Category: Benefits

The Federal Deposit Insurance Corporation (“FDIC”) Board of Directors last week approved final rules that will raise the deposit insurance coverage on certain retirement accounts at a bank or savings institution from $100,000 to $250,000. The increase will become effective on April 1.

Access the Press Release here–FDIC Insurance for Retirement Accounts Increased to $250,000–and a special two-page bulletin of the agency’s consumer newsletter which provides a summary of the higher coverage for retirement accounts here–What You Should Know About Higher FDIC Coverage for Retirement Accounts. Summary of the new rules from the bulletin:

The higher insurance coverage applies primarily to traditional and Roth IRAs (Individual Retirement Accounts). Also included are self-directed Keogh accounts, “457 Plan” accounts for state government employees, and employer-sponsored “defined contribution plan” accounts that are self-directed, which are primarily 401(k) accounts. In general, self-directed means that the consumer chooses how and where the money is deposited.

Under the FDIC’s new rules, which take effect on April 1, 2006, all of your deposits at the same insured bank that are in this broad category of retirement accounts are added together and the total is insured up to $250,000. Your retirement accounts also are separately insured from any other deposits you may have at the same institution.

This increase to $250,000 for retirement accounts is important because many people saving money for their retirement have accumulated well in excess of $100,000. With the higher FDIC coverage, more Americans who rely on banking institutions for safety and easy access will know that more of their money for retirement will be completely protected if their banking institution were to fail. There’s also the added convenience for people who, previously, might have gone to more than one institution to get full coverage of retirement deposits of more than $100,000.

Access the Board’s Distribution Draft here.

Learn more about deposit insurance for retirement plans on the FDIC website. Read about coverage for self-directed accounts here and coverage for other employee benefit plans here. See also this article here.

Unusual development reported in an article from Law.com: “Is the System Broke or Are Brokers Gaming the System?.” Excerpt:

In a spate of class action lawsuits against Merrill Lynch, Morgan Stanley, Prudential and other brokerages, filed principally in New York, securities brokers — who earned billions in commissions annually — now claim they were just hourly “wage earners,” who were misclassified by their employers to thwart the Fair Labor Standards Act and the California Labor Code.

They seek unpaid overtime, or “backpay” — using their prorated commissions (over a 40-hour work week) to calculate the “regular hourly rate” and demand 1 1/2 times this amount for all overtime hours. In other words, a broker who earned $400,000 last year, putting in 60-hour work weeks, made $200 per hour for a 40-hour work week (assuming 50 weeks per year). At time and a half for overtime, the employer owes this broker $300,000 per year. Under the FLSA, a court may double the amount of recovery when the violation at issue is “willful.”

Overlawyered comments on the development in Arise, ye prisoners of high-paid brokerage jobs and Michael Fox comments here.

The IRS has been busy auditing SIMPLE IRA plans and discovering a great deal of noncompliance as far as whether or not the plans have been properly amended for EGTRRA. At a recent Mid-Atlantic Pension Liaison meeting, IRS announced their intent to notify all 190,000 employers across the country who maintain SIMPLE IRA plans in an effort to motivate employers to get the amendments done. However, practitioners at the meeting were concerned about the effectiveness of notifying employers when, in fact, providers for the most part are the ones who should be supplying these updated documents.

In a Special March 10, 2006 edition of Employee Plan News, the IRS has formally announced this SIMPLE IRA compliance effort but now adds that it will also be sending letters to the “approximately 185 drafters of prototype SIMPLE IRA plans.” While this is a welcome change in the initiative, IRS will still be notifying all 190,000 employers, to the tune of 10,000 to 15,000 letters per week, the newsletter says, which could generate a lot of questions for practitioners when employers receive these letters. (Access the letter that will be sent to employers here and the letter that will be sent to drafters of prototypes here.)

What is the trick to helping employers find out if their plans are in compliance? The letters provide some tips for employers and practitioners in determining whether or not the plans are in compliance:

• If the employer is using IRS model forms, the model form is in compliance if the revision date of the form is either March 2002 or August 2005.
• If the employer is using a prototype issued by a financial institution or other institution, the prototype is likely in compliance if the issue date or most recent revision date is after April, 2002.

What is the fix for the employer if the documents have not been updated? For those employers using IRS model forms, they should obtain up-to-date model forms on the IRS website (Form 5304-SIMPLE–Not for Use With a Designated Financial Institution and Form 5305-SIMPLE–For Use With a Designated Financial Institution) and complete and sign them by December 31, 2006. For those employers using prototype documents, they should notify, i.e. bug, their providers until they send them new forms to complete. The IRS notes that, as to employers who use prototype documents, if for some reason the provider fails to supply the updated documents, the employer can always switch to updated IRS model forms, which will also bring the plan into compliance. (However, the employer should probably have an attorney review both documents to make sure there are not any unintended consequences in making the switch.)

The IRS notes that, even though the deadline has passed for making the EGTRRA amendments, employers will now have a grace period for making the amendments which will end on December 31, 2006. This grace period is important because if an employer fails to update the documents for EGTRRA on or before the December 31, 2006 date, the newsletter reminds employers that the plan could be disqualified:

Plans not in compliance with this requirement could lose all the retirement savings and tax benefits that these plans provide to both the employers sponsoring them and the employees participating in them.

(A SIMPLE IRA plan is an IRA-based plan that provides small employers with a simplified method for making contributions towards their employees’ retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity set up for each employee. SIMPLE IRA plans may be established only by employers that have no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year. Learn more about the changes made to SIMPLE IRAs under EGTRRA here. Learn more about SIMPLE IRAs here.)

Normally, articles by practitioners are available for purchase only on the ALI-ABA website. However, from time to time, ALI-ABA allows an article to be accessed free. A recent article that can be accessed is “Choosing a New Health Plan Design? Differences among HRAs, HSAs and FSAs Beyond the Basics” by Greta E. Cowart, Haynes and Boone, LLP (although it is really a table, rather than an article).

(You can access other articles which are available for purchase here. Search articles in the benefits-related area by selecting “Pension & Profit Sharing” or “Health Law” from the drop-down menu.)

Thank you to the mysterious Pension & Benefits Blogger (previously Beneblogger) for alerting us last week to the IRS’s recent Employee Plans Determinations Quality Assurance Bulletin entitled “Part-Time Employees Revisited.” The Bulletin is an item that every benefits lawyer should have at his or her fingertips. Most enlightening, in my opinion, are the examples which clearly show the IRS’s strong aversion (which has become even stronger now as indicated under this Bulletin) to any exclusion of employees by classification that looks and smells like an “indirect service requirement that could result in the exclusion of an employee that completes 1,000 hours of service.” In other words, a qualified plan cannot exclude folks as a class from participating by classifying them as “part-time” or “seasonal” because they might end up working at least 1,000 hours during the year, resulting in an improper exclusion under the rules.

Also, the Bulletin makes it clear (Example 3) that a plan cannot exclude a group of employees under a generic name like “Class B Employees” without defining in the Plan the specifications for such Class. This is because the IRS wants to make sure that the classification will not be making an “end-run” around the service requirements of the Internal Revenue Code and ERISA, i.e. that the employees are not being improperly excluded because of service.

The IRS even goes on to provide a definition that would meet the rules. The IRS says that “Class B Employees” could be defined as an “employee who is a member of the substitute workforce of the Employer, as distinguished from regular full-time and part time employees, that is a separate employment classification based upon availability to work” and the classification would be acceptable.

See this previous post–Employers Utilizing More Temp and Part-time Employees: Be Wary of Qualified Plan Issues–for a discussion of how improperly excluding part-time employees from a qualified plan can result in the need to make corrections. The post goes on to discuss the correction methods mentioned in Rev. Proc. 2003-44 for making an excluded employee whole. However, please note that the correction method for making improperly excluded employees whole in a 401(k) plan has been softened somewhat since I wrote that post. IRS has been indicating for some time at various conferences and meetings that they will issue a new Revenue Procedure which will provide revised correction procedures for replacing contributions of missed pre-tax deferrals of improperly excluded employees in a 401(k) plan. The new procedures will no longer require making up the full average deferral percentage (“ADP”) contribution for the excluded employee, but instead will only require a make-up contribution of 50 percent of the ADP contribution amount. However, the full match will still be required based upon the full ADP amount.

Also, as BNA reports this week in their Pension & Benefits Reporter, the IRS is also saying that the new Rev. Proc. will provide that replacement contributions for missed after-tax employee contributions will be equal to 40 percent of those missed contributions.

Number of Germs. (Source: Accounting Web) A study funded by the Clorox Company compared germ levels of professions as well as surfaces within the profession’s offices. Results indicate that the “germiest” jobs are:

• Teacher
• Accountant
• Banker
• Radio DJ
• Doctor
• Television Producer
• Consultant
• Publicist
• Lawyer

The article goes on to note that “[t]he desks and pens of lawyers had the lowest levels of germs, as did the telephones of publicists, the computer keyboards of bankers and the computer mouse of TV producers.”

The Clorox Company announced the results of the study here.

Interesting point from this Wall Street Journal op-ed: “Health Care or a House?” Excerpt:

Imagine walking into a job interview and your potential employer tells you that the best thing about working there is that the company will buy you a house. While it sounds preposterous, it just might be cheaper than providing you with health insurance.

The 2005 Kaiser Family Foundation Survey found that the average premium for family medical coverage is $10,880 per year, which is approximately $906 per month. According to the National Association of Realtors, the median price of existing single family homes in December was $211,000. With 20% down and a 30-year mortgage at 6.25%, the cost of buying the home is $1,040 per month. Given the choice between paying an average employee’s fixed-rate mortgage at $1,040 a month or paying for health care, the employer would be better served paying the mortgage. At least the mortgage payment will remain $1,040 a month 10 years from now; the monthly health insurance premium is likely to more than double, to $2,400.

I have inserted the 2006 Retirement Plan Limits over in the side-bar on the right. (Long overdue.)

Also, thanks to Tom Mighell for the mention of Benefitsblog in “The Strongest Links” published in the ABA’s Law Practice Today.

What are the most likely features employers will add to their defined contribution plans in 2006? This survey by Hewitt–“Hot Topics in Retirement for 2006“–lists the following:

• Automatic enrollment
• Automatic rebalancing*
• Online third party investment advisory services
• Automatic contribution escalation**
• Roth 401(k) contributions
• Managed accounts
• Annuities as a form of payment option; and
• 401(k) disability insurance.

* Automatic rebalancing – the ability of employees to have their investment mix rebalanced periodically to a target mix of investments that they select.
**Automatic contribution escalation – the ability of employees to have their contributions to a plan automatically increased over time.

From Peter Leo of the Pittsburgh Post-Gazette:

How do we love thee?
Let us count the gross adjusted income.

(Hat tip: TaxProf Blog)