Cypen & Cypen
JULY 5, 2007
Stephen H. Cypen, Esq., Editor
Internal Revenue Service is expanding an outreach effort to ensure that public schools throughout the United States are complying with the universal availability requirement for retirement annuities they may offer. Some schools and school districts may be overlooking offering employees the opportunity to participate in these retirement plans. To assess the level of compliance, IRS’s Employee Plans Compliance Unit has started sending questionnaires to public school districts in all 50 states under auspices of the 403(b) Universal Availability project. This expansion builds upon a pilot program that began in June 2006 with questionnaires that were sent to public schools in districts in New Jersey, Missouri and Washington. In the final phase of the expansion, IRS has begun contacting school districts in Alaska, Florida, Hawaii, Illinois, Nevada, Pennsylvania, Tennessee and Virginia. School districts in remaining states will be contacted as part of the project through 2008. Typical noncompliance involves excluding participation by certain classes of employees, such as substitute teachers, janitors, cafeteria workers and nurses. The law requires that all public school employees normally expected to work 20 hours per week must be offered the opportunity to participate in a 403(b) plan if the school or district sponsors one. A 403(b) plan is a retirement plan for certain employees at public schools, employees at certain tax-exempt organizations and certain ministers. IR-2007-123 (June 21, 2007).
2. TO AVOID LIQUIDATED DAMAGES AWARD UNDER FMLA, EMPLOYER MUST ESTABLISH THAT IT ACTED WITH SUBJECTIVE GOOD FAITH AND THAT IT HAD OBJECTIVELY REASONABLE BELIEF THAT ITS CONDUCT DID NOT VIOLATE THE LAW:
Under the Family and Medical Leave Act, an employer may be liable for back pay and interest and an additional amount of liquidated damages equal to the back pay and interest amount. The court may reduce, in its discretion, only the liquidated damages amount when the employer proves to the trial court’s satisfaction that the act or omission that violated FMLA was in good faith and that the employer had reasonable grounds for believing that the act or omission was not a violation of FMLA. The statute does not allow a reduction in liquidated damages to lessen the back pay and interest element of damages. The court may reduce the liquidated damages award to only compensatory damages if the employer proves the good faith and reasonable grounds prerequisite set out in the statute. Here, the employer committed unlawful employment practices under FMLA when it restrained, interfered and denied an employee her right to a leave of absence when her husband required quadruple bypass surgery. Patterson v. Browning’s Pharmacy & Healthcare, Inc., 32 Fla. L. Weekly D1551 (Fla. 5th DCA, June 22, 2007).
Florida’s First District Court of Appeal, which reviews orders of judges of compensation claims, has consistently held that when a claim involves an occupational disease, the date of accident for purpose of benefits is the date of disability, not the date of diagnosis, exposure to or contraction of the disease. And, in occupational disease cases, the date of accident is determined by the date of disability, and disability is defined as the date claimant became incapable of performing work in the last occupation in which he was exposed to hazards of the disease. Accordingly, detection of an occupational disease does not necessarily coincide with the date of disablement from the disease. The subject case involved an Orange County firefighter who was diagnosed with Hepatitis C in 1992. Although he returned to work full-time as a firefighter and continued to seek conservative treatment for his occupational disease, five years later he began treatment that left him weak and dizzy and with flu-like symptoms. A “new” date of accident was important because employees with injuries occurring prior to 1994 are not entitled to permanent impairment benefits. Orange County Fire Rescue v. Jones, 32 Fla. L. Weekly D1545 (Fla. 1st DCA, June 21, 2007).
Employee Benefits Institute of America reports on a private letter ruling that requested guidance on proper federal income tax treatment under Sections 105 and 106 of the Internal Revenue Code of retiree health benefits provided to management employees, their spouses and dependents. Under the employer’s retiree health care policy, retiree health benefits were automatically provided to management employees who met certain eligibility requirements. When an eligible employee retired, the employer contributed the employee’s accumulated unused sick and vacation leave into a trust. The trust funds were then used to pay the premiums under the employer’s retiree health care policy and premiums for other health insurance covering the retiree and his spouse and dependents. If an eligible employee died before retirement, the leave amounts were used to provide health coverage for his spouse or dependents or to pay the employee’s unreimbursed medical expenses if the employee had no surviving spouse or dependents. In no circumstances could the retiree (or his spouse or dependents) choose to receive any unused leave in cash or other benefits. Any leave amounts that were not used to provide retiree health benefits were forfeited. Internal Revenue Service ruled that the employer’s contributions of accumulated unused sick and vacation leave to the trust, and payments from the trust that were used exclusively to pay for health insurance premiums and other medical expenses of retirees and their spouses or dependents, were not taxable. IRS expressed no opinion on whether the policy satisfies the nondiscrimination requirements of Section 105(h) of the Internal Revenue Code or the federal tax consequences of the policy under Sections 83, 409A or 457 of the Internal Revenue Code. As usual, the ruling is directed only to the taxpayer requesting it and may not be used or cited as precedent. PLR 200709007 (March 2, 2007).
The United States Government Accountability Office has issued a report to Congress entitled Defined Benefit Pensions: Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement Challenges. To protect workers’ retirement security, Congressional requesters asked GAO to assess: (1) What is known about conflicts of interest affecting private sector defined benefit plans? (2) What procedure does the Pension Benefit Guaranty Corporation have to identify and recover losses attributable to conflicts? (3) What procedures does Employee Benefits Security Administration have to detect conflicts among service providers and fiduciaries for PBGC-trusteed plans? (4) To what extent do EBSA, PBGC and the Securities and Exchange Commission coordinate their activities to investigate conflicts? GAO interviewed experts, including agency officials, attorneys, financial industry representatives and academics, and GAO reviewed PBGC documentation and EBSA enforcement materials. GAO analyzed Labor, SEC, PBGC and private sector data, including data on pensions, pension consultants and rates of return data and conducted statistical and econometric analyses. A conflict of interest typically exists when someone in a position of trust, such as a pension consultant, has competing professional or personal interest. Though data are limited on the prevalence of conflicts involving plan fiduciaries and consultants, a 2005 SEC staff report examining 24 registered pension consultants identified 13 that failed to disclose significant conflicts (see C&C Newsletter for May 19, 2005, Item 1). GAO’s analysis found that, in 2006, these same 13 consultants had over $4.5 Trillion in U.S. assets under advisement. GAO also analyzed the sample of ongoing DB plans associated with the 13 consultants that, as of year-end 2004, had total assets of $183.5 Billion and average assets of $155.3 Million. Additional sample analysis showed that the DB plans using these 13 consultants had annual returns generally 1.3% lower than those that did not. Because many factors can affect returns, and data as well as modeling limitations limit the ability to generalize and interpret the results, this finding should not be considered as proof of causality between consultants and lower rates of return, although it suggests the importance of detecting the presence of conflicts among pension plans. Whether specific financial harm was caused by a conflict of interest is difficult to determine without a detailed audit. GAO recommends that PBGC assess risks from conflicts of interest; that EBSA expand enforcement to include a focus on PBGC-identified plans; and that each agency share data on conflicts. Congress should consider amending ERISA to expand Labor’s authority to recover losses against non-fiduciaries. Each agency generally concurred with the report, although EBSA expressed some methodological concerns. GAO-07-703 (June 28, 2007).
On June 28, 2007, Keith Brainard, Research Director for the National Association of State Retirement Administrators, presented a Public Pension Plan Trends webinar. Jointly sponsored by NASRA and International Foundation of Employee Benefits Plans, the conference was chock full of important information. The following represent but a few points of interest presented:
Brainard also quotes former PBGC-head Bradley Belt: “The pendulum always swings a little too far. Pension plan design doesn’t have to be an all-or-nothing proposition.” We’d say the pendulum always swings way too far.
Congressional Research Service has prepared a report for Congress on pension funds investing in hedge funds. The proportion of U.S. corporate-defined benefit pension funds investing in hedge funds has increased to 24% in 2006, up from 19% in 2004 and 12% in 2000. Although statistics vary, total corporate pension fund assets allocated to hedge funds in 2006 was 2.1%. Because of hedge funds’ risky nature, rapid growth, lack of oversight and recent losses, some wonder if they are appropriate investments for workers’ retirement funds. In 2004, the Securities and Exchange Commission issued a rule requiring many hedge fund advisers to register as investment advisers under the Investment Advisers Act. The rule took effect in February 2006, but in June 2006 a court challenge was upheld, and the rule was vacated. In early 2007, while the Bush administration called for increased vigilance rather than new government rules to handle industry risks, Congress asked the Government Accountability Office to examine use of hedge funds by public and private sponsors of defined benefit pension plans. In determining whether or not pension funds investing in hedge funds is appropriate, it is important to distinguish between the riskiness of a single investment and the risk to a portfolio. Individual hedge fund investors seek high returns, but they risk losing their entire investment. And the Long-Term Capital Management and Amaranth Advisors collapses show this can happen in a short period of time. As part of a portfolio, though, hedge funds can mitigate risk. Due in part to their non-correlation to traditional stock markets, hedge funds are powerful tools for portfolio diversification, and help to enhance returns, reduce volatility and increase risk-adjusted returns, especially during bear markets. During the first quarter of 2001, for example, when the S&P 500 Index experienced its worst quarter since 1987, pension fund managers saw hedge funds perform well while their stock values suffered.
The CRS report for Congress, referred to in Item 7 above, indicates that although there is no precise accepted or legal definition, the term “hedge fund” generally refers to an entity that holds a pool of securities or other assets, whose interests are not sold on a registered public offering and that is not registered as an investment company with the Investment Company Act of 1940. Early on, such funds invested in equities and used short selling to “hedge” the portfolio’s exposure to movements in the equity market. Today, however, hedge funds trade in a variety of investment vehicles such as equity and fixed income securities, currencies, derivatives, futures contracts and other assets. Hedge funds often seek to profit by using leverage (investing borrowed money, which can increase gains or losses) and other speculative investment practices that may increase risk of investment loss. Because hedge funds do not register the offer and sale of their interest under the Securities Act, they may not offer their securities public or engage in a public solicitation. Generally, they sell their interests in private offerings. They may sell their interests to “accredited investors,” which include individuals with a minimum annual income of at least $200,000 ($300,000 for the spouse) or $1,000,000 net worth and most institutions with at least $5,000,000 in assets. Alternatively, they may sell to “qualified purchasers,” a standard with significantly higher financial requirements than those necessary for accredited investors. Hedge funds are also characterized by their fee structures. Advisers typically receive 1% to 2% of assets as a management fee and a share of the capital gains and capital appreciation, commonly 20%. Hedge funds often employ a “lock-up period” during which investors may not liquidate their investments. All in all, hedge funds are not for the faint-of-heart.
In 2006, the number of people with more than one million dollars in investable assets, not including their homes, rose 8.3% to 9.5 million worldwide. And speaking of the world, its population is forecast to hit 6.6 billion this month.
“Destiny is not a matter of chance, it is a matter of choice; it is not a thing to be waited for, it is a thing to be achieved.” Williams Jennings Bryan
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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.