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Federal E-NewsNovember 2006
SEC Postpones Action on Proxy Access Ruling Until December On October 11th, the Securities and Exchange Commission (SEC) announced that it will postpone its consideration of proposals for revisions to Rule 14a-8 concerning shareholder proxy initiatives, originally set for October 18th, until December 13, 2006. The SEC is considering amending Rule 14a-8 to address issues raised by the Second Circuit’s September decision in AFSCME v. AIG. Some believe that the delay indicates a serious split among the five SEC Commissioners over the right direction to take on the contentious issue of proxy access, while others think it is just smart politics on the part of SEC Chairman Chris Cox, a former California Congressman, to wait until after the November elections to see which way the winds might be blowing in the new 110th Congress. Following the September 5, 2006 ruling by the U.S. Court of Appeals for the Second Circuit in American Federation of State, County and Municipal Employees Pension Fund v. American International Group, the SEC staff had been immediately directed to develop recommendations for amendments to Rule 14a-8. In that decision, the court found that AIG did not have the right to exclude AFSCME's shareholder proposal seeking proxy access in order to nominate directors. (See the October NCTR Federal E-News) This prompt reaction by the SEC led some to believe that it was poised to defend its current reading of the so-called "town meeting rule," which the 2nd Circuit's decision conceded was within the SEC’s discretion to adopt as a new interpretation – but not without explaining its departure from prior norms. It was thought that Chairman Cox, having seen the furor from the business community that arose when former SEC Chairman William Donaldson tried to promulgate a new proxy access rule in 2003, would choose to follow what some viewed as a course of lesser resistance. However, according to some reports, the other four SEC Commissioners are not unanimous in their support of such an approach. In addition, there has been strong pressure from shareholder groups to avoid what former SEC Commissioner Harvey Goldschmid has said would be a "tragic mistake" if the Commission decided "to simply turn the clock back." Finally, postponing the SEC’s consideration until after the election may have helped reduce the chance of Congressional meddling in the decision-making process, and also permits Chairman Cox to make a more politically informed assessment of the best course to follow. The Council of Institutional Investors (CII) called the SEC's decision to postpone action as "great news for investors." CII stated in a press release that it believes "resolutions on proxy access would make boards more responsive to shareowners, more thoughtful about whom they nominate to serve as directors and more vigilant about their oversight duties." CII said that it looks to working with the SEC "to help craft a sensible and effective rule that safeguards the interests of long-term shareowners without being unduly burdensome to business." Rich Ferlauto, AFSCME's director of pension and benefit policy, also praised the action, saying that the SEC had created an opportunity for shareholders, regulators and issuers to "get together to try to construct a process that might work for everybody." Jack Ehnes, chairman of CII's Board of Directors and CEO of the California Teachers’ Retirement System (CalSTRS), issued a joint statement with Fred Buenrostro, head of the nation’s largest public pension plan, the California Public Employees’ Retirement System (CalPERS), commending Chairman Cox for his decision "to go forward with a deliberative rulemaking process on the use of the proxy to nominate corporate directors," and expressing their confidence that the SEC's action "will result in a thoughtful rule permitting reasonable, fair shareowner access." By effectively letting the court decision stand until after the scheduled
filing deadlines for most companies with Spring annual meetings, the
SEC’s delay may mean that some proxy access proposals will appear
on ballots during the 2007 season. The nature and course of any such
proposals -- as well as the outcome of the November elections -- may,
in the end, provide the best indicator of where the SEC may go from
here.
U.S. Comptroller General David Walker thinks that the new Pension Protection Act (PPA) leaves the issues of coverage and plan design largely unanswered, and that it "will likely not reverse" the long-term decline in DB systems. The head of the Government Accountability Office (GAO) recently called for more attention to such questions as how existing retirement policies can be reformed to encourage income preservation strategies "so that retirement income lasts an individual's entire life (for example, benefit annuitization)." In a speech on "Retirement Challenges in the 21st Century" on October 10th, Mr. Walker said that the PPA was a key reform, but that it only shrinks, but does not close, many loopholes regarding DB plan funding. In addition, he said that the PBGC deficit "can be expected to continue to grow." According to the GAO chief, the new pension law fails to address the "fundamental mismatch" between DB plan assets and liabilities. Furthermore, the "appropriate balance of responsibility for retirement among employers, government and workers remains unclear," Walker cautioned. He warned policymakers to be careful when shaping reforms to improve plan funding that they not cause plan terminations that otherwise might not occur. In his address before the annual conference of the International Foundation
of Employee Benefits Plans, Walker also addressed the need for reform
of Social Security and the importance of a systematic reexamination
of the nation’s health care system. Based on GAO's simulations,
balancing the budget in 2040 could require actions as large as cutting
total federal spending by 60 percent or raising federal taxes to 2 times
today's level. "Faster economic growth can help, but it cannot
solve the problem," he stressed. "We cannot simply grow our
way out of this problem," according to Walker.
NFTC Divestiture Lawsuit Clears Hurdle; President Signs New Sudan Executive Order A Federal judge recently rejected an effort to have the lawsuit by the National Foreign Trade Council(NFTC) challenging the constitutionality of Illinois' Sudan divestiture law dismissed. President Bush has also signed a new Executive Order on Sudan generally toughening U.S. sanctions but also acknowledging that such actions may be undesirable in certain geographic areas of the ravaged country, which are provided new exemptions. On October 26th, Judge Matthew Kennelly of the Federal District Court for the Northern District of Illinois denied the State of Illinois’ motion to dismiss the August lawsuit filed by the NFTC and the boards of eight Illinois police and fire pension funds challenging the Illinois Sudan divestiture law. Under the Illinois statute, Illinois public pension funds are required to divest completely from companies doing any business in or with the Sudan by July 27, 2007. The NFTC lawsuit argues that the Illinois law intrudes on the Federal government’s exclusive power over foreign affairs; violates the clause of the U.S. Constitution that vests Congress with the power to legislate regarding foreign commerce; and is preempted by the Federal government’s own trade sanctions against Sudan. (See October NCTR Federal E-news) Illinois had argued that neither the NFTC nor the police and fire pension plans had legal standing to bring the suit. "Legal standing" means that a party in a lawsuit is sufficiently affected by the subject of the suit, and there is a case or controversy that can be resolved by legal action. In part, Illinois had argued that the eight pension funds were "creatures and instrumentalities of the state," and as such were precluded from challenging a state statute on certain Federal constitutional grounds. In an oral statement, Judge Kennelly is reported to have found no merit in any of the grounds which the state had asserted to deny standing, determining that the public pension funds are likely to suffer irreparable harm and are not municipal entities. The State of Illinois was given fourteen days to reply to the NFTC complaint itself, and the Judge indicated that he will rule on the motion for a preliminary injunction and the merits of the case at the same time. Judge Kennelly is reported to have indicated that he intends to issue a final ruling prior to the January 27, 2007 deadline for the next round of public pension fund divestment. Nor oral argument is scheduled. Earlier in the month, President Bush signed new Sudan legislation into
law, and also issued a new Executive Order on Sudan that same day (October
13th), in part to take into account the new Darfur Peace and Accountability
Act. The new Order specifically forbids transactions relating to Sudan's
petroleum and petrochemical industries, sectors in which the President
noted that "the Government of Sudan has a pervasive role"
that poses a "threat to the national security and foreign policy
of the United States." However, the new Order also exempts from
the prohibitions certain areas in Sudan, including Southern Sudan, Darfur
and marginalized areas in and around Khartoum. In effect, the new Order
means that so long as activities and transactions in these areas do
not involve the Government of Sudan or the petroleum and petrochemical
industries, U.S. sanctions no longer apply to these exempt locations.
NCTR, Other State, Local Groups Support Repeal of New 3% Withholding Requirement
Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, P.L. 109-222), enacted in March of this year, contains a requirement that all states and many local governments, as well as certain instrumentalities thereof, withhold three percent on all payments to persons providing them with property or services. Political subdivisions of states (and any instrumentalities thereof) with less than $100 million in annual expenditures for such properties or services would be exempt. In addition, other specific exemptions are made, such as for payments of interest; payments for real property; and intra-governmental payments. (See June NCTR Federal E-News) While there is no specific discussion of where public pension plans would fit under this new law, many believe that retirement systems could qualify as governmental entities subject to this new requirement. If so, the withholding requirements would appear to apply to a number of plan activities -- such as consultant contracts, fees paid to money managers, and payments to healthcare providers where the plan administers health benefits – but not to benefit payments. Senator Larry Craig (R-ID) and Congressman Wally Herger (R-CA) have introduced legislation (S. 2821, H.R. 6242) to repeal this requirement. In recent letters to both men, NCTR and NASRA, as well as the Council of State Governments (CSG), Government Finance Officers Association (GFOA), International City/County Management Association (ICMA), National Association of Counties (NACO), and National Association of State Auditors, Comptrollers and Treasurers (NASACT), have offered their support. As the letters point out, the new requirement, if implemented, imposes a massive unfunded mandate on State and local governments and will cause significant administrative burdens. Furthermore, the letters point out that the costs for doing business with state and local governments and their instrumentalities will increase, and the private sector companies will pass those costs along. Business groups, including the Federal government’s chief advocate
for small business, have also voiced concerns, warning that the provision
will impede the cash flow of small entities and would amount to "a
tax penalty on government contractors without a clear path for reimbursement."
However, as Congress faces the increasingly stark realities of record
deficits and entitlement programs teetering on the brink of collapse,
legislation that will reduce revenues – even those yet to be collected
– will face rough going unless the lost revenues are offset by
increases (or expenditure cuts) elsewhere. Got a spare $7 billion handy?
National Health Panel Recommends Universal Care as New Studies Show Coverage Continues to Decline, Dissatisfaction with Health Care System Increases
On September 29th, the Citizens' Health Care Working Group issued its final report showing what it refers to as a "remarkable consensus" among Americans for public policy that ensures that all Americans, regardless of their financial resources or health status, have affordable health care coverage. "In 37 states where meetings were held, and in more than 28,000 responses on the Internet, the message was consistently loud and clear: Americans want health care for all, and they want it now," the Working group stressed. While the report called for "universal coverage," it also acknowledged that the term means different things to different people. "The values and preferences being expressed did not lead the Working Group to conclude that there was only one particular model for ensuring that all Americans have access to high quality health care," the report noted. However, the panel underscored that people consistently emphasized the importance of shared responsibility and fairness. It concluded that all Americans should have access to a set of core health care services that includes wellness and preventive services. This defined set of benefits should be guaranteed for all, throughout their life, in a simple and "seamless" manner. These benefits should be portable and independent of health status, working status, age, income or other categorical factors that might otherwise affect health-insurance status. The Working Group proposes a five-year transition with the immediate first step to address serious threats to health security – very high costs, and gaps in access to basic health care, preventive services, and health education at the community level. The recommended target for ensuring a core set of benefits and services for all Americans is 2012. By law, the President has 45 days from the date of submission of the report to him to submit his report to Congress containing additional views and comments on the Working Group’s recommendations, as well as recommendations for legislative and administrative action that he thinks are appropriate. The statute then requires Congress, no more than 45 days after receiving the President's report, to hold at least one hearing in each Committee of the House and Senate with jurisdiction over health care, on the Final Recommendations and the President's report. As the Administration and the Congress attempt to address this call for universal care, the increasing decline in healthcare coverage underscores the urgency for a response. In a new issue brief from the Employee Benefit Research Institute (EBRI), entitled "Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2006 Current Population Survey," an analysis of U.S. Census Bureau's March 2006 Current Population Survey shows that the percentage of the population under age 65 with health insurance coverage declined in 2005 to a post-1994 low of 82.1 percent. Furthermore, EBRI finds that while employment-based health benefits remain by far the most common form of health coverage, this is also continuing to decline. In another new EBRI document, the 2006 Health Confidence Survey (HCS),
co-sponsored by Mathew Greenwald & Associates, Inc., survey results
document an increasing dissatisfaction with the American health care
system, focused primarily on rising costs, with the percentage of individuals
rating the system as poor doubling since the inception of the HCS in
1998. In addition, this survey also shows that more people are reporting
that increased health care costs have resulted in a decrease in saving
for retirement (36 percent, up from 25 percent in 2004) and other savings
(53 per-cent) and in difficulty paying for basic necessities (28 percent,
up from 18 percent) and other bills (37 percent, up from 30 percent).
Citizens' Health Care Working Group Recommendations
As Hedge Funds Increase, Congressional Attention, Concern also Grow
Today, the hedge fund industry is comprised of over 9,000 hedge funds that manage more than $1.1 trillion in assets. In the past, these high-risk, high-stake investments were traditionally used by wealthy investors with the means and the investment savvy to weather the challenges that such investments can present. However, in recent years, hedge funds have increasingly been targeted to institutional investors, who now account for approximately $360 billion of this total. Furthermore, according to a new study by The Bank of New York and Casey, Quirk & Associates LLC released on October 10, 2006, worldwide, this institutional investment in hedge funds will triple over the next four years to more than $1 trillion. The study, entitled "Institutional Demand for Hedge Funds 2: A Global Perspective," estimates that by 2010, approximately 25% of all institutional investors will be investing in hedge funds, a more than 60% increase from today. “Retirement plans globally will account for the vast majority of asset flows, with corporate and public pension plans in the United States accounting for the largest percentage increase overall,” a press release from The Bank of New York states. The study, based on over 100 interviews with institutional investors, investment consultants, hedge funds, fund of hedge funds and industry experts around the world, also predicts that half of global institutional flows will go to funds of hedge funds with the other half going to direct investments over the next five years. However, if, as suggested, “today's hedge fund techniques will be tomorrow's mainstream investing," then it appears that some pension funds may still need some convincing. For example, according to a recent survey by Mercer Investment Consulting of over 180 large pension plans worldwide, only 23% of them are satisfied with their investments in funds of hedge funds. Most (48%) are neutral, while 28% are dissatisfied. Nevertheless, a third of the pension funds surveyed globally invest in funds of hedge funds, and a majority (54%) say they plan to increase their allocations to hedge funds within the next two years, especially in the U.S. and Canada. Furthermore, of the pension funds that do not currently invest in funds of hedge funds, 19% say they are likely to do so within the next two years. Where pension funds are not invested in such funds, a majority (60%) give fees as their reason. Some at the Federal level are also less than convinced that everything is as it should be in this fast-growing sector. This situation has been exacerbated in recent years by a number of high-profile collapses of large hedge funds, in some instances involving criminal activity. Most recently, the collapse of Amaranth Advisors, with billions of dollars in losses for investors, has captured the attention of the press and the Congress. However, there is some question as to the appropriate response. For example, on September 27, 2006, the House of Representatives approved H.R. 6079, the “Hedge Fund Study Act.” This measure would direct the President's Working Group on Financial Markets to conduct a study of the hedge fund industry, to include, among other things, an analysis of whether hedge fund investors are able to protect themselves adequately from the risk associated with their investments; whether hedge fund leverage is effectively constrained; the potential risks hedge fund pose to financial markets or to investors; and the benefits of the hedge fund industry to the economy and the markets. As Congressman Barney Frank (D-MA), the likely Chairman of the House Financial Services Committee in a Democrat-controlled Congress, put it during debate on the measure, “At the rate at which [hedge funds] are growing, it may be we will reach the point in which there is more money in hedge funds than there is money.” “I simply did not think we should adjourn for the year with some people thinking that we have now decided that the appropriate action is nothing at all,” Mr. Frank explained. “That may in the end be a decision, but I do not think it is one that we have yet had a chance to look at,” he concluded. In the Senate, concern has also been raised with what Mr. Frank referred to as the “increasing interface between hedge funds and pension funds.” Noting that hedge funds are not subject to disclosure and transparency rules that apply to other financial intermediaries, and “are permitted to operate almost completely unfettered by government oversight or regulation, “ Finance Committee Chairman Chuck Grassley (R-IA) has also expressed worries that “the potential for significant losses at our nation’s pension funds due to hedge fund investments could put the retirement security of American workers in jeopardy.” In an October 16th letter to the heads of the Treasury Department, Labor Department, Securities and Exchange Commission, Commodity Futures Trading Commission, and the Pension Benefit Guaranty Corporation, Senator Grassley noted his concerns about the lack of publicly available information regarding hedge funds, and asked for their assistance “in identifying the scope of this problem and appropriate ways to remedy it.” Not everyone thinks that Government regulation is the best answer.
Former Bush Treasury Secretary John Snow is reported as saying in a
telephone interview with Bloomberg on October 31st that while hedge
funds, and how best they should be overseen, is “a fair question,''
he believes that the “far bigger risk is overreaching regulation.''
Snow believes that investors are the best regulators of hedge funds,
not the government.
Bush "Astounded," "Floored" by Size of CEO Pay Packages; Urges Shareholders to Take "Close Look" When Pay, Performance are Not Linked
According to the new annual survey of CEO compensation, released by The Corporate Library on October 4, 2006, median pay packages for chief executives rose by 16% in 2005. "The Corporate Library's 2006 CEO Pay Survey," which looks at 1,388 CEOs' pay packages, including salary, bonus, perks, exercised stock options and other long-term incentive pay, found that MidCap companies led the growth curve in 2005, posting a 19% increase over 2004’s numbers. Founded in 1999 by Robert A.G. Monks and Nell Minow, The Corporate Library is a leading independent source for U.S. corporate governance and executive and director compensation information and analysis. The 2005 growth rate was markedly down from 2004, which showed a 30% increase, double the rate of growth in 2003. However, as The Corporate Library’s website points out, “This does not mean that pay levels have fallen – at least not for the majority of CEOs. What it does mean is that compensation is just going up more slowly than it did last year.” Furthermore, according to the 13th Annual CEO Compensation Survey conducted by the Institute for Policy Studies and United for a Fair Economy, released in August of this year, average executive compensation is still up almost 300 percent since 1990, after adjusting for inflation, and has risen at a much faster rate than the stock market or corporate profits. Looked at another way, the ratio of CEO pay to average worker pay was 411-to-1 in 2005, according to this joint survey -- nearly 10 times as large as the 1980 ratio of 42-to-1. “To put the CEO-worker pay gap in perspective,” the survey explains, “we calculated how much average production worker pay would be worth today if it had grown at the same rate as CEO pay. In 2005, the average worker would have made $108,138, compared to the actual average of $28,314. Similarly, if the federal minimum wage had grown at the same rate as CEO pay, it would have been $22.61 in 2005, instead of $5.15.” President Bush was asked in an October 23rd CNBC interview what he thinks about when he hears stories on corporate CEO compensation – “one guy pulling down a billion dollars in pay packages from the health insurance company or hundreds of millions of dollars in pay from an oil company executive,” as CNBC’s Maria Bartiromo described it. In response, the President agreed that these executive compensation packages “can get out of hand, ” but cautioned that “I don't think government should control salaries.” However, he went on to say that “I get astounded by the size of the pay packages, I'm -- consider me floored when I see guys making billion dollars for -- as a CEO of a company.” “I mean, is anybody worth $400 million,” Bartiromo asked. “I guess it depends who you are. But it seems like not,” President Bush replied. Based on a new study by the Center for Effective Organizations at the University of Southern California's Marshall School of Business and Heidrick & Struggles, released October 4th, an increasing number of U.S. corporate board directors appear to essentially agree with the President. The 10th Annual Corporate Board Effectiveness Study, which claims to be the largest U.S. study of board directors, with a response from 768 directors at approximately 660 of the 2,000 largest publicly-traded companies in the U.S., found that nearly 40 percent of directors surveyed believe that CEO pay is “'too high in most cases.” This represents a significant increase over prior years' study results. Furthermore, 81% support increasing the link between CEO pay and performance.
Corporate
Board Effectiveness Study
New Reports Document Poor State of US Health IT; With Help from Congress Stalled, Governors Move to Address State-level IT Issues
A new report, “Health Information Technology in the United States: The Information Base for Progress,” which was jointly funded by the Robert Wood Johnson Foundation and the Office of the National Coordinator for Health Information Technology, provides a benchmark for where the U.S. healthcare system stands on the adoption of electronic health care records. As was feared, the benchmark is very low. As John Lumpkin, senior vice president and director of the healthcare group at the Robert Wood Johnson Foundation said, “We have to recognize that the quality of healthcare that we have in this country is poor. If we are going to reduce errors, working harder is not going to work." In addition to documenting the very low level of use of HIT, the new report also discusses the roadblocks to health IT adoption, including financial barriers, namely the high cost of HIT systems, and provider uncertainty regarding the value they will derive from adoption in the form of return on investment. For example, the study points out that economic incentives in the health care industry “generally do not reward good performance, reducing the motivation of self-interested health care actors to acquire HIT and compete more effectively.” Often, the report notes, health care compensation arrangements reward poor performance. “Inefficient and sub-optimal care, for example, can generate more visits, tests and procedures and thus more revenue for providers,” the report suggests. At a minimum, this reduces incentives for physicians and others to invest in systems to improve performance. “Making matters worse, the purchasers of HIT -- mostly doctors and hospitals -- would capture only a small fraction of HIT’s potential economic benefits. It has been estimated that as much as 80 percent of the potential savings generated through HIT inure to insurers and health care group purchasers, including the federal government, in the form of lower premiums and enhanced worker productivity,” the report concludes. Another new report, this one by the Commonwealth Fund, shows how poorly the state of HIT in the U.S. compares with other countries. The Commonwealth Fund’s 2006 International Health Policy Survey looked at more than 6,000 primary care physicians in Australia, Canada, Germany, the Netherlands, New Zealand, the United Kingdom, and the United States. It found that 98% of primary care doctors in the Netherlands use electronic patient medical records, 92% do so in New Zealand, and 89% in the UK. As noted, this compares with only about one fourth of U.S. practitioners. “In an era of advanced computer systems, it’s disturbing that the vast majority of primary care doctors in the U.S. don’t have the tools to electronically prescribe medications, access patients’ test results, or know when patients are overdue for essential care,” said Commonwealth Fund Senior Vice President Cathy Schoen, lead author of the article. The Survey also found that less than a quarter of U.S. primary care doctors (23%) receive computerized alerts for potential harmful drug doses or interactions. By contrast, 93% of primary care doctors in the Netherlands, 91% in the U.K., 87% in New Zealand, 80% in Australia, and 40% in Germany have computerized alert systems. Among the surveyed countries, only in Canada (10%) do primary care physicians make less use of computerized alerts than do U.S. primary care physicians. Indeed, the survey results show that almost half (47%) of U.S. primary care physicians have no system, computerized or manual, for alerting them to potential drug-related hazards. “The data show that U.S. primary care doctors find it difficult or impossible to perform tasks that doctors in other countries find easy;” according to Schoen, and “they also practice without basic decision supports that could improve health outcomes and reduce costs.” Congress has been struggling to adopt new HIT legislation, but has
run into roadblocks (see October
NCTR Federal E-News). Meanwhile, state leaders are moving on their
own to address the problem. On October 19th, the National Governors’
Association (NGA) announced the creation of the State Alliance for e-Health,
a collaborative body intended to help states increase the efficiency
and effectiveness of their HIT initiatives. Developed under a contract
with the Department of Health and Human Services (HHS) Office of the
National Coordinator for Health Information Technology, the new initiative
is intended to allow state policymakers to share best practices and
policies for health IT and serve as a consensus-based, state-level advisory
and coordinating body. Goals include identifying ways to resolve state-level
health IT issues that affect multiple states, and resolving privacy
and security issues surrounding the use and disclosure of electronic
health information, which has been a sticking point in Congressional
debate. Health Information Technology in the United States: The Information Base for Progress Commonwealth Fund's 2006 International Health Policy Survey
New Forms, Guidance From the IRS Available
The new 2006 instructions for Forms 1099-R and 5498 contain a number of new changes, including transfers on page R-4, which has been revised to include the purchase of permissive service credit. In addition, distribution codes 1 and 2 have been revised for withdrawals by qualified reservists and certain public safety employees, respectively, based on provisions in the Pension Protection Act of 2006. On October 18th, the IRS announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2007, many of which have changed due to reaching the statutory thresholds that trigger adjustment upward. For example, the limit on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $175,000 to $180,000; the cap on deferrals under Section 457(e)(15) is increased from $15,000 to $15,500. Others, however, remain the same, such as the dollar limitations under Section 414(v)(2)(B)(i) and (B)(ii) on catch-up contributions. Finally, on October 20th, the IRS published its final rule concerning
the use of electronic media by employee benefit plans for providing
notices to plan participants, as well as recording participant elections
and consents. The final standards, which apply to retirement plans --
401(a), 403(a), 403(b), and 457 -- as well as to accident and health
plans, medical savings accounts, health savings accounts, and IRAs,
are codified in Treas. Reg. 1.401(a)-21, are effective October 20, 2006,
and apply to electronic notices, elections, and consents on or after
January 1, 2007. Electronic Notices,
Consents Final Rule
Part B Premiums for Higher Income Elderly to Begin in 2007; Lower Investment Income Will Not Qualify for Premium Adjustment
The Medicare Part B standard monthly premium is intended to cover 25% of Part B program costs, with Medicare subsidizing the rest. However, when Congress adopted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Modernization Act or MMA), it established a Medicare Part B premium “subsidy reduction” which takes effect in January of next year. It is estimated that about 5% of beneficiaries will be affected, and by paying an increased share of costs, they will decrease Medicare costs by an estimated $7.7 billion over the next five years. Here’s how it will work: beneficiaries with incomes above a certain threshold will pay a greater share of program costs – beginning with 35% of costs and increasing in 15% increments to as much as 80% for the wealthiest when the program is fully phased in. The premium will vary depending upon enrollees’ modified adjusted gross income (AGI) and income tax filing status, and these income amounts will be indexed annually for inflation. The premium increase will be determined based on income two years prior to the year for which the increase takes effect. For example, 2005 modified adjusted gross income would be used to determine a beneficiary’s 2007 Part B premium. Thus, for 2007, individuals whose AGI in 2005 exceeded $80,000 and couples with a 2005 AGI of at least $160,000 will be affected; for those with AGIs of up to $100,00 and $200,000 respectively in 2005, their monthly premium will be $105.80, instead of $93.50, in 2007. Individuals with a 2005 AGI over $200,000, and couples with an 2005 AGI over $400,000 will pay $161.40 monthly, the highest premium for 2007. Confused? It gets even more complicated: premiums in 2007 for the more affluent represent one-third of their new percentage share of costs. In 2008, it will rise to two-thirds of their new share, and only by 2009 will they be paying their new, increased percentage of costs in full. What happens if AGI decreases? Will Part B premiums also be reduced? The answer is a definite and unequivocal “maybe.” If the income losses are due to a “major life-changing event” such as spousal death, changes in marital status, partial or full work stoppages or reduction or loss of pension income, then a reduction will be considered. However, according to new rules published by the Social Security Administration (SSA) on October 27th, if the income loss is due to decreases in dividend income and loss of income from financial securities, then the answer is “no.” According to SSA, such decreases “are not 'events' but rather fluctuations in the financial markets and should not be considered as part of the list of events with a potentially permanent effect on income." So the next time the market tanks, please try to think of it as just
a fluctuation and not a major life-changing event. You may not feel
any better about it, but SSA thanks you for doing your part to keep
government spending under control. New
SSA Rule on Medicare Part B Income-Related Monthly Adjustments
Boo! Sixth Circuit Reverses Itself and Delivers Halloween Ruling that KY Disability Plan is Age Discriminatory on its Face
The case began with an age discrimination charge filed with the EEOC by a deputy sheriff who applied for disability retirement in 1995 at age 61, with 17 years service as a public employee. He was denied because he had become eligible for regular retirement benefits at age 55. Since employees who qualified for disability retirement benefits were credited with additional years for purposes of calculating the disability retirement benefits – the number of years until the employee would have reached normal retirement age, not to exceed 20 years of service – the deputy claimed that he was being denied additional benefits because of his age. Following several years investigation and negotiations, the EEOC agreed, and filed suit in August of 1999 in U.S. District Court alleging a violation of the ADEA by the Jefferson County Sheriff’s Office, the Kentucky Retirement Systems (KRS), and the Commonwealth of Kentucky. Eventually, the District Court granted summary judgment to KRS in 2003, finding that the EEOC failed to show a prima facie case because it did not present evidence of discriminatory intent. On appeal to the U.S Court of Appeals for the Sixth Circuit, the District Court’s grant of summary judgment in favor of KRS was affirmed in September of 2005 by a three-judge panel. However, the EEOC requested a rehearing, and the full court later granted en banc review and has now vacated the panel's decision. In its recent ruling, the majority found that “there is absolutely no dispute" that an employee who becomes disabled after reaching normal retirement age "is adversely treated because of his or her age when compared to a disabled coworker who is similarly situated in all relevant aspects other than age." Furthermore, the majority noted that KRS did not dispute that the plan "pays lower disability-retirement benefits to an older worker who, apart from age, is similarly situated to a younger worker in all relevant respects." The Court found that “[o]nce a plaintiff has established that a policy is facially discriminatory in that it classifies or disadvantages an employee 'because of' the employee’s protected status, additional proof of discriminatory intent is not needed, as it is directly evidenced by the facially discriminatory nature of the policy itself," rejecting the KRS argument that the employer's age classification, to violate ADEA, had to be motivated by animus or stereotype against older workers. The dissent argued that KRS “does not provide younger workers with a specific benefit unavailable to older workers." Rather, the plan "simply provides that a worker who is disabled before reaching eligibility for normal retirement benefits has a way of receiving a retirement benefit equal to (or closer to) what he would have received had he not become disabled before reaching the normal retirement age or 20 years of service." While the majority opinion “argues that because older employees with, e.g., 10 years of service and final pay of $50,000 receive fewer benefits than younger employees with the same years of service and final pay, the KRS plan is facially discriminatory,” the dissent points out that “the majority misses the point that a 53-year-old employee who becomes disabled is not similarly situated to a 33-year-old employee who becomes disabled, even if they have the same service years and final pay at the time of disability. All else being equal, the non-disabled 33-year-old of course has more years to work and live than does a non-disabled 55-year-old.” According to the dissenters, “the number of years of additional work credit lost is a factor related to, but not determined by, age." The ruling permits the EEOC to finally proceed with its case against Kentucky in District Court. After more than 10 years’ expense at both the Federal and State levels, the EEOC will get to pursue its position that where a benefit plan ties the amount of benefits provided to the number of years it will be before an employee reaches normal retirement age, it is explicitly age-based and provides facial discrimination that does not require additional proof of intent. Therefore, if your plan has a disability program that provides additional
service for employees who become disabled before normal retirement age,
and denies similar benefits for those eligible for normal retirement,
you may want to read the Kentucky ruling very closely. Trick or treat!
6th
Circuit Decision on KRS Disability Program
NCSL Issues Report on Pensions and Retirement Plan Enactments in 2006 State Legislatures
The NSCL report is organized according to the topics that legislatures addressed in 2006, from benefit changes to vesting. Long-term security of defined benefits was a major focus -- reflected in action to reduce future benefits for new employees and place caps on future cost-of-living adjustments; increase employer and employee contribution levels; modify provisions for service purchase to ensure that the purchaser bear the cost; and provide for very limited benefit enhancements. However, the report states that “the most dramatic development
of 2006” was the vote by West Virginia members of the defined
contribution Teachers' Retirement Plan voted to merge it with the newly-reopened
defined benefit teachers' plan. NCSL 2006
Report on Pensions and Retirement Legislation
Everything You Wanted to Know about the New PPA – But Were Afraid to Ask
Ice Miller’s summary of items of interest from the 907 page PPA is arranged in Internal Revenue Code section order. Where ERISA amendments could be of interest, they have been included, followed by ADEA provisions. At the end, non-code amendments are discussed. Each PPA section title is provided, after which a summary of the law and the effective date of the provision are noted.
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