Pension Protection Act Blog

In a Special Edition of Employee Plan News, dated July 1, 2008, the IRS provides some guidance on sample language under Code section 409(p) for the Transfer of an ESOP’s S Corporation Shares. This plan language is designed to prevent a nonallocation year by transferring assets from the accounts of disqualified persons to the non-ESOP portion of the plan according to Treas. Reg. 1.409(p)-1(f). A nonallocation year can occur when disqualified persons, as defined in Code section 409(p)(4), own or are deemed to own 50% of the outstanding stock of an S corporation.

The sample plan language provided by the IRS for Code section 409(p) transfers is:

The IRS is requesting comments on this sample language language until August 15, 2008. This plan language can be used now pending the comment period.

June 30th marks the end of the IRS’ 2007-2008 Priority Guidance Plan. Tomorrow, making barely a ripple in the employee benefits universe, the IRS’ 2008-2009 Priority Guidance Plan will begin. Of course, the IRS has not released the 2008-2009 Priority Guidance Plan yet. They traditionally release Priority Guidance Plans during the month of August.

June 30th is also the mid-point in 2008 for calendar year plans, and is just a good day to reflect on what guidance the IRS has released so far this year, and what guidance is likely to be released before the Cycle D Cumulative List is released later this year. The IRS posts all guidance issued since January 1, 2008 on their website here.

Reviewing most of this guidance reveals that the IRS has really had a dual agenda this year. One part of the agenda has been issuing guidance for housekeeping issues, such as guidance needed in order to update cafeteria plans and non-qualified deferred compensation plans before the end of this year. The other part of the agenda has been issuing guidance to implement the Pension Protection Act.

With at least two bills pending before Congress to amend the Pension Protection Act - the Pension Protection Technical Corrections Act of 2008 and the Pension Protection Act ERISA Amendments of 2008 - one of the bills is likely to pass and create more PPA guidance items on the 2008-2009 Priority Guidance Plan.

Technorati Tags: Pension Protection Act, ppa, IRS, Priority Guidance Plan, ERISA

In a fascinating and completely unexpected twist to the U.S. Sugar ESOP class action lawsuit, the governor of Florida today announced that the State of Florida will buy U.S. Sugar for $1.75 billion. With the purchase, Florida will gain control over 187,000 acres of farmland in the northern Everglades while leasing the land back to U.S. Sugar for at least the next 6 years.

As the largest block of shareholders, the participants in U.S. Sugar’s ESOP will be the largest group of individuals affected by this purchase. Florida’s announced goal with this purchase is to gain control of the U.S. Sugar acreage to aid its plans to resurrect the Everglades. I originally wrote about the US Sugar ESOP litigation here.

More Information:

Booting US Sugar from the Everglades, Michael Gunwald, Time.com and Yahoo News;
US Sugar Class Action Lawsuit website, law firm of Colson Hicks Eidson.

Technorati Tags: Pension Protection Act, ppa, US Sugar, ESOP, Florida, ERISA

The new edition of Employee Plan News, released today by the IRS, contains this warning information about the new Form 5307 - it is important that customers send in the original copy of the application and not a photocopy. Photocopies of the bar code will not scan properly.

It seems that the bar code contains important information that will be optically scanned into the IRS’ computer system. What information the IRS is optically scanning from the bar code is not known. The same edition of Employee Plan News contains information that the DOL/EBSA is moving forward with the development of the EFAST2 system, which will receive, process, store, publicly disclose, distribute, and archive approximately one million Form 5500 submissions filed annually via the Internet. Mandatory electronic filing of Form 5500 is required for plan year 2009 filings, which will be filed in 2010.

Additionally, in this edition of Employee Plan News, Monika Templeman explains that one of the IRS’ critical priorities for this year is to target noncompliance through data-drive case selection methodologies.

In the private sector, this is called data mining and has been going on for years. It is a little disquieting that the IRS will be data mining both Form 5307s and Form 5500s. The new Form 5307 was first announced in Announcement 2008-23, and is available now. Use of the new Form 5307 becomes mandatory beginning Octoboer 1, 2008.

The IRS will still permit practitioners to create their own version of IRS bar coded Form 5307s and Schedules 8717 and 8905 by following the procedures in Publication 1167. The IRS notes that:

The substitute version of the form that is created MUST mirror (exactly) the IRS-printed Form 5307. (emphasis provided by the IRS).

The IRS is offering a limited number of paper copies of Form 5307 and Schedules 8717 and 8905, imprinted with bar codes for optical scanning through their form ordering service at 1-800-TAX-FORM.

Technorati Tags: Pension Protection Act, ppa, Form 5307, 8717, 8905, Publication 1167, IRS, data mining, ERISA

Often the entity that administers the plan, such as an employer or an insurance company, both determines whether an employee is eligible for benefits and pays benefits out of its own pocket. We here decide that this dual role creates a conflict of interest; that a reviewing court should consider that conflict as a factor in determining whether the plan administrator has abused its discretion in denying benefits; and that the significance of the factor will depend upon the circumstances of the particular case.

- Justice Breyer, majority opinion

In today’s decision in Metropolitan Life Insurance Co. v. Glenn, No. 06-923, the Supreme Court extends the four principles from Firestone Tire & Rubber Co. B. Bruch, 489 U.S. 101, in determining whether a conflict of interest materially affected MetLife’s decision to ultimately deny Glenn long term disability benefits. Firestone involved an employer who administered an ERISA benefits plan as well as evaluating claims for benefits and paying those benefits. MetLife has the Court evaluating a conflict of interest one step removed from the employer, where the plan administrator is not the employer but a professional insurance company who is evaluating claims for benefits as well as paying those benefits under a contractual relationship with the employer.

Glenn was a participant in her employer’s disability plan. She was diagnosed with a heart condition called severe dilated cardiomyopathy, and applied for disability benefits under the plan. MetLife approved her benefits for the initial 24 month period under the plan language which provided that she qualified for benefits under the terms of the plan if she could not perform the material duties of her own job. MetLife then referred her to a law firm who assisted her in applying for, and receiving, federal Social Security benefits. Under the terms of the plan, MetLife was entitled to reimbursement of benefits paid from her Social Security benefits, so when she was approved for retroactive Social Security benefits, her entire retroactive amount was paid to MetLife and the attorneys MetLife referred her to with Glenn receiving none of that award. The decision of the Administrative Law Judge, in approving the Social Security benefits, found that Glenn could not perform her own job and also was unable to perform any jobs for which she could qualify.

To continue receiving benefits, the plan required that after the initial 24 month period, Glenn had to meet a stricter standard of being incapable of performing not only her own job but also incapable of performing the material duties of any gainful occupation for which she was reasonably qualified. Despite medical reports to the contrary, and also contrary to the finding of the Administrative Law Judge which MetLife had materially benefited from, MetLife denied Glenn benefits for this extended period, finding that she was capable of performing full time sedentary work.

Glenn sought restoration of her benefits, first through administrative review and then by bringing a lawsuit against MetLife in federal district court. The federal district court ruled in favor of MetLife. Glenn appealed to the Sixth Circuit Court of Appeals, which found MetLife’s conflict of interest in this case troubling, and who reversed the decision of the district court and remanded the case back to the district court. MetLife then appealed to the U.S. Supreme Court.

The Supreme Court found nothing improper in the way in which the 6th Circuit conducted its review, and affirmed the 6th Circuit’s decision in this case. In making that determination, the Court discussed all four principles from Firestone. The majority opinion, written by Justice Breyer and joined by Justices Stevens, Souter, Ginsburg and Alito, is clearly troubled by MetLife’s conduct in this case, and in the potential financial motivation MetLife may have had in its’ decision to deny Glenn’s benefits. I wonder if the difficulty in completing a sentence at oral argument has come back to haunt MetLife with this opinion. Or it might be that MetLife’s behavior toward Glenn spoke louder than words to the Court when it came to deciding this case.

I’ve been working on a book about plan documents and divorce. This decision may not look that significant, but I think this decision will be viewed in hindsight as cutting the gordian knot if it results in divorcing the act of administering plans and evaluating claims for benefits from the act of paying those benefits, not that such a change is needed except in Glenn-type situations.

Additional information:

A New Firestone Drill: MetLife v. Glen, Andrew L. Oringer, BNA’s Pension & Benefits Blog;

Holding Pat and Satisfying No One: The Glenn ERISA Conflict of Interest Decision, Paul M. Secunda, Workplace Prof Blog;

MetLife Decision Handed Down - Supreme Court Affirms the Sixth Circuit, Roy F. Harmon III, Health Plan Law;

MetLife v. Glenn Decided!, Brian S. King, Brian King’s ERISA Blog;

The Supreme Court’s Ruling in MetLife v. Glen, Stephen Rosenberg, Boston ERISA & Insurance Litigation Blog - yes, Stephen, I do wish the Supreme Court would have asked before releasing this opinion today. Where were they last week when nothing happened in Planland so I spent the week proofreading my Cycle C ESOP/KSOP plan document and working on my DBK plan document. Today, I was finally able to confirm that the President signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) Act (affects the definition of comp in plans); the IRS released more cash balance-related regulations, the Court also released the opinion in Kentucky Retirement Systems v. EEOC; and my teenage daughter is holding a sleepover tonight.

Technorati Tags: Pension Protection Act, ppa, MetLife, Glenn, Firestone, Paul Secunda, Stephen Rosenberg, Supreme Court, 6th Circuit, conflict of interest, ERISA

At what point does a member of a corporation’s board of directors qualify as an “outside director” of purposes of Code section 162(m)(4)(C)(i) after serving as an interim chief executive officer? The IRS answered this question today in Rev. Rul. 2008-32.

In Rev. Rul. 2008-32, the IRS addresses the situation where a CEO suddenly resigns, and the corporation’s Board of Directors hires one of the directors to serve as Interim CEO while the corporation hunts for a CEO. The IRS’ analysis is short and to the point:

“The determination of whether an individual is or was an officer is based on all of the facts and circumstances in the particular case, including without limitation the source of the individual’s authority, the term for which the individual is elected or appointed, and the nature and extent of the individual’s duties. Director A was in regular and continued service from January 7, 2008 through December 11, 2008. Company X did not employ Director A for a special and single transaction and Director A did not merely have the title of officer. Instead, Company X employed Director A for an indefinite period to serve as interim CEO with the full authority vested in that office. Accordingly, under the facts and circumstances analysis, Director A was an officer of Company X.”

Rev. Rul. 2008-32 holds that under these facts, a member of the board of directors who serves as an interim chief executive officer is not an “outside director” for purposes of Code section 162(m)(4)(C) and Treas. Reg. 1.162-27(e)(3). The underlying question for the corporation was the tax treatment of the $1 million base salary compensation plan provided to Director A for serving as the interim CEO as well as Director A particating in Company X’s executive bonus plan, which pays a percentage of base salary. Code section 162(a)(1) provide a deduction for a reasonable allowance for salaries and other compensation for personal services actually rendered. Code section 162(m)(1) provides that for a publicly held corporation, no deduction is allowed for remuneration which exceeds $1 million with respect to any covered employees. If Director A is a covered employee, then no deduction for Company X above the $1 million in remuneration. If Director A is not a covered employee, then Company X may have a deduction for remuneration paid to Director A above $1 million.

Company X contends that Director A is an “outside director” and therefore is not a covered employee, thus they get the deduction. IRS responds with Rev. Rul. 2008-32 that Director A is a covered employee based on their analysis, and thus no deduction above $1 million in remuneration.

Technorati Tags: Pension Protection Act, ppa, Interim CEO, 162(m)(1), 162(a)(1), outside director, ERISA

The American Bar Association’s Section on Taxation has sent their recommendations for guidance to be included in the 2008-2009 IRS Priority Guidance List. Their list of items is reasonable and highlights a few items which are sorely needed. Their guidance recommendations for employee benefits are:

1. Nonqualified programs/executive compensation
a. Guidance on section 409A(b) funding rules.

b. Correction programs under section 409A.

c. Proposed Regulations on the application of a substantial risk of forfeiture under section 457(f).

d. Proposed Regulations implementing the changes to section 6039 reporting requirements made by section 403 of the Tax Relief and Health Care Act of 2006.

2. Tax-qualified plans
a. Proposed Regulations on the backloading issues addressed in Rev. Rul. 2008-7.

b. Guidance on permissible benefits under a qualified defined benefit pension plan (in follow-up to Notice 2007-14).

c. Guidance on permissible mid-year changes to a section 401(k) plan with “safe harbor” contributions.

d. Updated safe harbor explanation under section 402(f).

3. Health and other employee welfare benefit plans
a. Update section 105(h) Regulations.

b. Guidance on (i) calculating COBRA premiums for defined contribution (DC) health plans and (ii) application of COBRA generally to non-FSA DC health plans.

None of these recommendations are surprising. Many of them are housekeeping items which seem to sit on the backburner because Congress has been so active changing the Code sections 401 through 501 over the last 3 years.

Technorati Tags: Pension Protection Act, ppa, IRS Priority Guidance List, American Bar Association, ERISA

The IRS released Announcement 2008-56 today. In the short 2-page announcement, the IRS states that it will require dividends on employer securities that are distributed from an employee stock ownership plan (ESOP) under Code section 404(k) to be reported on Form 1099-R that does not report any other distributions. If there are other distributions from the plan in those years, they must be reported on a separate Form 1099-R. Payments of 404(k) dividends made directly from the corporation to the participants or their beneficiaries will still be reported on Form 1099-DIV. This requirement applies to distributions from a plan that are made in 2009 or later.

This announcement revokes Announcement 85-168. Announcement 85-168 permitted plans to use Form 1099-DIV if taxpayers used short Form 1040A to report 404(k) dividend income. Under Announcement 85-168, if 404(k) dividends were distributed in the same year as a total qualified distribution, the entire amount could be reported on Form 1099-R.

Technorati Tags: Pension Protection Act, ppa, Announcement 85-168, Announcement 2008-56, Form 1099, ERISA

Today, the IRS released 2 pieces of guidance for Health Savings Accounts (HSAs) - Notice 2008-51 and Notice 2008-52.

First, the IRS released Notice 2008-51. It provides guidance on Code section 408(d)(9), which was added to the Tax Code in 2006 by Section 307 of the Health Opportunity Patient Empowerment Act of 2006, which was enacted as part of the Tax Relief and Health Care Act of 2006. The guidance is specifically directed at a qualified HSA funding distribution from an individual’s IRA or Roth IRA to a HSA. This guidance provides that a qualified HSA funding distribution is a one-time transfer from an individual’s IRA to his or her HSA and is not subject to the 10% additional tax under Code section 72(t) as this distribution is generally excluded from gross income.

Notice 2008-51 provides that the amount contributed to the HSA through a qualified HSA funding distribution is not allowed as a deduction and counts against the individual’s maximum annual HSA contribution for the taxable year of distribution. The taxability of a qualified HSA funding distribution is also subject to the testing period rules in Code section 408(d)(9)(D). Qualified HSA funding distributions are also restricted to traditional IRAs or Roth IRAs. Ongoing SIMPLE IRAs and ongoing SEP IRAs are not eligible for this type of distribution.

Notice 2008-52 addresses the contribution limits on HSAs and High Deductible Health Plans (HDHPs). When Code section 223(b)(8) was added to the Tax Code by section 305 of the Health Opportunity Patient Empowerment Act of 2006, it changed how an individual’s maximum HSA contribution is calculated. Starting in 2007, an individual’s maximum HSA contribution for the year is the greater of the following:

1. The sum of the limits determined separately for each month under section 223(b)(2), based on eligibility and HDHP coverage o nthe first day of each month, plus catch-up contributions for each month, if applicable (see sum of the monthly contribution limits discussed below), or

2. The maximum annual HSA contribution under section 223(b)(2)(A) or section 223(b)(2)(B) based on the individual’s HDHP coverage (self-only or family) on the first day of the last month of the individual’s taxable year, plus catch-up contributions under section 223(b)(3), if applicable (see full contribution rule under section 223(b)(8)).>

With high deductible health plans becoming more popular, Notice 2008-52 should have immediate impact on health plans.

Technorati Tags: Pension Protection Act, ppa, Notice 2008-51, Notice 2008-52, high deductible health plan, 223(b)(2)(A), health savings account, HSA, ERISA

When the IRS issued Announcement 2002-2, the Service made a tantalizing offer to taxpayers with possible tax shelter issues. In exchange for disclosure, the IRS offered to waive the accuracy penalty and underpayment of tax related to tax shelters. Announcement 2002-2 contains a list of 7 items under the title of “Information Required to Make a Disclosure” which are required to be disclosed in order to take advantage of this offer. Number 6(c) on the list requires a statement agreeing to provide, if requested, copies of all of the following:

(c) All opinions and memoranda that provide a legal analysis of the item, whether prepared by the taxpayer or a tax professional on behalf of the taxpayer;

In U.S. v. Wealth and Tax Advisory Services Inc., No. 06-55915 (CA9, May 15, 2008), the 9th Circuit settles a dispute over the meaning of those words as they evaluate whether a draft opinion is included within the meaning of “all opinions and memoranda that provide a legal analysis”.

At the heart of this dispute was whether a 29-page “draft opinion letter” written by an accountant at Arthur Andersen and sent to McDermott Will & Emery, the law firm representing the taxpayers regarding an alleged tax shelter involving a leveraged bond transaction entered into by a trust created by the taxpayers. According to the Court, the 29-page draft opinion letter included extensive legal analysis of the leveraged bond transaction. The tax attorneys at McDermott Will & Emery reviewed the draft opinion letter and communicated with the Arthur Andersen accountants about it. The draft never ripened into a final opinion letter and Arthur Andersen never issued a finalized tax opinion letter to the taxpayers.

When the taxpayers decided to take advantage of Announcement 2002-2, they submitted a voluntary disclosure statement to the IRS. The IRS then initiated an audit, and issued a summons to Wealth and Tax Advisory Services, who had succeeded Arthur Andersen as tax advisors to the taxpayers. That summons sought copies of documents associated with the deduction claimed by the taxpayers on their 2001 tax return for the leveraged bond transaction entered into by their trust. Instead of producing the 29-page draft opinion letter, Wealth and Tax Advisory Services provided a privilege log identifying 4 documents that it withheld on the grounds of attorney-client privilege, work product and tax practitioner-client privilege. One of those 4 documents was the 29-page draft opinion letter.

The district court ruled that the 29-page draft opinion letter was not required to be disclosed because it was a draft, and did not rise to the level of tax opinion letter. The IRS appealed this ruling to the 9th Circuit, on the grounds that the draft is still a “memorandum that provides legal analysis” and therefore was within the meaning of Item 6(c) on the list of items required to be disclosed in Announcement 2002-2 as it requires disclosure of “all opinions and memoranda that provide a legal analysis”. The 9th Circuit overruled the district court’s decision, and remanded the case back to the district court. Deciding that “memoranda in the disclosure agreement refers to informal records designating something to be remembered”, the Court found the 29-page draft opinion letter was a memorandum within the meaning of Announcement 2002-2, and should be disclosed to the IRS pursuant to the agreement.

Technorati Tags: Pension Protection Act, ppa, Arthur Andersen, tax shelter, Announcement 2002-2, draft opinion letter, 9th Circuit, Wealth and Tax Advisory Services, McDermott Will, disclosure, ERISA