. An “employee welfare benefit plan” is defined as a “plan, fund, or program” whose purpose is to provide its participants or their beneficiaries with certain nonpension benefits, or “welfare” benefits. “Welfare” benefits are defined under ERISA to include medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability, death, or unemployment, or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, or prepaid legal services, holiday, severance, or similar benefits, or financial assistance for employee housing. The benefits may be provided for by the purchase of insurance or otherwise.

DOL regulation section 2510.3-1(j) provides an exception from ERISA for certain group or group-type insurance programs if, under the program, four conditions are met: (1) no contributions are made by the employer; (2) participation is completely voluntary for employees; (3) the sole functions of the employer with regard to the insurance program are—without endorsing the program—to permit the insurer to publicize the arrangement to the employees and to collect premiums from the employees through payroll deductions and remit them to the insurance carrier; and (4) the employer receives no consideration in connection with the program except reasonable expenses.)

Generally, these voluntary benefit plans are ERISA plans, unless they fall within the exception of DOL regulation section 2510.3-1(j) (just described), and it is this exception under ERISA, and the interpretation of the term “employer endorsement,” around which this whole controversy lies.

In closing, it does appear that these types of programs offer a great deal of risk to employers and employees, and that if employers do decide to offer them, it is better (although not foolproof) to structure them as non-ERISA plans with profuse “buy-at-your-own-risk” and “we-are-not-endorsing-this-program”-type disclaimers figured prominently in the offering.