Stephen H. Cypen, Esq., Editor

1. IRS FORMALIZES GUIDANCE ON RETIREE HEALTH CARE EXCLUSION FOR RETIRED PUBLIC SAFETY OFFICERS:

As our readers know, Section 402(l) of the Internal Revenue Code, which was added by Section 845(a) of Pension Protection Act of 2006, provides for an exclusion from gross income up to $3,000 annually for certain distributions made from an eligible governmental plan that are used to pay qualified health insurance premiums of an eligible retired public safety officer or his or her spouse or dependents. The term “qualified health insurance premiums” is defined in Section 402(l)(4)(D) as “premiums for coverage for the eligible retired public safety officer, his spouse, and dependents, by an accident or health insurance plan or qualified long-term care insurance contract (as defined in Section 7702B(b)).” Section 402(l)(5)(A) further limits the exclusion to premiums that are paid “directly to the provider of the accident or health insurance plan or qualified long-term care insurance contract.” Section 402(l) applies to distributions in taxable years beginning after December 31, 2006. IRS Notice 2007-7 (issued January 10, 2007), Q&A-23, provides that premiums paid to self-insurance accident or health plans are not eligible for the Section 402(l) exclusion from gross income because, in order to receive favorable tax treatment under Section 402(l), the accident or health plan receiving the premium payments must be an accident or health insurance plan. Thus, the plan must be providing insurance issued by an insurance company regulated by a state (including a managed care organization that is treated as issuing insurance). In general, Sections 104(a)(3) and 105(b) and (c) exclude from gross income certain amounts received through accident or for health insurance. Under Section 105(e)(1), amounts received under an accident or health plan for employees are treated as received through accident or health insurance for purposes of Sections 104 and 105. Section 1.105-5(a) of the Income Tax Regulations provides that an accident or health plan may be either insured or self-insured. On August 2, 2007, S. 1974, the Pension Protection Technical Corrections Act of 2007, was introduced in the Senate and, on August 3, 2007, H.R. 3361, the Pension Protection Technical Corrections Act of 2007, was introduced in the House of Representatives. Both bills have identical provisions, which would revise Section 845(a) of Pension Protection Act of 2006 by deleting the word “insurance” from the term “accident or health insurance plan,” which occurs in both the definition of qualified health insurance premiums and in the direct payment requirement. Because of these pending technical corrections and special considerations involving eligible retired public safety officers, Notice 2007-7, Q&A-23, is being modified as follows:

Q-23. Can the accident of health plan receiving the payments of qualified health insurance premiums be a self-insured plan?

A-23. Yes. An accident or health plan, which is defined under § 105(e), includes a self-insurance plan. See § 1.105(a) of the Income Tax Regulations.

IRS Notice 2007-99, dated December 3, 2007, is scheduled to be published in Internal Revenue Bulletin 2007-52, dated December 24, 2007. Good show, IRS.

2. FITCH SAYS INSURANCE COMPANIES HAVE MINIMAL SUBPRIME EXPOSURE:

The 20 largest U.S. property and casualty insurers had about $44 Billion of subprime mortgage exposure as of June 2007, but the amount made up only 3% of total investments, Fitch Ratings reports. The U.S. property and casualty insurance industry’s risk from subprime mortgage exposure is minimal based on Ftich’s analysis of statutory filings for the entire industry. Fitch said it did not take a negative rating action on any U.S. property/casualty insurer because of subprime-related issues this year.
3. MOST PLANS USE INVESTMENT CONSULTANTS:

Plansponsor.com reports that a new survey conducted by International Foundation of Employee Benefit Plans indicates that 69% of defined contribution plan sponsors use an investment consultant. Over half of DC sponsors say they look over their investment performance quarterly. One-third say they pay service provider fees based upon agreed service performance levels. The IFEBP survey found that 54% of responding DC sponsors have bundled arrangements, while 31% are unbundled. As for defined benefit sponsors, 88% hire consultants to assist with investment management, with 94% using outside investment managers. Nearly two-thirds of responding DB plan sponsors review investment manager performance quarterly.

4. FINANCIAL WELL-BEING INDEX:

The Principal Financial Group commissioned Harris Interactive to conduct online research with employees of small and midsized U.S. businesses (firm size 10 - 1,000 employees) about their attitudes and perceptions regarding their financial well-being and their current employee benefits. To compare responses, Harris Interactive also interviewed a group of retirees. Here are some key findings:

• Holiday Spending - Twenty-nine percent of employees and retirees plan to spend less money this holiday season than last year. Fifty-nine percent of employees and 64% of retirees plan to spend the same amount as last year.
• New Year’s Resolutions - Nearly half of the retirees responded they do not intend to make any financial resolutions, compared to 23% of the employees. The top two resolutions selected by employees were paying off credit card debt (40%) and putting a set amount of money into savings each month (39%). The resolution selected by most retirees (17%) was to pay off credit card debt.
• Personal Credit - On average, employees have 3.7 credit cards in their name for personal use and retirees report significantly more (4.4). However, when asked how many of these cards they use on a regular basis, only 5% of retirees and 2% of employees report using five or more. The average number of cards used by retirees regularly is 2.0, while the average for employees is 1.7.
• Personal Debt - Two-thirds of retirees report having no credit card debt they carry over from month to month, compared to a third of employees. One in ten employees report having between $5,001 and $10,000 in credit card debt, while 10% of employees have over $10,000.
• State of the Economy - Roughly half of retirees and employees fear we are heading in the direction of a recession. At least one in five retirees and employees think we are currently in a recession.
• Future of Social Security - Nearly half of employees and a third of retirees are very or extremely concerned about the future of Social Security.
• Social Security Benefit Collection - Most employees (61%) plan to collect their Social Security benefits after reaching Full Retirement Age. In contrast, the majority of retirees (67%) began collecting Social Security benefits prior to reaching their Full Retirement Age.

The first Principal Well-Being Index survey was conducted in the United States in 2000.
5. PBGC DEFICIT DECLINED TO $13.1 BILLION IN FISCAL YEAR 2007:

The Pension Benefit Guaranty Corporation’s insurance program for single-employer pension plans reported a deficit of $13.1 Billion in fiscal year 2007. The 2007 results represent a $5 Billion improvement over last year’s $18.1 Billion shortfall. As of September 30, 2007, the single-employer program reported assets of $67.2 Billion and liabilities of $80.4 Billion. The decline in the deficit was due primarily to investment income of $4.7 Billion and a $2.8 Billion actuarial credit as a result of higher valuation interest factors. (Hmmmm.) Total return on invested funds was 7.2%. The single-employer program posted premium income of about $1.48 Billion in 2007, up slightly from $1.44 Billion in 2006. In 2007, no new large pension plans were classified as probable losses on the PBGC balance sheet. PBGC’s annual management report also shows that its potential exposure to pension losses from financially weak companies decreased to $66 Billion, compared to $73 Billion in 2006. Gee. Don’t you feel much better now?

6. PBGC PENSION INSURANCE DATA BOOK 2006:

Speaking of the Pension Benefit Guaranty Corporation, PBGC was established by the Employee Retirement Income Security Act of 1974 to ensure that participants in defined benefit pension plans receive their pensions if their plans terminate without sufficient assets to promised benefits. PBGC administers separate insurance programs to protect participants in single-employer and multiemployer plans. PBGC has published the Pension Insurance Data Book annually since 1996 to present detailed statistics on PBGC program operations and benefit protections. This edition contains an update of a 1999 PBGC study on effects of PBGC’s benefit limitation provisions on the benefits of participants in the plans PBGC trustees. PBGC found:

• In both studies, the vast majority of participants in these trusteed plans received 100% of the benefits they earned under their plan;
• Sixteen percent of participants had benefits reduced by one or more of the limitation provisions in the current study compared to less than 6% in the 1999 study;
• On average, this study found that benefits were reduced by 28% for those affected compared with an average reduction of only 16% in the earlier study; and
• More than 80% of the plans in this study and more than 75% in the 1999 study had at least one participant whose benefits were reduced by one or more of the limitation provisions.

The change in both the number of participants whose benefits were reduced by these limitation provisions and the size of the reductions between the 1999 and 2007 studies is not unexpected. The impacts of these limitations depend critically on the characteristics of both the plans being trusteed (do they provide temporary supplemental benefits, do they regularly increase benefits through plan amendments, do they provide generously subsidized early retirement benefits?) and the participants in the plan (are they highly paid?). The updated study included several recently trusteed large plans from the steel and airline industries. These industries are heavily unionized and their plans are relatively-generous. These characteristics make them more likely to be the subject to guarantee limitations than the average defined benefit plan. The entire publication is available at www.pbgc.gov/publications/databook. Incidentally, separately, PBGC adopted a final rule amending the pension benefit that may be paid by PBGC with respect to a plan participant in a single-employer pension plan that terminates in 2008. Based upon a somewhat complicated formula (which involves Social Security data), the maximum guaranteeable benefit payable by PBGC to participants in single-employer plans that terminate in 2008 is $4,312.50 per month in the form of a life annuity beginning at age 65. If a benefit is payable in a different form or begins at a different age, the maximum guaranteeable amount is the actuarial equivalent of $4,312.50 per month.

7. IRS ISSUES FALL 2007 STATISTICS OF INCOME BULLETIN:

Internal Revenue Service has released the Fall 2007 issue of Statistics of Income Bulletin, featuring data from 134.4 million individual income tax returns filed for the year 2005. U.S. taxpayers reported $7.4 Trillion of adjusted gross income less deficit in the year 2005, up 9.3% from tax year 2004 when 132.2 million returns were filed. Certain types of income posted strong gains between 2004 and 2005. Net capital gains climbed 41%, taxable interest rose 29.5%, while net partnership and S corporation income gained 27.3%. Taxable income totaled $5.1 Trillion in tax year 2005, up 10% from the prior year. Total income tax increased for a second straight year, rising 12.4% to $934.8 Billion. Between tax years 2003 and 2004, total income rose 11.2%, the first increase in four years. The controversial alternative minimum tax grew 33.7% between 2004 and 2005, to $17.4 Billion. Four million taxpayers paid AMT in 2005, compared to almost 3.1 million in tax year 2004. IR-2007-195 (November 30, 2007).

8. ANNUAL CHRISTMAS PRICE INDEX UP 3.1 PERCENT:

The significantly higher price of gold and increased compensation for minimum wage workers will make Christmas more expensive this year, according to the PNC Christmas Price Index. The tongue-in-cheek economic analysis by PNC Wealth Management is based on the cost of gifts in the holiday classic, “The Twelve Days of Christmas.” According to the 23rd annual survey, the cost of “the Twelve Days of Christmas” is $78,100.00 in 2007, a 3.1% increase over last year. The rise in gift prices almost mirrored the U.S. Government’s Consumer Price Index, a widely-used measure of inflation calculated by the Bureau of Labor Statistics. The Consumer Price Index is up 3.5% so far this year. This year the price of five gold rings totals $395.00, a 21.5% increase over 2006 prices (but still no where close to 1989 prices, when the five gold rings hit an all-time high of $750.00). And the eight maids-a-milking, who had not had a wage increase since 1997, saw their wages increased by 13.6%, bringing cost of the octet for one hour of work to $46.80. (Look for more of the same next year and the year after, as Congress has already approved continued increases in the minimum wage.)

9. FLORIDA APPELLATE COURT “CORRECTS” MINOR FACTUAL ERRORS:

On September 28, 2007, the Florida First District Court of Appeal issued its decision in Brown v. State of Florida, Commission on Ethics, 32 Fla. L. Weekly D2342 (Fla. 1st DCA, September 28, 2007) (see C&C Newsletter for October 18, 2007, Item 1). Now, the court has withdrawn its prior opinion and issued a revised one in its place. The revised opinion corrects several minor factual errors that were brought to the court’s attention in the motion for rehearing filed by the appellees. The corrections are nonsubstantive and in no way affect the court’s initial ruling. Brown v. State of Florida, Commission on Ethics, 32 Fla. L. Weekly D2835 (Fla. 1st DCA, November 30, 2007).

10. MONEY MISTAKE NO. FOUR:

From SmartMoney, we learn that Money Mistake No. Four is “Living in the Moment.” Who wouldn’t rather watch television than clean out the attic? Humans, faced with tasks that are unpleasant or complicated, simply put them off until later. Procrastination, behavioral economists say, is one reason nearly half of us don’t participate in a 401(k) plan or contribute enough for the full company match -- essentially turning down free money. Additional symptoms: not coming up with a monthly budget or waiting until the last minute to make an IRA contribution. One solution is to set up regular transfers from your checking account. Just think, you only have to do it once!

11. DAFFY-NITIONS: Compromise :

The art of dividing a cake in such a way that everybody believes he got the biggest piece.

12. QUOTE OF THE WEEK:

“Distrust any enterprise that requires new clothes.” Henry David Thoreau