Month: June 2004

The PBGC has issued this report–“Companies Report $278.6 Billion Pension Shortfall in Latest Filings with PBGC“–providing an update on the status of underfunded pension plans:

Companies with underfunded pension plans reported a total pension shortfall of $278.6 billion in the latest round of filings with the Pension Benefit Guaranty Corporation (PBGC), the agency reported today. That is down slightly from the $305.9 billion reported last year, but up dramatically from the $18.4 billion reported in 1999.

View a chart entitled “Summary of Pension Underfunding Filings” here. It is important to note that the figures only include those companies with more than $50 million in underfunded pension liabilities. The announcement states that “[i]f underfunding in all insured pension plans is included . . . the total shortfall in the defined benefit pension system is significantly higher than $278.6 billion.”

Reuters has an article here. Quote of Note:

U.S. companies with pension underfunding of more than $50 million at the end of 2003 were required to file special reports to the agency by April 15, giving details of the shortfalls. While the reports are confidential, the agency is allowed to release the aggregated data to the public.

Usually the agency waits months to release the information, but its new director Brad Belt decided it should go out now, while Congress and the Bush administration are discussing possible reforms to the pension system.

“Workers and investors have a right to know the financial status of pension plans,” Belt said in a statement.

The Wall Street Journal (subscription required) is reporting: “Charities to Face Senate Panel’s Tax Scrutiny.” According to the report:

Charities and other tax-exempt groups will face fresh scrutiny Tuesday when the Senate Finance Committee holds a hearing on reports of major abuses. The committee plans to investigate issues ranging from improper use of charities for personal gain to tax-exempt organizations’ helping to facilitate tax shelters for wealthy investors and businesses. Internal Revenue Service Commissioner Mark W. Everson recently said “abuses” in this sector are “of increasing concern to the IRS.”

The article quotes staffers as saying that the hearing, which is called “Charity Oversight and Reform: Keeping Bad Things from Happening to Good Charities,” will include two confidential witnesses testifying behind a screen, their voices scrambled electronically to protect their identities. One will talk about “insiders fleecing a charity,” while the other will focus on “problems in the fund-raising arena.”

On the heels of Treasury’s announcement yesterday that it was withdrawing proposed regulations governing cash balance plans, House Workforce Committee leaders announced plans to move forward and look at solutions to solve the cash balance plan quagmire. The announcement is here and provides in part:

“Our Committee is not going to shy away from complex issues and difficult decisions, and that is why we plan to work in a responsible manner to pursue permanent solutions that preserve cash balance pension plans as a viable retirement security option for workers and employers,” Boehner added. “We look forward to working with all parties, including the Treasury Department, in a productive manner to implement responsible solutions and preserve the integrity of the defined benefit system.”

“It’s important we proceed with a careful, deliberative approach that starts with a hearing and bipartisan discussions on our Committee as we draft a comprehensive bill this year to strengthen and reform the defined benefit system,” said Employer-Employee Relations Subcommittee Chairman Sam Johnson (R-TX). “There are plenty of hybrid plans that currently need the certainty we will provide in our legislation and we will work to ensure that defined benefit pensions remain a vital and thriving employee benefit far into the future.”

AccountingWeb.com has an interesting letter from the IRS to the Public Advocate of the United States, Inc., regarding the issue of whether or not same-gender married couples are entitled to file their federal income tax returns jointly. Most of us figured the answer to that was no, due to the Defense of Marriage Act. The letter confirms it here. (Thanks to the TaxGuru for the link.) As the TaxGuru notes here, state income tax filings are a different story.

This is good news–“U.S. hiring plans near boom levels.” (via MSNBC) According to the article:

U.S. companies are gearing up to create jobs at rates not seen since the height of the 1990s boom, a survey released Tuesday showed, adding to evidence that job growth will keep the U.S. economic recovery rolling. . . Thirty percent of polled U.S. employers plan to add to their payrolls in the July to September period, the survey by Manpower Inc. showed. That is up from 20 percent a year earlier and 28 percent in the April to June period. The survey hit its highest level of 35 percent in 2000, powered by the Internet-fueled boom.

The Wall Street Journal (subscription required) is reporting: “House Panel Approves a Bill On Expensing Stock Options.” According to the article:

The House Financial Services Committee on Tuesday approved a watered-down version of an accounting-industry proposal to require public companies to treat stock options as an expense on their balance sheets.

Under the bill, companies would expense only the cost of options offered to their top five executives, rather than the cost of all employee stock options.

Also, the Securities and Exchange Commission would be prohibited from enforcing a proposed Financial Accounting Standards Board rule until the SEC studies its economic impact for a year after the bill becomes law.

The bill was introduced by Rep. Richard Baker (R., La.,) chairman of the House Subcommittee on Capital Markets and now goes to the full House for consideration. According to the article, the House may take up the bill before its August recess.

Thanks to the 401khelpcenter.com for alerting me to this great information published by The Vanguard Group: “Investment Committees: Vanguard’s View of Best Practices” and “Making Investment Committees More Effective.”

The IRS and Treasury issued this press release today:

Today, the Treasury Department and the IRS announced the withdrawal of proposed regulations on cash balance pension plans and cash balance conversions.

The regulations are being withdrawn to provide Congress an opportunity to review and consider a legislative proposal on cash balance plans that was included in the Administration’s Budget for Fiscal Year 2005. The legislative proposal would require a five-year “hold harmless” period for current employees following a cash balance conversion, would ban benefit “wear-away” after a cash balance conversion, and would clarify the legal status of cash balance plans and other hybrid plans.

What about all of those cash balance plans sitting at the IRS, waiting for determination letters to be issued? Announcement 2004-57 published with the press release contains the following statement:

Beginning September 15, 1999, cases in which an application for a determination letter or a plan under examination involved a cash balance conversion were required to be submitted to the Washington, D.C. office of the IRS for technical advice on the conversion’s effect on the plan’s qualified status. Many such cases were submitted and are still pending. Treasury and the IRS do not intend to process these technical advice cases while cash balance plan and cash balance conversion issues are under consideration by Congress.

U.S. District Judge Catherine Blake for the federal district court in Maryland has provided her opinion on the whole cash balance plan controversy in Tootle v. ARINC, Inc., et al., holding that a company’s cash balance plan did not discriminate against employees because of their age.

Facts of the Case. The company’s defined benefit plan (“DB Plan”) was converted to a cash balance pension plan (“CB Plan”), effective January 1, 1999. Employees who were eligible to participate in the DB Plan at the time of the conversion and who were transferred to the new CB Plan received initial credits to their cash balance accounts equal to the lump sum value of the benefits they had accrued under the DB Plan, as well as bonus “transition credits.” A group of almost 300 employees were offered a choice between continuing under the DB plan or switching to the CB plan. Under the CB plan the percentage of the employee’s salary that was to be credited to the account (the “contribution credit”) increased with the employee’s age. For example, an employee under age 25 would receive a contribution credit of 3% of salary, while an employee age 60 or over would receive a contribution credit of 16% of salary.

The plaintiff was offered a choice between the two plans and agreed to the switch. When he was terminated in March 2002, he elected to take a lump sum distribution of $94,772.24 for his accrued benefits under the CB Plan. An actuary for ARINC had calculated that if the plaintiff had remained under the DB Plan until his termination, he would have been entitled to a lump-sum equivalent of $80,438.42. (The court stated that the “difference of over $14,000 in these two figures may be attributed in part to the transition credits of $11,466 which [plaintiff] received when he switched to the cash balance plan.”) The plaintiff brought suit under the Age Discrimination in Employment Act and ERISA and sought class certification for all participants who “suffered age discrimination due to the conversion” of the plans. The plaintiff claimed that the conversion constituted unlawful age discrimination under ERISA, saying that the manner in which accrued benefits were calculated under the CB Plan favored younger workers.

What the Court Had to Say About Cash Balance Plans

1. “The claim of age discrimination arises because money contributed to a younger employee will be worth more (when expressed as an annuity starting at age 65) than the same amount of money contributed to an older employee, because the contribution to the younger employee will have more years to accrue interest before normal retirement age. . . Stated another way, if any employer contributes the same amount to an employee’s cash balance account every year, the value of those annual benefits (when expressed as an annuity starting at age 65) decreases with every passing year. . . This inevitably results in a declining benefit accrual rate as an employee ages, in apparent violation of ERISA. In other words, all cash balance plans per se violate the ERISA age discrimination provision, by virtue of their design (See Eaton, 117 F. Supp. 2d at 814-15, 823 (noting that if this argument is accepted “it is likely that hundreds of cash balance plans with millions of participants will be deemed illegal”).”

2. “The existing case law on this specific issue is sparse and divided. Compare Cooper, 274 F. Supp. 2d at 1022 (finding violation of ERISA), with Eaton, 117 F. Supp. 2d at 826 (finding no violation of ERISA); see also Campbell, 327 F.3d at 10 (noting problems with this theory of age discrimination). I agree with Judge Hamilton’s conclusion in Eaton that ERISA’s age discrimination provisions do not bar all cash balance plans. First, the legislative history and statutory language provide strong evidence that this aspect of ERISA is not intended to protect workers until after they have attained normal retirement age. See Eaton, 117 F. Supp. 2d at 826-29. Statutory headings in the text of the original enactment and in a parallel age discrimination provision in the Internal Revenue Code enacted at the same time both refer to accrual of benefits “beyond normal retirement age.” See id. at 826 (citing 26 U.S.C. section 411(b)(1)(H) and Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, 100 Stat. 1874, 1975). Statements in the legislative history confirm that ERISA’s age discrimination provisions were enacted to protect employees after normal retirement age. See Id. at 827-29.”

3. “Applying the ERISA provisions designed for traditional defined benefit plans to cash balance plans could lead to illogical results, as illustrated in this case. On its face the terms of the ARINC cash balance plan appear to favor older employees. All employees are entitled to regular interest credits at the same guaranteed rate, the regular contribution credits are based on a percentage of an employee’s salary that increases with age, and the transition credits were provided in terms slightly more favorable to older employees. The potential claim of age discrimination arises only by applying a definition for accrued benefits which does not fit with the way cash balance plans are structured. The more sensible approach is to measure benefit accrual under cash balance plans by examining the rate at which amounts are allocated and the changes over time in an individual’s account balance, as the ERISA provisions designed for traditional defined contribution plans would direct. Judge Hamilton followed a similar approach in Eaton, adopting the defendant’s suggestion to measure benefit accrual by the changes in an individual’s account balance from year to year. See 117 F. Supp. 2d at 832-33. Applying either the ERISA provisions for defined contribution plans or the approach taken in Eaton ARINC’s cash balance plan does not discriminate against employees because of their age.”

Comments: This case is very important in that it provides another federal district court’s “take” on the cash balance plan controversy, with the count now being 3 to 1 (with 3 courts generally holding that CB Plans do not violate ERISA, and the lone case of Cooper v. IBM et al. holding that they do.) It is interesting to note that Judge Blake in this recent case relied heavily on the reasoning in the Eaton case (holding CB plans did not violate ERISA). Oddly enough, the Eaton case was never even mentioned in the Cooper case which was decided last year.

The Tootle case also seems to be consistent with Treasury’s recent proposals which would “clarify that a cash balance plan satisfies the age-discrimination rules if the plan provides pay credits for older participants that are not less than the pay credits for younger participants, in the same manner as any defined contribution plan.”

You can read more about the cash balance plan controversy at this link. Also, PlanSponsor.com has a great article on the case here.