Category: Benefits

Those seeking information about SRI* will want to read this recent article by George R. Gay and Johann A. Klaasen from the Journal of Deferred Compensation–“Retirement Investment, Fiduciary Obligations, and Socially Responsible Investing.” Excerpt:

Whether motivated by the recent corporate scandals, by a desire not to profit from alcohol and tobacco, or by a growing concern for environmental sustainability, more plan participants are expressing a desire for a coherent system of selecting investments based on criteria beyond conventional analysis, with a focus on societal goals beyond investment returns. But in what circumstances, and to what extent, might such an investment strategy be permissible? May those charged with making decisions about retirement investments reasonably choose SRI?

The article goes on to conclude that “[c]onsiderations of fiduciary duty do not prevent retirement plan trustees from implementing basic SRI strategies in the plans for which they are responsible.”

Some additional resources pertaining to the legal implications of SRI:

• ERISA Opinion Letter 98-04A (May 28, 1998)
• Interpretive Bulletin 94-1, 29 C.F.R. section 2509.94-1
• Board of Trustees of Employees” Retirement System of City of Baltimore v. Mayor and City Council of Baltimore City, 562 A.2d 720, 317 Md. 72 (Md. 09/01/1989) (A case which is frequently cited in most articles on SRI, but which could not be found anywhere on the internet, so you can access it now from this website.)
• But see this recent DOL letter to the AFL-CIO (discussed in a previous post here) setting forth the DOL’s views regarding the ERISA violations that could occur if plan fiduciaries are involved in expending “plan assets to inform participants about the current public debate on Social Security” as well as the “hiring and firing of [plan] service providers based upon their opinions on Social Security reform.” DOL’s bottom line in that letter was that a “fiduciary may never increase a plan’s expenses, sacrifice the security of promised benefits, or reduce the return on plan assets, in order to promote its views on Social Security or any other broad policy issue.”
• See also The KLD Resource Page and this 2002 article from the Journal of Financial Planning–“Socially Responsible Investing: An Imperfect World for Planners and Clients” which lists resources.

(*Definitions of SRI or “Socially Responsible Investing”:

The article–“Retirement Investment, Fiduciary Obligations, and Socially Responsible Investing“–defines SRI as “investing in companies that meet certain baseline standards of social and environmental responsibility; actively engaging those companies to become better, more responsible corporate citizens; and dedicating a portion of assets to community economic development” and “the process of integrating values, societal concerns and/or institutional mission into investment decision-making.”

However, the article–“Socially Responsible Investing: An Imperfect World for Planners and Clients“–offers this comment regarding defining SRI:

Socially responsible investing—or more politically correct these days, socially conscious investing—started out as a protest in the early 1980s primarily against investing in South Africa during apartheid. Today, SRI has evolved into many permutations that can include not only the avoidance of the traditional “sin” stocks of gambling, pornography and alcohol, but tobacco, companies with bad records on employee relations or the environment, nuclear weapons, defense, and a variety of faith-based issues such as abortion or anti-family entertainment. Generally, it’s what people don’t want to invest in, versus what they do, though as Leonard’s client who wanted only women-led companies illustrates, that constraint can eliminate nearly everything.

Perhaps the most succinct, yet comprehensive, definition we heard came from Dennis Carpenter, CFP, whose Grapevine, Texas, planning firm of International Wealth Management specializes in biblically based investing: “Basically, it means making certain that your investment dollars and your beliefs are in concert with one another.

“Mission-based investing” is also a term used interchangeably by the industry, and is defined in this paper–“Introduction to Mission-Based Investing“–as “the incorporation of an institution?s mission into its investment decision-making process.” The paper goes on to note that “[a]n institution?s mission is its purpose or calling which is often summarized in a mission statement” and that the “institution?s mission may serve as a guide in determining what, if any, non-financial objectives it may set for its portfolio.”)

This previous post here highlighted the pitfalls related to incentive stock options and AMT. Please note this recent Tax Court case–Robert J. Merlo, TC Memo 2005-178–in which a taxpayer sought to stave off the ravages of AMT by arguing that the stock was subject to a substantial risk of forfeiture due to the employer’s policy against insider trading. Holding against the taxpayer, the court stated:

The evidence in the instant case shows that petitioner had no substantial risk of losing the rights to his shares of Exodus stock. There is no evidence that Exodus could have ever compelled petitioner to return his shares after he exercised his ISO; no sellback provision is present; nor is there any evidence that Exodus could have compelled petitioner to forfeit his shares of stock. In consequence of the foregoing, we hold that petitioner’s rights to his shares of Exodus stock were not subject to a substantial risk of forfeiture.

A related issue was discussed in this recent Revenue Ruling 2005-48 in which the IRS answered this question–If an employee exercises a nonstatutory option more than six months after grant, but is subject to restrictions on his ability to sell the stock obtained through exercise of the option under rule 10b-5 under the Securities Exchange Act of 1934 and certain contractual provisions, is the employee required to recognize income under section 83 of the Internal Revenue Code at the time of the exercise of the option? Roth CPA.com discusses the Revenue Ruling here.

Looking for that certain Tax Court opinion issued in 2005? Small Business Taxes & Management has created a handy summary of all Tax Court cases in 2005 with direct links to the full text of the cases located at the Tax Court website. You can also access a similar list of 2004 cases here.

I have added permanent links in the right-hand column for guidance (regulations, rulings, notices, etc.) published by the IRS in 2005 under the heading “Recent IRS Regulations and Published Guidance Relating to Benefits.” The links are as follows:

Treasury Regulations Issued in 2005

2005 Revenue Rulings

2005 Revenue Procedures

2005 Notices

2005 Announcements

(Source: Benefitslink.com)

From CBS MarketWatch: “Consumers spend it all: Savings rate falls to 0%; consumer spending up 0.8%. Excerpt:

U.S. consumer spending grew 0.8% in June, offsetting a sizable 0.5% gain in incomes, the Commerce Department said Tuesday. The agency also reported that the personal savings rate fell to 0%, the lowest since a consumer spending binge in October 2001 and the second-lowest since the Great Depression.

You can access the actual table showing the data here. Also, more information here.

Important development to note here: “Texas Jury Finds Humana HMO Liable in Wrongful Death Lawsuit.”

Another article on the development: “Others may copy Humana suit: Insurer held liable over patient’s care.” Excerpt:

A $4.6 million judgment against Humana in a Texas wrongful-death case could lead to more suits against employer-sponsored health plans over patients’ care, legal experts say.

The jury found Humana didn’t live up to its promise to coordinate medical care for the woman, who died at 66 of kidney-failure complications.

Health-law experts say the case illustrates an opening left by a U.S. Supreme Court decision last year that shut the door on many damage suits against health insurers.

According to the article, a “key piece of evidence in the three-week trial was Smelik’s Humana member handbook, which said the insurer would identify cases of chronic disease and make treatment recommendations to the patient, family and doctor.”

More on the case here:

In the Supreme Court decision, which also was based on suits filed in Texas, the court ruled patients may not pursue claims against their HMOs in state court, and that for their claims to move forward, they must follow the 30-year-old Employee Retirement Income Security Act of 1974, or ERISA law, and pursue their cases in a federal court (BestWire, June 21, 2004).

The patients suits were “preempted” by ERISA, the high court ruled, essentially taking insurers off the hook for large jury awards. Once in federal court, patients may only seek the value of the benefit the insurer denied them?thus sparing insurers the potential of paying out vast sums in punitive damages, which state court juries often hand out (BestWire, June 21, 2004).

But the Smelik family’s case wasn’t barred by ERISA, Powell explained, noting its significance.

The Smelik family didn’t allege that Humana denied benefits to Joan Smelik, he said. “It wasn’t that a claim for a kidney doctor was submitted and Humana denied it,” Powell said. Instead, “it was the HMO’s failure in managing her care. She didn’t get a case manager; she didn’t get a kidney doctor,” as Humana specified in its member handbook, he said.

The Wall Street Journal today in this article–Fund Firms Set More 401(k) Fees–reports how more and more mutual fund companies are charging redemption fees to 401(k) plan participants for moving money around in their plans. Excerpt:

Employees enrolled in company retirement plans used to fly under the radar when trading in and out of funds within a short time span. But mutual funds are clamping down on the activity, largely because of regulatory probes into rapid trading, also known as market timing. And employers and fund firms are struggling with how to explain the fees to 401(k) investors already confused by a plethora of choices. . .

Scott Peterson, who heads the retirement-outsourcing practice at Hewitt, said the toughest task has been talking to plan participants about the new fees. “Particularly when they have funds from various providers, it’s a real challenge to the participant to understand the rules and how decisions they’re making to their retirement plans are impacted,” he said.

Mr. Peterson estimates that about half of the retirement plans his group serves now have some kind of restriction on trading activity.

Please note that in order to comply with the safe harbor requirements of section 404(c) of ERISA, a participant or beneficiary must be provided, or have the opportunity to obtain, “sufficient information to make informed decisions with regard to investment alternatives available under a plan.” A participant or beneficiary will not be considered to have sufficient investment information unless the participant or beneficiary is provided with a “description of any transaction fees and expenses which affect the participant’s or beneficiary’s account balance in connection with purchases or sales of interests in investment alternatives (e.g., commissions, sales load, deferred sales charges, redemption or exchange fees).” See 29 CFR 2550.404c-1.

Also, it will be important for plan sponsors to have their plan documents and summary plan descriptions reviewed to make sure that those documents also make it clear that redemption fees are permitted under the plan. In this DOL statement last year, the DOL emphasized the importance of plan documents in the whole matter:

In considering appropriate courses of action, plan sponsors and fiduciaries have raised questions as to the steps that can be taken at the plan level to address identified market-timing problems. In particular, questions have been raised as to whether a plan’s offering of mutual fund or similar investments that impose reasonable redemption fees on sales of their shares would, in and of itself, affect the availability of relief under section 404(c) of ERISA.(1) Similarly, questions have been raised as to whether reasonable plan or investment fund limits on the number of times a participant can move in and out of a particular investment within a particular period would, in and of itself, affect the availability of relief under section 404(c).

Without expressing a view as to any particular plan or particular investment options, we believe that these two examples represent approaches to limiting market-timing that do not, in and of themselves, run afoul of the “volatility” and other requirements set forth in the Department’s regulation under section 404(c), provided that any such restrictions are allowed under the terms of the plan and clearly disclosed to the plan’s participants and beneficiaries. The imposition of trading restrictions that are not contemplated under the terms of the plan raises issues concerning the application of section 404(c), as well as issues as to whether such restrictions constitute the imposition of a “blackout period” requiring advance notice to affected participants and beneficiaries.

See also this previous post here which discusses a case where the court held that, because the plan document allowed market-timing, market-timing then became a “right to which [the participant] was entitled under his employee benefit plan.”

The Philadelphia Inquirer is reporting that a settlement has been reached in the HealthSouth ERISA litigation: “HealthSouth settles lawsuits by workers.” (Access the 8-K filing describing the settlement here.)

From MSNBC.com: “Health industry frets over ruling against cap on damages.” Excerpt:

The Wisconsin Supreme Court ruled July 14 that non-economic damage caps on malpractice jury awards are unconstitutional. Set by the Legislature in 1995 at $350,000, the cap now stands at $445,775, adjusted for inflation.

Also, from the ABA Journal Report–“Med-Mal ruling Has Doctors Reeling: Wisconsin Damage Cap Wiped Out in Rational Basis Review.” Excerpt:

Critics were especially perplexed because the court suggested some caps still might be constitutional, even ones applying to pain and suffering in medical malpractice cases. But the justices offered no hint as to what kind of limit would outlive a court challenge. The options are limited.

You can access the very lengthy Wisconsin Supreme Court opinion here (dissenting opinion included). Key excerpt from the opinion:

Young people are most affected by the $350,000 cap on noneconomic damages, not only because they suffer a disproportionate share of serious injuries from medical malpractice, but also because many can expect to be affected by their injuries over a 60- or 70-year life expectancy. This case is a perfect example. Matthew Ferdon has a life expectancy of 69 years; he was injured at birth. An older person with a similarly serious medical malpractice injury will have to live with the injury for a shorter period. Yet both the young and the old are subject to the $350,000 cap on noneconomic damages. Furthermore, because an injured patient shares the cap with family members, the cap has a disparate effect on patients with families.

The legislature enjoys wide latitude in economic regulation. But when the legislature shifts the economic burden of medical malpractice from insurance companies and negligent health care providers to a small group of vulnerable, injured patients, the legislative action does not appear rational. Limiting a patient’s recovery on the basis of youth or how many family members he or she has does not appear to be germane to any objective of the law. . .

Also, on a related note, KaiserNetwork.org reports: “House Approves Bill That Would Cap Noneconomic Damages in Medical Malpractice Cases.” Excerpt:

The House on Thursday voted 230-194 to approve a medical malpractice reform bill (HR 5), CQ Today reports. The legislation, sponsored by Rep. Phil Gingrey (R-Ga.) would limit non-economic damages to $250,000 and punitive damages to $250,000 or two times the economic damages, whichever is greater.

Got a chuckle from this. (Source: Tax Guru-Ker$tetter Letter.)