1. TOP EIGHT ITEMS TO LOOK FOR IRS GUIDANCE IN 2013:The Internal Revenue Service and Treasury Department recently issued their 2012-2013 Priority Guidance Plan. It represents guidance projects currently being worked by the IRS and Treasury. NAPPA Report counts down the top 8:
- Tax withholding on pension payments to addresses outside the U.S. Most of the country's larger public pension funds have a number of recipients who have retired outside the United States, and receive pension payments at foreign addresses. Public pension funds have potential liability to the IRS for failing properly to withhold on these pension payments as required by IRC § 3405. Look for the IRS to clarify the special tax withholding rules that apply in these cases.
- "Ineligible" Deferred Compensation Plans under IRC § 457(f). Many public systems are familiar with (and even administer) governmental IRC § 457(b) deferred compensation plans, which are essentially counterparts to private sector 401(k) plans and to 403 (b) plans used by governmental and tax-exempt educational institutions to allow employees voluntarily to defer income on salary. However, a number of public pension systems also provide non-traditional deferred compensation, termination or incentive-based compensation arrangements, particularly for executives and investment office staff. Depending on structure of these arrangements, they may be subject to the income inclusion requirements of IRC § 457(f). Unlike governmental IRC § 457(b) deferred compensation plans, IRC § 457(f) plan benefits become taxable upon participant vesting (actually, on the lapse of a "substantial risk of forfeiture") and not on payment (as with § 457(b) plan distributions). To the extent that regulations clarify and expand the types of arrangements considered to be subject to § 457(f) or limit the circumstances that constitute a substantial risk of forfeiture, public pension attorneys will want to review these regulations, even in cases where IRC § 409A may not apply.
- Due Diligence in Accepting Rollovers. IRS intends to issue guidance on facilitating rollovers into retirement plans. Many public plans allow members to "roll in" plan account balances from a prior employer's plan or an IRA rollover account (for example, to purchase service credit in case of a public defined benefit plan). This guidance will probably address current law under Treasury Regulations that require the receiving public plan administrator reasonably to conclude that the rollover is a valid rollover contribution. Look for guidance that will add more flexibility in demonstrating that a "reasonable conclusion" was made on the validity of a potential rollover contribution before it was accepted by a plan.
- Group trusts under Revenue Rulings 81-100 and 2011-1. As retirement systems struggle to achieve adequate investment returns for relatively smaller retiree health trusts, look for more commingling and co-investing of these assets alongside traditional pension fund investments. Many were pleased to see IRS clarify that governmental retiree health plans may be included in Rev. Rul. 81-100 group trusts with pension assets. Some custodians have been cautious in implementing these changes, and more guidance could be helpful.
- Affordable Care Act. Some public systems also administer health plan benefits for their members. The IRS is moving steadily toward full implementation of the Affordable Care Act, which includes potential play or pay penalty taxes for employers that do not meet certain minimum health insurance coverage requirements with respect to full-time employees and an annual "Patient-Centered Outcomes Research Institute" fee that applies to sponsors of self-insured health plans. Keep an eye out for guidance that may further clarify the application of these penalty taxes and fees that (surprisingly) also apply to public funds and governmental employers.
- Pick-up Contributions under IRC § 414(h)(2). While it may be a stretch to think the IRS will specifically address in generally applicable guidance issues involved with the long-pending Orange County private letter ruling request (dealing with elective changes in pick-up contributions in connection with a choice between old and new plan formulas), it is possible the IRS will clarify some aspects of Rev. Rul. 2006-43 (which sets forth certain conditions under which contributions to a qualified governmental plan will be treated as picked up by the employer under IRC §4l4(h)(2).) One of these conditions is that a participant in the plan cannot retain, from and after the date of a pick-up contribution, a cash or deferred election right with respect to contributions intended to be treated as pick-up contributions. For example, a participant generally cannot opt out of the pick-up contribution or elect to receive contributed amounts directly, instead of having them paid by the employer to the plan. Although a number of prior IRS private letter rulings indicated that a plan could allow individual elections to purchase permissive service credit through pick-up contributions under IRC §4l4(h)(2), the revenue ruling has created uncertainty regarding the issue. There is speculation that IRS will say that compliance will instead be treated as some sort of safe harbor, potentially giving some flexibility to governmental plans at least to continue past practice relating to service credit purchases through pick-up contributions.
- Normal Retirement Age Under Governmental Plans. IRS issued final normal retirement age regulations in 2007. Application of those regulations, however, to common governmental pension plan features, such as a definition of "normal retirement age" that is based on either the completion of a stated number of years of service or a combination of a participant's age and years of service, has remained open since the final regulations were issued. Through a number of pieces of subsequent guidance, IRS requested comments on certain of these issues, and postponed application of its 2007 regulations with respect to governmental plans. More recently, in Notice 2012-29, the IRS extended the effective date of the 2007 normal retirement age regulations for governmental plans generally to January 1, 2015. Notice 2012-29 also contained a request for comments on several additional issues related to governmental plans, such as information on overall retirement patterns of employees in government service (that is, typical retirement ages for such employees).
- Governmental Plan Definition. If and when it does come, guidance will likely be in the form of proposed regulations, given that the IRS and Treasury began the process with an Advanced Notice of Proposed Rule Making. It is possible IRS and Treasury will try to find a way to make progress by first providing safe harbors that would deem certain single-employer plans as "governmental," and then asking for additional comments on knottier issues.
Although there certainly is no guarantee that something will be issued on all of the eight projects in 2013, the odds are that many will result in public plan guidance by year end.
2. SEC CHARGES ILLINOIS FOR MISLEADING PENSION DISCLOSURES: The U.S. Securities and Exchange Commission charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations. SEC’s investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations, and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan. The state, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges. Regardless of the funding methodology that is used, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans. Public pension disclosure by municipal issuers continues to be a top priority of SEC’s Division of Enforcement. SEC’s order found that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. Although the state did disclose the pension holidays and other legislative amendments to the plan, it did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. Illinois took multiple steps beginning in 2009 to correct process deficiencies, and enhance its pension disclosures. The state issued significantly improved disclosures in the pension section of its bond offering documents, retained disclosure counsel and instituted written policies and procedures as well as implemented disclosure controls and training programs. Without admitting or denying the findings, Illinois consented to the SEC’s order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. Release 2013-37 (March 11, 2013). Not such cruel or unusual punishment.
3. FTC FINDS FLORIDA WORST STATE FOR IDENTITY THEFT COMPLAINTS: The Federal Trade Commission has issued its 2013 “Consumer and Sentinel Network Data Book,” which covers the period from January 1, 2012 through December 31, 2012. Of the two million complaints during the calendar year, at 18%, identity theft was the number one complaint category. Government documents/benefits fraud (46%) was the most common form of reported identity theft, followed by credit card fraud (13%) phone or utilities fraud (10%) and bank fraud (6%). Here are the worst ten states for per capita rate of reported identity theft complaints:
• Florida (361.3 complaints per 100,000 population)
• Georgia (193.9)
• California (122.7)
• Michigan (122.2)
• New York (110.1)
• Nevada (109.9)
• Texas (108.6)
• Arizona (107.3)
• Maryland (105.0)
• Alabama (104.9)
As can be seen, Florida is almost double second place. Nice. Read all 102-pages of http://www.ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2012.pdf.
4. AFFLUENT AMERICANS MAY BE UNDERESTIMATING THEIR RETIREMENT NEEDS: Despite a general sense of confidence in their financial readiness for retirement, affluent Americans might be overlooking critical tenets of retirement planning, according to a new Schwab survey of investors across nine major U.S. markets. As reported by Business Wire, 84 percent of investors say they have a retirement plan in place, and 80 percent of these respondents say they are confident about their financial readiness for retirement. However, when it comes to estimating how much money they will need once they actually retire, respondents say they will need on average around $66,000 in income annually, far lower than current average income, which is approximately $115,000. The survey also finds that, on average, respondents plan to work until they are 67, and expect to live to 86, suggesting that they anticipate living off their retirement savings for less than 20 years. However, when asked directly how many years they anticipate living off of their savings in retirement, people say 21 years, on average.
5. IT IS DAYLIGHT SAVING TIME…FOR MOST PEOPLE: Daylight Saving Time has begun -- that time of year when most people in the country lose an hour of sleep in exchange for more light in the evenings. It is more than just a custom; Daylight Saving is law in places where it is observed. (See Item 6 below). Findlaw.com says the practice of "springing forward" in March and "falling back" in November is observed in most states. The two notable exceptions are Arizona and Hawaii. But it was not always this way. In fact, Daylight Saving Time is officially less than a century old. Here is how it became law:
- 1918: During the first World War, Congress established official time zones, and set up standard time within each zone. In an effort to save energy, the new law also mandated Daylight Saving by pushing clocks forward one hour for a period of seven months. That provision was so unpopular it was eventually repealed.
- 1942: During World War II, Daylight Saving was again reinstated as part of the war effort. But instead of pushing clocks forward for just a few months of the year, the practice stayed in place year-round until September 1945.
- 1966: Rather than force states to abide by Daylight Saving Time, Congress passed the Uniform Time Act. That law standardized the start and end days of Daylight Saving Time, but allowed states to choose whether to comply.
- 2005: The time limits for Daylight Saving have changed over the years. At different points, it lasted for seven months, eight months, and even 10 months. But the most recent decision comes from the Energy Policy Act of 2005. There, Congress set up what we now observe as Daylight Saving Time -- the clocks move forward on the second Sunday of March, and fall back on the first Sunday of November. Those provisions went into effect in 2007.
- Today: More and more states have joined in on Daylight Saving Time over the years, so that the act of changing the clocks happens almost everywhere. State laws mandate the change to ensure consistency and predictability for citizens. (So, how come Arizona and Hawaii can get away with telling the U.S. Government to pound sand?)
6. DAYLIGHT SAVING TIME IN NEW YORK CITY: Following Item 5 above, here is the City of New York’s provision on Daylight Saving Time. Note that the dates have not been brought current:
The standard time throughout the City of New York is that of the seventy-fifth meridian of longitude west from Greenwich, except that at two o'clock ante-meridian of the last Sunday in April of each year such standard time throughout the city shall be advanced one hour, and at two o'clock ante-meridian of the last Sunday in October of each year, such standard time shall, by the retarding of one hour, be returned to the mean astronomical time of the seventy-fifth meridian of longitude west from Greenwich, and all courts, public offices and legal and official proceedings shall be regulated thereby.
Legislatures really know how to make something simple sound complicated.
7. REVISED 60’s HITS FOR BABY BOOMERS: Herman's Hermits -- Mrs. Brown, You've Got a Lovely Walker.
8. PROFUNDITIES: Giving money and power to government is like giving whiskey and car keys to teenage boys. -- P.J. O'Rourke, Civil Libertarian
9. ON THIS DAY IN HISTORY: In 1976, U.S. performs nuclear test at Nevada Test Site.
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