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Cypen building

August, 1996

Stephen H. Cypen, Esq., Editor

BUCK PREDICTS STATUTORY LIMITS: Now that the Bureau of Labor Statistics has released the Consumer Price Index for June 1996, Buck Consultants, Inc. is able to estimate various statutory limits used in employee benefit plans for 1997. Some of the more important ones are Section 415 Defined Benefit Plan dollar maximum - $125,000.00, Special Floor for Fire Fighters and Police Officers - $70,000.00 and Section 401(a)(17) Annual Compensation Limit - $160,000.00.

STATE ETHICS LAW TO CHANGE:Effective January 1, 1997, Chapter 96-328 amends the Code of Ethics for Public Officers and Employees. Previously, "food or beverage consumed at a single sitting or event" was not a gift. Now, "food and beverage consumed at a single sitting or meal shall be considered a single gift and the value of the food and beverage provided at that sitting or meal shall be considered the value of the gift." The value of a gift provided to several individuals is prorated among them. If the gift is food, beverage, entertainment or the like, provided at a function for more than ten people, the value of the gift to each individual shall be the total value of the items provided divided by the number of persons invited to the function, unless the items are purchased on a per person basis, in which case the value of the gift to each person is the per person cost. And you thought your legislators just sat around and ignored real important matters!

GOVERNOR WHITMAN VETOES CONTINUED PAID HEALTH BENEFITS: The Governor of New Jersey has vetoed a Bill that would have required local governments to continue paying health benefits to employees receiving them prior to December 18, 1995. After that date, local governments had the option to continue paying for such benefits, but the vetoed Bill would have required it. Because the Bill overwhelmingly passed both houses of the New Jersey legislature, there will be a strong effort to override the veto.

GASB TO ISSUE TECHNICAL BULLETIN: Your auditors have probably advised you that GASB Statement No. 5 will be superseded by GASB Statement No. 25 and GASB Statement No. 27. Because of different effective dates, employers are uncertain as to whether they must still follow GASB Statement No. 5 when the pension plan is no longer required to. You might want to make sure that your auditors have the proposed bulletin, which is available from the GASB Order Department, 401 Merritt 7, P. O. Box 5116, Norwalk, Connecticut 06856-5116.

COURT ALLOWS ROLLOVER ELIGIBILITY: In overruling a U.S. Tax Court determination to the contrary, the U.S. Court of Appeals for the Fourth Circuit ruled that a distribution made "on account of the employee's separation from service was eligible for rollover treatment." The State of Maryland had a retirement system that was closed to new participants after 1980. Participants in the prior system had the option to transfer to the new system, which the subject employee did. Upon retirement, the employee received a substantial transfer refund, most of which he rolled over into an IRA within sixty days. IRS unsuccessfully urged that the refund was paid on account of the employee's election to transfer rather than on account of his separation from service.

LACERA CONTRIBUTIONS TO DROP: As we previously reported (see C&C Newsletter for May 1996), the Los Angeles County Employees Retirement Association has reduced its assumed salary growth rate from 6% to 5.5%. (The earnings assumption remains at 8% per year.) Based upon a triennial actuarial experience study, county contributions will be reduced by approximately $15 Million, or 5.3%.

MASSACHUSETTS PUBLIC FUNDS REPORT PERFORMANCE: Over the past five years, the average rate of return for all public funds in the State of Massachusetts was 11.9%; for the past ten years, the average rate of return was 11.43%. The average earnings assumption is 8.5%.

PENSION "DAMAGES" TAX FREE: Section 104(a)(2) of the Internal Revenue Code excludes from income "the amount of any damages received (whether by suit or agreement and whether as lump sum or as periodic payments) on account of personal injuries or sickness." In a recent case involving ERISA wherein an employer implemented a scheme to avoid pension liabilities, plaintiffs obtained a substantial settlement. A federal appeals court held that the portion of damages designed to compensate plaintiffs for non-pecuniary losses is "on account of personal injury" and is tax free. Although this case does involve the private sector and ERISA, the logic would apply to a similar situation in the public sector. Of course, items such as back wages are subject to tax.

PHOENIX FIREFIGHTERS AGREE TO PENSION CHANGES: Firefighters in Phoenix, Arizona have agreed to reduce their pension contributions from 7.65% to 5% of compensation. Benefits will not be reduced, because the city has agreed to contribute the 2.65% difference, thus allowing firefighters to take home that much extra pay.

WYOMING DEFERRED COMP PLAN SOUND: According to BNA, a recent review of Wyoming's Deferred Compensation Program found it was "good and sound." Out of 18,000 eligible employees, 2,700 participate in the plan, which has assets of almost $130 Million. The average annual participant asset fee is .38% compared to .79% in surveyed-programs.

COURT UPHOLDS CONTRACT-NATURE OF PENSIONS: Oh, to be in Oregon. Following a long line of its prior decisions, the Supreme Court of Oregon has held that "the state may undertake binding contractual obligations with its employees, including benefits that may accrue in the future for work not yet performed. Moreover, the cases recognize that PERS pension plan is an offer for a unilateral contract which can be accepted by the tender of part performance by the employee. ... [V]esting encompass[es] not only work performed but also work that has not yet begun." In so holding, the Court invalidated a Ballot Measure that would have impaired the obligations of such contracts in violation of the United States Constitution. The Ballot Measure amended the Oregon Constitution to prohibit public employers from "picking up" employees' pension contributions; to prohibit existing guaranteed minimum rate of return on individual accounts of members; and to prohibit existing sick leave credit programs whereby a percentage of accumulated sick leave could be used to increase retirement benefits. Note that the "pick-up" involved here does not appear to be the traditional one under IRC Section 414(h)2 whereby the employee's obligation to contribute is merely "picked up" by the employer. Before 1979, employees who were members of PERS were required to contribute a percentage of their salary to the pension plan. Thereafter, employees agreed to forego a requested pay raise in exchange for the right to bargain with public employers for a 6% "pick-up." In essence, the state could give employees the equivalent of a 6% pay raise without increasing the state's payments to Social Security. If the measure were implemented, the 6% cost would be shifted to employees and the state would reduce its PERS costs by 6% of salary. Of course, employees would experience a reduction in salaries. In fact, because the "picked-up" amounts are statutorily considered part of salary, elimination thereof would also reduce pension benefits because "final average salary" would also be reduced.

OBRA '86 NOT RETROACTIVE: The United States Supreme Court has held that Section 9201 of the Omnibus Reconciliation Act of 1986 is not retroactive. That section, which amended the Age Discrimination In Employment Act, prohibits, in the case of a defined benefit plan, the cessation of an employee's benefit accrual or the reduction of the rate of an employee's benefit accrual because of age. The Court found the following statutory language quite clear: "The amendments ... shall apply only with the respect to plan years beginning on or after January 1, 1988, and only to employees who have 1 hour of service in any plan year to which such amendments apply." Thus, for plan years prior to the effective date, employers cannot be held liable for using age-based accrual rules. Lockheed Corporation v. Spink, 9 Fla. L. Weekly Fed. S660 (June 10, 1996).

BNA RELEASES SURVEY ON PERSONNEL POLICIES: The Bureau of National Affairs, Inc. has released its latest Personnel Policies Forum Survey, entitled "Services and Assistance for Employees." According to the report, the following services are offered by the following percentages of companies: Seminars on Stress Management (89%), On-Site Medical Examinations (57%), Formal Wellness Programs (36%) and Employer-Supported Child Care Facilities (9%).

CONNECTICUT PENSION TRUST FUND TAKES BATH IN FLORIDA REAL ESTATE: Give me land, lots of land. The State of Connecticut Pension Trust Fund intends to trim its poorly performing $1.1 Billion real estate portfolio by disposing of, among other things, the Plantation Fashion Mall. As of April 1995, the Fund had lost over $40 Million on the investment. Over the past seven years, the Fund's real estate portfolio has averaged a negative 19% return per year.

CHANGES IN ALASKA: The state has adopted an incentive program for school district employees covered by certain public plans. Savings of up to $15 Million are anticipated. Meanwhile, requirements for retiree health benefits for future state workers have been tightened. Finally, 3-year labor contracts have been negotiated, allowing wage increases of up to 1.5% per year.

BUCK RELEASES OUTSOURCING SURVEY: Lesson of the month: "Outsourcing" means the utilization of services, systems and/or staff of an outside provider to perform some or all of an administrative function. (Sure sounds like what we used to call "farming out.") In any event, according to a recent nationwide survey of public and private organizations conducted by Buck Consultants, Inc., almost half of the survey respondents used outsourcing for at least some portion of human resource and/or employee benefit functions. The most commonly outsourced functions are medical claims administration, utilization review, record keeping and investments. The least common are vacation/holiday administration, recruitment, enrollment and payroll.

DEFERRED COMP NOT EXEMPT IN BANKRUPTCY: A U.S. bankruptcy judge has held that the debtor's interest in a deferred compensation plan established by Collier County and administered by Public Employees Benefits Services Corporation (PEBSCO) is not exempt in bankruptcy under either Section 112.215(10)(a) or Section 222.21(2), Florida Statutes. In Re: Jeffrey Curtis Handshaw, 10 Fla. L. Weekly Fed. B30 (Bankr. MD Fla., July 18, 1996).

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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