Watson Wyatt has been comparing investment rates of return in defined benefit (DB) and defined contribution (DC) plans for more than 10 years, and DB plans have been the long-term victor. This analysis updates our prior studies with investment returns for 2006 and 2007 for a large set of plans, as well as a snapshot of year-end returns for 2008 based on a small set of plan sponsors.
Both the House and Senate health care reform bills currently being debated would establish a new voluntary long-term care insurance program. Called CLASS, the new program would be offered to all workers through the Department of Health and Human Services (DHHS). CLASS is significant for at least three reasons.
Health care reform has dominated the legislative agenda for much of 2009 — especially as legislation moved through committees and floor debates during the late summer and fall sessions. But retirement issues are also receiving attention and might see some action before the 2009 session ends. Defined benefit (DB) plan sponsors are hoping for funding relief, and lawmakers may discuss legislation to address disclosure of 401(k) fees. In addition, a new bill recently introduced in the House would change the nondiscrimination rules for qualified retirement plans.
The Affordable Health Care for America Act (H.R. 3962) approved by the House on Nov. 7 and the Patient Protection and Affordable Care Act (H.R. 3590) now under debate in the Senate would affect retiree health plans significantly. Some of the changes — such as taxing the retiree drug subsidy (RDS) provided to employers and prohibiting employers from reducing benefits after employees retire — could have a chilling effect on the sponsorship of retiree health benefits. On the other hand, a proposed reinsurance program for early retirees would (temporarily) reward sponsors of employment-based plans.
A new study by Watson Wyatt highlights the wide-ranging variations in hybrid pension plans, reflecting the spectrum of sponsors’ workforce planning, compliance and other needs and goals. It examines eligibility requirements, definitions of applicable compensation, benefit formulas, interest rates and transition methods for cash balance plans (CBPs) and pension equity plans (PEPs).
On Nov. 7, in a rare Saturday vote, the House of Representatives approved the Affordable Health Care for America Act (H.R. 3962) by a tally of 220 to 215. While the vote represents an important step forward in the health care reform debate, lawmakers still have a long and difficult battle ahead.
On Nov. 3, House Education and Labor Committee chair George Miller (D-Calif.) introduced the Emergency Influenza Containment Act to ensure that employees sent home by their employers because of a contagious illness receive paid sick leave. On Nov. 17, Senator Chris Dodd (D-Conn.) and Representative Rosa DeLauro (D-Conn.) introduced the Pandemic Protection for Workers, Families and Businesses Act, which shares many of the same goals, although there are important differences between the two bills as well. Paid sick leave has been receiving more attention from lawmakers recently, and legislative action is possible.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) subsidy enacted as part of the American Recovery and Reinvestment Act (ARRA) in February (see Watson Wyatt Insider, March 2009) will begin to phase out at year's end. ARRA provides a 65 percent premium subsidy for qualified beneficiaries who lose their health coverage and become eligible for COBRA following an involuntary termination of employment by Dec. 31, 2009. The premium subsidy is available for the first nine months of COBRA coverage, so the subsidy has already ended for those who began receiving it immediately after enactment. Others will continue receiving the subsidy into 2010.
The National Defense Authorization Act for Fiscal Year 2010 (H.R. 2647) expands eligibility for certain rights under the Family and Medical Leave Act (FMLA). The new law will increase the number of employees who qualify for leave on account of a family member's deployment and will broaden the circumstances in which employees may take leave to tend to a family member with a service-related injury or illness. The provisions took effect when President Obama signed the legislation on Oct. 28, 2009.
The IRS has released final regulations on employer comparable contributions to health savings accounts (HSAs). The regulations also provide guidance on the method and timing of reporting and paying excise taxes due under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Health Insurance Portability and Accountability Act (HIPAA) and the HSA (and Archer medical savings account) comparable contribution rules.
In an effort to tie compensation more closely to long-term performance and appropriate competitive levels, Special Master for TARP Executive Compensation Kenneth R. Feinberg has directed companies that received exceptional Troubled Asset Relief Program assistance to cut compensation for top executives by an average of 50 percent. While the pay cuts apply to only seven firms, the levels and structures could become a template for compensation at other financial institutions that participate in TARP. Feinberg also clarified that these firms are subject to the same corporate governance provisions that apply to other TARP recipients, including say-on-pay votes, clawbacks, compensation consultant disclosures, risk reviews, perquisite disclosures, prohibition on tax gross-ups and chief executive officer/chief financial officer certifications.
Watson Wyatt recently completed its third annual analysis of stock option valuation assumptions and results under Statement of Financial Accounting Standards (SFAS) 123(R). From 2007 to 2008, the percentage of companies disclosing option fair values decreased from 73 percent to 72 percent. The median percentage increase in stock compensation expense from 2007 to 2008 was 2.4 percent.
The 2008 Form 5500 instructions direct defined benefit (DB) pension plan sponsors (or plan administrators acting on their behalf) to display actuarial information from the form on their intranets. The instruction reflects a new PPA disclosure requirement for DB plan sponsors that maintain intranet Web sites for their employees. The DOL is also currently posting scanned versions of 2008 Schedule SB filings on a Web site that may be viewed by the general public.
After more than a decade of discussion, Congress finally enacted legislation mandating full parity for mental health and substance abuse benefits. The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act (MHPAEA) became law on Oct. 3, 2008, as part of the Emergency Economic Stabilization Act. The law, which generally becomes effective in 2010, affects insured and self-insured group health plans provided by employers.
A provision in America’s Healthy Future Act, passed by the Senate Finance Committee on Oct. 13, would limit deductible compensation for health insurers. If the provision makes it into the final legislation, it will establish a special rule under section 162(m) to cut the deductible compensation limit in half — from $1 million to $500,000 — for “covered health insurance providers.” The provision is targeted at the health insurance industry — employers with self- insured plans are excluded.
The IRS has announced the annual cost-of-living and statutory adjustments of various dollar limits for employee benefit plans. The limits that are adjusted by reference to Section 415(d) will remain unchanged for 2010.
In a series of studies since the global financial crisis began, Watson Wyatt has projected the regulatory funded status and minimum required contributions for single-employer defined benefit (DB) plans, in the aggregate. It has serially updated the analysis to reflect changing market conditions, new regulations and enacted or proposed temporary legislative relief. The studies have contributed to fruitful discussions with sponsors, regulators and legislative staff in the pension community; indeed, the article published in the October 2009 Insider underlay Mark Warshawsky’s Oct. 1 testimony to the House Ways and Means Committee. This new study continues that effort by incorporating market conditions to Oct. 15, 2009, adding two proposed legislative relief provisions and extending the funding horizon out to 2013.
On Oct. 1, 2009, two panels testified before the House Committee on Ways and Means on retirement -related matters. The first focused on, and lobbied for, defined benefit (DB) pension funding relief. The six panelists, including Watson Wyatt's director of Retirement Research, Mark Warshawsky, Ph.D., provided a wide range of experience and expertise. While it was universally accepted that pension relief is necessary, panelists disagreed about its form and who should receive it. Some advocated temporary relief from certain provisions of the Pension Protection Act of 2006 (PPA), while others argued for permanent changes to the law.
Testimony of Mark Warshawsky, Director of Retirement Research, Watson Wyatt Worldwide, presented to the House Committee on Ways and Means at the hearing “Defined Benefit Pension Plan Funding Levels and Investment Advice Rules,” Oct. 1, 2009.
Even as the economy continues to show signs of improvement, the recent financial turmoil has permanently altered the business environment. For example, the dialogue about risk, particularly as it relates to incentive compensation, is forever changed. Critics have accused various would-be culprits of triggering one of the worst economic crises in recent history, and many believe they have found the smoking gun in today’s executive and sales compensation models.
While recent legislative and regulatory measures have given defined benefit (DB) plan sponsors some funding relief for 2009, required contributions for 2010 and 2011 have loomed large. In this analysis, Watson Wyatt projects funded status and required contributions for single-employer DB plans using an updated version of its comprehensive and realistic model of plan funding. It considers five scenarios: (1) the law prior to Sept. 24, 2009, including the Pension Protection Act of 2006 (PPA), the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) and the March 2009 IRS guidance; (2) current law, including the IRS guidance released on Sept. 25, 2009; (3) House Education and Labor Committee bill (H.R. 2989) introduced in June 2009; (4) the main provisions of Representative Earl Pomeroy’s (D-N.D.) discussion draft released in August 2009; and (5) House Minority Leader John Boehner’s (R-Ohio) bill (H.R. 2021) introduced in April 2009.
In late summer 2009, health care reform seems almost within reach. President Barack Obama is urging the Congress to pass bills, and both the House and Senate are trying to deliver. There is relatively widespread agreement on the necessity of reform, but the devil is in the details.
The Securities and Exchange Commission (SEC) has voted unanimously to propose several important changes to the proxy disclosure rules that could take effect for the 2010 proxy season. The proposal calls for new disclosures about risk and more information about directors and compensation consultants.
The Pension Protection Act of 2006 (PPA) established new rules for the operation and administration of hybrid pension plans, but plan sponsors are still waiting for guidance. The lack of final (or in a number of cases even proposed) guidance leaves hybrid sponsors in a difficult position — required to act without knowing the rules for doing so. Watson Wyatt recently conducted a survey to identify the issues most important to these plan sponsors.
Portfolio selections and investment returns play an important role in accumulating wealth. Studies have established that many workers need to allocate their assets more wisely, particularly participants in defined contribution (DC) retirement plans. Measures are being proposed or are under way to encourage better informed, smarter and more effective investment. For example, on the regulatory side, the Department of Labor has encouraged a greater use of equities as part of qualified default investment alternatives in retirement accounts. The effects of these measures and policies on individuals’ investment behavior remain to be seen.
At its June 3 meeting, the Financial Accounting Standards Board (FASB) voted to approve the “FASB Accounting Standards Codification” as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The codification project required a structural overhaul to change from a standards-based model to a topically based model. The codification was launched on July 1, 2009, and takes effect for interim and annual periods ending after Sept. 15, 2009, when it will supersede all existing accounting standard documents.
The U.S. Department of the Treasury issued interim final regulations interpreting the restrictions imposed on executive compensation by the American Recovery and Reinvestment Act of 2009 (ARRA) and their interaction with previous iterations of Troubled Asset Relief Program (TARP) guidance. These regulations resolve many gray areas, generally in favor of TARP participants. For example, the rules eliminate President Obama’s proposed $500,000 cap on pay, clarify that commissions are not prohibited bonus payments and expand the definition of stock-based compensation that can be granted in lieu of other incentive compensation.
Before finalizing their 2009 funding valuation interest rate elections, many defined benefit (DB) plan sponsors would like to know what flexibility they will have for their 2010 elections. For calendar-year plans, the 2009 elections are generally due by Sept. 30, 2009.
The Pension Benefit Guaranty Corporation (PBGC) has proposed making it easier for military service members to qualify for guaranteed benefits if their pension plan terminates. Currently, the PBGC guarantees the pension benefit only if the participant satisfies all conditions for entitlement by the plan’s termination date.
On July 31, the House passed the Corporate and Financial Institution Compensation Fairness Act (H.R. 3269), which was proposed by House Financial Services Committee Chairman Barney Frank (D-Mass.). The act would require say-on-pay, mandate independence for compensation committees and compensation consultants, and establish new disclosure requirements for incentive-based compensation.
As Congress enters its August recess, health care reform legislation remains in flux. In July, four of the congressional committees responsible for moving the legislation approved proposals. Despite this progress, however, obstacles threaten to block the legislative path to reform, including escalating concern about costs — now and in the future — and dissent among House Democrats. Lawmakers plan to discuss the proposals with their constituents over the August recess, and constituents’ views will affect the negotiations when they return.
We can count mergers and acquisitions (M&A) activity as one more casualty of the credit crisis: During the last 12 months, deals have sharply declined in volume and size. As a result, an important change in the M&A landscape has not received the attention it would have attracted just a couple of years ago.
The testimony of Mark J. Warshawsky, Ph.D., Director of Retirement Research at Watson Wyatt Worldwide, before the Department of Labor ERISA Advisory Council on Promoting Retirement Literacy and Security by Streamlining Disclosures to Participants and Beneficiaries, July 23, 2009.
Wealth accumulations in defined contribution (DC) retirement plans hinge on the investment portfolio and contribution rates. Yet a new Watson Wyatt analysis suggests that many DC portfolios fall short of optimal asset allocation. Plan sponsors and policymakers hoping to help workers balance their portfolios more effectively need to know how asset allocations vary among households with different economic and demographic characteristics.
From 2008 to 2009, the number of Fortune 1000 firms sponsoring a frozen defined benefit (DB) pension plan increased by 4 percent. The freeze rate has remained relatively constant over the last two years, as plan sponsors continue to seek ways to lower expenses, especially in the current economic downturn.
For many workers, defined contribution (DC) plans and individual retirement accounts (IRAs) are their main savings vehicles. This trend gives employees greater responsibility for accumulating sufficient wealth to see them through retirement. Are workers, especially those approaching the end of their working career, saving enough? An analysis of account balances for near-retirees suggests widespread financial unreadiness for retirement looming, even before the stock and housing markets tumbled.
Restructurings in Chapter 11 under the U.S. Bankruptcy Code are undergoing a change. More and more Chapter 11 debtors simply can’t make it through a classic or typical restructuring, which can take 12 or more months and involve the complexities of negotiating a Plan of Reorganization and debating the value of the reorganized entity and each class of creditors’ claims.
On June 23, Representative Earl Pomeroy (D-N.D.) released a discussion draft for defined benefit (DB) funding relief. The draft features many ideas that Watson Wyatt and others in the business community have been advocating: expanding the asset corridor, automatically approving 2010 interest rate elections, providing a longer amortization period for recent market losses and more. However, some of the relief would be tied to maintenance-of-effort provisions, such as asking employers to keep their DB plans active or to continue contributing to employees’ 401(k) plans.
The Equal Employment Opportunity Commission (EEOC) has released proposed regulations on procedural and administrative issues under the Genetic Information Nondiscrimination Act of 2008 (GINA). The proposal would amend existing regulations to reflect GINA and update the language in the regulations.
Health care reform took important steps forward in mid-July, when three of the congressional committees responsible for moving the legislation approved proposals. President Obama and lawmakers and stakeholders who support the reform efforts hailed the committee votes. Despite the progress, however, obstacles threaten to block the legislative path to reform, including escalating concern about the proposals’ costs, dissent among House Democrats and the pending August recess. Lawmakers must forge consensus before any legislation can be presented for President Obama’s signature.
Back from its Independence Day recess, Congress now faces an intense schedule of health care reform activity, growing controversy about emerging proposals and a tight timeline. The debate so far has been marked by progress and setbacks. The Senate Health, Education, Labor and Pensions (HELP) Committee is debating the health care reform proposal released on June 9. A discussion draft of the House tri-committee proposal was released on June 19, and the three committees with jurisdiction – Ways and Means, Education and Labor, and Energy and Commerce – held hearings in late June. However, the Senate Finance Committee delayed its proposal and debate when the Congressional Budget Office (CBO) estimated the cost at more than $1.5 billion.
The adoption of International Financial Reporting Standards (IFRS) is advancing in fits and starts. The Securities and Exchange Commission (SEC) proposed a roadmap to IFRS in late 2008, but SEC Chairwoman Mary Schapiro expressed misgivings about the plan during her confirmation hearing earlier this year. Moreover, the SEC has received roughly 200 comments on its roadmap, some voicing support but others — including many from corporations and two from members of Congress —forcefully objecting to the proposed reporting regime. The Financial Accounting Standards Board (FASB) supports the goal of international reporting standards but has expressed some reservations and recommendations for modifications to the roadmap.
Comments on the risk characteristics of target-date funds that were presented by Mark J. Warshawsky, Director of Retirement Research at Watson Wyatt Worldwide, at a joint hearing of the U.S. Department of Labor (DOL) and the Securities and Exchange Commission (SEC) in Washington, D.C., on June 18, 2009.
On May 20, the Securities and Exchange Commission (SEC) voted 3-2 (along party lines) to give some shareholders access to the corporate proxies used to nominate board directors. SEC Chairwoman Mary Schapiro believes companies and boards need to be more responsive to shareholder interests — such as compensation structures and risk management — and wants shareholders to have a “meaningful opportunity to effectuate the rights that they already have under state law to nominate directors.”
The push for health information technology (IT) has prompted concerns about keeping health information private, and the American Recovery and Reinvestment Act of 2009 (ARRA) expands the privacy protections under the Health Insurance Portability and Accountability Act (HIPAA). The 2009 act imposes new notification requirements for breaches of unsecured protected health information (PHI), establishes new disclosure requirements for electronic health records, and strengthens enforcement and penalties for violations. It also includes provisions aimed at encouraging greater use of health IT.
Under regulations proposed by the IRS, an employer undergoing a substantial business hardship can reduce or suspend 401(k) safe harbor nonelective contributions during a plan year. The rules give employers an alternative to terminating their safe harbor plans. The regulations are proposed to be effective for amendments adopted after May 18, 2009, but employers may rely on the proposed regulations for guidance in the meantime. If the final regulations are more restrictive than those proposed, the stricter provisions will not be made retroactive.
Representative John Tierney (D-Mass.) has reintroduced the Emergency Retiree Health Benefits Protection Act (H.R. 1322), which would prevent employers from reducing or eliminating health benefits for retirees or their dependents. The bill has been around for years but has attracted more attention since it appeared in a pension bill last year.
Representative Rosa DeLauro (D-Conn.) has reintroduced the Healthy Families Act (H.R. 2460), which would require employers with more than 15 employees to provide paid sick leave to employees who work more than 30 hours per week. Senator Edward Kennedy (D-Mass.) is sponsoring the legislation in the Senate (S. 1152). Senator Kennedy had considered an earlier version of the legislation a top priority at the start of the 2007-2008 legislative session, but the act stalled. Supporters hope the recent flu outbreak will bolster support for legislation that could encourage sick workers to stay home.
The Equal Employment Opportunity Commission (EEOC) has released an opinion letter saying an employer’s health risk assessment program violates the Americans with Disabilities Act (ADA). While many employers have moved forward with health risk assessments and other mandated wellness arrangements, the EEOC’s letter is a reminder of the importance of considering ADA implications before instituting a wellness program.
The legislative push for new fee disclosure requirements for defined contribution plans is gaining momentum on Capitol Hill. Key lawmakers have brought back fee disclosure bills they sponsored during the 2007-2008 legislative session. Representatives George Miller (D-Calif.) and Rob Andrews (D-N.J.) reintroduced the 401(k) Fair Disclosure for Retirement Security Act (H.R. 1984). Senators Herb Kohl (D-Wis.) and Tom Harkin (D-Iowa) reintroduced the Defined Contribution Fee Disclosure Act (S. 401). And on June 10, Representative Richard Neal (D-Mass.) introduced a modified version of the Defined Contribution Plan Fee Transparency Act (H.R. 2779).
Congress is in a flurry of decision making and debate as it scrambles to get health care reform bills ready before the August recess. The next few months will be critical as lawmakers try to work out important and contentious issues — including individual and employer mandates, a health insurance exchange, a public plan option and subsidies to help individuals and families purchase coverage. President Obama has asked Congress to present a bill for his signature by Oct. 1 — which would be an impressive feat, given the upcoming Independence Day and August recesses.
The recently released annual reports from the trustees on the financial state of Social Security and Medicare show the current deep recession is taking a toll on the financing of both programs. The adverse consequences will occur in the short run — as outlays rise somewhat and, more significantly, revenues from payroll taxes fall — and in the long run, as the trust funds are smaller than expected. While the unsustainability of Medicare — caused mainly by rapidly rising health care costs — has been well known for some time, the imminent likely cash flow shortfall in Social Security’s finances is a more surprising and possibly more important development.
In 2008, the value of investments held by defined benefit (DB) pension plans dropped precipitously. Provisions of the Worker, Retiree and Employer Recovery Act (WRERA), judicious elections of valuation methods and the recent IRS announcement on the “applicable month” will ameliorate the impact of the market decline on 2009 required contributions. However, DB plan sponsors also face a steep increase in their variable-rate premium (VRP), which is paid to the Pension Benefit Guaranty Corporation (PBGC) to insure vested employee pension benefits.
A fundamental principle of modern financial theory is the inherent trade-off between risk and reward. To be attractive, riskier projects or investments must hold out the prospect of bigger rewards. At the corporate level, this risk premium is reflected in lower share prices for stocks and higher interest rates for bonds. But risk premiums and credit spreads are linked to attitudes toward risk and returns. When investors and companies are more willing to accept higher risks in pursuit of greater rewards, risk premiums and credit spreads tend to fall and aggregate risk levels rise.
The IRS has finalized regulations addressing the nondiscrimination safe harbor for certain qualified automatic contribution arrangements (QACAs) in defined contribution plans. The regulations also explain how employees automatically enrolled under an eligible automatic contribution arrangement (EACA) can opt out during the first 90 days and obtain a refund of contributions without being subject to the 10 percent early withdrawal tax. The final regulations make some changes and clarifications to the proposed regulations.
The health care reform debate began taking shape in March and intensified in April. In early March, President Obama convened a forum at the White House, which was followed by regional forums across the country. Lawmakers hope to move legislation through the House and Senate during the summer and to pass final legislation this year. It is an ambitious agenda — and one with important cost, design, compliance and other implications for employer-sponsored health plans.
The Employee Free Choice Act (EFCA) — also referred to as "card check" — was reintroduced on March 10. The act would allow the National Labor Relations Board (NLRB) to certify a union once a majority of employees sign authorization cards and would establish strict and mandatory deadlines for reaching an initial bargaining agreement. But the act is currently stalled in Congress and lacks the 60 votes required to overcome a filibuster.
In the wake of the financial crisis, defined benefit (DB) funding relief has become a critical issue for many plan sponsors. The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) allowed sponsors of underfunded plans to rely on their 2008 funded status to avoid plan freezes, phased in the Pension Protection Act funding targets and made other changes. In late March, the IRS offered additional relief by permitting plan sponsors to use a reasonable interpretation of the law (in the absence of final regulations) in selecting a yield curve for determining plan liabilities. This will provide options that can reduce required DB plan contributions for the 2009 plan year and also dim prospects for further relief from Congress, at least in the near term. However, the potential for steep contribution hikes for the 2010 plan year may fuel a renewed push.
During this severe recession, many companies are trying to trim costs where they can to stay afloat, and the cost-cutting measures include layoffs, hiring freezes, furloughs, salary freezes and even salary reductions. Employers are also looking at ways to lower retirement plan costs. Many are opting for a short-term solution — cutting company contributions to defined contribution (DC) plans.
The Health Insurance Restrictions and Limitations Clarification Act of 2009 passed the House on March 31 with overwhelming support. The bill aims to provide more transparency about benefit exclusions in group health plans to health care consumers.
On March 23, the U.S. Department of the Treasury outlined its Public-Private Investment Program aimed at removing troubled assets from the balance sheets of financial institutions, thereby reopening credit flows. The Treasury Department is particularly encouraging pension plans, insurance companies and other long-term investors to participate.
Changes to the executive compensation disclosure rules made during Christopher Cox’s tenure as chairman of the Securities and Exchange Commission (SEC) vastly improved disclosures, particularly in the enhanced Compensation Discussion and Analysis (CD&A) section. However, in reviewing the 2008 stock price performance of our clients, we have found the reporting rules require these companies to significantly overstate the value of executive compensation earned. The overstatement will make the inevitable criticism of executive pay practices that arises each proxy season far worse than it should be. In an effort to blunt the critics, companies might shift from shareholder-friendly equity compensation programs to less effective cash-based programs.
The recession began in late 2007, and during the last quarter of 2008, there were 6,327 mass layoffs, generating 922,807 initial claimants for unemployment insurance. In January 2009 alone, 598,000 jobs were lost. But the statistics and news reports reflect only part of the picture. Many of those still working are receiving little or no increase in overall benefits and salary. In private industry, overall benefits and salary increased by 2.4 percent in 2008 — a 20 percent decline from the increase in overall benefits and salary in 2007, and a 40 percent drop from the increase in 2003. Expectations for benefits and pay increases are even less optimistic for 2009.
The IRS is allowing defined benefit (DB) plans to use a reasonable interpretation in selecting a yield curve for determining a plan’s liabilities for funding purposes. The guidance, which appeared in a March 31, 2009, special edition of Employee Plans News, says that “for a calendar year plan with a January 1, 2009 valuation date, the IRS will not challenge the use of the monthly yield curve for January 2009, or any one of the four months immediately preceding January 2009.”
During the latter months of 2008, Watson Wyatt projected year-end pension funding status for accounting purposes at various times, capturing different interest rate and market environments. Now Watson Wyatt has analyzed actual funded status for the 100 largest pension sponsors among publicly traded companies with year-end 2008 fiscal dates, as disclosed in their Securities and Exchange Commission (SEC) 10-K filings. During 2008, actual funding ratios in this group declined by an average of 28 percentage points.
On Jan. 26, 2009, in Kennedy v. DuPont Plan Administrator, the Supreme Court unanimously ruled that the beneficiary designation in the ERISA plan document overrides a divorce decree invalidating a spouse’s right to the other spouse’s pension benefits.
The U.S. Department of Labor (DOL) recently published Field Assistance Bulletin (FAB) 2009-01, which addresses good-faith compliance with the annual funding notice requirement for defined benefit plans under ERISA section 101(f). The FAB also contains a model annual funding notice for single-employer plans.
In Traylor v. Avnet Pension Plan, a District Court ruled that the elimination of the so-called whipsaw calculation by the Pension Protection Act of 2006 (PPA) does not quash claims for additional benefits based on pre-PPA lump-sum distributions.
On March 9, the U.S. Court of Appeals for the 9th Circuit denied a petition for an en banc (full court) rehearing of the case involving ERISA preemption of San Francisco’s Health Care Security Ordinance. On Sept. 30, 2008, a three-judge panel for the 9th Circuit ruled that ERISA does not preempt the ordinance, which requires employers to help fund the city’s universal health care program.
President Obama signed the American Recovery and Reinvestment Act of 2009 (H.R. 1) into law on Feb. 17. Otherwise known as the stimulus bill, the act makes numerous changes to the Trade Adjustment Assistance (TAA) program. In addition to expanding TAA eligibility, the act increases the health coverage tax credit (HCTC) and extends COBRA eligibility periods for TAA-eligible individuals and Pension Benefit Guaranty Corporation (PBGC) pension recipients.
On Feb. 4, President Obama signed the Children’s Health Insurance Program Reauthorization Act (H.R. 2) into law, just hours after it was cleared for his signature. The act extends and expands the State Children’s Health Insurance Program (SCHIP). Several of its provisions affect employer-sponsored group health plans by adding special enrollment rights and imposing new reporting and disclosure requirements.
President Obama’s budget proposal for fiscal year 2010 would establish a reserve fund and guiding principles for health care reform. The retirement proposals emerged during the president’s campaign: to establish automatic workplace pensions and expand the Saver’s tax credit. To bring in revenue, the president proposes to means-test Medicare Part D premiums, tax carried interest as ordinary income and "reform deferrals and other tax reform policies."
On Feb. 17, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law. The massive stimulus package of government spending and tax cuts will have direct and immediate effects on employer-sponsored health care plans. Under the act, the government will subsidize Consolidated Omnibus Budget Reconciliation Act (COBRA) continuing health care coverage for certain individuals who lose their jobs between Sept. 1, 2008, and Dec. 31, 2009, through a payroll tax offset arrangement with employers. Individuals involuntarily terminated between Sept. 1, 2008, and Feb. 16, 2009, who do not currently have a COBRA election in place must be given a second chance to enroll.
President Obama signed the American Recovery and Reinvestment Act of 2009 on Feb. 17. The bill imposes stringent limits on executive compensation for companies receiving assistance under the Troubled Asset Relief Program (TARP). It applies the restrictions retroactively to all financial institutions currently participating in the TARP (with some limited exceptions for employment agreements in place before Feb. 11).
Compensation committees have been reexamining their non-core compensation elements under the brighter light shone by the recent changes to the Securities and Exchange Commission (SEC) proxy disclosure rules. Severance and change-in-control (CIC) benefits seem to be attracting the most criticism these days, so many companies are reevaluating the business purpose and effectiveness of those first.
In August 2008, the Department of Labor (DOL) proposed regulations and a class exemption for investment advice provided to participants in 401(k) plans. On Jan. 16, 2009, the department issued final regulations, which generally follow the proposed regulations. The final regulations were intended to take effect March 23, 2009, but the DOL has delayed the effective date to May 22, 2009. The delay was in response to a Jan. 20 request from White House Chief of Staff Rahm Emanuel to delay Bush administration regulations pending review by the Obama administration.
Having gradually worked back up to full funding after challenging financial-market conditions earlier in the decade, pension plan sponsors find themselves deep in another financial crisis. And the effect on pension plan funding has sharpened concerns about pension risks.
The Department of Labor (DOL) recently issued final Family and Medical Leave Act (FMLA) regulations addressing the new military family leave entitlements under the National Defense Authorization Act (NDAA) for fiscal year 2008. There are two new types of military leave: (1) qualifying exigency and (2) military caregiver. The regulations took effect Jan. 16.
On Jan. 29, 2009, President Obama signed the Lilly Ledbetter Fair Pay Act — his first major bill — into law. The act expands the time frame during which individuals may file workplace discrimination claims and will affect both compensation practices and retirement plans.
Expert opinion has a relatively optimistic outlook, sees significant changes in investment and is very concerned about retirement security.
The 2009-2010 congressional term promises to be another busy session for benefit- and compensation-related issues. During the 2007-2008 term, Congress enacted important laws affecting health care, retirement, executive compensation, and the Family and Medical Leave Act (FMLA), and considered new issues such as the investment of pension fund assets. Some of the legislation had been debated for years and received a final push from new Democratic majorities in the House and Senate. Other bills and efforts represent attempts to deal with trouble in the broader economy — such as the financial crisis and rising food and energy costs.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (H.R. 1) into law. The massive stimulus package will subsidize COBRA coverage for some eligible qualified beneficiaries. The COBRA provisions will take effect soon after enactment and so require prompt attention and action from plan sponsors and administrators. Among other actions, employers must issue updated COBRA notices, provide new enrollment options and implement subsidy procedures.
In his book, “Critical,” published in 2008, Tom Daschle, former Senate majority leader, describes his views on the problems of the U.S. health care system and how they can be fixed. One of the co-authors of the book is Jeanne Lambrew, deputy director of the White House Office of Health Reform. The incoming Obama administration and the Democratic leadership in Congress have indicated strongly that health care reform is one of their top legislative priorities in the next year or so. The book sets out key analytical conclusions and proposals that might emerge during the upcoming health care reform debates.
The Worker, Retiree and Employer Recovery Act (WRERA), signed into law on Dec. 23, 2008, provides some funding relief to defined benefit (DB) sponsors affected by recent market declines, as well as temporarily waiving the minimum distribution rules for seniors. The act also makes permanent technical corrections to the Pension Protection Act of 2006 (PPA).
An earlier Watson Wyatt analysis of pension funding in 450 Fortune 1000 firms projected an 8 percent decline in their defined benefit (DB) pension funding status under an assumption that the market conditions of Oct. 15 would persist through 2008. But interest rates have fallen by more than 200 basis points since then, and we are now projecting a much bigger 29 percent drop in funding status.
In the weeks following the Nov. 4 elections, some of the lawmakers hoping to steer health care reform legislation through the Senate this year got a head start. On Nov. 12, 2008, Senate Finance Committee Chairman Max Baucus (D-Mont.) released a policy paper outlining his vision for comprehensive health care reform. In addition, some members of the Senate Finance Committee and the Senate Health, Education, Labor and Pensions (HELP) Committee met to discuss health care reform. These endeavors capped a year in which Congress set the stage for a major health care reform debate and suggest that lawmakers plan to get to work on the issue early in 2009.
The overlay of the dramatic decline in asset values of the last few months on the incipient tougher funding requirements of the Pension Protection Act of 2006 (PPA) has prompted widespread concern about the magnitude of the required contributions to single-employer defined benefit (DB) plans in 2009 and 2010.
As a new administration takes office, companies are preparing for what is anticipated to be a lively congressional debate on perceived inequities between compensation paid to corporate executives versus that paid to rank-and-file employees. While many new ideas are certain to emerge between now and then, we’ve seen a number of proposals, some of which have become part of the recent bank bailout legislation. In addition, shareholder activists have enjoyed some success in winning approval for “say on pay” shareholder votes.
Germany has built its retirement system on three pillars: Social Security, occupational pensions and individual retirement investments. In this article, we focus on the first two pillars; the third pillar is still relatively small in Germany.
Watson Wyatt recently completed its second annual analysis of stock option valuation assumptions and results under Statement of Financial Accounting Standards (SFAS) 123(R). From 2006 to 2007, the percentage of companies disclosing option fair values decreased from 74 percent to 73 percent, and the number disclosing stock compensation expense increased from 93 percent to 94 percent. Median stock compensation expense increased by 9 percent in 2007.
The U.S. Department of Labor (DOL) recently issued Interpretive Bulletin 08-1, which warns plan fiduciaries against selecting investments to promote public policy preferences. The notice specifically addresses economically targeted investments (ETIs), which create economic benefits apart from their investment return. The bulletin replaces Interpretive Bulletin 94-1 and clarifies and formalizes the DOL’s position.
The IRS has proposed regulations that would require plan sponsors to include more information in the participant notices explaining the consequences of failing to defer a distribution. The regulations also would extend from 90 days to 180 days the election period for waiving the Qualified Joint and Survivor Annuity (QJSA) and the period for distribution of notices addressing rollover eligibility and the tax treatment of distributions.
The U.S. Department of Labor (DOL) has finalized regulations establishing a safe harbor for the selection of an annuity provider and purchase of annuity contracts for defined contribution (DC) plans. The final regulations simplify the safe harbor proposed in September 2007 and clarify that the safe harbor is an optional means of satisfying the fiduciary standards of the Employee Retirement Income Security Act (ERISA). The regulations took effect Dec. 8, 2008.
Valuation models were the subject of intense debate during the drafting of “Statement of Financial Accounting Standards (SFAS) No. 123(R) — Share-Based Payment.” The exposure draft would have required companies to use a binomial lattice model (or something similar) to value employee stock option awards, but the final standard has allowed companies to use either a binomial lattice or a closed-form model, such as Black-Scholes, without preference.
As workers approach retirement, they must make decisions that will affect their long-term financial futures. One of these is choosing the form of distribution from their defined benefit (DB) plan and defined contribution (DC) account. While there might be several distribution options, for many DB plan participants it comes down to a choice between a life annuity and a lump sum. But how many older workers know enough to make an informed decision?
Watson Wyatt’s response to the Actuarial Standards Board’s request to comment on the substance of Actuarial Standards of Practice and the Actuarial Standards Board’s procedures.
Watson Wyatt’s response to the Actuarial Standards Board’s exposure draft of a proposed revision of Actuarial Standard of Practice No. 41, Actuarial Communications.
Plan sponsors and others are concerned about the business risks posed by pension plans, particularly in today’s unpredictable market conditions. In this case, “risk” refers to a company’s exposure arising from pension deficits. At the end of 2007, the ratio of pension plan deficits to market capitalizations (current risk) for FORTUNE 1000 firms was small due to the rise in funding levels.
The IRS has announced the annual cost-of-living and statutory adjustments of various dollar limits for employee benefit plans.
When he made his urgent request on Sept. 19 to Congress for the federal government to buy distressed assets, Treasury Secretary Henry Paulson stated that “[t]he underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. … These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them.”
Unsurprisingly, the value of pension plan assets has dropped sharply so far this year, and under Financial Accounting Standard (FAS) 158, funded status for 2008 will decline for most pension plans. However, today’s higher discount rates will soften the drop considerably. Despite the dramatic drops in the stock market during early October, we project only a moderate decline in average funding status — from 96 percent in 2007 to 88 percent in 2008.
In Notice 2008-82, the IRS clarifies a new rule under which employers may allow reservists to cash out unused funds from their health flexible spending arrangements (FSAs) after being called to active military duty. The new rule is part of the Heroes Earnings Assistance and Relief Tax Act of 2008, which was enacted June 17. Ordinarily, distributions from health FSAs are allowed only to reimburse substantiated medical expenses, and the participant forfeits any funds remaining at the end of the plan year.
A ruling by the 9th U.S. Circuit Court of Appeals emphasizes the importance of compliance with the U.S. Department of Labor’s regulations on delivering plan documents electronically. In Gertjejansen v. Kemper Insurance Companies, Inc., the court applied a stricter standard of review to a claims denial because the employer’s delivery of the summary plan description (SPD) did not meet DOL requirements.
On Oct. 3, President Bush signed the Emergency Economic Stabilization Act (EESA) of 2008 into law. The act is aimed at stabilizing the nation’s turbulent financial and credit markets by authorizing the secretary of the Treasury to purchase troubled mortgages, mortgage-backed securities and other assets from financial institutions, including pension plans.
Watson Wyatt’s response to the Cost Accounting Standards Board’s request to provide comments to the Board as it reviews and revises the current Cost Accounting Standards (CAS) 412 and 413 to develop the CAS Pension Harmonization Rule required under the Pension Protection Act of 2006 (PPA).
On Sept. 30, the U.S. Court of Appeals for the 9th Circuit ruled that ERISA does not preempt San Francisco’s Health Care Security Ordinance, which requires employers to help pay for the city’s universal health care program. The Golden Gate Restaurant Association (GGRA) challenged the employer spending requirement, claiming ERISA preemption. The appeals court disagreed.
The U.S. Department of Labor (DOL) recently added a new section to its enforcement manual concerning gifts and entertainment provided to plan fiduciaries. The section directs DOL investigators to determine whether gifts, meals and entertainment (including expenses associated with educational conferences) violate ERISA’s fiduciary standards.
The 7th U.S. Circuit Court of Appeals recently ruled that the American Family Insurance defined benefit plan did not violate participant consent requirements by giving terminating workers a choice between immediate lump sum distributions and immediate or delayed annuities. Participants claimed that offering lump sums on an immediate-only basis imposed a significant detriment on participants who turned down the immediate distribution. The court disagreed.
Two recent IRS private letter rulings indicate that sponsors cannot use surplus assets from a terminating defined benefit plan for matching contributions under a defined contribution replacement plan. The surplus assets can be allocated only as a nonelective contribution.
After more than a decade of discussion, Congress has finally enacted legislation to mandate full parity for mental health and substance abuse benefits. The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act became law on October 3 when President Bush signed the Emergency Economic Stabilization Act, a broad bill aimed at stabilizing U.S. financial markets.
In the world of executive compensation, Congress has an inglorious history of passing laws to restrict compensation that achieve the opposite effect. Commentators often cite the million-dollar pay cap (in tax code section 162(m)) and the “golden parachute” excise tax (in section 280G) to prove the point. Rather than reduce executive compensation, companies simply shifted to stock option compensation in the 1990s (which is not subject to the million-dollar pay cap), and significant golden parachute payments (many that include tax gross-ups) remain very common.
Mexico is subject to the same demographic winds that have driven pension reforms around the world. In 1997, Mexico established mandatory individual accounts to (eventually) replace its traditional social security program. Under the new system, private-sector workers choose an investment vehicle from funds offered by approved investment vendors. Contributions are automatically deducted from their paychecks.
President Bush signed “Michelle’s Law” on Oct. 9. Under the new law, health plans must allow college students who take a leave of absence or reduce their class load because of illness to retain their dependent status under their parents’ health plan for up to one year. The act takes effect for medically necessary leaves of absence that begin in plan years beginning on or after Oct. 9, 2009 (Jan. 1, 2010, for calendar-year plans).
In an effort to encourage fuel-free commuting, the recently enacted Emergency Economic Stabilization Act (EESA) includes a provision allowing fringe benefits for bicycle commuters. Under the act, employers may provide tax-free reimbursement of up to $20 a month to employees for qualified bicycle commuting expenses.
On Oct. 7, President Bush signed the Fostering Connections to Success and Increasing Adoptions Act of 2008 (H.R.6893). The act focuses primarily on promoting adoption, but it also amends the definition of a qualifying child in the Internal Revenue Code. The definition is used to determine eligibility for certain tax benefits, such as the dependency exemption, the child tax credit, the earned income tax credit and the dependent care tax credit. In addition, it is referenced by many employer-sponsored health care and dependent care plans.
In Revenue Procedure 2008-48, the IRS announces some exceptions to its usual policy regarding children of divorced or separated parents.
The IRS has delayed – again – the effective date of Revenue Ruling 2006-57, which confirmed that employers could use debit, credit or smart cards to deliver qualified transportation fringe benefits and outlined the required procedures for doing so. The ruling was supposed to take effect Jan. 1, 2008, but was delayed for a year to give transit systems more time to implement the required technology. Apparently some transit systems are still not ready. The revenue ruling is now slated to take effect Jan. 1, 2009, but employers and employees may rely on the ruling in the meantime.
By 2009, roughly 30 percent of large employers will have an onsite health care facility, according to research performed jointly by Watson Wyatt and the National Business Group on Health. While these employer-provided onsite facilities serve a useful purpose, many employers and vendors are unaware of the welfare benefit implications they entail.
On Aug. 27, the Securities and Exchange Commission (SEC) voted unanimously to propose a road map for shifting U.S. companies from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS). The move to a global accounting language is intended to improve the comparability and transparency of financial reporting worldwide. It will also have important implications for U.S. employers in how they account for employee benefit and stock plans.
U.S. tax law generally treats transfers from foreign pension schemes to U.S.-qualified plans as taxable distributions. Although some advisers had been claiming the U.S.-U.K. tax treaty altered that principle, an internal IRS memo sets the record straight: Rollovers from one plan to another are permitted only if both are U.S.-qualified plans. The memo has no legal force, but it represents internal IRS policy and thus is likely to guide IRS enforcement policy.
The U.S. Department of Labor (DOL) has proposed new disclosure rules, which are intended to help 401(k) plan participants make informed retirement savings decisions. Under the proposal, companies offering 401(k) and other participant-directed individual account plans would have to disclose summary information, including fee and expense information, for all investment options under the plan.
Congress and policy and industry experts are gearing up for next year’s health care reform debate. On Capitol Hill, lawmakers and key committees are holding hearings and listening to experts. A recent hearing conducted by the Senate Finance Committee focused on the tax treatment of health care benefits. Other recent hearings have looked at state reform — especially how ERISA preemption might be impeding reforms.
During their months on the presidential campaign trail, Sens. Barack Obama (D-Ill.) and John McCain (R-Ariz.) have outlined competing visions for a reformed U.S. health care system. Both candidates aim to increase the number of Americans with health coverage, reduce costs and improve quality, but they take different approaches. Sen. Obama would create a new national plan, expand existing public programs and impose mandates. Sen. McCain opposes mandates and instead proposes tax changes and market reforms.
Pension funding has been much in the news during the last decade and over the last several years, most of the news has been positive. A Watson Wyatt analysis of defined benefit plan funding for the FORTUNE 1000 shows that plan funding improved again in 2007, and many pensions ended their fiscal year with significant surpluses. Funding received a boost from favorable asset returns and an increase in interest rates during 2007.
The IRS has updated the Employee Plans Compliance Resolution System (EPCRS), giving sponsors of defined benefit and defined contribution plans more time to self-correct operational errors. The new rules take effect Jan. 1, 2009, but sponsors may apply them after Sept. 2, 2008.
The IRS has finalized the regulations proposed in 2007 regarding the mortality assumptions used to determine present values for minimum funding purposes for defined benefit (DB) pension plans under the Pension Protection Act of 2006.
The IRS has ruled that transferring a qualified plan to an unrelated taxpayer for any purpose other than transferring assets, operations or employees violates the exclusive benefit rule. While the new ruling shuts down the prospect of being able to "sell" a company’s pension, the U.S. Department of the Treasury has suggested principles for doing so that could form the basis of future enabling legislation. However there has been little interest in such legislation so far from Capitol Hill.
The skyrocketing price of oil and gasoline was a key issue for Congress during its summer session. At the beginning of 2008, a barrel of crude oil cost close to $100, and a gallon of gasoline averaged about $3.05. By June, the average motorist was paying more than $4 per gallon for gas, prompting Congress to take a closer look. One discussion focused on whether speculation in the commodity markets is fueling higher prices.
Academics, policymakers and the media have been sounding alarms about shortfalls ahead for Social Security and Medicare for some time now. And many Americans have taken their warnings to heart, according to Watson Wyatt’s 2007 U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans. Roughly 61 percent of older workers — those 50 to 64 years old — are not confident of receiving unreduced Medicare benefits, and 52 percent are not confident of receiving unreduced Social Security benefits, according to the survey.
The Social Security Administration (SSA) recently unveiled its revamped Social Security benefit estimator on its Web site. The new online calculator allows users to vary the inputs. For example, people can instruct the calculator to base its estimates on higher (or lower) future earnings and different retirement ages. These options should enable users to arrive at more accurate estimates as well as to consider the financial effects of different scenarios, such as retiring earlier or later, or taking a few years off work.
The IRS has proposed regulations on the health savings account (HSA) comparability requirements under the Tax Relief and Health Care Act of 2006. The regulations also explain the penalties for making contributions that are not comparable, which include a 35 percent excise tax.
From 2007 to 2008, the proportion of defined benefit (DB) plan sponsors in the FORTUNE 1000 that had a frozen plan increased by five percentage points, according to a recent Watson Wyatt study. The rate of annual increase in the total number of sponsors of frozen DB plans climbed sharply from 2004 to 2006 — when it peaked — and has declined since then.
The IRS has released guidance addressing the tax treatment of benefit transfers from either a U.S.-qualified plan to a non-U.S.-qualified foreign plan, or from a plan qualified under both U.S. and Puerto Rico law (a “dual-qualified” plan) to a plan qualified only under Puerto Rico law. The IRS considers both of these transfers to be taxable distributions.
In Notice 2008-52, the IRS provides guidance on changes to the contribution limits for health savings accounts (HSAs) enacted by the Health Opportunity Patient Empowerment Act of 2006.
Employees may now make a one-time, tax-free transfer from their individual retirement account (IRA) to their health savings account (HSA). As long as the transfer complies with the new rules, the distribution from the IRA will neither be included in the employee’s gross income nor subject to the 10 percent penalty tax. Transferred amounts may not exceed the employee’s annual HSA contribution limit. The new rules take effect for taxable years beginning after Dec. 31, 2006.
In Revenue Ruling 2008-29, the IRS provides guidance on when and how to withhold income taxes from supplemental wages such as commissions, severance pay and signing bonuses. The ruling presents different scenarios to clarify issues that have sometimes puzzled payroll departments.
The IRS has proposed regulations to permit government retirement plans to rely on a reasonable good-faith standard when applying the minimum distribution rules under section 401(a)(9).
The IRS has issued final regulations clarifying the “counting nights” rule used to identify which parent can claim a child as a dependent after a divorce or separation. The regulations took effect July 2, 2008.
On July 30, 2008, the House passed “Michelle’s Law” (H.R.2851), which would enable full-time students on a medically necessary leave of absence to keep their health insurance for up to one year. Under most health plans, college-age dependent students who are not enrolled in school full-time are no longer eligible for coverage under their family’s health insurance plan. If the bill becomes law during this legislative session, it would apply to medically necessary leaves of absence beginning on or after Jan. 1, 2010.
On June 25, the House passed the ADA Amendments Act of 2008 by a vote of 402-17. The act would overturn U.S. Supreme Court decisions that have narrowed the range of disabilities that qualify for protection under the Americans with Disabilities Act (ADA). It would also establish that mitigating measures — such as hearing aids — do not affect the determination of disability. If the act passes, it will increase the number of workers who qualify for ADA protection.
The 2nd U.S. Circuit Court of Appeals ruled that under pre-Pension Protection Act of 2006 (PPA) law, the cash balance plans of Equitable Life Assurance Society (now AXA Equitable) and Verizon Communications are not inherently age discriminatory. This decision resolves a split among District Courts in the 2nd Circuit. Moreover, a federal District Court in Colorado held that Gannett Co.’s pension equity plan (PEP) is not inherently age discriminatory. The court decisions are good news for employers that sponsored hybrid plans before the PPA’s hybrid provisions took effect.
In Notice 2008-59, the IRS provides much-anticipated guidance on health savings accounts (HSAs). The guidance clarifies which onsite health clinic services cancel out HSA eligibility and when employers can recoup HSA contributions, as well as addressing other eligibility issues, high-deductible health plans (HDHPs), contributions, distributions and prohibited transactions. While some of the information restates earlier guidance, the notice fills in some gaps and provides new guidance as well.
Congress overrode President Bush’s veto to enact the Medicare Improvements for Patients and Providers Act (H.R.6331) on July 15, 2008. The act delays scheduled reductions in physician reimbursements, establishes incentives to encourage physician quality reporting and electronic prescribing, improves coverage for preventive services, expands low-income health programs and enhances pharmacy access.
Since the passage of the Pension Protection Act of 2006 (PPA), lawmakers have introduced several bills to correct minor technical glitches and clarify legislative intent. Most of the pending bills would permit 24-month asset smoothing. They also would require a defined benefit plan’s target normal cost to reflect both projected plan-related expenses that will be paid out of plan assets and mandatory employee contributions.
Watson Wyatt’s response to the Actuarial Standards Board’s request to comment on the Actuarial Standard of Practice No. 27, Selection of Economic Assumptions for Measuring Pension Obligations
Watson Wyatt’s response to the Internal Revenue Service’s request to comment on Proposed Treasury Regulations interpreting section 430 of the Internal Revenue Code, Determination of Minimum Required Pension Contributions.
The Genetic Information Nondiscrimination Act (GINA) has important implications for group health plans. The act’s restrictions on the collection and use of genetic information and privacy protections will affect many aspects of plan operations, including health risk assessments and vendor relations among others. To prepare, plan sponsors should review the new requirements, identify all practices that involve genetic information and determine whether changes will be necessary.
Financial Accounting Statement (FAS) 106 requires companies to report and accrue their obligations for postemployment benefits — including retiree health plans — for current and future retirees. The rate of growth in the cost of health care benefits, which must be projected well into the future, can be the most significant assumption in calculating the obligation, a present-value item. So the model and assumptions used in these projections are critical.
The IRS has proposed regulations confirming that “greater of” conversions do not violate the accrual rules. The proposed rules resolve a controversy that arose during the IRS determination letter process, when the IRS challenged cash balance plans that used a greater-of conversion method to transition from a traditional defined benefit plan. The IRS challenge sparked significant push-back from the plan sponsor community and Capitol Hill, prompting the IRS to temporarily suspend the policy.
The White House sent a memorandum to regulatory agencies on May 9 setting a deadline for proposed and final regulations in the last year of President Bush’s administration. The memo states that “except in extraordinary circumstances, regulations to be finalized in this Administration should be proposed no later than June 1, 2008, and final regulations should be issued no later than November 1, 2008.” The memo does not clarify what constitutes “extraordinary circumstances.”
Watson Wyatt’s response to the Actuarial Standards Board’s request to comment on certain revised sections of the Introduction to the Actuarial Standards of Practice.
On May 20, the House approved the Airline Flight Crew Technical Corrections Act (H.R. 2744) by a vote of 402-9. The act would enable more flight attendants and crew members to qualify for leave under the Family and Medical Leave Act (FMLA). These employees would qualify for unpaid leave after working at least 60 percent of the employer’s full-time schedule or the equivalent during the 12 months preceding the leave.
Overall compliance with the U.S. Securities and Exchange Commission’s (SEC’s) enhanced disclosure rules continued to improve during the 2008 proxy season, according to Watson Wyatt’s second annual Report on Proxy Statement CD&A Compliance completed in 2008.
President Bush signed the Heroes Earnings Assistance and Tax Relief Act (H.R.6081) into law on June 17, 2008. The act eases withdrawals from retirement accounts and health flexible spending accounts (FSAs), and protects survivor and disability benefits for men and women in the military and their survivors. It also addresses the treatment of differential wage payments, imposes new tax and withholding requirements on the property of some expatriating individuals and extends the Mental Health Parity Act. The effective dates vary by provision — some are retroactive or take effect immediately and will require immediate attention from plan sponsors.
After returning from the Memorial recess, Congress will resume its focus on tax extenders, Medicare reform, alternative minimum tax (AMT) relief and other legislation that will require revenue offsets. Some of the revenue-raisers on the agenda would affect deferred compensation, hedge funds and private equity funds, and Medicare.
Journalists and researchers have focused considerable attention on the baby boomers’ retirement readiness, as well as the retirement prospects for later generations. While expert opinion provides a valuable perspective, the expectations of American workers themselves are also important. Rising health costs, the economic downturn, the spiraling cost of gas and the slumping housing market have eroded many workers’ confidence in a comfortable retirement future. Inadequate retirement and health benefits may exacerbate workers’ worries, prompting many to delay retirement.
Every year in early spring, the trustees of Social Security and Medicare issue detailed reports about the current and projected future financial status of these enormous (and burgeoning) social insurance programs. Although changes in status are generally moderate from year to year, there are exceptions. Moreover, in the face of obviously needed reforms for both systems, the annual reports serve to remind the public and their elected officials of the importance of the programs, especially to public and private finances. This article reviews briefly the results of this year’s reports and comments on their implications for employer sponsors of retirement and health plans.
Watson Wyatt has been comparing rates of return between defined benefit (DB) and defined contribution (DC) plans for more than 10 years. This most recent comparison finds that between 1995 and 2006, DB plans outperformed DC plans by an average of 1 percent per year. Earlier studies also found that, over time, DB plans attained higher returns than did 401(k) plans.
Watson Wyatt’s response to the Actuarial Standards Board’s request to comment on the deviation language used for all Actuarial Standards of Practice.
Tracking the flow of money into and out of different types of retirement plans can identify broad and sometimes dramatic trends and behavior. For example, benefit disbursements from defined contribution (DC) plans are more erratic than those from defined benefit (DB) plans, partly because DC disbursements fluctuate along with the stock market. Contributions to DB plans have been much more erratic than those to DC plans, due to changes in funded status driven by market fluctuations and the operation of funding laws that tightly controlled permitted and required contributions. So in some years DB plan sponsors that wanted to contribute to their plans could not, while in other years sponsors were forced to contribute large amounts.
Can the widely noted recent stagnant salary growth for the average U.S. worker and increased income inequality be explained, in significant part, by the rapidly rising costs of health care benefits? This article argues that they can.
President Bush signed the Genetic Information Nondiscrimination Act (H.R.493) into law on May 21, 2008. The Senate approved the act by a vote of 95-0 on April 24, and the legislation cleared the House by a vote of 414-1 on May 1. The legislative goal is to ensure that people do not avoid genetic testing or counseling because they fear later health or employment discrimination.
On April 15, 2008, the IRS published proposed regulations in the Federal Register on calculating and paying minimum required contributions for defined benefit plans, and the penalties for failing to meet the requirements. The rules address required quarterly contributions and the use of credit balances.
The Equal Employment Opportunity Commission (EEOC) has proposed amending the regulations that govern disparate impact claims under the Age Discrimination in Employment Act (ADEA). The new rules would permit employment practices that have a disparate impact on older workers as long as the practice was based on a “reasonable factor other than age.” The current rules require employers to meet a narrower “business necessity” standard.
Fee disclosure is receiving considerable attention from the media, lawmakers and regulators. Legislators have held hearings to consider the appropriate disclosures for plan sponsors and plan participants, and have introduced several bills. Although the legislative outcome is uncertain, the regulatory changes are moving along. In December 2007, the U.S. Department of Labor (DOL) released proposed regulations on sponsor-level disclosure, and the department intends to propose regulations on participant-level disclosure this year. And the U.S. Securities and Exchange Commission (SEC) has introduced a simplified prospectus that would apply to all investment vehicles.
Under the Taxpayer Assistance and Simplification Act (H.R.5719), health savings account (HSA) trustees — typically banks — would be required to substantiate that HSA distributions were for health care-related expenses. Unsubstantiated withdrawals would be included in the account holder’s gross income and subject to a 10 percent penalty. The new rules would take effect for HSA distributions after December 31, 2010.
The IRS has proposed regulations regarding the notices defined benefit plan sponsors must provide as they comply with changes to funding rules enacted by the Pension Protection Act of 2006 (PPA). Under ERISA section 204(h), sponsors must give participants 45 days notice (or 15 days notice for multiemployer plans) of plan amendments that significantly reduce the rate of future benefit accrual. The proposed regulations clarify the timing requirements and list other notices that will satisfy the 204(h) rules so sponsors will not need to provide multiple notices.
Watson Wyatt’s response to the Financial Accounting Standards Board’s Proposed FSP FAS 132(R)-a, Employers’ Disclosures About Postretirement Benefit Plan Assets.
On March 12, the House approved the Pension Protection Technical Corrections Act (H.R.3361), which would make important corrections and clarifications to the Pension Protection Act of 2006 (PPA).
As baby boomers retire, they must decide how to receive payouts from their defined benefit (DB) plans, defined contribution (DC) plans and personal savings. Many pension experts believe that life annuities are the best way for retirees to ensure that they don’t run out of money. But most people do not choose annuities, and experts are wondering why. To find out, Watson Wyatt Worldwide asked a national panel of older workers and recent retirees about their payout and risk preferences, retirement decisions and related issues.
The U.S. Department of Labor (DOL) has proposed a safe harbor for deposits of employee contributions to pension plans (including 401(k) plans) with fewer than 100 participants. Employers sponsoring such plans would have seven business days after the employer received or withheld the contribution to make the deposits.
On January 9, 2008, a federal appeals court ruled that San Francisco’s health care ordinance could get under way while the court considers the ERISA preemption challenge. The mandate requires employers to spend specific amounts on health care for or on behalf of their employees.
Health care reform is a hot topic right now. The presidential candidates have made speeches, debated and discussed health care at voter forums. All three major party candidates have issued proposals aimed at increasing access or coverage, reducing costs and improving quality.
In Notice 2008-30, the IRS answers questions about certain distribution-related provisions of the Pension Protection Act of 2006 (PPA) that took effect in 2008. The notice addresses interest rate assumptions for lump sum distributions, rollovers from eligible retirement plans to Roth IRAs, qualified optional survivor annuity (QOSA) requirements and gap-period earnings.
The International Accounting Standards Board (IASB) has published a “preliminary views” paper that would make a number of changes to the way retirement benefits are accounted for on employer financial statements. The proposal would result in significant changes on both the balance sheet and income statement for companies that sponsor these types of plans.
Mental health parity reform moved another step closer to enactment when the House approved the Paul Wellstone Mental Health and Addiction Equity Act (H.R.1424) on March 5. The Senate approved the Mental Health Parity Act (S.558) – a version supported by the business community and mental health advocates – by unanimous consent in September 2007.
The U.S. Department of Labor (DOL) has proposed new regulations for the Family and Medical Leave Act (FMLA). Although employers were hoping for significant guidance, these proposed regulations provide mostly clarifications and minor changes.
Global accounting standards might be adopted much sooner than anyone expected (within years versus decades). Recent events and public statements from various accounting constituencies suggest an intensified focus on convergence and an uncertain future for the U.S. Financial Accounting Standards Board (FASB).
Corporate directors are considerably more optimistic than institutional shareholders about the effectiveness and future of the U.S. executive pay model. Both groups think the new proxy disclosures have improved transparency but need more work. These and other findings are from a new study by Watson Wyatt Worldwide, 2008 Report on Directors’ and Investors’ Views on Executive Pay and Corporate Governance.
Watson Wyatt’s response to the Internal Revenue Service’s request to comment on Proposed Treasury Regulations interpreting section 430 of the Internal Revenue Code, Measurement of Assets and Liabilities for Pension Funding Purposes.
Watson Wyatt’s response to the Internal Revenue Service’s request for comments on proposed statutory hybrid plan regulations.
Medicare and Medicaid legislation has seen considerable debate this legislative session. The Medicare, Medicaid and SCHIP Extension Act of 2007 (S. 2499) delayed scheduled cuts in physician reimbursements for six months, reauthorized the State Children’s Health Insurance Program (SCHIP) for 18 months and required employer-provided health plans to provide enrollment data to the secretary of Health and Human Services.
A Financial Accounting Standards Board (FASB) proposal made public on March 18, 2008, would significantly increase the amount and types of disclosures employers are required to file regarding postretirement benefits, such as pensions and retiree medical plans. These changes are proposed to take effect for fiscal years ending after December 15, 2008.
In January, the IRS released a private letter ruling (PLR) calling into question the tax deductibility of pay-for-performance plans that pay out at target at “not for cause” or “good reason” terminations or at retirement. Had that ruling been the last word, many companies would have had to scramble to change their financial statements and their plans. Thankfully, the IRS subsequently issued a revenue ruling that ratchets down the urgency.
The U.S. executive pay-for-performance model is not only viable, it is essential to the continued success of corporations and the U.S. economy.
President Bush has proposed a budget for fiscal year 2009. Many of the budget’s health care and retirement proposals appeared in earlier budget submissions, such as replacing the tax exclusion for employer-provided health insurance with a standard tax deduction, and establishing a new retirement savings plan to replace existing defined contribution plans. These proposals failed to gain legislative traction in earlier years and are unlikely to do so this year either.
Recent recommendations by the U.K. Accounting Standards Board (ASB) could have significant effects on pension accounting worldwide if the International Accounting Standards Board (IASB) and U.S. Financial Accounting Standards Board (FASB) follow the same line of reasoning. The ASB’s recommendations would substantially increase the reported pension liabilities that appear on the balance sheet.
The IRS recently modified its position on the permissibility of pretax payments for health coverage under a cafeteria plan for domestic partners and others who are not tax dependents. Formerly, employees had to pay taxable health benefits with after-tax dollars. Now, employees may pay for both nontaxable and taxable health benefits with pretax dollars, and the cost of the taxable benefits will be imputed to employees’ gross incomes.
The Equal Employment Opportunity Commission (EEOC) released final regulations that allow employers to coordinate retiree health benefits with Medicare benefits. Although the EEOC decided to approve this long-standing employer practice some time ago, the agency had been blocked from issuing these final rules by litigation brought by AARP. Under the final rules, employers can eliminate or reduce retiree health benefits when retirees become eligible for Medicare without violating the Age Discrimination in Employment Act (ADEA).
In a recent Field Assistance Bulletin (FAB), the U.S. Department of Labor (DOL) differentiates exempt from nonexempt supplemental health coverage under the Health Insurance Portability and Accountability Act (HIPAA). The DOL is responding to concerns about some insurance products being improperly marketed as HIPAA-exempt supplemental plans.
The IRS recently released a revenue ruling that addresses whether “greater of” transitions in cash balance conversions violate the accrual rules. In a greater-of transition, participants receive benefits under whichever formula gives them the larger benefit – the previous plan formula or the cash balance formula.
Watson Wyatt’s response to the Department of Labor’s request to comment on the Employee Benefit Security Administration’s proposed amendment to the regulations under ERISA 408(b)(2).
During the 1990s, both Canada and the United States were facing many of the same challenges to their Social Security programs. But while the United States has continued on the same course, with no changes made – despite continued projections of severe shortfalls ahead – Canada began partially prefunding its public pension plans with real assets in 1998. Would a similar approach be possible or appropriate for the financially challenged Social Security program in the United States?
Pension plan funding has been up and down during the last seven years. In many firms, the pension plan surpluses of the late 1990s turned into deficits early in the next decade, as both the stock market and interest rates declined. Then in 2006, an inverse of the earlier “perfect storm” delivered strong asset returns and higher discount rates for pension liabilities. These market trends helped to bring pension plans’ aggregate funding status back to full financial health.
Employees may take up to six months of job- and benefit-protected leave to care for family members injured in the line of active military duty. In certain other circumstances, workers may take up to 12 weeks of leave when a family member is on active duty or has been notified of an impending call to active duty.
The U.S. Department of Labor (DOL) has released proposed regulations that require certain service providers to disclose information about fees and compensation – both direct and indirect – to plan fiduciaries.
Pension fiduciaries may not engage in politically motivated proxy activity, according to an opinion letter released by the U.S. Department of Labor (DOL). The letter states that fiduciaries may not introduce or support proxy resolutions unless doing so would provide a clear economic benefit to the plan. The DOL was responding to an inquiry from the U.S. Chamber of Commerce about whether a shareholder activism campaign organized by an employee organization to promote its health care agenda – and reportedly to seek disclosure of political contributions from corporate directors and officers to candidates who oppose that agenda – was compatible with ERISA.
The U.S. Department of Labor’s Employee Benefits Security Administration, in conjunction with the IRS and the Pension Benefit Guaranty Corporation, recently finalized new Form 5500 regulations, making a few changes to the proposed version.
The IRS has proposed regulations to implement the Pension Protection Act of 2006 (PPA) requirements for hybrid plans. The regulations expand on the transitional guidance released last year in Notice 2007-6, clarifying some issues and asking for comments on others.
Mental health parity. 401(k) fees. Deferred compensation. COBRA. Carried interest. Medicare. Expatriate taxation. These are just some of the benefit and compensation issues Congress discussed last year. During 2007, lawmakers evinced a continuing desire to enact legislation that would affect employer-sponsored health, retirement and compensation programs – yet very little of that legislation passed. The year also marked the emergence of new issues that would affect plan investments.
Pension systems in developed countries are often described as having three pillars: Social Security, employer-sponsored pensions and personal savings. In the Netherlands, the first two pillars are unusually comprehensive and widespread among workers. Nonetheless, employer-sponsored pensions have undergone significant changes recently, both in benefit structures and in regulatory oversight.
Defined contribution (DC) plan participants in the private sector who are younger, better-educated, more risk-tolerant, and have an employer-sponsored defined benefit (DB) plan and a longer planning horizon, generally hold a larger share of equities in their DC accounts than other participants. Being married and in good health reduces the likelihood that a household will avoid equities altogether. These and other findings are from Watson Wyatt’s recent analysis into asset allocations in DC plans.
The Pension Protection Act of 2006 (PPA) required the U.S. Department of Labor (DOL) to provide fiduciary protection for default investments in participatory defined contribution plans. The DOL proposed default investment guidance in 2006 and now has finalized the qualified default investment alternative (QDIA) regulation.
The House and Senate approved separate versions of legislation to grant tax relief to members of the U.S. armed forces. The Senate’s Defenders of Freedom Tax Relief Act of 2007 and the House’s Heroes Earnings Assistance and Relief Tax Act have similar or identical provisions addressing retirement plan benefits, differential pay and other tax issues for workers who are called to active military duty.
The IRS has issued proposed regulations on automatic contribution arrangements under the Pension Protection Act of 2006 (PPA). The proposed regulations address the special 401(k) and 401(m) nondiscrimination test safe harbor for qualified automatic contribution arrangements (QACAs).
Like in the United States – and for many of the same reasons – there has been a shift in the United Kingdom in the provision of retirement benefits to workers by private-sector employers from defined benefit (DB) to defined contribution (DC) plans. The change has unfolded differently, however, in the two countries.
Under the Pension Protection Act of 2006, defined benefit plans will no longer be required to furnish a summary annual report (SAR) to participants and beneficiaries. Defined benefit plans will file their first annual funding notice in 2009 for the 2008 plan year, which will replace the SAR.
In what is becoming an annual ritual, the IRS delayed the requirement for companies to report nonqualified deferred compensation (NQDC) plan deferrals on Forms W-2 and 1099 for another year.
During the past few months, the IRS has issued three notices extending the deadlines for complying with various rules under section 409A. Because the guidance has been issued piecemeal and the effective date for the final regulations has been delayed, it is difficult to reconcile all the implications.
On October 25, House Ways and Means Chairman Charles Rangel (D-New York) introduced the Tax Reduction and Reform Act of 2007, which he describes as the most comprehensive tax legislation since the Tax Reform Act of 1986. The bill would permanently repeal the alternative minimum tax (AMT), treat most tax-carried interest as ordinary income, modify the unrelated-business-income tax rules and reduce the corporate tax bill.
The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has released new 5500 forms for 2007 plan years. The new (and last) Schedule B has been updated for certain Pension Protection Act of 2006 (PPA) changes that became effective in 2007.
The House has approved legislation that could extend continuing health care coverage to trade-displaced workers for 10 years or more. The act also would increase the tax credits available to help such workers pay for COBRA continuation coverage or other health care coverage.
Fair values as a percentage of underlying stock values dropped from 39 percent in 2004 to 33 percent in 2006 among the FORTUNE 1000, largely because of lower expected volatility. The overwhelming majority of these companies – 85 percent -- used the Black-Scholes formula to value their options – only 14 percent used the more complicated lattice model (1 percent used both). Expected option life assumptions generally have remained very stable from year to year.
Representatives Earl Pomeroy (D-North Dakota) and Eric Cantor (R-Virginia) have introduced legislation (H.R.3868) to delay the effective date of certain provisions in the Pension Protection Act of 2006 (PPA).
Mental health parity reform has passed the three House committees with jurisdiction, and the House is likely to approve the Paul Wellstone Mental Health and Addiction Equity Act (H.R.1424) within weeks.
The Pension Protection Act of 2006 (PPA) calls for the use of corporate bond yields rather than 30-year Treasury yields to calculate minimum lump sums payable from defined benefit plans that define benefits in terms of annuities.
The IRS has announced the annual cost-of-living and statutory adjustments of various dollar limits for employee benefit plans.
Senator John Kerry (D-Massachusetts) and Representative Rahm Emanuel (D-Illinois) have introduced legislation that would prohibit offshore deferred compensation. Under the Offshore Deferred Compensation Reform Act, compensation deferred under a nonqualified deferred compensation (NQDC) plan of a foreign corporation would be treated as taxable income unless there was a substantial risk of forfeiture.
Senator Carl Levin (D-Michigan) has introduced legislation to change the corporate tax treatment of stock options. Under the Ending Corporate Tax Favors for Stock Options Act (S.2116), companies could not deduct more than the amount they had claimed as an expense against earnings, and the expense would have to be recognized and deducted in the same period. Stock options could no longer be considered performance-based compensation and would be subject to the $1 million compensation limit.
If today’s defined contribution approach to saving for retirement relies too heavily on workers’ doing the right things at the right times, and being lucky besides, maybe it’s time to restructure traditional pensions for the 21st century. To make defined benefit plans more viable, we need to minimize the risks that are scaring off sponsors but retain the benefits that make these plans so valuable.
The House approved the Tax Collection Responsibility Act (H.R.3056) on October 10. The legislation would prohibit the IRS from using private debt collectors. It also would impose so-called mark-to-market taxation on expatriates, which would affect plan administration and communication for employers.
In early October, Congress continued to focus on 401(k) fees. On October 4, the House Education and Labor Committee held a hearing on the 401(k) Fair Disclosure for Retirement Security Act (H.R.3185), which committee Chair George Miller (D-California) introduced in July.
Legislation to expand the mental health parity requirements continues to move forward. In the House, the Energy and Commerce Committee approved the Paul Wellstone Mental Health and Addiction Equity Act (H.R.1424) on October 16, which cleared the bill for a vote by the full House.
Senator Carl Levin (D-Michigan) introduced the Ending Corporate Tax Favors for Stock Options Act (S.2116) on September 28.
As expected, President Bush vetoed legislation to reauthorize and expand the State Children’s Health Insurance Program (SCHIP).
On August 21, the Securities and Exchange Commission (SEC) asked the CEOs of roughly 300 large public companies to submit additional information for their fiscal year 2007 Compensation Discussion and Analysis (CDA) and proxy disclosures by September 21. While many of the SEC’s comments may not warrant a restatement of either the proxy or the company’s 2007 10-K, they suggest a significant gap between what the SEC expected and what was filed.
The Social Security Administration (SSA) has proposed to suspend the Disability Service Improvement (DSI) initiative, while soliciting public input on other possible reforms.
The IRS recently released proposed regulations on benefit restrictions soon to be imposed on certain underfunded pension plans (and on those deemed to be underfunded by the new rules). The regulations address credit balances, limitations on benefits and accelerated payouts, and the certification of funded status under the Pension Protection Act of 2006 (PPA).
Companies had to disclose significantly more information about executive pay in their latest proxies than ever before. To gain greater insight into the current state of executive compensation and lay the groundwork for future trend analyses, Watson Wyatt studied the first proxy disclosures under these new rules, focusing on 690 of the largest U.S. companies (FORTUNE 1000 companies that were the earliest filers of their 2007 proxy statements).
Pension funding has generated considerable interest during the last decade. Former surpluses became shortfalls in 2001 and 2002, as deteriorating market conditions drove plan assets down and pension obligations up. Getting funding levels back where they should be has required steady effort — including large cash infusions — from many sponsors, as well as good asset returns, but in 2006, most employer-sponsored plans regained full financial health.
A district court has specifically rejected the argument that a “greater of” hybrid plan conversion violates the accrual rules. In Wheeler v. Boeing, the court ruled that plans do not have to aggregate separate benefit formulas for accrual-rule testing, and that the IRS’s interpretation of the regulations is unpersuasive and not entitled to any deference.
The federal district court for the northern district of Illinois recently ruled that defining normal retirement age (NRA) by years of service does not violate ERISA, thereby eliminating the need for a whipsaw calculation.
The Sixth Circuit Court of Appeals affirmed the district court ruling in Drutis v. Rand McNally; Quebecor World that Quebecor’s cash balance plan is not inherently age discriminatory under pre-PPA law. It is the third appellate court to arrive at the same verdict, following the Cooper v. IBM and Register v. PNC decisions. The decision adopts a similar analysis to that used in the Cooper and Register cases, and quotes heavily from the earlier appellate decisions.
The Pension Protection Act of 2006 (PPA) requires the Cost Accounting Standards Board (CASB) to harmonize the PPA’s funding requirements with the cost accounting standards applicable to government contractors by January 1, 2010. Watson Wyatt has filed comments with the CASB regarding the harmonization project.
The 401(k) Fair Disclosure for Retirement Security Act of 2007 (H.R.3185) would require plans to disclose more information about fees charged to 401(k) participants and potential conflicts of interest. It also would require that 401(k) plans offer an index fund.
More than a year after its enactment, the Pension Protection Act of 2006 (PPA) remains under discussion on Capitol Hill and in the administration. Just before heading off for their month-long August recess, lawmakers introduced legislation that would make technical and clarifying changes to the PPA.
Legislation pending in the House and the Senate to address pay discrimination could have unintended consequences for employer benefit plans. Representative George Miller (D-Massachusetts) introduced the Lilly Ledbetter Fair Pay Act of 2007 in the House, and Senator Edward Kennedy (D-Massachusetts) introduced the Fair Pay Restoration Act in the Senate. Both bills share nearly identical language that would eliminate the statute of limitations on federal employment discrimination lawsuits, effective retroactively to May 28, 2007.
There are two bills pending in the House and Senate to reform the Mental Health Parity Act of 1996. Under the bills, health plans could not impose different treatment limitations and financial requirements on mental health/substance abuse benefits than on medical/surgical benefits. The parity requirements would apply to all plans that offer mental health and substance abuse benefits. Debate has been focused on three broad issues: ERISA preemption, mandated benefits and medical management practices.
The House and Senate approved separate bills to reauthorize and expand the State Children’s Health Insurance Program (SCHIP), setting the stage for conference negotiations in September. The bills also would make changes to Medicare and the Family and Medical Leave Act (FMLA) – with implications for employers.
Many workers who leave their jobs must make a decision that may have significant ramifications down the road: what to do with their defined benefit (DB) or defined contribution (DC) plan. Sometimes one of the choices is to cash out the account — withdraw the money in one lump-sum payment. But workers who exchange tax-deferred savings for ready money may be dimming their later prospects for a secure, adequate retirement income.
Media reports about private-sector employers — including many large, financially sound companies — freezing and terminating their defined benefit (DB) plans have appeared frequently in both business journals and the popular press. Commentators have proposed various theories to answer the “whys” of the recent employer shift from DB to defined contribution (DC) plans: maintaining competitiveness, exploding health costs, unmanageable pension costs and risks, changing workforce characteristics, and a punishing regulatory environment. Most of the media coverage focuses on how the change will affect workers, but the consequences will ripple to employers as well.
With health costs still rising at twice the rate of inflation, employers are looking for ways to get more from their health care dollars. To encourage workers to improve their health, some new insurance products provide supplemental benefits to members who meet specific health thresholds, such as a low body-mass index or cholesterol level, or practice certain healthy behaviors, such as not smoking.
The percentage of plan sponsors that froze their pension plans dropped from 7 percent in 2006 to 4 percent in 2007, according to a recent study by Watson Wyatt. Studies over the last few years have shown a gradual and steady increase in plan freezes, but this year we might be seeing the beginning of a slowdown.
The retirement system in Spain includes three pillars: a generous, almost universal Social Security program; employer pension and insurance plans, which are mainly sponsored by large companies and cover fewer people; and a moderate but significant penetration of individual retirement savings products. Spain’s population is aging rapidly, and, like many developed countries, Spain must act soon to avert significant deficits later in its public retirement income programs.
The Children’s Health and Medicare Protection Act of 2007 (CHAMP Act, H.R. 3162) would reauthorize and expand the State Children’s Health Insurance Program (SCHIP) for five years. It also would impose an annual fee on insured and self-insured health plans to fund a new research center to study health care services and procedures.
Recent publicity surrounding private equity firms, carried interest and hedge funds has drawn legislative attention to those issues. Key lawmakers have indicated that legislation is unlikely to advance in 2007, but the issues could move up the legislative agenda in 2008. Any new tax or disclosure rules for these investments could have significant implications for retirement plans.
As Congress headed into the July 4 recess, compensation and benefits were high on the legislative agenda. The focus is expected to last through the year, with health care likely to play a role in the presidential elections as well. After the prolonged debate preceding enactment of the Pension Protection Act of 2006 (PPA), retirement issues slipped down the agenda a few notches. However, Congress enacted some technical corrections to the PPA and is discussing others, as well as retirement savings, 401(k) fees, hedge fund disclosures and other retirement matters.
The legislated limits on covered compensation, benefits and contributions to tax-qualified retirement plans have been changed many times. Although the limits are indexed to consumer prices, these legislative changes have kept absolute dollar limits flat or only modestly higher from 1987 to today. By contrast, benefits under Social Security, which are indexed to faster-rising average wages, have increased significantly over the period.
On August 6, 2007, the IRS issued proposed cafeteria plan regulations that would have a significant impact on employers. When finalized, the rules would generally apply for plan years beginning on or after January 1, 2009.
The U.S. Court of Appeals for the Third Circuit recently upheld the Equal Employment Opportunity Commission’s (EEOC’s) proposed regulation to allow employers to coordinate retiree health benefits with Medicare benefits. Finding that the regulation was “reasonable” and “necessary and proper in the public interest,” the appeals court upheld a lower court’s decision to lift an injunction, permitting the regulation to stand. The EEOC is now free to finalize its rule, thereby giving employers license to coordinate retiree medical benefits with Medicare.
Watson Wyatt’s executive compensation consultants are advising clients to rethink their severance and change-in-control provisions and, when warranted, to bring them into closer alignment with their purpose and shareholder interests.
In a first for the nation, all residents of Massachusetts were required to obtain health insurance by July 1, 2007, under a law passed last year. By May 2007, more than 100,000 residents who had been uninsured had acquired coverage. To make universal coverage possible, the law makes new demands on employers in Massachusetts, which must make a “fair and reasonable” contribution to the cost of their employees’ health insurance or else pay a fair-share contribution to the state.
In Revenue Ruling 2007-43, the IRS clarifies that a participant turnover rate of at least 20 percent creates a presumption of a partial plan termination, although the ultimate determination still rests with the specific facts and circumstances. While the ruling does not establish any new principles for determining when a partial termination has occurred, it consolidates existing guidance and important case law.
In Beck v. PACE International, the U.S. Supreme Court ruled that a plan merger is not a method of plan termination, so in choosing whether to merge plans or to undergo a standard plan termination, the sponsor is not making a fiduciary decision. The ruling confirms that choices about a plan’s future — such as changing the plan design, freezing or terminating the plan and recovering excess assets — are not fiduciary decisions subject to ERISA.
For the first time in eight years, the IRS is responding to determination letter requests for cash balance plans. But now the IRS is challenging some cash balance conversions that used a “greater of” formula. In a greater-of transition, participants receive benefits under the previous plan formula or under the cash balance formula, whichever gives them the bigger benefit. This is good for participants, but the IRS is claiming that these greater-of transitions violate the accrual rules that govern all pension plans.
The U.S. Department of Energy (DOE) has decided to drop a controversial proposal to stop reimbursing contractors for new employees' defined benefit coverage.
In Announcement 2007-59, the IRS clarifies that a plan will not fail to be a 401(k) safe harbor plan merely because of midyear changes to implement a qualified Roth contribution program or the hardship withdrawals relating to a primary beneficiary described in Notice 2007-7.
The IRS recently proposed regulations regarding the mortality assumptions used to determine present values for minimum funding purposes under the Pension Protection Act of 2006 (PPA). In addition to establishing standard mortality tables, the guidance proposes a framework for using a plan’s mortality experience to establish a substitute mortality table and outlines the process for obtaining IRS approval.
On June 5, the U.S. Senate Homeland Security and Governmental Affairs’ Permanent Subcommittee on Investigations held a hearing on executive stock options. The hearing focused on the mismatch between the expensing of stock options for financial reporting purposes and the tax treatment of those options.
In May, the Senate approved a provision to allow the importation of prescription drugs from Canada and other industrialized countries, but a separate provision requiring the secretary of Health and Human Services to certify the safety of imported drugs would likely prevent the measure from taking effect. The developments constitute yet another point-counterpoint in the years-long legislative wrangling over prescription drug importation. Supporters vow to continue their push to legalize drug importation.
The Pension Benefit Guaranty Corporation (PBGC) recently proposed changing the calculations that determine variable-rate premiums under the Pension Protection Act of 2006 (PPA). The proposed changes would take effect for 2008 premium payment years.
After the drawn-out and arduous pension reform debate preceding enactment of the Pension Protection Act (PPA) last summer, Congress is unlikely to pursue new pension legislation this year. However, lawmakers are discussing a variety of retirement issues.
The IRS recently released final regulations on phased retirement that restrict a plan’s normal retirement age (NRA) to an industry-based typical retirement age and establish certain safe harbors for in-service distributions.
The IRS has issued Roth 401(k) final regulations that address the taxation of distributions, rollovers, reporting and recordkeeping. The final regulations generally adopt the provisions of the proposed regulations with some modifications.
A measure President Bush signed into law on May 25, 2007, to fund the Iraq war included provisions to raise the minimum wage for the first time in 10 years and make technical corrections to the Pension Protection Act (PPA) of 2006.
The U.S. Department of Treasury and the IRS recently released final regulations addressing nonqualified deferred compensation (NQDC) plans under section 409A. The regulations provide voluminous guidance — 397 pages worth — on a variety of qualification and other issues pertaining to NQDC plans.
The Financial Accounting Standards Board (FASB) concluded the first phase of its two-part project on postretirement benefit accounting reform last year with the issuance of Statement of Financial Accounting Standards (SFAS) 158. Although the FASB is pleased with the first phase of its accounting reforms, which moved market-based measures of funded status from the footnotes of financial statements to the balance sheet, the board left many of the biggest issues for Phase Two.
Provisions to cap annual deferrals under nonqualified deferred compensation (NQDC) arrangements and expand the number of workers covered by the $1 million cap on executive compensation were dropped from the minimum wage package.
For the first time in 50 years, the Social Security Administration (SSA) is revamping its disability determination process. The final rule, which is intended to shorten decision times and pay out benefits faster, took effect August 1, 2006, in the New England region.
The U.S. Department of Labor (DOL) has issued a Request for Information (RFI) about fee disclosure for 401(k)-type plans.
Early this year, the IRS released guidance on the Pension Protection Act (PPA) provisions concerning hybrid defined benefit plans and asked the public to comment on the proposed guidance along with several other issues concerning hybrid plans.
The IRS recently issued final regulations under section 415. These are the first comprehensive revision of the section 415 regulations since 1981, and the new rules incorporate all the statutory and other changes released during the 26-year interim.
On April 20, the House approved the Shareholder Vote on Executive Compensation Act (H.R.1257) by a vote of 269-134. The “say for pay” legislation would give shareholders an annual, nonbinding vote on the executive compensation packages disclosed in corporate proxy statements. It would also give them a nonbinding advisory vote on golden parachute packages in some circumstances involving negotiations to buy or sell the company.
In a 420-3 vote on April 25, the House approved the Genetic Information Nondiscrimination Act (H.R.493), which would prohibit health insurers and employers from discriminating against employees based on their (or their family members’) genetic information.
The Senate’s attempt to allow the secretary of Health and Human Services (HHS) to negotiate the price of prescription drugs under the Medicare Part D program was blocked on April 18 when the legislation failed to gain the 60 votes it needed for final debate and passage.
The Department of Energy (DOE) is seeking recommendations on the best way to address rising costs and liabilities in its contractors’ pension and health plans. The DOE first announced a controversial policy to stop reimbursing contractors for defined benefit (DB) plan expenses for new employees in April 2006.
Last year, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 158, bringing the first phase of the FASB’s accounting reforms for pensions and other postretirement benefits to a close. Phase One moved market-based measures of funded status from the footnotes of sponsors’ financial statements to the balance sheets. Many important issues were left for Phase Two, including the determination of expense, liability measurement and balance sheet consolidation. Phase Two will essentially rebuild the foundation of pension accounting. As plan sponsors and their advisers are completing the implementation of Phase One, this article, the second in a planned series about Phase Two, focuses on liability measurement.
In a recent speech before the Corporate Counsel Institute, Securities and Exchange Commission (SEC) Chairman Christopher Cox warned filers that enforcement of the SEC’s plain-English requirement for proxy statements will become increasingly strict during the coming year, although the commission is granting filers some leeway during the transition. The SEC adopted new rules last year to give investors a clearer and more complete picture of executive compensation.
As required under the Pension Protection Act of 2006, the U.S. Department of Labor (DOL) recently issued interim final regulations to clarify the qualified status of domestic relations orders (DROs). A qualified domestic relations order (QDRO) assigns all or part of a participant’s retirement benefits to a spouse, former spouse, child or other dependent.
The House and Senate are considering bills that would expand the mental health parity requirements in current law. The existing Mental Health Parity Act of 1996 prevents group health plans from imposing lower annual or lifetime dollar limits on mental health benefits than on medical/surgical benefits.
The federal government last tried to restore long-term financial solvency to Social Security 24 years ago. The Social Security Amendments of 1983 were supposed to make Social Security fiscally sound for the next 75 years. This article discusses why the 1983 amendments did not deliver the long-term solution policymakers were hoping for and how future reforms can avoid the same fate.
In Field Assistance Bulletin (FAB) 2007-01, the U.S. Department of Labor provides guidance on the statutory prohibited transaction exemption (PTE) for investment advice under the Pension Protection Act of 2006 (PPA). The guidance primarily affects defined contribution plan sponsors and those who provide investment advice to defined contribution plan participants.
On September 29, 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 158, which concluded the first phase of the FASB’s accounting reforms for pensions and other postretirement benefits.
Employers increasingly provide retirement benefits to their employees through defined contribution (DC) plans. To build up enough wealth for a secure retirement, workers must save regularly and invest wisely. Automatic enrollment and effective default investments can help with both.
On February 1, 2007, the IRS began accepting Cycle B applications for determination letters that consider the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and other changes to tax law. Cycle B closes on January 31, 2008. All plan sponsors that want determination letter reliance on a new or amended plan’s tax-qualified status must file a determination letter application within the determination letter cycle assigned to the plan.
Last month, the IRS published final regulations that provide new mortality tables for 2007 plan years for single-employer defined benefit plans. The regulations change the assumption used for non-disabled participant mortality when determining a pension plan’s current liability. Overall, the new tables are expected to increase plans’ current liability for 2007 and funding targets for 2008 and later.
President Bush has proposed a new budget for fiscal year 2008. Some of the administration’s proposals are continuations of past initiatives, such as expanding health savings accounts (HSAs), while others represent new directions, such as eliminating the income tax exclusion for employer-provided health coverage.
The Senate Health, Education, Labor and Pensions (HELP) Committee approved the Genetic Nondiscrimination Act (S.358) on January 31, 2007. The act would prohibit health insurers and employers from discriminating against employees based on their (or family members’) genetic information.
Increasing the minimum wage is a priority for the new Democratic majority in Congress. Although both House and Senate Democrats want a higher minimum wage, politics have driven the chambers to take different approaches.
Pension plan funding has been up and down during the last six years. In many firms, formerly fully funded defined benefit plans became significantly underfunded early in the decade, as the stock market plummeted and falling interest rates pushed up present-value measures of liabilities. These trends are cyclical and, fortunately, the trend for 2006 is up.
In Field Assistance Bulletin (FAB) 2006-3, the U.S. Department of Labor provides guidance on the new requirements for benefit statements for both defined benefit and defined contribution plans, which were enacted by the Pension Protection Act of 2006 (PPA).
A few days before his State of the Union address, President Bush unveiled a proposal to change the tax treatment of health care coverage. The proposal would make employer-sponsored coverage taxable and establish a new standard deduction for private health coverage.
The IRS has released guidance on a variety of retirement plan distribution issues arising from the Pension Protection Act of 2006 (PPA). The guidance addresses both defined benefit and defined contribution plans. Because it deals with so many different issues, the IRS is calling the guidance the distribution “grab-bag.”
On December 22, 2006, the Securities and Exchange Commission (SEC) adopted interim final rules for the disclosure of executive compensation. The new rules make the reporting of stock and option awards in the Summary and Director Compensation Tables comparable with their accounting treatment under Financial Accounting Statement (FAS) 123(R).
The U.S. Supreme Court has declined to review the appellate court decision in Cooper v. IBM, thereby ending the litigation. The case — one of the most controversial pension decisions in many years — significantly influenced the Pension Protection Act, which clarified, prospectively, that hybrid defined benefit plans are not inherently age-discriminatory.
On January 12, the House approved the Medicare Prescription Drug Price Negotiation Act of 2007 (H.R.4) by a vote of 255-170. The legislation would require the secretary of Health and Human Services (HHS) to try to negotiate lower drug prices – including discounts, rebates and other price concessions – for sponsors of Part D prescription drug or Medicare Advantage plans. The secretary would have to report the results of these negotiations to Congress twice a year.
The IRS is asking for comments on allowing 62-year-old employees to collect in-service distributions from their pension plans, which was part of the Pension Protection Act of 2006 (PPA).
On January 17, 2007, the United States Court of Appeals for the Fourth Circuit affirmed a lower-court decision that ERISA preempts the Maryland Fair Share Health Care Fund Act, which would have required nongovernmental employers with 10,000 or more workers to spend at least 8 percent of their payroll on health care or pay the difference in taxes.
Congress’ new Democratic majority wrapped up its first 100 hours of legislation – an agenda that included bills to change executive compensation taxes and require the government to negotiate prices for Medicare-covered drugs. Both proposals could have a significant impact on employers and employees, but both have a long way to go before they can become law.
In his State of the Union address on Jan. 23, 2007, President Bush outlined plans to change the way health care benefits are taxed in an effort to encourage more Americans to purchase health care insurance.
In one of its first significant decisions on how it will implement the Pension Protection Act (PPA), the IRS issued a notice on Dec. 21, 2006, that defines hybrid pension plans and calls for public input on implementing other PPA provisions.
Employers will be required to provide paid sick leave for all employees within San Francisco city and county under a new law approved by San Francisco voters as Proposition F on Nov. 7, 2006.
The Pension Benefit Guaranty Corporation (PBGC) recently announced its intention to audit all terminating defined benefit plans that distribute cash or purchase irrevocable annuity commitments without first having filed a standard termination notice (Form 500).
The IRS has released guidance explaining how to apply the Pension Protection Act (PPA) to cash balance plans, pension equity plans (PEPs) and other hybrid defined benefit plans. The PPA established — prospectively — that hybrid plans are not inherently age-discriminatory and imposed new rules on hybrid plan conversions, benefit accruals and benefit payouts. This guidance is the first interpretation of those new restrictions and provisions by government regulators.
In Notice 2006-100, the IRS extends the waiver of employers’ and workers’ reporting requirements for section 409A-compliant deferrals. This means that employers and other payers need not report these annual deferrals on Form W-2 or Form 1009-MISC for 2005 or 2006.
The U.S. Department of Labor (DOL) is seeking information and comments from the public on the Family and Medical Leave Act (FMLA) and its implementing regulations.
As health savings accounts (HSAs) and the high-deductible health plans (HDHPs) that go with them are being more widely used, employers and employees have run into some obstacles. Over recent months, lawmakers have been discussing legislation to simplify and improve these plans. During the 11th hour of the 2006 legislative session, Congress passed the Tax Relief and Health Care Act (H.R.6111), which President Bush signed into law December 20.
By the time it finished up in early December, the 109th Congress had approved several important benefits-related bills, including the Pension Protection Act of 2006 (PPA) and the Tax Relief and Health Care Act, which makes important changes to health savings accounts (HSAs).
The Pension Protection Act of 2006 established diversification rights for participants and beneficiaries who hold publicly traded employer securities in their defined contribution plans.
The 2007 ERISA Reporting Calendars are now available online! Plan administrators of single and multiemployer pension and welfare benefit plans can visit our web site for concise information on filing annual and special reports with the DOL, IRS and PBGC.
In Lewis v. Harris, decided October 25, 2006, the New Jersey Supreme Court ruled that same-sex couples in New Jersey are entitled to the same rights and benefits enjoyed by heterosexual couples under state marriage laws.
Beginning in 2007, the Pension Protection Act of 2006 (PPA) permits in-service retirement plan distributions to employees 62 and older. The act does not mention the IRS regulations proposed in 2004 (see Watson Wyatt Insider, December 2004), which would permit phased retirement distributions to employees 59½ and older, as long as certain conditions were met. The PPA provision and the proposed guidance set out different rules, leaving the status of the proposed regulations unclear.
The IRS has released final regulations allowing plan administrators to use electronic systems to satisfy “in writing” requirements. The regulations give sponsors two ways to satisfy the requirements for notices and set out separate rules for electronic elections and consents. The final rules generally take effect on January 1, 2007.
Automatic enrollment arrangements and the corresponding default investment provisions in defined contribution (DC) plans have been gaining popularity as a way to help more workers save for retirement.
In Retail Indus. Leaders Association v. Fielder, a federal judge in Maryland ruled that ERISA preempts the Maryland Fair Share Health Care Fund Act, which was slated to become effective January 1, 2007.
In Field Assistance Bulletin (FAB) 2006-2, the U.S. Department of Labor (DOL) draws the lines more clearly between practices that do and don’t make a health savings account (HSA) subject to ERISA, something most employers prefer to avoid. Earlier guidance on the subject had left employers somewhat confused about what constituted a “safe” level of involvement.
Two recent decisions show there is still life in age-discrimination claims against cash balance plans. In Re J.P. Morgan Chase, the district court for the Southern District of New York denied the plan’s motion to dismiss an age-discrimination claim, applying an analysis that considers all cash balance plans inherently age-discriminatory.
On September 29, 2006, the Financial Accounting Standards Board (FASB) released its Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS 158 requires firms to put the net financial status of their postretirement plans on their balance sheet, and eliminates all smoothing of actuarial gains and losses in the funding position that flows into the other comprehensive income section in shareholders’ equity.
The election of Democratic majorities in the U.S. House and Senate is likely to considerably shift the legislative agenda on compensation and benefits topics important to employers, especially health care.
The U.S. Department of Labor (DOL) has proposed guidance concerning default investments in participant-directed defined contribution plans under ERISA section 404(c), as required by the Pension Protection Act of 2006. The guidance would protect plan fiduciaries if, in the absence of investment direction from the participant, the fiduciary invests the participant’s assets in a qualified default investment alternative (QDIA) and certain notice and other conditions are met. Plan fiduciaries would still have to prudently select and monitor any QDIAs under their plans.
As companies prepare their compensation disclosures under the Securities and Exchange Commission’s (SEC’s) new reporting regime, questions arise about the best approach to creating the Compensation Discussion and Analysis (CD&A). To comply with the new rules, companies need to understand exactly what the SEC expects to find in the CD&A.
On September 29, 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. The two biggest changes for sponsors are the requirements to: (1) put the net financial status of their pensions and other retirement benefits on the balance sheet, and (2) measure assets and liabilities as of the end of the fiscal year. The changes are intended to make reported financial information more complete, useful and transparent.
As health savings accounts (HSAs) have become more popular, employers, participants and policymakers have become aware of some of their shortcomings. Over the past year, lawmakers have shown growing interest in fixing some of these problems (see Watson Wyatt Insider, July 2006). On September 27, the House Ways and Means Committee approved a bill to allow rollovers from health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) and individual retirement accounts (IRAs). The bill would also increase the deductible contribution limit and make other changes.
In Notice 2006-69, the IRS simplifies the use of debit cards for health flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs). The notice also expands allowable expenses, adds a new substantiation method and clarifies acceptable substantiation practices, and permits the use of debit cards in dependent care plans. The guidance generally takes effect immediately.
The IRS released its to-do list for the year on August 15, two days before the Pension Protection Act was signed into law. The PPA is certain to require reams of new guidance, so future quarterly updates of the priority plan will likely include PPA-related projects.
The federal district court for the Southern District of New York recently ruled that defining a plan’s normal retirement age (NRA) by years of service violates ERISA if it makes the NRA earlier than age 65. It also follows a majority of courts by ruling that cash balance plans are not inherently age-discriminatory.
Popular discussions of the shift from defined benefit plans to defined contribution and other individual account plans have thus far focused mainly on differences in risks, returns and flexibility during the benefit accrual/asset accumulation phase of the retirement cycle. As the baby boom generation begins to retire, however, the zeitgeist will follow the money, focusing on differences in risks, returns and flexibility at the other end of the retirement cycle, when distributions begin in earnest.
The IRS has announced the annual cost-of-living and statutory adjustments of various dollar limits for employee benefit plans.
The Pension Protection Act of 2006 offers defined contribution plan sponsors new opportunities within a more demanding regulatory framework. The act permanently extends important retirement savings and IRA provisions that were scheduled to expire in 2010, and endorses and encourages automatic enrollment arrangements.
The Pension Protection Act clarifies — primarily prospectively — that cash balance and other hybrid defined benefit plans are not inherently age discriminatory. The act clarifies the age-discrimination standard for defined benefit plans in general and establishes new rules for “applicable defined benefit plans.”
The Pension Protection Act of 2006 imposes new rules on multiemployer plans, including shorter amortization periods for many liabilities, more stringent requirements for underfunded plans in endangered or critical status, and more demanding disclosure requirements. The changes, which generally take effect in 2008, will affect contributing employers, plan trustees, participants and beneficiaries.
On August 11, 2006, the Securities and Exchange Commission published 436 pages of executive compensation proxy disclosure rules. Companies must comply with those rules in their proxy statements for fiscal years ending on or after December 15, 2006.
The Equal Employment Opportunity Commission (EEOC) has proposed regulations revising its position on the Age Discrimination in Employment Act (ADEA) and discrimination against younger workers. The revisions respond to the Supreme Court’s decision in General Dynamics v. Cline, which interpreted the ADEA as permitting employers to favor older workers over younger workers. The revisions are mostly clarifications and minor changes to the text.
The IRS has issued final anti-cutback regulations that adopt the U.S. Supreme Court’s ruling in Central Laborers’ Pension Fund v. Heinz. In that case, the court ruled that ERISA’s anti-cutback rule prohibits any change to a pension plan’s suspension-of-benefits rules that would reduce benefits for employees who continued working after retirement (see Watson Wyatt Insider, August 2004).
The IRS has finalized part of the regulations proposed last year under section 404(k) concerning the deduction for dividends paid on employer securities held by an employee stock ownership plan (ESOP). Under the final regulations, payments that redeem employer securities in an ESOP should not be treated as dividends for purposes of section 404(k) and are not deductible.
The request of plaintiffs in the Cooper v. IBM case for a rehearing by the entire Seventh Circuit Court of Appeals has been denied. (The appeals court recently ruled that hybrid plans are not inherently age-discriminatory; see Watson Wyatt Insider, August/September 2006.) In a one-page order, the court noted that all three of the judges who heard the case voted to deny rehearing, and none of the other judges on the circuit requested a vote on the petition.
The IRS has delayed the general effective date for the regulations regarding section 403(b) arrangements that were proposed in 2004 (including the related controlled group regulations under section 414(c)).
In Revenue Ruling 2006-43, the IRS clarifies the designation required by an employing governmental unit in order to “pick up” employee contributions. In a pick-up plan, the Code allows governmental employers to “pick up” mandatory employee contributions, which are then treated as nontaxable employer contributions instead of taxable employee contributions.
After much deliberation the last year, the Financial Accounting Standards Board (FASB) released the final version of its accounting standards for postretirement benefits on Sept. 29, 2006.
The Financial Accounting Standards Board is moving ahead with the first phase of its proposed changes to postretirement benefit accounting, which involves recording a plan’s underfunding or overfunding on the corporate balance sheet.
Companies must file their Form 5500s electronically for plan years beginning January 1, 2008, under final guidance recently released by the U.S. Department of Labor’s Employee Benefits Security Administration.
On July 31, the IRS issued much-anticipated final regulations on how employer contributions to health savings accounts can satisfy the comparability rules. The final regulations are substantially similar to the proposed rules (see Watson Wyatt Insider, October 2005).
On August 7, the Seventh Circuit Court of Appeals ruled that IBM’s cash balance plan is not inherently age-discriminatory. In a strongly worded decision, the court rejected arguments against hybrid plans, specifically: (1) that compound interest is age-discriminatory, and (2) that the accrual rate of the normal retirement annuity benefit is the only standard for judging age discrimination. This decision, along with the recently passed pension reform legislation, should give hybrid plan sponsors a measure of confidence that their plans can withstand legal and legislative scrutiny.
The Securities and Exchange Commission voted unanimously to adopt a sweeping overhaul of proxy disclosures for executive compensation. The new disclosures will give shareholders a far more complete picture of compensation paid and payable to the CEO, the CFO and the three highest-compensated named executive officers.
President Bush has signed off on pension reform, finally concluding a debate that has swirled around Capitol Hill for years. The Pension Protection Act of 2006 enacts sweeping changes that will affect defined benefit plan sponsors, workers and — eventually — retirees.
Over the last six years, pension finances — just like the stock market — have been riding a roller coaster. Before then, defined benefit plan assets were outpacing pension liabilities.
Last night the U.S. Senate passed a long-awaited pension reform measure that when signed into law will mark the most significant overhaul of pension laws since the Employee Retirement Income Security Act (ERISA) was enacted in 1974. The House of Representatives approved the bill one week ago and President Bush is expected to sign the legislation shortly.
The number of firms in the FORTUNE 1000 that sponsor one or more frozen or terminated defined benefit (DB) plans rose from 71 in 2004 to 113 in 2005. Watson Wyatt has been tracking DB plan terminations and freezes among the FORTUNE 1000 for the last five years.
A recent Government Accountability Office (GAO) study concluded that consumer-directed health plans (CDHPs) — both health reimbursement arrangements (HRAs) and health savings accounts (HSAs) that are coupled with high-deductible health plans (HDHPs) — account for a small but growing share of private health care coverage in the United States.
President Bush signed the Tax Increase Prevention and Reconciliation Act (H.R.4297, P.L.109-222) into law on May 17, 2006. The act removes income restrictions on converting traditional IRAs to Roth IRAs. It also imposes new penalties and reporting requirements on managers of tax-exempt entities — including qualified plans, IRAs and other tax-favored arrangements, as well as charities and more traditional tax-exempt organizations — who engage in certain tax-shelter transactions.
The source tax law enacted in 1996 prohibits states from taxing the retirement income of former residents. However, at least one state held that the 1996 law did not apply to former partners. So, the House and the Senate approved legislation clarifying that the law does apply to the retirement income of former partners.
The Citizens’ Health Care Working Group, established by the Medicare Prescription Drug, Modernization and Improvement Act of 2003, released its interim recommendations on June 1. The group recommends making affordable health care coverage for all Americans a matter of official U.S. public policy. The coverage should include a package of core services and financial assistance as necessary. The group suggests having an independent, nonpartisan group identify and periodically update the core benefit package.
In Miller v. Xerox, a district court ruled that in coordinating earlier distributions with later benefit accruals in a defined benefit floor offset plan, Xerox’s plan had violated ERISA. Floor offset plans coordinate benefits from a defined contribution plan and a defined benefit plan, typically reducing benefits under the defined benefit plan by the balance in the defined contribution plan.
On June 8, the Delaware Supreme Court upheld the Chancery Court’s decision that Walt Disney’s officers and directors did not violate their fiduciary duty in hiring and firing former president Michael Ovitz (Watson Wyatt Insider, September 2005).
IRS National Headquarters is closed for the month of July because of significant flooding caused by unusually heavy summer rains in the Washington, D.C., area; some parts of the building may be closed until next year. IRS officials and personnel are being temporarily reassigned to other office space in the metropolitan area as available.
The Financial Accounting Standards Board decided on July 12, 2006, that its new rules on postretirement benefit accounting will require pension plan sponsors to report benefit obligations based on estimated future salary increases.
U.S. Department of Energy Secretary Samuel W. Bodman has agreed to suspend for a year a recently announced and controversial policy to discontinue reimbursing DOE contractors for defined benefit pension coverage.
The DOL has updated a prohibited transaction class exemption (PTE 80-26) regarding certain interest-free loans to employee benefit plans. The DOL eliminated the three-day duration requirement for certain loans and now requires a written agreement for loans whose duration exceeds 60 days.
The DOL has updated the Voluntary Fiduciary Correction Program (VFCP), which allows plan officials to correct certain ERISA violations without being subject to an enforcement action. Plan officials report corrected violations to the regional offices of the DOL’s Employee Benefits Security Administration (EBSA).
The Department of Energy (DOE) has announced that it will no longer cover the cost of defined benefit (DB) pensions for its contractors’ new employees.
The U.S. Department of Labor (DOL) has released Field Assistance Bulletin (FAB) 2006-1, providing guidance on mutual fund settlement proceeds.
The U.S. Government Accountability Office’s (GAO’s) recent study of consumer directed health plans (CDHPs) examined their prevalence, funding, use and prospects. The study found that the number of CDHP enrollees is rising — from roughly 3 million in January 2005 to between 5 million and 6 million in January 2006.
Rev. Proc. 2006-27 describes the newest IRS compliance resolution procedures for employee plans.
The IRS has proposed new regulations for individual tax returns that will also affect employer-provided dependent care assistance programs (DCAPs), because the IRS applies the same definitions of “qualifying individual” and “employment related expenses” to both.
In Notice 2006-44, the IRS provides a sample plan amendment for plan sponsors that want to provide for designated Roth contributions in their 401(k) plans.
Members of Congress trying to reach a compromise on pension reform legislation fell short of a self-imposed Memorial Day deadline to move the bill but several high-ranking congressional leaders say they hope the bill will be enacted before July 4.
Escalating increases in health care costs in recent years have wreaked havoc on companies’ compensation budgets, often holding pay and other perks hostage. Health care costs continue to rise, but at least the rate of increase has slowed. And some employers are finding ways to regain control over these costs, according to the latest National Business Group on Health/Watson Wyatt Employer Survey on Purchasing Value in Health Care.
On March 31, the Financial Accounting Standards Board (FASB) released its exposure draft of proposed phase 1 changes to accounting for defined benefit pensions and other postretirement benefit plans. Some of the more controversial changes could significantly affect corporate financial statements and impose new administrative burdens on some companies.
Congress began a two-week legislative recess on April 7, leaving pension reform on hold. When lawmakers return to the conference committee negotiating table, they must try to agree on key reform issues: how to determine at-risk status, new rules for credit balances, the length and conditions for smoothing periods for assets and interest rates, the best way to transition to new funding rules, the legal status of hybrid pension plans and much more.
When plan participants become eligible for their pensions, they generally must choose from several optional forms of payment, typically including a qualified joint and survivor annuity (QJSA). Optional forms of payment are usually equal in value. However, differences may arise from less-than-full actuarial reductions for longevity or surviving spouse benefits, mandated actuarial assumptions or simplified actuarial factors.
As Congress entered its April recess, hybrid plan sponsors remained in a state of sustained uncertainty about the legal status of their plans. Legislation that would prospectively clarify their status is pending before a pension reform conference committee, but the House and Senate provisions differ significantly and negotiations are expected to be contentious.
The House-Senate conference committee will try to reconcile the pension reform bills before April 15, when the next round of corporate pension contributions for calendar-year plans are due. But what will happen if pension reform doesn't pass this year?
The Securities and Exchange Commission (SEC) recently proposed new rules for disclosing executive compensation to make compensation information easier to find, understand and compare. The new transparency should give corporate stakeholders a clearer picture of all elements of executive pay, including its rationale, practice and results.
Massachusetts Gov. Mitt Romney signed a law April 12, 2006, that requires all residents to purchase health insurance by July 1, 2007 and provides subsidized low cost insurance for those who cannot afford it. Those that do not comply with the mandate will lose tax benefits, including the personal exemption on state income taxes.
To more accurately quantify the cost of participating in multiemployer pension plans, Moody’s Investors Service has proposed a methodology for estimating a contributing employer’s share of plan underfunding and reflecting it on the company’s financial statement. This information would be used for credit analysis purposes.
The Securities and Exchange Commission (SEC) recently proposed new rules for disclosing executive compensation to make compensation information easier to find, understand and compare.
Congress left town for a two-week spring recess April 7, 2006, without reaching agreement on a measure to overhaul pension plan laws. However, before leaving, the House of Representatives voted 248-178 to instruct a conference committee working out differences between the House and Senate versions of the reform bills to adopt the Senate’s more restrictive language concerning hybrid plans.
The Financial Accounting Standards Board (FASB), which is expected to release draft rules March 31, 2006, on accounting for postretirement benefits, decided at its most recent meeting to ask companies to comment on the proposed effective dates of the new rules and to explain the obstacles they will face in meeting them.
President Bush signed a federal budget bill Feb. 8, 2006, that will substantially increase the Pension Benefit Guaranty Corporation (PBGC) premiums single- and multi-employer plans pay.
Employers, even those that do not offer retiree medical benefits, may be required to file reports with federal officials regarding prescription drug coverage, under the new Medicare Part D prescription drug benefit.
Under the Securities and Exchange Commission's recent proposal, companies would have to disclose far more details about the pay and perks provided to named executive officers.
Pension plan sponsors will pay higher Pension Benefit Guaranty Corporation (PBGC) premiums this year, now that the Deficit Reduction Act has been signed into law. The act increases flat-rate premiums for single-employer and multiemployer plans. It also establishes a new premium for single-employer plans that undergo involuntary terminations or distress terminations in connection with a bankruptcy reorganization.
President Bush sent Congress his budget proposal for fiscal year 2007 on February 6, 2006. The budget puts renewed emphasis on health care initiatives, proposing to expand health savings accounts (HSAs), encourage greater transparency about health care cost and quality, authorize association health plans (AHPs) and improve health information technology.
The IRS has issued Roth 401(k) proposed regulations, which are in addition to the regulations that were finalized by the agency last month. The final regulations dealt primarily with plan qualification issues. These proposed regulations address the taxation of distributions and other related issues.
A couple of months ago, Watson Wyatt projected the effects of phase 1 of the Financial Accounting Standards Board's (FASB) proposal to change accounting standards for pensions and postretirement benefit plans. Phase 1 focuses on disclosing the funded status of postretirement benefit obligations on corporate balance sheets. As the details of FASB's approach have evolved, we have undertaken a second analysis.
The U.S. Department of Labor (DOL) recently released a final regulation implementing the annual funding notice requirements for multiemployer defined benefit plans, which were added by the Pension Funding Equity Act of 2004. Under the act, plan administrators of multiemployer defined benefit plans must annually notify interested parties of the plan's funded status.
The U.S. Securities and Exchange Commission voted Jan. 17, 2006, to propose significant changes to the executive compensation disclosures required on proxy statements.
The U.S. Treasury Department and the IRS issued final regulations Dec. 30, 2005, on establishing and offering Roth 401(k)s to employees. The final regulations took effect Jan. 1, 2006 and made few revisions to rules proposed in March 2005.
Pension reform moved ahead Dec. 15, 2005, as the U.S. House of Representatives passed the Pension Protection Act (H.R. 2830). The measure establishes new funding rules and disclosure requirements for defined benefit plans, imposes benefit restrictions on underfunded pension plans and increases the premiums plan sponsors pay to the Pension Benefit Guaranty Corporation (PBGC).
With Vice President Dick Cheney casting the tie-breaking vote, the U.S. Senate passed a federal budget bill Dec. 21, 2005, that would increase Pension Benefit Guaranty Corporation (PBGC) premiums on single- and multi-employer defined benefit plans.
As the U.S. House of Representatives was wrapping up its 2005 legislative session, the Pension Protection Act (PPA, H.R.2830) seemed stalled. But a last-minute agreement between key lawmakers and the United Auto Workers cleared the way, and the House approved the PPA by a vote of 294-132 on December 15, 2005.
The IRS has finalized the Roth 401(k) regulations that were proposed last year. Although the final regulations generally follow the proposed regulations, the IRS made some changes.
During the last five years, most defined benefit plan sponsors have watched their plans' funded status topple from overfunded to significantly underfunded and then slowly recover lost ground.
Benefits-related legislation remained high on the legislative agenda during 2005 as Congress focused on pension reform. Legislators proposed clarifications to the legal status of hybrid pension plans and new laws to encourage automatic 401(k) enrollment, improve retirement education and increase other retirement savings.
The new section 409A rules — along with more aggressive IRS enforcement — will require tax-exempt and government sponsors of section 457(f) plans to review their existing deferred compensation plans and to consider new plan designs carefully.
Eight years of research into Watson Wyatt's Human Capital Index® (HCI) has consistently found a strong correlation between effective HR program design and financial performance.
Representative Eric Cantor (R-Virginia) introduced the Flex HSA Act (H.R.4511) on December 13, 2005. The act aims to promote health savings accounts (HSAs) by raising the limit on HSA contributions and permitting individuals covered by flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) to contribute to HSAs.
The Government Accountability Office (GAO) recently released a study on how participants fare in cash balance plan conversions.
Sentiment has been rising among financial market participants that pension accounting standards are confusing and lack a solid grounding in economic principles.
Sentiment has been rising among financial market participants that pension accounting standards are confusing and lack a solid grounding in economic principles.
Hybrid plans remained a key pension reform issue as the 2005 legislative session drew to a close. Both the House and the Senate pension reform bills address hybrid plans, but important differences between the two bills remain to be worked out.
Defined benefit reform has dominated the 2005 legislative agenda, but defined contribution issues started gaining traction as pension reform moved through the House and the Senate.
The Government Accountability Office (GAO) recently released a study on how participants fare in cash balance plan conversions. In a sharp departure from earlier studies, the GAO report concludes that such conversions significantly reduce most participants’ retirement benefits.
In Notice 2005-86, the IRS clarifies the effect of a health flexible spending account (FSA) grace period on health savings accounts (HSAs). Employees who participate in a health FSA with a grace period may not participate in an HSA until the first day of the first month after the grace period ends.
The IRS’s 2005 Form 2441, Child and Dependent Care Instructions, quietly fixes a discrepancy for taxpayers claiming child and dependent care expenses for the care of a disabled dependent adult.
The IRS has released the 2006 cost-of-living adjustments to limits for the adoption credit, child tax credit, qualified transportation benefits, adoption assistance programs, medical savings accounts and health savings accounts.
After a month of delay, the Senate overwhelmingly voted (97-2) to approve the Pension Security and Transparency Act (PSTA, S.1783) on November 16.
The regulations recently proposed under section 409A have broadened the definition of nonqualified deferred compensation (NQDC) to encompass virtually all equity or equity-based grants not covered by a specific exception. Fortunately, most NQDC can be crafted to either qualify for an exception or comply with section 409A. In some situations, however, seemingly innocuous designs or design changes could unwittingly run afoul of the new rules, with unfavorable tax results.
Pending pension reform would attempt to clear up the legal ambiguity surrounding hybrid plans and would impose new restrictions on conversions of traditional defined benefit plans to hybrid plans. But the new rules may leave existing plans in legal limbo.
As Congress entered the final stretch of the 2005 legislative session, broad pension reform was moving, but slowly. The Senate approved its pension bill — the Pension Security and Transparency Act. The House Ways and Means Committee approved the Pension Protection Act, which the Education and the Workforce Committee approved in June.
Pending pension reform would require defined benefit plan sponsors to change the mortality assumptions they use to value their plan liabilities, so Watson Wyatt analyzed the impact of the proposed changes. We find that the new mortality assumptions would increase liabilities somewhat for most plan sponsors, especially for plans in which men outnumber women.
A media frenzy has surrounded the pension woes of several airlines and the resultant potential financial hit on the Pension Benefit Guaranty Corporation (PBGC). This, along with the increasing number of large defined benefit (DB) pension sponsors that have either frozen or closed their plans to new hires, has led many analysts to conclude that the traditional DB pension system is in a tailspin.
In January 2005, President Bush tasked the President's Advisory Panel on Federal Tax Reform with reforming the U.S. tax code. Former U.S. Senators Connie Mack (R-Florida) and John Breaux (D-Louisiana), the panel's chair and vice-chair, recently presented the panel's final report to Treasury Secretary John Snow.
Under the IRS's new determination letter program, individually designed plans have a regular, five-year remedial amendment cycle.
The U.S. Department of the Treasury and the IRS recently issued proposed regulations under section 409A, which governs plans and arrangements that provide nonqualified deferred compensation.
The IRS has proposed the first regulations on health savings accounts, which generally follow the comparability guidance issued in previous notices.
The district court judge who prohibited the U.S. Equal Employment Opportunity Commission (EEOC) from issuing its final rule on coordinating retiree medical benefits with Medicare has reversed her decision.
The Watson Wyatt Human Capital Index® links effective human capital management with overall firm performance.
This article takes a fresh look at the relationship between pension deficits and the credit ratings of sponsoring firms.
In the wake of Hurricane Katrina and the urgent need for charitable relief, many employers want to make a difference.
On September 8, the Senate Health, Education, Labor and Pensions (HELP) Committee approved the Defined Benefit Security Act (DBSA).
The IRS has finalized regulations and proposed additional regulations addressing when plan sponsors may eliminate or reduce early retirement benefits, retirement-type subsidies and optional forms of benefit without having to grandfather the eliminated or reduced benefit.
Senate Finance Committee chair Charles Grassley (R-Iowa), Finance Committee ranking member Max Baucus (D-Montana), and House Ways and Means Committee chair William Thomas (R-California) recently introduced the Tax Technical Corrections Act of 2005.
Since 1998, Watson Wyatt's Human Capital Index® (HCI) has been tracking the link between human capital management and firm performance.
As interest rates have declined over the past five years, sponsoring defined benefit pension plans has become increasingly expensive — as plan sponsors are well aware.
A Delaware court recently ruled that Walt Disney's officers and directors did not violate their fiduciary duty in the hiring and firing of former President Michael Ovitz.
The 2005–2006 Guidance Priority List is out, reflecting the IRS's regulatory intentions for the next year. This year's list shows a modest decrease in the number of employee-benefits-related projects, down to 45 projects from 47 in the past two years.
Senate Finance Committee chair Charles Grassley (R-Iowa) and ranking member Max Baucus (D-Montana) released a new version of their National Employee Savings and Trust Equity Guarantee Act (NESTEG) on July 22, placing a stronger focus on defined benefit funding and related pension reform issues. The Finance Committee approved NESTEG on July 26, thus advancing the pension reform debate.
Changes in the underlying economics of defined benefit plans have made hybrid plans more attractive to employers and to many employees as well. But it could be foolhardy to establish these plans in today's unfriendly legal environment. Unless employers can safely go with the economic and demographic flow to hybrid plans, defined benefit plans may be headed for extinction.
Under pension funding law established over 30 years ago in ERISA, plan sponsors that contribute more than the minimum funding requirement in any plan year accumulate the overpayments as "credit balances" in their funding standard accounts. This encourages sponsors to prefund their plans when they can afford to, generally during good economic times, so there is less need for additional funding during poorer economic times.
The Pension Protection Act (PPA) approved by the House Education and the Workforce Committee on June 30, 2005, would significantly reform the rules governing multiemployer pension plans. The act would reduce the amortization period from 30 to 15 years, establish special funding rules for "endangered" or "critical" multiemployer plans and impose new reporting requirements.
As defined benefit reform was debated on Capitol Hill in June and July, lawmakers also continued to focus on retirement savings and other issues that affect defined contribution plans. Final pension reform could include provisions to ease automatic 401(k) enrollment, encourage annuities, and promote retirement education and investment advice.
At least one Big Four accounting firm has opined that companies cannot fix the equity grant date at which expensing would begin until the terms of the award have been communicated to employees.
Congress moved one step closer to pension reform when the House Education and the Workforce Committee approved the Pension Protection Act of 2005 (H.R.2830) on June 30, 2005.
Representative John Boehner, chairman of the House Education and the Workforce Committee, recently introduced the Pension Preservation and Portability Act, which would clarify that cash balance and other hybrid plans do not violate age discrimination laws.
Employers devote considerable resources to designing, funding and administering their retirement programs.
Since the Medicare Modernization Act passed in December 2003, employers, health plans and other affected entities have been busy preparing for January 1, 2006, when Medicare begins financing a standard prescription drug benefit.
The proposed section 415 regulations clarify that terminated employees may make elective deferrals only from specified forms of post-severance compensation.
As recently as five years ago, companies didn't have to think much about their defined benefit pension funds.
President Bush's nomination of Representative Christopher Cox to succeed outgoing Securities and Exchange Commission chairman William Donaldson could affect the future of important SEC executive compensation initiatives.
At its May meeting, the Financial Accounting Standards Board directed its staff to analyze how accounting for a defined benefit plan that offers a lump sum payment option would be affected if the accumulated benefit obligation for each participant eligible for a lump sum were required to at least equal the lump sum payable to the participant as of the measurement date.
In the executive compensation world, the American Jobs Creation Act (AJCA) is best known for substantially revamping the tax rules that govern nonqualified deferred compensation.
Treasury Won't Change FSA Use-It-Or-Lose-It Rule, President Bush Appoints Tax Reform Panel, PBGC to Assume United Airlines Pilots' Plan, PBGC Proposes Changes to ERISA
The following chart shows key dates for Medicare part D.
Congress moved one step closer to pension reform when House Education and the Workforce Committee chair John Boehner (R-Ohio) introduced the Pension Protection Act of 2005 (H.R.2830) on June 9, 2005.
Last month, U.S. companies received two important — and mostly welcome — messages from the Securities and Exchange Commission (SEC) regarding the new stock option accounting rules under FAS Statement No. 123R.
Employers that provide cafeteria plans may now establish a two-and-one-half-month grace period for participant claims, under a new rule released by the IRS last month.
On April 28, 2005, President Bush unveiled another piece of his plan for Social Security, addressing the criticism that his proposal for individual accounts ignores the projected long-term insolvency.
Prompted by a lawsuit filed by AARP, a federal court in Pennsylvania has prohibited the Equal Employment Opportunity Commission (EEOC) from issuing its final rule on coordinating retiree medical benefits with Medicare.
The last five years have been difficult ones for firms that sponsor defined benefit pension plans. Volatility in financial markets arrived at a time when many firms were facing poor business conditions.
In Revenue Ruling 2005–24, the IRS authorizes tax-free employer contributions of accumulated unused vacation and sick leave to health reimbursement arrangements (HRAs) for retirees.
In Revenue Ruling 2005-25, the IRS clarifies the health savings account (HSA) eligibility rules and contribution limits for married individuals.
With retirement security and personal savings acquiring an increased sense of urgency, Congress wants to encourage workers to save more in their 401(k) and other employer-sponsored defined contribution plans.
In Smith v. City of Jackson, the U.S. Supreme Court resolved a split in the circuits, ruling that the Age Discrimination in Employment Act (ADEA) permits disparate impact claims.
In Rousey v. Jacoway, the U.S. Supreme Court exempted IRAs from the bankruptcy estate, so that assets held in IRAs cannot be reached by creditors when an IRA owner files for bankruptcy.
Congress has started public discussions about the administration's pension reform proposal. The Senate Finance Committee, House Education and the Workforce Committee, and House Ways and Means Select Revenue Measures Subcommittee held hearings in March. In addition, the Senate Health, Education, Labor and Pensions (HELP) and Finance Committees conducted a joint forum to discuss the future of the private pension system.
Recent trends in U.S. private pensions are undeniable. Over the last 25 years, defined benefit plans — once the centerpiece of the retirement portfolio — have lost considerable ground to defined contribution plans, which have become the primary vehicle for saving for retirement. Some analysts claim that traditional defined benefit plans are a dying breed (if not already dead).
The IRS has issued proposed amendments to the 401(k) and (m) regulations that would provide guidance on designated Roth contributions under Internal Revenue Code section 402A, added by EGTRRA. Beginning in 2006, a 401(k) plan may permit employees to designate some or all of their elective contributions as Roth contributions.
Under the U.S.-Canada Tax Treaty, U.S. taxpayers with a Canadian Registered Retirement Savings Plan or Registered Retirement Income Fund can make an election to avoid paying taxes on plan earnings until they start receiving benefits from the plan. Typically, a U.S. taxpayer who has an RRSP or RRIF is a U.S. resident who previously lived and worked in Canada.
In March, the Pension Benefit Guaranty Corporation released final revised 4010 regulations.
On March 29, 2005, the Securities and Exchange Commission (SEC) issued widely anticipated guidance that affords U.S. corporations latitude in measuring the value of employees' stock options when new rules go into effect requiring them to record an expense for employee stock options.
The rhetorical battle over Social Security reform has been somewhat sidetracked by a disagreement over whether the system is in "crisis" or not.
It is important to consider the current workings of our Social Security pension system in order to fully grasp the nature of the financing shortfall ahead and evaluate various proposals to deal with it.
Opponents of individual accounts have noted the double burden of funding the new accounts while continuing to pay out accrued benefits.
Responsible commentators agree that the U.S. Social Security system (OASDI, excluding Medicare, for purposes of this discussion) will run at a substantial deficit over the next 75 years. It is indeed a system in crisis. As part of the overall solution, the Bush administration has proposed individual defined contribution accounts as a replacement for a portion of Social Security. The addition of individual accounts within Social Security is a very bad idea for three reasons: (1) the extra cost would be burdensome, much higher than the administration estimates; (2) the timing of the extra cost would be uniquely poor; and (3) some of the changes in relative equities between various groups would be politically impossible, leading to substantial hidden costs that have not been included in most analyses.
There are many ways to address Social Security’s projected underfunding. One proposal that has received some scrutiny in the press and elsewhere is to change the method for determining initial benefits at retirement.
Social Security reform will affect us all — whether as employers, workers or retirees. There's considerable agreement that reforms are ahead, but, so far, little consensus on what those reforms will be.
I first advocated individual accounts as an element of Social Security reform in a book I wrote on the system in 1982. A reading of history had led me to conclude that, unless we reengineered the system, we would likely squander the coming trust fund accumulation anticipated during the baby boomers’ working careers. Today, the trust fund has accumulated to $1.7 trillion, but the vast majority of people agree that we have not “saved” these assets. As we look for an answer to the financing shortfalls we now face, we need to devise a solution that backs up pension promises with real wealth, so we can provide retirement security for future retirees without imposing an undue and unfair burden on future workers.
An important issue in the current debate on Social Security reform relates to the role a retirement plan plays in personal and national savings.
In formulating reforms for our Social Security system, it is important to first understand all its current functions, so we can rationally design reforms that preserve those elements worth keeping and modify those that are due for a change.
In the recently released budget proposals, the Bush administration outlines pension funding reforms whose stated goals are twofold: to protect workers' benefits and to avert a taxpayer bailout of the financially beleaguered Pension Benefit Guaranty Corporation.
On January 10, 2005, the Bush administration released a proposal to overhaul the funding rules for single-employer defined benefit plans, establish new disclosure requirements for plan sponsors and raise PBGC premiums. President Bush's budget proposal for the 2006 fiscal year provided more details about the proposal.
In addition to proposing reforms to the defined benefit funding rules, President Bush's budget proposal for fiscal 2006 would change the rules governing hybrid pension plans, health care plans and retirement savings plans.
On February 4, a federal court in Pennsylvania blocked the Equal Employment Opportunity Commission from issuing its final rule on coordinating retiree medical benefits with Medicare.
Social Security and the baby boomers' impending retirement have received considerable attention from the media, the business community and academia lately.
The American Jobs Creation Act created a temporary tax benefit for companies that repatriate earnings of foreign subsidiaries and use the funds for specified purposes.
The U.S. Department of Labor has issued proposed regulations implementing the annual funding notice requirement for multiemployer defined benefit plans, which was enacted by the Pension Funding Equity Act of 2004.
President Bush has released his budget proposal for fiscal year 2006. It includes more details on the administration’s defined benefit funding proposal and on previously released proposals relating to hybrid pension plans and retirement savings.
Companies now have a partial roadmap for implementing the changes made by new section 409A of the Internal Revenue Code, which was added by the American Jobs Creation Act of 2004.
The Bush administration has unveiled a new proposal to reform the pension funding rules.
Executive compensation is as controversial as ever — from trials over allegedly excessive severance payments to ongoing criticism of ultra-high pay levels and putative lack of pay for performance.
The IRS has finalized the 401(k) and (m) regulations that were proposed in 2003.
In Notice 2005-5, the IRS provides guidance on the automatic rollover rules for qualified retirement plans, section 403(b) plans and section 457 plans.
The composition and character of retirement plans for U.S. workers have changed over the past few decades.
Last month, the U.S. Departments of Labor, Treasury, and Health and Human Services issued final and proposed regulations on the portability provisions of the Health Insurance Portability and Accountability Act.
On December 16, 2004, the Financial Accounting Standards Board (FASB) published FASB Statement No. 123 (revised 2004), Share-Based Payment. Statement 123(R) provides comprehensive guidance on how to recognize the compensation cost of share-based payment transactions on company financial statements.
For many workers today, 401(k) plans are their primary retirement savings vehicle. Are American workers making the most of their 401(k) plans? Unfortunately, most of them are not. One-quarter of eligible workers choose not to participate in their employer's 401(k) plan, and, of those who do participate, less than 10 percent contribute the maximum.
As the United States considers reforms to its social security system, it has plenty of company. All over the world, countries with aging populations are trying to squeeze their old pension systems into the shape of new demographic realities. The combination of too few workers and too many retirees poses a threat to the comfortable retirement most workers in developed economies have come to expect as their due.
Election Day has come and gone, but the effects on benefits-related issues are likely to be significant and long-lasting. President Bush is expected to stay the course on health care and to move toward Social Security reform.
The IRS has proposed regulations permitting phased retirement arrangements in qualified defined benefit or money purchase pension plans under specified conditions. After the rules become final, these plans will be able — for the first time — to provide in-service distributions to participants younger than normal retirement age.
The wave of litigation against cash balance plans continues. A new lawsuit against the Bank of America's cash balance plan alleges age discrimination and makes a variety of other claims based on the plan's unique design and features.
The IRS has proposed the first comprehensive guidance under section 403(b) in 40 years. 403(b) plans involve retirement annuity contracts and mutual fund custodial accounts for employees of 501(c)(3) tax-exempt organizations and public educational organizations, and retirement income accounts established or maintained by churches or church-affiliated organizations.
Alan L. Beller, director of the U.S. Securities and Exchange Commission's (SEC) Division of Corporation Finance, recently shared his views on how companies should go about disclosing executive compensation on their proxies and how compensation committees can ensure that executive compensation serves the interests of shareholders.
The 2004 session of Congress continued into December, but benefits-related discussions were wrapped up in November. The 108th Congress had a busy legislative agenda, enacting legislation on hybrid pension plans, defined benefit funding and nonqualified deferred compensation.
On November 2, voters failed to uphold California's Pay or Play Employer Mandate, Proposition 72/SB2.
President Bush signed the American Jobs Creation Act (H.R.4520) into law on October 22, 2004.
In addition to the highly publicized new rules for nonqualified deferred compensation plans, the American Jobs Creation Act includes several other compensation and benefit provisions.
The U.S. Department of Labor has released final safe harbor regulations for automatic rollovers of mandatory distributions to IRAs.
On October 4, President Bush signed the Working Families Tax Relief Act. The act extends the Mental Health Parity Act and changes the interest rate provisions of the Jobs Creation and Worker Assistance Act.
The Working Families Tax Relief Act of 2004 changed the Code section 152 definition of "tax dependent," which is often used to determine health and group plan eligibility and benefits’ tax status.
The vast majority of qualified plan sponsors seek IRS confirmation of their plan’s tax-qualified status.
In Field Assistance Bulletin (FAB) 2004-02, the U.S. Department of Labor provides guidance on steps for plan fiduciaries to take to locate missing participants and beneficiaries in terminated defined contribution plans.
Can America Afford to Grow Old? is the title of a book written by three economists at the Brookings Institute and published in 1988. The book title, along with much else written on the subject since then, suggest that the answer is no.
The U.S. Department of Labor has proposed regulations to clarify the implementation of the Uniformed Services Employment and Reemployment Rights Act of 1994.
In Revenue Ruling 2004-98, the IRS shuts down an abusive employment tax arrangement in which employers were essentially reimbursing employees twice for the same parking expense.
On September 29, 2004, IBM announced that it agreed in principle to settle all claims in the Cooper v. IBM class-action lawsuit except claims that the IBM cash balance pension design and the “always cash balance” transition benefit are inherently age discriminatory.
In its October 13 meeting on equity-based compensation, the Financial Accounting Standards Board (FASB) tentatively decided to delay the effective date of the FAS 123 ruling by six months, to interim or annual periods beginning after June 15, 2005.
Election Day is approaching, and President Bush and Senator Kerry are entering the final stages of their presidential campaigns. Health care reform has been a popular campaign topic. Both candidates have plans for increasing access to health care coverage, controlling prescription drug costs, improving health information technology and otherwise reforming the U.S. health care system.
The Sixth Circuit Court of Appeals has overturned the district court's ruling in Crosby v. Bowater. In that case, the district court had ruled that, in a cash balance plan where accrued benefits are payable as a death benefit, a pre-retirement mortality discount should not be figured into the lump sum payment amount.
On March 31, 2004, the Financial Accounting Standards Board (FASB) released Share-Based Payment, its exposure draft (ED) on share-based payment transactions, which would require companies to expense their stock options.
Managing investment returns in a volatile stock market is always challenging. How do rates of return differ between professionally managed and participant-managed funds?
The move to repeal the use-it-or-lose-it rule for health care flexible spending accounts (FSAs) has shifted its focus from Capitol Hill to the U.S. Department of the Treasury. In August, Senate Finance Committee chair Charles Grassley (R-Iowa) wrote a letter urging Treasury Secretary John Snow to repeal the use-it-or-lose-it rule administratively.
The Financial Accounting Standards Board (FASB) met on September 1 to address issues pertaining to the exposure draft on the accounting for share-based awards.
The Financial Accounting Standards Board (FASB) continues to make important (tentative) decisions related to stock compensation.
At its August 25 meeting, the Financial Accounting Standards Board (FASB) addressed key issues related to income taxes and employee stock purchase plans (ESPPs), as part of its continuing review of comments pertaining to the exposure draft on accounting for equity-based compensation.
The Financial Accounting Standards Board (FASB) met August 4 to begin re-examining key decisions in the exposure draft on Share-Based Payments.
Hybrid pension plans have been in the spotlight for some time now, receiving ongoing attention from lawmakers, regulators and the media. One of the most focused public discussions of cash balance issues was on July 7, 2004, when the House Education and the Workforce Committee held the hearing "Examining Cash Balance Plans: Separating Myth from Fact."
The 2003 Medicare Prescription Drug, Improvement and Modernization Act (MMA) created tax-favored health savings accounts (HSAs), which are used in conjunction with high-deductible health plans (HDHPs). The idea is that consumers use the money in their HSA to pay their out-of-pocket health costs and rely on the HDHP mostly for medical catastrophes.
The 2004-2005 Guidance Priority List is out, reflecting the IRS's regulatory intentions for the next year. After a couple of years with wide fluctuations in the number of projects — namely a dramatic decrease in 2002 followed by an increase in 2003 — this year's list contains the same number of projects as last year's: 47.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 created a new health savings vehicle, Health Savings Accounts (HSAs), that employers may provide in conjunction with high-deductible health plans (HDHPs).
The U.S. Supreme Court has ruled that ERISA preempts state laws that allow health plan participants to sue their health plans for denying coverage.
The controversy surrounding cash balance and other hybrid pension plans shows no signs of letting up.
In Central Laborers’ Pension Fund v. Heinz, the Supreme Court ruled that ERISA’s anti-cutback rule prohibits changes to a pension plan’s suspension-of-benefits rules that would reduce benefits for employees who continue working after retirement.
On June 17, the House approved the American Jobs Creation Act (H.R.4520), which would make several significant changes to the rules on nonqualified deferred compensation (NQDC).
On June 8, Senator Tom Harkin (D-Iowa) sent a letter to Treasury Secretary John Snow stating that he does not object to the proposed delay of the effective date of the relative value regulations, except as they pertain to lump sum distributions.
The IRS has issued comprehensive final regulations on required minimum distributions under Code section 401(a)(9).
The U.S. Department of Labor (DOL) has issued final COBRA regulations addressing notice and disclosure.
The IRS has released guidance on determining the appropriate U.S. tax treatment for a distribution from a U.S. qualified plan to a nonresident alien participant.
The California Health Insurance Act of 2003, or SB2, mandating employer-sponsored health coverage, is on the November 2004 ballot as Proposition 72 for the public to keep or repeal.
The Jumpstart Our Business Strength (JOBS) Act (S.1637) would impose new limits on nonqualified deferred compensation arrangements, restrict the deferral of gains from employer securities and make other changes that would affect executive compensation.
The House of Representatives approved legislation to allow up to $500 of unused money in a flexible spending account to be carried forward or rolled over into a health savings account.
In Revenue Rule 2004-45, the IRS explains when having either a health flexible spending account or a health reimbursement arrangement disqualifies an individual from making tax-free contributions to a health savings account.
Despite significant increases in plan liabilities, the average funded status of pension plans sponsored by Fortune 1000 companies rose from 82 percent in 2002 to 88 percent in 2003, according to their annual reports.
On May 12, the House Financial Services Committee subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises approved legislation to delay the Financial Accounting Standards Board’s proposal to require companies to expense stock options.
According to WorkUSA® 2004, a survey of the attitudes and opinions of U.S. workers, most employees do not believe their company’s performance management program actually improves performance.
On April 22 the U.S. Equal Employment Opportunity Commission (EEOC) voted to approve a proposed rule permitting employers that offer medical benefits to early retirees to continue the long-standing practice of offering different medical benefits to retirees eligible for Medicare.
After months of delay, President Bush signed the Pension Funding Equity Act into law on April 10, 2004. The act provided important funding reform for defined benefit plan sponsors only days before the April 15 due date for plans’ quarterly contributions.
A decade ago, employers began converting their traditional pension plans to hybrid plans, such as cash balance and pension equity plans (PEPs).
Amid double-digit increases in the cost of health care benefits and mounting concerns about prescription drug costs, drug importation is attracting renewed attention.
The IRS recently issued its second round of guidance regarding health savings accounts (HSAs), which answers employers’ most pressing questions and concerns about these new accounts.
The 2003 Medicare Prescription Drug Modernization Act allows employers to establish Health Savings Accounts (HSAs) in conjunction with high-deductible health plans (HDHPs) to pay for medical expenses not covered by the HDHP.
Even as Congress struggled to enact temporary interest rate reform, lawmakers were setting the stage for more fundamental reform of the rules that govern defined benefit funding.
The IRS has issued a helpful general information letter on automatic compensation reduction elections (also known as “automatic enrollment,” “passive enrollment” and “negative elections”) for contributions to 401(k) plans and 403(b) plans.
Since the Medicare Prescription Drug Act was passed in December 2003, employers have sought clarification from the IRS of the new tax-advantaged Health Savings Account (HSA). The Treasury Department and the IRS responded on March 30, 2004, with new guidance.
The U.S. Treasury’s recently proposed hybrid pension legislation is, as we have said previously, a mixed bag. Some elements are quite positive, and others would be destructive to the defined benefit system.
On March 31, the Financial Accounting Standards Board (FASB) released Share-Based Payment, its exposure draft (ED) on share-based payment transactions.
The U.S. Supreme Court recently ruled that the Age Discrimination in Employment Act (ADEA) does not prohibit employment or benefit practices that favor older workers over younger workers, even when the younger workers fall within the ADEA’s protected class.
The concept of retirement is taking on an entirely new meaning. Rather than stopping work altogether, many retirement-age workers today would prefer to simply shift into a lower gear. Some are even beginning new careers.
The IRS has proposed regulations on when a plan sponsor may amend a plan to eliminate or reduce an early retirement benefit, a retirement-type subsidy or an optional form of benefit (Code section 411(d)(6)(B) protected benefits), without having to grandfather the previously existing benefit.
In Private Letter Ruling (PLR) 200407021, the IRS ruled that a plan sponsor’s Microsoft PowerPoint® presentation at employee meetings satisfies the written notice requirements of ERISA section 204(h).
In Revenue Ruling 2004-10, the IRS has ruled that, in a defined contribution plan, charging plan administrative expenses to former employees’ accounts but not to current employees’ accounts does not violate the rules concerning participant consent to a distribution.
In Rev. Rul. 2004-11, the IRS provides guidance on the grace period for coverage and nondiscrimination testing after a change in the controlled group.
Treasury’s proposed legislative solution to end the current limbo status of hybrid plans has some aspects that are very good and others that are worse than we expected.
President Bush submitted his Fiscal Year 2005 budget proposal to Congress on February 2, 2004. It proposes new savings vehicles and expanded access to health insurance and long-term care insurance, and addresses other employment-related issues.
In its budget proposal for Fiscal Year 2005, the Bush administration tackles conversions to cash balance and other hybrid plans. The proposal would establish more restrictive transition rules for plan conversions and would change the calculations used to determine lump-sum distributions from hybrid plans.
The world is getting older. And, of course, no one knows exactly what life will be like in tomorrow’s older societies. But we do know that age dependency ratios — the ratio of retirees to workers — will be much higher than we see today.
In late January, Congress inched closer to establishing a new temporary pension interest rate when the Senate approved the Pension Stability Act (H.R.3108). But controversy over some of the act’s provisions is holding up the works.
Congress did not enact pension interest rate reform before wrapping up its 2003 legislative session. As a result, the temporary relief enacted in 2002 by the Job Creation and Worker Assistance Act will expire at the end of employers'' 2003 plan year.
The controversy over cash balance plans continues to play out. The first appellate court to consider whether the plan design violates federal age discrimination laws has ruled in favor of the plans.
Absent any last-minutes surprises, 2004 will be the final year of no accounting expense for stock options. The Financial Accounting Standards Board’s tentative decision is for the new standard to become effective for fiscal years beginning after December 15, 2004.
The IRS’ final regulations on disclosing optional forms of benefit govern the content of Qualified Joint and Survivor Annuity and Qualified Preretirement Survivor Annuity notices, and specify requirements for disclosing the relative values of optional forms of benefit.
On December 8, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act. The act creates a prescription drug benefit for the first time in Medicare’s history and makes other important changes to the program.
Congress has enacted the most sweeping changes ever made to Medicare by passing the Medicare Prescription Drug, Improvement and Modernization Act, which was signed into law December 8, 2003. The act provides a prescription drug benefit for Medicare beneficiaries and enacts reforms intended to encourage more private health plans to offer integrated benefits to seniors.
Some Americans are saving large amounts of money by purchasing their prescription drugs from Canada. Although health plan sponsors may find the potential savings attractive, there are good reasons to steer clear of importing prescription drugs from Canada.
In addition to its focus on prescription drug benefits and other reforms to Medicare, the Medicare Prescription Drug, Improvement and Modernization Act creates Health Savings Accounts. These accounts could promote consumer-driven health care by making high-deductible health plans more attractive to both employers and individuals.
With the recent enactment of SB2, the "pay or play" employer mandate in California, employers with 200 or more employees will be required to provide health insurance coverage for their employees and dependents by January 1, 2006.
The Financial Accounting Standards Board plans to complete its deliberations on the equity-based compensation project this quarter and to issue an Exposure Draft in early 2004 and a final statement later in the year.
After the Enron accounting scandal and bankruptcy, participants in the company’s retirement plans filed lawsuits charging alleged fiduciaries with liability for the plans’ investment losses.
Effective corporate communication appears to boost both profits and employee satisfaction, according to Connecting Organizational Communication to Financial Performance — 2003/2004 Communication ROI Study™.
In the continuing deliberations on replacing the current liability interest rate, two new proposals emerged in September.
In Revenue Ruling 2003-102, the IRS clarifies that insured and self-insured health plans, including health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) and consumer-driven health plans (CDHPs), may allow participants to pay for over-the-counter (OTC) drugs with pretax dollars.
Many health plans, providers and health plan sponsors just recently managed compliance with the Health Insurance Portability and Accountability Act’s privacy requirements, which became effective in April of this year. Now, these same plans and covered entities must begin planning for the next phase of HIPAA — the Security Rule — which becomes effective in April 2005 (April 2006 for small plans).
On September 9, the House of Representatives approved an amendment offered by Representative Bernie Sanders (I-Vermont) to the Treasury/Transportation appropriations bill that would prohibit the U.S. Treasury Department from becoming involved in efforts to overturn the Cooper ruling.
A federal district court recently ruled that IBM's cash balance plan and pension equity plan violate age discrimation law.
In the end, it comes back to the question of fairness. After all the newspaper articles, the legal maneuvering and the congressional clamor, the core question remains: Are hybrid pension plans unfair to older workers?
It's always disturbing when the news media confuse opinion with fact or make unsubstantiated generalizations. And when the issue at hand affects countless organizations and potentially millions of workers, the confusion cries out for clarification.
It is difficult these days to pick up a newspaper or business magazine or to watch a national news broadcast without seeing a story about pensions.
A spate of recent articles in various publications has prompted a debate among actuaries, academics and other professionals in pension plan finance about how financial economics tenets apply to pension plans.
The gradual shift away from defined benefit plans and toward 401(k) plans has several consequences, one of which is to essentially reassign responsibility for ensuring adequate retirement income from plan trustees to individual participants.
The IRS recently issued final retroactive annuity starting date election regulations, which describe the required procedures for distributing qualified joint survivor annuity explanations to participants and spouses after the annuity starting date.
The 2003-2004 Guidance Priority List is out, reflecting the IRS’s regulatory intentions for the next year, although the agency may release other guidance as well. After a dramatic decrease in the number of employee benefit plan projects last year, this year's number is higher, increasing from 40 to 47.
The differences between the Senate-approved Prescription Drug and Medicare Improvement Act (S.1) and the House-approved Medicare Prescription Drug and Modernization Act (H.R.1) will be negotiated by a House-Senate conference committee that convenes in July.
The U.S. Treasury Department released a controversial proposal to measure pension liabilities using a yield curve, and the Ways and Means Committee approved legislation that would temporarily use a corporate bond rate.
At its May 15 meeting, the Emerging Issues Task Force concluded that a cash balance plan should be considered a defined benefit plan for accounting purposes and that the traditional unit credit (TUC) actuarial cost method should be used in accounting for cash balance plans.
The FASB has tentatively decided to make some changes to FAS 132 pension disclosures.
The IRS has proposed new comprehensive regulations for CODAs under Internal Revenue Code section 401(k) and for matching contributions and employee contributions under section 401(m).
The EEOC has issued a proposed exemption to the ADEA that would allow employers to alter, reduce or eliminate employer-sponsored retiree health benefits when retirees become eligible for Medicare or a state-sponsored retiree health benefits program.
The SEC approved the NYSE and NASDAQ proposals to change their respective requirements for the shareholder approval of equity compensation plans.
The DOL is proposing new rules to improve the consistency and clarity of four COBRA notices furnished by employers, plan administrators, employees and their families.
Revenue Ruling 2003-85 concerns the tax treatment of transfers that exceed 25 percent of excess assets from a terminating defined benefit plan to a replacement defined contribution plan.
In Revenue Ruling 2003-62, the IRS provides definitive, final guidance on the tax consequences of using distributions from a qualified retirement plan to pay for benefits offered under a cafeteria plan.
The IRS has issued final regulations on catch-up contributions, which allow workers age 50 and older to defer more money to retirement plans that accept elective deferrals.
A typical employer-provided retiree drug plan today — involving employer payments, retiree contributions and retiree out-of-pocket amounts — might be funded as follows.
The following text is from the Executive Summary of Watson Wyatt’s response to the IRS’s request in Notice 2002-43 for comments on phased retirement. The full report summarizes Watson Wyatt’s responses to the specific questions posed in Notice 2002-43 and provides additional detail and analysis.
As this issue of the Watson Wyatt Insider went to press, the House and Senate had approved separate bills to reform Medicare and provide prescription drug coverage for seniors. There are some important differences between the Senate’s Prescription Drug and Medicare Improvement Act and the House-approved Medicare Prescription Drug and Modernization Act.
Over the last few years, the investment climate has been marked by the equivalent of a perfect storm, leaving many defined benefit plan sponsors with underfunded plans. Unless we see extraordinarily healthy investment performance very soon, plan sponsors will have to make significant contributions to their pension plans over the next few years.
A range of health care issues — Medicare, drugs for seniors, genetic discrimination, generic drugs and health savings accounts — has been the focus of recent congressional attention. The Medicare and prescription drug debates are in full swing, and Congress is discussing legislation to ban discrimination based on genetic information, to speed generic drugs to the marketplace and to authorize Health Savings Accounts.
In Field Assistance Bulletin (FAB) 2003-3, the U.S. Department of Labor (DOL) gives plan sponsors and fiduciaries considerable flexibility to determine — as a matter of plan design or administration — how to allocate defined contribution plan expenses among participants and beneficiaries. For the purposes of this guidance, the DOL assumes that the expenses are proper plan (not settlor) expenses and are reasonable amounts. The guidance does not address issues that could arise under IRS rules.
Efforts to impose new restrictions on nonqualified deferred compensation plans and certain stock compensation arrangements are gaining momentum in Congress.
On May 14, the House approved the Pension Security Act by a vote of 271-157. Prompted by the Enron scandal, the bill is similar to legislation approved by the House in April 2002.
In a long-awaited revenue ruling, the IRS has approved the use of debit or credit cards to reimburse qualified medical expenses from health Flexible Spending Accounts and Health Reimbursement Arrangements.
Requiring companies to recognize stock-based compensation as an expense may not exert the downward effect on stock prices that many have feared, according to a recent analysis by Watson Wyatt Worldwide.
In Field Assistance Bulletin 2003-1, the U.S. Department of Labor provides some resolution to the potential conflict between the Sarbanes-Oxley Act of 2002 and ERISA.
The United States and United Kingdom have finally ratified their 2001 tax treaty, providing significant relief for expatriate employees in both countries, but particularly for U.S. participants in British “approved pension schemes.”
The Supreme Court has agreed to hear Cline v. General Dynamics, to determine whether the Age Discrimination in Employment Act prohibits employment or benefit practices that favor older workers over younger workers within the protected class.
The IRS recently published its second white paper on the determination letter program for qualified retirement plans.
The IRS has released two revenue rulings that clarify which types of cosmetic-type treatments and over-the-counter treatments and supplies are “qualified medical expenses” and thus eligible to be paid or reimbursed under a medical plan.
The Financial Accounting Standards Board (FASB) staff met on May 28, 2003 to consider the consensus reached by the Emerging Issues Task Force (EITF) on May 15, 2003 regarding issues related to cash balance accounting.
Proposed EITF Guidance Under Issue 03-4, "Accounting for 'Cash Balance' Pension Plans"
Since their release in December, the proposed age discrimination regulations have been a source of controversy.
On April 11, Representatives Rob Portman (R-Ohio) and Ben Cardin (D-Maryland) introduced the Pension Preservation and Savings Expansion Act (H.R.1776), which proposes a wide range of retirement savings and pension reforms.
The Department of Defense (DoD) has called up more than 200,000 military reservists for the war in Iraq — and additional call-ups will likely be necessary to maintain U.S. forces in Iraq for post-war activities.
In the Financial Accounting Standards Board’s (FASB) first meeting on the stock-based compensation project on April 22, the Board reached a key tentative conclusion that stock-based compensation (SBC) should be recognized as an expense and that the stock grants should be recorded at their fair value as measured on the grant date.
The passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) was hailed as one way to make health benefits more portable for American workers. Title II of the Act, Preventing Fraud and Abuse, received relatively little attention back then.
Issues surrounding defined benefit plan funding and the demise of the 30-year Treasury bond are being discussed in Washington, D.C.
Following Enron’s collapse, the media and the 2002 congressional session focused considerable attention on the fallout — on Enron’s 401(k) plan participants in particular and on employer stock in 401(k) plans and other 401(k) issues more generally.
On March 12 the Financial Accounting Standards Board (FASB) decided to open a major project on accounting for stock-based compensation. First on the agenda will be stock options and whether they should have a compensation expense.
The First Circuit Court of Appeals has affirmed the decision in Campbell v. BankBoston, becoming the first appellate court to consider age discrimination claims against a cash balance plan.
When President Bush proposed his fiscal year 2004 budget, he included $400 billion over 10 years for prescription drug coverage and other reforms to Medicare.
In the wake of the Enron scandal, the House approved the Pension Security Act in April 2002. The legislation was intended to give employees more control over investments in their 401(k) plans and broader access to investment information and advice.
In early February, President Bush sent Congress his budget proposal for fiscal year 2004. It includes benefit and compensation provisions, Medicare reform and proposals to help the uninsured gain health care coverage.
The funded status of U.S. pension plans has declined sharply since 2000, and more employers will be required to make contributions for the 2002 plan year, according to Watson Wyatt’s 2002 Survey of Actuarial Assumptions and Funding.
The U.S. Department of Labor (DOL) has finalized, with some changes, requirements for blackout notices to 401(k) plan participants as required by the Sarbanes-Oxley Act.
The IRS is soliciting comments on the application of the anti-cutback rule to contingent event benefits, such as plant shutdown benefits or involuntary separation benefits.
In Revenue Procedure 2003-16, the IRS explains how taxpayers can apply for a waiver of the 60-day rollover requirement and describes circumstances in which a waiver is automatic.
Few could have predicted the magnitude and number of forces that would bear down on executive compensation over the past year. The Conference Board Commission on Public Trust and Private Enterprise rightfully called the aggregated events a “Perfect Storm.” The Sarbanes-Oxley Act, passed in July of 2002, is just the beginning. It broadly affects financial reform, criminal penalties, and corporate governance. From a compensation perspective, it prohibits loans to officers and affects insider trading by requiring insiders to report trades within two business days and prohibiting sales during 401(k) blackout periods. The SEC’s delay in clarifying vague aspects of the Act in areas such as loans prolongs the storm and confusion.
The IRS and U.S. Treasury Department released proposed regulations concerning age discrimination in employer-sponsored retirement plans in December 2002.
In December 2002, the Financial Accounting Standards Board (FASB) issued FAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which amends FAS 123, Accounting for Stock-Based Compensation.
In recently released Revenue Rule 2003-11, the IRS approves plan amendments retroactively applying the $200,000 compensation limit to all former employees effective as of the first plan year beginning after December 31, 2001.
In Advisory Opinion 2002-14A, the U.S. Department of Labor (DOL) responds to a request from an insurance company for clarification of how the safest available annuity provider requirements, described in Interpretive Bulletin (IB) 95-1, apply to defined contribution plans.
In Revenue Procedure 2003-10, the IRS extends the deadline for plan sponsors to amend their defined benefit (DB) plans to comply with the 401(a)(9) final and temporary regulations.
In December, the IRS published proposed regulations explaining how cash balance plans can demonstrate compliance with age discrimination laws and general nondiscrimination tests. The draft regulations are primarily age discrimination rules that apply to all employer-sponsored retirement plans, with specific attention paid to cash balance plans.
The 108th Congress is underway, with the new Republican majority bringing significant changes — the most important being Republican control of the Senate and the House.
In a new form of informal guidance called a Field Assistance Bulletin (FAB), the U.S. Department of Labor’s national office explained to its regional office staff (and indirectly to the private sector) what it believes are the fiduciary considerations under ERISA involved with refinancing an employee stock ownership plan (ESOP) loan.
The U.S. Department of Labor’s Pension and Welfare Benefits Administration has released Field Assistance Bulletin 2002-2, describing circumstances under which multiemployer trustees may be acting in a settlor — rather than a fiduciary — capacity.
After making a few changes, the IRS has finalized plan loan regulations proposed in 2000. The regulations address multiple loans, refinancing, suspension of loan repayments due to military leave and loans subsequent to a deemed distribution.
The IRS recently released two Technical Advice Memoranda concerning section 4958 taxes on excess benefit transactions, reflecting increased IRS scrutiny of tax-exempt organizations’ pay practices. TAM 200244028 emphasizes how important it is for board compensation committees at tax-exempt organizations to rely upon appropriate pay data in establishing the pay level of certain executives, referred to as disqualified persons.
To encourage delinquent Form 5500 filers to take advantage of the Delinquent Filer Voluntary Compliance (DFVC) program, the IRS and the U.S. Department of Labor (DOL) are jointly searching various databases to identify potential non-filers. Delinquent filers who are "caught" may not participate in the DFVC program, which offers substantially reduced civil penalties for delinquent filings.
The U.S. Department of Labor (DOL) has released requirements for blackout notices to 401(k) plan participants as required by the Sarbanes-Oxley Act enacted earlier this year.
Accounting scandals have focused legislative, media and corporate attention on accounting for stock options, and there have been calls for new laws and revamped accounting rules.
The 107th Congress finished its work with a post-election “lame duck” session — further legislative action must wait until the 108th Congress convenes in January. During the 2001-2002 term, Congress focused on a range of benefits-related issues.
In an effort to counter the increasing complexity of pension plan administration, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 directed the IRS to provide plan sponsors with some relief.
In August, the U.S. Department of Labor (DOL) filed a “friend of the court” brief in Tittle v. Enron Corp. (S.D. Tex.), indicating that although the DOL is not a party to the litigation, it wishes to advise the court on the case.
The IRS has proposed regulations that would require plan administrators to disclose information to help participants compare the relative values of the distribution options available under their defined benefit plans.
Inadequate communication about the true value of their compensation and benefits has led many workers to conclude that the grass may be greener at other organizations when it comes to rewards, according to the new Watson Wyatt WorkUSA® 2002 Survey.
Only 6 percent of the health plan vendors responding to a Watson Wyatt survey met the October 16, 2002, deadline for complying with the Electronic Data Interchange (EDI) rules issued under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The remaining 94 percent applied for an extension from the Department of Health and Human Services (DHHS).
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 made a number of changes to retirement plans, including higher compensation, contribution and benefit limits, and expanded rollover opportunities.
Executive compensation is facing intense scrutiny today from all quarters: political, media, corporate boards and even executives themselves.
The federal government's decision to stop issuing 30-year Treasury bonds drove interest rates nearly two percentage points below other conservative long-term bond rates.
Since 1985, defined benefit plan sponsors have been required to report pension income and expense for accounting purposes using Statement 87 of the Financial Accounting Standards Board (FASB). The rules, which amortize asset gains and losses over many years to compute pension expense, have recently come under attack.
Once again, Congress is struggling over prescription drug issues, including price increases and coverage for Medicare beneficiaries.
Today’s trend away from employer-provided retiree health benefits is certain to continue, thanks to rising health care costs, growing retiree populations, uncertain business profitability and federal regulations that discourage employers from prefunding retiree medical benefits.
The congressional spotlight has recently been focused on corporate governance, and retirement plans, including 401(k), cash balance and other qualified plans, have become part of that focus.
The IRS has changed its position on transfers of surplus assets from terminated defined benefit plans to qualified defined contribution replacement plans.
The Department of Health and Human Services (HHS) recently published final regulations that clarify the Health Insurance Portability and Accountability Act (HIPAA) standards due to become effective April 2003.
In a July 29, 2002 press release, Standard & Poor's (S&P) announced that they are asking U.S. corporate bond issuers who sponsor defined benefit pension plans to submit information concerning their plan assets as of June 30th, 2002, because S&P "has grown increasingly concerned about the funding status of U.S. corporate [sic] with defined benefit pension plans."
Winning back investor trust may be a difficult assignment, but the pressure is mounting for employers to do just that. While a few have responded by voluntarily expensing stock options, others mull suggestions to raise ownership targets or require more disclosure around intended sales by executives. Currently debated legislation may provide some guidance but it won't help a company maximize the performance and motivation of its own work force. What’s an employer to do?
Stock options, deferred compensation and other executive compensation issues are receiving considerable attention on Capitol Hill.
The IRS recently released Notice 2002-47, which continues the IRS moratorium on collecting FICA and FUTA taxes on statutory stock options.
On June 26, the IRS issued a Notice and a Revenue Ruling on the tax treatment of Health Reimbursement Arrangements (HRAs).
On July 30, President Bush signed the Sarbanes-Oxley Act of 2002 — a corporate accountability and accounting reform law prompted by the business scandals of recent months.
On July 10, the Senate Finance Committee approved the National Employee Savings Trust and Equity Guarantee (NESTEG) Act (S.1971).
News of a company’s 401(k) plan misfortunes usually hits plan participants hard, often affecting attention to work, quality of work and employee morale.
In a notice released on July 3, 2002, the IRS proposed extensive regulations that, when finalized, will dramatically change the taxation of future split dollar arrangements.
In Rush Prudential HMO, Inc. v. Moran, the Supreme Court recently ruled that a state statute allowing for an independent review of certain denials of benefits is not preempted by ERISA for an insured group health plan.
The IRS has separately requested comments on issues relating to phased retirement under qualified defined benefit plans and on eliminating optional forms of distribution from defined benefit plans.
The easy flow of information between individuals, businesses and governments has legislators and consumers worried about the security and confidentiality of personal information, especially medical records, financial information, Social Security numbers and other sensitive data. Congress and the states have been busy enacting privacy protections.
The DOL Office of Inspector General (OIG) has released a report reviewing the enforcement activity of the DOL Pension and Welfare Benefits Administration (PWBA) with respect to cash balance plan conversions.
Those who have been following the recent press coverage of corporate-owned life insurance, most notably in the Wall Street Journal, may be asking: “What’s the problem with COLI?”
In a recent revenue ruling, the IRS has confirmed that employers may automatically enroll employees for health coverage in a cafeteria plan as long as employees have an opportunity to decline coverage each plan year.
The IRS recently issued guidance on dealing with a health Flexible Spending Arrangement (FSA) in an asset sale, confirming that employees transferred to the buyer may continue coverage under the health FSA without interruption.
Over the past two decades, efforts to reform public pensions in the U.K. have focused on shifting the financial burden from the state to the individual. This movement was launched when the Conservative Party came to power under Prime Minister Margaret Thatcher in 1979, and has continued since then — even under the current Labour Party government.
Earlier this month, the IRS issued proposed regulations on Section 457 deferred compensation plans. The most important provisions could put an end to nonprofit employers using nonqualified stock options as deferred compensation.
In CSX Corp. v. U.S., a Court of Federal Claims recently held that certain Supplemental Unemployment Compensation payments are not FICA wages. This is an important decision, because employers that downsized and paid supplemental unemployment compensation in 1999 or later most likely treated those payments as FICA wages and paid FICA taxes.
If one were to consider likely candidates for significant social security reform, Italy would not immediately spring to mind. Yet, Italy, like Sweden, managed to push through significant reforms, relying heavily on a negotiated approach.
The IRS has proposed new regulations on the participant notice requirements for plan amendments that reduce the rate of future benefit accrual. The notice requirements were revised by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
The parties in Erie County Retirees Assoc. v. County of Erie, Pennsylvania recently settled their case out of court, bringing to a close their three-year court battle over how the ADEA affects retirees.
A new California state law limits printing, transmitting, communicating or otherwise using Social Security numbers (SSNs). The law goes into effect July 1, 2002, and will change the way employers use SSNs, including in employee benefit plan transactions.
The Department of Labor (DOL) recently issued final rules for disclosing certain employee benefit plan information via electronic media and maintaining employee benefit plan records electronically.
On April 11, the House approved the Pension Security Act by a vote of 255-163. The act would expand diversification rights for participants in defined contribution plans; require employers to provide participants with benefit statements, information about investing wisely and notification of planned blackout periods; and increase access to retirement education and advice.
In February, after a three-year buyback program for 30-year Treasury bonds that drove rates nearly two percentage points below other conservative long-term bond rates, the federal government stopped issuing these bonds altogether.
The IRS has issued final and temporary regulations on minimum required distributions (MRDs) under Code section 401(a)(9). The regulations provide new life expectancy tables, allow more time for beneficiary determinations and simplify the process for providing MRDs from defined benefit plans and annuity contracts.
The IRS has indefinitely suspended the requirement to file Schedule F of Form 5500. Before now, employers maintaining cafeteria plans, educational assistance programs and adoption assistance programs had to file Schedule F annually.
The IRS has ruled that participation in a weight-loss program as treatment for a disease or diseases diagnosed by a physician - including obesity - is a deductible medical expense, and thus reimbursable under a health flexible spending account
President Bush's Commission to Strengthen Social Security presented its set of three reform proposals at the end of last year and has not been heard from since. Though few expect Social Security reform to see the legislative light of day this year, it cannot be put off forever.
On March 9, President Bush signed the Job Creation and Worker Assistance Act into law. The bill – an economic stimulus package aimed at creating new jobs and providing assistance to displaced workers – includes important provisions for defined benefit plans.
Legislation to reform 401(k) plans began the long trek through Congress when the House Ways and Means Committee approved a bill on March 14, 2002.
Congress and the Securities and Exchange Commission (SEC) have taken aim at current rules that allow corporate insiders to report sales of company stock days — or even more than a year — after the transaction occurs. Lawmakers and securities regulators want faster reporting to both the government and the public.
The February unemployment rate fell to 5.5 percent from its December high of 5.8 percent. As the economy moved into recession last fall — exacerbated by the terrorist attacks on September 11 — Watson Wyatt predicted that the U.S. labor markets would likely firm up again fairly quickly once the economy started to recover.
The IRS proposed new golden parachute regulations in February. The original pro-posed regulations — issued in 1989 — have clearly withstood the test of time very well. Other than a narrower definition of disqualified individuals and more guidance on the valuation of stock options, changes and clarifications in the new proposed regulations are relatively few and minor.
As expected, employer stock in 401(k) plans has become a key issue for Congress. Committees in both the House and Senate have held or planned 401(k)-focused hearings, and legislative proposals continue to pour in. The range of issues is growing as discussions continue, so in addition to limits on employer stock in 401(k) plans, Congress is talking about blackout periods, investment education, fiduciary responsibility, portfolio diversification and other related issues. By mid-February, almost a dozen proposals were on the table to fix a range of perceived problems.
In 1996, Congress passed the Health Insurance Portability and Accountability Act (HIPAA). This far-reaching legislation affects employers, health plans and others, and provides numerous safeguards and procedures for maintaining and administering group health plans. When employers or plan administrators hear "HIPAA," they typically think - certificates of creditable coverage, special enrollment rights or nondiscrimination rules.
When Enron declared bankruptcy last year, Congress began taking a closer look at 401(k) investments — especially 401(k) plans invested heavily in employer stock.
In DOL Advisory Opinion Letter 2001-09A, the Department of Labor permits a regulated financial services company specializing in retirement savings products to team up with an independent financial expert to offer personalized investment advice to plan participants.
The Supreme Court recently handed down a decision that effectively prevents ERISA welfare benefit plans from recovering money paid out in health care benefits to participants, even when the participant later receives tort damages from a third party responsible for his or her injuries.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included several retirement provisions increasing benefit, contribution and compensation limits and liberalizing the rules for rollovers.
The 2002 legislative session is underway, and a variety of benefits-related issues are on the table. The approaching elections will affect discussions of key issues — patients’ rights, Medicare reform and other health care areas that are particularly sensitive during campaign season.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) expanded the Code §404(k) dividend deduction for C corporations to apply to dividends participants elect to have paid to an ESOP and reinvested in qualifying employer securities.
In the decades-long effort by the IRS to clarify the income tax treatment of split-dollar life insurance arrangements, the IRS and the Treasury Department recently issued a new installment of guidance. Notice 2002-8 revokes Notice 2001-10.
The SEC adopted new disclosure requirements for reporting companies with stock compensation plans. Registrants must include a new table in their annual reports on Form 10-K, as well as in their proxy statements in years when they are submitting a compensation plan for security holder action.
The IRS recently issued a revenue ruling addressing the validity of a health care arrangement under which certain health care payments were excluded from an employee’s gross income.
Shortly after the Financial Accounting Standards Board (FASB) released Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (FIN 44), the Emerging Issues Task Force (EITF) began to consider a myriad of stock compensation accounting issues relating to APB 25, Accounting for Stock Issued to Employees, and FIN 44. So far, the EITF has addressed approximately 40 open questions, with one of the most important being accounting for repricings.
The IRS has announced the annual cost-of-living adjustment of various dollar limits for employee benefit plans.
The widespread shift toward 401(k) plans and away from defined benefit plans has prompted a corresponding shift in investment responsibilities — from plan trustees to employees. To analyze how that shift is affecting the potential retirement income and security of today’s workers, Watson Wyatt authored an ongoing series, "Can Your Employees Afford to Direct Their Own Retirement Plan Investments?"
The IRS is giving employers more time to amend their retirement plans to comply with the GUST amendments. While plans have been required to operate in accordance with the new laws for some time, the IRS had repeatedly extended the deadline for adopting the related plan amendments.
The IRS recently proposed regulations that would impose Social Security, Medicare and unemployment taxes on the exercise of statutory stock options. The agency maintains that the exercise of statutory stock options constitutes wages for FICA and FUTA purposes.
In today’s slowing economy, many companies are looking for ways to trim their labor costs without resorting to layoffs. For some employers, one answer is encouraging more workers to retire early. An early retirement window offers workers extra retirement incentives for a limited period of time. A recent Watson Wyatt survey found that 17 percent of U.S. companies have offered early retirement windows over the past three years.
The IRS recently issued final regulations governing the interaction of the Family and Medical Leave Act (FMLA) with cafeteria plans. These regulations finalize the regulations proposed in 1995, with a few modifications, and become effective for cafeteria plan years beginning on or after January 1, 2002.
Faced with a new round of double-digit health care benefit cost increases in 2002, more than half (56 percent) of employers say they will raise employee contributions by as much as or more than their expected cost increases. In addition, more than 70 percent of employers are considering benefit reductions or an increase in employee copays over the next 12 months, according to Watson Wyatt's Health Care Costs 2002 Survey.
The IRS has proposed regulations for the new catch-up contribution provision enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Intended to help older workers boost their retirement savings, the new law allows all workers age 50 and older to defer more money to retirement plans that accept elective deferrals.
The Retirement Security Advice Act (H.R.2269) moved forward again on October 3 when it cleared the House Education and the Workforce Committee. Sponsored by Education and the Workforce Committee chair John Boehner (R-Ohio), the bill would give employees access to specific investment advice.
The IRS has released guidance on the higher maximum benefits from qualified plans enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
The tragic events of September 11 raise many issues for U.S. employers, including human resource and benefits issues. The IRS, Department of Labor (DOL) and other government agencies already have issued guidance providing some relief, and Congress is expected to provide even more.
In the wake of the September 11 terrorist attacks, the Department of Defense (DOD) has been authorized to call up military reservists. Their mobilization brings up many questions regarding the employment status and benefits of employees called to military service.
Every decade or so, employer-sponsored health care benefits seem to undergo a sea change. In the 1970s, we faced ERISA; in the early 1980s, flex emerged; late in the 1980s and into the 1990s, managed care moved into the mainstream.
The mapping of the human genome and related scientific developments have prompted concerns about the potential abuse of genetic information, including discrimination by health insurers and employers on the basis of such information.
IRS Notice 2001-56 provides important guidance on effective dates for certain provisions in the Economic Growth and Tax Relief Reconciliation Act, while companion Notice 2001-57 provides model plan amendments to simplify the EGTRRA amendment process for employers.
The economic expansion of the past decade has clearly ended. Corporate profits have fallen over $80 billion during the first half of this year -- a 10 percent drop. Faced with diminishing profits, employers are scrambling to boost their bottom lines, employing strategies such as closing plants, discontinuing product lines and lowering dividend payouts.
The Retirement Security Advice Act (H.R.2269) is back and on the move. Introduced by Education and the Workforce Committee chair John Boehner (R-Ohio), the legislation would provide employees with broader access to specific investment advice.
The IRS has released a white paper soliciting comments on the future of the qualified plan determination letter program. Structural changes to the program will take some time - the white paper indicates that some of the options under consideration could take five years or more.
The Mental Health Parity Act of 1996 is scheduled to expire September 30, but parity supporters are hoping new, broader legislation will be enacted before then.
The patients’ rights debate took another step forward in August when the House approved a revised version of the Bipartisan Patient Protection Act (H.R.2563).
A new tax treaty between the United States and the United Kingdom provides significant relief in the pension treatment of employees transferred between the two countries. After the treaty''s ratification by the U.K. Parliament and the U.S. Senate, pension rules will be more favorable to expatriate employees in both countries.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) imposed new disclosure requirements for pension plan sponsors when a plan amendment significantly reduces the rate of future benefit accrual.
The IRS has finalized regulations clarifying the characterization of qualified plan trusts as domestic trusts. Drawing virtually no comments, the final regulations are unchanged from the proposal (see Watson Wyatt Insider, November 2000), providing relief for plans sponsored by multinational employers.
In response to the September 11 terrorist attacks on New York and Washington, both the IRS and the Department of Labor (DOL) have granted Form 5500 extensions for filers located in areas designated as federal disaster areas. Extensions also were granted for Form 5500 filers who are located outside of the disaster areas but unable to obtain the information necessary for filing from service providers, banks or insurance companies.
The Department of Defense (DOD) has been authorized to mobilize as many as 50,000 military reservists, raising many questions on the employment status and benefits of employees called to service. The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) governs the reemployment, health care, pension and other benefit rights of such employees.
Ruling against a cash balance plan’s method of determining lump sums, another federal court has held that lump sum distributions cannot be determined simply by reference to the cash balance account.
The Equal Employment Opportunity Commission (EEOC) has backed off from its previous position that reducing or eliminating retiree medical benefits on the basis of age or Medicare-eligibility violates the Age Discrimination in Employment Act (ADEA).
The IRS recently issued guidance to help plan sponsors amend their plans to reflect changes made by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The basic principle behind the detailed guidance in IRS Notice 2001-42 is that plan terms must reflect the plan's actual operation for this round of legislative changes, and plan sponsors must make good-faith efforts to amend their plans accordingly.
Faced with the prospect of receiving thousands of GUST determination letter submissions at or shortly before the end of the year, the IRS is offering plan sponsors the option of a simplified application process. The new procedures appear in Announcement 2001-77.
Recently finalized regulations describe how "new comparability" defined contribution plans can demonstrate compliance with nondiscrimination requirements based on plan benefits rather than plan contributions. The final regulations are essentially identical to last year's proposed regulations (see Watson Wyatt Insider, November 2000), with one exception: the addition of a cap on the potential contribution required to test a defined benefit plan aggregated with a defined contribution plan on the basis of plan benefits.
The IRS has released final regulations dealing with the requirement that employers that transfer excess assets from their defined benefit plan to a §401(h) account pursuant to §420 must provide retiree health benefits that satisfy a minimum cost standard for five years after the transfer.
When the Democrats took control of the Senate in June, the patients' bill of rights moved straight to the top of the legislative agenda. Most observers expected a lengthy debate with numerous amendments, but the Senate approved the Bipartisan Patient Protection Act (S.1052) by a vote of 59-36 on June 29.
The Economic Growth and Tax Relief Reconciliation Act has passed, providing welcome relief from some of the laws working against retirement plans and retirement savings. Study after study confirms that, as a whole, our aging population is not financially prepared for retirement, and something must be done—soon.
Tax rate reductions are the heart of the Economic Growth and Tax Relief Reconciliation Act. The law creates a new 10 percent tax bracket and eventually reduces most of the other tax brackets by at least three percentage points. The new 10 percent rate is retroactive to the beginning of 2001, and applies to some income that was previously taxed at 15 percent.
President Bush signed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) on June 7, 2001. The $1.35 trillion tax cut—the centerpiece of the president's agenda—includes retirement security and pension reform provisions that have been the focus of the business and benefits communities for more than four years.
The media has focused mostly on tax cuts and estate tax provisions, and the benefits community has been concerned primarily with the pension package. But the Economic Growth and Tax Relief Reconciliation Act also affects educational assistance, adoption assistance and other employer programs.
In late May, Senator James Jeffords of Vermont announced his intention to leave the Republican Party, becoming an Independent instead. This switch gave Democrats a one-seat majority, putting them in control of the Senate's floor schedule and committees.
In a case of first impression, a federal district court in Seattle ruled in Erickson v. Bartell Co. that an employer violated the Pregnancy Discrimination Act (PDA) by not covering prescription contraceptives under the group health plan. This ruling specifically affects employers in the western district of Seattle—but may reveal a trend in cases to come.
Legislative and legal developments have created an uncertain climate for employers who sponsor hybrid pension plans. Much of this uncertainty involves "whipsaw"—the way lump sum distributions are calculated in cash balance plans. Eric Lofgren, Watson Wyatt's Global Director of Benefits Consulting, took this opportunity to write key lawmakers to discuss the problem and suggest simple solutions.
Without much fanfare—but with potentially significant implications for retiree medical plans—the District Court for the Western District of Pennsylvania ruled in Erie County Retirees Assoc. v. County of Erie, Pennsylvania, that the county's retiree medical plan failed the equal benefit/equal cost safe harbor under the Age Discrimination in Employment Act (ADEA). This is the first court to apply the equal benefit/equal cost safe harbor under the ADEA.
As this issue of the Watson Wyatt Insider went to press, bipartisan pension reform awaited President Bush's signature. The legislation moved forward this spring, when the House and Senate included the retirement security legislation in President Bush's tax package.
The Joint Committee on Taxation (JCT) recently studied the U.S. tax system and issued a report recommending wide-ranging changes to simplify the Internal Revenue Code, tax compliance and administration. The JCT identified many sources of complexity in the Code, including lack of clarity and readability, frequent changes in the law, use of the tax code to advance social and economic policies, increased complexity in the economy and interaction with other areas of law.
The 2001 Guidance Priority List is out, reflecting the IRS's regulatory intentions for the current year (although the agency may release other guidance as well). Several trends have been consistent enough over recent years to be considered IRS traditions. The number of guidance projects on the list has increased again this year, with the total number now at 299.
The Family and Medical Leave Act of 1993 (FMLA) provides up to 12 weeks of unpaid leave following the birth or adoption of a child, to care for an employee's own serious medical condition or to care for an ill family member. In recent years, bills and regulations have attempted to expand the FMLA. For example, some bills have proposed adding "parental involvement" leave that parents could use to attend their children's school activities, meet with teachers or take their children to doctors.
The "whipsaw" issue penalizes our nation's more generous cash balance plan sponsors, ultimately undermining the retirement benefits of American workers. Eric Lofgren, Watson Wyatt's Global Director of Benefits Consulting, submitted a letter to key lawmakers to discuss the problem and suggest simple solutions.
Congress is discussing the Patients' Bill of Rights again, and expanded liability is still the most contentious issue. Liability provisions, which allow patients to sue their health plan if delayed or denied care causes injury or death, have appeared in many recent patients' rights bills, including the one that passed the House in 1999.
Senate Finance Committee chair Chuck Grassley (R-Iowa) and Finance ranking member Max Baucus (D-Montana) introduced the Retirement Security and Savings Act (S.742) last month. Their bill shares many goals and provisions with the Comprehensive Retirement Security and Pension Reform Act (H.R.10), introduced by Representatives Rob Portman (R-Ohio) and Ben Cardin (D-Maryland) in March.
Watson Wyatt recently launched eHR/Benefits, a new service that includes a customizable web portal to facilitate the administration and management of health and welfare benefits. eHR/Benefits brings together our benefits, communication and technology expertise to offer clients strategic consulting services in the areas of plan design and pricing, vendor management and employee communications - all in one seamless service.
President Bush and Congress are under tremendous pressure to create a prescription drug benefit for Medicare beneficiaries. Escalating drug prices, Medicare+Choice withdrawals and other factors have stepped up demand for a drug benefit.
Employer-provided pension plans receive preferential tax treatment in exchange for their greater good: increasing both the proportion of workers participating in a pension plan and their eventual retirement income.
The Supreme Court has ruled that ERISA preempts state laws that automatically revoke spousal beneficiary designations after a divorce. The ruling applies to all ERISA-covered plans, such as life insurance, retirement and most types of executive deferred compensation plans.
Last August, in Erie County Retirees Assoc. v. County of Erie, Pennsylvania, the Third Circuit Court of Appeals held that the Age Discrimination in Employment Act (ADEA) applies to retirees and retiree health plans. As long as that ruling stands, employers in Pennsylvania, New Jersey, Delaware and the Virgin Islands who offer their over-65 retirees less coverage than their under-65 retirees may be violating the ADEA (unless their plan meets the safe harbor test).
As the federal government pays down the national debt, the process is yielding an unintended consequence for qualified retirement plans: lowered returns on 30-year Treasury bills, especially in comparison with other benchmark indices. Since the 30-year Treasury bill rate is used to calculate pension funding and lump sum distributions, today's lower rate is costing employers money, inflating both minimum pension funding contributions and lump sum distributions.
Representatives Rob Portman (R-Ohio) and Ben Cardin (D-Maryland) have introduced their Comprehensive Retirement Security and Pension Reform Act—again. Since its first introduction in 1998, the bill has gained widespread bipartisan support and has become the key retirement savings bill in Congress.
Last month, the House and Senate approved bankruptcy reform legislation, which President Bush plans to sign into law. The bill makes it harder for individuals to declare bankruptcy, but it also protects the pension assets of bankruptcy filers.
In Board of Trustees v. Garrett, the Supreme Court recently ruled that Congress exceeded its constitutional authority when, under the Americans with Disabilities Act, it subjected the states to suits brought by private citizens in federal court for money damages.
The Department of Labor recently released several pieces of guidance with important information for employers on how an insurer's demutualization affects ERISA employee benefits plans. Demutualization is when a mutual insurance company, which is owned by policyholders, converts to a stock company, which is owned by shareholders.
Figuring out the best way to provide affordable prescription drugs to America's seniors has been hotly debated for several years, and recent escalating drug costs have focused even more attention on the issue.
Executive pay in the United States reflects one of the founding values of our country: It is the land of opportunity. This year's report on executive pay reinforces this belief and confirms findings from previous years; namely, that there is a correlation between executive pay programs and company performance.
The 2000 Form 5500 has some new features, including changes in ERISA Filing Acceptance System (EFAST) processing, a new EFAST help line and financial reporting requirements for certain plan investments.
This article highlights recent proposed changes to the 1987 proposed regulations under Section 401(a)(9). The 2001 proposed rules provide a uniform table for calculating annual minimum distribution amounts from individual account plans, allow more time to identify beneficiaries after an employee's death, extend the deadline for providing documentation to plan administrators on trust beneficiary designations, and propose other changes to the minimum distribution rules.
The value of qualified transportation fringe benefits is excluded from an employee's gross income, as long as it is within a statutory monthly limit. After previously issuing notices, proposed regulations and announcements, the IRS recently issued final regulations that provide employers with "one-stop shopping" for qualified transportation plans.
In 1999, the IRS issued both proposed and final regulations regarding continuation of group health coverage under COBRA. Recently, the IRS issued another set of final regulations, which finalize (with limited modifications) the 1999 proposed COBRA regulations and amend the 1999 final COBRA regulations.
HHS issued regulations governing the use and disclosure of personal medical information. These complex and controversial regulations constitute the first comprehensive federal standards for protecting the privacy of health information.
For the first time in many years, most of the major stock market indexes showed negative returns for 2000.
On January 10, 2001, the IRS issued final regulations relating to the circumstances under which employees may change elections under a cafeteria plan.
The EEOC recently expressed an opinion in a "Commission Decision" that could affect many employers' health plans.
In a move that surprised industry insiders, the IRS recently issued guidance on taxation of "split-dollar" insurance arrangements.
Under HIPAA, group health plans and issuers may not discriminate against participants or beneficiaries based on health status.
HIPAA requires portability and continuity of health coverage, and prohibits discrimination in health coverage based on health status.
The IRS recently released Notice 2001-14, providing interim guidance relating to FICA, FUTA and income tax withholding on statutory options.
The IRS released proposed regulations dealing with the requirement that employers that transfer defined benefit excess assets to a §401(h) account pursuant to §420 must provide retiree health benefits that satisfy the minimum cost requirement for a five-year period after the transfer.
The DOL has released new guidance on paying plan expenses from plan assets.
Despite an end-of-the-session push, the 106th Congress failed to enact benefits-related legislation. So bipartisan pension reform, patients' rights, Medicare reform, stock options and other benefits-related issues are all waiting for the 107th Congress. The new Congress was sworn in on January 3, ushering in a new political environment that could significantly affect benefits-related legislation.
The Department of Labor (DOL) audit program reviewing the practice of paying plan expenses with plan assets is expanding beyond the Kansas City office (see Watson Wyatt Insider, August 2000), potentially affecting many more plans. Sources report that six or seven of the 10 DOL field offices are gearing up for participation in the audit program.
Traditionally, retirement has been viewed as a one-time, take-it-or leave-it act that signifies the end of one's working life. In many organizations today, however, retirement is evolving from an abrupt act into a gradual process of easing out of a full-time work schedule. Phased retirement is, so to speak, a work in progress.
The Department of Labor (DOL) has issued a final rule amending the labor regulations that govern the content of summary plan descriptions (SPDs) provided to employee benefit plan participants and beneficiaries under ERISA.
In 2000, Watson Wyatt conducted its third annual 401(k) Value Index survey, surveying nearly 300 U.S. employers representing nearly 2.5 million full-time and part-time employees, and all major industry sectors. Watson Wyatt's 401(k) Value Index™ enables plan sponsors to measure how well their 401(k) plan is meeting its goals and delivering value to participants.
Notwithstanding the current downward trend in the stock market, returns to investors over the past decade have been phenomenal. There are many factors behind this stock market performance, but much of the growth can be attributed to the increased use of stock-based incentive compensation (especially stock options) to link the interests of employees and shareholders.
Watson Wyatt released its 2000 Survey of Actuarial Assumptions and Funding this month, which is its 32nd annual survey of U.S. pension plans with 1,000 or more active plan participants. Although most of the surveyed plans are Watson Wyatt clients, comparisons with data obtained from a larger database of Form 5500 filings show relatively consistent agreement between the survey results and results from the larger U.S. pension plan universe.
On October 2, 2000, in Saks v. Franklin Covey, a district court in New York dismissed Rochelle Saks' claims against her employer, Franklin Covey, for failure to cover specific infertility treatments. Saks sued Franklin Covey when its self-insured plan failed to cover costs for her intrauterine insemination and in vitro fertilization.
In Central States, Southeast and Southwest Areas Pension Fund v. Reimer Express World Corporation, the Seventh Circuit Court of Appeals ruled that a multiemployer plan could not execute a judgment for withdrawal liability against the foreign parent of a contributing employer.
The final Internal Revenue Code section 411(d)(6) rules have given plan sponsors the green light to eliminate the following optional forms of payment from their defined contribution plans.
The Department of Labor (DOL) recently issued final regulations on claims procedures for employee benefit plans governed by ERISA. Although these regulations focus mainly on group health and disability benefit plans, some changes apply to pension plans and other welfare benefit plans.
The IRS has announced the annual cost-of-living adjustment (COLA) of various dollar limits for retirement plans. The Internal Revenue Code sections and their new dollar limits are as follows.
Proposed IRS regulations prescribe conditions under which certain defined contribution plans, referred to as "new comparability" plans, can demonstrate compliance with nondiscrimination requirements based on plan benefits rather than plan contributions.
The IRS has proposed regulations clarifying the characterization of qualified plan trusts as domestic trusts. Correcting problems created by previous regulations, the proposal provides relief for plans sponsored by multinational employers and for Puerto Rican plans.
The IRS has approved a government plan that allows participants to accumulate sick leave during their careers and then convert its value into additional pension benefits when they retire.
In Grande v. Allison Engine Co., an employee successfully sued his employer and health plan for denying a claim he submitted to his health flexible spending account (FSA).
Information disclosure by fiduciaries of employee benefit plans governed by ERISA—specifically what information must be disclosed to participants and when—is addressed by ERISA and has been the focus of various court cases as well. However, the DOL is concerned about whether all plan participants and beneficiaries are receiving the same protections.
The challenge of attracting and retaining employees in today's environment of record low unemployment and an overall labor shortage has figured prominently in recent news. But an equally important issue that gets much less press is workforce health and productivity—ensuring that employees are able and willing to work to their full potential.
The IRS has announced that rather than having to provide transit passes each month, employers may provide passes that can be used over a several-month period.
In Erie County Retirees Assoc. v. County of Erie, Pennsylvania, the Third Circuit Court of Appeals held that the Age Discrimination in Employment Act applies to retirees and retiree health plans. This holding is contrary to the view of most employers, and if the decision stands, many of them could find themselves in violation of the ADEA.
Ruling against a cash balance plan's method of determining lump sums and reversing an earlier district court decision, two federal courts of appeal have held that lump sum distributions cannot be determined simply by reference to the cash balance account.
The IRS has issued final regulations that permit qualified defined contribution plans to eliminate extended payment forms, including joint and survivor annuities, and to allow certain transfers between defined contribution plans for the first time. The final regulations became effective September 6, 2000.
Pension issues were on Congress' end-of-the-session agenda, and much of the discussion focused on cash balance conversion issues, such as new disclosure requirements and proposals to ban wear-away.
In Bellas v. Westinghouse, a court of appeals has held that a "permanent job separation" benefit in Westinghouse's pension plan was a protected plan benefit, and thus could not be eliminated by an amendment to the plan. The court's ruling contradicts both formal guidance from the IRS stating that similar benefits are not protected, and an IRS determination letter ruling that Westinghouse's amendment to its plan complied with qualification requirements.
The Department of Health and Human Services (HHS) has issued a final standard for electronic health care transactions. This is the first of the final standards to be released under the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HHS plans to finalize other standards later this year, including health plan and provider identifiers and privacy regulations.
In Bins v. Exxon, the Ninth Circuit Court heard arguments on whether an employer violated its duties under ERISA by not informing employees that the company was "seriously considering" a proposal to offer enhanced retirement benefits, which might affect the employees' decision to retire.
The Pension Benefit Guaranty Corporation recently issued a technical update regarding its Early Warning Program, explaining when the PBGC is likely to become involved in a business transaction and what it is likely to do. The update represents formal codification of the PBGC's policy of monitoring business transactions and stepping in if the transaction could result in increased liability to the PBGC.
Retirement issues have figured prominently in political agendas this summer, although the activity has been heavy on debate, light on resolution. The House of Representatives approved a broad, bipartisan retirement security bill intended to ease plan administration and increase retirement savings
Overall concern about retirement savings has sparked interest in "automatic enrollment," which means that, absent specific instructions from employees to the contrary, a percentage of their salary is automatically contributed to a savings plan.
In all the recent hoopla about pensions and disclosure, one concern has focused on whether employers are doing a good enough job of communicating the comparative value of different distribution options. It has even been suggested that some employers deliberately withhold this information, hoping that employees will elect "unsubsidized" lump sum distributions instead of "subsidized" annuity options. This is very unlikely, for at least two reasons. First, it overlooks the reason plan sponsors provide subsidies at all—which is to make subsidized options more attractive to participants, not less. Second, it misstates the relative costs of providing various annuity and lump sum distribution options.
The IRS has proposed plan loan regulations that would limit the ability of participants to refinance existing loans from a retirement savings plan, or to have multiple loans outstanding under a single plan. The proposed rules would change the way loan administrators calculate maximum loan limits, and provide new guidance on suspending loan repayments during military service.
The UK has recently enacted two important pieces of legislation that could affect U.S. companies with operations in the UK. The All-Employee Share Ownership Plan will significantly change the way equity compensation is used in the UK - and offers U.S. companies even more exciting opportunities.
In response to recent Supreme Court rulings, the EEOC has issued a final rule stating that mitigating measures may be taken into account in determining whether an individual has a disability under the Americans with Disabilities Act (ADA).
The IRS has finalized the regulations providing lump sum cash-out guidance. The final rules allow plan sponsors to distribute involuntary cashouts to terminating employees whose benefits are worth $5,000 or less.
HMOs recently scored a small victory when the Supreme Court unanimously ruled in Pegram v. Herdrich that an HMO cannot be sued under ERISA for offering monetary incentives to doctors for containing costs. In Pegram, a physician-employee owned HMO (Carle) offered incentives connected to a physician reward for limiting patient treatment. The particular incentive at issue was a year-end distribution to the HMO physicians based on the profitability of the HMO.
The Medicare prescription drug debate shot to the top of the legislative agenda earlier this summer, when both the House and Senate debated prescription drug legislation. The House approved a bill in June. Senate Democrats forced a floor vote on a competing prescription drug proposal, and members of the Senate Finance Committee met behind closed doors to discuss prescription drugs and other Medicare reform issues. In addition, President Clinton unveiled estimates of a much bigger budget surplus than was formerly projected and now wants to set aside $250 billion for prescription drugs
A new law designed to promote electronic commerce could also change benefits administration. The Electronic Signatures in Global and National Commerce Act was signed into law on June 30. More commonly known as the e-sign, e-signatures or digital signatures bill, it grants "electronic signatures" the same validity as traditional pen-and-ink signatures. Appropriately, President Clinton signed the bill using both a traditional signature and smart card technology.
Several Insider articles have focused on how our aging population and shrinking workforce are affecting both our Social Security system and U.S. employers' retirement plans. But people are getting older and living longer all over the world. And these demographic trends will impose extraordinary worldwide economic, social and political stress, according to a new study, Global Aging: The Challenge of the New Millennium, by Watson Wyatt Worldwide done in partnership with the Center for Strategic and International Studies for the Commission on Global Aging.
From Tokyo to Paris to Warsaw to Washington, global aging is already generating similar newspaper headlines on roughly the same fiscal, family and health issues. Beneath these headlines, and beneath even the daunting fiscal projections, lies a longer-term economic, social and cultural dynamic whose workings we are only just beginning to understand. What will it be like to live in societies that are much older than any we have ever known or imagined?
In three recent Pension and Welfare Benefits Administration (PWBA) Advisory Opinion letters, the Department of Labor (DOL) has ruled that plans may continue to be classified as governmental plans, even if the plan is a collectively bargained plan negotiated between a labor union and a governmental employer, or the plan covers a certain de minimus number of nongovernmental employees.
A Midwest DOL office is examining cases of plan sponsors using plan assets to pay expenses. So far, the examination program is operating only out of the Kansas City DOL office, which has jurisdiction over Colorado, southern Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota and Wyoming.
Watson Wyatt and the Washington Business Group on Health recently conducted a mini-online survey to capture an early picture of how health care costs are shaping up for the year 2001. Sixty-one large employers representing more than 1.7 million full-time employees responded to the survey.
In February, the Department of Labor (DOL) issued an interim rule requiring Multiple Employee Welfare Arrangements (MEWAs) to comply with certain reporting requirements established by the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Under the rule, MEWAs that provide medical care coverage were supposed to file Form M-1 with the DOL by May 1, 2000. There may be civil penalties for not filing the form.
Prompted by congressional concern and some media reports, the Department of the Treasury is currently investigating whether to require pension plan sponsors to provide more information on the relative value of payment options available at retirement. The concern is whether prospective retirees have enough information to make an informed choice between the various annuity and lump sum options. Articles in the press have focused on situations where employees eligible for "subsidized" early retirement benefits were offered lump sums based on unsubsidized normal retirement benefits.
Watson Wyatt recently completed a comprehensive analysis of conversions to hybrid pension plans. One key finding was that employers that convert to hybrid plans generally eliminate early retirement subsidies, often an important feature of the previous plan.
The IRS has issued a revenue ruling concerning one event that enables participants to get a distribution from their 401(k) plan. The ruling broadens the IRS's interpretation of the separation from service distributable event to cover certain corporate transactions.
The increasing popularity of stock options has attracted attention on Capitol Hill, where lawmakers are considering a bill to create a "super stock option." The Wealth Through the Workplace Act (H.R.3462), sponsored by Representative John Boehner (R-Ohio), would create a new type of stock option that provides favorable tax treatment to both employers and employees.
Adding prescription drug benefits to Medicare has been the central issue in the recent Medicare reform debate
The old saying "you can't see the forest for the trees" refers to the tendency to get caught up in the details, thereby missing the more important message in the big picture. The expression seems especially appropriate with respect to the current cash balance controversy. With so much media and political attention focused on recent cash balance conversions, the debate is missing the much bigger picture—the dramatic, 20-plus-year decline in our nation's defined benefit retirement system.
Workers who defer receipt of Social Security benefits after their SSNRA will receive a delayed retirement credit, up to age 70, thus increasing their benefit when they do retire.
This family-friendly employer provided employees with a calendar year, full-blown cafeteria plan, chock full of health care benefits, group-term life insurance and a dependent care assistance plan
Workers who were misclassified as independent contractors and later reclassified as employees cannot retroactively participate in the employer's qualified plan.
Although benefit managers are concerned about how much their health plans cost, they are even more concerned about employee satisfaction.
The Worker Economic Opportunity Act exempts stock option plans and certain other stock ownership programs from the overtime requirements of the Fair Labor Standards Act
The regulations are intended to reassure plan sponsors that accepting rollover contributions, in appropriate circumstances, will not jeopardize the plan's qualified status.
The proposed regulations would allow elimination from most 401(k) and other profit-sharing plans of nearly all existing forms of payment if certain specified forms of payment are available.
The interpretation provides guidance on issues that have emerged as stock compensation practices have changed since APB 25 was issued in 1972
While this package of regulations reinforces many of the rules employers have already been following, it also contains some new rules that employers will want to note.
Many plan sponsors today are finding themselves in the position of having overfunded defined benefit plans. This is due partly to the relative conservatism built into the FAS 87 pension expensing process, and partly to the strong recent market performance. Many plans are so well funded that even after accounting for each year's benefits for active employees and paying pensions to retirees, the FAS 87 rules leave enough left over to provide a significant contribution to corporate net income. Some articles in the popular press have referred to this pension income as a "spike" in corporate earnings, implying that the income is temporary and so should not be fully considered as part of overall corporate financial performance. However, recent Watson Wyatt research shows that this implication is false. For many plan sponsors, the spike is likely to be a significant component of their financial statements for years to come.
Although the account approach has been around since the 1980s, relatively few employers have adopted it.
Employers offering broad-based stock options or other stock compensation plans would face considerably higher overtime costs, not to mention the administratively complex task of recalculating the overtime pay of each overtime-eligible employee.
As usual, the list provides an interesting glimpse into IRS priorities, defined as much by items that don't make the cut as by those that do.
Deciding whether or not a legitimate mistake has been made, and whether to allow the employee to correct the mistake is at the employer's discretion.
An article in the May 4, 2000 edition of The Wall Street Journal ("Treasury Takes Serious Look at Whether Workers Get Enough Details on Pension Payouts") creates some misconceptions about lump-sum payments and Watson Wyatt's Single Payment Optimizer Tool (SPOT).
The IRS concludes that although a cafeteria plan operates to protect certain benefits from 'constructive receipt and taxation,' it does not protect qualified plan distributions from taxation.
Whether patients should be allowed to sue their health plans has been a key issue in recent debates in Congress, state legislatures and the courts. Last year, the House approved a health care reform bill allowing patients to sue their health plans in state court; at least 35 states debated laws that would permit such suits; and lawsuits were filed in courts across the country.
While cash balance plan design has been making the papers, cash balance communications have not received the same attention. Generally overlooked by the media is the impact of good communication in rolling out a cash balance plan, and, conversely, the even more dramatic impact of poor communication.
Three years have passed since the Balanced Budget Act (BBA) of 1997 launched the Medicare+Choice experiment. For those employers who have not already done so, now is a good time to take a hard look at the advantages and disadvantages of incorporating Medicare+Choice plan options within their retiree medical program.
Although there are a record number of mergers and acquisitions taking place, far too many fall short of their financial and strategic goals. The fact is that it is much easier to make a deal than to make a deal work. M&A failure often occurs on the "people" side of the equation, and begins when change dynamics heighten employee resistance to the newly formed company.
Plan administrators will be filing a new Form 5500 annual return/report for the 1999 plan year. It consists of a single Form 5500 with basic identifying information, to be completed by all filers, and 13 schedules focused on specific subjects and filing requirements—five pension schedules, seven financial schedules and one fringe benefit schedule. Form 5500-C/R has been eliminated.
A federal district court has dismissed claims by current and former employees of First Union that the firm's practice of limiting investment options for its 401(k) plan to its own mutual funds violated ERISA.
This is the Executive Summary of the report "The Unfolding of a Predictable Surprise: A Comprehensive Analysis of the Shift from Traditional Pensions to Hybrid Plans."
The IRS recently issued proposed regulations regarding qualified transportation fringe benefits under Code §132. Under §132(f), qualified transportation fringe benefits provided to employees are not considered taxable income, as long as their value does not exceed specified monthly limits. In addition, these qualified transportation fringe benefits may be provided to employees in lieu of salary.
The IRS has issued final rules on using electronic media for certain qualified plan distribution transactions. The new rules generally apply to all distribution transactions, except for participant loans and waivers of qualified survivor annuity benefits.
We know that tomorrow's health care picture—including treatments, costs and benefits—will be quite different from the one we see today. Gene therapy and DNA libraries may change the way we think about diseases. New medical technologies will introduce new possibilities.
Results from the Fifth Annual Watson Wyatt/Washington Business Group on Health/Healthcare Financial Management Association Survey Report on Purchasing Value in Health Care
In its second fees and costs survey, Watson Wyatt found that total costs of managing pension funds have declined globally since its first such survey, undertaken in early 1995. Both surveys are part of Watson Wyatt's ongoing Global Asset Study. The Global Pension Fee and Cost Survey provides greater insight into local customs and global practices and attempts to identify all costs (the total expense ratio) to plan sponsors in each marketplace. It identifies fees paid to benefit investment managers as well as to third parties (for example, stockbrokers and custodians) and presents an overview of emerging trends.
The cash balance debate being played out in the media and Congress has focused in part on the concept of "wear-away," a method of transitioning from one benefit program to another. The popular consensus seems to be that wear-away is a problem that must be fixed. However, most plan sponsors don't view wear-away as either positive or negative, but simply as a necessary step in any benefit transition.
The IRS has made some changes to the 401(k) safe harbor rules.
An excerpt from The Complete Guide to Mergers and Acquisitions, writen by M&A consultants Timothy Galpin and Mark Herndon and available from Jossey-Bass Publishers.
The IRS has ruled that duplicating benefits and service for highly compensated employees may violate the Code's discrimination requirements.
When Congress returns to Washington this month, it’s expected to resume work on a variety of pending benefits-related issues: managed care reform, medical records privacy, cash balance legislation and broad pension reform. Some of these issues are deep into the legislative process, others are still in the early discussion stages, but all are likely to be difficult and time-consuming to resolve. Some benefits-related issues are already playing a part in election campaigns, and others could be affected by candidates’ tax reform or other campaign plans.
It is sometimes said that cash balance and other hybrid plans offer employers the opportunity to deliver better benefits and reduce their cost at the same time. At first, this sounds too good to be true. How could employers provide better benefits for less money? The answer lies in the arithmetic, which can be seen by comparing the buildup in value for a traditional 1.0 percent final pay defined benefit plan with comparable value buildups. Table 1 shows this buildup of value.
Your firm has completed the cost management basics: managed care, carve-outs, flex benefits and a paid time off (PTO) plan. What’s your next step for further improving benefit costs, absenteeism, workers’ compensation experience and employee health?
Orthodontic expenses can take quite a bite out of an employee’s health flexible spending arrangement (FSA). In a 1997 general information letter released through a Freedom of Information Act request, the IRS gave an informal nod to 'up front' reimbursement of orthodontic expenses.
On November 30, 1999, President Clinton announced proposed Department of Labor (DOL) regulations to allow states to use their unemployment insurance to offer paid leave to new parents.
In an effort to identify leading-edge thinking and practices in the management of global pension investments, Watson Wyatt recently interviewed pension officers at the corporate headquarters of a select group of recognized multinational organizations whose foreign pension fund assets exceed $50 billion.
The Departments of Health and Human Services (HHS) and Labor each recently issued proposed regulations on state implementation of the Child Support Performance and Incentives Act of 1998 (CSPIA).
The Year 2000 ERISA Reporting Calendars are now available...online!
1999 benefits enrollment is over! Time to breathe a sigh of relief and tell us about your experiences.
When Congress missed its August 21, 1999, deadline for enacting medical privacy legislation, that gave the Department of Health and Human Services (HHS) the green light to issue rules protecting the privacy of electronic health information
Amidst recent media critiques of cash balance conversions, praise has been reserved for those employers who offer their employees a choice between the old defined benefit and new cash balance formulas. At first blush, choice sounds like a panacea - and for many employers, it may be an entirely appropriate benefit design strategy. But before jumping on the choice bandwagon, plan sponsors and Congress should recognize some of the pitfalls.
When President Clinton vetoed the Taxpayer Refund and Relief Act on September 23, he also vetoed the pension reform package and other benefits-related provisions that were part of the act (see Watson Wyatt Insider, September 1999). When House and Senate leaders decided to abandon the tax bill until next year, it looked as if the benefits-related provisions would also have to wait. Now, those provisions are back as part of a bill to increase the minimum wage. The Senate approved the benefits-related provisions from the tax bill on November 9, when the minimum wage bill was added to bankruptcy reform legislation. The House is also discussing a minimum wage bill.
The Balanced Budget Act (BBA) of 1997 "saved" Medicare until 2008 - largely by significantly reducing payments to providers and implementing new methodologies for determining reimbursement. But health care providers complained that payment cuts have been steeper than expected, and thus are imposing hardships on both providers and patients.
The Small Business Job Protection Act (SBJPA) of 1996 redefined foreign and domestic trusts, which now must meet two conditions: (1) a U.S. court can exercise primary supervision over administration of the trust, and (2) only U.S. persons have authority to control substantial trust decisions. This change has important implications for plan sponsors, since under IRS regulations, qualified retirement plans must maintain a domestic trust.
Employers' retiree health programs are somewhat successful in meeting their number one objective—supporting employees' financial needs in retirement—according to Retiree Health Care Strategies, a new survey conducted by Watson Wyatt and the Washington Business Group on Health (WBGH).
Employees often don't understand the value of their pension benefit, and thus are less likely to appreciate you, the employer, for offering such a benefit.
This article discusses four recent studies conducted by Watson Wyatt Worldwide in the areas of human resources practices, disability management, executive pay and the effective use of strategic rewards.
Much of the recent media furor about conversions from traditional defined benefit to cash balance plans has focused on a few cases where the shift has reduced benefit accrual rates for some participants. Some articles have implied that redefining accrual rates, even on a prospective basis, is unfair.
Participants Challenge First Union's Use of Own Funds Current and former employees of First Union Corporation, the sixth largest bank holding company in the United States, are suing their employer as sponsor of their 401(k) plan.
Last month the Social Security Administration began mailing out individual earnings and benefit estimate statements.
Although House approval is significant, managed care reform is far from being a done deal.
This article is the fourth in a continuing series of Watson Wyatt commentaries on the cash balance issue. You can also find previous articles "PEP and Cash Balance: Not the Same", "Cash Balance Plans: Will Congress Take the Media" and "Cash Balance Article Raises False Alarm".
When President Clinton used his State of the Union message to propose vast changes in the way Social Security is financed, he escalated what may become the hottest public policy debate of the next several years.
The Internal Revenue Code limits employers' contributions and benefits under qualified retirement plans, including an overall limit for individuals who participate in both defined benefit and defined contribution plans. The Small Business Job Protection Act of 1996 repealed the combined plan limit, effective for years after 1999.
Over the past two months, FASB has been revisiting its Proposed Interpretation of APB Opinion No. 25 (Exposure Draft 195-B), Accounting for Certain Transactions Involving Stock Compensation (Watson Wyatt Insider, May 1999). The redeliberative process has included a key change that would provide the same accounting treatment for director stock grants as for employee stock grants.
More plan sponsors are exploring Qualified Supplemental Executive Retirement Plans (QSERPs) as a means of providing enhanced retirement benefits to executives.
Stretching the Pension Dollar is a recent study conducted by Watson Wyatt Worldwide for the American Council for Capital Formation and the Association of Private Pension and Welfare Plans.
This is the third in a series of Watson Wyatt commentaries on the cash balance issue. The first article, "Cash Balance Article Raises False Alarm," appeared in the January 1999 Watson Wyatt Insider. The second article, "Cash Balance Plans: Will Congress Take the Media Bait?" appeared in the August 1999 Insider. This article highlights the differences between cash balance plans and pension equity plans (PEPs), particularly when making the conversion from a traditional plan to a hybrid plan.
It’s tax season on Capitol Hill — not the tax season when everyone files their tax returns with the IRS — the one where members of Congress argue about changing the tax code. This year’s debate has been particularly divisive, thanks to the strong economy and large budget surplus. Some lawmakers have been pushing big tax cuts, while others want to hold the entire surplus in reserve for Social Security and Medicare. Before the August recess, Congress passed a $792 billion tax cut bill, the Taxpayer Refund and Relief Act of 1999 (H.R.2488).
In Cox v. AutoZone, Inc., the U.S. Court of Appeals for the Eleventh Circuit ruled that a portion of the Family and Medical Leave Act (FMLA) regulations was invalid. The court held that a notification requirement in the FMLA regulations effectively added requirements and granted entitlements beyond those in the law, and that the provision was inconsistent with the stated purpose of the FMLA.
Since the passage of ERISA, funding limits have chiseled away at pension benefits. Over the years, a pattern has emerged where limits are introduced at one level but are later reduced. The net effect of this pattern has been that the provisions covering tax-qualified plans today are not nearly as generous as they were a couple of decades ago.
The Senate passed the Patients’ Bill of Rights Plus Act (S.1344) on July15, 1999. The vote on the Republican-sponsored bill capped off months of political posturing and negotiations between Democratic and Republican leaders. Predictably enough, the debate highlighted contentious policy divisions: patient protection versus cost-containment, state versus federal regulation of health insurance, and access to health care versus quality standards.
Having implemented such alternative work arrangements as job-sharing, work-at-home and flexible scheduling, employers are now considering alternative retirement arrangements. Watson Wyatt’s survey of phased retirement arrangements reveals that among a significant number of employers, flexibility is coming to retirement.
The IRS has released a revenue procedure describing how plan sponsors can correct compliance problems in qualified plans. The correction methods are especially useful for plan sponsors who want to self-correct operational errors without requesting advance IRS approval.
Over the last several months, Watson Wyatt Insider has run a series of articles describing Social Security reform proposals currently under consideration. This article takes a slightly different tack, by explaining an underlying aspect of Social Security policy that many employers may not have fully grasped as they have dealt with financing their own retirement benefit plans. The basic premise is that the way Social Security has been implemented in the United States has served to spur the creation of employer-sponsored pensions.
On June 22, 1999, the Supreme Court ruled in three cases dealing with the effect of the Americans with Disabilities Act (ADA) on employees who can correct or compensate for their impairments. Ruling that the ADA was not intended to protect workers with treatable impairments or medical conditions such as bad eyesight or hypertension, the Court narrowed the application of the ADA.
Citing reports from the Surgeon General on the dangers of smoking, the IRS has revoked a 20-year old revenue ruling, for the first time allowing taxpayers to deduct their costs for smoking cessation programs as medical expenses.
The Social Security policy deliberations in Washington have taken another interesting twist. Ways and Means Committee chairman Bill Archer (R-Texas) and the Social Security Subcommittee chairman Clay Shaw (R-Florida) have proposed their own version of Social Security reform.
President Clinton has released a Medicare reform proposal aimed at safeguarding the program’s financial solvency until 2025. The proposal would devote 15 percent of budget surpluses over the next 15 years — almost $800 billion — to Medicare.
Workers are bombarded with hundreds of messages and bits of information every day — some of it useful, but much of it not really relevant. And the volume of these communications only seems to increase. Amidst all of this "noise," how can organizations communicate effectively with employees?
The Senate recently completed debate over the delicate balancing act between the role of regulation and the market in the U.S. health care system. Senate Republicans ultimately voted to impose a limited set of new regulations on certain managed health care plans.
This is the second in a series of Watson Wyatt commentaries on the cash balance issue. The first article, "Cash Balance Article Raises False Alarm," appeared in the January 1999 Watson Wyatt Insider.
As the August 21 deadline for enacting privacy legislation approaches, medical records privacy is increasingly playing center stage on Capitol Hill. It's going to be a tough debate to resolve in such a narrow time frame—medical records privacy is a complicated and contentious issue
As the conflict in Yugoslavia continues, questions regarding employment and benefits rights for returning veterans may arise. The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) governs many of the reemployment, health care, defined contribution and other employment issues for these workers.
A well-designed summary plan description (SPD) meets ERISA requirements for content and serves as a useful communications tool for plan sponsors as well.
Population aging poses health care challenges, given that consumption of medical goods and services increases with age.
During May 1998, the National Commission on Retirement Policy (NCRP) released a proposal for Social Security reform.
Japanese companies are preparing to reflect huge unrecognized retirement obligations on their balance sheets beginning April 1, 2000
Ruling in favor of a cash balance plan's method of determining lump-sum distributions, a Georgia federal district court has determined that plan participants cannot enforce IRS requirements for calculating distributions under ERISA.
It is not uncommon for plan sponsors offering an early retirement window to want to limit the number of "takers." But based on a recent court ruling, these sponsors need to exercise caution.
The Pension Benefit Guaranty Corporation (PBGC) recently released its September 30, 1998, annual report. For its 1998 fiscal year, the PBGC showed $18.4 billion in assets and $13.0 billion in liabilities — a net surplus of $5.4 billion.
The EEOC has proposed regulations based on the Supreme Court's decision last year in Oubre v. Entergy Operations.
After more than a year of work, the National Bipartisan Commission on the failed to achieve consensus on a reform plan and threw in the towel in mid-March
In the last two issues of the Insider, we looked at reform proposals that would tap into the projected federal budget surpluses to help resolve Social Security's underfunding.
Nearing the final stage of a project that began in August 1996, the Financial Accounting Standards Board (FASB) released its Proposed Interpretation of APB Opinion No. 25 (Exposure Draft 195-B), Accounting for Certain Transactions Involving Stock Compensation, on March 31.
On March 18, the Senate Committee on Health, Education, Labor and Pensions (formerly the Committee on Labor and Human Resources) approved a version of the Patients' Bill of Rights Act (S.326) sponsored by committee chair James Jeffords (R-Vermont).
Retirement security is expected to be a key issue for the 106th Congress — and lawmakers have wasted no time getting down to business.
The Securities and Exchange Commission adopted amendments to Rule 701 under the Securities Act of 1933, which provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements.
The 1999 Guidance Priority list is out, alerting interested parties of what to expect from the IRS this year, although the agency may release other guidance as well.
Among the most welcome news to employers over the past several years has certainly been the dramatic slowdown in the growth rate of health care spending
Most policymakers and policy analysts looking at Social Security today advocate more funding. Last month we looked at President Clinton's proposal to use 60 percent of projected federal budget surpluses to fund currently promised benefits through the first half of the next century
The IRS recently issued final regulations regarding the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation of health coverage, and at the same time also issued new proposed COBRA regulations.
For the fourth year in a row, the Washington Business Group on Health (WBGH) and Watson Wyatt Worldwide surveyed U.S. employers on purchasing value in health care. This year, 293 organizations participated, with health plans covering nearly 9.3 million employees and dependents.
According to reasonable estimates, more than half — perhaps as much as 60 to 65 percent — of all contributions to employer-sponsored qualified retirement plans in 1999 will be to 401(k) plans. Employers have steadily increased the portion of retirement dollars going into 401(k) plans since their introduction back in the 1980s.
Most of us are keenly aware of the need to keep our personal lives in some semblance of balance. Although juggling work, family, hobbies, church and other activities can be difficult, striving for a workable balance is still a worthwhile goal.
U.S. interest in other nations' health care systems peaked during the national health care reform debate at the start of the decade, as analysts looked to Canada's single-payer system, and to Germany and Japan's mandated social insurance systems as potential reform models
It's springtime in the nation's capitol and, along with the cherry blossoms, dormant issues are coming back to life. One such overdue discussion concerns Social Security policy.
The Supreme Court has agreed to address the issue of whether state employers have immunity from Age Discrimination in Employment Act (ADEA) claims under the 11th Amendment to the U.S. Constitution.
In late January, the IRS issued final regulations on section 3121(v) concerning the FICA treatment of nonqualified deferred compensation (NQDC) plans.
When the 106th Congress convened in early January, the health care quality debate got off to a quick start, picking up almost where it left off last year. Key figures from last year's debate are back—and their bills remain largely the same as well
The IRS recently issued proposed regulations revising the uniform premium table (commonly referred to as Table I) used to calculate the cost of group-term life insurance coverage.
The Supreme Court has essentially dismissed a participant suit against an overfunded contributory plan sponsor for breach of fiduciary duty.
As human resources and retirement plan administrators and sponsors face increasing pressure to provide better service to their participants and to improve their bottom lines, many are moving toward "paperless" systems.
The IRS has issued new guidance on the notice to participants required when qualified plan amendments significantly reduce the rate of future benefit accruals.
The IRS has issued temporary and proposed regulations providing lump-sum cash-out guidance.
The IRS has finalized regulations concerning the qualified joint and survivor annuity (QJSA) explanation and consent requirements. The final rules affect qualified plans and their participants and beneficiaries.
A recent front-page article in the Wall Street Journal on cash balance plans has caused some commotion in the benefits community.
As the 21st century approaches and the baby boomers near retirement age, benefits issues such as retirement security, Social Security and Medicare reform, and retiree health care have been attracting more attention on Capitol Hill.
Medicare's rate increases were limited to 2 percent for most HMOs in 1999, prompting some HMOs to drop out of the program or reduce service areas
Employee stock option plans have become increasingly controversial. Stock options motivate executives and other employees, but they also pose a significant potential dilution problem to existing shareholders. As options are exercised, the shares are issued and counted as outstanding.
The IRS recently issued two private letter rulings (PLRs) holding that a transfer of surplus assets from a terminating defined benefit plan to a replacement defined contribution plan is a reversion for excise tax purposes—but not for income tax purposes
The General Accounting Office (GAO) has issued a report concerning the financial viability of the Pension Benefit Guaranty Corporation (PBGC). The report concludes that the agency's financial condition has improved, but risks to its long-term financial viability remain.
The Newborns' and Mothers' Health Protection Act of 1996 (NMHPA) was enacted to provide minimum hospital stays for mothers and newborn children following childbirth.
The IRS has released Notice 98-52, providing guidance on the "safe harbor" methods for satisfying §401(k) and §401(m) (matching contributions portion only) nondiscrimination tests.
Medical liability for managed care and other health plans has become a significant issue, attracting attention from Congress as well as state governments. Last year, Texas became the first state in the nation to allow lawsuits against HMOs and other health plans when treatment decisions adversely affect a patient's health. Now, the family of a man who committed suicide after being released from the hospital is suing his health plan.
The plan sponsor of a cash balance plan has successfully defended a legal challenge by former plan participants for additional benefits.
The Pension Benefit Guaranty Corporation (PBGC) has invited plan sponsors and other interested parties to comment on its proposal to discontinue publishing its lump-sum assumptions.
The Newborns’ and Mothers’ Health Protection Act of 1996 (NMHPA) was enacted to provide minimum hospital stays for mothers and newborn children following childbirth. The NMHPA amended the Internal Revenue Code, ERISA and the Public Health Service Act (PHSA). The IRS, Department of Labor (DOL) and Department of Health and Human Services (HHS) share oversight and enforcement. On September 9, the DOL issued an interim rule amending the summary plan description (SPD) requirements for ERISA-covered group health plans regarding the NMHPA.
Deflation, a decline in the general level of prices, can be viewed as the result of too few buyers chasing too many goods and services. Last month's Watson Wyatt Insider included the article "Deflation, Financial Markets and Plan Sponsors," which described how deflation could affect pension trust funds and contribution or expense calculations. The basic message was that deflation — despite its generally negative effects — need not be catastrophic for plan sponsors. Careful planning, asset-smoothing techniques and investment discipline can help plan sponsors navigate troubled deflationary waters.
ERISA requires employee benefit plan administrators to furnish Summary Plan Descriptions (SPDs) to each plan participant and beneficiary. The SPD is the primary vehicle under ERISA for informing participants and beneficiaries of their rights, benefits and obligations under their employee benefit plans. Since the 1977 release of the initial regulations governing SPDs, the laws that affect benefit plans and the design and practices of health care programs have changed significantly. In response to those changes, the Department of Labor (DOL) has proposed amendments to the labor regulation governing the content of SPDs.
The IRS has released regulations providing relief from the anti-cutback protection for plan amendments that reduce or eliminate benefits if the amendment is made pursuant to the Taxpayer Relief Act of 1997 (TRA 97).
The Department of Labor (DOL) has issued a proposed regulation that would provide increased protection for group health plan claimants. The new regulation would apply only to participants in plans subject to ERISA.
The Watson Wyatt Insider has published several articles addressing PBGC policies and practices that we believe are detrimental to the growth of defined benefit plans.
The Financial Accounting Standards Board (FASB) is making progress on its project on how to account for stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees. Key tentative decisions to date would (1) preserve favorable accounting for §423 Employee Stock Purchase Plans, and (2) apply variable plan accounting to option repricings, which would increase the compensation expense and therefore change the practice of option repricings. FASB plans to publish an exposure draft of a proposed Technical Bulletin in early 1999.
As this issue of the Watson Wyatt Insider went to press, Congress was preparing to recess for the November elections. A new health mandate was included in the omnibus spending bill, and a bankruptcy reform bill, which would help protect retirement savings in cases of personal bankruptcy, was awaiting action from the President. Otherwise, it appeared that few benefits-related provisions would be addressed before the end of the session.
The IRS announced in Notice 98-29 its intention to loosen up the requirement to preserve qualified plan payment forms, and asked for comments.
This is the third article in an occasional series that introduces Workforce Management—a new framework for attracting, retaining and motivating workers.
With worldwide attention focused on the recent Asian market and currency crisis, U.S. investors are debating the possibility of our economic climate shifting from inflationary to deflationary. Our part of the current debate focuses on how mild deflationary influences would affect pension plan investments, plan liabilities, annual plan expense and annual cash funding requirements.
The Ninth Circuit Court of Appeals has affirmed the decision in Lucky Stores v. Commissioner that a contributing plan sponsor that accelerated its deduction for regularly scheduled contributions to a multiemployer defined benefit plan was not entitled to the additional deduction.
When Congress returns to work this month after its traditional August recess, health care quality will be at the top of the Senate's agenda.
November's introduction of a Medicare+Choice education program will usher in a new era in Medicare.
Over the past two months, FASB has been revisiting its Proposed Interpretation of APB Opinion No. 25 (Exposure Draft 195-B), Accounting for Certain Transactions Involving Stock Compensation (Watson Wyatt Insider, May 1998).
The Pension and Welfare Benefit Administration (PWBA) has issued its second press release on the Year 2000 software problem, stressing to plan administrators their fiduciary responsibility to protect workers' benefits and ensure that the problem is addressed.
In Announcement 98-62, the IRS asks for comments on a number of issues relating to paperless plan administration technologies. The request seems to indicate that future IRS guidance will focus on paperless administration of participant elections and consents, plan notices, plan loans and distributions, but will not address spousal consent issues.
Pension fund managers continue to commit more assets to higher risk investments, such as U.S. and foreign equities, rather than to historically more stable assets such as bonds.
Many investment and pension professionals would agree that better-educated workers tend to take more risks and be more aggressive in investing their 401(k) plans. Since occupation generally corresponds to level of education, it would logically follow that average rates of return would differ significantly by occupation. A Watson Wyatt study confirms that workers in industries that generally require more skills, training and education generally achieve better rates of return in their 401(k) accounts than workers in other occupations.
In Foley v. Bethlehem Steel, the U.S. Federal District Court for the Western District of New York ordered a retiree to pay $15,000 for filing a frivolous, time-barred claim under ERISA.
This is the second article in an occasional series that will introduce Workforce Management — a new framework for attracting, retaining and motivating workers.
As the 105th Congress struggles over broad health-care quality issues and Social Security reform, smaller benefits-related provisions have been moving along. Provisions to enhance transportation benefits, extend educational assistance and repeal a Tax Court decision relating to deferred compensation have passed Congress and affect certain distributions from defined contribution plans.
A new Watson Wyatt study of investment performance showed a surprising result — plans with small average 401(k) accounts achieved rates of return that are comparable to plans with much larger average 401(k) accounts.
As promised, the Department of Labor's Pension and Welfare Benefits Administration (PWBA) has issued "A Look at 401(k) Plan Fees," a booklet intended to help employees understand the fees and expenses associated with 401(k) plan accounts.
Throughout the United States, employers are faced with rising disability and health care costs. According to calculations based on Census Bureau data, by the year 2000 total disability costs will top $340 billion—double what they were at the start of the decade.
In Geissal v. Moore Medical Corporation, the Supreme Court ruled that employers must provide COBRA continuation coverage to individuals who have other group health plan coverage before the date of their COBRA election.
The focus on Social Security, new bills, recent hearings and a White House summit have helped bring retirement security issues back to the forefront, with pension access and portability emerging as key issues this year.
Health care quality has ranked high on the legislative agenda since the 105th Congress convened in early 1997. And interest in health care quality legislation isn't likely to waver, with Election Day approaching and polls showing that many Americans support reforms (as long as they don't significantly increase costs).
This article is the second of a two-part series. Part one, in last month's Insider, examined the health care market's lessons for policymakers, looking at the separate influences of private and public forces. It concluded that in the near future, market forces would continue to dominate change in the health care market, and that large employers and purchasing coalitions are the engines driving that change.
The IRS has released a favorable revenue ruling concerning negative—also known as automatic or passive—401(k) elections.
The Equal Employment Opportunity Commission (EEOC) has finalized a regulation governing individual waivers of rights and claims under the Age Discrimination in Employment Act (ADEA), as amended by the Older Workers Benefit Protection Act of 1990 (OWBPA). The OWBPA required that waivers be "knowing and voluntary" in order to be valid.
The IRS has finalized rules providing anticutback relief for amendments that eliminate in-service distributions for plan participants (other than 5 percent owners) who reach age 70½ after 1998.
The IRS has announced its intention to propose regulations loosening the requirement of Code §411(d)(6) to preserve qualified plan payment forms for accrued benefits.
This is the first article in an occasional series that will introduce workforce management—a new discipline that Watson Wyatt is pioneering.
A Court of Appeals for the Second Circuit has held that in order for contributions to a retiree medical benefit "reserve" to be tax-deductible under Voluntary Employees Beneficiary Association (VEBA) funding rules, their purpose must be solely to fund postretirement benefits.
This article is the first of a two-part series. Part one recaps the successes and limitations of market-based restructuring. Part two, in next month's Insider, will look at the implications for employers.
The Pension Benefit Guaranty Corporation (PBGC) recently released its September 30, 1997, Annual Report. For the 1997 fiscal year, the PBGC showed $15.9 billion in assets and $12.2 billion in liabilities, resulting in a net surplus of $3.7 billion. This amount is considerably higher than last year's $1 billion surplus.
As we all know, the phenomenal growth of 401(k) plans has materially shifted ultimate investment responsibility from plan trustees to individual participants. Concern about the impact of this shift was the seed for a four-part series called: "Can Your Employees Afford To Direct Their Own Retirement Plan Investments?"
Responding to plan sponsors' complaints about the complexity of 401(k) nondiscrimination tests and the resulting refunds to highly compensated employees, the Small Business Job Protection Act of 1996 (SBJPA) included a provision for "safe harbor" 401(k) plans. These plans were to be sufficiently generous so as to exempt adopting sponsors from testing.
Key House and Senate Democrats have introduced their own health care quality bill. The Patients' Bill of Rights Act (S.1890,1891/H.R.3605) is based on recommendations by President Clinton's Advisory Commission on Quality and Consumer Protection in the Health Care Industry.
For many tax-exempt organizations, designing deferred compensation plans has been a frustrating ordeal since they became subject to section 457's restrictive deferral rules under the Tax Reform Act of 1986.
In a recent press release, Olena Berg, Assistant Secretary for the DOL's Pensions and Welfare Benefits Administration, said that employee benefit plan administrators have a fiduciary responsibility to address the Year 2000 software problem.
After much discussion and careful crafting, Representatives Earl Pomeroy (D-North Dakota) and Jim Kolbe (R-Arizona) have introduced the Retire-ment Account Portability (RAP) Act (H.R. 3503). The RAP Act would allow rollovers between 401(k), 403(b) and 457 plans and from Individual Retire-ment Accounts (IRAs) to workplace-based retirement accounts.
A Michigan district court has ruled that partially vested former participants do not have to be vested upon plan termination if the employer went out of business.
The IRS has finalized the proposed and temporary regulations concerning the interest rate and mortality assumptions used to convert annuity benefits to lump-sum distributions, which were changed by the General Agreement on Tariffs and Trade (GATT) legislation.
As part of our ongoing research into retirement plan participant behavior, Watson Wyatt Worldwide recently studied characteristics of terminating employees who chose lump-sum distributions rather than immediate or deferred annuity payments.
In recent years, Watson Wyatt has developed the Value Creation ProcessTM, which helps employers identify health plans that offer the greatest value to all interested parties.
The 1998 Guidance Priority List is out, reflecting the guidance the IRS intends to release this year (although other guidance may also be released).
The Health Care Quality, Education, Security and Trust (QUEST) Act sponsored by Senators James Jeffords (R-Vermont) and Joseph Lieberman (D- Connecticut) is the latest entry into Congress' health care quality debate.
When President Clinton sent his fiscal 1999 budget proposal to Capitol Hill in early February, it marked the first step in what likely will be a long and contentious budget debate. Much attention has focused on the new budget surplus, and Congress and the White House already have begun sparring over how to spend it.
The Supreme Court has ruled that an employee's failure to return severance benefits she received in exchange for an ineffective waiver of age-related discrimination claims does not stop her from pursuing those claims in federal court. The January 1998 decision in Oubre v. Entergy Operations, Inc. serves as a reminder of the needs for strict compliance with the legal restrictions on Age Discrimination in Employment Act (ADEA) waivers.
Andy Grove, CEO of Intel, recently pointed out the importance of companies knowing where they are in the life cycle of their business: "There is at least one point in the history of any company when you have to change dramatically to rise to the next level of performance. Miss that moment and you start to decline."
The International Accounting Standards Committee (IASC) has approved revised International Accounting Standard (IAS) 19, Employee Benefits.* The key revision to the 1996 exposure draft is a change to the proposed method for amortization of actuarial gains and losses, which would have caused excessive volatility.
The Financial Accounting Standards Board (FASB) released FAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The statement simplifies some disclosure requirements and eliminates others.
This is the second of a three-part series about a new Watson Wyatt model for assessing retirement income targets. The first article (Watson Wyatt Insider, December 1997) discussed the philosophical basis for the model—workers need to save enough during their working years to meet their retirement income needs, and target employee savings and expected retirement age are key variables in the equation.
The IRS, Department of Labor (DOL) and Health Care Financing Administration (HCFA) have released interim rules regarding parity between medical/surgical benefits and mental health benefits. The interim rules basically follow the provisions of the Mental Health Parity Act of 1996 (MHPA), as amended by the Taxpayer Relief Act of 1997, with some added details.
The IRS has extended the time allowed for making corrections under the Administrative Policy Regarding Self-Correction (APRSC).
The IRS, the Department of Labor (DOL) and the Health Care Financing Administration (HCFA) are responsible for providing guidance on the Health Insurance Portability and Accountability Act of 1996 (HIPAA). These Agencies recently issued clarifications to the interim regulations that came out in April 1997. The clarifications pertain to two areas: (1) flexible spending accounts (FSAs), and (2) the nondiscrimination rules relating to health status.
The IRS has released new guidance (Revenue Ruling 98-1) on changes to Code §415(b) limitations for defined benefit plans enacted by the General Agreement on Tariffs and Trade (GATT) and the Small Business Job Protection Act (SBJPA).
The IRS has released proposed regulations under §72(p) concerning the taxation of plan loans.
The IRS recently released proposed regulations providing guidance on changes to the COBRA continuation coverage rules made by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Omnibus Budget Reconciliation Act of 1989 (OBRA '89) and the Technical and Miscellaneous Revenue Act of 1988 (TAMRA).
The IRS is proposing to simplify the rules that apply if a trust is named as a beneficiary of an employee's benefit under a retirement plan.
The IRS has extended the proposed effective date for the regulations governing FICA taxation of nonqualified deferred compensation.
IRS regulations encourage (but do not require) payers of partly taxable and partly nontaxable retirement plan distributions to report taxable amounts on Form 1099-R.
The IRS is planning to open the determination letter program for plan amendments required in the current remedial amendment period on April 27, 1998.
The IRS has released new guidance on age 70½ distributions from qualified plans (other than certain church and government plans) and section 403(b) tax-sheltered annuities.
Stretching the Pension Dollar is a recent study conducted by Watson Wyatt Worldwide for the American Council for Capital Formation and the Association of Private Pension and Welfare Plans.
Debates on health care, Social Security and retirement income are expected to continue when the 1998 congressional session opens in late January, but will it be all talk and no action?
President Clinton signed the Savings Are Vital for Everyone's Retirement (SAVER) Act on November 19, 1997. The act is intended to promote public understanding of retirement savings and "its critical importance to the future well-being of American workers and their families," and to educate employers and employees about current retirement savings options.
In November, President Clinton''s Advisory Commission on Quality and Consumer Protection in the Health Care Industry released a bill of rights, which outlines seven patient rights along with a list of patient responsibilities.