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Cypen & Cypen
NEWSLETTER
for
AUGUST 4, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. FLORIDA PREMIUM TAX DISTRIBUTION AMOUNTS RELEASED:

The Municipal Police Officers’ and Firefighters’ Retirement Trust Funds Office has released the amounts available to be distributed to firefighter and police officer pension plans. The total distribution for firefighters is $48,515,163.63 (up from $44,731,478.00) and for police officers, $62,223,910.78 (up from $61,544,848.00). Once again, our client City of Miami leads both packs: $5, 020,797.13 (fire) and $5,354,288.51 (police). Readers can view the entire list for firefighters at http://www.myflorida.com/frs/mpf/2004firelist.pdf and for police officers at http://www.myflorida.com/frs/mpf/2004policelist.pdf. All cities/districts that have been “approved” were ordered August 2, 2005, and the accounting office expects the comptroller to have checks available for distribution by August 15, 2005. Thanks to Keith, Trish, Melody, Martha and Julie.

2. FLORIDA LEGISLATURE EXPANDS PENSION MONEY EXEMPTION:

Section 222.21, Florida Statutes, which exempts pension money from legal processes, has been expanded to include additional tax-exempt funds or accounts. Funds or accounts exempt from taxation under §§414, 457(b) or 501(a) of the Internal Revenue Code have been added to previously-exempt §§401(a), 403(a), 403(b), 408, 408(A) and 409 of the Internal Revenue Code. Further, even if one of the foregoing funds or accounts is not exempt from taxation under the Internal Revenue Code, such plan may still be exempt from legal processes if the person claiming such exemption proves by a preponderance of evidence that the fund or account is maintained in accordance with a plan or governing instrument that: (a) is in substantial compliance with applicable requirements for tax exemption under the applicable Internal Revenue Code section or (b) would have been in substantial compliance with applicable requirements for tax exemption under the Internal Revenue Code but for the negligent or wrongful conduct of a person or persons other than the person who is claiming the exemption. (Wow!) There are two other new provisions. First, it is not necessary that a fund or account be maintained in accordance with the plan or governing instrument that is covered by any part of the Employee Retirement Income Security Act for money or assets payable from any interest in that fund or account to be exempt from claims of creditors -- in other words governmental plans. Second, any money or other assets that are exempt from claims of creditors do not cease to qualify for exemption by reason of a direct transfer or eligible rollover. The new law retains the old provision that none of the foregoing accounts are exempt from the claims of an alternate payee under a Qualified Domestic Relations Order. As we have said, there can be no “alternate payee under a Qualified Domestic Relations Order,” relating to a governmental plan, so that purported QDROs cannot reach benefits under such plans. (See C&C February, 1997, Special Supplement.) Of course, we understand that the Florida Retirement System, ostensibly pursuant to Section 222.21, Florida Statutes, honors Qualified Domestic Relations Orders, and will obviously continue to do so. Chapter 2005-101, approved by the Governor on June 1, 2005.

3. BOND MARKET ASSOCIATION WANTS 30-YEAR BOND BACK:

According to bondmarkets.com, the Bond Market Association has submitted a letter to the U.S. Treasury Department calling for re-introduction of the 30-year Treasury bond, or “long bond,” by February, 2006. In its letter, the Association states that re-issuing a 30-year bond would provide the U.S. Treasury with more flexibility in managing its debt portfolio and may help reduce borrowing costs and rollover risk. The 30-year Treasury bond was discontinued in November, 2000 due to reduction in the Treasury’s borrowing needs. The letter also cites results of an Association survey of Treasury market participants, indicating a strong potential demand for long-term securities, with 98% of participating firms stating they would be more likely to trade and invest in long-term securities if the 30-year bond were re-introduced. The letter recommends that, should the 30-year bond be re-introduced, an initial issue size be between $12-18 Billion, with a reopening size between $7-15 Billion. The Association also urges the Treasury to maintain or increase its current issuance of 10-year nominal and 10-year and 20-year TIPS securities.

4. NASD REMINDS MEMBERS OF RESPONSIBILITIES WHEN OUTSOURCING: NASD

Notice to Members 05-48-July 2005 is entitled “Members’ Responsibilities When Outsourcing Activities to Third-Party Service Providers.” NASD is aware that members are increasingly contracting with third-party service providers to perform certain activities and functions related to their business operations and regulatory responsibilities that members would otherwise perform themselves -- a practice commonly known as outsourcing. The notice is to remind members that, in general, any parties conducting activities or functions that require registration under NASD rules will be considered associated persons of the member, unless that service-provider separately registers as a broker-dealer. In addition, outsourcing an activity or function to a third party does not relieve members of their ultimate responsibility for compliance with all applicable federal securities laws and regulations and NASD rules regarding the outsourced activity or function. As such, members may need to adjust their supervisory structure to ensure that an appropriately qualified person monitors the arrangements, which may include conducting a due diligence analysis of the third-party service provider.

5. NCTR, NASRA AND NCPERS COMMENT ON PROPOSED 415 REGULATIONS:

By letter dated July 25, 2005, National Council on Teacher Retirement, National Association of State Retirement Administrators and National Conference of Public Employee Retirement Systems have submitted comments on proposed regulations under IRC §415. Beside asking for an extension of the July 25 deadline for receipt of comments, the organizations address proposed rules dealing with treatment of defined benefit plan COLAs, multiple annuity starting dates, Increasing the defined benefit limit after age 65 and application of IRC §415(b) to benefit accruals. Perhaps the most serious matter deals with the first item, treatment of defined benefit plan COLAs. The current proposed regulations require that a plan actuarially convert a fixed percentage COLA into a straight life annuity, which is then to be added into the annuity benefit tested under applicable dollar limits at time of commencement. Unfortunately, this position may cause many benefits otherwise well under applicable dollar limits to exceed the limits merely because the plan happens to provide that form of COLA protection. The groups suggest that COLA increases not be taken into account at the time an annuity benefit commences, but only when the annuity benefit is increased pursuant to the COLA provision. Thus, the annuity benefit is increased by the COLA as tested in the year of increase against the limit in effect at time of increase. Such approach is simple, straightforward and would not result in reductions in promised benefits merely because the plan provides protection from inflation through a fixed COLA. By way of background, NCTR’s membership consists of 75 state and local government retirement systems that include teachers and other public employees; NASRA members are directors of the nation’s state, territorial and largest statewide public retirement systems; and NCPERS represents over 500 public sector pension funds and provides education to trustees, administrators and public officials. Together, the groups’ members, which are principally defined benefit plans, serve over 17 million working and retired state and local government workers and oversee $2 Trillion in assets. (Separately, also by letter dated July 25, 2005, similar comments were submitted by Los Angeles County Employees Retirement Association.)

6. NCTR RELEASES SURVEY:

National Council on Teacher Retirement has issued its fifth edition (and first since 2000) of Protecting Retirees’ Money, a survey of 50 statewide retirement systems that include teachers and other public employees. The publication explains the structure of retirement systems that serve teachers and other public employees. It details composition of boards that oversee most of the systems, and describes whether a board administers the pension plan and invests its assets or whether some other entity carries out these functions. A broad array of laws protects assets of these retirement systems. These laws regulate conduct of the fiduciaries who invest the assets. Because these fiduciaries are responsible for the money that will be paid to retirees, they are subject to the most stringent laws possible. They must adhere to prudence rules, conflicts of interest laws and codes of ethics. As in previous editions, the publication provides citations to all statutes, as well as relevant case law and regulations, so readers can obtain further information on their own. The survey shows the considerable extent of oversight and reporting that ensure accountability of retirement systems. They are subject to legislative and executive oversight, and also prepare and widely disseminate a variety of reports that show their financial position and other critical data. Finally, the piece summarizes the protection of plan participants’ right to their pensions. Some protections are in state constitutions or statutes. Others arise from court decisions. In many states, more than one type of protection exists. The publication is designed to assist federal policy makers in evaluating the extent of protection afforded to retirement systems that serve teachers and other public employees. Hopefully, it will also aid state legislators and other policy makers who wish to learn more about these retirement systems.

7. VALID PLEDGE OF 403(b) FUNDS SURVIVES BANKRUPTCY:

Joseph Coppola and his wife divorced. The divorce decree provided for 53 monthly alimony payments of $4,000, totaling $212,000. Coppola owned a retirement account as a faculty member of a state-supported educational institution. He assigned/pledged funds from his Qualified Employer § 403(b) Retirement Plan to his wife as security for alimony payments, when the account was worth over $640,000. After about 14 months, Coppola stopped making payments and began withdrawing substantial sums from his § 403(b) account. When his ex-wife filed a state court action, Coppola retaliated with a Chapter 7 bankruptcy petition and claimed an exemption for his § 403(b) account under Texas law. The bankruptcy court found in favor of the ex-wife, and the federal district court affirmed. On appeal, the United States Court of Appeals for the Fifth Circuit upheld the lower courts. The ex-wife had a valid security interest in Coppola’s § 403(b) account to secure his $212,000 alimony debt, which security interest did not violate Texas’s anti-assignment law. The assignment/pledge constituted a loan and thus a deemed distribution from the § 403(b) plan to Coppola under IRC § 72(b). And because the deemed distribution portion no longer qualified under the § 403(b) plan, it was non-exempt under Texas law and the Bankruptcy Code. In the Matter of: Coppola, Case Nos. 04-20311 and 04-21013 (U.S. 5th Cir., July 25, 2005).

8. FOLLOW-UP ON UP-CHUCK CASE:

That unnamed teenager who was charged with battery for deliberately throwing up on his Spanish teacher (see C&C Newsletter for June 30, 2005, Item 8) has been convicted. Now, he has been ordered to spend four months cleaning up after people who throw up in police cars. Gee, we wonder how often that happens. [plansponsor.com, July 29, 2005]


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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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