Category: Benefits

From the Wall Street Journal today–“Bush to Seek Bigger Health-Savings Tax Break“:

President Bush is expected to propose sweetening the tax breaks associated with health savings accounts, part of an effort to persuade more people to save for their own medical expenses, administration officials said.

The proposal under discussion would let people deposit more money into their tax-free HSAs each year and use that tax-free money to pay health-insurance premiums. The proposal is part of a broader array of changes in the health-care system that the president is expected to propose in his State of the Union address Jan. 31.

Also, from this week’s radio address:

For the sake of America’s small businesses, workers, and families, we must also make health care more affordable and accessible. A new product known as Health Savings Accounts helps control costs by allowing businesses or workers to buy low-cost insurance policies for catastrophic events and then save, tax-free, for routine medical expenses. This year, I will ask Congress to take steps to make these accounts more available, more affordable, and more portable. Congress also needs to pass Association Health Plans, which allow small businesses across the country to join together and pool risk so they can buy insurance at the same discounts big companies get.

Harold J. Ashner who previously served as Assistant General Counsel for Legislation and Regulations at the PBGC has written a great article for the Tax Management Compensation Planning Journal entitled “Dealing with the Pension Benefit Guaranty Corporation.” The article contains a lot of practical information which practitioners may find useful in representing clients who have PBGC-related issues.

Excerpt from the section entitled “Researching PBGC Issues”:

When researching PBGC issues, it is important to go beyond the obvious sources of statutes, regulations, case law, and PBGC opinion letters. A great deal of important guidance can be found in other sources. One key source that is well-known in the actuarial community but not nearly as familiar in the legal community is the PBGC ‘‘Blue Book.’’ The Blue Book, which is analogous to the IRS ‘‘Gray Book’’ and is prepared annually in conjunction with the Enrolled Actuaries Meeting, consists of a summary of questions asked by the Enrolled Actuaries Program Committee and the answers provided by PBGC staff.

Ashner also mentions Technical Updates, FAQs, and Preambles to the proposed and final regulations (find the regulations here) as good resources for researching PBGC issues. (FAQs, I gather, are scattered throughout the PBGC’s website when you look up various topics.)

From the SEC’s press release here:

The Securities and Exchange Commission today voted to publish for comment proposed rules that would amend disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters, and security ownership of officers and directors. The proposed rules would affect disclosure in proxy statements, annual reports and registration statements. The proposals would require most of this disclosure to be provided in plain English. The proposals also would modify the current reporting requirements of Form 8-K regarding compensation arrangements.

Under the proposal, executive compensation disclosure would be organized into three broad categories: (1) compensation over the last three years; (2) holdings of outstanding equity-related interests received as compensation that are the source of future gains; and (3) retirement plans and other post-employment payments and benefits.

Highlights of the proposal:

• A reorganized Summary Compensation Table would be the principal vehicle for showing three-year compensation. The Table would include additional information, such as a new column reporting total compensation, a dollar value showing all stock-based awards, including stock and stock options measured at grant date fair value, and an “All Other Compensation” column showing “the aggregate increase in actuarial value of pension plans accrued during the year and all earnings on deferred compensation that is not tax-qualified.”
• The threshold for disclosing perquisites would be reduced to $10,000 and interpretive guidance is provided for determining what is a perquisite. Two supplemental tables would report Grants of Performance-Based Awards and Grants of All Other Equity Awards.
• Regarding the retirement plan disclosures, the press release indicates that “retirement plan and post-employment disclosure” would be required to include (1) a “Retirement Plan Potential Annual Payments and Benefits Table” which would disclose annual benefits payable to each named executive officer; (2) a “Nonqualified Defined Contribution and Other Deferred Compensation Plans Table” which would disclose year-end balance, and executive contributions, company contributions, earnings and withdrawals for the year; and (3) “disclosure of payments and benefits (including perquisites) payable on termination or change in control, including quantification of these potential payments and benefits.”

Also, here are some excerpts from Chairman Cox’s comments in his Opening Statement yesterday:

(1) “. . . Our purpose here today is to help investors keep an eye on how much of their money is being paid to the top executives who work for them. Today’s open meeting marks the first time in 14 years that the Commission has undertaken significant revisions of its rules for executive compensation. Simply put, our rules are out of date. It’s high time we updated the rules on executive compensation. To that end, the staff of the Division of Corporation Finance is recommending proposed changes to the current regime of executive and director compensation disclosure to do just that. . . “

(2) “. . . We want investors to have better information, including one number-a single bottom line figure-for total annual compensation. That single figure will include a more accurate representation of perquisites. Currently, companies are required to report a lump sum if an executive’s perks are more than $50,000, or 10 % of his or her salary and bonus. And under current rules, an individual perk has to be reported only if it represents more than 25% of all the perks that an executive receives. Under the proposal, perquisites must be itemized if they total $10,000 or more.. . ”

(3) “. . . The proposed new rules would also improve the disclosure of retirement benefits. New tables would outline the defined-benefit and defined-contribution retirement plans of top officers. There would also be detailed descriptions of payments that could be made if an executive is terminated. Those disclosures aren’t required under our current rules.. . “

Broc Romanek at CorporateCounsel.net Blog has comments regarding the proposals. Also, Michelle Leder at Footnoted.org attended the open meeting and has a Fact Sheet summarizing the proposals which is posted here.

From the Wall Street Journal–“Maryland Votes To Override Veto Of Wal-Mart Bill“:

Maryland legislators voted to become the first state to enact a law forcing large employers — namely Wal-Mart Stores Inc. — to pay a penalty if they fail to spend a certain amount of their payrolls in the state on health insurance for their workers.

The Senate voted 30-17 to override Republican Gov. Robert Ehrlich’s veto of the bill last year. The Maryland House followed suit last night with an 88-50 vote for the override.

The bill proposed requiring employers with more than 10,000 workers in Maryland to pay a penalty to the state’s health-insurance program if they fall short of paying an amount equal to 8% of their payroll in the state for health insurance for those employees. . .

The debate could continue in the courts. The Maryland Chamber of Commerce has argued that the potential new law will conflict with federal employment law, namely the Employee Retirement Income Security Act. Supporters counter that it isn’t pre-empted by ERISA.

Access a summary of the bill here and the text of the bill itself here.

Important links regarding the debate:

• Maryland Attorney General J. Joseph Curran Jr. (D) has opined that that the bill is not preempted by ERISA. Access his letter here.
• The Maryland Chamber of Commerce says that ERISA does preempt the legislation. You can access the letter here, prepared by Smith & Downey, in support of the Chamber’s view.
• Phyllis Borzi, a professor at the George Washington University School of Public Health and Health Services, has written a letter here opining that ERISA does not preempt the Fair Share Health Care Fund Act. (A summary of Borzi’s position from this article here: “Since 1995 the Supreme Court has adopted a more narrow interpretation of the pre-emption clause in the federal act, striking down state laws less frequently than before, said Borzi, who until 1995 served as employee benefit counsel for the U.S. House Committee on Education and Labor. She said ERISA would not pre-empt the fair share bill. “It’s just a tax, just like states can tax employers for anything,” she said, noting the assessment imposed by the legislation would be on employers, not on the benefits plan.”)
• Lots of links about the bill at the Maryland Chamber of Commerce Blog.
• The Wall Street Journal Law Blog has a post on the subject, and provides a link to a CNBC clip “of a heated exchange between lawyer Richard Berman and Chris Kofinis, of the United Food and Commercial Workers International Union, debating the Maryland bill.”
• University of Mississippi law professor Paul Secunda and author of Workplace Prof Blog provides his thoughts on the bill here.

This article from CNNMoney.com–“Maryland bill a big blow for Wal-Mart? Other states also considering bills that penalize companies for falling short on healthcare plans“-gives a run-down of the states that have tried to pass similar legislation:

Although the efforts failed in Arizona, California, Connecticut, New Hampshire and Tennessee, and was vetoed by Maryland’s and Vermont’s governors, the measure is still alive in five other states.

They include New York, Massachusetts, Minnesota, Oregon, Pennsylvania and Washington.

The TaxProf Blog has a link to a Tax Notes article here summarizing the tax-related opinions written by Judge Alito. The article includes a section on “Employee Benefits” cases. The TaxProf has also published his own list of cases here (prepared by his research assistant) which include some benefits-related cases as well.

(Previous post here discusses Judge Alito’s dissent in a memorable ERISA case.)

The Gulf Opportunity Zone Act of 2005 (H.R. 4440), which was signed into law on December 21, (P.L.109-135.) contains some provisions amending section 409A slightly. Here is some helpful info regarding the changes made:

(1) A summary of the changes made to 409A from the Technical Description of the Gulf Opportunity Zone Act (Joint Committee on Taxation, 12/16/05):

Nonqualified deferred compensation plans (Act sec. 885).-The provision clarifies that the additional tax and interest under the nonqualified deferred compensation provision of the Act are not treated as payments of regular tax for alternative minimum tax purposes. The provision also clarifies that the application of the rule providing that certain additional deferrals must be for a period of not less than five years is not limited to the first payment for which deferral is made. The provision also clarifies that Treasury Department guidance providing a limited period during which plans can conform to the requirements applies to plans adopted before January 1, 2005. The provision also clarifies that the effective date of the funding provisions relating to offshore trusts and financial triggers is January 1, 2005. Thus, for example, amounts set aside in an offshore trust before such date for the purpose of paying deferred compensation and plans providing for the restriction of assets in connection with a change in the employer’s financial health are subject to the funding provisions on January 1, 2005. Under the provision, not later than 90 days after the date of enactment of this provision, the Secretary of the Treasury shall issue guidance under which a nonqualified deferred compensation plan which is in violation of the requirements of the funding provisions relating to offshore trusts and financial triggers will be treated as not violating such requirements if the plan comes into conformance with such requirements during a limited period as specified by the Secretary in guidance. For example, trusts or assets set aside outside of the United States that would otherwise result in income inclusion and interest under the provision as of January 1, 2005, may be modified to come into conformance with the provision during the limited period of time as specified by the Secretary.

(2) Text of the GO Zone Act amending Section 409A:

(hh) AMENDMENTS RELATED TO SECTION 885 OF THE ACT.—

(1) Paragraph (2) of section 26(b) is amended by striking ‘‘and’’ at the end of subparagraph (R), by striking the period at the end of subparagraph (S) and inserting ‘‘, and’’, and by adding at the end the following new subparagraph:‘‘(T) subsections (a)(1)(B)(i) and (b)(4)(A) of section 409A (relating to interest and additional tax with respect to certain deferred compensation).’’.

(2) Clause (ii) of section 409A(a)(4)(C) is amended by striking ‘‘first’’.

(3)(A) Notwithstanding section 885(d)(1) of the American Jobs Creation Act of 2004, subsection (b) of section 409A of the Internal Revenue Code of 1986 shall take effect on January 1, 2005. (B) Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury shall issue guidance under which a nonqualified deferred compensation plan which is in violation of the requirements of section 409A(b) of such Code shall be treated as not having violated such requirements if such plan comes into conformance with such requirements during such limited period as the Secretary may specify in such guidance.

(4) Subsection (f) of section 885 of the American Jobs Creation Act of 2004 is amended by striking ‘‘December 31, 2004’’ the first place it appears and inserting ‘‘January 1, 2005’’.

(3) This post here contains the text of section 409A which has now been revised to reflect changes made by the GO Zone Act.

I have also added the following links, as well as a link to this post on the GO Zone Act changes, to the 409A section over in the sidebar:

• IRS Notice 2005-94
• IRS Notice 2006-4

Dennis Kennedy has handed out his “Best of Legal Blogging” Awards for 2005. Read about it here. Benefitsblog received an honorable mention in the category of “Best Practice Specific Legal Blog.” Marty Schwimmer’s The Trademark Blog took first place. Excerpt from his post on the awards:

The Trademark Blog won this award last year and, even though I wanted to move to a different winner, the fact is that The Trademark Blog remains the model of a practice-specific blawg. Marty covers trademark law with a great eye for compelling material, his trademark wit and lots of pictures. I said last year: “The Trademark Blog is a great example of a way lawyers can speak in a plain voice to both a legal and non-legal audience in an engaging way.” Two other practice-specific blogs I wanted to single out this year are Dennis Crouch’s widely-acclaimed Patently-O blog and Janell Grenier’s always interesting Benefitsblog. Both are great examples of ways to do practice-specific blogs.

Many thanks, Dennis. (Read about Dennis’s transformation from tax lawyer to technolawyer in this article.)

Is it permissible under the law to have a Roth-only 401(k) plan? No, according to final regulations issued by Treasury and IRS today. Here is the pertinent excerpt from the preamble to the regulations addressing the issue:

Some commentators requested that an employer sponsoring a qualified cash or deferred arrangement be permitted to offer only designated Roth contributions. However, under section 402A(b)(1), designated Roth contributions are made in lieu of all or a portion of elective contributions that the employee is otherwise eligible to make under the cash or deferred arrangement. If a cash or deferred arrangement offered only designated Roth contributions, an employee participating in the arrangement would not be electing to make such contributions in lieu of elective contributions he or she was otherwise eligible to make under the plan. Thus, these final regulations clarify that, in order to provide for designated Roth contributions, a qualified cash or deferred arrangement must also offer pre-tax elective contributions.

The press release announcing the issuance of the final regulations is here. Roth 401(k) final regulations are here.

IRS Promulgations:

• Notice 2005-99: Guidance on valuation of stock-based compensation for purposes of qualified cost sharing arrangements.
• Notice 2005-94: Suspension of employer and payer reporting and wage withholding requirements with respect to deferrals of compensation under § 409A for calendar year 2005; no assertion of penalties against service providers in certain circumstances
• Corrections to Proposed Regulations governing employer comparable contributions to health savings accounts under Code Section 4980G
• New Version of IRS Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans

DOL Announcement

• DOL Launches New Compliance Assistance Web Portal. Portal is here.

Department of Treasury

• Treasury Celebrates Two Year Anniversary of Health Savings Accounts

Benefits quote of the week:

“[A]ny court forced to enter the ERISA preemption thicket sets out on a treacherous path.” Kidneigh v. UNUM Life Ins. Co. of Am., 345 F.3d 1182, 1184 (10th Cir. 2003).

I have often thought that someone should start a blog to cover the subject of Internal Revenue Code Section 409A and its application to nonqualified deferred compensation plans. Until someone does, I guess I will have to settle for a sidebar item over in the right-hand column devoted to the topic. There are tons of articles by law firms and consulting firms on 409A and related IRS guidance, but I have listed only a few that are my favorites. If you have any helpful links that you would like to share, please do so and I will post the ones that I think are noteworthy. So far I have compiled the following links:

• Text of 409A
• IRS Notice 2005-1
• Proposed Regulations
• Deloitte: “The Effect of Section 409A: Now and in the Future“
• Alden Bianchi: “The Effects of Internal Revenue Code §409A on the Design and Operation of Ineligible Plans of Deferred Compensation of Tax-Exempt Employers“
• Kilpatrick Stockton: “The Wait Is Over: Proposed Regulations Under Section 409A“

You can access previous posts related to 409A here.