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Cypen & Cypen
JANUARY 28, 2010

Stephen H. Cypen, Esq., Editor

1.            IRS ISSUES GUIDANCE ON HEART ACT CHANGES: Internal Revenue Service has provided guidance in the form of questions and answers with respect to certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008, Pub. L. No. 110-245.  Sections of the HEART Act addressed in the notice are section 104 (relating to survivor and disability payments with respect to qualified military service), section 105 (relating to treatment of differential military pay as wages), section 107 (relating to distributions from retirement plans to individuals called to active duty), section 109 (relating to contributions of military death gratuities to Roth IRAs and Coverdell education savings accounts) and section 111 (relating to an employer credit for differential wage payments to employees who are active duty members of the uniformed services).  By way of background, under the Uniformed Services Employment and Reemployment Rights Act of 1994, an employee who leaves a civilian job for qualified military service generally is entitled to be reemployed by the pre-service civilian employer if the individual returns to employment within a specified period and meets other eligibility criteria under USERRA. USERRA also provides that an individual, upon reemployment, is entitled to receive certain pension, profit-sharing and similar benefits that would have been received but for the employee's absence during military service.  The Internal Revenue Code provides rules regarding interaction of USERRA with rules governing tax-qualified retirement plans. The Code provides that an employer maintaining a plan is treated as meeting requirements of USERRA only if: an employee reemployed under USERRA is treated as not having incurred a break in service because of the period of military service, the employee's military service is treated as service with the employer for vesting and benefit accrual purposes, the employee is permitted to make additional elective deferrals and employee contributions in an amount not exceeding the maximum amount the employee would have been permitted or required to contribute during the period of military service if the employee actually had been employed by the employer during that period and the employee is entitled to any accrued benefits that are contingent on employee contributions or elective deferrals to the extent the employee pays the contributions or elective deferrals to the plan.  (In Florida, under the Division of Retirement’s interpretation of Chapters 175 and 185, Florida Statutes, returning firefighters and police officers are not required to make up “missed” employee contributions.)  Section 104(a) of the HEART Act adds § 401(a)(37) to the Code.  Under § 401{a)(37), qualified retirement plans must provide that, in case of a participant who dies while performing qualified military service, survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that would have been provided under the plan had the participant resumed employment and then terminated employment on account of death.  Section 104(b) of the HEART Act provides that an employer sponsoring a retirement plan may, for benefit accrual purposes, treat an individual who dies or becomes disabled while performing qualified military service as if the individual had resumed employment in accordance with the individual's USERRA reemployment rights on the day preceding death or disability and then terminated employment on the actual date of death or disability. Section 104(d)(1) of the Act states that amendments made by section 104 apply with respect to deaths and disabilities occurring on or after January 1, 2007.  Section 105(a) of the HEART Act amends the Code to treat differential wage payments as wages for income tax withholding purposes.  In the case of employees who were called to active duty, some employers paid some or all compensation that a serviceman would have received from the employer during the service member’s period of active duty had the employee not been called to active duty.  Prior to enactment of the HEART Act, these payments, commonly  referred to as "differential wage payments," were not treated as wages through federal employment tax purposes.  Amendments made by Section 105(b) of the Act apply to years beginning after December 31, 2008.  Under current law, a taxpayer who receives a distribution from a qualified retirement plan prior to age 59½, death or disability is generally subject to a 10-percent additional income tax penalty under § 72(t), unless an exception applies.  Prior to amendments made by the Pension Protection Act of 2006, the Code provided that the 10-percent additional income tax does not apply to a qualified reservist distribution.  As originally enacted in PPA, the special rules for qualified reservist distributions applied to individuals ordered or called to active duty after September 11, 2001 and before December 31, 2007.  Section 107 of the HEART Act deletes reference to December 31, 2007, so that the special rules for qualified reservist distributions no longer have an expiration date.  IRS is considering issuing additional guidance regarding the above sections of the HEART Act, and requests comments regarding such guidance, which should be submitted by April 9, 2010.  Notice 2010-15.  

 2.         U.S. PLANS’ 2009 PERFORMANCE STELLAR:  U.S. pension funds, aided by strong equity and bond returns plus a declining dollar, returned 19.6% in 2009, outperforming their peers in the world's seven largest markets.  According to, strong equity markets lifted pension fund returns worldwide into double digits, a major about-face from 2008, when real returns sank as low as -27%.  U.S. plans lost an average 25.2% in 2008.  Pension fund returns in the United Kingdom rose 14.5% in 2009 (compared to -13.1% in 2008).  Australian investors returned an average 14% (-27% in 2008), while Canadian pension funds were up 13.8% last year, after losing 14.7% in 2008.  Pension fund returns in the Netherlands, Switzerland and Japan rose, respectively, 13.2%, 10.8% and 9.5% in 2009.  In 2008, the same funds returned -16.6%, -13.3% and -21.2%.  Despite the financial crisis of 2008-2009, few plans made major changes to their asset allocations.  Instead, pension officials reviewed risk and governance.

 3.            FEDERAL JUDGE ORDERS REMEDIES IN NYC DISCRIMINATION CASE:  We recently reported on a federal court’s decision finding New York City liable for disparate-impact discrimination and for intentional discrimination (see C&C Newsletter for January 21, 2010, Item 2).  Now, the court has proceeded to the remedial phase.  In essence, the court concluded that two broad forms of relief are needed to remedy the City’s discrimination:  (1) compensation for the identified victims of the City’s discriminatory testing practices and (2) compliance measures to ensure that the City implements and administers a fair and job-related test for entry-level firefighters.  These forms of relief are simple in concept, but will be complex in execution.  Achieving these basic aims will require ongoing oversight, attention to myriad details and resolution of disputes among the parties.  The court ordered the following measures designed to compensate identified victims of discrimination:  (1) there will be a notice-and-claims procedure by which approximately 7,400 minority applicants who sat for written examinations will have the opportunity to claim entitlement to relief; (2) the City will have the opportunity, and the burden, to show that any of these individual candidates were not victims of discrimination because they were not hired for legitimate reasons; (3) the remaining identified victims of discrimination will be eligible for monetary relief, apportioned on a pro rata basis among them; (4) 293 victims of discrimination will be eligible for priority hiring relief, provided that they meet current requirements for appointment as an entry-level firefighter; and (5) retroactive seniority will be available to priority hires, as well as to those whose hiring was delayed by the City's discrimination.  The court also entered extensive compliance relief, including a requirement that the City develop a new testing procedure for position of entry-level firefighter.  The court, however, declined at this time to impose interim hiring quotas on the City as part of its remedy.  United States of America vs. The City of New York, Case No. 07-CV-2067 (ED NY, January 21, 2010) (Memorandum & Order). 

 4.            SE.XUAL PROFANITY MAY SUPPORT HARASSMENT CASE:  The United States Court of Appeals for the Eleventh Circuit sat en banc  to consider a claim of hostile work environment under Title VII, 42 U.S.C. § 2000e-2(a)(1), and whether it was error for the district court to grant summary judgment to C.H. Robinson Worldwide, Inc.  After thorough review of the record, and reading the evidence in a light most favorable to Ingrid Reeves, the appellate court concluded that there was sufficient evidence to present a jury question of disparate treatment.  While the record was replete with evidence of general, indiscriminate vulgarity, there was also ample evidence of gender-specific, derogatory comments made about women on account of their se.x.  The court recited profane language that allegedly permeated this workplace exactly as it was spoken in order to present and properly examine the social context in which it arose.  The court did not explicate this vulgar language lightly, but only because its full consideration was essential to measure whether these words and this conduct could be read as having created an environment that a reasonable person would find hostile or abusive.  The full court, in a unanimous ruling, reversed and remanded.  We will not report here the specific language quoted; suffice it to say, the language was extremely crude and vulgar.  The Eleventh Circuit has heretofore been very tough on plaintiffs, generally requiring touching.  However, the court found that Reeves had pointed to enough evidence of conduct that it be actionable in order to support her claim.  The court also rejected Robinson’s argument that use of gender-specific terms was not based on se.x.  Early on in the opinion, the court determined that Reeves’s complaint was properly evaluated as one of disparate treatment (where women or minorities are treated differently than other employees) or disparate impact (where a job requirement or condition that applies to all employees disparages women or minorities).  You might want to read the opinion while listening to the Howard Stern Show (which the court actually referred to in a footnote).  Reeves v. C.H. Robinson Worldwide, Inc., Case No. 07-10270 (U.S. 11th Cir., January 20, 2010).  

 5.         PENSIONS POUR INTO EMERGING MARKET DEBT:  U.S. pension funds are poised to pour almost $100 Billion into emerging market debt in the next five years, according to JPMorgan. believes the impending buying spree will be augmented by strong flows from central banks desperate to diversify out of the dollar, bolstering the ongoing rally in emerging market bonds and potentially pushing yields relative to U.S. Treasuries to a record low.  Demand is being driven by the Pension Protection Act of 2006, which compels U.S. corporate pension funds to discount their future liabilities using a market interest rate, rather than using their expected rate of return on assets, as public sector funds can.  Thus, corporate funds are being pushed to sell equities and buy bonds, as they seek assets whose value moves in line with the new discount rate.  In the 10 months ended August 2009, U.S. corporate pension funds increased their allocation to bonds from 32.4 per cent to 38.4 per cent, with further buying expected this year.  Nevertheless, we remain skeptical.  Emerging market government bonds have collectively gained investment grade status for the first time, in spite of investor worries over risk of future sovereign defaults.  The average rating of the 39 countries that make up the benchmark emerging market sovereign bond index has moved up one notch from junk (high yield) to the lowest rung of investment grade, according to Moody’s.  Does the word “bubble” sound familiar? 

 6.            INDIVIDUAL DEFERRED ANNUITY INVESTORS SUE VALIC:  Two individual deferred annuity investors have brought a class action against The Variable Annuity Life Insurance Company and others, on behalf of all persons who purchased an individual deferred annuity contract or who received a certificate to a group deferred annuity contract, issued by VALIC, on or after January 1, 1974, which was used to fund a contributory (not defined benefit) retirement plan or arrangement qualified for favorable income tax treatment pursuant to Internal Revenue Code sections 401, 403, 408, 408A, or 457.  The covered retirement plans include IRAs, 401(k) plans, 403(b) plans for teacher, hospital and non-profit organization employees and state government employee plans.  Under the Internal Revenue Code, insurance products, including annuities, are exempt from income taxation on their inside investment build-up (earnings).  The main economic value of a deferred annuity (as opposed to a payout annuity) is to act as a wealth accumulation device that confers tax advantages, including tax deferral of earnings and ability to switch among different investment accounts inside the annuity, without triggering current taxation.  The tax advantages of investing through a deferred annuity insurance product are, however, unnecessary for persons funding retirement plans that are already tax deferred regardless of the investment used in the plan (for example, 403(b) plans, 401(k) plans and IRA rollovers).  Nevertheless, VALIC targets sales of deferred annuities to persons seeking to fund tax-qualified retirement plans.  The individuals claim that they have suffered economic injuries as a result of paying fees and other detriments, including surrender penalties, associated with the insurance aspects of these hybrid insurance and investment products that they would not have agreed to pay if VALIC had made full and fare disclosure in the sale that the tax-deferral feature of the annuity is unnecessary because the tax-deferral benefit is already provided by the retirement plan.  The investors seek compensatory damages and reformation of the subject contracts, if the contracts have not already been surrendered, or, an order declaring the VALIC contracts are rescinded, and awarding restitution of any monies paid to VALIC.  The individuals also seek declaratory relief, injunctive relief, disgorgement of profits and an award of punitive damage against VALIC for its “outrageous, intentional, evil-minded, malicious and wanton misconduct.”  Incidentally, VALIC is a subsidiary of AIG.  Hall v. The Variable Annuity Life Insurance Company, was filed in the United States District Court, District of Arizona.

 7.            HARVARD GOES BACK TO THE DRAWING BOARD:  The richest and oldest U.S. school has named a new risk head of its endowment-management company, which suffered a record loss last year (see C&C Newsletter for October 1, 2009, Item 5).   According to ai5000, Harvard’s endowment dropped 30%, to $26 Billion in the year ended June 30, 2009, as investments declined 27%.  The university’s loss of billions of dollars was largely due to issues with its private-equity and hedge fund portfolios, leading to cost cuts, a halt on campus expansion and a review of how it manages and allocates its assets.  Harvard’s CEO has expressed confidence that the new hire will be effective as Harvard continues to refine the endowment's risk profile to ensure that it can support the growth and plans of the University over the long term.  Live by the sword,... .

 8.            HIGH-PROFILE PURCHASE OF MANHATTAN COMPLEX COLLAPSES UNDER MOUNTAIN OF DEBT:  Its owners have decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to their creditors in the collapse of one of the most high-profile deals of the real estate boom.  The decision came, according to the Wall Street Journal, after the venture defaulted on the $4.4 Billion debt used to help finance the deal.  The venture acquired the 56-building, 11,000-unit property for $5.4 Billion in 2006 -- the most ever paid for a single residential property in the United States.  The venture had been struggling for months to restructure the debt, but capitulated in face of a massive debt load and a weak New York City economy that undercut rents and demand for high-priced apartments.  By some accounts, the project is only valued at $1.8 Billion now, less than half the purchase price.  Equity investors, including the Florida Retirement System and California Public Employees' Retirement System (see C&C Newsletter for September 3, 2009, Item 12, C&C Newsletter for September 10, 2009, Item 7  and C&C Newsletter for October 29, 2009, Item 1), are in danger of seeing most, if not all, of their investments wiped.  What’s that flushing sound?

 9.            IF FAMOUS CHARACTERS THROUGHOUT TIME HAD JEWISH MOTHERS:  ABRAHAM LINCOLN'S JEWISH MOTHER:  “Again with that hat!  Why can't you wear a baseball cap like the other kids?” 

10.            FABULOUS RANDOM THOUGHTS:  Do you remember when you were a kid, playing Nintendo and it wouldn't work?  You take the cartridge out, blow in it and that would magically fix the problem.  Every kid in America did that, but how did we all know how to fix the problem?  There were no message boards or FAQ's or internet.  We just figured it out.  Today's kids are soft. 
11.            QUOTE OF THE WEEK:  “If there’s a way to do it better, find it.”  Thomas Edison (And, boy, did he ever.) 


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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.

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