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Cypen & Cypen
APRIL 2, 2009

Stephen H. Cypen, Esq., Editor


Those few of you who have provisions for plan loans will be interested to know that the Board of Governors of the Federal Reserve has amended Regulation Z of the Federal Truth in Lending Act to exempt retirement plan loans from TILA coverage. According to Seyfarth Shaw, TILA and Reg Z generally require creditors to disclose key terms of lending arrangements to consumers, as well as costs related to that extension of credit. Previously, retirement loans that allowed loans to be taken from participant accounts were subject to disclosure requirements under Reg Z. In approving the amendment, the Board concluded that plan loans typically come from, and repayments are reinvested in, the borrower’s own plan account. Thus, the need for disclosure in these types of transactions is lessened because there is no third-party creditor imposing interest charges on the borrower. Effective July 1, 2010, the new exemption applies to any extension of credit to a participant from (1) an employer-sponsored retirement plan qualified under IRC Section 401(a); (2) a tax-sheltered annuity under IRC Section 403(b); or (3) an eligible governmental deferred compensation plan under IRC Section 457(b), including plans not subject to ERISA. The extension of credit must be of fully vested funds from the participant’s account and otherwise be made in compliance with applicable provisions of the Internal Revenue Code. Thus, plan sponsors who routinely provide TILA disclosure statements to participants receiving loans from the plan will no longer be required to do so, unless the loan is made from funds that are not fully vested. (Employers who sponsor plans subject to ERISA, however, must still comply with ERISA disclosure requirements, including disclosure of plan administration fees.) If you would really like to drill down, the actual change was announced in 74 Federal Register 5244 (January 29, 2009).


The General Retirement System for Employees of Jefferson County, Alabama, was created in 1965 by an Act of the Alabama Legislature. It is funded by yearly contributions from participating Jefferson County employees, which are matched by yearly contributions from the County and by income generated from investment of those contributions. At some point during the 1970s, approximately 238 Jefferson County sheriff’s deputies voluntarily withdrew from the Retirement System and removed their contributions, with interest. In 2003, the Alabama Legislature approved a local law, allowing Jefferson County employees who had previously withdrawn from the Retirement System to rejoin and “make up” for up to twenty years in which they did not contribute to or participate in the Retirement System. The Act also allowed Jefferson County employees who had not withdrawn to convert periods of unpaid service to paid service upon making an additional contribution to the Retirement System. The Act then required the County to contribute matching funds for any employee taking advantage of the Act, and to pay any additional amounts necessary to make the Retirement System actuarially sound. In other words, the Act essentially required the County to contribute additional funds to replicate investment earnings that would have occurred had the employees in question continually contributed to the Retirement System. After the Act was passed, two groups of County employees filed suit in state court to establish constitutionality of the Act, and to force the County to implement it. Sheriff Deputy Black brought one of the class action lawsuits on behalf of all deputies who had opted out of the Retirement System and who were seeking to rejoin as allowed under the Act. Certain other Jefferson County employees also sought a hearing before a special master when the County did not allow them to convert unpaid service to paid service under the Act. Employee-members who had not opted out of the Retirement System brought a separate lawsuit seeking to invalidate the Act. The cases were all consolidated in state court, with Black identified as lead plaintiff. The Black court ruled that the Act, which created additional pension benefits for certain employees of Jefferson County, was constitutional and due to be enforced. Thereafter, the court set deadlines for the County’s compliance with terms of the Act. In an effort to offset costs of funding the enhanced pension benefits mandated by the Act, the Jefferson County Commission passed a resolution, stating that if a member of the Retirement System elected to take advantage of the additional pension benefits provided by the Act, he would no longer be eligible to receive the discretionary, non-pension benefits of retiree health insurance and sick leave retirement benefits. The County resolution was distributed to persons otherwise-eligible under the Act, giving them the option of (1) obtaining the Act’s enhanced benefits and forgoing the non-pension benefits or (2) remaining eligible for retiree health insurance coverage and sick leave benefits, and forgoing the enhanced pension benefits available under the Act. Black made a motion for supplemental relief, arguing that the resolution impermissibly impaired and impeded the prior order that instructed the County to implement the Act. Nevertheless, the state court judge denied Black’s motion for supplemental relief on the ground that the court would not infringe upon the County’s responsibility for maintaining a balanced budget except for fraud or an abuse of vested discretion, neither of which was present. Black did not appeal from denial of the supplemental motion. Green then filed a class action against the Retirement System and the County in state court, seeking to represent the class of 107 Jefferson County employees who had elected to receive additional pension benefits provided under the Act. Green sought a declaration that the resolution was invalid, but the court granted the County’s motion for summary judgment “for the reasons stated therein.” (The County’s motion contained four separate grounds, including res judicata.) Green took an appeal, and while his appeal was pending before the Alabama Supreme Court, 104 Jefferson County employees, again led by Green, filed a federal lawsuit against the Retirement System and the County. This time, Green alleged that, by adopting the resolution, the County had discriminated against them and violated their procedural due process rights under the First, Fifth and Fourteenth Amendments to the United States Constitution, and established a policy of discriminating against them in violation of the Public Health Services Act. The federal district court ultimately granted defendants’ motion for summary judgment, and Green sought review in federal appellate court. The federal appellate court affirmed the grant of summary judgment, not based on the reasons cited by the lower federal court, but based upon res judicata principles of Alabama law. Applying Alabama preclusion law, the federal appellate court concluded that there was a prior final judgment on the merits in the Black case, that judgment was rendered by a court of competent jurisdiction, the parties in the Black litigation and the first Green litigation and the subject action were substantially identical, and the cause of action was the same in all three disputes. (Interestingly enough, while the federal appeal was pending, the Alabama Supreme Court affirmed the state trial court’s grant of summary judgment in the first Green case based on the doctrine of res judicata.) It just goes to show you that not all cases are simply black and green. Green v. Jefferson County Commission, Case No. 08-15888 (U.S. 11th Cir., March 31, 2009).


In a case very recently decided by the United States Supreme Court, members of a union were respondents. Under the National Labor Relations Act, the union was the exclusive bargaining representative of employees within the building-services industry in New York City. The union had exclusive authority to bargain on behalf of its members over their rates of pay, wages, hours or other conditions of employment, and engaged in industry-wide collective bargaining with the Realty Advisory Board on Labor Relations, Inc., a multiemployer bargaining association for the New York City real estate industry. The agreement between the union and the RAB was embodied in their collective bargaining agreement, which required union members to submit all claims for employment discrimination to binding arbitration under the CBA’s grievance and dispute resolution procedures. Petitioner in the case was a member of the RAB, which owned and operated the New York City office building where respondents worked. Respondents were directly employed by a cleaning contractor. After the building owner, with union consent, engaged a unionized security contractor affiliated with the cleaning contractor, the cleaning contractor reassigned respondents to jobs as porters. Contending that such assignments led to loss of income, other damages and were otherwise less desirable than their former positions, respondents asked the union to file grievances alleging, among other things, that the building owner and the cleaning contractor violated the CBA’s ban on workplace discrimination by reassigning respondents on the basis of age in violation of Age Discrimination in Employment Act of 1967. The union requested arbitration under the CBA, but withdrew the age discrimination claims on the ground that its consent to the new security contract precluded it from objecting to respondents’ reassignments as discriminatory. Respondents then filed a complaint with the Equal Employment Opportunity Commission, alleging that the building owner and the cleaning contractor had violated their ADEA rights, and EEOC issued each of them a right-to-sue notice. In the ensuing lawsuit, the district court denied the building owner’s and the cleaning contractor’s motion to compel arbitration of the age discrimination claims. The Second Circuit Court of Appeals affirmed, holding that prior Supreme Court authority forbade enforcement of collective bargaining provisions requiring arbitration of ADEA claims. On certiorari to the Court of Appeals, the United States Supreme Court reversed: a provision in a collective bargaining agreement that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law. The union and the RAB, negotiating in behalf of the building owner, collectively bargained in good faith and agreed that employment-related discrimination claims, including ADEA claims, would be resolved in arbitration. As in any contractual negotiation, a union may agree to inclusion of an arbitration provision in a collective bargaining agreement in return for other concessions from the employer, and courts generally may not interfere in this bargained-for exchange. Thus, the CBA’s arbitration provision must be honored unless ADEA itself removes this particular class of grievances from NLRA’s broad sweep; it does not. The U.S. Supreme Court has previously squarely held that ADEA does not preclude arbitration of claims brought under the statute. Further, because respondents’ arguments that the CBA does not clearly and unmistakably require them to arbitrate their ADEA claims were not raised in the lower courts, they have been forfeited. In an unsurprising lineup, Justice Thomas delivered the opinion of the Court, in which the Chief Justice and Justices Scalia, Kennedy and Alito joined. 14 Penn Plaza LLC v. Pyett, Case No. 07-581 (U.S., April 1, 2009).


All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers, according to Internal Revenue Service. Under American Recovery and Reinvestment Act, enacted in February (see C&C Newsletter for February 19, 2009, Item 1), all persons who receive unemployment benefits during 2009 are eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive. The new law does not affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable. Unemployed workers can choose to have income tax withheld from their unemployment benefit payments. Withholding on these payments is voluntary. However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year. Those who choose this option will have a flat 10 percent tax withheld from their benefits. Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits should consider the $2,400 exclusion in determining whether to continue to have tax withheld. IR-2009-029 (March 26, 2009).


State and local governments are entitled to offer compensatory time off in lieu of overtime pay, if employees agree to this procedure. With assent of the police officers’ union, Chicago has implemented a comp-time program. In a recent lawsuit, some officers who had accumulated credits under the program contended that Chicago had made the leave too hard to use. A magistrate judge agreed with plaintiffs, and entered a detailed injunction specifying how Chicago must handle all future applications for compensatory time. The applicable statute provides that an employee of the public agency who has accrued compensatory time off and has requested use thereof shall be permitted by the employer to use such time within a reasonable period after making the request, if use of the compensatory time does not unduly disrupt the operations of the public agency. On appeal, the court held that plaintiffs were entitled to monetary, but not injunctive, relief, as their damages cannot be irreparable. Under the applicable Department of Labor regulation, a worker proposes a date and time for leave. The employer decides whether time off then would cause undue disruption, and if it would, the employer has a reasonable time to grant leave on some other date. The regulation makes sense when specifying that the employee must ask whether leave on the date and time requested would produce undue disruption, and only if the answer is in the affirmative may the employer defer the leave -- and then only for a “reasonable time.” Injunction vacated, and case remanded for award of appropriate non-injunctive relief. Heitmann v. City of Chicago, Illinois, Case No. 08-1555 (U.S. 7th Cir., March 25, 2009).


The California Public Employees’ Retirement System announced that it intends to restructure relationships with its hedge fund managers to achieve better alignment of interests, more control of its assets and enhanced transparency. In recent years, institutional investors have displaced wealthy individuals as main clients of hedge funds. However, the hedge fund marketplace has not evolved sufficiently to accommodate what institutional investors require to maximize long-term benefits for their beneficiaries. Instead of focusing on commingled accounts, CalPERS intends to move toward a focus on customized vehicles, managed accounts and other methods to improve control of its assets. CalPERS also says fees should be based on long-term rather than short-term performance. The present model provides possibility of a hedge fund manager realizing a 20 percent performance fee at the end of a bonanza year. If the fund suffers a significant decline the next year, the manager could still have a large net gain at the end of two years, but the investor may break even or lose money. Performance fees should be based on long-term performance, and mechanisms such as delayed realizations and clawbacks can better align long-term interests of managers and investors. Management fees should better reflect the cost associated with generating performance and not be an invitation for asset-gathering. Now you tell us? (With $173 Billion in market assets as of January 31, 2009, CalPERS is the nation’s largest public pension fund. For your information, as of June 30, 2008, CalPERS had $238 Billion in assets.)


Morrison invested in a retirement plan sponsored by her former employer, MoneyGram International, Inc., and established pursuant to the Employee Retirement Income Security Act. She brought a class action against various plan fiduciaries, including MoneyGram itself and the pension committees. Morrison alleged that defendants breached various fiduciary duties, and that those breaches resulted in losses for which they were now liable to the plan under ERISA. The matter came on before the United States District Court for the District of Minnesota on defendants’ motion to dismiss for lack of subject matter jurisdiction, which the court denied. The ruling is directly contrary to a very recent decision of the same district (see C&C Newsletter for March 26, 2009, Item 2). Here, the court respectfully disagreed with the prior decision of its sister court (and others), and held that, under the U.S. Supreme Court decision in LaRue v. DeWolff, Boberg & Associates, Morrison had standing. Morrison v. MoneyGram International, Inc., Case No. 08-CV-1121 (D. Minn., March 25, 2009).


Some workers can nickel and dime you to death when it comes to tardiness. If you have people ignoring the starting bell, Supervisor’s Portable Answer Book suggests the following tactics: $ Let people know they are late. You deserve an explanation. $ Insist the time be made up on the other end, and make sure it is. Do not leave this as an open-ended offer. Get the time made up that day. $ Give undesirable tasks to late arrivals. $ Hold early morning meetings without announcing them in advance. People will be more cautious about being late. $ Dock the pay of people who do not get the message. There must be a better way.


VALUE INVESTING -- The art of buying low and selling lower.

P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.


"A word to the wise ain't necessary - it's the stupid ones that need the advice." Bill Cosby

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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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