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Federal E-NewsNovember 2007
SEC Votes to Roll Back Shareowner Proxy Access Rights The Securities and Exchange Commission (SEC) has voted to once again permit corporations to bar investors from offering bylaw amendments that would establish procedures permitting shareowners to include in the corporate proxy materials their nominees for the board of directors. The action effectively overturns the 2006 AFSCME v. AIG decision, under which investors could offer such bylaw amendments during the last proxy season. SEC Chairman Chris Cox claimed the move was necessary in order to provide clarity for the upcoming proxy season, and promised renewed efforts to expand shareholder access next year. Shareholder rights advocates decried the decision, and House and Senate leaders also expressed dismay with precipitous action taken by a short-handed Commission. Whether Congress will move to block the new rule is unclear. Will proxy access advance in 2008, or, as others would argue, does the trend toward majority voting make such access unnecessary? SEC Chairman Christopher Cox, as feared, decided to take action on the SEC’s so-called “short rule” proposal addressing proxy access, and joined with his two fellow GOP Commissioners (Paul Atkins and Kathleen Casey) to reinstate the SEC’s most recent staff interpretation of Rule 14a-8(i)(8) by a 3-1 vote on November 28, 2007. Annette Nazareth, the sole remaining Democratic Commissioner on the 5-member panel (which currently has one vacancy), strongly objected. As originally written, Rule 14a-8(i)(8) permits a company to omit from its proxy materials any proposal that "relates to an election for membership on the company's board of directors or analogous governing body." Until 1990, the SEC had interpreted this “election exclusion” as limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election, and not applicable to shareholder proposals that would institute procedures making such election contests more likely, such as bylaw amendments providing access to the proxy for shareholder nominees. However, beginning in 1990, SEC staff began applying the rule differently, and allowed it to be used to exclude bylaw proposals that might result in contested elections, even if the proposal would only alter general procedures for nominating and electing directors. It is this staff interpretation that the AFSCME v. AIG court found insufficiently explained by the SEC, and therefore invalid. The SEC’s action has now amended the language of the rule to read as follows: "If the proposal relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election." Thus, the rule now on its face supports the post-1990 SEC staff approach, and gives them the authority to once again begin to issue no-action letters when a corporation determines to exclude bylaw amendments dealing with director elections. Chairman Cox said the action “maintains the status quo of the past decade,” and was needed in order to avoid uncertainty. "If the Commission did nothing, then there would be no clear and authoritative interpretation of our rules,” Cox asserted. However, Commissioner Nazareth sharply disagreed, calling the discussion of uncertainty “a post-hoc rationalization of a path that was ill-conceived in the first place.” Two weeks earlier, Cox heard the same opposing arguments from members of the Senate Banking Committee at a hearing called to object to the SEC’s impending action. Investor representatives also appeared, including the Council of Institutional Investors (CII), the International Corporate Governance Network, and the California Public Employees’ Retirement System (CalPERS) – all urging the SEC not to act precipitously to reverse shareholder advances provided by the AFSCME v. AIG decision. As Dennis Johnson, CalPERS’ Senior Portfolio Manager for Corporate Governance, put it, Chairman Cox could address any alleged uncertainty just as easily by codifying the court ruling as by reversing it. The SEC Chairman acknowledged that more needed to be done to address legitimate investor concerns, and the SEC did not take up the so-called “long rule” that would have provided the opportunity for shareowners to override the Rule 14a-8(i)(8) bar in certain instances – but which has also been strongly criticized as deeply flawed as written. Instead, Cox promised to “re-open this discussion in 2008 to consider how to strengthen the proxy rules to better vindicate the fundamental state law rights of shareholders to elect directors." However, Commissioner Nazareth spoke for many investor groups when she noted “I do not see a principled way to vote for the non-access release and claim to be supportive of shareholder rights in the longer term.” Nazareth, who has also announced that she will be leaving the SEC in the near future, argued that “if this amendment were truly intended to be a temporary stopgap measure, then it would have a sunset provision.” It does not, she noted, stressing that “Ultimately, our votes here today are the actions that matter, not our unenforceable aspirations for change.” Both Congressman Barney Frank (D-MA), Chairman of the House Financial Services Committee, and Senator Chris Dodd (D-CT), Chairman of the Senate Banking Committee, issued press releases decrying the SEC’s actions. Noting that the SEC’s proposals generated an “unprecedented response and concerns,” as evidenced by a record 34,000-plus public comments -- the overwhelming majority of which were in opposition to the proposals -- Senator Dodd said “I would have hoped that the Commission would not have moved forward until current vacancies at the Commission had been filled.” Congressman Frank expressed his disappointment with the Commission’s actions, which he said “leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns.” He also believes that the Commission should have waited until it was at full membership and was able to deal comprehensively with the issue of proxy access. “There was no need to take this piecemeal approach to a problem that should be dealt with comprehensively, as the Commission itself has recognized by proposing broader changes to the proxy access rules,” Frank pointed out. “The result of today’s vote is a step backwards for shareholders,” the Congressman concluded. Two names have reportedly now been forwarded by Senate Democrats to the White House to fill these vacancies: Luis Aguilar, a former SEC staff attorney and currently a securities lawyer at McKenna Long & Aldridge in Atlanta; and Elisse Walters, formerly a Deputy Director of the SEC’s Division of Corporation Finance, then General Counsel of the CFTC, and currently Senior Executive Vice President, Regulatory Policy & Programs, for the Financial Industry Regulatory Authority (FINRA, formerly the NASD). However, whether President Bush -- and his supporters at the Business Roundtable -- will now feel any urgency to take action on these vacancies is uncertain at best, and, in the view of many, very unlikely. And without the Democratic seats on the SEC filled, it will be virtually impossible for Chairman Cox to advance any new proxy access proposals next year. So what happens now? AFSCME announced on the same day as the SEC’s action that its Employees Pension Plan along with other public pension plans had filed binding bylaw amendments to establish proxy access procedures at Bear Stearns and JP Morgan based on “concerns regarding the mismanagement of sub prime credit issues and risk exposure.” (The Bear Stearns proposal was co-filed with the New Jersey Division of Investments and the Office of the North Carolina State Treasurer. The North Carolina Treasurer is also a filer at JP Morgan Chase.) AFSCME intends to file additional proposals in the coming weeks. If the AFSCME target companies choose to ask the SEC for no-action relief rather than placing the proposals in their proxy materials, then AFSCME says “we are prepared to litigate to defend the AIG decision.” In addition to this litigation strategy, there have also been some indications that further Congressional action could also be forthcoming. Whether this would be in the form of an actual amendment to the Securities laws, or a rider placed on the SEC’s appropriations that would bar the agency from enforcing the new rule is unclear. Regardless, any such action would be unlikely to occur in time to affect the upcoming proxy season. Furthermore, there are some supporters of investor rights who believe that the current efforts at proxy access are misguided. In a November 9, 2007, address at a securities regulation conference, Joseph Grundfest, professor of law and business at Stanford University Law School and a former SEC Commissioner, argued that giving shareholders the ability to nominate directors on the corporate proxy is unnecessary in large part because the "tide has turned" toward widespread majority voting. According to Professor Grundfest, “The current call for shareholder access is… overly aggressive, premature, and contrary to the best interests of the shareholder community.” Grundfest believes that majority vote bylaws or board policies should be sufficient mechanisms for shareholder voice. Instead of proxy access, he favors a system of advice and consent, in which shareholders have the right to veto the incumbent board’s nominees. He calls the current debate over the SEC’s proxy access proposals nothing more than “a clash of raw political interest,” and not “a reasoned debate over the best interests of America’s corporations.” Grundfest summarizes his view thusly: “If you like complicated contraptions, filled with arbitrary triggers and definitions that can generate mountains of litigation while fomenting unnecessarily confrontational battles between shareholders and incumbent boards, and that require administrative or legislative action, while running roughshod over any notion of socially responsible incrementalism, then you should love proxy access.” The SEC also voted on November 28th to adopt a new Rule 14a-17 to provide liability protection for a shareholder, company, or third party on behalf of a shareholder, or company that establishes or maintains an electronic shareholder forum, regarding statements or information provided by a third party participating in the forum. The goal of this new rule, according to Chairman Cox, is to “spark the growth of online forums for shareholders, and stimulate experimentation and innovation in communications between shareholders and their companies.” The forums would be a supplement to the existing shareholder proposal process, not a substitute for it.
Chairman Cox Statement on New Proxy Access Rule SEC Commissioner Annette Nazareth’s Statement Senate Banking Committee Hearing on Proxy Access Proposals Professor
Joseph Grundfest Speech on Proxy Access A Senate Finance Subcommittee hearing on the problems associated with the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP) produced vivid examples of the hardships and inequities created by these two provisions for many governmental employees. However, attendance by Senators was sparse and the answer to the question of how to pay for the cost of any such repeal -- estimated at around $82 billion over 10 years – remained illusive. As expected, the subject of mandatory Social Security came up, but the difficulties with this as a possible “solution” to the problem, or as a source of revenue with which to pay for repeal, were also underscored. While hearings on legislation to repeal GPO and WEP were mentioned as a possibility for 2008, incremental reform also appeared to be at the heart of some of the questions raised by the Subcommittee’s chairman, Senator John Kerry (D-MA), and was even suggested by a chief proponent of repeal as a possible alternative. On November 6, 2007, the Senate Finance Committee’s Subcommittee on Social Security, Pensions, and Family Policy held a hearing on “GPO and WEP: Policies Affecting Pensions from Work Not Covered by Social Security.” The Subcommittee’s chairman, Senator John Kerry (D-MA), had come under intense pressure to hold such a hearing after saying earlier in the year that he thought the best way to address the problems with GPO and WEP would be in the context of overall reform of the Social Security system. Senator Kerry, the lone member of the Subcommittee to be active in the hearing, began by stressing the fact that GPO and WEP “often treat public sector employers worse than private sector employees.” He also noted how they served to discourage individuals from staying in public service. “Those affected by these exemptions are people that we, as a country, value enormously: they teach our kids, they keep our streets safe, they deliver our mail, and they protect our homes from fires.” “We owe them a fair shake and a secure retirement,” Senator Kerry said, “and I hope we can use this hearing to explore how best to do that.” The testimony presented by the Government Accountability Office (GAO) explained the rational for GPO and WEP, but also conceded that the provisions have been difficult to administer because they depend on having complete and accurate information on noncovered earnings and pensions (information that has proven difficult to get, according to the GAO), and have been “a source of confusion and frustration for public employees and retirees.” The GAO documented the cost of repeal: according to current Social Security Administration (SSA) estimates, eliminating the GPO entirely would cost $41.7 billion over 10 years; eliminating the WEP would cost $40.1 billion. Furthermore, the GAO pointed out that if the GPO were eliminated or reduced for spouses who had paid little or no Social Security taxes on their lifetime earnings, it might be reasonable to ask whether the same should be done for dually entitled spouses who have paid Social Security on all their earnings. Otherwise, such couples would be worse off than couples who were no longer subject to the GPO. Since far more spouses are subject to the dual entitlement offset than to the GPO, the GAO warned that the result of eliminating the dual entitlement offset would be even greater than the $41.7 billion for GPO repeal. As to mandating coverage for all newly hired state and local government employees as a solution, the GAO warned that states and localities could require several years to design, legislate, and implement changes to current pension plans, and mandating Social Security coverage for state and local employees could result in state constitutional challenges. Also, GAO pointed out that mandatory coverage would not immediately address the issues and concerns regarding the GPO and the WEP, as these provisions would continue to apply to existing employees and beneficiaries for many years to come before eventually becoming obsolete. Finally, the GAO noted that state and local governments would have to administer two different systems -- one for existing noncovered employees and another for newly covered employees -- until the provisions no longer applied to anyone or were repealed. In summary, the GAO said that, as far as mandating universal coverage was concerned, it would promise eventual elimination of the GPO and the WEP, but at potentially significant cost to affected state and local governments, and even so, the GPO and the WEP would continue to apply for many years to come unless they were repealed. Two witnesses provided specific examples of the impact of the GPO and WEP on public employees. The first, Margaret Kane, a retired teacher from Medford, Massachusetts, testified on behalf of the Massachusetts Teachers Association (MTA) and the National Education Association (NEA). In addition to providing her own personal example of the effects of these provisions, and that of several other MTA members, her statement also underscored how these provisions undermine teacher recruitment efforts. Priya Mathur, an elected member of the Board of Administration of the California Public Employees’ Retirement System (CalPERS) and a member of the American Federation of State, County and Municipal Employees (AFSCME), also offered specific examples of the adverse impact of the GPO and WEP. Her testimony stressed that in jurisdictions that don’t participate in Social Security, the average total contribution to a public pension can amount to 21 percent of pay or more, compared to a much lower total of only 12.4 percent under Social Security. This disparity is important because, unlike private pensioners whose pension plans are generally financed solely by employers, public pensioners typically put in more than half of the total pension contribution. “Most private pensioners only pay into Social Security, yet they can receive a full pension AND a full Social Security benefit, with no offset of any kind,” she explained. “In effect, public pensioners are penalized for their contribution to their own retirement,” Ms. Mathur told Senator Kerry. Furthermore, she reminded him that a public retiree’s entire pension is subject to Federal income tax – including the part that is deemed equivalent to Social Security -- while most Social Security benefits are tax-free. This means that the public retiree is effectively hit twice – once with taxes and again with the GPO. The hearing concluded with testimony from Lawrence H. Thompson, a Senior Fellow with the Urban Institute. He characterized his testimony as a discussion of the public policy problems arising because certain employers do not currently participate in the Social Security program. Thompson dismissed the argument of opponents of mandatory Social Security that they would have to pay a new net cost as a “half-truth.” He argued that if the governmental units impacted by such a change “adjusted their benefit package so that new hires would get as much from the combination of Social Security and a supplemental pension as they would have received from the non-covered pension alone (including similar benefits for those retiring before age 62), the new package would increase total pension costs by some 6 to 7 percent of payroll, essentially half of the amount that the entities would be paying in newly imposed Social Security contributions.” Thompson argued that a better approach to improving coordination between Social Security and those governmental units not now covered by the program would be through an exchange of credits. Under this approach, those state and local employees not now covered by Social Security would, in the future, be entitled to a Social Security benefit. As is currently the case with railroad workers, that benefit would be based on all earnings, both those from their currently uncovered employer and those from other employers that do participate in Social Security. The benefit could be paid either through the Social Security Administration or through their employer’s pension organization. Its cost would be shared by their employer and SSA in proportion to the indexed earnings recorded under the respective programs. Those employers not currently participating in Social Security could decide how they wanted to adjust to this new regime. “They may want to take the opportunity to restructure their pension and convert it to a purely supplemental pension,” Thompson suggested. In the alternative, “they may decide simply to deduct the amount being paid as a Social Security benefit (or, alternatively, that portion attributable to earnings from employment with them) from what they would otherwise have paid, guaranteeing that their employees would be no worse off,” said Thompson. The change could be applied only to new hires, or (depending on how the current pension plan is adjusted) it could be applied to those currently working for the affected state and local government units, to the extent that sufficient earnings records exist to implement the plan. Thompson believes that a reform such as this “would allow us eventually to get rid of both the Government Pension Offset and the Windfall Elimination Provision and of the errors introduced by the roughness of the justice each introduces.” However, he also concedes “At the same time, it must be acknowledged that the reform would not be costless to affected state and local governments (and/or their employees).” In the end, it is this issue of cost -- whether that of repeal of the GPO and WEP for the Federal government, or that for state and local governments and their employees as a result of mandatory Social Security – that lies at the heart of this overall problem and any resolution thereof. And as long as the Democratic Congress sticks to its policy of pay-as-you-go, any successful effort to repeal the GPO and WEP will have to confront these cost issues head-on. Senator Susan Collins (R-ME), one of the original sponsors along with Senator Dianne Feinstein (D-CA) of S. 206, Senate legislation to repeal GPO and WEP, was also a witness at the hearing. She pointed out that nationwide, more than one-third of teachers and education employees, and more than one fifth of other public employees, are affected by the GPO and/or the WEP. However, while she urged the Finance Committee to take action on this legislation, she also asked them to “at the very least, take incremental steps toward full repeal to modify the effect of these two unfair provisions.” Many public employees and retirees don’t want to hear it, but incremental reform may ultimately be the only real political possibility for now, given the seemingly insurmountable cost issues. Senate Finance Committee Hearing on GPO/WEP PPA Technical Corrections Bill Still Needs “Correcting” Legislation to provide technical corrections to the Pension Protection Act (PPA) is still in process, but reports are that the tax committees are very close to a final package. Although key staff in both the House and Senate have expressed approval for an amendment to fix a potential age discrimination problem with credited interest provisions of public plans, the language remains in play – reportedly due to concerns raised by Treasury. The ultimate plan is to combine the PPA technicals package with technical corrections to other provisions in the tax code, but a final vehicle for enactment prior to the Christmas recess is still in question. A provision of the PPA aimed at problems with conversions of defined benefit plans to cash balance plans in the private sector threatens serious problems for public plans if left unaddressed. The troubling provision would require the rate of interest credited by a defined benefit plan -- whether on refunds of contributions, deferred retirement option plans (DROPs), survivor benefits, or other optional forms of benefit – to be no greater than a “market rate of return.” Otherwise, the plan would be deemed to be in violation of the Age Discrimination in Employment Act (ADEA), and subject to enforcement actions by the Equal Employment Opportunity Commission (EEOC). An amendment to solve the problem has been developed by NCTR and NASRA and appears to have the support of key Congressional staff. (See the July/August 2007 NCTR Federal e-News) However, the language was not included in the PPA technicals packages as introduced in both the House and Senate in early August (S. 1974 and H.R. 3361). At the time, the issue appeared to be related to jurisdictional matters, as the public sector fix was actually in the form of an amendment to ADEA, and not the Federal tax code. A letter from twenty public sector organizations, including NCTR, was subsequently sent to the House Ways and Means Committee urging the amendment be made a part of any final legislation correcting problems with the PPA. Now, as a final package is being developed, tax committee staff have signaled that they would be willing to include the ADEA language as long as the jurisdictional committees (the House Education and Labor Committee and the Senate Health, Education, Labor and Pensions Committee) sign off on it. However, it appears that Treasury has expressed some general, unspecified concern that the proposed amendment would somehow favor younger workers over older workers. This is a frustrating development. When NCTR and other public sector representatives met with Treasury earlier this year, Treasury officials were repeatedly asked to identify what discriminatory issues they believed existed in public pension plans with which they were concerned. No specifics were provided in response. Instead, the Treasury representatives focused on what they viewed as their procedural limitations in accommodating public plan designs, since the regulations they were writing were for sections of the Code inapplicable to public pensions. Public plan representatives have once again pointed out to staff that our issues with the ADEA language do not center on cash balance conversions. Our problems deal with the fact that the vast majority of traditional public DB plans credit interest on such things as refunds of contributions and survivor benefits. In other cases, interest may be credited as part of optional ancillary provisions added to provide flexibility or accommodate the needs of short-service employees while safeguarding the traditional pension as the primary plan benefit. Depending upon the market at any given time, the interest rate associated with these features – often set through public law -- may or may not exceed a market rate of return. Nevertheless, there is still good reason to believe that any Treasury objections can be satisfactorily dealt with. The larger problem may be in finding an opportunity to get a tax bill through Congress at this time. Currently, the focus is on getting a temporary “patch” for the alternative minimum tax (AMT), which is currently set to apply to about 23 million taxpayers next year unless Congress acts. Furthermore, the longer they wait to act, the more problems this is creating with the 2008 filings. For example, if no final action on a short-term AMT fix is taken until just before Christmas, the time it will take to program the IRS computers to reflect this change will mean that the processing of 15.5 million tax returns will be delayed, resulting in significant delays in the refunding of almost $40 billion in tax refunds. Not a happy result for politicians to look forward to in an election year! However, under the new PAYGO rules of the Democratic Congress, this AMT temporary extension will require offsetting revenues in the form of tax increases or spending cuts to the tune of about $50 billion over ten years. (See October 2007 NCTR Federal e-News) This offsetting revenue -- primarily to come from changes in the taxation of hedge fund managers -- is running into fierce opposition from Republicans, and the White House states firmly that it will veto any tax hikes to pay for the AMT fix. To make matters even worse for the Democratic leadership, it will be all the more difficult to obtain a majority vote – let alone a veto-proof one – in the Senate with the increasing absence of the four Democratic Senators (Clinton, Obama, Dodd and Biden) currently running for President. So even if the public pension credited interest amendment can be included in any final technical amendments package, it may be a case this holiday season of being “all dressed up with no place to go.” Public Pension Letter on Credited Interest Amendment IRS Issues Model 403(b) “Written Plan” Language, New Transition Relief for 90-24 Transfers, “Orphan Contracts”
When the IRS issued the final revisions of its regulations under Internal Revenue Code (IRC) section 403(b) in July of this year, they contained a requirement that a section 403(b) contract be issued pursuant to a written plan. At that time, the IRS and the Treasury Department promised to publish guidance that would include model plan provisions that may be used by public school employers to comply with the new requirements. (N.B. The IRS Office of Federal, State and Local Governments (FSLG) has included a comprehensive review of the more important provisions of the final regulations relating to governmental 403(b) plans in their January 2008 semiannual newsletter which has just come out; see FSLG January 2008 Newsletter.) The final regulations also contained new rules regarding so-called “90-24 transfers.” These are named after IRS Revenue Ruling 90-24, which permits transfers among 403(b) vendors essentially without employer involvement. Under the final regulations, after September 24, 2007, such transfers can be made only if the employer sponsoring the participant’s plan and vendors receiving the transfer agree to enter into an information sharing agreement, which must be executed on or before January 1, 2009. In addition, the terms of the employer’s plan document must, by January 1, 2009, ratify the transactions by authorizing exchanges made in this interim. Failure to meet these requirements could mean that a participant’s 403(b) account would lose its tax-deferred status, thus making the exchange a taxable event. (After January 1, 2009, participants may only change their 403(b) investments to other investment products listed in their plan document.) Because of the numerous questions that such information-sharing arrangements raised, such as who will maintain and store the required information on participants, and the potentially disastrous consequences for plan participants making exchanges if such details were not worked out satisfactorily, some plans decided to place a freeze on 90-24 transfers after the September 24th date until more clarity and guidance could hopefully be obtained. Finally, the new regulations did not provide guidance with regard to how to treat so-called “orphan accounts,” which are 403(b) accounts that are not related to any particular employer (such as accounts established with an employer who no longer has a 403(b) plan, or those invested in a product no longer supported by an employer’s plan). The new IRS Revenue Procedure 2007-71, which will be effective December 17, 2007, is intended to address these issues. First, it provides a model written plan that any public school employer may adopt in order to comply with the written plan requirements of the final regulations. This model language is not designed for a plan that provides for matching contributions or other employer nonelective contributions, or for adoption by any other type of employer. According to the IRS, the model language has been prepared to take into account the general requirement that a plan include all the material terms and conditions for benefits under the plan. “For example, the model language does not incorporate the applicable legal requirements by reference, but instead describes them in a manner intended to enable the plan administrator to implement the plan provisions on the basis of the model language to the extent feasible,” the IRS explains. If a public school employer amends its plan language to include any portion of the model language, the form of the written plan will be treated as meeting the requirements of § 403(b), to the extent covered by the model plan language that is adopted – but only if the employer adopts the model language on a word-for-word basis or adopts an amendment that is substantially similar in all material respects. If a public school doesn’t have a written plan, adoption of the entire model language (once again, on a word-for-word basis or using language that is substantially similar in all material respects) will have the same status as a private letter ruling which provides that the written form of the plan satisfies Section 403(b). It is interesting to note that the model plan language includes certain optional alternatives, including one under which the plan may automatically enroll employees for elective deferrals (or alternatively to enroll only employees who file an affirmative election). As for the 90-24 transfers and “orphan accounts,” the new revenue procedure provides transitional relief for contracts or custodial accounts that were issued or exchanged before January 1, 2009, in order to comply with the requirement that all contracts and custodial accounts be part of a written plan. For contracts issued after December 31, 2004, and before January 1, 2009, by an issuer that no longer receives contributions under the plan in a year after the contract issue date (for example, because of either the issuer being discontinued as an issuer under the plan or having become an issuer under the plan in a post-September 24, 2007 exchange permitted under Revenue Ruling 90-24), the contract will not be subject to disqualification even if it is not part of a written plan that satisfies the new 2007 regulations. However, this will only be the case if the employer makes a reasonable good faith effort to include the contract as part of its plan. Such a reasonable good faith effort includes collecting available information about the issuers and notifying them of the plan administrator’s name and contact information to satisfy the new information sharing requirements. The model plan language can also be helpful in understanding and complying with these requirements, describing in certain sections the type of information that would satisfy the information sharing agreement required in certain circumstances. For contracts issued before 2009 held for former employees or beneficiaries, if the issuer that holds contracts under a 403(b) plan stops receiving contributions before January 1, 2009 (for example, because the employer ceased to exist), then the 403(b) plan will not be disqualified for failing to include terms relating to those contracts, so long as, in a case where the participant or beneficiary requests a loan from the contract, the issuer makes such a loan only after the issuer has made reasonable efforts to determine: (1) whether the participant or beneficiary has in the prior 12 months had any other outstanding loans from qualified employer plans of the employer; and (2) if the participant or beneficiary has had any such loans, the highest outstanding balance of such loans during that period. Finally, for a contract received in a 90-24 exchange after September 24, 2007, and before January 1, 2009, there is provision made for a re-exchange of such an “intermediate contract” back into the plan when such contracts are not issued by an authorized provider and are not made subject to an information sharing agreement with the employer. If, before July 1, 2009, such contracts are exchanged pursuant to revenue Ruling 90-24 for a contract issued by an issuer which is either receiving contributions as part of the plan or has an information sharing agreement, then the information sharing conditions do not apply to the intermediate contract and the re-exchanged contract does not lose its 403(b) status. The IRS and Treasury are interested in receiving comments on the model language contained in this revenue procedure and any other model language that interested parties believe should be added to this revenue procedure. Therefore, they have requested comments specifically on three questions: 1. While the model language has generally been prepared for use by employers based on provisions commonly found in defined contribution retirement plans, are there additional provisions which should be added to reflect features that are widely used? 2. Are there changes that should especially be made to reflect the circumstances applicable to public schools, including not only revised versions of the model language, but also whether additional provisions are necessary or appropriate for them? 3. Should the provisions found in section 7.3 of the model language, which have been prepared to satisfy the 2007 final regulations requirements for the plan document to reflect the available vendors, be expanded, including changes to reflect the special relief in section 8 of this revenue procedure? Comments are requested to be submitted by March 16, 2008. New IRS Revenue Procedure 2007-71 Health IT Legislation Once Again Appears Stalled
Congress’ on-again, off-again love affair with health IT legislation appears to be off again – at least for now. It is difficult to understand why the relationship continues to be so frustrating. After all, health policy experts from all points of the political spectrum and virtually all participants in the health care system support the goal of promoting the improved use of information technology in health administration, popularly know as health IT. Indeed, estimates suggest that broad use of interoperable electronic health records could save as much as $140 billion annually in health care costs, as well as improve the quality of care. Furthermore, in 2006, both the House and Senate passed their own versions of health IT legislation – the Senate by a vote of 97-0. Then, earlier this year, despite reports of its apparent demise, the legislation looked like it had received a second chance as signs of renewed interest in the topic appeared on both side of Capitol Hill, and the issue also received a major boost from large business and labor interests. A redraft of the “Wired for Health Care Quality Act” (S. 1693) was subsequently introduced mid-year in the Senate (see the June 2007 NCTR Federal e-News) and had strong bipartisan support, including Health, Education, Labor and Pensions (HELP) Committee Chairman Ted Kennedy (D-MA) and his GOP counterpart, Ranking Member Mike Enzi (WY). Democratic Senators Clinton of New York, Obama of Illinois, Klobuchar of Minnesota, and Kohl of Wisconsin support the measure, as do Republicans Hatch of Utah, Alexander of Tennessee, Burr of North Carolina, Gregg and Sununu of New Hampshire, and Isakson of Georgia. However, when there were attempts in November to “hotline” the legislation by obtaining a unanimous consent agreement – an expedited procedure that would bypass amendments and protracted debate – the wheels came off the car. The problem centered around the adequacy of privacy protections in the bill, an issue that has haunted this issue from the beginning and was part of the reason that the health IT measure was unable to reach a Conference committee between the House and Senate last year, thus killing it in the last Congress. Specifically, patient privacy protection groups argued that the bill relies too heavily on privacy standards promulgated under the Health Insurance Portability and Accountability Act (HIPAA) in covering non-medical entities like data aggregators – privacy standards that are viewed as seriously flawed. Experts have testified that if patients do not trust the new IT system, many of its promised improvements in care and cost containment will not materialize. Privacy is believed to be the cornerstone of building a system that consumers will trust enough to allow potentially embarrassing information on sexual or mental illness, for example, to enter their computerized record. Many also fear that the information will be used against them by employers and insurers. Therefore, when 36 medical groups, including the American Medical Association, sent a November 9th letter expressing their concerns to the legislation's main sponsors, the “hotlining” effort promptly cooled off. The letter said that “key provisions in this bill do not adequately address the essential elements needed to ensure a national HIT network that is functional, interoperable, and adequately addresses barriers to adoption.” The letter also raised concerns with the legislation’s quality standards, government-based approach, funding levels, and grant process, warning that "The [HHS] secretary and federal government are not equipped to unilaterally mandate the practice of medicine….there is a significant risk that the measures will not be appropriate or valid for the services that are to be measured, and, therefore, will not be useful to patients or could even harm patients." The letter suggested that $278 million in grants for equipment was not enough, that the grant process was needlessly complex, and that quality standards should be developed through an open, transparent process. In an attempt to respond to the privacy concerns, Senator Pat Leahy (D-VT) is reportedly working on an amendment to give patients more rights to opt out, deny data access to third parties, and make some sensitive information harder to access than others. Senators Kennedy and Enzi are said to be receiving the changes favorably and the Leahy efforts are also supported by patient privacy advocates. Negotiations reportedly continue, but the calendar does not favor resolution of the issue anytime soon. Health IT, however, is the kind of previously-vetted consensus measure that could still break through the logjam created by the calendar and the partisan atmosphere of an election year. For example, in connection with recent Senate Finance Committee consideration of Medicare legislation that would delay the scheduled 10% cut to physician Medicare reimbursements, Health and Human Services Secretary Mike Leavitt reportedly said that "any new bill should require physicians to implement health information technology that meets [HHS] standards in order to be eligible for higher payments from Medicare." According to Leavitt, such a requirement would “accelerate adoption of this technology considerably and help to drive improvements in health care quality as well as reductions in medical costs and errors." However, the Finance Committee has not discussed health IT as part of the Medicare package. On the House side of the Hill, HR 3800, the “Promoting Health Technology Act” (HR 3800) has recently been introduced by Congresswoman Anna Eshoo (D-CA) and Congressman Mike Rogers (R-MI). The legislation is similar to S. 1693 in many respects, and this could help to expedite a conference between the House and Senate should the two be able to clear their respective health IT bills. Also, the House Science and Technology Committee has approved legislation that would direct the National Institute of Standards and Technology (NIST) to “participate in the development of technical standards" for health IT. The committee also approved an amendment requiring NIST to form a task force for developing common terminologies and classifications for HIT systems. According to Congressman Bart Gordon (D-TN), who sponsored the measure, the goal is to speed up the adoption of health IT. So, as with any on-again, off-again romance, hope always springs eternal. Medical
Groups’ Letter to Senate Sponsors of S. 1693 Should the SEC Provide Easier Investor Access to Company Info Concerning Business with State Sponsors of Terrorism?
SEC Chairman Chris Cox says that his agency is interested in helping investors “find what they’re looking for” in the information already on file with the SEC that could help them “to avoid supporting terrorism directly or indirectly through their investments.” Earlier this year, the SEC provided a Web tool that linked to portions of companies' most recent annual reports that described their business activities in Cuba, Iran, North Korea, Sudan and Syria. However, following a firestorm of complaints from companies and the Congress about the accuracy of the information, the SEC suspended its use less than a month after the effort began. At that time, the Commission said that it intended to more formally determine how best to make public company disclosure of business activities in or with a State Sponsor of Terrorism more accessible to investors, and the new Concept Release is the result. The SEC notes that the Federal securities laws require disclosure of business activities in or with a State Sponsor of Terrorism if this constitutes “material information” that is necessary to make a company’s statements, in the light of the circumstances under which they are made, not misleading – and the SEC intends to apply this standard to company disclosure regarding business activities in or with State Sponsors of Terrorism just as they do with other materiality standards. In other words, the SEC staff, when reviewing disclosures related to business activities in or with a State Sponsor of Terrorism, will interpret materiality in the same way it does when reviewing disclosures relating to any other corporate activities not covered by a specific rule or regulation. Furthermore, the SEC also points out that it does not believe that, as part of its role in applying the materiality standard, it is “to determine the degree to which a public company’s business activities may support terrorism or may be inconsistent with U.S. foreign policy or U.S. national interests.” But if not them, who? “We nevertheless seek comment raising any opposing views and alternatives” to this approach, the SEC kindly offers. The SEC release wants to know if “enhanced access” to such material information is necessary. Specifically, it asks if information currently available in public company filings regarding business activities in or with State Sponsors of Terrorism is sufficient, and if this information is important in making investment decisions. The questions also raise a number of other issues, including whether such enhanced access could disproportionately impact U.S. or foreign private issuers, or if providing easier investor access to U.S. listed companies’ disclosures would positively or negatively impact the competitiveness of U.S. financial markets. The SEC is also interested in knowing if there are means of providing easier access to existing disclosures, such as improvements to their Web tool, or if data tagging by companies themselves is desirable. Comments are due on or before January 22, 2008. IRS Issues Final Regulation Defining
“Salary Reduction Agreement” This final regulation amends the Employment Tax Regulations by providing guidance relating to section 3121(a)(5)(D), finally closing the book on the temporary and proposed regulation defining the term "salary reduction agreement" that was issued on November 16, 2004, by finalizing it without change. The regulation defines a salary reduction agreement for purposes of section 3121(a)(5)(D) to mean a plan or arrangement (whether evidenced by a written instrument or otherwise) whereby payment will be made by an employer, on behalf of an employee or his or her beneficiary, under or to an annuity contract described in section 403(b) if (1) the employee elects to reduce his or her compensation pursuant to a cash or deferred election; (2) the employee elects to reduce his or her compensation pursuant to a one-time irrevocable election made at or before the time of initial eligibility to participate in such plan or arrangement (or pursuant to a similar arrangement involving a one-time irrevocable election); or (3) the employee agrees as a condition of employment (whether such condition is set by statute, contract, or otherwise) to make a contribution that reduces his or her compensation. The regulation applies to contributions to 403(b) plans made on or after November 15, 2007. Final IRS Regulation on Salary Reduction Agreement New Report on Social Investing Suggests
Positive Results The Asset Management Working Group of the United Nations Environment Programme Finance Initiative (UNEP FI) and Mercer LLC have recently issued a joint report suggesting that “responsible investing” in companies based on environmental, social and governance (ESG) factors does not necessarily compromise investment performance, and may actually enhance it in some cases. The report is based on a review of twenty academic research papers that examine the link between these factors and investment performance, as well as ten broker studies on the materiality of these factors on investment performance, selected from a list of broker research compiled by the UNEP FI Asset Management Working Group, and chosen to provide variation across regions, sectors and research methods. The joint report, entitled “Demystifying Responsible Investment Performance,” addresses what it calls the “misperception” that responsible investment automatically translates to underperformance, creating a constant barrier to the widespread acceptance of this investment strategy. Based on the 20 academic studies reviewed, the report finds that there was evidence of a positive relationship between environmental, social and governance (ESG) factors and portfolio performance in half of them. Of the remaining studies, 7 reported a neutral effect and only 3 found a negative association. According to Mercer, a “combination of short data samples, variability in data sources and different geographic regions” is likely responsible for the divergence in results. “On balance,” Mercer concluded, “the evidence suggests that there at least does not appear to be a performance penalty from taking wider factors into account in the investment management process.” As for the broker studies, the report notes that while the sample was limited in terms of corporate governance and emerging markets studies, “our view is that the ten studies we selected are representative of the growing type of ESG research that is currently most commonly produced by brokers.” In summary, the review of broker studies found that there is already explicit evidence and acknowledgment of the materiality of ESG factors and its influence in driving business strategy. “Addressing ESG factors appears to be currently centered on improving risk management, mainly for large caps,” the report concludes. “The opportunity side is largely viewed through a thematic lens, mainly for small and mid caps, with a primary focus on environmental aspects, or the E,” the report goes on, while it seems that “the S and the G are labeled under compliance check.” Accordingly, the report notes that there is a real need for additional research that aggregates ESG, and “links it with compliance, risk and opportunity.” The UNEP FI is a public-private partnership with 175 banks, insurers and investment firms from 38 countries. It was established 15 years ago, with a commitment to sound environmental management. It has evolved over time into a vehicle for communicating to the broader investment community and capital markets that environmental, social and governance considerations should be part of mainstream business and investment. “Demystifying Responsible Investment Performance” IRS Summarizes Employee Health Benefit Plan Rules for State and Local Governments The Internal Revenue Service (IRS) Office of Federal, State and Local Governments (FSLG) has included a summary of the allowable and prohibited features of employer health benefit reimbursement plans in their semiannual newsletter for January, 2008, which has just been released. Such plans fall into two basic categories: Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs). The FSLG notes that in the face of constantly escalating health benefit costs, governments are increasingly focused on ways in which to provide adequate coverage for their employees. The tax-favored treatment available for health and medical benefits is a critical element in determining the level of benefits that can be made available, and the FSLG reports that it has been seeing “more questionable health benefit systems” appearing. In recent years, the IRS has issued several rulings and notices addressing allowable and prohibited features of such plans. Therefore, in an effort to ensure that government employers are familiar with the basic principles involved so that they can make the best decisions for coverage and avoid employment tax problems, the FSLG has provided an overview of the rules covering the two basic categories of employer health benefit reimbursement plans, HSAs and FSAs. In addition to covering the general rules for health care plans, the article also provides links to several recent related IRS rulings dealing with health plans if more detailed information is sought.
Some Suggested Holiday Reading… Two new releases from two very different sources can provide interesting Holiday reading for all you public pension junkies out there. One, from the Center for Retirement Research at Boston College, is “nice,” while the other, from the Hoover Institution, is definitely in the “naughty” category. The Center for Retirement Research at Boston College is undertaking a multi-year in-depth study of state and local pension plans, funded by the Center for State and Local Government Excellence. In what it calls a “prelude” to subsequent reports on various aspects of state and local plans, Alicia Munnell and Mauricio Soto have produced a brief entitled “State and Local Pensions Are Different From Private Plans.” Halleluiah! (Well, it is the season for performances of Handel’s “Messiah,” after all.) Some one is finally getting it! This brief identifies the key differences between employer-sponsored plans in the private and public sectors. “In fact, the two worlds turn out to be quite different,” the report begins, and goes on to do a solid job of discussing these differences. So if you want to feel all warm and fuzzy, settle down in your favorite warm winter’s chair or sofa, and read on. On the other hand, if you’ve gotten a little too sluggish from all those seasonal goodies and need something to jolt you wide awake, take a gander at “Peaks, Cliffs, and Valleys, the peculiar incentives of teacher pensions,” by Robert Costrell and Michael Podgursky. This article, taken from the Hoover Institution’s Winter 2008 issue of their journal, “Education Next,” should get your blood boiling in a hurry. Although the issue of teacher recruitment and retention is an important one, and the role of their pensions in this process is certainly a legitimate topic for discussion, the two professors seem intent on picking a fight. By the time they arrive at their conclusions, which are that (1) “the underlying problem with DB systems is their distortion of retirement incentives, stemming from the broken link between benefits and contributions;” and (2) that “DC systems and cash balance (CB) plans restore that link,” at least you won’t be surprised. And guess what? DC and CB systems satisfy all their principles for reform far better than what they refer to as “the traditional and outdated DB systems.” Yes, you may think you’ve heard it all before, but our opponents are becoming more creative in the types of arguments that they are using to push for conversion from DB to DC. I guess their theory is that if you throw enough mud against the wall, some of it is bound to stick eventually? In any case, happy reading, and Happy Holidays to you all! |
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