Cypen & Cypen
JANUARY 10, 2008
Stephen H. Cypen, Esq., Editor
As the new year begins, it may be valuable to review major Social Security changes taking place in 2008. All of these changes are result of scheduled and automatic programs built into Social Security law and are tied to the annual cost-of-living adjustment (COLA), according to Copley News Service. Adjustment is based on annual increase in the consumer price index. The 2008 COLA is 2.3%, which means Social Security beneficiaries saw 2.3% increase in their Social Security checks last month. The average monthly benefit to a retiree this year will be $1,079, up from $1,055 in 2007. Average disability benefit goes up $23, to $1,004 in 2008. Women getting widows’ benefits will see an average monthly check of $1,041, compared to $1,017 last year. The COLA also impacts the amount of money an early retiree can earn before he is penalized. People who apply for Social Security benefits in 2008 who are under their full retirement age can earn up to $13,560 and still collect all their Social Security. But for every $2 they earn over the $13,560 threshold, $1 must be withheld from their annual Social Security benefits. The 2007 threshold was $12,960. Social Security disability beneficiaries are also affected by the COLA. In addition to the 2.3% increase in their monthly checks, there is also an increase in the amount of money they can make per month if they are trying to work despite their disability. The law says disabled people can get Social Security benefits any month they are not performing substantial gainful activity. The 2008 level is $940, meaning that a disabled person who is trying to work can continue to receive disability checks if he earns less than $940 per month. There is also a COLA impact on active workers/taxpayers: the maximum amount of earnings subject to Social Security taxes goes up to $102,000 from last year’s $97,500. In addition, the earnings necessary to get “quarters of coverage” for Social Security entitlement purposes rises. In 2007, your earned your maximum four annual credits once you made $4,000; now, you will have to earn $4,200 before your Social Security record can be updated to the maximum four credits. Remember, you need forty credits to be eligible for Social Security retirement benefits. Another change, not tied directly to COLA, is the increase in Part B Medicare premium from $93.50 to $96.40. (Although not tied to the COLA, this premium is calculated to pay for 25% of the cost of the Part B Medicare Program.) So, don’t complain about your Medicare Premiums -- working taxpayers pay 75% of your cost!
California Public Employee Retirement System’s new allocation will shift some $44 Billion, or nearly 18% of its total portfolio, into international equity and alternative strategies. Pensions & Investments reports that the changes represent the most significant policy shift in the last ten years. At a December meeting, trustees approved the new allocation that will cause CalPERS to pour an additional $24 Billion into its $46 Billion international equity portfolio, $4.4 Billion more into its $20.6 Billion private equity portfolio, another $5.2 Billion into its $19.8 Billion real estate portfolio and $10 Billion more into a new inflation-linked asset class. The international equity figure assumes that one-third of CalPERS’ $138 Billion global equity portfolio is invested in international stocks. (Yikes.) The new global equity target has been pared to 56%, from 60%. Private equity and real estate will be increased to 10% each, up from 6% and 8%, respectively. The new inflation-linked asset class will make up 5% of assets. Global fixed income will drop to 19% from 26%, resulting in a $21.3 Billion reduction in size of that portfolio. Much of the reduction will be used to fund the new inflation-linked asset class. Although the total fund’s Sharpe ratio will remain at 0.543, the new asset mix will increase CalPERS’ expected annual return to 9.06% from 8.92% (while slightly increasing the fund’s overall volatility). Although we generally believe in following the leader -- especially when it comes to CalPERS -- this time, we’re not sure it’s worth the candle.
The U.S. Equal Employment Opportunity Commission has published a final rule allowing employers that provide retiree health benefits to continue the long standing practice of coordinating those benefits with Medicare (or comparable state health benefits) without violating Age Discrimination in Employment Act. The EEOC rule is in response to the 2000 U.S. Third Circuit Court of Appeals’ decision in Erie County Retirees Association v. County of Erie (see C&C Newsletter for September, 2000, Item 14). The court there held that ADEA requires health insurance benefits received by Medicare-eligible retirees to be the same, or cost employer the same, as health insurance benefits received by younger retirees. The Erie County decision would have made most existing retiree plans unlawful. EEOC’s new rule is designed to ensure that employers can continue to offer their retirees much-needed health benefits. To correct the problem, the new regulation provides an exemption for ADEA coverage for this common and long-standing employer practice. Readers may recall that in early 2005 AARP sued EEOC to prevent publication of the new rules, but the District Court and the Third Circuit ruled for EEOC, finding that the rule was a reasonable, necessary and proper exercise of its authority (see C&C Newsletter for October 12, 2005, Item 4 and C&C Newsletter for June 21, 2007, Item 1). And although AARP’s petition for writ of certiorari in the United States Supreme Court is pending, most observers believe the EEOC exemption will ultimately be upheld.
The National Association of State Retirement Administrators recently released a report summarizing its annual survey of the nation’s largest public pension funds (see C&C Newsletter for October 25, 2007, Item 9). Reviewing said report in governing.com, Girard Miller concludes that most public pension plans are stronger financially and recovering steadily from the last recession. If financial markets can hold their current levels or better, the funding status of most pension plans should continue to improve in next year’s report as well. Although funding status of public pension plans has improved significantly, because of “actuarial smoothing” it is almost impossible to come to that conclusion. With good intentions, actuaries try to dampen volatility of stock market returns in making their projections of required employer contributions. So they smooth, or average, actual market levels of plan assets over time. When the stock market is rising in an expanding economy, asset values used by actuaries are less than what the portfolio is really worth. (An average always lags the latest number when a trend is underway.) One noteworthy graphic in this year’s NASRA report shows distribution of each system’s ratio of actual market assets versus actuarial “smooth” assets used to calculate the unfunded liability ratio. Some plans were below 90% and one was actually 140% of its smooth actuarial value. (Considering the usual “80% - 120% collar,” we do not understand how that one plan could be so out of whack.) Anyway, the average plan had a market value of 103.8% of its actuarial number, meaning plans are in better shape than their actuarial reports would suggest. And it is not a result of anything devious by the plan administrators or actuaries. Over the long run, actuarial smoothing helps avoid highly erratic annual funding contributions by public employers, which could wreak havoc on their budgets and tax rates. Especially when times are good and markets are ebullient, actuarial data help deter “tomb raiders” looking for magical benefit increases. After all, the next recession will likely take 15 points off those funding ratios before the next upcycle.
After Rask was dismissed from her job, she sued her former employer under Americans with Disabilities Act and Family and Medical Leave Act. The federal district court granted summary judgment against Rask, who had worked as a patient care technician at two of her former employer’s kidney dialysis clinics. Following a series of disciplinary and attendance problems, the employer terminated Rask when she failed to come to work. Rask had a long history of depression, and she filed an action claiming that her depression was a disability and that termination of her employment constituted discrimination under ADA. She also claimed that some of the days when she did not come to work were covered medical leave under FMLA. On appeal, the United States Court of Appeals for the Eighth Circuit affirmed. Rask failed to show that she was qualified to perform essential functions of her job. Courts have consistently held that regular and reliable attendance is a necessary element of most jobs. While there is evidence in the record that the employer had sufficient manpower to staff its operations without Rask, she made no showing that the employer would be able to do so on short notice at times when the employer expected her to be at work. Rask’s job was not the type that could be performed from another site or put off until another time: she cared for seriously ill patients in need of dialysis. As to Rask’s FMLA claim, the trial court found that she failed to provide the employer with sufficient notice that she was taking FMLA leave. The statute does not specify what kind of notice employees are required to give of their intent to take FMLA leave when the need therefor is unforeseeable. But relevant regulations provide some considerable guidance, and they are generous to employees: notice must be given as soon as practicable, but the employee need not explicitly assert rights under FMLA or even mention FMLA to require employer to determine whether leave would be covered by FMLA. Here, in an apparent effort to explain her absences, Rask said that she “let her supervisors know that I’m having problems with my medication ... I might miss a day here and there because of it.” Rask v. Fresenius Medical Care North America, Case No. 06-3923 (U.S. 8th Cir., December 13, 2007) (corrected opinion).
Internal Revenue Service and the Treasury Department have issued proposed regulations that provide employers sponsoring single-employer defined benefit plans with guidance regarding the measurement of pension assets and liabilities under new funding rules enacted as part of the Pension Protection Act of 2006. The proposed regulations, together with proposed regulations related to mortality issued in May, proposed regulations relating to funding balances and funding-based benefit limitations issued in August, the yield curve guidance issued in October and guidance on lump sum determinations issued in November will assist plan sponsors in determining contribution requirements that apply to their defined benefit plans for the first year that the new funding rules apply. Although new funding rules are generally effective for plan years beginning on or after January 1, 2008, the regulations are proposed to be effective for plan years beginning on or after January 1, 2009. However, plan sponsors can rely on these proposed regulations for purposes of satisfying requirements of Section 430 for plan years beginning in 2008. IRS and Treasury intend to issue guidance in the near future indicating that the proposed effective date for these regulations should also apply to the proposed regulations relating to employer-specific mortality tables issued in May and proposed regulations related to funding balances and funding-based benefit limitations under Section 430(f) and 436 issued in August. Although final regulations will not apply to plan years beginning before January 1, 2009, plan sponsors may also rely on those proposed regulations for purposes of satisfying statutory requirements for plan years beginning in 2008. On December 19, 2007, the Senate passed an amended version of Pension Protection Technical Corrections Act of 2007. These proposed regulations, like the earlier ones, do not reflect any proposed technical corrections. They also do not include any reflection of the proposed modification to the rules for determining asset values. After technical corrections are enacted, the regulations will be modified to take into account the enacted provisions. IR-2007-212 (December 31, 2007)
On December 28, 2007, President Bush vetoed legislation that would have amended the Family and Medical Leave Act of 1993 to allow employees to use leave in certain circumstances when their spouse, child or parent is called for active duty in the military. According to hr.blr.com, the FMLA provision was part of a larger defense bill (H.R. 1585, the National Defense Authorization Act). According to a White House fact sheet, the President vetoed the legislation because particular provisions included in the bill risk imposing financially devastating hardship on Iraq that will unacceptably interfere with the political and economic progress everyone agrees is critically important to bringing our troops home. (Huh?) The move came as a surprise to leaders in Congress, who fully expected Bush to approve the legislation. Inasmuch as the veto had nothing to do with the provision that would have amended FMLA, it is possible that Congress might again pass legislation including a similar provision, which, hopefully, would not meet the same fate.
Losinske was a member of the Wisconsin Carpenters’ Pension Fund, an employee benefit trust organized and maintained under the Employee Retirement Income Security Act of 1974. The trustees administer the fund in accordance with a trust agreement that authorized creation of a pension plan and trust fund. Under the pension plan and trust fund, a retirement benefit plan was created in 1963 for union members. According to the plan, the fund may suspend a participant’s retirement benefits if he continues or resumes work in a “plan-related employment,” which is defined as, among other things, employment in an industry involving any business activities in which employees covered by the plan were employed at the time that payment of benefits commenced. A participant’s work in plan-related employment will suspend benefits for any calendar month in which the suspendible participant worked 40 or more hours after having worked 400 hours in prior months in such calendar year in plan-related employment as an employee. Under the plan, a rebuttable presumption arises that a participant is working 160 hours a month if the suspendible participant fails to notify the trustees of his plan-related employment, and the trustees become aware that a suspendible participant is working in such employment. In an action for declaratory and monetary relief filed under ERISA, a United States district judge has granted summary judgment in favor of defendant. The court found that Wisconsin Carpenters’ Pension Fund employed fair procedures to reach a reasonable determination that plaintiff engaged in plan-related employment in 2005 for 160 hours each month, upholding its decision to suspend his retirement benefits. The standard of review is the deferential “arbitrary and capricious” standard, because the plan gives the trustees authority to determine eligibility for benefits and to construe terms of the plan. Under this standard, the court must limit its review to the record available to the plan administrator at time the decision was made, and defer to the plan administrator’s interpretation of the plan’s terms and its factual findings on that record. In particular, plaintiff contended that defendant acted arbitrarily and capriciously by applying the plan’s presumption that plaintiff was working 160 hours each month. Although the plan allows for such presumption when a participant fails to report plan-related employment, federal regulations prohibit administrators from employing plan presumptions unless certain requirements are met, including yearly disclosure to retirees of the presumption and its effect. However, defendant contended that plaintiff was precluded from presenting this argument because he failed to raise it before the trustees during their review of his case, and the court agreed. Losinske v. Wisconsin Carpenters’ Pension Fund, Case No. 3:07-cv-00185 (W.D. Wis., December 19, 2007).
The tax treatment of Social Security benefits and pension income by state governments is a critical concern for older Americans because these are two of their primary sources of income. In 2004, nearly nine out of ten households age 65 or older received Social Security benefits and 41% received other retirement income benefits. AARP’s Public Policy Institute has released a new Issue Brief , updating a similar one addressing the year 2000. In this one the author summarizes personal income tax treatment of Social Security benefits and pension income for the year 2006 by the 41 states and the District of Columbia that have a broad-based income tax; describes exclusions and credits on other types of retirement income; and indicates any age or income requirements for receiving retirement income exemptions/credits. Policymakers, public officials and policy analysts will find the information useful in making state comparisons, and retirees can use it to help them make decisions on where to retire based on differences in tax treatment. The entire fifteen page publication is available at http://www.aarp.org/research/financial/pensions/ib84_taxation.html. Happy moving.
TheStreeet.com says it is time to set your goals for 2008, and map out your financial strategy for the year to come. Part of that strategy should be to find ways to increase your wealth. Doing so is important because it allows you to spend your time the way you choose, doing the things you enjoy more than listening to other people tell you what they want you to do. You can take a number of steps that will have a large impact. Here are five that should be on your list:
As you look at your finances for the past year and begin making plans for 2008, make sure to include these wealth-building strategies to make this year a financial success for your family and you. Do I hear Jim Cramer screaming in the background?
Miser: A person who lives poor so that he can die rich.
“Money is a terrible master, but an excellent servant.” P.T. Barnum, who reportedly (but erroneously) also said “There’s a sucker born every minute.”
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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.