IRS Revises Voluntary Correction Program. It just got easier to correct qualified and 403(b) retirement plan defects. The Internal Revenue Service (IRS) revised and simplified the Employee Plans Compliance Resolution System (EPCRS), a program under which sponsors may correct problems with their qualified and 403(b) retirement plans on a voluntary basis. The new revenue procedure expands the program to include Simplified Employee Plans (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs. It simplifies the voluntary correction program (VCP) prong of EPCRS, under which sponsors submit applications to the IRS detailing plan defects and proposing corrections. Before the change, VCP consisted of several subcategories. All of the subcategories have been consolidated, and the application process has been streamlined. In addition, the IRS has added specific correction methods for sponsors who have failed to amend their plans in accordance with GUST1. The new revenue procedure provides for a fixed, single payment of compliance fees for most correction submissions to the IRS and eliminates the requirement that the fees be paid by certified check. Rev. Proc. 2003-44, 2003-25 IRB.

Years of Service While Plan was Frozen Count for Vesting. The IRS ruled years of service under a qualified pension plan completed while benefit accruals under the plan were frozen count for purposes of vesting. Accordingly, when the plan was unfrozen and benefit accruals resumed, the plan sponsor had to count all years of service after the plan was created, including the frozen years, for vesting purposes with respect to future accruals. IRS regulations provide that service after a plan is terminated is excluded for vesting purposes. Freezing a plan, the IRS reasoned, results only in a partial termination, not a full plan termination. Thus, service after a plan is frozen cannot be ignored for vesting purposes. Rev. Rul. 2003-65, 2003-25 IRB.

Proposed Regulations Update Stock Option Rules. The IRS issued proposed regulations that would update existing regulations on incentive stock options (ISOs). The regulations cover Internal Revenue Code (IRC) § 422, which authorizes ISOs, and IRC § 421, which governs the tax treatment of ISOs. These regulations replace regulations proposed in 1984. The new proposed regulations reorganize and renumber most of the rules contained in the 1984 proposed regulations. They provide expanded guidance to reflect current issues. For example, the regulations state an ISO plan may be evidenced in electronic form and provide rules for plans in electronic form. The proposed regulations also remove obsolete provisions and update the cross-references to reflect amendments to the applicable statutes and the reorganization of the regulations. The proposed regulations would apply 180 days after the publication of final regulations. Taxpayers may rely on the proposed regulations for ISOs granted after June 9, 2003. REG-122917-02 (June 9, 2003).

Regulations Ease Extension Rules for Forms 1099, W-2, and 990. Final and temporary regulations issued by the IRS on June 10 provide a simplified method to obtain automatic 30-day extensions for filing Forms 1099 and W-2, and three-month extensions for Form 990. The automatic extensions may be obtained without having to provide a reason or a signature by using Form 8809 (for Forms 1099 and W-2) or Form 8868 (for Form 990). The extensions for Forms 1099 and W-2 apply only to filing with the IRS, not the obligation to provide these forms to recipients. Form 990 is an information form filed by many nonprofit organizations. The temporary regulations will expire in 2006. Treasury Decision 6091 (June 11, 2003).

DOL Continues 401(k) Audit Activity. At a Washington, D.C. meeting June 12, a top Department of Labor (DOL) official indicated that audits of 401(k) plans would continue to be a primary focus of the Department’s enforcement efforts. Of particular interest: adherence to the plan document in the payment of plan expenses and prudence of plan fiduciaries in meeting their responsibilities. The DOL official summarized the fiduciary audits with three questions: “Who is the fiduciary? What did they know? What did they do about it?” Following through on routine plan duties, such as paying salary reduction contributions to the plan’s trust accounts as soon as the amounts can reasonably be segregated from company assets, as required by DOL regulations, can be helpful in minimizing audit risks.

PBGC Takes Over Consolidated Freightways Plan. The Pension Benefit Guaranty Corporation (PBGC) announced June 3 it assumed responsibility for Consolidated Freightways Corporate Pension Plan, which covers more than 8,000 employees. The company went into bankruptcy earlier this year and failed to meet minimum funding obligations in April. PBGC estimates the plan has about $228 million in assets to cover $504 million in promised benefits. For plans terminating in 2003, the maximum annual benefit guaranteed by PBGC at age 65 is $43,977. The PBGC news release and information on the Consolidated Freightways plan can be found at the PBGC Web site: www.pbgc.gov.

CASES

Grocery Store Voucher Program Deemed a Pension Plan. A grocery store’s voucher program for its retirees was an ERISA pension plan; thus, the elimination of the program’s “vested benefits” violated ERISA, the U.S. Court of Appeals for the 5th Circuit held. The grocery store chain, Schwegman Giant Super Markets, created a grocery voucher program to provide its retirees with a portion of their monthly food needs. Retirees who met certain age and service requirements received vouchers each month to purchase food at Schwegman’s Giant Super Markets. Although the program was unfunded and never documented in writing, the court found it was administered in a systematic way. The company issued Form 1099-Rs to the recipients of the vouchers and deducted the business expense on its tax returns under the category of “retirement plans.” The court determined the program provided retirement income as an ERISA pension plan that could not be eliminated without protecting the vested rights of the retirees. Muscemi v. Schwegman Giant Super Markets Inc., 5th Cir., No. 02-30246 (6/11/03).

Executives and Secured Creditor Have No Priority to Rabbi Trust Assets in Bankruptcy. The U.S. Court of Appeals for the 7th Circuit held a company’s former executives and a secured creditor had no priority interest in assets totaling more than $14 million held in the company’s rabbi trust. The company, Outboard Marine Corp., created the rabbi trust in 1987 as a payment source for various unfunded deferred compensation plans for company executives. Upon a change in control of the company, the company transferred $14 million to the trust to fund the plan obligations, as required by the trust agreement. Shortly thereafter, the company obtained a letter of credit from Bank of America under which it granted the bank a security interest in the company’s “general intangibles.” The court held the assets of the rabbi trust were part of the company’s bankruptcy estate, reasoning a rabbi trust agreement forbids an employer from creating a security interest in the trust for the executives or any creditor. Had the company funded the trust after executing the security agreement, the court noted, the assets contributed to the trust would have been subject to the security agreement regardless of the terms of the trust. Bank of America v. Moglia, 7th Cir., No. 02-2517 (6/2/03).

Vague Discussion of Benefit Claims Does Not Exhaust Administrative Remedies. An employee’s verbal discussions with his employer about benefit claims failed to exhaust the company plan’s administrative remedies in accordance with ERISA, the U.S. Court of Appeals for the Sixth Circuit ruled. The employee filed suit alleging violations of ERISA for excluding him from certain pension and medical benefits offered by the A&P grocery store chain. The Sixth Circuit affirmed the lower court’s dismissal of the suit for failure to exhaust administrative remedies under the plans, as required by ERISA. Although the employee verbally discussed his claims with his employer, he made no effort to comply with A&P’s formal internal benefit claims procedures. Borman v. The Great Atlantic & Pacific Tea Co., 6th Cir., No. 01-2110, unpublished (5/22/03).

Major Settlement in Plant Closing Case. McDonnell Douglas Corp., through its successor Boeing Corp., agreed to a $36 million settlement in a class action lawsuit brought by former employees who claimed loss of ERISA rights in the closing of a plant in Oklahoma. The plaintiffs’ case was based on the allegation the employer closed the plant to avoid paying retirement and health benefits. Section 510 of ERISA prohibits an employer from discharging employees with the purpose of interfering with employee rights under ERISA. While there have not been many decisions adverse to employers under this provision in plant shutdown situations, the settlement points out the importance of assessing ERISA issues in major corporate decisions. Millsap v. McDonnell Douglas, N.D. Okla., No. 94-C-633-H (settlement 5/28/03).