Stephen H. Cypen, Esq., Editor
1. USERRA EMPLOYEE BENEFITS FOR PERSONS ON MILITARY LEAVE: One effect of the September 11th terrorist attacks has been activation of more than 50,000 military reserves throughout the country. Thus, knowing the rights of persons on military leave is critical. The Uniformed Services Employment and Reemployment Rights Act of 1994 became law on October 13, 1994. In order to eliminate conflicts with the Internal Revenue Code, the Small Business Job Protection Act of 1996 applied USERRA rules to qualified retirement plans. Considering the infrequency with which USERRA issues arise, confusion and misunderstanding are not surprising. USERRA is intended to minimize disadvantages to an individual that occur when he needs to be absent from his civilian employment to serve our country's uniformed services. The law encourages noncareer uniformed service so that America can enjoy the protection of those services, staffed by qualified people, while maintaining a balance with the needs of private and public employers who also depend on these same individuals. USERRA potentially covers every individual in the country who serves in or who has served in the uniformed services, and applies to all employers in the public and private sectors. The law seeks to ensure that those who serve their country can retain their civilian employment and benefits, and seek reemployment free from discrimination because of their service. In order to be covered by USERRA, one returning from the uniformed services must meet the following five criteria: (1) holding a civilian job before the service period; (2) giving notice to the employer that he was leaving the job for the uniformed services; (3) serving no more than five years in the uniformed services while with a single employer; (4) being released from the uniformed services under honorable conditions; and (5) reporting back to the civilian job in a timely manner or submitting a timely application for reemployment. Time limits for return to work depend upon duration of the military service: less than 31 days service -- employee must return by beginning of first regularly-scheduled work period after end of last calendar day of duty; 31 to 180 days -- application for reemployment must be submitted no later than 14 days after completion of service; 181 days or more -- application for reemployment must be submitted no later than 90 days after completion of service. Basically, USERRA guarantees reemployed persons pension plan benefits that accrued during military service, regardless of whether the plan is a defined benefit plan or a defined contribution plan. The law also provides continuation of group health benefits for members and their families for up to 18 months of service. (Similar to the Consolidated Omnibus Budget Reconciliation Act, COBRA, employees may be required to pay 102% of premium.)
2. IRS ISSUES FAVORABLE NOTICE ON CHARITABLE DONATION OF VACATION LEAVE: Recently, the Internal Revenue Service released guidance that paves the way for employers to offer vacation or leave donation programs to their employees, according to Buck Consultants, Inc. In Notice 2001-69, IRS says it will not consider, as income to the employee, payments made by an employer to a charitable organization in exchange for vacation, sick or personal leave that an employee elects to forgo , provided that payments are made before January 1, 2003. Further, IRS says that it will not challenge any such program by asserting that the employee's ability to make such an election results in constructive receipt of income. The payments would not have to be included in the employee's Form W-2. However, employees would be unable to claim a charitable contribution deduction for the amounts. As to the employer, payments to the charity are deductible under IRC §162 as an ordinary and necessary business expense rather than under IRC §170 as a charitable contribution. Such treatment is more favorable because charitable contributions are subject to limits.
3. EX-WORKER CAN SUE FOR DISCRIMINATION UNDER ADA: In a 2 to 1 decision, the United States Court of Appeals for the Eleventh Circuit has reversed its own prior decisions to the contrary and held that a former employee is eligible to file suit under Title I of the Americans With Disabilities Act of 1990, which makes it unlawful to discriminate with respect to employment against a qualified individual with a disability because of the disability of such individual. This change-of-heart is based upon a 1997 decision of the United States Supreme Court that addressed the same question as it arose under Title VII of the Civil Rights Act of 1964, answering the question in the affirmative. On the substantive issue involved, the appeals court concluded that the employer's long-term disability plan, which differentiates between individuals who are totally disabled due to a mental disability and individuals who are totally disabled due to a physical disability because of the given individual's type of disability, appears to distinguish among beneficiaries on a basis that constitutes a form of discrimination contravening Title I of the ADA. Because the lower court erred in granting the employer's motion to dismiss, the cause was remanded for further proceedings consistent with the appellate decision. Johnson v. K Mart Corporation, Case No. 99-14563 (U.S. 11th Cir., November 21, 2001).
4. AND FORMER EMPLOYEE CAN SUE UNDER FMLA: The United States Court of Appeals for the Eleventh Circuit was presented with the following issue of first impression in the circuit: Whether a former employee who alleges that his employer retaliated against him in its decision not to rehire him should be considered an "employee" under the enforcement provision of the Family and Medical Leave Act of 1993 that provides for a private right of action "against any employer...by any one or more employees." The trial court held that a former employee who applied for reemployment lacked standing to bring suit because the FMLA affords a private right of action only to individuals who suffer adverse action while they are employed. Because the appellate court found that the subject provision of the FMLA is ambiguous and that the Department of Labor regulation interpreting the FMLA to protect former employees from discrimination in hiring decisions is reasonable, it reversed summary judgment in favor of the employer. As the court said, "if former employees...knew they would have no remedy if their former employers retaliated against them for their past use of FMLA leave, it would tend to chill employees' willingness to exercise their protected leave rights and would work against the purpose of the FMLA." Smith v. BellSouth Telecommunications, Inc., Case No. 00-15708 (U.S. 11th Cir., November 27, 2001).
5. BANKRUPTCY DEBTOR'S INTEREST IN FORMER WIFE'S IRA NOT EXEMPT: A bankruptcy appellate panel for the United States Eighth Circuit Court of Appeals has ruled that a debtor's interest in his former wife's individual retirement account was not exempt in his bankruptcy proceedings, because he had obtained his interest in the IRA through dissolution of marriage rather than through his own employment. The debtor relied upon a Minnesota statute exempting IRAs to the extent that the debtor's interest therein does not exceed the present value of $54,000.00. Following binding precedent in the circuit, the court held that the debtor's interest was not exempt because he had not obtained an interest therein through his own employment, as required by the statute. In Re: Anderson, Case No. 01-6044MN (U.S. 8th Cir., November 5, 2001).
6. WHY DIVERSIFY? BECAUSE WINNERS ROTATE!: From year to year various asset classes perform differently, illustrating the need for an asset allocation plan. Over the past 20 years (1981-2000) the following asset classes were the best performing:
|International (MSCI EAFE Index)||5 times|
|Large Cap Growth (S&P/BARRA 500 Growth Index)||4 times|
|Small Cap Value (Russell 2000 Value Index)||4 times|
|Bonds (Lehman Brothers Aggregate Bond Index)||3 times|
|REITs (NAREIT Index)||2 times|
|Small Cap Growth (Russell 2000 Growth Index)||2 times|
And the following represent the worst performing asset classes:
|Small Cap Growth||3 times|
|Large Cap Growth||2 times|
We guess losers also rotate! Incidentally, the only two asset classes that did not perform best or worst over the last 20 years were Large Cap Value (S&P/BARRA 500 Value Index) and the S&P 500 Index.
7. FORMER EMPLOYEES HAVE NO STANDING TO CHALLENGE PENSION PLAN'S QUALIFICATION: Section 7476 of the Internal Revenue Code allows certain employees to bring an action in the Tax Court for a declaratory judgment to challenge a determination that their employers' retirement plan qualifies for favorable tax treatment. Pursuant to the statute's express delegation of authority, the Secretary of the Treasury promulgated regulations determining which employees would be permitted to utilize the declaratory judgment remedy. Former employees sought a declaratory judgment to challenge IRS's determination that the amended retirement plan of their former employer continued to qualify for favorable tax treatment. The regulations, however, grant standing only to current employees, not former employees. Thus the Tax Court dismissed the action for declaratory judgment, and upheld the regulations that denied standing to former employees. The Court of Appeals affirmed, finding the regulations valid because they are based on a reasonable construction of the statutory language and because they are rooted in a rational distinction between current and former employees in plan amendment cases. Flynn v. Commissioner of Internal Revenue Service, Case No. 00-1457 (U.S. D.C. Cir., October 30, 2001).
8. DECIMALIZATION IMPACTS TRADING STRATEGIES: In August, 2000 the New York Stock Exchange implemented decimalization as mandated by the Securities and Exchange Commission (see C&C Newsletter for August, 2000, Item 6). In March, 2001, Nasdaq followed suit (see C&C Newsletter for March, 2001, Item 8). A survey by Midwood Securities reported in PlanSponsor.com indicates that decimalization has adversely affected market liquidity and transparency for a majority of institutional investors. In fact, more than 75% of responding traders report that they have altered their trading strategies. Of those reporting changes, almost 50% have increased the use of limit orders, nearly 60% have opted to trade smaller orders and more than 70% have made some changes in executing orders. In addition, more than half the respondents said that their trading costs -- such as those for systems, compliance and administration -- have increased. Under decimalization, the incremental difference between the best price to buy a share and the best price offered to sell a share, known as the spread, changed from 1/16th of a dollar to one penny.
9. SEC REG FD SURVEYED: The Securities and Exchange Commission's Regulation Fair Disclosure (FD) was designed to promote full and fair disclosure information by issuers and to clarify and enhance existing prohibitions against insider trading (see C&C Newsletter for December, 2000, Item 10). A recent survey by PricewaterhouseCoopers summarized in PlanSponsor.com found that 90% of respondents want Regulation FD continued; however, 68% believe that the SEC should issue guidelines on what is "material" to companies (requiring disclosure) and what is not. Unlike the last survey we reported (see C&C Newsletter for April, 2001, Item 2), many respondents felt Regulation FD impacted company disclosures favorably: almost one-half said Regulation FD has influenced the quantity or scope of their disclosures (a net of 26% providing more information); one-third noted a change in the quality of their company's disclosures (a net of 25% making higher quality disclosures); almost 25% cited a change in frequency of company disclosures (a net of 14% providing information more often); and almost 20% reported a change in the timing of their disclosures (a net of 10% disclosing sooner).
10. DEATH "TOO SOON" COSTS PENSION: After 32 years on the job, Milwaukee's City Librarian celebrated her last workday with a party thrown by her longtime co-workers. However, according to the Employees' Retirement System, the librarian had not retired. Unfortunately, 5 weeks later and before her final 28 hours of accumulated leave time had been paid out, the seemingly-healthy librarian died of a cerebral hemorrhage. Although the librarian's designated beneficiary will receive a lump sum death benefit of $90,000.00, she is not eligible for a pension of more than $1,300.00 per month (75% of the librarian's benefit). The librarian had specifically calculated her retirement date based on when her 248 hours of vacation and 28 hours of comp time would have been paid out. Ironically, the librarian could have retired years before, taken vacations earlier or even refused comp time. In a statement showing great empathy, one Retirement System official said it would not matter if she had died "28 minutes" too early, according to the Milwaukee Journal Sentinel.
11. EMPLOYERS OFFERING BOTH DB AND DC PLANS MORE GENEROUS: PlanSponsor.com reports on a recent survey by William M. Mercer, which reveals that only 58% of defined contribution plan sponsors also offer a defined benefit pension plan -- and the proportion is declining. However, in terms of plan design, the survey found that half of employers offering both types of plans have no age requirement for eligibility, compared with 30% of those with only DC plans. Employees at half of the DB/DC employers were eligible within three months of hiring, compared with 28% of those with DC-only employers. More DB/DC sponsors (45%) have immediate vesting on employer matches, compared to DC-only sponsors (27%). And DB/DC plan sponsors are more than twice as likely as DC-only sponsors (26% vs. 11%) automatically to invest company matching contributions in employer stock.
12. FORMER ARIZONA GOVERNOR SETTLES WITH PENSION FUNDS: Following a ruling in February, 2001 that he pay $18 Million to six union pension funds he defrauded (see C&C Newsletter for April, 2001, Item 5), ex-Arizona Governor Fife Symington has agreed to pay at least $2 Million to resolve the matter. Symington will pay the greater of that amount or 40% of his share in a family trust that will be distributed to him and other beneficiaries upon the death of his uncle. Although it did not get much press at the time, then-President Clinton pardoned Symington just as prosecutors were about to prosecute him on fraud charges.
13. WILL ST. LUCIE COUNTY FLORIDA TAXPAYERS GET SOAKED FOR PENSION?: A report in the local press indicates that in order to boost her state pension benefits, the wife of the St. Lucie schools superintendent was placed in a "no-show" position on the payroll of Indian River Community College. Roberta Vogel took the job as a "senior associate" in June, 1997, shortly after leaving a school job near Orlando, where she had worked for 27 years. Because Ms. Vogel was only 54 when she left her teaching job and because her new pay exceeded $70,000.00 a year, her Florida Retirement System lifetime benefit based upon a total of 30 years of creditable service rose from $17,000.00 a year to more than $35,000.00 when she retired last year. To paraphrase that great philosopher, Mel Brooks, "It's good to be Queen."
14. CENSUS BUREAU REPORTS RETIREMENT ASSETS OF PUBLIC PLANS AT RECORD HIGH: Investment holdings of state and local government employee retirement systems reached a record high of $2.2 Trillion in 2000, up $263 Billion over 1999, according to the Commerce Department's Census Bureau. Almost $1.9 Trillion of the total was invested in nongovernmental securities: $788 Billion in corporate stocks; $343 Billion in corporate bonds; $286 Billion in foreign securities; $186 Billion in mortgages and other securities; $174 Billion in real property and other investments; and $121 Billion in cash. There were 2,208 public employee retirement systems in the United States in 2000. In some states, local and state government employees were consolidated into a small number of statewide systems. In others, there is a large number of systems, many serving employees of individual local governments. Illinois (with 377) and Pennsylvania (with 360) had the most employee retirement systems. Five states, including Florida, had 100 or more systems. In 21 states there were fewer than ten systems, with Hawaii and Maine each having only one system that serves all local and state government employees.
15. ONAN SETTLES CASH BALANCE LITIGATION: In September, 2000, in a lengthy opinion granting partial summary judgment in favor of Onan Corp., a federal judge ruled that cash balance plans do not violate the Age Discrimination in Employment Act (see C&C Newsletter for October, 2000, Item 6). However, the judge did not decide whether the plan violated ERISA. Now, in order to avoid further litigation, the class action has been settled, resulting in higher pension benefits for some employees. Conversion to a cash balance plan prohibited workers from choosing to receive their benefits either in lump sum or as an annuity. The settlement will allow them to choose, meaning recalculation under a new actuarial formula. The cost to Onan Corp. is between $23 Million and $53 Million.
16. TENNESSEE SHERIFF'S ASSOCIATION FILES FOR BANKRUPTCY: The Tennessee Sheriff's Association, saddled with over $500,000.00 in debts, has filed for Chapter 11 bankruptcy protection while the nonprofit group attempts to reorganize its finances. The organization, which provides in-service training for sheriffs and deputies, will continue to operate, according to an Associated Press report. A number of fund-raising problems got the Association into a bad situation: because of the economic downturn, it cost more to fund the campaigns than were being received as donations.
17. FEDERAL FIREFIGHTER RETIREMENT AGE RISES TO 57: Under a bill signed into law by President Bush, federal firefighters will be able to stay on the job until they reach 57. Previously, mandatory retirement age for firefighters was 55. Firefighters must still serve twenty years to receive full retirement benefits. Until now, the Forest Service and the Interior Department would not hire firefighters older than 35 because of the mandatory retirement age.
18. COOPER CONSULTANTS EVALUATES INVESTMENT CONSULTING FIRMS: Berkeley, California-based Cooper Consultants has evaluated the "25 top" investment consulting firms by assigning each an "Independence Rating." The rating consists of two separate sub-ratings: the Business Rating and the Implementation Rating. The Business Rating evaluates structure of the firm, its ownership, affiliates, strategic alliances, joint ventures and revenue sources to determine the potential for conflicts of interest. The top rating (1) is for firms solely in the business of selling services to clients such as pension plans. These firms receive income solely from clients and do not receive any kind of economic benefit from another entity in conjunction with their advice to clients. The bottom rating (4) is for brokerage firms. These firms are actively engaged in the business of other than giving investment advice. The Implementation Rating evaluates the firm's policies, internal structure, regulatory history and other approaches to dealing with conflicts of interest. The top rating (A) is for firms having positive evaluations in conflict of interest policy, regulatory history, disclosure, internal structure, policing and culture. The bottom rating (D) is for firms having an inadequate conflict of interest policy, recent regulatory violations or significant revenues from money managers relating to consulting activities. Pension boards and plan sponsors might want to learn how their own consulting firm stacks up.
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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.