Category: Benefits

Many thanks to Benefitslink.com for this article at Benefits Canada on how many countries share the same problems pertaining to their retirement systems–pension shortfalls, regulatory overhauls, and challenging demographics.

The IRS has released final regulations (via Benefitslink.com) under section 457 of the Internal Revenue Code. Sungard Corbel has already provided a summary of the regulations. The regulations will be a “Hot Topic” over in the links section to the right where I will list forthcoming articles on the new regulations.

After I had breakfast today at my favorite local diner in West Chester (where I live), I drove by the Chester County Courthouse to view the Ten Commandments plaque which was unveiled yesterday. I must say that I found it a welcome sight. Hard to believe that this quaint little town with brick streets and historical stone buildings could be the center of so much controversy. . . Todays’ edition of the Daily Local News (Chester County local news) reports: “WEST CHESTER — The plaque is back” and the Philadelphia Inquirer reports “Chesco takes the cover off plaque: In June, a court ruled it did not violate the Constitution.” Both articles report that the cover came off “unceremoniously” yesterday after the county solicitor’s office received the order Wednesday morning from the Third Circuit Court of Appeals that the county could uncover the plaque at any time. The Daily Local News reports as well:

Commissioners’ Chairman Colin Hanna said that the county decided not to make a big deal about removing the shroud after remarks made in the Third Circuit Court noted that the commissioners had chosen not to sensationalize the issue.

“The Third Circuit Court was very gracious in its remarks concerning the commissioners, in saying that we acted thoughtfully and with a lack of sensationalism,” Hanna said. “It seemed to be the most consistent with the Third Circuit Court’s decision that we did not particularly want to have a ceremony.”

As most are aware, in late June a three-judge panel for the Third Circuit unanimously overturned a March 2002 ruling in which a federal trial judge found that the plaque represented an unconstitutional endorsement of religion by government and ordered its removal. The decision by the Third Circuit, Freethought Society v. Chester County, was followed by another Eleventh Circuit court decision, Glassroth v. Moore, which involved a different result with different facts. Some are saying there is a split in the circuits now, but many argue that the facts are so different that the two cases can be reconciled.

If you have time for a thought-provoking journey into what bloggers are saying about the cases, this would be a good place to start and as well as Jeff Cooper’s Cooped Up post. An interesting discussion has centered around the Ten Commandments and whether they are an important foundation to American law, which was started by Eugene Volokh here and continued on here by Edward Boyd at Zonitics.com, with more here and here. My own personal belief is that they are indeed a very important foundation to American law and that many of the basic principles found in the Bible are woven throughout the laws and history of our country.

Today’s Federal Register.

The front page of today’s edition of the Wall Street Journal has a controversial article by Ellen E. Schultz which you can access online here (with subscription): “Firms Had a Hand in Pension Plight They Now Bemoan: Relying on Arcane Rules, Some Have Drawn Down Assets for Corporate Purposes; Now, Asking Congress for Relief.” You can read my comments about the article in a separate post today.

The WSJ is also chock-full of articles discussing Microsoft’s announcement to end its stock option program (sorry, links only accessible online with subscription): an op-ed: “Better Shareholder Options“, “Cultural Evolution: At Maturing Microsoft Corp., Entrepeneurial Ethos Goes the Way of Stock Options,” “Will Options Shift Scare off Good Job Seekers” and “Ballmer Seeks Stability in Stock Awards.” Also, there is this article–“The Employee Guide to Restricted Stock“–and these three articles: “Wall Street Hunts for Underwater Options: J.P. Morgan’s Deal with Microsoft Likely to Spur Many Firms,” “For Now, Workers Have Few Options for their Options” and this–“Microsoft’s Reboot: Decision to Restate Earnings is Unusual.” Some light reading for those summer evenings if you don’t have time for all of that this morning. . .

The Washington Post has this op-ed–“Welcome Steps on Stock Options.” The article suggests that Microsoft’s action may be part of a “bigger shift that could herald the end of what the Wall Street Journal called ‘the golden age of stock options.'” Another article in the Washington Post by Jackie Spinner and Kirstin Downey here: Tech Firms’ Options Fight Loses Steam: Microsoft Move May Doom Attack on Rule.”

The Associated Press for the Detroit Free Press reports: “DaimlerChrysler might abandon stock options.”

“Even as Microsoft Corp. abandons the practice, many technology startups need the allure of stock options to attract talented – and risk-taking – workers who otherwise might opt for more established companies”: that’s what this article by Paul Elias for the Seattle Post has to say–“Stock options common in Silicon Valley.” SFGate.com also reports: “The impact of switching from options to shares: Loss of stock options won’t change Silicon Valley’s mentality.”

On the other hand, Gary Strauss and Michelle Kessler for USAToday have this to say: “Stock options on their way to passé?“

UPDATE: Mike Sullivan at CorpLawBlog provides this discussion and a later update regarding the details of how the sale of underwater options to J.P. Morgan will be structured. Broc Romanek’s blog in today’s post also discusses the issue as well as the possible tax consequences.

There are multiple articles today about Microsoft’s announcement that it is abandoning its stock option program and will begin awarding its employees actual shares of restricted stock instead:

• Boston Globe: “Microsoft drops stock options; Workers to get shares outright.”
• Reuters: “Microsoft to end stock options, start expensing grants.”
• CBS MarketWatch: Microsoft Junks Stock Options.
• CNNMoney.com: “Microsoft’s better option: Back to sanity: The decision to end the options game is good news for Microsoft and for tech.”
• SFGate.com: “Microsoft to halt stock options: Tech giant to give shares as expense.”
• Bloomberg.com: “Microsoft May Boost Dividend After Scrapping Executive Options.”

The front page of the Wall Street Journal also reports: “Microsoft Ushers Out Era of Options: Software Giant Exchanges Symbol of Bull Market For Restricted Stock.” The article discusses how Microsoft employees will have the opportunity to sell their nearly worthless “underwater” options which they already hold, in an arrangement with J.P. Morgan Chase & Co. The article quotes Microsoft CEO Steve Ballmer as saying in an interview that grants of restricted stock will prove more valuable to employees than options at a time when Microsoft shares are unlikely to rise as rapidly in value as they did in the 90’s.

Mike O’Sullivan at CorpLawBlog has a more extensive post yesterday and today on the Microsoft news.

All of this comes at the same time as a ruling from an advisory group of FASB as reported in the Philadelphia Inquirer: “Board rules options can be easily valued.” The Board’s nine-member Option Valuation Group yesterday “rejected arguments from computer companies that forcing stock-option expenses to be deducted from earnings would add a volatile element to financial statements because it was impossible to determine their value.” The article reports Standards board chairman Robert Herz as saying that the “data needed to value employee stock options is accessible . . .and can be precise.”

Today’s Federal Register.

Regarding the Bush administration’s proposal (discussed here yesterday) addressing pension fund shortages, Christine Dugas for USA Today writes: “Treasury plan could slash pension payouts .” Several things from the article worth noting: On July 15, the House Education and the Workforce Subcommittee on Employer-Employee Relations will hold a hearing on the proposal. Regarding lump sum payouts under the proposals, the rules would not affect lump sum distributions in the first two years, but during the next three years, a new formula gradually would be phased in that would be based on a corporate bond yield curve matching the age and tenure of the workers in a plan which would generally result in lower lump sum payouts.

Another article by Corbett B. Daly for CBS MarketWatch–“Congress reacts to Bush pension plan“–reports how members of Congress and others are reacting to the pension funding proposal. According to the article, the American Benefits Council has called the plan “unnecessarily complex.” ABC President James Klein is quoted as saying that “[t]here are serious concerns with the administration’s proposal” and that “using a yield curve for valuing pension liabilities would inject needless volatility and complexity in pension funding.” He argues further that “increased volatility in particular would hurt defined benefit plan sponsorship at a time when the pension system needs strengthening.”

More on the Bush pension proposal: Alan Beattie provides this report on the subject for the Associated Press via FT.com and Yahoo! News: “Mixed greeting for Bush pensions plan” and John D. McKinnon for the Dow Jones Business News via Yahoo! News writes: “Bush Pension Plan Seen Offering Transition Period.” Also, this from Forbes.com by Ari Weinberg: “White House Throws Pensions A Curve.”

Lynn Brenner has this helpful article for Newsday.com: “Changing Beneficiaries Without Their Knowing.”

The Philadelphia Inquirer has an article by Todd Mason–“Easing up on company stock“–which discusses the impact that class-action lawsuits are having on companies’ offering company stock as a match or an investment. (The article reports that Seattle-based Keller Rohrback has “18 class-action suits alleging fraud in 401(k) plans and company stock, including one filed in February against Cigna Corp.”)

Today’s edition of the Wall Street Journal has an article worth reading by Ian McDonald: “Mutual Funds Grateful for Automatic Pilots.” The article discusses the impact 401(k) automatic deferrals had on the mutual fund industry last year. Normally investments coming from tax-deferred retirement plans, like a 401(k) or 457 plan, represent only 15% to 20% of money that has flowed into stock, bond and money market mutual funds. Last year, due to the downturn in stocks, investments from such accounts now represent a “full 85% of all net buying of mutual funds in 2002.” That’s because stock funds suffered “$54 billion in net outflows from nonretirement accounts” according to the article which discusses a report from the Investment Company Institute, the fund industry’s largest trade group. What is driving the numbers, according to the article, is the automatic payroll deduction. The article reports Chris Brown, a retirement product analyst with Boston fund consultant Financial Research Corporation, as saying that without automatic deductions “there’s just no way people would write a check every week or two in a bear market.”

A very important factor to consider in the whole analysis would be the impact that company matching had on the continued influx of such deferrals during the bear market. Did participants for the most part continue their deferrals during the bear market in plans where there was no company match?

Today’s Federal Register contains proposed IRS regulations governing when certain distribution options may be eliminated from qualified defined contribution plans. The regulations amend Regulation Section 1.411(d)-4, Q&A-2(e)(1) which provides that a defined contribution plan may be amended to eliminate or restrict an optional form of benefit without violating the Internal Revenue Code section 411(d)(6) anti-cutback rules if certain conditions are met, one of which was a 90-day notice requirement. These proposed regulations apparently eliminate the 90-day notice requirement (although there are still DOL requirements for notifying participants via a summary of material modification or summary plan description which must be complied with). The purpose of the elimination of the 90-day requirement is to make the regulations consistent with Section 645(a)(1) of EGTRRA which revised section 411(d)(6) in a manner that is similar to Section 1.411(d)-4, Q&A-2(e), but without the advance notice condition.

Also, final catch-up regulations have been released (via Benefitslink.com). More on this later. . .

IRS Notice 2003-49 (via Benefitslink.com) has been released and provides guidance regarding when the EGTRRA remedial amendment period begins for purposes of determining if a determination letter application is eligible for elimination of the user fee.

Today’s edition of the Wall Street Journal (“Bush Team Develops Plan on Pension Shortfalls: Long-Term Rule Change Could Hurt Companies with Many Older Workers” by John D. McKinnon) and other sources are reporting that the Bush administration has unveiled its proposal for helping businesses address the “massive shortfalls in their pension funds.” You can read the Treasury Department’s Press Release here which provides as follows:

The Administration recommends that pension liabilities ultimately be discounted with rates drawn from a corporate bond yield curve that takes into account the term structure of a pension plan’s liabilities. For the first two years, pension liabilities would be discounted using the blend of corporate bond rates proposed in HR 1776 (Congressmen Portman and Cardin). A phase-in to the appropriate yield curve discount rate would begin in the third year and would be fully applicable by the fifth year. Using the yield curve is essential to match the timing of future benefit payments with the resources necessary to make the payments.

How would this proposal affect pension liabilities and funding requirements? By linking the calculation of corporate pension liabilities to corporate bond rates instead of Treasury bonds, it would lower the amount of money many companies would have to put into their pension plans. Corporations have been putting heavy pressure on the administration for relief, arguing that the money they were shoveling into their pension funds was money they could be investing to expand and hire new workers.

More on this: Jonathan Weisman for the WashingtonPost.com reports: “Bush Seeks To Change Pension Calculation: Employers Would Set Aside Less Money, Release More Data.” Jonathan Nicholson for Reuters via Yahoo! News reports: “Bush Administration Proposes Pension Fund Overhaul.”