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Cypen & Cypen
OCTOBER 22, 2003

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

According to the Washington Post, pressure from veterans groups has forced Republican leaders to announce that they will allow more veterans to collect both full retirement and disability benefits -- something prohibited in the past. Half a million veterans are affected by current law, which requires retirees to give up a dollar in retirement benefit for every dollar received for disability compensation. The new proposal, to be phased in over ten years, covers those whose disabilities are 50% or higher. Veterans would receive different payments according to their disabilities: veterans with total disability would receive $750.00 a month toward their lost retirement pay, while those 50% disabled would receive $100.00 per month. About 250,000 veterans would benefit from the change. Democrats have been fighting to force a House vote that would have eliminated the offset for all veterans, but they are about ten votes short of bringing a bill to the House floor.

The Internal Revenue Service announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2004. Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost-of-living increases. For most of the limitations, the cost-of-living index met the statutory thresholds that trigger their adjustment. Furthermore, several limitations, set by the Economic Growth and Tax Relief Reconciliation Act of 2001, are scheduled to increase at the beginning of 2004. Effective January 1, 2004, the limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) is increased from $160,000.00 to $165,000.00. The limitation for defined contribution plans under Section 415(c)(1)(A) will rise from $40,000.00 to $41,000.00. The annual compensation limit under Section 401(a)(17) is increased from $200,000.00 to $205,000.00. Finally, the limitation on deferrals under Section 457 deferred compensation plans is increased from $12,000.00 to $13,000.00.

Social Security’s Old-Age, Survivors Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit rises each year with increases in the national average wage index. This annual limit is the contribution and benefit base. For earnings in 2004, the base is $87,900.00. The OASDI tax rate for wages paid in 2004 is set by law at 6.2% each for employers and employees. Thus, an individual with wages equal to or greater than $87,900.00 would contribute $5,449.80 to the OASDI program in 2004, as would his or her employer. The OASDI tax rate for self-employment income in 2004 is 12.4%. Tax rates of 1.45% each for employers and employees, and 2.90% for self-employed persons, are applied to all earnings -- without a taxable maximum -- under Medicare’s Hospital Insurance program.

Medicare premiums will rise an unusually high 13.5% next year, reflecting higher payments to doctors and other care providers. The monthly Part B premium, which covers doctors and outpatient services, will rise from $58.70 to $66.60. The premium represents 25% of the cost of care, the balance of which is paid by the government. For Medicare Part A, which covers inpatient hospital bills, skilled nursing facilities and some home health care, the annual deductible will rise from $840.00 to $876.00. Several proposals that would charge wealthy people higher premiums for Part B are floating around, but none are imminent.

The Internal Revenue Service has released the optional standard mileage rates to use in 2004 in computing deductible costs of operating an automobile for business, charitable, medical or moving expense purposes. Beginning January 1, 2004, the standard mileage rate for use of a car (including a van, pickup or panel truck) will be 37.5 cents a mile, up from 36 cents a mile in 2003. When computing deductible charitable, medical or moving expenses, the rate is 14 cents a mile, up from 12 cents.

When they were first introduced by the U.S. Postal Service in 1963, ZIP codes were intended to make mail delivery faster and more effective. ZIP codes, an acronym for “zoning improvement plans,” quickly developed a different sociological meaning than its creators may have ever imagined. Because they often broke down cities and towns along geographical fault lines that separated one neighborhood from another, they became instant delineators of wealth and status. Based upon median home price, the following are the five most expensive ZIP codes in America:

  • 33455 Jupiter Island, Florida $5,600,000.00
  • 81611 Aspen, Colorado $2,600,000.00
  • 31561 Sea Island, Georgia $2,232,000.00
  • 33480 Palm Beach, Florida $2,200,000.00
  • 11771 Centre Island, New York $2,000,000.00

Conspicuously absent is Beverly Hills, 90210 -- possibly the most famous ZIP code in the country. With the median home price of $1,042,000.00, 90210 came in at number 24. Considering that the U.S. median home price is just $158,300.00, the movie celebs aren’t exactly on food stamps.

Sections 112.531-112.535, Florida Statutes, constitute “The Law Enforcement Officers’ and Correctional Officers’ Bill of Rights.” The law is designed to ensure certain rights for law enforcement and correctional officers. Section 112.532(1), Florida Statutes, specifically requires that when a law enforcement officer or correctional officer is under investigation and subject to interrogation by members of his or her agency for any reason that could lead to disciplinary action, demotion or dismissal, the interrogation must be conducted under conditions prescribed by the statute. Such conditions include the requirement that the interrogation be conducted at a reasonable time, for reasonable periods, either at the office of the command of the investigating officer or at the office of the local precinct, police unit or correctional unit in which the incident allegedly occurred. The officer is entitled to be informed of the rank, name and command of the officer in charge of the investigation, the interrogating officer and all persons present at the interrogation, as well as the nature of the investigation and the names of all complainants. In addition, in instances where an officer may be subject to arrest, Section 112.532(1)(h), Florida Statutes, provides: “If the law enforcement officer or correctional officer under investigation is under arrest, or is likely to be placed under arrest as a result of the interrogation, he or she shall be completely informed of all his or her rights prior to the commencement of the interrogation.” While the foregoing paragraph does not enumerate the particular rights of an officer in the circumstances, a review of the legislative history indicates that the legislature intended to provide a law enforcement officer the same protection as would be afforded the average citizen subject to arrest and being questioned for a criminal offense. Thus, the officer being questioned is entitled to be advised of his or her constitutional rights, as well as any other statutory rights that might apply, such as those set forth above in Section 112.532, Florida Statutes. Seems like a no-brainer to us. AGO 2003-43 (September 25, 2003).

The 10.9.03 issue of Plansponsor has an opinion piece from the one-and-only Gary Findlay, Executive Director of the Missouri State Employees’ Retirement System. Entitled “Glass Houses -- It’s never too late to change,” the piece deals with happenings in the public fund universe during the last three years. Findlay suggests that “we” have not paid nearly as much attention to our own governance as we should have. While it does not appear that the way public funds conduct their affairs has changed materially, outcomes have changed. When things were positive, public funds did not get much attention, and collateral issues began to take precedence over the real task at hand. However, when things went south, (1) trustees sued other trustees on their boards, (2) members sued trustees, (3) fund CEOs and CIOs left their positions in record numbers and (4) retirement boards and systems were blamed for many things over which they had absolutely no control (such as benefit levels and state budget dilemmas). Findlay believes we could have done better and that it is not too late to change. Although system management and benefit structures vary from state to state, they all have at least one thing in common: the underlying trust fund obligates the various fiduciaries involved to see that the system conducts its business in the exclusive interest of plan participants. In order to carry out this mission and pursue excellence in service delivery and risk management, fiduciaries who have ultimate legal responsibility for the trust must also have ultimate legal authority for, and programmatic control over, all system activities. In order successfully to pursue excellence, the following operational characteristics are essential:

  • The governance model should clearly identify roles and responsibilities of the various players and provide a game plan for establishing accountability measures. The board’s role should be focused on establishing policy, monitoring performance of those benefit and investment professionals who have been entrusted to implement that policy and making adjustments to policy where it is deemed appropriate.
  • The governance model should make it clear that the focus of all system activity is to be in the exclusive interest of plan participants, and further that it be directed at those functions related to enhancing either risk management or customer service.
  • The board should have unilateral authority to approve the system’s operating budget, including salary levels. The board should be able to establish personnel policies believed to be in the best interest of the system.
  • The board should have unilateral authority with respect to establishing actuarial assumptions and methods.
  • The board should have unilateral authority with respect to retaining those outside service providers needed for proper operation of the system, including but not limited to, actuaries, legal counsel, auditors, investment advisors and consultants.

In other words, the board should be able autonomously to establish policies needed to pursue excellence and then extend authority to the managing fiduciaries to implement those policies.

HR 3055, which would mandate Social Security coverage of newly-hired state and local government employees starting in 2004, has been introduced into the House of Representatives. The bill -- supposedly to ensure solvency of the Social Security system -- also provides for voluntary private retirement accounts. By most estimates, however, the Social Security system is solvent through 2042, even if no changes are made. Inasmuch as the President has not signaled any interest in Social Security reform prior to the election, the bill will likely go nowhere.

After more than 31 years of employment with ComEd, Beach began considering early retirement. Although he had become aware of rumors that ComEd might offer a retirement incentive plan, the company representatives denied the rumor. Beach told them that if the rumors were true, he would wait to retire so that he could participate. He specifically asked company representatives to keep him informed of any new developments. Only six weeks after Beach retired, ComEd announced it was offering a voluntary severance plan, for which Beach would have been eligible had he not retired. The plan included severance pay, extended health care benefits, life insurance, education and out-placement assistance. Beach sued, alleging that ComEd had breached its fiduciary duty under ERISA, by making misrepresentations to him prior to his retirement about the potential availability of a retirement incentive plan. A federal trial court has denied ComEd’s motion for summary judgment, finding that there are genuine issues of material facts, requiring a trial. In cases involving possible future plan amendments, there are two standards: the “serious consideration” standard and the “materiality” standard. Here, the court applied the latter, less burdensome standard. Beach v. Commonwealth Edison Company, Case No. 00 C 3357 (N.D. Ill, August 6, 2002).

n general, Internal Revenue Code Section 401(a)(13) provides that a trust shall not constitute a qualified trust unless the plan of which the trust is a part provides that benefits under the plan may not be assigned or alienated. One exception is “collection by the United States on a judgment resulting from an unpaid tax assessment.” A company was served with an order of garnishment, requiring it to pay the United States sums being held in its plan on behalf of a participant who had been convicted of a federal crime and fined. Concerned that satisfying the fine from the trust might disqualify it, the company sought guidance from Internal Revenue Service. In Private Letter Ruling 200342007, IRS concluded that the company’s honoring the court order of garnishment pursuant to which it was ordered to pay amounts from the participant’s account to the United States will not result in failure of the plan to meet the requirements of IRC Section 401(a)(13). (Note that the plan did contain a somewhat standard antialienation clause.) As always, IRS’s letter is directed only to the taxpayer that requested it and may not be used or cited as precedent.

This story just came across from Associated Press. Prosecutors have dropped a charge of speeding against an ambulance driver who was stopped by police while transporting a liver for transplant. Mike Ferguson, a senior driver with an ambulance service, was charged with speeding down a highway at 104 miles an hour while taking the liver from one hospital to another just outside of London. He pleaded not guilty and had been due to appear in court. However, prosecutors decided it was not in the public interest to continue with the case. (No kidding.) Ferguson, 56, who could have lost his license if found guilty, said he was overjoyed.

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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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