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Febuary, 1999

Stephen H. Cypen, Esq., Editor

1. PROPOSED IRS REGS IMPLEMENT 1509 OF TRA '97: In response to Section 1509 of the Taxpayer Relief Act of 1997 (see C&C Special Supplement dated September, 1997, pages 2-3), the Internal Revenue Service has proposed amended regulations. The proposed regulations clarify that it is not necessary for a distributing plan to have a favorable IRS determination letter in order for a receiving plan administrator to reach a "reasonable" conclusion that a contribution is a valid rollover contribution. The new regulation applies to any qualified retirement plan receiving or distributing eligible rollover distributions. There is no mandate as to any particular documentation or procedures that a plan administrator must see in order to reach such reasonable conclusion. In one example, an employee provides a statement from the administrator of the distributing plan that the distributing plan is "qualified" and that administrator is not aware of any plan provision or operation that would result in its disqualification.

2. SEC'S LEVITT TURNS UP HEAT ON "PAY-TO-PLAY" ABUSES: Securities and Exchange Commission Chairman Arthur Levitt wants rules regarding "pay-to-play" issues in the public pension arena. Levitt's target is the practice of money managers giving campaign contributions to elected politicians who run large public pension funds and then being selected by those funds because of the contributions rather than because of their competence or their ability (see C&C Newsletter for August, 1997, page 5). Although no time frame has been established, according to BNA, the issue is a top priority of SEC's Investment Management Division. Rules would prohibit investment advisors from making contributions to politicians who have decision-making authority on selection of investment advisors.

3. ST. LOUIS COURT EMPLOYEES TO RECEIVE ACCUMULATED SICK-LEAVE: Mirroring a City of St. Louis program, St. Louis's circuit judges narrowly approved a plan to pay eligible court employees lump sum payments for 100% of accumulated sick-leave upon retirement. As with the city program, court employees must meet minimum service and other requirements to be eligible for payment. Of 300 current employees, about 20 are now eligible, according to BNA. Our readers will recall that the city program recently withstood a constitutional challenge (see C&C Newsletter for September, 1998, item 18).

4. PORTION OF SERVICE-CONNECTED DISABILITY BENEFITS EXCLUDABLE: A police officer retired on a service-connected disability. The subject pension plan provided for a service-connected disability benefit of 75% of annual pay unless the member has 20 or more years of continuous service when the determination of disability is made. A police officer who is granted a disability retirement after 20 or more years of continuous service receives a disability pension equal to 100% of his annual rate of pay. In a Private Letter Ruling issued the week of December 14, 1998, the Internal Revenue Service found that amounts equal to 75% of pay are due regardless of age, years of service and prior contributions, and thus are excludable under 104(a)(1) of the Internal Revenue Code. Amounts which exceed 75%, on the other hand, are attributable to length of service and are includable in income under IRC 61. PLR 9850003.

5. DOL ISSUES Y2K COMPLIANCE GUIDANCE FOR PRIVATE PLANS: The Department of Labor's Pension and Welfare Benefits Administration has issued Guidance on Fiduciary Liability and the Expected Year 2000 Computer Glitch. The standard for evaluating prudent procedures in the Y2K context is similar to the standard used in other matters related to ERISA-governed plans and their operations. Summarized in BNA, the Guidance indicates that a plan fiduciary should evaluate Y2K compliance of its own computer system, its sponsor's computer system, its service providers' computer systems and computer systems relating to the plan's investments. In recognition of the possibility that it may not be possible to prevent a disruption of computer operation in the year 2000, a plan fiduciary must determine how best to protect the plan and its participants and beneficiaries through the establishment of a contingency plan that will be implemented in the event the plan's essential operations are affected. Attached to the memorandum are sample questions that PWBA staff may be asking plan fiduciaries. As we have often said, ERISA guidelines are instructive to public plan fiduciaries. Note that on July 24, 1998 we provided our clients with Y2K questionnaires to be addressed to their cities and service providers.

6. "NEW" DEPENDENTS MAY PARTICIPATE IN RETIREES' INSURANCE PLANS: Section 112.0801, Florida Statutes, reads in pertinent part: "Any state agency, county, municipality, special district, community college, or district school board which provides life, health, accident, hospitalization, or annuity insurance, or all of any kinds of such insurance, for its officers and employees and their dependents upon a group insurance plan or self-insurance plan shall allow all former personnel who have retired prior to October 1, 1987, as well as those who retire on or after such date, and their eligible dependents, the option of continuing to participate in such group insurance plan or self-insurance plan. Retirees and their eligible dependents shall be offered the same health and hospitalization insurance coverage as is offered to active employees at a premium cost of no more than the premium cost applicable to active employees. For the retired employees and their eligible dependents, the cost of any such continued participation in any type of plan or any of the costs thereof may be paid by the employer or by the retired employees." In AGO 98-82 (December 30, 1998), the Florida Attorney General concluded that the statute is not limited to dependents who were participating in a municipality's group insurance plan at the time of the employee's retirement and should be read to allow open enrollment for the eligible dependents of retirees who wish to participate in a municipality's group insurance plan. Our long-time readers may recall that the Attorney General previously found that the statute authorizes, but does not require, the employer to pay for such insurance. AGO 96-06 (January 16, 1996). (See C&C Newsletter for June, 1996, Page 2.)

7. WILL CALPERS ABANDON ASSET ALLOCATION?: A front page story in Pensions & Investments indicates that the giant California Public Employees' Retirement System is seriously considering dropping traditional asset allocation in favor of what officials call "risk allocation," also known as risk budgeting. Most pension plans allocate assets to maximize return for a limited amount of risk, thus backing into the risk issue when allocating assets. Under the CalPERS proposal, the board would determine how much risk the plan can tolerate and still meet the assumed interest rate, keep its employer contributions low and meet its liabilities; thus utilizing the reverse approach. Once the maximum risk level is determined, the fund would have a "budget" of risk or risk units to parcel out to investments. The proposed method will probably mean greater volatility for CalPERS -- which, considering its existing 65% allocation to equities -- sounds a little frightening.

8. MISSOURI SYSTEM EXECUTIVE DIRECTOR CHALLENGES P&I: In a letter to the Editor of Pensions & Investments, Missouri State Employees' Retirement System Executive Director Gary Findlay made reference to a prior report about consulting firms. He felt that "while the information regarding whether fees are payable in hard dollars, soft dollars or both is interesting, it does not reveal to the potential consumer anything about possible conflicts of interest which may result within the firms." He asked P&I in future reports on consulting firms to collect and disclose basic information regarding sources of revenue for the firms, suggesting that data be provided as to percent of revenue from the following sources: plan sponsor consulting, services to money managers, money management, brokerage income (from other than soft dollar services) and other. The Missouri System recently took the rather unusual step of including soft-dollar questions in an equity manager search RFP (see C&C Newsletter for September, 1998, Item 6).

9. CIRCUIT COURT HAS JURISDICTION OVER LAW ENFORCEMENT OFFICERS' BILL OF RIGHTS DISPUTE: The Pinellas County Police Benevolent Association and several police officers filed suit in circuit court for a determination of the officers' rights under Part VI of Chapter 112, Florida Statutes, the Law Enforcement Officers' Bill of Rights. In an attempt to prevent the circuit court from exercising jurisdiction, the City of St. Petersburg and its chief sought a writ of prohibition in the district court of appeal. They contended that the circuit court lacked jurisdiction because there was no allegation that the amount in controversy exceeded $15,000.00, the monetary threshold for circuit court jurisdiction. In declining to issue a writ of prohibition, the appellate court held that many issues involving statutory or constitutional rights and status cannot be measured in dollars. Thus, there is no reason to force attorneys to allege an arbitrary amount merely to invoke jurisdiction of the circuit court, which historically has resolved such disputes. Davis v. Pinellas County Police Benevolent Association, Inc., 24 Fla. L. Weekly D16 (Fla. 2d DCA, December 16, 1998).

10. OFF-DUTY POLICE OFFICER NOT ENTITLED TO WORKERS' COMP UNLESS DISCHARGING PRIMARY LAW ENFORCEMENT RESPONSIBILITY: By definition, an employee's right to receive workers' compensation benefits is limited to injuries "arising out of work performed in the course and the scope of employment." Section 440.09(1), Florida Statutes. However, whether a police officer was acting in the course of employment is governed by a special rule contained in Section 440.09(1), Florida Statutes: a police officer who is discharging a primary law enforcement responsibility "shall be deemed to have been acting in the course of employment" regardless of his or her duty status at the time. Evidence that a police officer was prepared to discharge such duty is not alone sufficient to trigger the statutory exception. Here, after a night of social drinking, a police officer encountered two men who he thought were involved in illegal drugs. When he thought they were following his car, he drove at a high rate of speed, lost control of his car, crossed over the median into oncoming traffic and was severely injured. In reversing the judge of compensation claims' award of workers' compensation benefits, the First District Court of Appeal held that the accident did not occur while the officer was discharging his primary responsibility as a police officer and did not occur under circumstances reasonably consistent with the manner in which an officer's primary responsibility would be discharged. City of North Bay Village v. Millerick, 24 Fla. L. Weekly D36 (Fla. 1st DCA, December 21, 1998).

11. CHECK YOUR SOCIAL SECURITY STATUS ON THE WEB: If you would like to receive an estimate of what your monthly Social Security check will be, you can do so using the Internet. Go to SSA's website at and open the link labeled "Personal Earnings & Benefit Estimate Statement." Complete the questionnaire and electronically transmit it to SSA. Within a few weeks, SSA will mail you back an estimate of your monthly SSA retirement check, showing when you will be eligible for full benefits and what will happen if you retire early. Incidentally, you can access SSA's website through the Resource Links page on our website.

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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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