Cypen & Cypen
OCTOBER 25, 2007
Stephen H. Cypen, Esq., Editor
On October 18, 2007 Internal Revenue Service issued IR-2007-171, announcing cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2008. Effective January 1, 2008, the limitation on annual benefits of a defined benefit plan under Section 415 is increased from $180,000 to $185,000. Similarly, the limitation for defined contribution plans under Section 415 is increased from $45,000 to $46,000. And annual compensation limit under Section 401(a)(17) is increased from $225,000 to $230,000. Finally, the limitation on deferrals under Section 457 deferred compensation plans of state and local governments remains at $15,500.
More than 54 million Americans who receive Social Security will see a 2.3% boost (about $24, on average) in their monthly checks next year. Down from a 3.3% increase last year, the latest increase is the smallest since a 2.1% rise in 2004. The increase will first apply to December 2007 benefits payable in January 2008. Increased payments to more than 7 million Supplemental Security Income beneficiaries will begin on December 31, 2007. Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $102,000 from $97,500. Of the estimated 164 million workers who will pay Social Security taxes in 2008, about 12 million will pay higher taxes as a result of the increase in the taxable maximum in 2008.
Wife appealed a supplemental final judgment of dissolution of marriage, asserting as error its failure to consider any part of husband’s deferred retirement option program account in effecting equitable distribution. Following well-settled precedent, the appellate court reversed. The portion of the DROP account attributable to husband’s employment during marriage is a marital asset that should have been distributed equitably. Allocating DROP accounts between former spouses is closely analogous to deferred division of benefits on a fixed percentage basis approach used for pensions. In DROP cases, the deferred division of benefits on a fixed percentage basis includes all associated interest and cost of living adjustments. For purposes of equitable distribution, each spouse has an interest in all retirement, annuity and deferred compensation benefits, including DROP accounts, to which either spouse earns the right during marriage. Arnold v. Arnold, 32 Fla. L. Weekly D2500 (Fla. 1st DCA, October 19, 2007).
InvestmentNews reports that U.S. retirement assets totaled $16.6 Trillion, with retirement savings accounting for 38% of all household financial assets, at the end of the first quarter. This figure marks March, 2007 as a high-water point in American retirement savings, as retirement assets for 2006 amounted to $16.4 Trillion. Individual retirement accounts and defined contribution plans factored into the retirement savings growth, with first-quarter IRAs growing to $4.4 Trillion from $4.2 Trillion and DC plans growing to $4.2 Trillion from $4.1 Trillion. In other categories, totals remain unchanged from 2006: government pension plans stood at $4.2 Trillion, private benefit plans at $2.3 Trillion and annuities at $1.3 Trillion. Long-term funds -- including equity, hybrid and bond mutual funds -- remained the most widely-used method of holding mutual fund assets, with 47% of investors using them as a retirement savings method. Money market funds accounted for 13% of savings plans, and other funds represented 39%.
Starting next year, casinos and other
sponsors of poker tournaments will be required to report
winners and Internal Revenue Service, according to IR-2007-173
(October 19, 2007). The new requirement, which goes into
effect on March 4, 2008, was contained in guidance released
September 4, 2007 by the Treasury Department and IRS. The
guidance is designed to clear up confusion about tax reporting
rules that apply to poker tournaments. In recent years,
some casinos and players have been confused over whether
poker tournament sponsors who hold the money for participants
in a poker tournament are required to report the winnings
to IRS and withhold tax on the winnings. If a tournament
is completed during 2007, and before March 4, 2008, casinos
and other sponsors of poker tournaments will not be required
to report winnings to IRS or withhold tax on the winnings.
But beginning March 4, 2008, IRS will require all tournament
sponsors to report tournament winnings of more than $5,000,
usually on an IRS Form W-2G. Tournament sponsors who comply
with this reporting requirement will not need to withhold
federal income tax at the end of the tournament. If any
tournament sponsor does not report tournament winnings,
IRS will enforce the reporting requirement and also require
the sponsor to pay any tax that should have been withheld
from the winner if the withholding requirement had been
asserted. The withholding amount is normally 25% of any
amounts that should have been reported. So that tournament
sponsors can comply with this requirement, tournament winners
must provide their taxpayer identification number, usually
a Social Security number, to the tournament sponsor. If
a winner fails to provide this identification number the
tournament sponsor must withhold federal income tax at
the rate of 28%. IRS reminds tournament winners that, by
law, they must report all their winnings on federal income
tax returns. This rule applies regardless of the amount
and regardless of whether the winner receives a Form W-2G
or any other reporting form. This requirement is true for
2007 and earlier years, and will continue to be the case
after the new reporting requirement goes into effect. You’ve
got to know when to hold ‘em... .
When it comes to saving money, state and local government employees most often take their cues from professionals, make retirement their top financial goal and are overwhelmingly confident their strategy will lead to a secure retirement. Paying for health care in retirement is the most serious threat to their plans. Those are the results of a new poll commissioned by ICMA-RC, in which 9 out of 10 responding to the survey said they are confident that their strategy for saving will lead to a secure retirement. Almost all of 500 ICMA-RC plan participants polled said that retirement saving is their top financial priority. Three-quarters of them believe they can maintain their standard of living in retirement with the financial resources they will have at hand. Almost one in five believe they will have a higher standard of living in retirement. Nearly half, however, plan to keep working, at least part-time. Just one in 20 feel their standard of living in retirement will be worse than it is now. There are a lot of dreamers out there.
The National Association of State Retirement Administrators asserts that recent studies have begun to reveal that public pensions have positive effects on local and state economies. In 2006, state and local government retirement systems in the U.S. distributed over $100 Billion more in benefits than they received in taxpayer-funded contributions, a figure that is growing each year. Personal income from state and local government pensions exceeds the personal income derived from the nation’s farming, fishing, logging and hotel/lodging industries combined. Together with the economic multiplier effect, in these and other ways the aggregate economic impact of public pensions is considerable and reaches every city and town of every state. NASRA lists resources as examples of this economic phenomenon with reference to CalPERS (see C&C Newsletter for October 4, 2007, Item 7), CalSTRS, Ohio Police & Fire, South Dakota and Texas. Readers can reach all links through http://www.nasra.org/resources/economic.htm.
Stevenson had an extreme emotional and physical response to a stray dog entering her workspace at the company. She left work soon after and for the most part stayed home for the next several days. The few times she tried to return to work, she felt unable to function and demonstrated erratic and emotional behavior. Her co-workers were so concerned that they eventually locked her out of the building. She was then informed by letter that she had been terminated. Stevenson claimed that the company had noticed she was suffering from a serious health condition and thus violated her rights under Family and Medical Leave Act, when it fired her. Despite the unprecedented nature of Stevenson’s troublesome behavior following the dog incident, the company claimed it was unaware that she might suffering from a serious mental health condition. The district court agreed with the company, and granted its motion for summary judgment. Seeing some genuine issues of material fact, the appellate court reversed and remanded for further proceedings. Typically, an employee must inform the employer thirty days in advance that the employee will need FMLA leave. When the need for FMLA leave is not known in advance, however, an employee should give notice to the employer of the need for FMLA leave as soon as practicable under the facts and circumstances of the particular case. In such a situation, it is expected that an employee will give notice to the employer within no more than one or two working days of learning of the need for leave, except in extraordinary circumstances where such notice is not feasible. The notice must succeed in alerting the employer to the seriousness of the health condition. In this case, taking the facts in the light most favorable to Stevenson, it is possible that she herself was unaware that she was suffering from a serious medical condition. Direct notice from the employee to the employer is not always necessary. An employee’s inability to communicate his illness to his employer or clear abnormalities in the employee’s behavior may constitute constructive notice of the serious health condition. Apparently, Stevenson was not barking up the wrong tree. Stevenson v. Hyre Electric Co., Case No. 06-3501 (U.S. 7th Cir., October 16, 2007).
The National Association of State Retirement Administrators has issued the results of its public fund survey for the fiscal year ending 2006. The survey contains data on a combined 13.4 million active members, 6.3 million annuitants and $2.46 Trillion in assets, representing over 85% of the entire state and local government retirement system community. (According to the U.S. Census Bureau, employees of state and local government represent more than 10% of the nation’s workforce. These employees are school teachers/administrators, firefighters, judges, police officers, public health officials, correctional officers and others providing myriad public services.) Perhaps the most recognized measure of a public retirement plan’s health is its actuarial funding ratio, derived by dividing the actuarial value of plan assets by the value of liabilities accrued to date. Most pension benefits for public employees are pre-funded, meaning that all or some of the assets needed to fund pension liabilities are accumulated during an employee’s working life, and paid out in the form of retirement benefits. Pre-funding is one way of financing a pension benefit. The opposite of pre-funding is pay-as-you-go, in which current obligations are paid with current receipts. In most cases, a pay-as-you-go pension plan eventually becomes too expensive to support with only tax receipts and contributions. Investment earnings account for most revenue generated by a pre-funded pension plan, reducing the need for contributions from employees and employers (taxpayers). A pension plan whose assets equal its liabilities is funded at 100% and is “fully funded.” A plan with assets that are less than its accrued liabilities is considered “underfunded.” However, underfunding is a matter of degree, not of kind. That is, underfunding is not necessarily a sign of fiscal or actuarial distress; many pension plans remain underfunded for decades with no detrimental consequences. The critical factor in assessing current and future health of a pension plan is not so much the plan’s actuarial funding level, as whether or not funding the plan’s liabilities creates fiscal stress for the pension plan sponsor. A plan’s funded status is simply a snapshot in an ongoing pre-funding process. It is a single frame of a movie that spans decades. There is nothing magic about a pension plan being fully funded and even with no changes to funding policies or plan design, most underfunded pension plans will be able to pay promised benefits for decades. Pension liabilities typically extend years into the future, and it is during this time that a pension fund can accumulate the assets it needs to funds its future liabilities. In addition to the actuarial funding ratio, other factors of a pension plan’s health include:
Some important statistical findings from the survey: (1)
average actuarial funding ratio was 85.8%, (2) predominant
and median investment return assumption remains 8% (comprising
3.5% for inflation and 4.5% for real rate of return), (3)
average percentage allocation to equities and fixed income
changed from 60.3/27.8 to 59.5/28.6 and (4) average percentage
allocation to Accounting and Real Estate increased, respectively,
from 3.8 and 4.5 to 4.5 and 5.1. As always, kudos to Keith
Brainard, NASRA’s Research Director. Read all the
Centers for Medicare & Medicaid Services, Office of Public Affairs, has announced Medicare premiums and deductibles for 2008. The Standard Medicare Part B monthly premium will be $96.40 in 2008, an increase of $2.90, or 3.1%, from $93.50 Part B premium for 2007. The 2008 amount is the smallest percentage increase in the Part B premium since 2001, and is $2.10 less than the increase in the premium for 2007. The 2008 Part B premium of $96.40 is equal to the amount projected in the 2007 Medicare Trustees Report issued in April (see C&C Newsletter for April 26, 2007, Item 1). This monthly premium paid by beneficiaries enrolled in Medicare Part B covers physicians’ services, outpatient hospital services, certain home health services, durable medical equipment and other items. The Part B deductible will be $135, compared to $131 in 2007. CMS also announced the Part A deductible and premium for 2008. Medicare Part A pays for inpatient hospital, skilled nursing facility, hospice and certain home health services. The $1,024 deductible for 2008, paid by the beneficiary when admitted as a hospital inpatient, is an increase of $32 from the $992 in 2007. The Part A deductible is the beneficiary’s only cost for up to 60 days of Medicare-covered inpatient hospital care in a benefit period. Beneficiaries must pay an additional $256 per day for days 61 through 90 in 2008, $512 per day for hospital stays beyond the 90th day in a benefit period. This compares with $248 and $496, respectively, in 2007. Daily co-insurance for the 21st through 100th day in a skilled nursing facility will be $128 in 2008, up from $124 in 2007.
On October 22, 23 and 24, the Division of Retirement sponsored its Thirty Ninth Annual Police Officers’ and Firefighters’ Pension Trustees’ Conference in St. Petersburg, at the Radisson Hotel and Conference Center. As always, the group (Keith Brinkman, Trish Shoemaker, Melody Mitchell, Martha Moneyham and Julie Browning) sponsored a terrific program. The speakers and their topics were beneficial to all trustees, and the materials presented in the handbook provide instant reference and answers to many of your burning questions. Those of you who did not attend this year’s conference should make plans to be there next year. You will enjoy the program and increase your knowledge ... thus making your job as trustee much easier.
Money can't buy happiness but it sure makes misery easier to live with.
Copyright, 1996-2007, all rights reserved.
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.