2004 Cost-of-Living Adjustments. In a November 19 revenue procedure, the Internal Revenue Service (IRS) released the 2004 cost-of-living adjustments (COLAs) applicable to various tax-rate tables, credits, deductions, benefits, and other items subject to annual inflation adjustment (Rev. Proc. 2003-85, 2003-49 IRB _____ (Dec. 8, 2003)). On the benefits front, the amount that may be excluded from an employee’s income in 2004 for qualified parking benefits under an Internal Revenue Code (IRC) § 132(f) qualified transportation fringe benefit plan has been increased by $5 to $195 per month. The monthly limit for mass transit and vanpooling expenses remains at $100 for 2004. Our Web site features a complete list of the benefits limitations for 2004. Medical Savings Accounts (Archer MSAs) also saw a small increase of $100 to $150 in the maximum deductibles and out-of pocket expense limits that determine whether a health plan qualifies as a high deductible plan for 2004, entitling participants to contribute to medical expense reimbursement accounts on a tax-free basis.

Agency Rulings, Etc.

Nowhere to Run, Nowhere to Hide: IRS Begins Executive Compensation Compliance Initiative. The IRS announced in a November 13 Webcast of its Internet program “Tax Talk Today” that it has begun a small, yet comprehensive compliance initiative to deal with taxation of executive compensation. Two dozen large, publicly traded companies have been selected for examination on the following issues: nonqualified deferred compensation, stock-based compensation, $1 million cap on deductible compensation (IRC § 162(m)), golden parachutes (IRC § 280G), split-dollar life insurance, transfer of compensatory options to family limited partnerships, employee leasing asset protection plans, and executive perks (e.g., housing allowances, corporate planes and cars). Agents have received special training in these eight issues. More can be expected; the IRS plans to add special training in these issues to all IRS agents in the future. Returns of top executive officers also will be examined by the audit teams.

IRS Hands Down Transitional Rules for Plans of Employee Leasing Organizations. The IRS amplified its 2002 guidance to professional employer organizations (PEOs) in which it required a PEO to either terminate its plan for employees it leases to multiple employers or convert the plan to a multiple-employer plan. The 2003 revenue procedure grants the PEOs additional time to make the needed plan amendments and answers tough transitional questions on successor plans, top heavy rules, IRC §§ 401(k) and 401(m) testing, required minimum distributions, and determination of highly compensated employees (HCEs). (Rev. Proc. 2003-86, 2003-50 IRB _____ (Dec. 15, 2003).)

U.S. and Canada Agree on Something in Drug Area. Amid concerns over the importation of Canadian drugs into the U.S. market, the United States and Canada signed an agreement November 18 to share information related to pharmaceutical investigations, marketing, and compliance. The agreement went into effect on its signature date, November 18, and will remain in effect for 10 years; it may be adjusted after one year. Proposed market withdrawals, regulatory guidance documents, and enforcement actions are some of the items covered by the data-sharing agreement. (Memorandum of Understanding between the Food and Drug Administration, Department of Health and Human Services of the United States of America, and the Health Products and Food Branch, Health Canada of Canada, signed Nov. 18, 2003, available at www.fda.gov/oia/agreements/HCFDAMOU111803.pdf.)

Help Is on the Way: Guidance on Reporting and Disclosure, Military Benefits, and Covered Compensation Tables.

The Department of Labor (DOL) issued an updated version of its Reporting and Disclosure Guide for Employee Benefit Plans (October 2003) to assist employers, plan sponsors, service providers, and others. Included are charts on basic disclosures, annual reporting requirements, and Pension Benefit Guaranty Corporation (PBGC) requirements. The PBGC assisted with the guide. The publication is available by calling toll-free, 866-444-EBSA (3272) or online at www.dol.gov/ebsa/pdf/rdguide/pdf.

Guidance for Military Families. The IRS issued a news release providing guidance on enhanced tax benefits for military families in the Military Family Tax Relief Act of 2003. Included are enhanced survivor death benefits, now wholly tax free, and a longer time to test home residency for the exclusion of gain on a home sale. Both parts of the Act are retroactive and refunds may be obtained in appropriate cases. (IR-2003-132, Nov. 24, 2003.)

Covered Compensation Tables Issued. The IRS has provided the 2004 covered compensation tables used to determine contributions to defined benefit plans and permitted disparity. The taxable wage base is $87,900, up from $87,000 for 2003. (Rev. Rul. 2003-124, 2003-49 IRB _____ (Dec. 8, 2003).)

Cases

Impact of Massachusetts Gay Marriage Ruling on Benefits Unclear. In a landmark decision, the Massachusetts Supreme Judicial Court ruled November 18 that state laws prohibiting marriage between same-sex couples are unconstitutional and gave the state legislature 180 days to take “appropriate” action. Holding the state may not deny “the protections, benefits, and obligations conferred by civil marriage to two individuals of the same sex who wish to marry,” the highest court in the state based its decision in part on the “benefits accessible only by way of a marriage license.” Among the benefits dependent on marriage enumerated by the court were spousal medical coverage, spousal COBRA benefits, state pension benefits for surviving spouses, and qualification for bereavement and family medical leave for spouses. The impact of the decision on employers and the benefits they offer, however, is not entirely clear, because federal law does not recognize same-sex marriage. Although it appears Massachusetts state and municipal pensions must extend survivor benefits to a same-sex spouse, for example, private company pensions are regulated by federal law. Arguably, any benefit plan covered by ERISA is exempt from adherence to the ruling, which affects state law. In addition, it remains unclear what rights a same-sex married couple would have in the legal and benefits arena if the couple relocates to a state that does not recognize same-sex unions. Stay tuned for future guidance and interpretations. (Goodridge v. Dept. of Public Health, Mass., 440 Mass. 309, ___ N.E. 2d ___, Nov. 18, 2003.)

Contractors’ Employees Not Entitled to Mobil Corp. Benefits. John MacLachlan, an electronic technician, and six other plaintiffs brought a class-action suit against ExxonMobil Corporation. They provided services for Mobil Corporation (Mobil) (before Mobil’s 1999 merger with Exxon) as direct employees of an outside contractor to Mobil. All seven named plaintiffs were employed by third-party companies and classified by Mobil as independent contractors or employees of third parties. Under the many Mobil plans in issue, benefits were limited to “regular employees.” The plaintiffs made some common and some novel arguments, from assertions they were common-law employees to applying the Age Discrimination in Employment Act. The lower federal court, as well as this federal appeals court, summarily found reasonable the plan administrator’s interpretation that the plaintiffs were not eligible for Mobil benefits. (MacLachlan v. ExxonMobil Corp., _____ F. 3d _____ (5th Cir. 2003, Nov. 20, 2003).)

Unvested Stock Options May Be Separate Property. Addressing an issue we see frequently when executives and other employees face divorce, a Florida District Court of Appeals recently held unvested stock options and shares of restricted stock clearly identified in plan documents as incentives for future services were not marital property subject to equitable distribution on divorce. Other jurisdictions generally have agreed the marital status of unvested options turns on the factual issue of whether they “were primarily awarded as deferred compensation for past services or as an incentive for future services.” Noting options granted prior to the cutoff date for the determination of marital assets (generally the date the divorce action commences) may be marital property even if they remain unvested as of the cutoff date, this mid-level state appeals court also determined unvested stock options instead may be separate property. Their status depends on “the predominant purpose for which the options were given.” In this case, the court relied on the explicit expression of purpose in the plan documents and agreements to find the unvested options and shares were the separate property of the employee’s spouse. Each plan document clearly stated the purpose of the award was “to attract and retain and provide incentives to employees.” The individual option agreements reinforced this purpose, stating the grants were intended as an incentive to advance the interests of the company. The court also pointed to the monthly incremental vesting schedules for the stock options and shares to suggest that each monthly increment vested as it was earned. (Ruberg v. Ruberg, ____ So. 2d ____(Fla. App. 2 Dist., Nov. 7, 2003).)

Disappearance of Old Job Irrelevant for Social Security Disability Determination. In an opinion by Justice Antonin Scalia, the U.S. Supreme Court ruled unanimously that a woman who is capable of performing her former job as an elevator operator is not eligible for Social Security disability benefits, even though her prior job no longer exists in significant numbers in the national economy. Pauline Thomas worked as an elevator operator for six years until her job was eliminated in 1995. She applied for disability benefits under the Social Security Act (Act), claiming she was disabled by heart disease and other ailments. Despite her acknowledged health problems, Thomas’s application was denied on the basis that she was not disabled because her “impairments do not prevent [her] from performing her past relevant work as an elevator operator.” The District Court affirmed the decision, but the Court of Appeals for the Third Circuit reversed, holding the Act provides that the ability to perform prior work disqualifies an applicant from benefits only if it is “substantial gainful work which exists in the national economy.” The Supreme Court, in turn, reversed the federal appellate court, resolving a split in the federal circuits. The decision by the highest court in the land hinged on a grammatical reading of the definition of “disability” in the statute, which provides an individual is disabled only if his or her impairments are “of such severity that he is not only unable to do his previous work but cannot, considering his age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy.” The Supreme Court sided with four other federal circuits in determining the clause “which exists in the national economy” qualifies only the requirement that an individual cannot engage in any other kind of substantial gainful work. Therefore, the court concluded it is irrelevant that Thomas’s previous work no longer exists in the national economy. (Barnhart v. Thomas, 540 U.S. ____, 124 S. Ct. 376 (Nov. 12, 2003).)

$239 Million the Price of Peace in One Cash Balance Battle. The Xerox Corporation (Xerox) announced November 14 its cash balance plan reached an agreement in principle to settle the high-profile lawsuit against the plan. The Seventh Circuit Court of Appeals in July had ruled against the plan. The terms require the plan to settle for $239 million, subject to a final agreement and court approval. Among the trickier issues: how to divvy up the $239 million among the participants. Berger v. the Xerox Corporation Retirement Income Guarantee Plan was reported in earlier Employee Benefits Developments, along with other cash balance plan activity. (See Xerox news release. See July 28–Aug. 8, 2003 and Oct. 6–Oct. 17, 2003 Employee Benefits Developments on our Web site.)