Category: Benefits

In response to the SEC’s recent release of a “Staff Report Concerning Examinations of Select Pension Consultants” (read about it here and here), the SEC and the DOL have collaborated and developed a set of questions to assist plan fiduciaries in evaluating the objectivity of the recommendations provided by pension consultants. You can access the Tips for Plan Fiduciaries here as well as the press release here. The DOL warns plan fiduciaries that the Staff Report raises “serious questions concerning whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients.” Thus, plan fiduciaries are urged to use the questions provided in order to gather and analyze information about pension consultant practices in order to help plan fiduciaries prudently select and monitor their pension consultants so as to fulfill their fiduciary duties and obligation under ERISA.

The SEC provides the same Tips for Plan Fiduciaries on their website as well as an announcement here.

On May 31, 2005, the Joint Committee on Taxation issued a Bluebook entitled “General Explanation Of Tax Legislation Enacted In The 108th Congress (JCS-5-05) [pdf].”

Benefitslink.com has posted the Bluebook here providing very helpful links to all of the laws impacting benefits.

Today’s Wall Street Journal reports:

Sen. Baucus, a Montana Democrat, recently joined Finance Committee Chairman Chuck Grassley and others to propose legislation that would repeal the alternative minimum tax. Sen. Baucus said millions of Americans recently have “watched in suspense as Anakin Skywalker was lured to the dark side and became Darth Vader. What millions of those same Americans may not be aware of is another Darth Vader lurking in our tax code; that is the AMT.”

“Both Skywalker and the AMT started off with good intentions, but eventually they went astray. Now, the Darth Vader of the tax code is bearing down on millions of unsuspecting families,” Sen. Baucus said. “It’s time to put the AMT in a galaxy far, far away and erase it from the tax code.”

Read more about the “dark side” of AMT in previous posts here.

While the rising cost of health care is a big issue for those currently employed, the issue is also problematic for retirees and those approaching retirement, especially when coupled with the fact that many retiree health plans seem to be going by the wayside. This article from the Los Angeles Times via the Philadelphia Inquirer highlights one idea for providing for health care during retirement which appears to be taking on at colleges and universities: “Health-care idea for earlier retirement.” Excerpt:

The latest invention to come out of American universities has nothing to do with science or technology. Instead, it’s a new kind of health insurance.

Worried that many employees were delaying retirement simply to keep their medical coverage, a group of colleges and universities has created a plan that lets workers and employers contribute to a fund that can be tapped after retirement for medical expenses and for insurance to supplement Medicare.

You can read more about the program here and here, and also in this No Action Letter from the SEC which describes in detail the legal structure of the program:

Each College will establish two VEBAs, one to receive and hold contributions made to the Plan by the College, and the other to receive and hold contributions made by individual participants. . . The College will make contributions to an employer-contribution VEBA to fund its portion of the College’s Plan. Participating employees and former employees of each College may make voluntary after-tax contributions to an employee-contribution VEBA trust . . . Each VEBA will maintain a separate account for the assets of each participant. Employee and employer contributions will not pass through the Consortium. Rather, contributions will be under the control of the trustee, which will be unaffiliated with the Consortium or any of the Consortium’s employees. . .

Following the participant’s retirement, the balances in the individual accounts held for each participant in a College’s Plan will be available to pay for health-insurance premiums and other qualifying medical expenses. A portion of each benefit payment (i.e., premium payments or reimbursement of qualifying medical expenses) will be drawn from each of the participant’s VEBA accounts on a pro-rata basis based on total assets in each of the accounts . . . [A]ny funds in an individual participant’s account in each VEBA not used for medical benefits will be forfeited.

According to the Emeriti website, Fidelity Investments in a 2005 release estimates that a couple retiring in 2005 at age 65 would require $190,000 in savings to cover medical costs over the next 15 to 20 years. The estimate apparently included the Medicare premium, expenses associated with Medicare cost-sharing provisions, and the cost of services not covered by Medicare, but did not include the cost of long-term care except on a very limited basis. (You can actually estimate your health care expenses during retirement by using this handy Retirement Health Care Cost Calculator here.)

There is a related article on the same topic from the Journal of Financial Planning: “Health Care Costs a Nightmare for Retirement Dreams.” The article discusses how health savings accounts are thought to be a good vehicle for paying for health care expenses during retirement. The small percentage of individuals who might be able to afford it could pay for their current medical expenses out of their own pockets without tapping the money in their health savings accounts, thus allowing the money in their health savings accounts to accumulate for future health care expenses to be incurred during retirement.

The Wirtz Labor Library and the Wirtz Labor Law Library, maintained by the Department of Labor, have provided in their “Law Tip of the Week” a page of information about Labor & Employment Blogs which lists the Employment Law Blog, the Arbitration Blog, ERISAblog and Benefitsblog. Blogs are also listed here in the site’s Law Tips Archive. You can read more about the Wirtz Labor Library here and subscribe to the “Law Tip of the Week” here.

In each edition of the IRS’s quarterly newsletter for Retirement Plans, the IRS focuses on a “common plan mistake” frequently turning up on audit. In a recent edition of the Retirement News for Employers[pdf], the IRS focuses on an issue which is sure to become even more and more common as the baby boomers age and either continue in the workforce or begin drawing down on their retirement accounts. (Commentators are indicating many baby boomers will continue to work past retirement age due to a lack of savings and the need caused by demographics for employers to retain older employees in their workforce.)

As most probably are aware, the Internal Revenue Code establishes a mandatory date, known as the “required beginning date” (“RBD”), by which payments to a plan participant must begin. Normally, the RBD for a participant who is not a 5% owner is the April 1st following the end of the calendar year in which the later of two events occurs: (1) the participant reaches age 70½ or (2) the participant retires. For a participant who is a 5% owner, the RBD is the April 1st following the end of the calendar year in which the participant attains age 70½, regardless of whether he or she retires by the end of that year.

The IRS notes in its newsletter that a common plan mistake found on audit is that required minimum payments have not been paid at all from a plan or have not been paid on a timely basis. The IRS notes that “this is especially true when a non-5% owner continues working after reaching age 70½.” (My guess is that they meant to say “this is especially true when a 5% owner continues working after reaching age 70½.”) As one would expect, the IRS warns that failure to follow the minimum distribution rules can disqualify the plan and can mean that participants or beneficiaries who do not receive their minimum distribution on time are subject to a 50% additional tax on the underpayment. (Ouch!)

The IRS newsletter goes on to discuss how to “fix” the error, for those who want to learn more. On a related note, however, see also this recent paper by Jason J. Fichtner, Joint Economic Committee–“The Taxation of Individual Retirement Plans: Increasing Choice for Seniors“–which argues for the repeal or modification of the minimum distribution requirements. The paper laments that such rules force many seniors to take distributions when they do not need them and, in cases of a down market, require “seniors to sell assets at depressed prices to pay taxes, even if investment losses have been incurred.” And, as the IRS newsletter reminds us, a plan’s failure to comply with the minimum distribution requirements can also cause seniors to incur the monstrous 50% excise tax on plan underpayments.

John Wasik for Bloomberg.com has an op-ed–“Darkest Side of Pension Consultants Still Unseen“–discussing the SEC’s findings reported in a recently released “Staff Report Concerning Examinations of Select Pension Consultants” (discussed here in a previous post).

Also, the Foundation for Fiduciary Studies has provided comments on the Staff Report here. (Source: 401kHelpCenter.com)

This announcement from the IRS: “Treasury and IRS to Provide More Time to Spend FSA Funds.” Excerpt:

Today the Treasury Department and the IRS issued Notice 2005-42 which will allow employers to modify Flexible Spending Arrangements (FSAs) to extend the deadline for reimbursement of health and dependent care expenses up to 2½ months after the end of the plan year. Previously, employees were required to “use-or-lose” FSA funds by the end of the year. Under the old rules, any unspent funds at year’s end would be forfeited.

What do employers need to do to take advantage of the “grace” period for their FSAs? The Notice provides that employers must amend their plans:

An employer may adopt a grace period as authorized in this notice for the current cafeteria plan year (and subsequent cafeteria plan years) by amending the cafeteria plan document before the end of the current plan year.

See IRS Notice 2005-42 for more details.

KaiserNetwork.org reports on the development here.

This recent article from Wharton–“Retirement Programs Face an “Aging-Population Tsunami“–reports on what was said at a recent conference entitled “The Evolution of Risk and Reward Sharing in Retirement” sponsored by the Wharton School’s Pension Research Council and Boettner Center for Pensions and Retirement Research. Excerpt:

Against the backdrop of rising concerns over both public and private pension systems in the U.S., industry experts convened at a recent Wharton conference to debate ways in which retirement programs can be better managed. Participants discussed such topics as the problems facing Social Security, the solvency of the Pension Benefit Guaranty Corp., and the consequences of an increase in defined contribution plans like 401(k)s along with a corresponding decline in defined benefit plans.

Douglas Holtz-Eakin, director of the Congressional Budget Office (CBO), told the conference. “Retirement policy is the central policy issue of our time. Period.” Mark Warshawsky, assistant secretary for economic policy at the U.S. Department of Treasury stated that “[t]he pension insurance premium structure provides little or no incentive for adequate funding” of pension plans.

An interesting suggestion for improving the retirement system came from Douglas Fore, principal research fellow at the Teachers Insurance Annuity Association-College Retirement Equities Fund (TIAA-CREF):

Fore suggested the possibility of developing a portable defined benefit plan in which employees could work toward a defined benefit pension even if they switch jobs. To do that, a system based on common actuarial standards and plan-benefit design would have to be developed. He also suggested individuals could purchase service credits and carry them along as they switch jobs. “We have just begun to sketch this out, but we do think this approach has some potential.”

The Internal Revenue Service and the Treasury Department today announced the issuance of revisions to the new Circular 230 standards for written tax advice that were announced late last year. Practitioners had asked for clarification in several areas and the revisions are apparently in response to those requests.

Three of the five revisions issued expand on the definition of “excluded advice” that is not subject to the detailed covered opinion standards of Circular 230. The revisions apply to:

• Advice from in-house tax professionals to their employers;
• Situations in which the advice is provided after the client files the relevant tax return; and
• “Negative advice” wherein an advisor tells a client a transaction will not provide the purported tax benefit.

Advice that is excluded from the covered opinion standards by these revisions will continue to be subject to the general requirements for other written advice.

Read more about Circular 230 here and here.