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Cypen & Cypen
OCTOBER 22, 2009

Stephen H. Cypen, Esq., Editor

1.            401(K)S MAY NOT BE THE ANSWER NOW:  Following last week’s prescient article in Time (see C&C Newsletter for October 15, 2009, Item 1), USA TODAY has published an article entitled “Retirement overhaul:  401(k)s may not be the answer now.”  Congress created the 401(k) in 1980 to supplement company pension plans.  But with pension plans no longer offered to all workers or frozen, millions of Americans have been relying solely on 401(k) plans to fund retirement.  Others -- nearly a third of American households -- do not have any retirement savings.  And only 4% of middle-income married couples who do not have a pension and are nearing retirement are likely to have enough money to last their lifetime.  America faces a retirement crisis, says Retirement USA, launched by the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, the Service Employees International Union, the Pension Rights Center, AFL-CIO, the National Caucus and Center on Black Aged and the National Consumers League.  The group's goal is to create a new retirement system that works in conjunction with Social Security and existing plans.  Members agree that the retirement system must be universal, secure and able to ensure that all will have a reasonable standard of living after they stop working.  The current system does not meet those basic needs.  Millions of retirees are barely surviving financially:  nearly 24% of Americans older than 65 have incomes below the poverty threshold.  The 401(k) is clearly the center of the retirement storm; some consumer advocates say the 401(k) is a failure that should end.  Retirement USA wants to keep the best parts of the current system and add to it.  Statistics show that 401(k) plans do not serve everyone well, and those who use them often make big investing mistakes, including cashing them out early.  Many workers -- especially women, Hispanics and African Americans -- do not contribute to a 401(k) plan at all.  Only 41% of Hispanic workers say they save money for retirement, and only 25.6% are covered by an employer-sponsored retirement plans.  Women also face an obstacle men do not:  they need to replace more of their final pay for retirement -- 2% more than the average male -- because they live longer.  A recent AARP survey found that 29% of workers ages 45 to 64 had stopped making retirement contributions.  About 18% of workers in the same age group have withdrawn funds from their 401(k) plans in the past year, either taking loans or cashing out.  Draining retirement funds, even to pay off credit card debt or medical bills, is a losing proposition.  People think it will solve their problem, but when the underlying problem does not go away, they end up not paying back the 401(k) loan and taking the tax penalty.  Double whammy. 

 2.            IRS ANNOUNCES PENSION PLAN LIMITATIONS FOR 2010:  Internal Revenue Service has announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2010.  Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans.  Section 415(d) requires that the Commissioner annually adjust these limits for cost-of-living increases.  Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415.  Under Section 415(d), adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under the Social Security Act.  The limitations adjusted by reference to 415(d) will remain unchanged for 2010.  This situation arises because the cost-of-living index for the quarter ended September 30, 2009 is less than the cost-of-living index for the quarter ended September 30, 2008, and, following procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation.  Effective January 1, 2010, the limitation on annual benefit under a defined benefit plan under 415(b)(1)(A) remains unchanged at $195,000. For participants who separated from service before January 1, 2010, the limitation for defined benefit plans under 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2009, by 1.0000.  The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged for 2010 at $49,000.  The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A).  After taking into account applicable rounding rules, the amounts for 2010 are as follows: 

The limitation under Section 402(g)(1) on exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.  (This limitation affects elected deferrals to Section 401(k) plans.) 

Annual compensation limit under Section 401(a)(17) remains unchanged at $245,000. 

Annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans which, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $360,000.

Limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.

Thank goodness the statute prohibits reduction in limitations, or we would have seen them for 2010.  IR-2009-094 (October 15, 2009). 

 3.            IRS UPDATES SAFE HARBOR EXPLANATIONS FOR ELIGIBLE ROLLOVER DISTRIBUTIONS:  As reported by Gabriel Roeder Smith & Company, Internal Revenue Service has issued Notice 2009-68, updating its Safe Harbor Explanations for Eligible Rollover Distributions.  Administrators of qualified plans are required to provide rollover recipients with a clearly written explanation of rules related to eligible rollover distributions.  Qualified plans include defined benefit and defined contribution plans under IRC §§ 401(a), 401(k), 403(a) and governmental 457(b) deferred compensation plans.  For plans qualified under § 403(b), the payor is required to provide the written explanation.  The written explanation should include descriptions of (1) direct rollover rules; (2) mandatory income tax withholding rules; (3) tax treatment of distributions that are not rolled over; (4) when distributions may be subject to different restrictions; and (5) tax consequences of the rollover.  The written explanation is to be provided to the recipient not more than 180 days and not less than 30 days before the date on which the distribution is to be made.  However, the recipient may waive the 30-day requirement.  Notice 2009-68 provides two safe harbor explanations that satisfy the Code: one for rollovers from designated Roth accounts and the other for all other rollovers.  The new explanations update those issued in 2002, and include tax law changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001; the Pension Protection Act of 2006; and the Worker, Retiree, and Employer Recovery Act of 2008, among others.  The changes include, but are not limited to: 

  • Ability of participants to roll over amounts from an eligible employer plan to a Roth IRA (subject to certain income and other limitations); 
  • Ability of non-spouse beneficiaries to roll over distributions to IRAs (required for all plan years beginning after January 1, 2010); and 
  • Relief from the 10% early withdrawal penalty for distributions from government plans to qualified public safety employees who separate from service after attainment of age 50. 

The notice allows plan administrators to customize safe harbor explanations by omitting information that does not apply to the plan, provided the resulting document is consistent with the safe harbor explanations.  The new explanations may be used immediately; however, 2002 explanations will continue to serve as safe harbor explanations through the end of 2009.  Notice 2009-68 can be accessed at:

 4. “INFLATION” HAS LITTLE EFFECT ON TAX RATES AND BENEFITS IN 2010:   Tax rate brackets and various tax benefits will remain unchanged or change only slightly in 2010 due to inflation, according to an Internal Revenue Service announcement.  By law, dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation.  As a result, more than three dozen tax benefits are subject to inflation adjustments each year, but because recent inflation factors have been minimal, many of these benefits will remain unchanged or change only slightly for 2010.  Key provisions affecting 2010 returns, filed by most taxpayers in early 2011, include the following: 

  • Value of each personal and dependency exemption available to most taxpayers is $3,650, unchanged from 2009. 
  • New standard deduction for heads of household is $8,400, up from $8,350 in 2009.  For other taxpayers, standard deduction remains unchanged at $11,400 for married couples filing a joint return and $5,700 for singles and married individuals filing separately.  Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions and state/local taxes. 
  • Various tax bracket thresholds will see minor adjustments.  As an example, for a married couple filing a joint return taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $68,000, up from $67,900 in 2009. 
  • Annual gift tax exclusion remains unchanged at $13,000. 

IR-2009-093 (0ctober 15, 2009). 

 5. POLL FINDS MANY OKAY WITH PUBLIC PENSIONS:   Despite public pension systems all over California drowning in red ink, there is little public alarm over what government workers are paid in retirement benefits, a report from shows.   According to a nonpartisan, statewide poll, only 32 percent of registered voters believe public pensions are too generous, 40 percent say they are about right and 16 percent say they are not generous enough.  The poll also reveals strong partisan differences about pension benefits:  among Democrats, 24 percent believe public pensions are too generous and 47 percent say they are about right; when it comes to Republicans, 45 percent say they are too generous and 33 percent believe they are not. A significant gender gap also emerged:  forty percent of men interviewed said they think public pension benefits are too generous, but only 24 percent of women did.  (Hard to believe.)  The poll found that the majority of California voters, 52 percent, believe that public safety workers should continue to receive more generous benefits than other state and local government workers.  

 6. JUDGE SEES “NOVEL” ASPECTS IN NEW YORK PENSION PROBE:   Reuters reports that a New York criminal court judge said New York Attorney General Andrew Cuomo's fraud charges against a central figure in a major pension kickback case partly rested on a "novel" use of state securities law.  Called the Martin Act,
New York's securities law gives the attorney general broad powers over financial fraud.  The judge did not elaborate on what he believes is novel about Cuomo's use of state law.  However, he did say that Henry Morris, a top political adviser to the former state comptroller who has been charged with taking millions of dollars in illegal fees, did not work for the state.  Morris's lack of a direct relationship may raise questions about whether he was required to disclose, for example, fees he was paid from investment firms that sought business from the state pension fund.  The judge did say that the issue must be resolved sooner or later, predicting an appeal of any decision he makes. 

 7. SUPREME COURT OF MONTANA UPHOLDS VERDICT FOR RETIREES:  Northwestern Corporation and others appealed a jury verdict rendered against them and in favor of Ammondson and others, which awarded plaintiffs/retirees approximately $17.5 million dollars in compensatory damages and $4 million dollars in punitive damages based on a claim for breach of contract, and the torts of breach of the covenant of good faith and fair dealing, abuse of process and malicious prosecution.  Ammondson and the others were all former employees of Montana Power Company for periods ranging from 3 to 40 years.  Each retiree left MPC after entering into separate agreements that provided them monthly payments to supplement their regular retirement plans.  These agreements were known as "Top Hat Contracts," a term derived from the Employee Retirement Income Security Act.  Northwestern Corporation had purchased MPC’s assets, and assumed responsibility for all current future obligations of MPC as they related to any supplemental pension benefit or benefit replacement restoration plan, program or individual agreement that had been maintained by MPC.  When Northwestern subsequently filed for Chapter 11 reorganization in bankruptcy court, Northwestern did not provide notice to holders of the Top Hat Contracts that it would reject their contracts during bankruptcy and seek to treat them as general, unsecured creditors.  Instead, Northwestern continued to pay the retirees under terms of the Top Hat Contracts throughout bankruptcy proceedings.  Later, after the bankruptcy court had confirmed Northwestern’s Chapter 11 bankruptcy organization plan, Northwestern, without giving any prior notice to any of the retirees, ceased making payments to them under the Top Hat Contracts.  In generally affirming the trial court’s judgment, among other holdings, the state’s highest court held that (1) retirees’ claims were not preempted by federal bankruptcy law; (2) the lower court did not err by denying defendants the opportunity to present an advice-of-counsel defense; (3) the trial court did not err in allowing the jury to consider retirees’ claims for emotional distress; and (4) the trial court did not err in denying defendants’ post-trial motion to offset the judgment against the amount of retirees’ pre-trial settlement with the attorneys for defendants.  Ammondson v. Northwestern Corporation, DA 07-0243 (Mont., October 13, 2009). 

 8. PBGC SETS FLAT-RATE PREMIUM INCREASES FOR 2010 PLAN YEAR:  The Pension Benefit Guaranty Corp. has announced the flat-rate premium increase for 2010 plan year.  The per-participant flat-rate premium for plan year 2010 is $35.00 for single-employer defined benefit pension plans (up from $34.00 for plan year 2009) and $9.00 for multiemployer defined benefit pension plans (unchanged from plan year 2009).  By law, premium rates are adjusted for inflation each year based on changes in national average wage index.  Of course, PBGC protects retirement incomes of nearly 44 million American workers in more than 29,000 private-sector defined benefit pension plans.  PBGC is not funded by general tax revenues. 

 9. TECHNICAL CORRECTION ON PUBLIC SAFETY TAX-FIX:  We recently reported that Florida Senator Bill Nelson had introduced a bill to fix certain tax issues related to passage of the Pension Protection Act of 2006 (see C&C Newsletter for October 15, 2009, Item 6).  We referred to a companion bill having been introduced by Florida Representative Kendrick Meek introduced on May 22, 2008 (see C&C Newsletter for June 12, 2008, Item 1).  We should have realized that at the end of each session of Congress proposed bills that have not passed are cleared from the books.  Therefore, Meek’s 2008 bill had to be reintroduced, which it was on January 27, 2009 (HR 721).  Incidentally, one of Meek’s co-sponsors is Florida colleague Ileana Ros Lehtinen (R-FL).  Well, it looks like this one is an all-Florida team. 

10. A LESSON IN GOLF:  Big-time executives have always played lots of golf.  However, with unemployment pushing 10%, people have much more time for the sport -- assuming they can afford to pay.  Anyway, for those of you who want to learn on the cheap, here is your first lesson in golf, provided by Ralph Kramden (Jackie Gleason) and Ed Norton (Art Carney):

11. AN OLD FARMER’S ADVICE:  If you find yourself in a hole, the first thing to do is stop diggin'.  

12. IDIOSYNCRASIES OF OUR LANGUAGE:  Would a fly without  wings be called a walk? 

13. QUOTE OF THE WEEK:  “No man is an island, but some of us are long peninsulas.”  Ashleigh Brilliant (Brilliant, Ashleigh.)


Copyright, 1996-2009, 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.

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