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Employee Benefits

Employee Benefits Developments 5/5 to 5/16 2003

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IRS/DOL RULINGS, OPINIONS, ETC.

IRS Proposes Further Regulations Governing Split-Dollar Arrangements. On May 9, 2003, the Internal Revenue Service (IRS) proposed additional regulations relating to the valuation of economic benefits under certain equity split-dollar arrangements. Specifically, these proposed regulations address the tax consequences to the non-owner of the policy in an endorsement split-dollar arrangement. Under the proposed regulations, a non-owner would be taxed on the current life insurance protection provided to the non-owner and any portion of the policy cash value that is directly or indirectly accessible by the non-owner. A non-owner is treated as having access to a portion of the policy cash value if he or she can directly or indirectly make a withdrawal from the policy, effect a total or partial surrender of the policy, anticipate, assign, pledge, or encumber the policy’s cash value, or if the policy’s cash value is available to the non-owner’s creditors. A public hearing on these regulations is scheduled for July 29, 2003. The IRS has indicated it will move quickly to finalize the regulations proposed in July, 2002 as well as these regulations after the public hearing. (68 Fed. Reg. 24898, 5/9/03.)

It is essential that employers and individuals who have existing split-dollar arrangements review those arrangements in 2003. IRS guidance permits certain actions to be taken prior to 2004 with respect to existing split-dollar arrangements that will not be available after this year.

IRS Finalizes Regulations Regarding Returned IRA Contributions. In these final regulations, the IRS describes the amount of net income attributable to Individual Retirement Account (IRA) and Roth IRA contributions that must be distributed or re-characterized in order to comply with contribution limitations. The method of calculation is based on actual earnings and losses during the time the IRA or Roth IRA holds the contribution. Previously, that income was computed from the first day of the tax year in which the contribution was made and ending on the date of distribution. (TD 9056.)

IRS Allows Use of Credit/Debit Cards to Reimburse Health Expenses. The IRS issued guidance in Revenue Ruling 2003-43 regarding reimbursements from employers to employees through use of a credit or debit card under a flexible spending account or health reimbursement arrangement. Under the procedures, the employee may certify the expenses incurred have not already been reimbursed or claimed in any other plan by executing an agreement at the beginning of the coverage period and by having an appropriate certification appear on the credit or debit card. Additionally, employers must undertake certain administrative procedures with the merchant or provider of the card to verify the expenses are properly reimbursable under the plan or arrangement. Finally, employers must take certain actions if they determine an invalid payment was made. This ruling opens the door to increased use of credit and debit cards for payments under flexible spending accounts and health reimbursement arrangements. (Rev. Rul. 2003-43.)

DOL Reiterates Employee Contributions Must Be Timely Made. The Department of Labor (DOL) issued Field Assistance Bulletin 2003-2, holding neither a collective bargaining agreement nor any other agreement may provide for longer maximum time periods for forwarding amounts withheld from wages of employees contributed to a multiemployer plan. The DOL has regularly stated, with respect to single employer plans, the contribution must be forwarded as soon as an employer is able to segregate a participant’s contributions from general assets. Contributions made by the 15th business day of the month following the month in which the amounts were withheld are not timely made if the amounts could be reasonably segregated at an earlier time. In this bulletin, the DOL holds this same rule applies to multiemployer plans and overrides any conflicting provisions in a collective bargaining agreement or multiemployer plan document. (DOL Field Assistance Bulletin 2003-2.)

CASES

Requirement That Prisoner Receive His Pension Benefits at Prison Address Does Not Violate ERISA. In a split decision, the Michigan Supreme Court ruled on May 14 that a state trial court’s order requiring that a prisoner receive his pension plan benefits at his current prison address is not an assignment of these benefits in violation of ERISA. The ruling allows the prison warden to appropriate and distribute the funds held in the prisoner’s account under the State Correctional Facility Reimbursement Act (SCFRA). The state treasurer sought to recover the costs of incarcerating Thomas K. Abbott under the SCFRA. The state treasurer argued Abbott’s monthly pension payment should be sent to his prison address, deposited in his prison account, and appropriated by the warden. The appeals court held ERISA’s anti-alienation provision barred the deposit of funds into Abbott’s prison account. The appeals court based its decision on State Treasurer v. Baugh where the U. S. District Court for the Eastern District of Michigan found a court order requiring a pension fund to make pension payments to a prisoner’s prison account against his will constituted an assignment in violation of ERISA’s anti-alienation provision. The Michigan Supreme Court declined to follow the federal court’s precedent and relied on the Treasury Department’s definition of assignment, which is a transfer of interest to another person, e.g., a person other than the beneficiary himself, in its holding. In this case, no assignment took place because the warden did not acquire a right in the pension payments and was only required to deposit Abbott’s pension fund checks in Abbott’s prison account. The court held once pension funds were deposited in the prison account, the pension funds were no longer protected by ERISA. (State Treasurer v. Abbott, Mich., No. 120803, 4/14/03.)

Increasing Health Care Premiums Not a Breach of Employer’s Fiduciary Duty. The U.S. Court of Appeals for the Sixth Circuit ruled Midland Resources Inc. did not breach its fiduciary duty under ERISA when it increased the premiums for a retired employee’s health care plan. Prior to taking early retirement, Glenn Hardy asked Midland about its retirement benefits. Midland’s benefit administrator sent Hardy a letter in 1995 stating coverage under the health and dental plan was available to Hardy and his spouse until age 65 and listed the cost of the monthly health care premium. Hardy elected to participate in the plan. In July 1999, Midland informed Hardy his monthly premium would increase and would increase again in the future. Hardy filed a lawsuit in June 2000, claiming the 1995 letter precluded Midland from raising his monthly health insurance premium until he reached age 65 and asserted a claim under ERISA for breach of fiduciary duties. The court held Hardy did not prove Midland misrepresented the amount Hardy would have to pay in premiums in the future because the statements in the 1995 letter were true when made and did not state the premiums would not change until he reached age 65. In addition, Midland’s health care plan document reserved the right to modify the plan for any reason at any time. (Hardy v. Midland Enterprises Inc., 6th Cir., No. 01-4121, unpublished 4/30/03.)

Owner of Company Held Personally Liable for Delinquent Contributions to Multiemployer Plan. Elaine Gibson, on behalf of a company she owned, signed two collective bargaining agreements providing for contributions for multiemployer pension and welfare benefit funds. Included in each agreement was a provision stating the agreement is binding personally and individually upon the union, the employer, and each individual owner, partner, and shareholder of the employer. The company failed to make required contributions to the multiemployer plans. The pension and welfare funds brought an action for delinquent contributions. The company conceded it was liable for delinquent contributions, but Elaine Gibson claimed she was not personally liable. While she signed the agreements on behalf of the corporation, there was no signature on behalf of herself as an individual. The court held Gibson knowingly signed the agreements that contained clear and unequivocal provisions stating the agreements were binding personally and individually and therefore held Elaine Gibson liable for delinquent contributions. (Trustees of the Minnesota State Basic Building Trades Fringe Benefit Fund v. GibSons Construction Enterprises Inc., D. Minn., No. 01-2170 ADM/AJB, 5/6/03.)

While ERISA generally does not provide for individual liability for multiemployer plan contributions and delinquencies, the employer should be aware such liabilities can be imposed pursuant to contractual agreements. Therefore, employers, shareholders, and officers of corporations entering into such agreements should review them carefully to determine whether they impose liability on additional individuals.