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Cypen & Cypen
July 3, 2012

Stephen H. Cypen, Esq., Editor

1.     OBAMACARE’S INDIVIDUAL MANDATE PROVISION SURVIVES SUPREME COURT SCRUTINY; MEDICAID EXPANSION DOES NOT:     In 2010, Congress enacted the Patient Protection and Affordable Care Act in order to increase the number of Americans covered by health insurance and decrease the cost of health care.  One key provision is the individual mandate, which requires most Americans to maintain “minimum essential” health insurance coverage.  For individuals who are not exempt and who do not receive health insurance through an employer or government program, the means of satisfying the requirement is the purchase of insurance from a private company. Beginning in 2014, those who do not comply with the insurance must make a “shared responsibility payment” to the Federal Government. The Act provides that this “penalty” will be paid to the Internal Revenue Service with the individual’s taxes and “shall be assessed and collected in the same manner” as tax penalties.  Another key provision of the Act is the Medicaid expansion.  The current Medicaid program offers federal funding to States to assist pregnant women, children, needy families, the blind, the elderly and the disabled in obtaining medical care.  The Affordable Care Act expands the scope of the Medicaid program and increases the number of individuals the States must cover.  For example, the Act requires state programs to provide Medicaid coverage by 2014 to adults with incomes up to 133 percent of the federal poverty level, whereas many States now cover adults with children only if their income is considerably lower, and do not cover childless adults at all.  The Act increases federal funding to cover the States’ costs in expanding Medicaid coverage.  But if a State does not comply with the Act’s new coverage requirements, it may lose not only the federal funding for those requirements, but all of its federal Medicaid funds.  Twenty-six States (including Florida), several individuals and the National Federation of Independent Business brought suit in Federal District Court, challenging the constitutionality of the individual mandate and the Medicaid expansion.  The Court of Appeals for the Eleventh Circuit upheld the Medicaid expansion as a valid exercise of Congress’s spending power, but concluded that Congress lacked authority to enact the individual mandate.  Finding the mandate severable from the Act’s other provisions, the Eleventh Circuit left the rest of the Act intact.  On certiorari to the Eleventh Circuit, the U.S. Supreme Court held the judgment is affirmed in part and reversed in part.  The 5-4 decision was authored by Chief Justice Roberts.  The Anti-Injunction Act provides that no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, so that those subject to a tax must first pay it and then sue for a refund.  The present challenge seeks to restrain the collection of the shared responsibility payment from those who do not comply with the individual mandate.  But Congress did not intend the payment to be treated as a tax for purposes of the Anti-Injunction Act.  The Affordable Care Act describes the payment as a penalty, not a tax. That label cannot control whether the payment is a tax for purposes of the Constitution, but it does determine the application of the Anti-Injunction Act.  The Anti-Injunction Act therefore does not bar the suit. The Constitution grants Congress the power to regulate commerce. The power to regulate commerce presupposes the existence of commercial activity to be regulated.  The Court’s precedent reflects this understanding.  As expansive as this Court’s cases construing the scope of the commerce clause have been, they uniformly describe the power as reaching activity.  The individual mandate, however, does not regulate existing commercial activity.  It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce.  Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority.  Congress already possesses expansive power to regulate what people do.  Upholding the Affordable Care Act under the Commerce Clause would give Congress the same license to regulate what people do not do.  The Framers knew the difference between doing something and doing nothing.  They gave Congress the power to regulate commerce, not to compel it.  Ignoring that distinction would undermine the principle that the Federal Government is a government of limited and enumerated powers.  The individual mandate thus cannot be sustained under Congress’s power to regulate Commerce.  The individual mandate also cannot be sustained under the Necessary and Proper Clause, as an integral part of the Affordable Care Act’s other reforms.  The Court’s prior cases upholding laws under that Clause involved exercises of authority derivative of, and in service to, a granted power.  The individual mandate, by contrast, vests Congress with the extraordinary ability to create the necessary predicate to the exercise of an enumerated power and draw within its regulatory scope those who would otherwise be outside of it.  Even if the individual mandate is necessary to the Affordable Care Act’s other reforms, such an expansion of federal power is not a proper means for making those reforms effective.  The most straightforward reading of the individual mandate is that it commands individuals to purchase insurance.  But, for the reasons explained, the Commerce Clause does not give Congress that power.  It is therefore necessary to turn to the Government’s alternative argument that the mandate may be upheld as within Congress’s power to lay and collect Taxes. In pressing its taxing power argument, the Government asks the Court to view the mandate as imposing a tax on those who do not buy that product.  Because every reasonable construction must be resorted to, in order to save a statute from unconstitutionality, the question is whether it is fairly possible to interpret the mandate as imposing such a tax.  The Affordable Care Act describes the shared responsibility payment as a penalty, not a tax.  That label is fatal to application of the Anti-Injunction Act.  It does not, however, control whether an exaction is within Congress’s power to tax.  In answering that constitutional question, this Court follows a functional approach, disregarding the designation of the exaction, and viewing its substance and application.  Such an analysis suggests that the shared responsibility payment may for constitutional purposes be considered a tax.  The payment is not so high that there is really no choice but to buy health insurance; the payment is not limited to willful violations, as penalties for unlawful acts often are; and the payment is collected solely by IRS through the normal means of taxation.  Even if the mandate may reasonably be characterized as a tax, it must still comply with the Direct Tax Clause, which provides: No capitation or other direct tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.  A tax on going without health insurance is not like a capitation or other direct tax under the Court’s precedents.  It therefore need not be apportioned so that each state pays in proportion to its population.  The Spending Clause grants Congress the power to pay the debts and provide for the general welfare of the United States.  Congress may use this power to establish cooperative state-federal Spending Clause programs.  The legitimacy of Spending Clause legislation, however, depends on whether a state voluntarily and knowingly accepts the terms of such programs.  The Constitution simply does not give Congress authority to require the states to regulate.  When Congress threatens to terminate other grants as a means of pressuring the states to accept a Spending Clause program, the legislation runs counter to this nation’s system of federalism.  The Act authorizes the Secretary of Health and Human Services to penalize states that choose not to participate in the Medicaid expansion, by taking away their existing Medicaid funding.  The threatened loss of over 10 percent of a state’s overall budget is economic dragooning that leaves the states with no real option but to acquiesce in the Medicaid expansion.  The government claims that the expansion is properly viewed as only a modification of the existing program, and that this modification is permissible because Congress reserved the right to alter, amend or repeal any provision of Medicaid.  However, the expansion accomplishes a shift in kind, not merely degree.  The original program was designed to cover medical services for particular categories of vulnerable individuals.  Under the Act, Medicaid is transformed into a program to meet the health care needs of the entire nonelderly population with income below 133 percent of the poverty level.  A state could hardly anticipate that Congress’s reservation of the right to alter or amend the Medicaid program included the power to transform it so dramatically.  The Medicaid expansion thus violates the Constitution by threatening states with the loss of their existing Medicaid funding if they decline to comply with the expansion.  The constitutional violation is fully remedied by precluding the Secretary from withdrawing existing Medicaid funds for failure to comply with the requirements set out in the expansion.  The other provisions of the Act are not affected.  Congress would have wanted the rest of the Act to stand, had it known that states would have a genuine choice whether to participate in the Medicaid expansion.  Yes, we said that Chief Justice Roberts wrote the opinion of the Court.  National Federation of Independent Business v. Sebelius, Case No. 11-393 (U.S. June 28, 2012). 
2.      YOUNG U.S. FAMILIES DO NOT SAVE:     Cash is slipping like sand through young American families’ fingers at a growing clip, with savings rates lagging behind previous generations amid a moribund economy, according to the Economic Policy Institute.  The situation is particularly worrisome because younger families were falling behind earlier cohorts even before the Great Recession.  Indeed, the U.S. has seen a recession roughly every ten years in recent decades, which caused young families to lag behind in savings well before the 2007 economic downturn. Households in the 35-44 and under-35 age groups suffered declines in the wake of two previous recessions without fully regaining the lost ground in the intervening years.  Families headed by someone age 35 to 44 had seen declines in net worth after two previous recessions without fully regaining the lost ground.  Losses are sizable.  Those between 35 years and 44 years old, the age when families start getting serious about saving for retirement, saw a 54 percent drop between 2007 and 2010.  Indeed, that group’s rate of loss is considerably higher than that of the typical American family, who saw their net worth fall 39 percent -- from 126,400 U.S. dollars in 2007 to 77,300 U.S. dollars in 2010 -- over the last three years.  The decline was sparked when the housing bubble popped in 2007 and sent the world’s largest economy reeling.  Oddly, however, savings losses before the Great Recession happened during times of unprecedented growth in the U.S. economy, and the fact that net worth declined for these younger age groups between 1989 and 2010 is remarkable amid an economy that grew by a third on a per capita inflation-adjusted basis over that period.  Also alarming is that younger families should have been saving more to make up for declines in employer-provided pensions and social security benefits.  
3.      THE SITUATION IN LONGBOAT KEY, FL:        Writing in theLongboat Key News, Al Green, Town Commission member, says the Town Commission of Longboat Key is now playing with dynamite with a policy change that could totally destroy what many have labored over the years to make a true paradise.  The idea is one of switching to a 401(k) type of pension system instead of defined benefit plan for the two uniformed services that has succeeded in creating the best emergency medical care in Florida and, arguably, the entire country.  When Green first came on the Town Commission, the turnover for police and fire personnel was 50 percent:  That is right, the town lost half of its policemen and firemen every year.  (By some estimates, it costs a public employer about $200,000 just to train a police officer or firefighter.)  The town also had a constant stream of older people in effect evacuating the key when they reached an age that made access to the hospital a serious concern.  The town then implemented the changes that made Longboat Key a destination not a launching pad, a proper pay package and benefits.  The pain of a few extra dollars a year would be pennies on the dollar to the loss of value in residential real estate if Longboat Key would go back to the quality of staffing that was present in the late eighties, and residents did not feel comfortable in knowing that at the other end of a 911 call was top drawer emergency care that has saved countless lives.  Police and fire personnel work their jobs for many reasons, not the least of which is the lifetime security it provides.  With every neighboring community providing for this benefit, the best of the group will be leaving post haste.  Don’t mess with success.  Don’t succumb to the national hysteria of making taxes the total criterion.  It is screwing up communities all over America.  Don’t let it happen on Longboat Key.  You can’t afford the consequences. 
4.      PICKING THE RIGHT FINANCIAL ADVISER:        Choosing the right retirement plan adviser can be a daunting task; it must be done with the skill and expertise of the Employee Retirement Income Security Act’s prudent person, after all -- and it is a selection that must be monitored constantly. has presented the questions participants should ask an adviser who is seeking to earn their trust.  Obviously, if an adviser has already been hired for assistance with the pension trustees as plan fiduciaries, you will know the answers -- or should.  The questions can help your participants beyond the workplace, better to evaluate qualifications of any adviser they may want to engage.  Listed below are five factors that a board of trustees should consider before beginning its search to retain an adviser’s services:  

  • Know where the adviser is based and how his location affects his service model.  Do you care if he is geographically proximate or is “a phone call away” close enough?  How often will he meet with you face-to-face? 
  • Know what the adviser has done for others and what services you can expect.  Get references, preferably before you contact the person.  
  • Know if the adviser expects to act as a fiduciary to your plan and participants, including offering investment advice.  Know the size and strength of the organization that stands behind his commitment.  Be aware that hiring an adviser who will be a fiduciary to your plan does not diminish your own responsibility as a fiduciary.  (We would add a requirement of adequate professional liability insurance.) 
  • Know the adviser’s background and expertise.  What education, honors, designations or other credentials does he have?  How does he stay current on market and regulatory developments, and how will he keep you current? 
  • Know how much -- and how -- you will be expected to pay the adviser.  Verify that, when the adviser is paid for services rendered to your plan, he will not be compensated in a way that unduly influences (or could appear to influence) his objectivity. If the adviser is vague on this point, no matter how qualified he may seem, walk -- no, run -- away. 

Of course, ultimately, choice of the right adviser will be a combination of personal chemistry, professional acumen, relevant experience and trust.  As with any important relationship, it pays to put effort into finding a good match.  
5.      PREPARE TO RETIRE AT 70:  
     The National Retirement Risk Index measures the share of American households at risk of being unable to maintain their pre-retirement standard of living in retirement.  The NRRI is determined by comparing households’ projected replacement rates -- retirement income as a percentage of pre-retirement income -- with target rates that would allow them to maintain their living standards.  A recent update shows that, in the wake of the financial crisis and the Great Recession, 51 percent of today’s working households are at risk.  But a key assumption of the NRRI is that people retire at 65.  Clearly, if people worked longer, the percentage at risk would decline.  A new issue brief from Center for Retirement Research at Boston College adapts the NRRI calculations to address the question:  at what age would the vast majority of households be ready to retire?  The first section lays out the nuts and bolts of the NRRI, and explains how it has been adapted for the subject analysis.  Projected replacement rates are calculated not only for the generally-assumed retirement age of 65, but also for every potential retirement age between 50 and 90.  These replacement rates are then compared to a target rate to determine the percentage of households ready for retirement at each age.  The second section presents the results, showing the cumulative percentage of households ready for retirement at different ages, with breakdowns by income and current age.  The third section addresses how much longer households have to work beyond age 65 to be prepared for retirement.  The final section concludes that over 85 percent of households would be prepared to retire by 70.  Thus, many individuals will need to work longer than their parents did, but they will still be able to enjoy a reasonable period of retirement, especially as health and longevity continue to improve.  Number 12-12 (June 2012).
6.      WHEN THE CAT’S AWAY, WILL THE MICE STILL PLAY?:    The recession has caused many American workers to rule out their annual vacations, but according to a new survey from CareerBuilder, bosses are finding more time for getaways than their workers.  Eighty-one percent of managers have taken or plan to take a vacation this year, compared to 65 percent of full-time employees.  While American workers who have already taken or plan to take a vacation is up from 61 percent in 2011, the number of vacationers fell well below pre-financial crisis levels.  In 2007, for example, 80 percent of full-time workers went on vacation or expected to take a vacation that year.  The new nationwide survey found that vacations are still financially out of reach for many Americans.  Nineteen percent said they cannot afford to go on vacation, which is down from 24 percent in 2011.  An additional 12 percent of workers say they can afford vacations, but have no plans to take one, consistent with past years.  Here are several other vacation trends and topics of note:  

  • Duration of vacations shrinking post-recession.  This year, 17 percent of workers took or planned to take a vacation for ten days or more, down from 24 percent in 2007.  
  • Many workers contact work while on vacation.  Thirty percent of workers contact work during their vacation, on par with last year.  Thirty-seven percent of managers say they expect their employees to check in with work while on vacation, although most say only if the employee is involved in a major issue going on with the company.  
  • Letting paid time off go to waste.  Fifteen percent of workers reported they gave up vacation days last year because they did not have time to use them, down from 16 percent who gave up days in 2010.   
  •  “Stay-cations” are a popular option.  Thirty-eight percent of workers stayed home or are planning to stay home this year. 
  • Working while the family vacations.  Twenty-three percent of workers say they once had to work while the family went on vacation without them, consistent with last year.  

:       Our Newsletter is going out early this week so that everyone can enjoy the 4th of July.  We wish you a happy and safe holiday.  Take time to give thanks that we live in the greatest country in the world. 
8.      GOLF WISDOMS:      The nearest sprinkler head will be blank. 
9.      PUNOGRAPHICS:     I’m reading a book about anti-gravity.  I just can’t put it down.      
10.    QUOTE OF THE WEEK:   “Patience, persistence and perspiration make an unbeatable combination for success.”  Napoleon Hill  
11.    ON THIS DAY IN HISTORY:  In 1930, the U.S. Congress created the U.S. Veterans Administration.    
12.    KEEP THOSE CARDS AND LETTERS COMING:  Several readers regularly supply us with suggestions or tips for newsletter items.  Please feel free to send us or point us to matters you think would be of interest to our readers.  Subject to editorial discretion, we may print them.  Rest assured that we will not publish any names as referring sources. 
13.    PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you.



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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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