Stephen H. Cypen, Esq., Editor

1. PPA RAISES SIGNIFICANT QUESTIONS:

As expected (see C&C Newsletter for August 10, 2006, Item 1), on August 17, 2006 President Bush signed into law the Pension Protection Act of 2006. Sections 828 and 845 of the Act are of particular interest to governmental pension plans that provide benefits for police officers, firefighters and emergency medical workers. Section 828 enables those employees to receive payments from a plan if they leave active service after age 50, instead of age 55, without being subject to the additional 10% early distribution tax. Section 845 of the Act enables those same retirees, among others, to exclude from gross income up to $3,000 per year of pension payments that are directed by the plan to pay qualified health insurance premiums of the retired employee. A. D. “Gus” Fields, prominent tax attorney, has posed some very pointed questions to Internal Revenue Service. Mr. Fields believes that most, and probably all, of the questions can be answered without waiting for regulations. Nevertheless, if some of the questions cannot be readily answered, Mr. Fields requests whatever guidance in those areas that IRS feels comfortable providing now. Here are some of the questions:

Section 828

Section 72(t) of the Internal Revenue Code imposes an additional 10% tax on the taxable part of an early distribution from a qualified pension Plan unless an exception applies. One exception that provides relief from the 10% tax applies to a distribution made to an employee after separation from service after attainment of age 55. The 10% additional tax did not apply if the employee separated from service at any time during the year he attained age 55. Section 828 of the Act adds a new paragraph (10) to Section 72(t) to provide in effect that, in the case of a distribution to a qualified public safety employee, the Section shall be applied by substituting “age 50" for "age 55." This provision, applies to distributions after enactment of the Act.

• Does the amendment apply to employees who separated from service after age 50 but before August 17, 2006, date of enactment?
• Will a plan need to file two 2006 Forms1099R with respect to a public safety employee who received one or more 2006 distributions before enactment and one or more distributions in 2006 after enactment that would have been subject to the tax in the absence of enactment?

Section 845

Section 845 of the Act provides for a tax-free distribution from a pension plan of up to $3,000 per year to help pay premiums on health insurance or long-term care insurance for a retired public safety officer, his spouse and dependents. The employee must have separated from service due to disability or after attaining normal retirement age. In order for these amounts to be tax free the plan participant must elect after termination of employment to have payment forwarded directly from the pension plan to the accident or health insurance plan or long-term care provider.

• Will “early” retirees ever receive a tax benefit?
• What is normal retirement age? Is the normal retirement age in the eligible retirement plan, usually not higher than 50 for public safety officers, the age that will be used for this purpose?
• If the plan does not have an express normal retirement age but requires a stated number of years of service for commencement of a pension (like 20-and-out) that is not actuarially reduced, will this be the normal retirement age?
• Will the plan have to be amended expressly to provide for employee elections and distributions in order to enable the retired employees to receive the tax benefit?
• Does the term "accident or health insurance plan" include an employer's self-insured medical or dental care plan?
• Does the term include a plan of a different employer than the one that maintains the eligible retirement plan?
• Does the term include an individual contract purchased by the employee?
• Can the eligible retirement plan limit the accident or health insurance plans to which tax-free transfers may be made? For example, could the plan limit transfers only to accident or health insurance plans maintained by the same employer that maintains the eligible retirement plan?
• Is each eligible retiree required to make a specific election to receive this benefit, or can the plan simply treat employees as having made the election if they are having insurance premiums deducted, including those who are having premiums deducted on an after-tax basis at the effective date of the amendment?
• If individual elections are required, must they be in writing?
• If individual elections are required, may the plan's governing body specify how often they will be made (that is, annually, once-in-a-life time)?
• If the former employer maintains a health and accident plan and the eligible retirement plan transmits payments to the employer to be forwarded to the health and accident plan, is the "direct payment" requirement met?
• Could the eligible retirement plan forward the premiums through an insurance agency or other third party?
• Could the monthly premium check be delivered to the retired employee for forwarding to health and accident plan if it is made payable to the insurer?
• Since the election must be made after retirement but the premiums also benefit the employee's spouse and dependents, is there no tax exclusion if an employee dies before retirement?
• If the retired employee makes an election after retirement and then dies, will the exclusion still apply to payments made to the spouse or dependents?
• Will Form 1099R and instructions be revised to reflect the health and accident insurance exclusion which, unlike amounts shown in present Box 5, will not reduce future excludable distributions or will these excludable amounts simply be omitted from the Form 1099R?
• Will the retired employee need to claim the exclusion on Form 1040?

Although Mr. Fields’s letter was written September 11, 2006, we just received a copy of it. Hopefully, Mr. Fields will share with us, and others, any answers he receives. Thank you, Gus.

2. IS HOUSING BOOM OVER?:

Latest numbers from the National Association of Realtors should concern all homeowners contemplating a sale. Nationally, the number of sales of existing homes fell 7% during the second quarter, compared with a year earlier. But in some populous, high-price states, the bottom really opened up: Arizona and Florida, down 27%; California, 25%; and Virginia and Nevada, 24%. Only 20 states had increases. Interestingly, prices paid were still going up during the quarter -- even in those states where transactions plummeted! It is as if buyers have gone on strike but sellers don’t know it yet.

3. NEW YORK LAW REQUIRES EMPLOYERS TO PROVIDE LEAVES OF ABSENCE FOR MILITARY SPOUSES:

On August 16, 2006, a new New York State law went into effect that requires certain employers to provide employees who are married to members of the Armed Forces with up to ten days of unpaid leave upon request. According to Bond, Schoeneck and King, the law enables employees who are married to members of the Armed Forces to spend some time with their spouses while the spouses are on leave from the Armed Forces during a period of military conflict. The law applies to all persons or entities in New York that employ 20 or more employees in at least one site within the state, including individuals, corporations, counties, towns, cities, school districts, public authorities or other governmental entities of any kind. In order to qualify, an employee must be married to a member of the Armed Services of the United States, National Guard or Reserves, who has been deployed during a period of military conflict or combat theater or combat zone of operations. The leave may only be used when the employee’s spouse is on leave from the Armed Forces during a period of military conflict. The law prohibits employers from retaliating against any employee who requests or obtains a leave of absence pursuant to the law. The law does not prevent an employer from providing leave for military spouses in addition to the leave allowed under any other provision of law. In addition, the law does not affect an employee’s rights with respect to any other employee benefit provided by law.

4. NYC MAY EASE RULE ON VETERANS’ PAY REIMBURSEMENT:

According to the New York Times, New York City officials say they are working to spare more than 1,600 recent veterans some of the financial strain they face from the requirement that they reimburse part of their military or city pay on returning to city jobs. The requirement calls for return of the lesser of their military pay or their city pay, which continued during their service. Officials say they are looking closely at a proposal to exclude food and housing allowances when calculating military pay of city employees who were called up for service in the wake of 9/11. The benefits program allows city employees called to active military service to continue receiving their full salary and benefits -- including health insurance, annual leave, sick leave and pension benefits -- as long as they agree to repay the lesser of their military pay or city salary on returning to their city jobs. The city has insisted that veterans repay their gross salaries, even though their take-home pay, after taxes and deductions for Social Security and Medicare, was substantially less.

5. NEW FIDUCIARY LIABILITY INSURANCE ON THE HORIZON?:

From Pension Risk Matters ? we learn that at least one insurance company has announced a “hard hat of sorts” for money managers. The policy’s goal is to provide additional protection to investment advisers, mutual funds and hedge funds for risks associated with providing asset management products and services to investors. Specifically, policy terms include coverage for incidents such as:

1. Failure to adhere to investment guidelines and restrictions.

2. Misrepresentations and failure adequately to disclose risks.
3. Mismanagement of investments by an adviser on behalf of a pension fund.

4. Breach of fiduciary duties to clients or pension plan participants.

5. Unintentional errors committed in the course of performing regular investment adviser duties.

Pension board trustees may want to inquire into whether their money managers have this expanded coverage or whether they should be required to obtain it, if available.

6. AUSSIES MORE INTERESTED IN SOCCER THAN FINANCES:

Plansponsor.com reports that Australians spend twice as much time working out their football (soccer) tips each week as they do on retirement planning. A survey found that respondents spent on average 22 minutes a week sweating on their football tips, but only 10 minutes on their financial future. Apparently Aussies are huddling way too much.

7. QUOTE OF THE WEEK:

“The reason why worry kills more people than work is that more people worry than work.” Robert Frost