Employee Benefits

Employee Benefits Developments 11/5 to 11/18 2002

IRS/DOL Rulings, Opinions, Etc.

IRS Extends GUST Remedial Amendment Period. Revenue Procedure 2002-73 extends the time for adopting employers of pre-approved (master or prototype or volume submitter) plans to amend their plans to comply with GUST. The new deadline is

The later of September 30, 2003; or
The end of the 12th month beginning after the date on which the IRS issues a GUST opinion or advisory letter for the pre-approved plan.

The Revenue Procedure also extends the time by which a plan must be amended to comply with Rev. Rul. 2001-62 (relating to new mortality tables to be used for Code section 417(e) calculations) and Rev. Rul. 2002-27, (relating to the inclusion of deemed section 125 compensation in the definition of compensation under Code section 415(c)(3)). These changes must be made by the later of the plan’s GUST remedial amendment period or the deadlines under the rulings. Finally, Rev. Proc. 2002-73 extends the time by which a plan must be amended to comply with section 314(e) of the Community Renewal Tax Relief Act of 2000 regarding the inclusion of deferrals for qualified transportation fringe benefits in a plan’s definition of compensation for certain purposes. This deadline now is the latest of

The end of the first plan year beginning on or after January 1, 2002;
The end of the plan’s GUST remedial amendment period; or
June 30, 2003.

Plan May Buy Variable Annuity for Beneficiary. In Private Letter Ruling 200244023, the IRS ruled a profit sharing plan could use a participant’s accounts to purchase a variable annuity for the benefit of a non-spouse beneficiary without violating Code section 401(a)(9)’s minimum distribution rules. The annual required minimum distribution calculation would be determined with reference to the net asset value of the various segregated asset accounts in which the annuity funds are invested. This approach allows the beneficiary to extend the payout period of the plan benefit beyond the normal five year payout requirement.

Covered Compensation Tables. Revenue Ruling 2002-63 provides updated tables of covered compensation for the 2003 plan year. These tables are used for making benefit and contribution calculations under “integrated” defined benefit plans. For purposes of determining covered compensation for the 2003 plan year, the taxable wage base is $87,000.

PBGC Guaranty Increased. The Pension Benefit Guaranty Corporation announced an increase in its benefits guaranty to retirees in underfunded plans that terminate in 2003. Beginning in 2003, the PBGC will pay a maximum single life annuity of $3,664.77 per month ($43,997.24 per year) to affected retirees. This new amount is an increase from the current amount of $3,579.55 per month ($42,954.60 per year).

DOL Guidance on “Float.” In Field Assistance Bulletin 2002-3, dated 11/15/02, the Department of Labor stated that “float,” compensation earned by service providers from short-term investments of plan assets, must be regarded by plan fiduciaries and service providers as part of the service provider’s compensation for services to the plan. Thus, the plan fiduciary must have an adequate understanding of how the provider will earn float and must avoid giving the provider discretion to affect the amount of compensation earned from float.

Cases

Liability for Failure to Provide Plan Information. In Cherry v. Toussaint (2d Circuit, 11/1/02), trustees will be required to defend themselves against personal liability for failure to provide within 30 days information requested by plan participants. This pro se plaintiff gets his day in court. The plan denied a lump sum payout, and the participant requested information. The plan dragged its feet in answering and denied some of the request. After an adverse summary judgment in the District Court, the 2d Cir. finds that a valid claim is made for the $110 per day penalty and remands the case for further proceedings.

Application of “Clawback” and Forfeiture for Competition Clause in Stock Plans. The 2d Circuit reversed a lower court’s grant of summary judgment to a former IBM executive relating to the executive’s action alleging his restricted stock awards and stock options were forfeited improperly when he began working for an IBM competitor. The court determined that summary judgment was granted improperly because there was a genuine issue of fact as to whether the executive had been fired from IBM or whether he had left IBM voluntarily. The stock options and awards were subject to a “forfeiture for competition” clause that provided if the executive left IBM voluntarily and worked for a competitor, the amounts would be forfeited. The court found the district court ignored key evidence of a voluntary departure in its determination that the executive had been fired. In addition, the court determined there was a genuine issue of fact as to whether a non-compete “clawback” provision applied to severance payments made to the executive. The lower court had dismissed IBM’s counterclaim that the severance payments were subject to the non-compete and thus should have been returned to IBM. Lucente v. International Business Machines Corp. (2d Circuit, 11/4/02).

Severance Plan Held not to be an ERISA Plan. A 5th Cir. case finds that a severance plan that did not require “ongoing administration” is not an ERISA plan. This is another revisiting of the Fort Halifax decision by the Supreme Court. Here the employer was looking to use ERISA coverage as a shield to preempt state law. The court concluded the plan was “based on a one-time calculation using a fixed formula” and was not subject to ERISA. Tinoco v. Marine Chartering Co. (5th Circuit, 10/31/02).