Month: November 2008

You can access the complete text of Senator Baucus’s health care proposals here. (Click on “Call to Action” Complete Text for the 98-pg White Paper.)

Plan Sponsor has a good summary of the proposal here. Excerpt:

According to the “Call to Action” report, the foundation of Baucus’ plan is the creation of a nationwide insurance pool called the Health Insurance Exchange – a marketplace where Americans could easily compare and purchase the plans of their choice. Private insurers offering coverage through the Exchange would be precluded from discrimination based on pre-existing conditions.

Premium subsidies would be available to qualifying families and small businesses. Baucus expects that the vast majority of American employers would continue to provide coverage as a competitive benefit to attract employees, so those who already have health coverage could choose to keep what they have.

Also, on the retirement plan front, the Wall Street Journal has this op-ed: “It’s Time to Rethink Our Retirement Plans.”

“Deductions are a matter of ‘legislative grace'”, according to the Tax Court. Such grace was not extended to a piano teacher’s claim for deductions in this Tax Court case: Langer v. Commissioner. Thanks to the Tax Update Blog for the link.

Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update, November 12, 2008

Professor Ed Zelinksy has posted this interesting piece on SSRN entitled “Employer Mandates and ERISA Preemption: A Critique of Golden Gate Restaurant Association v. San Francisco.” In the paper, he predicts that, if the Ninth Circuit maintains its position in the case (which you can read about in a previous post here) the Supreme Court will likely overturn the decision. The Golden Gate Restaurant Association has filed a Petition for Rehearing En Banc asking the Ninth Circuit to consider an en banc review of the decision.

One of Zelinksy’s arguments is as follows:

In sum, Golden Gate II concludes that an employer’s ongoing payments under the San Francisco ordinance do not give rise to an ERISA plan because the employer has neither significant administrative tasks nor discretion in connection with those payments. If so, an employer’s ongoing payments to a traditional insurer, HMO, PPO or HSA provider do not constitute an ERISA plan either, since those payments also entail the same, quite minimal administrative burdens and discretion for the employer. These providers, like San Francisco, perform the administrative tasks and execute the discretionary functions necessary to furnish medical care to employees.

The Ninth Circuit’s ERISA analysis of employers’ payments to San Francisco disregards the language of the statute and is a classic argument that proves too much. If correct, the Ninth Circuit’s analysis would radically reconfigure our understanding of ERISA by exempting from its coverage the many programs by which employers finance medical care for their employees through payments to insurers, HMOs and PPOs. It is more convincing to recognize that San Francisco under the ordinance acts like any other health care provider, including the exercise of administrative responsibilities and discretionary functions. Consequently, all ongoing payments to these equivalent health care providers, including the City of San Francisco, constitute employee benefit plans for ERISA purposes.

Please note that the DOL makes this same argument in their Amicus Brief filed in support of the Petition for Rehearing. Excerpt:

The Secretary [has] explained that when an employer chooses to fund health benefits for its employees by making payments to the City under the HAP program, the employer establishes an ERISA-covered plan for its employees, just as an employer establishes an ERISA-covered plan when it provides health benefits for its employees through the purchase of insurance. Id. at 13-14 (citing Qualls v. Blue Cross of Cal., 22 F.3d 839, 843 (9th Cir, 1994) (holding that an employer’s purchase of insurance for its employees creates a plan because of the “complex ongoing relationship between the insureds and the insurer which require[s] the constant administrative attention by the insurer”).

There is no relevant difference between an employer’s decision to provide benefits through HAP or to provide benefits through the purchase of insurance – in both cases, the employees receive their benefits from a third party and the program is substantially administered by a third party. Nothing in the statute or the case law turns on whether the particular benefit arrangement relies upon a private insurer for the administration of benefits, rather than public employees or contractors hired by the City. Whether the employer provides benefits through private insurance or HAP, it has elected an arrangement for providing ERISA-covered benefits to its employees that meets the established test for determining whether a plan exists.

Here is a great link for those interested in the history of Veterans Day: “The History of Veterans Day.” View a timeline of America’s wars, examine conflict maps, and watch videos of veterans’ experiences.

There are many veterans in my family to honor on this day:

A father who served as a fighter pilot in World War II (he flew these and these)

One uncle who died in the Battle of the Bulge

Four more uncles who served in World War II and lived to tell about it

Excerpt from his speech:

I’m now seven months into my five-year term. It’s an honor and privilege to lead the IRS. And for each day I’ve been in office, I’ve been amazed by what an incredible organization the IRS is.

Just think about it for a minute. The IRS not only collects the approximately $3 trillion it takes to run the federal government but interacts every year with practically every American adult and business. We’re the face of government. And contrary to some opinion, it can be a most welcome face. This year, as of October 24th, we issued 106 million tax refund checks totaling $254 billion.

And, as you know, we work very closely with the non-profit community — whether it’s processing over 70,000 determination applications per year or applying oversight or audits when we detect a problem.

Now, in addition to the filing season, a lot has happened in these seven months. It’s not a time in my life I will easily forget. . .

More:

We’ve also began conducting studies of several of the largest taxpayer segments within the tax-exempt community by sending out comprehensive questionnaires that focus on an area of interest and then analyzing the responses. If necessary, we can follow up with an examination.

In fact, we’re about to release the hospital study report. Stay tuned, but I can say this much. I’m confident that the new hospital schedule for the Form 990 — the Schedule H — is the right tool to allow nonprofit hospitals, of all types and sizes, to report how they promote the health of their communities and to justify their tax exemption. And the Schedule H will give the IRS and the public better transparency into these important institutions.

We also recently launched a study of colleges and universities. In the spirit of collaboration and the recognition that we must be in dialogue with sectors with whom we engage, we did advance work with colleges and universities on the questionnaire. We wanted to understand how they talk about themselves, what kind of measures they use, and so forth. When we have agreement about what data means, we eliminate a lot of friction. I want to apply this lesson throughout the IRS, not just in Exempt Organizations.

From the Dow Jones Newswire: “House Ways and Means Re-Tool Corporate Tax Cut Plan.” Excerpt:

House Ways and Means Committee Democrats and staff are retooling a proposal to overhaul the corporate tax code, with an eye toward introducing a new bill early next year.

The new legislation in the U.S. House of Representatives will be an updated version of a corporate tax code blueprint introduced by House Ways and Means Chairman Charles Rangel, D-N.Y., late last year, according to a Democratic House aide.

That bill would have cut the corporate rate from 35% to 30.5%. However, the new version will push that rate lower, people familiar with the effort told Dow Jones Newswires.

(From the Tax Prof Blog)

With a lot of baby boomers nearing retirement, some may be looking for alternatives to the stock market for investing their accumulated retirement plan assets. Some may even be approached by promoters promising that they can use their funds in their 401K, IRA, profit-sharing, or annuity plans to open a business without paying taxes on the distribution. In its most recent newsletter here, the IRS has provided a lot of helpful information on the legal pitfalls pertaining to the design of these programs. The IRS is calling these programs “ROBS” which stands for “Rollovers as Business Startups.”

The IRS outlines in this Memorandum issued October 1, 2008 how the programs typically work:

An individual establishes a shell corporation sponsoring an associated and purportedly qualified retirement plan. At this point, the corporation has no employees, assets or business operations, and may not even have a contribution to capital to create shareholder equity.

The plan document provides that all participants may invest the entirety of their account balances in employer stock. The individual becomes the only employee of the shell corporation and the only participant in the plan. Note that at this point there is still no ownership or shareholder equity interest.

The individual then executes a rollover or direct trustee-to-trustee transfer of available funds from a prior qualified plan or personal IRA into the newly created qualified plan. These available funds might be any assets previously accumulated under the individual’s prior employer’s qualified plan, or under a conduit IRA which itself was created from these amounts. Note that at this point, because assets have been moved from one tax-exempt accumulation vehicle to another, all assessable income or excise taxes otherwise applicable to the distribution have been avoided.

The sole participant in the plan then directs investment of his or her account balance into a purchase of employer stock. The employer stock is valued to reflect the amount of plan assets that the taxpayer wishes to access.

The individual then uses the transferred funds to purchase a franchise or begin some other form of business enterprise. Note that all otherwise assessable taxes on a distribution from the prior tax-deferred accumulation account are avoided.

After the business is established, the plan may be amended to prohibit further investments in employer stock. This amendment may be unnecessary, because all stock is fully allocated. As a result, only the original individual benefits from this investment option. Future employees and plan participants will not be entitled to invest in employer stock.

A portion of the proceeds of the stock transaction may be remitted back to the promoter, in the form of a professional fee. This may be either a direct payment from plan to promoter, or an indirect payment, where gross proceeds are transferred to the individual and some amount of his gross wealth is then returned to promoter.

The IRS notes that it has identified 9 promoters of these programs. Here are the main legal deficiencies being identified in the programs, according to the Memorandum:

We have examined a number of these plans – having opened a specific examination project on them based off referrals from our determination letter program – and found significant disqualifying operational defects in most. For example, employees in some arrangements have not been notified of the existence of the plan, do not enter the plan or receive contributions or allocable shares of employer stock. Additionally, we have identified that plan assets are either not valued or are valued with threadbare appraisals. Required annual reports for some plans have not been filed. In several situations, we have also found that the business entity created from the ROBS exchange has either not survived, or used the resultant assets on personal, nonbusiness purchases.

The IRS states that there are “two primary issues raised by ROBS arrangements”: (1) violations of nondiscrimination requirements, in that benefits may not satisfy the benefits, rights and features test of Treas. Reg. § 1.401 (a)(4 )-4. and (2) prohibited transactions, due to deficient valuations of stock.

Many promoters will claim that they have IRS approval for their program, when in fact the IRS has only approved the form of the Plan document. The Memorandum notes that the violations that occur are typically operational and not document failures.

In the past, I have had clients ask me about these programs after being approached by promoters. It will be nice to be able to point folks to these resources as a “starting point” for further discussions.

UPDATE: More on this from Joe Kristan: “The dangers of ROBS-ing your retirement plan.”

What is happening with Proposition 101 in Arizona? One news report:

A scant 20 voting precincts remain unaccounted for out of 2,239 statewide, yet those votes could make the difference between whether or not Proposition 101 passes.

With the tallies at 50.1 percent against the proposition and 49.9 percent voting yes, the two sides are deadlocked until more ballots are counted.

Currently, votes in favor and opposed are separated by a margin of 2,124 out of over 1.7 million ballots cast.

The ballot initiative, backed by Medical Choice for Arizona, would guarantee that citizens would always have the right to choose and possibly pay for whichever health plan they wished, without interference, and that no law could incur a fine for opting out of or obtaining health care coverage.

Previous post here and here.

Update: More from the WSJ Health Blog here.

Footnoted.org has a link to this letter agreement provided to a TARP participant’s executives by the participant/company’s chief human resources officer under which the executive is to forego golden parachutes and other executive comp pursuant to the requirements of the TARP program. The Letter Agreement contains this language:

In addition, the Company is required to review its Benefit Plans to ensure that they do not encourage senior executive officers to take unnecessary and excessive risks that threaten the value of the Company. To the extent any such review requires revisions to any Benefit Plan with respect to you, you and the Company agree to negotiate such changes promptly and in good faith.

All of this is agreed to “in consideration of the benefits” that the executive will receive as a result of the Company’s participation in the government’s Capital Purchase Program.

More on TARP in previous posts here.