Department of Labor Releases COBRA Rules. The Department of Labor (DOL) has released final regulations on the notice requirements for health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). These rules go into effect for plan years beginning after November 25, 2004. The final rules contain revised model notices that may be used by employers.

The general "Notice of COBRA Continuation Coverage Rights" must be provided at the "commencement of coverage" date. A second "Continuation Coverage Election Notice" is provided at the time of a qualifying event. This notice is used by the covered employee or beneficiary to elect the continuation coverage. The model notices can be completed with plan-specific information giving names, addresses and other contact information for the plan.

The regulations address the timing and content of notices under the federal rules for continuation coverage. The model notices can be found at the DOL's website: www.dol.gov/ebsa.

For calendar year plans, the regulations will be effective beginning in 2005. (69 Fed. Reg. 30083)

Union-Administered § 457 Plans Approved. Revenue Ruling 2004-57 permits a labor union to offer and administer a governmental deferred compensation plan under Internal Revenue Code (IRC) § 457(b). This is somewhat unusual because we normally believe these plans must be maintained by the employer-not a union. The Internal Revenue Service (IRS) reached its conclusion in this ruling because the employer agreed to "maintain" the deferred compensation plan administered by the union. Readers should note that § 457 plans in New York must be approved by the New York State Deferred Compensation Board; therefore action on the concept approved in this revenue ruling is subject to state approval in New York.

60 Day Limit for Rollovers-Usually. In numerous private letter rulings, including some reported recently in this publication, the IRS has made it clear you can't always tell if the 60-day rollover requirement will be strictly enforced. We have reported on these developments in our treatise, Taxation of Distributions from Qualified Plans, Chapter 17. (See www.riahome.com/estore.) When a participant receives a "qualifying rollover distribution" from a retirement or § 401(k) plan, the amount must be rolled into another plan or individual retirement account (IRA) within 60 days to avoid current taxation. We advise clients to take great care to meet the 60-day requirement, but sometimes it is waived by the IRS. Because of the cost and time to obtain a private letter ruling, meeting the 60-day deadline still is advisable. The emerging pattern seems to be that incorrect advice from third parties or personal incapacity may allow a waiver, while inattention or neglect will not.

In the latest batch of rulings, the IRS granted a waiver of the 60-day rule where a bank failed to complete a rollover timely (PLRs 200420034 and 200420035), the participant was hospitalized and then died during the 60-day period (PLR 200420037), the taxpayer was blind and elderly and could not understand the rollover rules without assistance (PLR 200421006), and the taxpayer received erroneous advice from the IRA custodian or was confused by a mutual fund company (PLRs 200421008 and 200421009).

The IRS denied a waiver, however, where the taxpayer had the excuse that he didn't know about the tax benefits of a rollover until after the 60-day period expired. (PLR 200421003)

IRS Audit Triggers. In a recent seminar for pension actuaries, Catherine Jones, the IRS employee plans mid-Atlantic manager, Tax Exempt/Governmental Entities, listed the top five audit "triggers." This list might be useful as calendar year plans look to file their 2003 Forms 5500 by July 31:

large number of separated participants with less than 100% vesting;
large percentage of assets classified as "other assets";
disproportionately large distributions on income statements;
top-heavy IRC § 401(k) plans; and
top-heavy plans covering self-employed individuals.

Cases

Officers' $37.6 Million Parachute Payments Not "Extraordinary" Under SOX. In a ruling under the 2002 Sarbanes-Oxley Act, the Court of Appeals for the Ninth Circuit ruled $37.5 million of cash plus 6.7 million shares of stock payable to two officers of a public company are not "extraordinary payments" within the meaning of new securities law rules that could result in the impoundment of such payments. The case involved two officers of Gemstar who were terminated following the discovery of an overstatement of revenues and a restructuring of management. One wonders how far the bounds of "ordinary" payments extend these days. (SEC v. Yuen, 9th Cir. 2004)

Bargaining Agreement to Settle Plant Shutdown Issues Can Eliminate ERISA and LMRA Claims. RBX Industries found itself in financial trouble and eventually went bankrupt, shut down its operations, and laid off nearly all its employees, including those represented by the United Steel Workers. In the course of these events, the union negotiated various shutdown benefits, including compromises on a supplemental unemployment benefit plan and a medical plan. The compromise changed and reduced the benefits that otherwise would have been provided by the plans. In this case, a group of the union employees sued their union, the company, and the plans to enforce their rights under the Employee Retirement Income Security Act of 1974 (ERISA) and under the Labor Management Relations Act (LMRA-the Federal labor relations law). The Court of Appeals for the Sixth Circuit upheld the negotiated agreement reached between the company and the union by denying relief. If employees could prevail in this case, the federal appellate court noted, collective bargaining would be undermined where labor and management negotiate plant closing issues. (Bauer v. RBX Industries, 6th Cir. 2004)

Retired Employees Have No Vested Right To Postretirement Life Insurance Benefits. In a case dealing with postretirement benefits, the Court of Appeals for the Eleventh Circuit ruled retirees of American General Life Insurance Co. did not establish a "vested" right to lifetime postretirement life insurance benefits. The claim was made when the employer eliminated the benefits. ERISA does not provide for vesting in welfare benefits, such as life insurance, as it does for retirement benefits. As long as an employer adequately reserves the right to change, modify or terminate postretirement welfare benefits, the elimination of a postretirement benefit is permissible. Careful plan drafting and employee communication in this case resulted in a decision for the employer. (Jones v. American General Life Insurance Co., 11th Cir. 2004)

Supreme Court Invites U.S. Solicitor General to File Brief in State Taxation of Federal and State Retirement Benefits Case. In a somewhat unusual case, the U.S. Supreme Court invited the U.S. Solicitor General to file a brief in a case dealing with state taxation of government retirement benefits. Federal law prohibits states from favoring state and local retirement benefits, compared to Federal retirement benefits, under state tax laws. While South Carolina once favored state pensions illegally under its laws, a change in state law imposed equal taxes on both state and federal pensions, but at the same time increased state pensions by 7%. The South Carolina Supreme Court found nothing wrong with this in a case brought by federal retirees living in South Carolina. Now the case will be heard by the U.S. Supreme Court. Stay tuned for the results. (Ward v. South Carolina, U.S. Sup. Ct. Case No. 03-1304)

Other Resources

Web-Based Resources for Small Business. In two News Releases, the IRS directed small business taxpayers to numerous free resources available through the internet. The "Small Business and Self-Employed One-Stop Resource" can be found at: http://www.irs.gov/smallbiz.

The website provides a range of tax information for small business, including procedures for starting, operating and closing a business properly under Federal tax laws. For small employer retirement plans, the IRS has developed a periodic newsletter and plan "Check-Ups" for SIMPLE IRA, SEP and SARSEP plans. The newsletter is called "Retirement News for Employers" and can be found at: http://www.irs.gov/retirement/article/0,,id=122823,00.html.

Employers can subscribe to the newsletter, which will be sent out via e-mail. (IRS New Releases IR-2004-68 and IR-2004-69)

Getting It Right-Know Your Fiduciary Responsibilities. The Secretary of Labor announced a nationwide campaign to improve fiduciary performance under ERISA. The DOL program is called "Getting It Right - Know Your Fiduciary Responsibilities."

This program is intended to focus on:

understanding plan terms;
selecting and monitoring service providers;
insuring timely plan contributions;
avoiding prohibited transactions; and
making timely disclosures to participants and beneficiaries.

The DOL is scheduling seminars and other speaking engagements beginning this month. Although no seminars are presently scheduled in New York, we expect to see more publicity locally. Information about the program can be found at: http://www.dol.gov/opa/media/press/ebsa/EBSA2004898.htm and at http://www.dol.gov/ebsa/fiduciaryeducation.html.

This newsletter is a periodic publication of Hodgson Russ LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your own situation and any specific legal questions you may have.