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Miami

Cypen & Cypen
NEWSLETTER
for
December 18, 2014

Stephen H. Cypen, Esq., Editor

1.  IRS ISSUES 2014 CUMULATIVE LIST, EXTENDS DB PLAN APPROVAL PERIOD: In Notice 2014-77, the Internal Revenue Service has provided the 2014 Cumulative List of Changes in Plan Qualification Requirements to be used by plan sponsors and practitioners submitting determination letter applications for plans during the period beginning February 1, 2015, and ending January 31, 2016. Plans using this Cumulative List will primarily be single employer individually designed defined contribution plans and single employer individually designed defined benefit plans that are in Cycle E. Generally, an individually designed plan is in Cycle E if the last digit of the employer identification number of the plan sponsor is 5 or 0, or if the plan is a § 414(d) governmental plan (including governmental multiemployer or governmental multiple employer plans) for which an election has been made by the plan sponsor to treat Cycle E as the second remedial amendment cycle for the plan. In addition, in Announcement 2014-41, the IRS has extended to June 30, 2015, the deadline for submitting on-cycle applications for opinion and advisory letters for pre-approved defined benefit plans for the plans’ second six-year remedial amendment cycle. This announcement also provides a two-day extension (from Saturday, January 31, 2015, to Monday, February 2, 2015) for Cycle D on-cycle submissions (primarily individually designed plans including multiemployer plans). The extension to June 30, 2015, applies to pre-approved defined benefit mass submitter lead and specimen plans, word-for-word identical plans, master and prototype minor modifier placeholder applications, and defined benefit non-mass submitter lead and specimen plans. The submission period for these applications is scheduled to expire on February 2, 2015. This extension applies to all on-cycle pre-approved defined benefit plan submissions. In general, plans submitted in accordance with this extension will continue to be reviewed for qualification items based on the 2012 Cumulative List. The IRS also said it expects to modify Revenue Procedure 2011-49 to expand the preapproved program to include defined benefit plans containing cash balance features and defined contribution plans containing employee stock ownership plan features. In addition, the IRS is developing tools, which will be available before June 30, 2015, to assist plan sponsors in drafting these plans. Summary by plansponsor.com.

2. SUMMARY OF LEADING PROPOSALS TO EXPAND RETIREMENT COVERAGE: There are at least fifteen proposals under current discussion or consideration by Congress to expand retirement plan coverage. American Benefits Council offered a brief summary of each, together with other details. Space will not permit us to deal anything further than the proposal and whether it is voluntary or mandatory:

  • Starter 401(k) Plan - Voluntary
  • New Automatic Enrollment Safe Harbor - Voluntary
  • Eliminate the Cap on Automatic Escalation - Voluntary
  • Open Multiple Employer Plans - Voluntary
  • USA Retirement Funds - Mandatory
  • Open Thrift Savings Plan to Private Individuals - Voluntary
  • American Retirement Accounts - Voluntary
  • MyRA - Voluntary
  • Eliminate Top - Heavy Testing or Reduce Burden - Voluntary
  • Auto IRA - Mandatory
  • State Run Mandatory Plans - Mandatory
  • State Run Voluntary Plans - Voluntary
  • Increase Start – Up Credit - Voluntary
  • Enhance Savers’ Credit - Voluntary
  • Treat Part Time Employees as Full Time - Voluntary (unless employer already has a plan).

3. OMINOUS SPENDING BILL DESIGNS PLAN SHORE UP STRUGGLING MULTIEMPLOYER PENSION FUNDS: Multiemployer pension funds are traditional defined benefit plans jointly funded by groups of employers and industries like construction, trucking, mining and food retailing. Reform was initially developed by National Coordinating Committee for Multiemployer Plans, representing both labor and management. The organization proposed allowing troubled plans to take action to save themselves. More than a million Americans currently have their retirement savings in multiemployer pension plans that are severely distressed, and expected to collapse in the near future. Workers and retirees in these failing plans will see their benefits cut severely. Even more troubling, failure of these plans will bankrupt the Pension Benefit Guaranty Corporation, which serves as the federal backstop charged with protecting these workers’ pensions. If PBGC collapses, all ten million workers with the multiemployer pension -- even those in currently healthy plans -- would be put at risk, and many retirees would be left with nothing. Demographic changes, the Great Recession and other challenges have led to this crisis, which will have far-reaching consequences.  Plans have already been taking every step possible to stay afloat, but there are no more options available protect workers’ retirement. Failing to address this looming disaster will mean less retirement security, fewer good-paying jobs and greater risks to taxpayers. The National Coordinating Committee for Multiemployer Plans developed an agreement that will:

  • Permit trustees of severely underfunded plans to adjust vested benefits, enabling deeply troubled plans to survive without a federal bailout.
  • Require approval by plan participants of any new proposed benefit adjustments that take effect. This provision includes a fail-safe mechanism for those plans that present a systemic risk to the multiemployer pension system.
  • Provide participant protections to safeguard the most vulnerable retirees, including disabled retirees and individuals age 75 and older.
  • Give the PBGC authority to take earlier action to save failing plans, including potential future costs.
  • Adjust the premium structure in order to place PBGC on more firm financial ground.

4. SOME PENSION PLANS HAVE NOT RECOVERED FROM RECESSION: Governing analyzed 146 larger pension funds across the country to determine whether or not they had recovered their assets prior to the recession. Overall 57 pension systems (39%) have not recovered, and 18 of those plans are still more than 10% below their peaks. Meanwhile, 89 systems have now regained their losses. Most plans’ peak year was 2007, followed by losses the following two years that added up to a one-quarter drop in average value across the plans. In the 2010 fiscal year, although many did face varying losses again in 2012. Collectively, asset values of the 146 systems have recovered from the recession, and now total $2.84 trillion, up about 1% from 2007. The recovery level of plans, however, is varied. Some have surpassed their pre-recession peaks by more than 50%. On the other end, Kentucky’s state employee system has the farthest to go, followed by other pension plans that commonly make headlines. Those are Chicago’s police, city and teachers’ funds, Pennsylvania state and teachers plans and New Jersey Teachers’ plan -- all of which are more or less one-quarter short of their pre-recession peaks. Among the foregoing plans, underfunding is a recurring theme. All of these plans were not being fully funded by their governments when the recession hit, and they continued to be underfunded through the market recovery period. The result is that these pension plans were unable fully to capitalize on the big gains of the stock market in recent years. And, it is not as if liabilities stood still since the recession: for a plan to improve its funded ratio, its assets have to grow faster than its liabilities. So when there have been losses in 2008 and 2009, they really need to have monumental gains to improve their funded ratio. If there is already a huge numbers in liabilities, the plan cannot just be plodding along if it wants to make up that ground. Even plans that have been well funded by their governments have generally not been able to catch up to their funded status before the recession. They do, however, tend to be far healthier than plans that have not caught up. (FRS’s 2011 funded ratio was 87%. It was virtually unchanged at 86% in 2012. FRS had net assets of $129,672,088,100 in 2013 and a pre-recession peak of $134,315,240,500 in 2007. The change was -3.5%.)

5. APPEALS COURT WITHDRAWS PRIOR OPINION IN GABRIEL:The U.S. Court of Appeals for the Ninth Circuit has withdrawn its opinion in Gabriel v. Alaska Electrical Pension Fund, Case No. 12-35458 (U.S. 9th Cir. June 6, 2014) (See C & C Newsletter for July 10, 2014, Item 7.) The panel withdrew its prior opinion, denied petitions for rehearing and rehearing en banc as moot, and filed a superseding opinion affirming in part and vacating in part the district court’s summary judgment in favor of Alaska Electrical Pension Fund and other defendants on claims (1) that the Fund abused its discretion in denying plaintiff benefits under the Alaska Electrical Pension Plan and (2) that plaintiff was entitled to equitable relief under ERISA. For over three years, the Fund paid plaintiff monthly pension benefits he had not earned. When the Fund rediscovered an earlier determination that the plaintiff had never met the plan’s vesting requirements, it terminated his benefits. The panel affirmed the district court’s determination that the plaintiff failed to raise a genuine issue of material fact as to his entitlement to “appropriate equitable relief” under 29 U.S.C. §1132(a)(3) in the form of equitable estoppel or reformation. The panel rejected the plaintiff’s argument that the Fund failed to comply with ERISA procedural requirements or waived its determination that plaintiff had never vested, and therefore affirmed the district court’s deference to the Fund’s denial of benefits. Because the district court made its ruling prior to the Supreme Court’s decision in CIGNA Corp. v. Amara, (See C & C Newsletter for July 21, 2011, Item 5), and therefore did not consider availability of the equitable remedy of surcharge, which the Supreme Court held may be “appropriate equitable relief” for purposes of §1132(a)(3), the panel vacated the district court’s ruling that plaintiff was not entitled to any form of “appropriate equitable relief.” The panel remanded for the district court to reconsider availability of surcharge in this case, and, if available, whether plaintiff adequately alleged a remediable wrong.Gabriel v. Alaska Electrical Pension Fund, Case No. 12-35458 (U.S. 9th Cir. December 16, 2014).

6. STUDIES INDICATE VALUE OF PENSIONS: National Institute on Retirement Security has released a new issue brief entitled “Teacher Retirement Plans: Case Studies in Washington and Ohio Indicate Value of Pensions.” For more than a century, public retirement systems have provided financial security to current and future retired teachers, while also enabling public schools to manage their educational workforce. However, in recent years, a few states have moved to new benefit design structures for K-12 teachers, including providing teachers a choice between a traditional defined benefit pension design and alternative designs, such as a defined contribution plan, or a “hybrid” DB-DC combination design, which includes both DB and DC benefits. In offering teachers a choice between retirement plans, public policy considerations include state budget concerns, financial health of the pension fund and the distribution of risk between state and employees. In terms of teacher pensions, effects on education quality should also be considered, for example, the retirement plan’s effect on recruitment and retention of quality teachers to foster a highly effective teaching workforce. In 1997, Washington State started covering all teachers in a DB-DC combination plan with a choice to move to that plan from the DB pension available to those teaching in 1997. More recently, the state legislature changed the law to reopen membership in the traditional DB pension for all new teachers hired since 2007 to allow them to choose between the two plans. Several papers on the Washington State experience have somewhat different conclusions on the value and implications of the choice option for teachers in that state. The new paper delves more deeply into the unique experience in Washington, as well as the teacher choice experience in Ohio, and finds that:

  • The experience of teacher election patterns in Washington State is unique, in that the combined DB-DC plan included special features and timing patterns which encouraged participation. Specifically:  
  • Teachers were provided upfront financial payments to switch to the DB-DC combined plan. 
  • The bull stock market of the 1990s may have caused teachers to overestimate how much money they would be likely to accumulate in their DC account, thereby making the combined plan seem more generous.
  • The state offers in-plan annuitization of the DC account balance, which provides teachers with a much larger lifetime income stream than if they were to buy an annuity from an insurance company, but also shifts longevity risk back to the state.  
  • Ohio, the only other state that offers teachers a choice between a DB plan and a combined DB-DC plan, does not provide such incentives in the combined plan, and has experienced very different election results. Between 2002-2014, 86% of teachers have opted for the traditional DB plan, versus just four percent who opted for the combined plan. 
  • Education policy research finds that traditional DB pensions play a critical role in recruiting and retaining productive teachers. Therefore, offering an alternative retirement design could have adverse effects on teacher quality.

Evidence from these two states suggests that teachers are unlikely to choose an alternative retirement plan design unless the state undertakes significant risk in individual account portion of the plan. Furthermore, because research suggests that offering a choice could have adverse effects on teacher retention and quality, policymakers should proceed with caution before implementing a choice between a DB pension and a combined DB-DC plan.

7. UM PRESIDENT’S COMPENSATION TOPS THE LIST: With annual compensation of just over $1.2 million, Donna Shalala of University of Miami is the highest paid president of a nonprofit college in Florida in 2012, according to southflorida.citybizlist.com. At $7.1 million, Shirley Ann Jackson of Rensselaer Polytechnic Institute was the highest paid chief executive of a nonprofit college in the United States. John L. Lahey of Quinnipiac University ($3.8 million), and Lee C. Bollinger of Columbia University ($3.4 million) rounded out the top three earners. Rensselaer Polytechnic and Columbia University are located in the state of New York; Quinnipiac University is based in Hamden, Connecticut. The data showed compensation received by 537 chief executives at 497 private nonprofit colleges in the United States in 2012. Data for private nonprofit baccalaureate, master’s and doctoral institutions with the largest endowments, were compiled from the Internal Revenue Service’s Form 990, which is filed by most nonprofit entities. Fourteen college presidents from Florida appear in the overall list. Here are six who made the top 100:

Rank           President                        CollegeTotal                     Compensation
 
17              Donna E. Shalala            University of Miami            $1,225,689

38              John P. Johnson              Embry-Riddle Aeronautical
                                                           University at Daytona
                                                           Beach                                $  983,026
 
60              George L. Hanbury II       Nova Southeastern
                                                           University                            $  803,500
 
77               Arthur F. Kirk Jr.               Saint Leo University           $  695,823
 
90               Donald R. Eastman III     Eckerd College                   $  653,262
 
100             Anthony J. Catanese      Florida Institute of                                                                                                   Technology                         $  624,045
 
8. BEST PLACES TO WORK: Based on employee feedback, the Glassdoor has compiled a list of the best small and large companies to work for in 2015. Workers were asked how satisfied they are with their company overall, how they feel their CEO is leading the company, and detailed some of the perks of working at the firm:
 
Top Small Business

  • TubeMogul – Ninety-two percent of employees would recommend the employer to a friend, 93% approve of the CEO’s job.  It has managed to preserve the no “BS” culture. The culture has strengthened as leaders at all levels of the organization have matured, and the company as a whole has grown more confident with success.  
  • Intacct Corporation – Ninety-four percent of employees would recommend the employer to a friend, 99% approve of the CEO’s job. Awesome company with tons of liberty.  
  • Evolent Health – Ninety-two percent of employees would recommend the employer to a friend, 99% approve of the CEO’s job. Smart and creative people, and open collaborative culture.  
  • Fast Enterprises – Ninety-five percent of employees would recommend the employer to a friend, 96% approve of the CEO’s job. The work is engaging, given a lot of freedom in the job.  
  • The Motley Fool – Ninety-five percent of employees would recommend the employer to a friend, 94% approve of the CEO’s job. The culture is one of drive, entrepreneurship, fun and helping the world invest better. As an employee you are trusted and respected.

Top Large Companies

  • Boston Consulting Group – Ninety-percent of employees would recommend the employer to a friend, 96% approve of the CEO’s job. Great work life-balance on most days.  
  •  F5 Networks – Ninety-three percent 93% of employees would recommend the employer to a friend, 99% approve of the CEO’s job. Best employee training anywhere. Employees feel valued. Employees are given the opportunity to rise to their potential.  
  • Nestlé Purina PetCare – Ninety-five percent of employees would recommend the employer to a friend, 98% approve of the CEO’s job. Great company that still is looking to take things to the next level.  
  • Bain & Company – Ninety-five percent of employees would recommend the employer to a friend, 99% approve of the CEO’s job. Good work life balance/culture.  
  • Google – Ninety-one percent of employees would recommend the employer to a friend, 96% approve of the CEO’s job. Food, food, food. Fifteen or more cafes on main campus alone. Mini-kitchens, snacks, drinks, free breakfast/lunch/dinner all day, every day. (Real deep thinking!)

9. HOW BUSINESS CREATED PENSIONS TO THWART UNIONS:Buried in the $1.1 trillion spending bill signed into law on December 16, 2014 is a provision that would allow the benefits of retired truckers, construction workers and others who contributed to multiemployer pensions to be cut, for the first time (see item 3) . An opinion piece in BloombergView says this change potentially affecting as many as 1.5 million current and future retirees in underfunded plans, mostly union workers, will undoubtedly set off volleys of finger pointing to find a culprit for the accelerating collapse of the system. Many commentators will blame unions for allegedly extorting extravagant, unsustainable retirement packages from employers that are now falling apart. But it is not so simple. In fact, the long, tangled history of U.S. private pensions is equally a story of how business sought to manage labor, conserve profits and block expansion of a modern welfare state. Research by historians helps explain why the U.S. is almost unique in its reliance on private, company-sponsored pensions instead of comprehensive, government sponsored benefits. For reasons of space, we skip to the bottom line: pensions are now a vestigial presence in American work life, replaced by defined contribution plans such as the 401(k). In the last 15 years, the portion of the U.S.’s largest companies offering defined benefit pensions to new workers has fallen to 24% from 60%. The changes in the spending bill, which could permit cuts to multiemployer private pensions for about 10% to 15% of the 10 million workers in such plans, are framed as a necessary measure to preserve solvency of the PBGC. But on a deeper level, this step is a harbinger of the ultimate demise of a private pension system that has outlived its usefulness to the business community. Read the entire interesting article at http://www.bloombergview.com/articles/2014-12-17/big-business-promoted-pensions-to-crush-unions.

10. DILLERISMS: The reason women do not play football is because 11 of them would never wear the same outfit in public. - Phyllis Diller
 
11. STUFF YOU DID NOT KNOW: What is the most popular boat name requested?  Obsession.
 
12. TODAY IN HISTORY: In 1912, Piltdown Man, later discovered to be a hoax, is supposedly found in the Piltdown Gravel Pit, by Charles Dawson.

13. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

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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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