Proposed Regulations Provide Qualified Plan Age Discrimination Rules and Cash Balance Plan Conversion Guidance. The Treasury Department on December 10 issued proposed regulations (REG-209500-86, REG-164464-02; Prop. Reg. § 1.401(a)(4)-3, Prop. Reg. § 1.401(a)(4)-9, Prop. Reg. § 1.411(b)-2; Ann. 2003-1, 2003 I.R.B. 2) addressing the age discrimination rules applicable to retirement plans—in particular, the requirement that benefit accruals may not cease or be reduced on account of attainment of any age. The proposed regulations make it clear the rules are applicable to reductions that occur either directly or indirectly on account of age. The proposed regulations provide a general rule for determining the rate of benefit accrual under a defined benefit plan. They also propose a special rule that may be used by cash balance plans (i.e., defined benefit plans that determine a participant’s benefit by reference to a hypothetical account balance). Many opponents of cash balance plans had argued these types of plans violated age discrimination rules. The Internal Revenue Service (IRS) cautions this proposed regulation may not be relied on until it is finalized. If the final regulations are similar to these proposals, sponsors of these types of plans would have additional support against claims of age discrimination. The proposed regulations also provide age discrimination requirements are satisfied if conversions of traditional defined benefit plans into cash balance plans are made on an age-neutral basis and if established plans provide older workers with pay credits equal to or greater than those provided to younger workers. The proposed regulations condone conversions that do not result in a wearaway period or those establishing opening account balances based on reasonable actuarial assumptions that do not vary with age, at least to the degree older participants would have lower balances. A “wearaway” effect occurs when accruals are stalled until the participant’s hypothetical account exceeds the value of benefits accrued and frozen under the traditional plan’s formula. A moratorium on determination letters for pension to cash balance plan conversions has existed since 1999. The moratorium will end when the proposed regulations become final, after a 90-day public comment period. A public hearing is scheduled for April 10.

Final Regulations Address Issues for Plan Loans to Participants. The IRS issued final regulations (T.D. 9021; Reg. § 1.72(p)-1) governing loans from retirement plans to plan participants. These final regulations are effective December 3, 2002 and apply to loans made after 2003. Generally, the final regulations follow regulations proposed in July 2000. Modifications made by the final regulations include:

Interest accrued while performing military service may be amortized over remaining loan repayments or satisfied by having a balloon payment at the end of the loan.
The proposed limitation of making no more than two loans to a participant in a year was removed.

Advance Reimbursements and Advance Loans for Uninsured Medical Expenses Are Taxable. The IRS made yet another ruling restricting attempts to avoid rules applicable to health care flexible spending accounts under Internal Revenue Code (IRC) § 125 cafeteria plans. In Revenue Ruling 2002-80, 2002 I.R.B. 49, the IRS held amounts paid as advance reimbursements or loans to an employee without regard to the employee’s actual incurred medical expenses are not excludable from the employee’s gross income under IRC § 105(b) or employment taxes.

EEOC to Propose Exemption to ADEA for Medicare Eligible Retirees. According to the Equal Employment Opportunity Commission’s latest regulatory plan published on December 9, a proposed exemption to the Age Discrimination in Employment Act (ADEA) will allow employers, without violating the ADEA, to reduce or end benefits when a retiree becomes eligible for Medicare or comparable state retiree health benefits.

Fiduciary Action in Response to United Air Lines Bankruptcy. United Air Lines (UAL) filed for bankruptcy protection on December 9 after the federal government rejected UAL’s application for a federal loan. On December 4, the Air Transportation Stabilization Board denied UAL’s application for a $1.8 billion federal loan guaranteeing UAL’s underfunded pension plan.

Aon Fiduciary Counselors sold all the UAL stock held by UAL’s 401(k) plans before UAL filed for bankruptcy. UAL employees owned roughly 12.5 million shares, or about 12% of UAL's stock, in their 401(k) plans. The stock sales raised between $25 and $30 million. Aon was the independent fiduciary for the 401(k) plans.

On December 11, UAL Corp., the parent of UAL, secured a bankruptcy order to prevent holders of large stakes in the airline from selling or transferring their holdings. The order applies to entities that hold $65 million or more in claims against UAL or 2.5 million shares or more of the company’s stock. The court order is in effect until at least January 15. State Street Bank, which serves as the independent fiduciary for UAL’s ESOP, is fighting the order so that it may continue to liquidate the ESOP’s holdings of UAL shares.

IRS Does Not Extend Tax Waiver on Leave-Based Donations to Charity. On December 11, the Internal Revenue Service announced in Notice 2003-1 that the value of donated leave made after 2002 will be treated as income to the employee. The IRS earlier provided interim guidance in Notice 2001-69, which stated it would not assert donated leave was income to the employee until December 31, 2002. (An extended discussion of this Notice appears at http://www.hodgsonruss.com/practice_areas/
pg_news.asp?lid=853&pg=Employee.)

Cases

Portion of Disability Pension Subject to Equitable Distribution. In a dispute over the division of a disability pension under a domestic relations order, the New York State Appellate Division, Third Department, rejected the defendant’s argument that his disability pension must be viewed separately from the ordinary plan benefit, because, he argued, there was no length-of-service component for the disability benefit. Peek v. Peek (3rd Dept., 12/2/02). The court held the defendant’s disability retirement pension replaced the defendant’s ordinary retirement pension, which had already vested. Therefore, the vested property rights are included in the pension.

Participant Cannot Rely on Incorrect Statement to Obtain Increased Benefits. In Hart v. Equitable Life Assurance Society (S.D.N.Y., 11/26/02), a computer generated benefit statement erroneously credited a retirement plan participant with 10 additional years of service with her employer. The statement contained a disclaimer informing participants the benefit statement was not a guarantee of benefits. Because the benefit statement disclaimer clearly set forth cautionary language, the District Court held it did not give rise to the level of affirmative misrepresentation that would constitute a breach of fiduciary duty or constitute a valid claim for equitable estoppel (i.e., barring a party from asserting a position contrary to that party’s previous act).

Employer Fined $50 per Day Penalty for Failure to Give COBRA Notice. In O’Shea v. Childtime Childcare Inc. (N.D.N.Y., 12/2/02), the Federal District Court held a former employee was prejudiced by the employer’s lapse in providing COBRA notice for the 46-day period plaintiff O’Shea was without insurance. In addition to the penalty, O’Shea is continuing her action to receive reimbursement for medical care expenses incurred during the 46-day period.