Author: jfortenberry@fortenberrylaw.com

The IRS has announced the 2009 cost-of-living adjustments to dollar limitations for pension plans and other items. The new 401(k) deferral limit will be increased from $15,500 to $16,500. The annual benefit under a defined benefit plan will be increased from $185,000 to $195,000 and the annual limitation for defined contribution plans will be increased from $46,000 to $49,000.

The Wall Street Journal today has an article today entitled: “McCain Presses Obama on Health-Plan Penalties.” Excerpt:

As the presidential candidates push their competing health-care plans, Sen. John McCain regularly presses Sen. Barack Obama to tell voters how big a fine he would impose on companies that don’t offer their workers health insurance. . .

He made the point again at Wednesday’s presidential debate. “Senator Obama, I’d …still like to know what that fine’s going to be.”

Obama officials say the campaign has no plans to answer that question before Election Day on Nov. 4. Neera Tanden, a top Obama policy adviser, said the fine is intended to discourage employers from dropping coverage, not to raise significant revenue.

Here is what Senator Obama’s website says about his proposals for health care as it pertains to employer contributions:

(4) EMPLOYER CONTRIBUTION. Large employers that do not offer meaningful coverage or make a meaningful contribution to the cost of quality health coverage for their employees will be required to contribute a percentage of payroll toward the costs of the national plan. Small businesses will be exempt from this requirement.

You can read about a similar requirement imposed now at the state level in Massachusetts in this article from McDermott Will & Emery: “The Massachusetts Health Care Reform Act–What Employers Need to Know.”

My guess is that initially large employers might be required to pay a fee under Obama’s plan similar to the ones currently adopted under laws such as the Massachusetts law, but that once the door is opened on this, the fees will be raised more and more because the costs of the program will require it. (Read about how this is already happening in Massachusetts here.)

An issue of real concern will be whether employers, once they are required to provide a minimum benefit, will then discard their more generous programs and that employees will end up footing more of the costs themselves. It is also ironic that the Obama proposal would target large employers when they are the ones typically providing more benefits to employees in the first place.

Another question is: what is a “large employer” under this plan? I do not find an answer anywhere, but if you use the Massachusetts model, employers with 11 or more employees were subjected to the “fair share” mandates. Certainly “Joe, the Plumber” would probably not be subjected to the mandate as discussed in the debates last night unless he became a “large employer” under the Democratic plan.

Notice 2008-TAAP: The Notice provides guidance on certain executive compensation provisions applicable to a financial institution from which the Treasury acquires troubled assets through an auction purchase. Section 111(c) of EESA prohibits such a financial institution from entering into entering into any new employment contract that provides a golden parachute to a senior executive officer (“SEO”) in the event of the SEO

Note Q & A-2 in new Notice 2008-94 issued today (and discussed in this previous post here) in connection with the Troubled Asset Auction Program (“TAAP”):

Q-2: Can a corporation that is not publicly traded, or an entity that is not a corporation, be an “applicable employer”?

A-2: (a) General rule. Yes. An applicable employer for purposes of § 162(m)(5) is not limited to a publicly traded corporation or even to the corporate business form. Thus, an entity, whether or not publicly traded, is an applicable employer if the entity is described in Q&A-1 of this notice regardless of whether the entity is a corporation, a partnership (or taxed as a partnership for federal tax purposes), or a trust.

There is a slight reference in EESA to pension plans being able to participate in the program which you can read about in this previous post here. Perhaps the reference to a “trust” in this Notice might be tied to this possibility? More on this somewhat confusing aspect of the legislation from the Groom Law Group here.

The Treasury today announced the development of three programs under the Emergency Economic Stabilization Act of 2008 (“EESA”): (1) the auction purchase of troubled assets; (2) the direct purchase program; and (3) interventions to prevent the impending failure of a systemically significant institution. In connection with these programs, the Treasury has issued guidance regarding the executive compensation and corporate governance standards which will apply to institutions who decide to take advantage of these programs. The standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers. Any firm participating in these programs will be required to adopt the standards.

Those standards were outlined in a press release as follows:

(1) Troubled Asset Auction Program- As prescribed by EESA, any financial institution that sells more than $300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. (See Notice 2008-TAAP regarding this restriction – No link yet.) Furthermore, under the Act, (1) the financial institution may not deduct for tax purposes executive compensation in excess of $500,000 for each senior executive, (2) the financial institution may not deduct certain golden parachute payments to its senior executives and (3) a 20-percent excise tax will be imposed on the senior executive for these golden parachute payments. (See Notice 2008-94 regarding these new tax rules.)

(2) Capital Purchase Program- Any financial institution participating in the Capital Purchase Program will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program. The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury will be issuing interim final rules for these executive compensation standards.

(3) Programs for Systemically Significant Failing Institutions- The Treasury Department is currently developing a third program to potentially provide direct assistance to certain failing firms on terms negotiated on a case-by-case basis. The Treasury will be issuing guidance for the executive compensation standards that will apply to the firms participating in such programs and their senior executives (Treasury Notice 2008-PSSFI). These standards will be similar in all respects to the Capital Purchase Programs executive compensation standards described above, with one significant difference. In situations where the Treasury provides assistance under the systemically significant failing institutions programs, golden parachutes will be defined more strictly to prohibit any payments to departing senior executives.

From Instapundit here.

I know there are truly a lot of folks who cannot get affordable health care, but it is good to remember the other side of the coin, i.e. that there are some who could get it, but simply choose not to.

Surprising results reported at the Tax Foundation here. Excerpt:

To the surprise of some, even though Senator Obama’s tax plan lowers taxes for the bottom four quintiles, marginal tax rates would fall only for the very lowest-income couples. Taking both income and payroll taxes into account, those at the very bottom of the income distribution would see their effective marginal tax rates fall from 27.4 percent to minus 58.6 percent due to proposed changes to the earned income tax credit and Senator Obama’s new “Making Work Pay” credit.

Most low- and moderate-income couples would see their effective marginal tax rates rise, in some cases, significantly. Indeed, some low- and moderate-income taxpayers will see their marginal rates rise to more than 50 percent.

High-income taxpayers can also expect their effective marginal tax rates to rise—to 47.2 percent-under Senator Obama’s tax plan. This increase is caused by rolling back the 2001 and 2003 reductions in the top two tax rates, curtailing deductions and exemptions at high income levels, and potentially raising Social Security taxes.

Senator McCain’s tax plan also changes marginal tax rates. His proposal to replace the exclusion for employer-based health insurance with a new health tax credit boosts taxpayers’ taxable incomes by their health insurance premiums which generally pushes taxpayers into higher tax brackets, but not to as great an extent as Senator Obama’s tax plan.

(It would be interesting to calculate how much overall tax a person would end up paying under the Obama plan considering the sum of the following: (1) federal tax owed under the highest income tax bracket, (2) state income tax, (3) local tax (which we pay here in the East), and (4) self-employment tax if you are self-employed. Also, add to that real estate taxes (also very high in the East) and sales tax.)

At the recent Hearing before the U.S. House Committee on Education and Labor, entitled “The Impact of the Financial Crisis on Workers’ Retirement Security,” there was a lot of discussion about the dire state of the retirement security of Americans. And from that hearing came the remark that American workers have lost as much as $2 trillion in retirement savings over the last year and that the system is broken. You can access the testimony here (as well as the recommended fixes). While it is true that we need to be examining a number of areas involved here, I don’t agree with those who are advocating that we need a universal pension system. I would say that there are ways to improve the current system and for starters would recommend the following:

(1) Congress should get rid of the oppressive excise tax (50%) imposed on surplus assets distributed to employers from overfunded defined benefit plans. This tax which was enacted in the 80’s was the beginning of the decline of the defined benefit plan (IMHO). One of the reasons this tax is so unfair is that there is no way employers can adequately predict exactly how much money should go in to a defined benefit plan, i.e. actuaries can only make an educated guess at what the market is going to do and the mortality rates are going to be. Therefore, in the 80’s there were a lot of plans that were overfunded. This enabled plans to ride out the down times in the market. However, now with this excise penalty tax in place, employers have been much more cautious about how much they put into these plans and therefore, when the plan hits rough times, many employers are forced to terminate or freeze them. Many such employers will then adopt a 401(k) plan in its place which unfortunately doesn’t always compare with the rich benefits people have or used to have under the defined benefit plan system. Thus, Congress should repeal the Section 4980 excise tax so as to encourage employers to maintain defined benefit plans and perhaps encourage employers who have abandoned these plans to reinstate them.

(2) Congress should get rid of the 10% penalty tax on early distributions. It is enough of a disincentive for people to have to pay income tax on a distribution. They do not need an additional tax like the early distribution penalty to encourage them to keep their money in a retirement plan socked away for retirement. In fact, I would argue that this tax actually discourages people from saving. Whether or not Congress does something on a permanent basis, they need to at least get rid of this tax on a temporary basis for people affected by this economic crisis.

(3) Congress should get rid of the minimum distribution requirements. Older Americans are lulled into thinking that because they are taking a distribution and paying tax on it, they can then spend it and do not have to save it. So, when the stock market declines, they do not have enough money in their retirement plan to make up the difference. It also forces older Americans to have to liquidate their assets to pay a distribution.

Also, dittos on all of the efforts to reduce fees and make them more transparent. See also these comments from Jerry Bramlett who testified at the Hearing:

. . . I do not believe the 401(k) system is doing an adequate job of educating participants as to how they need to invest their account as they get closer to retirement. The practical impact of a substantial market decline on a 64-year old worker months away from retirement can be very different than the impact on a 50-year old 15 years from retirement. If the retirement account of the 64-year old is heavily invested in equities, the impact of a major market decline on retirement income expectations can be devastating. However, if that same account had been properly diversified with a greater emphasis on fixed income securities, the impact of a major market decline may very well be manageable. Although the advent of target-date investment funds based on a participant’s age has greatly helped in this regard we need to do more. I would recommend that Congress instruct the Department of Labor to develop educational materials specifically for 401(k) participants that have reached age 50 to assist them in better managing their account in preparation for retirement.

UPDATE: Apparently, McCain is advocating the repeal of the minimum distribution requirements as well. Read about it here- “McCain Calls for Suspending Rule on Retirement Accounts.” The article notes that “[s]uspending that part of the tax code would benefit

Press release is here:

Statutory Exemption for Cross-Trading of Securities

Selection of Annuity Providers–Safe Harbor for Individual Account Plans

Amendment to Interpretive Bulletin 95-1

Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries

Adoption of Amendment to Prohibited Transaction Exemption 2006- 06; (PTE 2006-06) For Services Provided in Connection With the Termination of Abandoned Individual Account Plans

Regarding the final regulation pertaining to the selection of annuity providers for individual account plans (a hot topic right now due to AIG’s demise and bailout):

(1) The DOL has eliminated paragraph (c)(2) of the proposed regulation which provided additional guidance concerning what information a fiduciary should consider in meeting the requirements for the safe harbor. One of those factors was “[t]he annuity provider’s ratings by insurance ratings services.” However, the DOL states in the preamble to the final regulations:

Further, although an annuity provider’s ratings by insurance ratings services are not part of the final safe harbor, in many instances, fiduciaries may want to consider them, particularly if the ratings raise questions regarding the provider’s ability to make future payments under the annuity contract. The Department also believes that some information regarding additional protections that might be available through a state guaranty association for an annuity provider also would be useful information to a plan fiduciary, even if limited to that information which is generally available to the public and easily accessible through such associations, state insurance departments, or elsewhere.

(2) In addition, the DOL makes it clear that a fiduciary is not home free by meeting the safe harbor at the time the annuity provider is selected as a provider for the plan generally. The fiduciary has ongoing responsibilities of monitoring the provider to ensure the ability of the annuity provider to make all future payments under the annuity contract and that the costs (including fees and commissions) of the annuity contract are still appropriate. The fiduciary is required to consult an expert, if necessary.

When employees terminate employment or retire, some plans are written to allow former employees the flexibility of keeping their plan monies in their former employer’s plan. Employers are asking whether such flexibility is desirable from an employer’s standpoint. Yes, according to this article: Is Your Defined-Contribution Plan Leaking? No, according to one advisor as reported in this article: Advisers to make funds transparent to avoid suits.

However, something not really discussed in either article is the fact that the DOL now permits employers to allocate the administrative expenses associated with these former employee accounts to such accounts (i.e. active participants need not share in the expenses associated with these accounts). However, if employers want to take advantage of this rule, their plan documents will have to be amended accordingly. In addition, employers should make sure that the Summary Plan Description and any communication documents sent to participants and former participants are updated to reflect the use of the rule.

Excerpt from the DOL’s Field Assistance Bulletin 2003-3 which addresses this practice:

Some plans, with respect to which the plan sponsor generally pays the administrative expenses of the plan, provide for the assessment of administrative expenses against participants who have separated from employment. In general, it is permissible to charge the reasonable expenses of administering a plan to the individual accounts of the plan’s participants and beneficiaries. Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses or only expenses on behalf of certain plan participants. In the latter case, such payments by a plan sponsor on behalf of certain plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, plans may charge vested separated participant accounts the account’s share (e.g., pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses and without regard to whether the vested separated participant was afforded the option of withdrawing the funds from his or her account or the option to roll the funds over to another plan or individual retirement account.

Something to consider. . .