Transfer of Non-Statutory Options or Deferred Compensation in Divorce Does Not Result in Immediate FICA and FUTA Taxes. FICA (Federal Insurance Contributions Act) taxes must be withheld from payments relating to nonqualified options and nonqualified deferred compensation that have been transferred to a former spouse. At the same time, the employee gets the FICA and FUTA (Federal Unemployment Tax Act) credit associated with the payments. The Internal Revenue Service (IRS), in a recent revenue ruling, addressed the taxation of nonqualified options and nonqualified deferred compensation transferred to a former spouse in connection with a divorce. The employee/transferor is not required to include an amount in FICA and FUTA wages on the transfer, but, when calculating FICA and FUTA wages, must include amounts recognized on the subsequent exercise of the option or payment of the deferred compensation. Note the IRS previously had ruled on the income tax consequences of these transferred amounts, holding the employee’s former spouse is taxed on the income. (Rev. Rul. 2004-60)

Year-to-Year Election Affects Taxation of Disability Plan Benefits. Employees can decide if their disability benefits will be taxable or not by making a yearly election on the taxation of their disability premiums. The IRS, in a recent revenue ruling, described how an employee can affect the taxation of these benefits. Under the terms of the plan, the employee annually elects, in writing before the plan year begins, to have the employer pay the premiums for the disability benefit on either a pre-tax or after-tax basis. The ruling holds employees electing pre-tax payment and employees electing after-tax payment are treated as separate classes of employees. As a result, an employee electing payment of premiums on a pre-tax basis must include the full amount of disability benefit in income, while the employee electing payment of premiums for that year on an after-tax basis does not include the disability benefit in income. (Rev. Rul. 2004-55)

CEOs Reminded of Their Duties With Respect to Retirement Benefits. The Department of Labor (DOL) has made available the text of a speech delivered by Secretary of Labor Elaine L. Chao in which she highlighted the DOL’s new fiduciary education campaign, “Getting it Right.” Secretary Chao reminded executives that the Employee Retirement Income Security Act (ERISA) provides pension fiduciaries with a road map for thoughtful decision making, which is a process-driven regimen, and that it is helpful to document all decisions in writing. Secretary Chao stated it is important for CEOs to monitor the fiduciaries of their employee pension plans. Reiterating the litigation position of the DOL, Secretary Chao noted that designating another person or entity to manage a plan does not relieve the CEO or others of responsibility or liability. It is the DOL’s position that the designating official has a responsibility to assess the performance of the appointed fiduciaries of the plan. This evaluation would include reading the fiduciaries’ reports, holding regular meetings regarding the performance of the plan, and providing designated plan managers with information necessary to perform their duties. Hodgson Russ has developed charters for retirement communities, checklists, standardized procedures, and similar documents to help employers develop better processes for complying with ERISA. The text of Secretary Chao’s speech may be found at: http://www.dol.gov/_sec/media/speeches/20040528_Yale.htm.

Cases

Supreme Court Addresses Reduction of Benefits on Plan Amendment. The U.S. Supreme Court has issued a decision regarding the application of the so-called suspension of benefit rules under ERISA. Two construction workers were eligible for benefits under the Central Laborers’ Pension Fund (the Fund) as long as they did not engage in “disqualifying employment” following their retirement. In 1996, the term “disqualifying employment” meant engaging in employment as a construction worker. Upon retiring, the two employees became construction supervisors, employment that was not considered “disqualifying employment” at the time. In 1998, the Fund modified the definition to provide that disqualifying employment meant working in any construction industry job. The two individuals continued to perform services as construction supervisors and the Fund suspended their retirement plan payments.
The Supreme Court unanimously held the amendment of the definition of disqualifying employment represented an impermissible cutback of their benefits under ERISA. Justice Souter, writing the opinion of the Court, indicated each individual “… worked and accrued retirement benefits under a plan with terms allowing him to supplement retirement income by certain employment, and he was being reasonable if he relied on those terms in planning his retirement.” While the Court was unanimous in its decision, four of the Justices indicated they did not believe the opinion of the Court would prohibit the IRS or the DOL from issuing regulations allowing for plan amendments to increase the scope of the disqualifying employment with respect to benefits attributable to already-performed services. (Central Laborers’ Pension Fund v. Heinz, U.S. Sup. Ct., 2004)

Human Resources Representative Not a Fiduciary to Plan. A participant, Connie Weeks, argued a human resources representative, Karen Yates, who was not a named administrator of the plan, became an ERISA fiduciary by answering questions about Weeks’ benefits rather than transferring her call to the benefits department. Yates, who incorrectly answered questions about Weeks’ benefits, is not a plan fiduciary, according to the U.S. Court of Appeals for the Fourth Circuit, which affirmed a lower district court’s decision to grant summary judgment to the employer. The federal appellate court’s inquiry on whether Yates was a plan fiduciary “solely focuse[d] on whether that person actually exercised any discretionary authority over the management and administration of the plan in question.” The court concluded Yates did not have any discretionary control over the manner in which employee plans were managed and administered. The court relied on an earlier Fourth Circuit decision (HealthSouth Rehab. Hosp. v. Am. Nat’l Red Cross, 1996) to hold “reading a computer screen to determine who is and who is not covered” does not make someone an ERISA fiduciary because that function is administrative, not discretionary. (Estate of Weeks v. Advance Stores Co., 4th Cir. 2004 (unpublished))

Firing Employee With Large Medical Expenses Did Not Violate ADA or ERISA. International Business Machines Corporation (IBM) fired Thomas Larimer shortly after his twin daughters incurred nearly $200,000 in medical expenses that were paid by IBM’s health benefit plan. Larimer argued IBM violated the Americans with Disabilities Act (ADA) because his daughters are disabled. Larimer’s ADA claim was not brought on behalf of his daughters, but instead was brought under a provision of the ADA that forbids discrimination against a qualified individual because of a known disability of an individual with whom the qualified individual has a relationship. The U.S. Court of Appeals for the Seventh Circuit held Larimer failed to establish a case, indicating the health plan expenses are in the budget of the unit of IBM that employed Larimer, in which case Larimer’s supervisors would have cause to be concerned about the actual expense for health benefits in the unit. The federal appellate court also found there was no evidence IBM retaliated against Larimer for exercising his rights under the IBM health benefits plan pursuant to § 510 of ERISA because he was discharged by IBM for poor work performance. (Larimer v. International Business Machines Corp., 7th Cir. 2004)

Free Application Did Not Bind Employer to Collective Bargaining Agreement. In a case that reminds us to watch what we sign and send in, LaCosta, Inc., an employer, was held not liable for contributions to a multi-employer benefit plan because LaCosta did not know when it signed a free membership application to join a Chicago contractors’ association that it was bound to a collective bargaining agreement requiring contributions to the plan. The membership application did not state that, on signing the application, employers would be subject to a collective bargaining agreement. LaCosta was never provided the association’s constitution and bylaws that would have given LaCosta notice it was bound by the collective bargaining agreement, noted the U.S. District Court for the Northern District of Illinois. The federal district court rejected the fund trustee’s argument that LaCosta conducted itself as if it were bound by the bargaining agreement based on the fact that LaCosta’s accountant mistakenly, on two occasions, sent fringe benefit reports to the fund. (Trustees of the Chicago Painters and Decorators, Pension , Health, Welfare and Deferred Savings Plan Trust Funds v. LaCosta Inc., N.D. Ill. 2004)

Ex-Wife to Receive Value in § 401(k) Plan as of Date of Divorce, Not Distribution. The plaintiff/respondent, Orzetta Grecian, divorced from the defendant/appellant, Bryce Grecian, in May 2000. According to the terms of the divorce (which was later restated in a qualified domestic relations order (QDRO)), Orzetta was entitled to half of Bryce’s IRC § 401(k) plan account, valued on the date of the divorce. The value of the 401(k) plan at the time of the divorce was $64,011. The plan administrator did not distribute Orzetta’s benefits until several months after the divorce. At the time of the distribution the account had declined in value to $45,264. Bryce argued the couple should have shared equally the loss in the 401(k) plan’s value and claimed the divorce court effected an unequal distribution of the 401(k) plan. The Idaho Court of Appeals affirmed the lower court ruling and held the divorce decree and QDRO both clearly determined the date at which the value was to be determined and was agreed to by both parties and stated, therefore, there was no “unequal distribution.” This case underscores the importance of clarity in determining benefit distributions in QDROs. (Grecian v. Grecian, Idaho Ct. App. 2004)

Those Who Act in “Bad Faith” Lose Out in the End. The IRC § 401(k) plan sponsored by North American Coal Corporation issued a check to its former participant, Todd Roth, in the amount of $42,738.79, representing a distribution of Roth’s benefits from the plan. Shortly after, North American Coal filed suit against Roth to recover an erroneous over-payment of $28,651.78. Roth filed two motions for summary judgment and subsequently appealed the summary judgment granted in favor of North American Coal to the U.S. Court of Appeals for the Eighth Circuit. North American Coal filed a motion to recover attorney fees and costs from Roth with respect to this action. The U.S. District Court for North Dakota granted the request, holding Roth acted in bad faith when he endorsed the check because he knew he was not entitled to the erroneous payment. The federal district court ordered Roth to pay attorney fees and costs in the amount of $6,003.90, which it found Roth could satisfy out of the $14,086.81 he was rightfully entitled to receive from the plan. (North American Coal Corp. Retirement Savings Plan v. Roth, D. N. Dakota 2004)

Sprint Ahead? The U.S. District Court for Kansas ruled litigation regarding the Sprint Corporation IRC § 401(k) plan should proceed to trial. The federal district court held the plaintiffs made an adequate allegation that the board of directors of Sprint and members of the 401(k) plan committees had a duty to disregard plan provisions and eliminate Sprint Corp. stock as an investment option when Sprint incurred financial difficulties which reduced its credit rating to near-junk bond status. Fidelity Management Trust Company, the directed trustee, argued it should be dismissed from the action on the basis that its status as directed trustee precludes it from liability; the federal district court refused to do so. With respect to the board of directors, the court dismissed certain actions holding the directors were not plan fiduciaries. The decision allows the directors to be sued, however, for failing to monitor members of the plan administrative committees, whom they appointed. (In re Sprint Corp. ERISA Litigation, D. Kansas, 2004)

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.