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Cypen & Cypen
DECEMBER 9, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The cover story on the December, 2004 Benefits & Compensation Digest is an excerpt from the International Foundation of Employee Benefit Plans’ recently published Investment Policy Guide Book for Trustees, Fifth Edition, by the legendary Eugene B. Burroughs. Here is how the article starts: If an employee benefit plan does not have an investment policy statement, it does not have an investment policy. Now, that is a harsh statement, but it represents a strong sentiment of truth. The absence of a cohesive written statement results in a loose aggregation of ideas. Loose aggregation of ideas results in a fuzzy understanding of what your objectives are, and until you go through the arduous task of finalizing a statement, the investment manager may be seeking objectives incompatible with the needs of the plan, or the investment vehicle selected for your plan may be inappropriate, given its needs. If a policy is not reduced to writing, it is not mutually understood, and the absence of understanding between the trustees and the professionals is the most significant cause of poor investment results. The statement prepared for the fund in aggregate generally includes at least the following elements:

1. Background information on the fund
2. Identification of fiduciaries
3. Organizational structure
4. Cash flow requirements
5. Lines of authority and delegations
6. Diversification of the portfolio
7. Active/passive strategies
8. Definition of assets
9. Performance objectives
10. Guidelines
11. Brokerage
12. Voting of proxies
13. Trusteeship/custodianship

To assist trustees, the article contains a checklist of potential elements to include in policy statements. The book can be ordered at Happy reading (and learning).


The International Foundation of Employee Benefit Plans also reports on a survey conducted by Diversified Investment Advisers and administered by LIMRA International and FGI Research, Inc. The results are that defined benefit plans show a positive return in employee retention, according to 84% of survey respondents. To insure viability of such plans, companies made substantial contributions to them in 2003, with 30% contributing between $10 Million and $99 Million. Publicly-traded firms made higher employer contributions to their defined benefit plans than did privately-owned companies. U.S. companies with at least 1,000 nonunion employees, including 122 publicly-traded and 84 privately-owned firms, were questioned.


For administrators and others who do this kind of stuff, take note that Internal Revenue Service has announced a revision of instructions for the 2004 Form 1099-R, which is used to report distributions from retirement plans. The explanations for codes 1 and 2 shown in the Guide to Distribution Codes for Box 7 have been changed. (These codes are used to report distributions to participants under age 59-1/2.) In general, code 1 indicates that the distribution may be subject to a 10% early distribution penalty under Internal Revenue Code Section 72(t). Code 2 indicates that the distribution is exempt from the penalty. The published 2004 instructions severely limited circumstances in which a plan or IRA could use code 2, which IRS has now corrected on its website. Under the correction, a plan uses code 2 in any of the following circumstances:

  • A Roth IRA conversion or reconversion.
  • A distribution made from a qualified plan or IRA because of an IRS levy under section 6331.
  • A section 457(b) plan distribution that is not subject to the additional 10% tax.
  • A distribution from a qualified retirement plan after separation from service where the taxpayer has reached age 55.
  • A distribution that is part of a series of substantially equal periodic payments as described in sections 72(q), (t) and (v).
  • Any other distribution subject to an exception under section 72(q), (t) and (v) that is not required to be reported using code 1, 3 (disability) or 4 (death).

As corrected, a plan would use code 2 for a corrective distribution, while under the printed instructions, the plan would use code 1, potentially inviting IRS to contact the participant to explain why he is not subject to the penalty tax.


Fifteen employees of the San Antonio Fire Department who are members of either the United States military reserves or the National Guard brought a civil action under the Uniform Services Employment and Reemployment Rights Act of 1994 against the City of San Antonio for declaratory, injunctive and equitable relief; compensation for lost wages and benefits; and additional liquidated damages. They contended that the City violated USERRA by denying them employment benefits because of their absences from work while performing their military duties. More specifically, they asserted that the City’s collective bargaining agreement and policies regarding military leave of absence deprived them of straight and overtime pay, opportunities to earn extra vacation leave and vacation scheduling flexibility and opportunities to secure unscheduled overtime work and job upgrades. Plaintiffs asserted that under USERRA Section 4311(a) the City, in implementing such employment practices, unlawfully discriminated against them by deeming them “absent” from work as opposed to “constructively present at work.” On the other hand, the City contended that because USERRA Section 4316(b)(1) provides that persons absent from civilian employment by reason of military service are entitled only to such non-seniority rights and benefits as the employer provides to employees when they are on non-military leaves of absence, plaintiffs cannot recover because they were treated equally as to such rights with all employees absent on non-military leave. On appeal from a judgment in favor of the employees, the United States Court of Appeals for Fifth Circuit reversed: USERRA does not grant escalator protection to service members’ non-seniority rights and benefits but provides only that the employer treat employees absent because of military service equally with employees having similar seniority, status and pay who are on comparable non-military leaves of absence under a contract, agreement, policy, practice or plan in effect at anytime during that uniform service. Thus, City is not liable for lost straight-time pay, lost overtime opportunities or missed upgrade opportunities. However, the case was remanded for further proceeding on plaintiffs’ claims for bonus day leave, perfect attendance leave and the cap on lost overtime. Rogers v. City of San Antonio, Case No. 03-50588 (U.S. 5th Cir., December 2, 2004).


The Supreme Court of North Dakota has reversed a lower court ruling that held a husband’s disability payments were in the nature of early retirement payouts and thus marital property. The divorce court had found that the disability benefits were, in essence, meant to replace the regular longevity based upon retirement payments the husband would have received had he remained at work. In reversing, the high court found that the lower court’s ruling was contrary to law: “We conclude as a matter of law the benefits [husband] presently receives are disability benefits and are his solely. However, we further conclude that at the time [husband] is eligible to retire under the California statutes governing his CalPERS benefits, the benefits become retirement benefits and are marital property subject to division.” In other words, I’ll pay you later, but not now. Striefel v. Striefel, Case No. 20040072 (N.D., November 19, 2004).


As reported by Bloomberg News, the Securities and Exchange Commission has released its 160-page ruling extending oversight to the $866 Billion hedge fund industry (see C&C Newsletter for October 28, 2004, Item 6). The rule includes a 30-page dissent from SEC’s two Republican commissioners. Hedge fund managers with more than $25 Million must register with the agency as investment advisers by February, 2006. Registration opens the hedge funds to periodic audits and also means that they must comply with various record-keeping requirements, and name a compliance officer.


We have learned from that New York State’s hourly minimum wage will step up from its current $5.15 to $7.15, as the State Senate overrode the Governor’s veto. The measure will raise the minimum wage to $6.00 an hour on January 1, 2005, to $6.75 on January 1, 2006 and to $7.15 on January 1, 2007.

Copyright, 1996-2004, 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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