Category: Benefits

Announcement from the IRS:

The Internal Revenue Service announced today that the general effective date for the regulations regarding section 403(b) arrangements that were proposed in 2004 (including the related controlled group regulations under section 414(c)) will be extended.

In order to provide employers, employees, insurance carriers, and mutual funds involved in section 403(b) arrangements a reasonable advance period before the regulations go into effect, the final regulations generally will not be effective earlier than January 1, 2008.

See this article from KaiserNetwork.org–“More U.S. Companies Offering Patient Advocate Services in Their Health Care Plans–and this one from the Philadelphia Inquirer on Sunday–“They’ve got your back – and heart, head, feet…Advocates guide patients through medical morass.”

Some great tax humor from the TaxGuru here and here.

What type of subrogation provision in a health plan can be enforced against a plan participant under the Supreme Court’s recent ruling in Sereboff? (Read about Sereboff here.) The Eleventh Circuit in two recent cases–Popowski v. Parrott and BlueCross BlueShield v. Carillo (combined into one opinion)–interpreted Sereboff and held that one type of reimbursement/subrogation provision could be enforced while another could not.

The court upheld the plan’s right to reimbursement in the Popowski case, but rejected the plan’s right to reimbursement under the BlueCross BlueShield (“BCBS”) case. What was the difference in the results? Plan language. Excerpt from the Popowski opinion:

The subrogation and reimbursement provision in the United Distributors Plan claims a lien “on any amount recovered by the Covered Person whether or not designated as payment for medical expenses.” PR1-1, Exh. G at 63. It further clarifies that “[t]he Covered Person . . . must repay to the Plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer.” Id. (emphasis added). Thus, language essentially identical to the Supreme Court’s characterization of the plan language in Sereboff, specifies both the fund (recovery from the third party or insurer) out of which reimbursement is due to the plan and the portion due the plan (benefits paid by the plan on behalf of the defendant). Unlike in Knudson, a significant portion of the funds specified went directly into the Parrotts’ bank account and, thereby, was in their possession for purposes of this case. Thus, at the time they filed their suit, Popowski and the Commerce Group sought “not to impose personal liability on [Parrott], but to restore to the plaintiff[s] particular funds or property in [Parrott’s] possession.” See Knudson, 534 U.S. at 214, 122 S. Ct. at 714-15. Accordingly, we conclude that Popowski and the Commerce Group have stated a claim for “appropriate equitable relief” under § 1132(a)(3) and that the district court erred in dismissing the suit for lack of subject matter jurisdiction.

Contrast that with the court’s decision in the BCBS case:

The subrogation and reimbursement provision in the Mohawk Plan, unlike that of the United Distributors Plan, claims a right to reimbursement “in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness,” but does not specify that that reimbursement be made out of any particular fund, as distinct from the beneficiary’s general assets. BCBS Letter Br., Exh. B; BR1-1 at 3. Instead, it makes receipt of “a settlement, judgment, or other payment relating to the accidental injury or illness” a trigger for the general reimbursement obligation. Id. Further, in requiring reimbursement “in full”, it fails to limit recovery to a specific portion of a particular fund. Accordingly, we conclude that, because the Mohawk plan fails to specify that recovery come from any identifiable fund or to limit that recovery to any portion thereof, it fails to meet the requirements outlined in Sereboff for the assertion of an equitable lien for the purposes of 29 U.S.C. § 1132(a)(3). For this reason, we conclude that it was not error to dismiss BCBS’s claims.

The case illustrates how those representing employers and/or health plans should review the plan document language and SPD language to ensure that it tracks the language of Sereboff in order to better ensure that the Plan will be in a position of recovering under the principles laid out in Sereboff.

It is interesting to note that in 2005 the DOL had filed an Amicus Brief in the BCBS case which you can access here.

From How Appealing:

D.C. Circuit declares a provision of the federal tax code unconstitutional as applied: Today’s ruling, by a unanimous three-judge panel, holds that “insofar as §104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional.” You can access the complete ruling at this link.

According to today’s opinion, written by Chief Judge Douglas H. Ginsburg, “The Sixteenth Amendment simply does not authorize the Congress to tax as ‘incomes’ every sort of revenue a taxpayer may receive.”

The opinion goes on to explain:

As we have seen, it is clear from the record that the damages were awarded to make Murphy emotionally and reputationally “whole” and not to compensate her for lost wages or taxable earnings of any kind. The emotional well-being and good reputation she enjoyed before they were diminished by her former employer were not taxable as income. Under this analysis, therefore, the compensation she received in lieu of what she lost cannot be considered income and, hence, it would appear the Sixteenth Amendment does not empower the Congress to tax her award.

And the opinion concludes:

In sum, every indication is that damages received solely in compensation for a personal injury are not income within the meaning of that term in the Sixteenth Amendment. First, as compensation for the loss of a personal attribute, such as well-being or a good reputation, the damages are not received in lieu of income. Second, the framers of the Sixteenth Amendment would not have understood compensation for a personal injury — including a nonphysical injury — to be income. Therefore, we hold §104(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.

(The Sixteenth Amendment states:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.)

Summary from the TaxProf Blog:

The D.C. Circuit held today, in Murphy v. United States, No. 03cv02414 (D.C. Cir. 9/22/06), that § 104(a)(2) is unconstitutional under the 16th Amendment as applied to a recovery for a non-physical personal injury (emotional distress and loss of reputation) unrelated to lost wages or earnings. Murphy received $70,000 from New York State for anxiety suffered and injury to her reputation as a result of being “blacklisted” after becoming a whistleblower against her employer (the New York Air National Guard).

RothCPA.com has comments and a good compilation of links as to what people are saying about the case here.

From the White House: “President Bush Signs H.R. 4, the Pension Protection Act of 2006.” Some comments from the President at the signing:

In a few moments, I will have the honor of signing the most sweeping reform of America’s pension laws in over 30 years, the Pension Protection Act of 2006. . .

Americans who spend a lifetime working hard should be confident that their pensions will be there when they retire. Last year I asked Congress to strengthen protections for the pensions of our workers. Members of both parties came together to pass a good bill that will improve our pension system, while expanding opportunities. .

Today, we’ve taken an important step toward ensuring greater retirement security for millions of American workers. I want to thank the House and the Senate for their good work on this vital legislation. It’s been hard work. It took a lot of pages to write that bill, as you can see. (Laughter.)

You can view a video of the signing by clicking here or a photo of the signing here. See also this Fact Sheet on the Pension Protection Act of 2006 here.

From the CorporateCounsel.net Blog:

On Friday, the SEC posted the 436-page adopting release for its executive compensation disclosure rules. The compliance dates appear on page 2 – but you should also read pages 195-197 for more information about those important dates, including transition details.

Pension & Benefits Weblog notes that EEOC regulations were recently issued, reflecting the Supreme Court’s ruling in the General Dynamics case here (the case was discussed previously here.) Here is the EEOC’s explanation of the changes to the regulations:

Section 1625.2 is being revised as follows. The caption will be changed from “Discrimination between individuals protected by the Act” to “Discrimination prohibited by the Act” to reflect the Supreme Court’s holding that the ADEA permits employers to make age-based employment decisions that favor relatively older employees. The text of the regulation will be similarly revised, and Sec. 1625.2(b), which explicitly permits employers to give older employees preferential benefits in some circumstances, will be removed as redundant. Thus, the new regulation will not have paragraphs (a) and (b), and will simply be referred to as Sec. 1625.2. Other language changes in Sec. 1625.2 are made for the sake of clarity.

Section 1625.2 now reads:

Sec. 1625.2 Discrimination prohibited by the Act.

It is unlawful for an employer to discriminate against an individual in any aspect of employment because that individual is 40 years old or older, unless one of the statutory exceptions applies. Favoring an older individual over a younger individual because of age is not unlawful discrimination under the Act, even if the younger individual is at least 40 years old.

Someone is compiling articles and links related to the stock option backdating saga here. (It certainly would take a separate blog to keep up with all of them.)

RothCPA.com talks about changes in the law regarding COLI insurance and charitable deductions under the Pension Protection Act here.

Professor Paul Secunda points out a new article by Professor John H. Langbein in a post at the Workplace Prof Blog: Langbein on Judicial Review of Benefit Denials under ERISA. (Professor Langbein has been mentioned in previous posts which you can access here.)

A victory for IBM and cash balance plans in general: “Kathi Cooper v. IBM Personal Pension Plan and IBM Corporation.”

Some readers may enjoy the more casual tone of this opinion written by Circuit Judge Frank Easterbrook. (Read more about Judge Easterbrook here from How Appealing.) Here are some notable quotes from the opinion:

(1) “. . . [The district court’s] approach treats the time value of money as age discrimination. Yet the statute does not require that equation. Interest is not treated as age discrimination for a defined-contribution plan, and the fact that these subsections are so close in both function and expression implies that it should not be treated as discriminatory for a defined benefit plan either. The phrase “benefit accrual” reads most naturally as a reference to what the employer puts in (either in absolute terms or as a rate of change), while the defined phrase “accrued benefit” refers to outputs after compounding. That’s where this litigation went off the rails: a phrase dealing with inputs was misunderstood to refer to outputs.

(2) “Nothing in the language or background of §204(b)(1)(H)(i) suggests that Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus a greater opportunity to earn interest on each year’s retirement savings. Treating the time value of money as a form of discrimination is not sensible.”

(3) “Our conclusion that “benefit accrual” (for defined-benefit plans) and “allocation” (for defined-contribution plans) both refer to the employer’s contribution rather than the time value of money between contribution and retirement has the support of regulations that the Treasury Department proposed. (Appropriations riders have prevented the Treasury from taking final action on the draft regulations, but they still help to inform our understanding of the statute.)”

(4) “As far as we can see, ours is the first appellate decision to address the status of cash-balance plans under §204(b)(1)(H)(i). The class directs our attention to two decisions from other circuits that it says supply helpful analysis. Miller v. Xerox Corp. Retirement Income Guarantee Plan, 447 F.3d 728 (9th Cir. 2006); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000). As the class reads them, these opinions stand for two important propositions. First, that an “accrued benefit” in a cash-balance plan is an annuity at normal retirement age. Second, that there is a “fundamental” distinction between defined-contribution and defined-benefit plans. Both of these propositions are correct, and both of them are irrelevant.”

(5) “. . . [A] plaintiff alleging age discrimination must demonstrate that the complained-of effect is actually on account of age. One need only look at IBM’s formula to rule out a violation. It is age-neutral.”

(6) “An employer is free to move from one legal plan to another legal plan, provided that it does not diminish vested interests—and this transition did not.”

(7) “Litigation cannot compel an employer to make plans more attractive (employers can achieve equality more cheaply by reducing the highest benefits than by increasing the lower ones). It is possible, though, for litigation about pension plans to make everyone worse off. After the district court’s decision IBM eliminated the cash-balance option for new workers and confined them to pure defined-contribution plans. . . Whether that is good or bad (for employees or society as a whole) is not for us to say. What we can and do conclude, however, is that the decision may again be made freely, governed by private choice rather than legal constraint.”

While the Pension Protection Act of 2006 passed by Congress last week (discussed here) contains some relief for cash balance plans, the relief is only prospective. Thus, this decision handed down by the Seventh Circuit is highly significant.

(Hat Tip: Benefitslink.com)