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Cypen & Cypen
JUNE 12, 2008

Stephen H. Cypen, Esq., Editor


National Conference on Public Employee Retirement Systems announces that Representative Kendrick Meek (D-FL) recently introduced legislation in the House of Representatives to fix issues related to public safety retiree taxation that came about as a result of recent changes to the tax code. Section 828 of the Pension Protection Act of 2006 amended the tax code to allow retired public safety employees beginning at age 50 to take distributions from their defined benefit pension plans without paying the 10 percent early distribution tax. Section 828 was enacted recognizing that, due to nature of the profession and in many cases mandatory retirement ages, public safety employees typically retire earlier than the general population. Of course, 26 U.S.C. 72(t)(2)(A)(v) permits all other retirees to take distributions without the 10 percent tax, beginning at age 55. Unfortunately, since implementation of PPA Section 828, two issues have arisen that need to be fixed. First, public safety employees between ages 50 and 55 who chose to roll over their distributions into a 457 plan and then take distributions from the 457 plan are now subjected to the 10 percent early distribution tax until age 59½. The second issue revolves around public safety employees who retired before age 55 and before enactment of Section 828 and who opted to annuitize their benefit to avoid the 10 percent early distribution tax. After enactment of Section 828, if those retirees decide to take a modified distribution from their plans, they are subjected to a 10 percent recapture tax on the previous annuitized distributions. NCPERS has been working with members of Congress and other interested partners to craft a legislative fix, and on May 22, 2008, Representative Meek introduced H.R. 6157, a bill that will do what is necessary. The bill has been referred to the House Ways and Means Committee. NCPERS is committed to continuing to seek Congressional support for the bill and ensuring that it becomes law. Readers can help by calling or writing their member of Congress in Washington, and asking that he or she sign-on as a co-sponsor to H.R. 6157. The Capitol switchboard can be reached at 202.224.3121. As always, NCPERS is to be congratulated for its fine work in the area of public employee retirement issues.


In ultimately rejecting an Oregon woman’s discrimination lawsuit, the United States Supreme Court said the case threatened to turn millions of ordinary job grievances into federal cases. Engquist, an Oregon public employee, filed suit against her agency, her supervisor and a co-worker, asserting, among other things, claims under the Equal Protection Clause. She alleged she had been discriminated against based on her race, sex and national origin, and she also brought a so-called “class-of-one” claim, alleging that she was fired not because she was a member of an identified class (unlike her race, sex and national origin claims), but simply for arbitrary, vindictive and malicious reasons. A jury rejected the class-membership equal protection claims, but found for Engquist on her class-of-one claim. The United States Court of Appeals for the Ninth Circuit reversed in relevant part. Although recognizing that the Supreme Court had upheld a class-of-one equal protection challenge to state legislative regulatory action, the Court of Appeals emphasized that the U.S. Supreme Court had routinely afforded government greater leeway when it acts as employer rather than regulator. However, the U.S. Supreme Court concluded that extending the class-of-one theory to the public-employment context would lead to undue judicial interference in state employment practices and invalidate public at-will employment. Thus, the high court held that the class-of-one theory of equal protection does not apply in the public employment context. Engquist v. Oregon Department of Agriculture, Case No. 07-474 (U.S. June 9, 2008).

3. PENSION PLANS SAY “THANK YOU SUBPRIME” FOR RETURN TO OVERFUNDING: reports that the subprime-mortgage crisis that crushed home sales and financial stocks during the last year was a boon to at least one group of investors: pension plans at some of the largest U.S. companies. The global credit shortage and its effect on interest rates helped companies in the Standard & Poor’s 500 Index cut estimates of pension obligations, as their returns from U.S. government bonds increased. The combined pensions of S&P 500 companies swung to a $63 Billion surplus in 2007 after five years in the red. The number of overfunded plans rose to 127 last year from 85 in 2006. The health of U.S. pension funds is crucial to investors as well as retirees because changes in funding can ripple through financial statements, affecting profits, cash outlays, credit ratings and bank loans. As home-loan delinquencies climbed in the last twelve months, banks scaled back lending and investors fled corporate debt for the safety of Treasuries. The market adjustment caused Treasury yields to fall and corporate yields to rise, driving up the so-called discount rate used by most pension plans by an average of 50 basis points.


Social Security offers three distinct types of benefits for retired workers and their spouses: (1) the basic retirement worker benefit, which is determined by how long an individual works and how much he earns; (2) a spousal benefit, which provides a worker’s spouse with a benefit once the worker has claimed his own benefits; and (3) a survivor benefit, which provides a surviving spouse with a benefit after a worker’s death. The full retired worker benefit (Primary Insurance Amount or PIA) is available at a worker’s Full Retirement Age (FRA), which is currently 66, but will eventually rise to 67. Individuals are allowed to claim a smaller benefit as early as age 62 or a larger benefit by claiming after FRA up to age 70. A piece from Center for Retirement Research at Boston College describes three unusual, but allowable, strategies for claiming Social Security benefits. These strategies may allow some households to receive increased lifetime benefits, depending on their specific work histories, personal preferences, demographic characteristics and mortality. On the other hand, these strategies could result in lower lifetime benefits depending on how long the claimant lives. So, here we go:

Strategy 1 - Borrow and Invest. An individual can claim Social Security benefits at, say, 62 and then reclaim at, say, 66 at a higher benefit level as long as he pays back the money that he has received, without interest, during the interim period. This strategy is the same as receiving a zero-interest loan from Social Security. The claimant could invest his Social Security benefits, keeping investment earnings and then later pay back the principal of the “loan.” The claimant, with an average life expectancy, comes out ahead by the amount of the investment earnings. Of course, should the claimant die shortly after giving back the benefits, this strategy would involve a loss.

Strategy 2 - Claim Now, Claim More Later. A married individual can claim a spousal benefit at Full Retirement Age and switch to her own retirement worker benefit at a later date. This approach allows a worker to begin claiming one type of benefit while still building up delayed retirement credits, which will result in a higher worker benefit later. Individuals who have not reached FRA are not allowed to limit the scope of their benefit application in this way.

Strategy 3 - Claim and Suspend. An individual may claim his Social Security benefit and then suspend payment in order to allow his spouse to claim a spousal benefit while still allowing the value of his own future benefit to rise. This claiming strategy was authorized by the Senior Citizens’ Freedom to Work Act of 2000, which allows a worker to earn delayed retirement credits after filing for benefits if he requests that he not receive benefits during a given period. The intuition is that, by allowing a spouse to claim right away while allowing a worker to continue building up delayed retirement credits, such a provision may help encourage older individuals to work longer.

How much more complex can Social Security get?


Principal Financial Group has released its quarterly Well-Being Index?. Its purpose is to identify and track changes in the workplace of small and mid-sized (growing) businesses. Employees surveyed consisted of adults who work at small and mid-sized U.S. businesses (10-1,000 employees). Retirees consisted of adults over 60 who reported they are retired, employed part-time, self-employed and retired from a previous career. The following are some key findings:

  • Six out of ten retirees and nearly as many employees (58%) think we are currently in a recession.
  • When asked how they would reduce spending due to an economic slowdown, employees and retirees said they would eat fewer meals at restaurants, spend less on clothing and other consumer items and cut back on entertainment.
  • For employees, rising fuel costs have affected their automobile purchasing decisions (35%) and holiday vacation plans (35%). Retirees’ holiday vacation plans (33%) and automobile purchasing decisions (20%) have been influenced.
  • Six out of ten employees and nearly half of retirees (49%) indicate they are going out to eat less to offset increases in grocery prices. Around half of both retirees (47%) and employees (55%) are purchasing store or generic brands.
  • Approximately seven out of ten retirees (69%) and six out of ten employees (58%) have an emergency fund of money they can immediately access if necessary. Over half of retirees (54%) said they could cover over six months of living expenses with their emergency fund, compared to only 29% of employees.
  • As to employees, job security was ranked number one in terms of importance by more employees (47%), over long-term financial future (41%) and challenging work (12%). Significantly more employees ranked job security as number one in terms of importance than in the second quarter of 2007. Just about a quarter (24%) of employees have some level of concern with their own job security.

When the fit hits the Shan, it’s not going to be pretty.


The professor discovered that her theory of earthquakes was on shaky ground.


“The trouble with jogging is that the ice falls out of your glass.” Martin Mull


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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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