Category: Benefits

I have always thought that it would be a great idea if someone could keep track of practitioners’ “war stories” about DOL and IRS audit activity in order to keep plan sponsors apprised of developments. Ilene Ferenczy has provided some great information about DOL audit activity going on in the Atlanta region in this email update entitled “DOL Working Hard in the Atlanta Area to Ferret out Fiduciary Breaches.” She notes in her article that the DOL examinations she has been involved with recently happen to be targeting small employers (3 – 5 employees) rather than large employers. In one case where the owner of the company was the trustee, she discusses how the DOL had taken issue with the fact that there were no investment policies and procedures in place.

Where can you learn more about the ERISA requirements for investment policy statements? Actually, there is no specific ERISA provision that mandates that a plan have an investment policy statement. However, the DOL has said the following in Interpretative Bulletin 94-2:

The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA section 404(a)(1)(A) and (B).

Also, at least one federal district court has gone farther than that and held that a failure to have an investment policy statement under the facts of the case before the court constituted a breach of fiduciary duty. Liss v. Smith, 991 F.Supp. 278 (S.D.N.Y. 1998). (Sorry, no link to the case that I can find.)

(By the way, Ilene is well-known in the benefits world for her treatise: “Employee Benefits in Merger and Acquisitions.”)

Today was apparently the first day in 2008 to be working for yourself rather than the federal government according to the Tax Policy Blog:

Most people have heard of Tax Freedom Day by now. For the few who haven’t, Tax Freedom Day is the day on which Americans have earned enough money to pay all their federal, state and local taxes for the year. On Tax Freedom Day, we have earned enough to pay the government and we can finally start keeping our paychecks for ourselves and our families. It’s a great way to illustrate how much the nation as a whole pays in taxes. We also calculate a Tax Freedom Day for each state.

How did Tax Freedom Day come about? According to this Special Report:

Tax Freedom Day was conceived by Florida businessman Dallas Hostetler in 1948. He performed the calculation himself and promoted his copyrighted concept until his retirement in 1971. He deeded the intellectual property to the Tax Foundation, and since then the Tax Foundation has used historical data to calculate Tax Freedom Day back to the beginning of the 20th century, and in 1990 sufficient data became available to calculate a separate Tax Freedom Day for each state.

Listen to the Tax Freedom Day song here.

(Complements of the Tax Prof Blog and RothCPA.com.)

You won’t want to miss reading the transcript for oral arguments in the case of MetLife v. Glenn argued before the Supreme Court this morning. Access it here. I liked this exchange regarding reference to the Supreme Court’s previous decision in the Firestone case:

MR. ROSENKRANZ: Mr. Chief Justice, and may it please the Court: This Court got it right in Firestone when it said, of course a conflict must be weighed. There’s no reason for this Court to override its well-reasoned and unanimous conclusion which –
JUSTICE SCALIA: Dictum.
MR. ROSENKRANZ: It was dictum, Your Honor, but it was very well-considered dictum because -(Laughter.)
MR. ROSENKRANZ: — the only issue before the Court so far as the parties thought was what is the effect of this dual role that Firestone had? And this Court did not answer that question, but that’s what the parties were arguing about. So this Court correctly discerned the rule from trust law. It correctly discerned and balanced ERISA’s policies and, if anything –
JUSTICE SCALIA: What I don’t like about the dictum is I don’t know what it means.
MR. ROSENKRANZ: Your Honor –
JUSTICE SCALIA: I think it’s lovely to say weigh it as a factor, it gets the case off our docket and it’s fine. But what does it mean?

Read more about the case in a post here by Roy Harmon and a post here by Stephen Rosenberg.

UPDATE: Paul Secunda has some good analysis and commentary here on today’s oral arguments.

I don’t know about you, but I always worry about employers and their benefit plans when I see articles like this one in the LA Times: “Independent Contractor Status Scrutinized.” That is because misclassification issues can create problems with employee benefits plans. (Read about it in previous posts here and here.) The article reports that the state of California is cracking down on “businesses that wrongly claim employees are independent contractors and, as a result, not subject to a slew of taxes and labor laws.” While obviously such action is intended to uncover those employers who might be abusing the system by improper classification of their workforce, there are other employers who aren’t involved with such abuse, but who will find this worrisome due to the difficult issues that arise in deciding whether to classify individuals as “employees” or “independent contractors.” Sometimes it is not so clear whether an individual is an “employee” or “independent contractor” because the individual may have characteristics of both in his or her relationship with a company or firm. And as this site of the California Industrial Relations Board here indicates: “[I]t is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law.”

You can read more about worker classification under IRS rules here. See also this post discussing another state’s scrutiny of worker misclassifications here.

All benefits lawyers who do plan drafting or review plan documents will want to carefully read and digest this opinion written by Seventh Circuit Judge Richard Posner: “Call, et al. v. American Management Pension Plan.” It seems to me that the results of the case hinged on the questionable placement of the phrase “except as otherwise permitted by law and applicable regulations” in an anti-cutback provision of the plan document.

To learn more about the anti-cutback language IRS requires to be included in a plan which was the focus of the lawsuit and the opinion, see the Alert Guidelines Form 5623:

If the early retirement benefits or other optional retirement benefits are changed by an amendment, are the benefits with respect to the benefits accrued to the date of the amendment not reduced for any employee who at any time on or after the amendment satisfied the pre-amendment conditions for the benefit except as provided under the regulations?

Also, the Plan Administrator’s Firestone-related discretionary authority did not “save the day” because Judge Posner said in the opinion that there was no ambiguity in plan language which would have triggered the use of such discretion:

Just as unambiguous terms of a statute leave no room for the agency that administers the statute to exercise interpretive discretion, National Cable & Telecommunications Ass?n v. Brand X Internet Services, 125 S. Ct. 2688, 2700 (2005), so unambiguous terms of a pension plan leave no room for the exercise of interpretive discretion by the plan?s administrator, or at least not enough to carry the day for the administrator in this case.

Benefitslink.com has this link here to a recent case in the Southern District of New York, in which Judge Harold Baer denied a motion to dismiss on an age discrimination claim involving a cash balance plan. Judge Baer disagreed with the conclusions reached by the Seventh Circuit in the IBM case:

Part of the Seventh Circuit’s decision relied on a finding that “‘benefit accrual’ (for defined-benefit plans) and ‘allocation’ (for defined-contribution plans) both refer to the employer’s contribution.” Id. at 639. Defendants in this case make a similar argument and they argue that Congress was saying the same thing when they used the term “allocation” in one provision and “rate of benefit accrual” in the other. The fact is accrual, using its dictionary meaning and in line with the structure of defined benefit plans, refers to what the employee accumulates (the outputs from the plan) whereas allocation, using its dictionary definition and in line with the structure of defined contribution plans, refers to what an employer puts into the account. As this Circuit has observed, “[w]hen Congress uses particular language in one section of a statute and different language in another, we presume its word choice was intentional.” U.S. v. Peterson, 394 F.3d 98, 107 (2d Cir. 2005). . .

Although it appears that this ruling may make it more difficult for companies to construct a cash balance plan that comports with ERISA requirements, Congress, not the Courts, is the place to turn for redress. The Second Circuit said as much in Esden¸ “[t]he issue is whether the Plan’s terms complied with the law. They did not.” Id. at 172.

Further, the age discrimination arises because this is a defined benefit plan and older workers accrue their retirement benefits at a slower rate than similarly situated younger workers. As directed by the Supreme Court, my role “is to apply the text, not to improve upon it.” Pavelic & LeFlore v. Marvel Entm’t Group, 493 U.S. 120, 126 (1989). That is the province of Congress, and it addressed some of the tensions that arise when the binary statutory framework is applied to cash balance plans at the time they passed the Pension Protection Act of 2006 this summer.

The Corporate Counsel.net. Blog has the latest here on yesterday’s decision issued by New York State Justice Ramos in Spitzer v. Grasso. (Access the opinion here.) This opinion is a must-read for every benefits lawyer who drafts or advises clients on nonqualified deferred compensation plans. There are pages and pages of discussion regarding the NYSE SESP’s and SERP’s terms.

Also, excerpt from this Wall Street Journal article here:

Jim Barrall, head of the global executive-compensation and benefits practice at Latham & Watkins LLP in Los Angeles, described the findings as “stunning.” “I have never heard of a court decision finding a breach of fiduciary duty based on the failure to disclose all the numbers” about the size of a supplemental pension.

At a minimum, Mr. Barrall suggested, corporate CEOs will have to make sure “the board understands the numbers and all the elements of the [leader’s] pay package and how they work together.” At many companies, the size of an executive’s supplemental pension swells along with the magnitude of bonuses and equity awards.

Legal experts expressed surprise that the justice would make such a ruling before the case went to trial. “It’s really extraordinary,” said Christopher Clark, a former assistant U.S. attorney who is now an attorney at LeBoeuf, Lamb, Greene & MacRae LLP. “I’m not used to seeing cases with this many facts and this many depositions decided without a trial.”

More links:

• AG’s press release
• Findlaw’s compilation of links, including a link to the actual employment agreement discussed in the case (an argument was made that the employment agreement constituted an amendment to the SESP, amending the SESP to allow for an in-service distribution. The argument was rejected.)

Many of us will fondly recall the discussion by Third Circuit Judge Edward Becker (1933-2006) on ERISA preemption in the case of DeFelice v. Aetna (which was eventually decided by the U.S. Supreme Court – read about it here and here). In that case Judge Becker discusses how trying to understand ERISA preemption is like a “descent into a Serbonian bog wherein judges are forced to don logical blinders and split the linguistic atom to decide even the most routine cases.” (I discussed Judge Becker’s opinion here.) While not related to the same issues as were decided in the DeFelice case, I was reminded of Judge Becker’s discussion when I saw that the Fifth Circuit had recently withdrawn its opinion pertaining to ERISA preemption in the case of Bank of Louisiana v. Aetna. You can access the prior opinion here and the latest opinion issued October 18, 2006 here. The case is interesting because it shows how, even in trying to resolve contract claims between employers and insurers, the whole tangled mess of ERISA preemption can be a real challenge.

(Also, it is rare to find folks arguing that they are ERISA fiduciaries, but that is exactly what happened in the Bank of Louisiana case where the insurer was trying to claim that ERISA preemption applied. See page 9 of the October 18th opinion.)

I thought it would be a good idea to keep track of all the governmental agency promulgations and news items relating to the Pension Protection Act of 2006 in one central location. Therefore, I have created the Pension Protection Act Resource Center for Potter Anderson & Corroon LLP. (Please note that the text of the Pension Protection Act is indexed.)

(Many thanks to Frank Gribbin in Potter Anderson’s IS department for helping to put this together.)

As predicted, IRS has issued a Notice extending the deadline for complying with many aspects of Internal Revenue Code section 409A from January 1, 2007 to January 1, 2008. See Notice 2006-79 accompanied by a press release. Full compliance with the operational and documentary requirements of section 409A is delayed until January 1, 2008 to give taxpayers and practitioners sufficient time to digest and comply with the final regulations (which the press release states will be issued by the end of this year.) The Notice also extends certain transition relief provided for in the preamble to the proposed regulations (except with respect to certain discounted stock rights) and provides additional transition relief for payment elections in linked plans and collective bargaining arrangements.