Aiken & Aiken

Sheila Aiken June 19th, 2008

In recent years, the news has been filled with stories of large companies terminating or freezing their DB (pension) plans.  IBM, Sears, Verizon, and United Airlines are just a few of the companies that recently either closed their DB plans to newly hired employees, froze the benefit accumulation for existing participants, or outright terminated the plan. 

The well-publicized problems that some companies have experienced with their pension plans gives the impression that DB plans are no longer viable alternatives as employer-sponsored retirement vehicles.  However, that is not necessarily true.  In the right circumstances, DB plans could be the best option for some companies. 

A DB plan is a qualified retirement plan that is structured to provide a predetermined benefit to plan participants, usually defined in the plan as a specific amount or as a percentage of annual compensation.  Employer contributions to a DB plan are determined annually by an actuary and are non-discretionary.  Generally, the limitation on the annual benefit under a DB plan is the lesser of $185,000 in 2008 or 100% of the participant’s average compensation (limited to $230,000 in 2008) for the three highest consecutive years.  In comparison, the annual limitation for defined contribution (DC) plan contributions for 2008 is $46,000.  DB plans offer the opportunity for small business owners to possibly double or triple the maximum DC contribution limit applicable to 401(k) and profit sharing plans.

DB plans are making a resurgence for certain companies.  DB plans can be wonderful retirement vehicles for small business owners looking to maximize retirement savings in a relatively short time period, while minimizing the company’s tax burden.  Companies that have a predictable earning stream over a long period of time, with significant profits in excess of the owner’s salaries, should look at DB plans when considering their retirement planning strategy.  For example, a physician’s office, a law firm, a small CPA firm, or an investment advisor partnership may find a DB plan to be the best option for them.

A word of caution - while DB plans have many advantages, some of which are detailed above, they are not for every company.  DB plans tend to be more administratively expensive and burdensome than other qualified retirement vehicles, and they have less flexibility when it comes to annual contributions.  However, these drawbacks can be more than offset by the increased annual contribution amounts allowed and the accompanying significant tax savings for the right company. 

Employers interested in establishing a DB plan should consult with professional advisors before making any decisions.  Each employer’s situation is unique and should be objectively reviewed to determine what the best course of action is based on the employer’s own circumstances.  Some of the factors that will need to be considered are:  the company’s employee demographics, the company’s short and long-term growth projections, and the company’s historical revenue stream.  These and other factors can significantly impact whether a DB plan is right for a business.

Please contact our office for more information about whether establishing a DB plan is right for your business.

• Benefits , ERISA , Pension , Retirement
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Michele Aiken June 10th, 2008

In today’s competitive business environment, employers and HR personnel are all too often put in the position of having to pay insufficient attention to employment and employee benefits legal compliance until problems arise - resulting in dire and costly consequences.  Failure to comply with the complex and ever-changing laws in these areas often results in one or a combination of: substantial penalties, steep fines, governmental agency audits, and / or litigation.  Unfortunately, all of these options usually have a very expensive price tag attached.

Consider the following:

Employment Practices

• 67% of all employment cases that litigate result in a judgment for the plaintiff
• 1/3 of employment case verdicts award punitive damages
• 75% or more of the total judgment amount awarded in an employment case is usually for punitive damages
• Based on 2000 data, median compensatory awards for employment cases were:
  • $268, 926 for age discrimination
  • $120,951 for race discrimination
  • $100,000 for gender discrimination
• Median compensatory awards rose from $78,592 to $218,000 between 1994 and 2000

Employee Benefits Plans

• From 2000 to 2001 the number of ERISA civil suits filed increased from 9,124 to 10,292 (almost 13%)
• In 2001, the Department of Labor investigated 4,862 businesses and recovered $648 million in penalties and damages
• In 2000, the average defense cost of a fiduciary liability claim was $124,000
• In 2000, 47% of fiduciary liability claims were based on benefits disputes (including denial of benefits)

How can an employer protect itself:

Self-Audits are reviews that companies usually undertake with the assistance of benefits counsel to identify legal compliance gaps in their plans, policies and/or operational procedures.  The audit focuses on areas that could place the company at risk for governmental fines and penalties, as well as expose the company to an increased risk of lawsuits.  These audits can be done for either or both a company’s employment practices and employee benefits plans. 

The scope of an audit can vary from a basic overview of plans, policies and procedures with identification of possible compliance gaps, to a comprehensive assessment and analysis with specific recommendations for methods of correction of any identified gaps and drafting and/or updating any needed plans, policies and procedures.  By conducting these voluntary self-audits, a company can significantly reduce the costs of future problems - costs that can have a huge impact on the company’s bottom line.

Employers should consider performing self-audits at least annually.  Additionally, when there are major changes to the law or major changes to the business, a self-audit should be done.  Employers should work with professionals with experience conducting these audits.  Employment and benefits lawyers can assist employers in auditing their policies, practices and plans.  Proactively identifying and addressing issues can be the best protection from legal action for an employer.

• Benefits , ERISA , Employment , General
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Sheila Aiken June 5th, 2008

On June 4, 2008, the IRS released Notices 2008-51 and 2008-52, which provide guidance for HSAs.  Generally, Notice 2008-51 applies to the treatment of qualified HSA funding distributions and Notice 2008-52 applies to contributions to HSAs.  Each Notice is discussed in further detail below.

Notice 2008-51

Notice 2008-51 provides guidance on a qualified HSA funding distribution from an IRA or Roth IRA to a HSA, effective for taxable years beginning after December 31, 2006.  The notice states that the qualified HSA funding distribution is a one-time transfer from an individual’s IRA or Roth IRA to that individual’s HSA.  Generally, it is excluded from gross income and not subject to the 10% additional tax for early distributions.  The IRA distribution is counted against the maximum annual HSA contribution for the taxable year of the distribution and is subject to the §408(d)(9)(D) testing period rules.  Distributions from both traditional IRAs and Roth IRAs are allowed, however, distributions from “ongoing” SEP or SIMPLE IRAs do not qualify.

The qualified HSA funding distribution must be less than or equal to the maximum annual HSA contribution, based on the individual’s age as of the end of the taxable year and the type of high deductible health plan (HDHP) coverage at the time of distribution.  Only one IRA distribution for contribution to a HSA is permitted during an individual’s lifetime, with one exception.  If the IRA distribution occurs when the individual has self-only HDHP coverage and later in the same taxable year the individual has family HDHP coverage, a second qualified distribution is allowed in that taxable year.  The normal HSA contribution rules do not apply to qualified funding distributions.  A qualified HSA funding distribution relates to the taxable year in which it is actually made, and it must be a direct transfer from an IRA to a HSA. 

The amount of the qualified HSA funding distribution is excluded from gross income and the 10% penalty tax does not apply provided the individual remains eligible during the entire testing period.  The testing period starts with the month the contribution is made to the HSA and ends on the last day of the 12^th month following the start month.  If an individual ceases to be eligible, the qualified distribution is included in gross income in the taxable year in which the individual first fails to be eligible, and the 10% additional tax applies unless the failure is due to death or disability. 

If a distribution from a HSA is not used for qualified medical expenses, that amount is included in income and subject to the 10% additional tax, regardless of whether the contribution includes the qualified HSA funding distribution.

Notice 2008-52

Notice 2008-52 provides guidance on the annual contribution limit to HSAs, effective for tax years beginning after December 31, 2006.  This notice provides that an individual who is an eligible individual on the first day of the last month of the taxable year (December 1 for calendar year) as having been an eligible individual for the entire year and therefore may make a full contribution for the year.  However, a testing period does apply to this full contribution rule.

The testing period starts with the month the contribution is made to the HSA and ends on the last day of the 12^th month following the start month.  If an individual ceases to be an eligible individual during the testing period, a portion of the contributions will be included in gross income and subject to the additional 10% tax.  This includable amount is the amount of the contributions attributable to months preceding the month in which the individual was not an eligible individual (which could have not have been made but for the provision).  It is includible for the taxable year of the first day of the testing period that the individual was not eligible.  However, an exception applies if the individual ceases to be eligible due to death or disability.

Those that wish to take advantage of these new rules, should ensure they have a thorough understanding of the requirements.  Both IRS Notices contain examples which illustrate the rules provided in the notices.  For additional information on how this new HSA guidance could impact your plans, please contact our office.

• Benefits , Health Care , Health Savings Accounts (HSAs)
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Sheila Aiken June 2nd, 2008

Late last month (May 20^th and May 22^nd), the House and the Senate, respectively, unanimously approved the Heros Earnings Assistance and Relief Tax Act of 2008 (H.R. 6081).  The bill is now pending President Bush’s signature to enact it as law.  President Bush is expected to sign it.

H.R. 6081, among its many provisions, includes changes to the Internal Revenue Code of 1986, as amended, that may impact certain employee benefits plans.  The provisions of H.R. 6081 are effective at differing dates and include provisions that:

• Amend existing rules governing cafeteria plans to allow Health Flexible Spending Accounts to distribute account balances to reservists who are called for active duty for indefinite periods or 180 days or more
• Require qualified retirement plans to provide additional benefits that would have been provided to the participant had he/she resumed employment prior to death to the survivors of plan participants who die during qualified military service
• Allow employers to make contributions to qualified retirement plans on behalf of participants who die or become disabled in combat
• Allow employers to treat the day prior to the day of the participant’s death or disability as the day the participant returned to work from military duty so as to provide the retroactive benefit accruals available under USERRA
• Require qualified plans to treat differential military pay as compensation for plan purposes and as wages subject to withholding
• Provide a tax credit under certain circumstances for small employers that provide differential military pay
• Authorize qualified plans to treat participants on active duty for greater than 30 days as terminated in order to access distribution from a qualified retirement plan
• Make the PPA waiver of the 10% penalty tax for early retirement distributions permanent

As mentioned above, it is expected that President Bush will sign the legislation and it will therefore become law.  Employers should make plans to begin reviewing their plans for areas that need amending to comply with the required provisions.  Additionally, employers should review the non-mandatory provisions to determine whether they wish to amend their plans to allow for these provisions. 

During the plan review, employers need to keep in mind the differing effective and/or application dates of the provisions.  Benefits counsel can assist employers with the review and amendment of plan documents to ensure that plans are updated appropriately.

• Benefits , Health Care , Pension , Retirement
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Michele Aiken May 29th, 2008

The Employee Retirement Income Security Act was enacted in 1974.  Since then, more than 75 laws have been passed that affect employee benefit plans and the protections afforded them by ERISA.  Many of these subsequent laws have mandated extensive changes to benefit plans.

The following are some of the major laws passed along with a very brief description of a few of the provisions contained within the statute:

• National Defense Authorization Act (NDAA) - amends the Family and Medical Leave Act (FMLA) to create 2 new FMLA leave entitlements and modifies some Department of Defense contracting requirements.
• Pension Protection Act of 2006 (PPA) -  makes several modifications to retirement plans including funding requirements for defined benefit plans, authorizing the use of cash balance and hybrid pension plans and requiring more disclosure to plan participants.
• American Jobs Creation Act of 2004 (AJCA) - provides significant new rules for non-qualified deferred compensation plans, including the enactment of Internal Revenue Code Section 409A.
• Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) - expands the Medicare program including prescription drug coverage for post-65 and disabled Medicare beneficiaries and provides for a Medicare subsidy, which is excludable from income, payable to employers who provide retiree health coverage that is at least actuarially equivalent to the Medicare drug benefit.
• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) - provides significant changes to retirement plans including increasing the allowable participant elective deferrals, allowing “catch-up” contributions, increasing compensation limits for some pension plans and changing the definition of compensation for deduction purposes.
• Health Insurance Portability and Accountability Act of 1996 (HIPAA) -  limits restrictions that a health plan can place on benefits for preexisting conditions, defines numerous offenses relating to health care and sets civil and criminal penalties for them and establishes regulations for the use and disclosure of Protected Health Information (PHI).
• Older Workers Benefit Protection Act of 1990 (OWBPA) - allows retirement plans to continue to have minimum age for eligibility and to have subsidized early retirement benefits provided it is voluntary.
• Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) -  requires specified employers to offer continuation of group health plan coverage to beneficiaries who no longer qualify for coverage due to certain events.
• Pregnancy Discrimination Act of 1978 (PDA) - requires employers to cover costs of pregnancy, childbirth and related medical conditions under the same terms as other medical conditions.

The above information is just a small portion of what is required by these laws as applied to benefit plans.  Additionally, there are many more laws that impact employee benefits plans then those few described above.  For example, the PPA, in addition to the brief overview already provided, requires additional extensive compliance for retirement plans and makes some of the other changes under previous laws mandatory.

Benefit plans and operational policies and procedures that have not remained current with new requirements are at risk for being non-compliant and subject to fines and penalties.  All employers should review their ERISA plans, including retirement and heath and welfare plans, as well as their operational policies and procedures, to verify that their plans, policies and procedures have been updated and amended for all applicable changes in the law.

Once plans, policies and procedures are current, employers need to remain vigilant to ensure continued compliance with changing laws.  Employment and benefits counsel can assist employers in reviewing and updating their existing plans to ensure compliance with all applicable laws, as well as assisting employers to proactively update their policies, plans and procedures as required for future changes.

• Benefits , COBRA , ERISA , Health Care , Pension , Retirement
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