June 2006
Pension Conferees Miss Another Deadline
Despite a promising start, the month of May proved not so merry for
pension conferees, as yet another deadline for final action on reconciling
the House and Senate pension reform measures came and went, and Congress
left town March 26th for its Memorial Day recess without having yet
produced a conference agreement. The Senate bill's provision requiring
companies with poor credit ratings to contribute more to their pension
plans appears to have become the pivotal issue, with all the other items
in disagreement reportedly depending upon the resolution of this matter.
And, as Congressman Buck McKeon (R-CA), Chairman of the House Education
and the Workforce Committee, has been quoted as saying, "We have
agreed that until everything is settled, nothing is settled."
The month began with the House of Representatives, at the urging of
Congressman George Miller (D-CA), the ranking Democrat on the Education
and the Workforce Committee, agreeing to instruct its pension conferees
to impose the same restrictions on corporate executives' nonqualified
retirement plans as would be imposed on benefits for participants in
a company's qualified pension plan when it becomes less than 80 percent
funded. These restrictions would include prohibitions on benefit increases,
cost of living adjustments, and lump sum pension payments.
Then, when tax conferees finally worked out an agreement on a capital
gains tax-cut extension later in the month, this freed up several key
Congressmen and Senators who had been assigned to both tax and pension
conference committees to focus more on pension issues. In addition,
the decision to have several popular tax breaks (such as the expired
tax credit for research and development) included in a separate "trailer"
tax bill also presented the opportunity to roll them into the pension
conference agreement. Some believe that this strategy would enhance
the likelihood for reaching a final pension compromise.
However, such a packaging would also face a more difficult time under
Senate budget rules. For example, one of the reasons for leaving the
popular extenders out of the capital gains agreement was to keep the
cost of the bill to $70 billion or less. This was important because
it meant that the bill would not be subject to a point of order since
it fell within the parameters of the Senate's budget resolution. (In
order for such a point of order to be waived, a super-majority of 60
votes is required.)
The pension conference agreement has no cost allowance under the budget
resolution and will therefore be subject to such a point or order if
it has any net revenue loss associated with it. Assuming that it contains
the House-passed provisions providing for the permanency of the EGTRRA
pension provisions which NCTR strongly supports but which also have
a price tag of $28 billion it will already have a budget problem. Therefore,
it will almost certainly need 60 votes in order to pass. This argues
for the inclusion of popular items to draw additional votes, such as
the R&D tax credit. However, the addition of such big ticket items
will also increase the overall revenue loss, and could serve to draw
increased opposition from deficit hawks.
While supporters of pension reform aren't giving up, final action could
therefore be months away as Congress returns June 5th to wrestle with
immigration reform, a Constitutional amendment banning gay marriage,
and the continued fallout from the first direct raid on an office of
the Legislative branch by the Executive branch in 219 years. And with
the business community admittedly less than excited about reaching a
pension agreement, which will increase their costs significantly, it
may be that any pension deal could be postponed until a possible lame
duck session following the November elections.
* House Instructs Conferees on Executives Pensions <http://www.house.gov/list/press/ed31_democrats/rel5406b.html>
New Tax Law Imposes New Withholding Requirements
Despite the fact that neither the House nor the Senate included a
similar provision in their original versions, the Tax Increase Prevention
and Reconciliation Act (TIPRA) signed by President Bush on March 17,
2006, (extending current capital gains and dividend treatment another
two years) 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. The provision, which would apply to
payments made after December 31, 2010, also imposes information reporting
requirements on such payments, and is expected to raise approximately
$7 billion over the first 10 years.
The Statement of Conferees specifically notes that payments under government
programs to provide health care or other services that are not based
on the needs or income of the recipients would be subject to such withholding,
including programs where eligibility is based on the age of the beneficiary.
Although there is no specific discussion of where public pension plans
would fit under this new law, it would certainly appear possible that,
depending upon the specific circumstances of their establishment and
governance, 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.
The withholding proposal appeared in the Joint Committee on Taxation's
report, "Options to Improve Tax Compliance and Reform Tax Expenditures,"
issued January 27, 2005. (This is the same report that proposes the
repeal of the public sector section 414(h)(2) employer pick-up , and
underscores the danger of JCT proposals being used at the last minute
to fill revenue "holes" in legislative packages.) According
to the JCT, "withholding on nonwage payments would increase compliance
and facilitate IRS collection activities by filtering regular tax payments
from large numbers of taxpayers through significantly fewer collection
points." While acknowledging that the proposal would impose new
administrative requirements on some payors, the JCT argues that "in
many cases the affected parties will already have procedures in place
that can be modified to accommodate the additional requirements. For
example, present law imposes information reporting requirements on governmental
entities. Arguably, the proposal will require only the expansion of
existing information reporting procedures to satisfy the broader withholding
requirement, not the creation of wholly new procedures, in such cases."
A number of organizations representing public employers, including the
National Association of Counties (NACo), the National League of Cities
(NLC), and the Government Finance Officers Association (GFOA), have
already gone on record opposing the provision as a costly unfunded mandate.
In addition, on the same day that the President signed TIPRA, Senator
Larry Craig (R-WY) introduced legislation, S. 2821, that would repeal
the provision.
Please review the links below and provide NCTR with your input as to
the potential impact, if any, of this provision on your plan.
* Statute and Conference Report Language <http://www.nctr.org/pdf/TIPRA3percent.pdf>
* JCT Report <http://www.house.gov/jct/s-2-05.pdf>
Energy Department Attempts to Nix Contractors
DB Plans
Arguing that it was only trying to ensure that its reimbursement of
costs incurred by Department of Energy (DOE) contractors for their pension
and medical benefits "are reasonable... and reflect prudent business
practices," at the end of April the DOE announced its intentions
to no longer cover the costs of its contractors defined benefit (DB)
pensions for their new employees.
Furthermore, the DOE's directive noted that, generally speaking, it
would not approve costs for reimbursement of any amendments to a contractor's
existing DB plan that augment in any way the benefit for any plan participant,
including any early retirement incentive even if the plan is fully funded.
Nor would the DOE pay for lump sum distributions of more than $5,000.
But the DOE would be happy to reimburse costs associated with existing
employees' elections to convert from their DB to a DC plan. Of course.
Not surprisingly, defined contribution (DC) plans were given the DOE's
seal of approval -- as long as they are "market based." That
is, contractors could still receive reimbursement for DC plans if, essentially,
they did not exceed industry benchmarks for value and cost by more than
5 percent. Similarly, medical benefit plans would not be reimbursed
unless they were also market-based.
Almost immediately, the DOE's plan ran into a political buzz saw. Democrats
on both sides of Capitol Hill were incensed, and sent letters of protest
to President Bush. The Senate letter stated that "defined benefit
pension plans are the bedrock of retirement security," and told
the President that despite his assurances that he wants to strengthen
the DB pension system, not dismantle it, "your credibility is called
into serious question when your Department's stated policy prevents
even those employers who want to provide defined benefit plans to their
workers from doing so." The House letter warned that, by tying
reimbursement to a "market based medical benefit plan," the
DOE would be encouraging contractors "who provide comprehensive
medical coverage to reduce such coverage and to further shift health
care cost burdens onto employees, rather than addressing rising health
care costs."
In an increasingly rare display of bipartisanship, House appropriators
took quick action to block the DOE plan. An amendment was promptly added
to the FY 2007 Energy and Water Appropriations bill, H.R. 5427 (providing
funding for the DOE), that would prohibit the DOE from using any funds
for the implementation of this directive. The measure passed the House
on May 24, 2006, and is now pending in the Senate Appropriations Committee.
NCTR, joined by other public sector interest groups, will be sending
a letter urging that the House-passed prohibition be included in any
final measure sent to the President for his signature.
* DOE Directive <http://www.energy.gov/news/3555.htm>
* Senate Letter <http://reid.senate.gov/newsroom/record.cfm?id=255240&&>
* House Letter <http://edworkforce.house.gov/democrats/pdf/doeletter51006.pdf>
IRS Ruling Underscores Need for Service Credit
Amendment
The Internal Revenue Service (IRS) continues to issue private letter
rulings (PLRs) that demonstrate its insistence that Code section 415(n)
requires that, in order to qualify as "permissive service credit,"
the purchased service must correspond to a period of actual employment
that was not previously credited under a plan. The PLRs underscore the
importance of technical corrections to Section 415(n) contained in the
Senate version of pension reform currently pending in conference.
In PLR 200617038, dated February 3, 2006, and recently released, the
IRS has once again ignored one of the purposes of 415 (n) when it was
originally enacted, which was to provide a solution to problems that
arose in connection with different tiers or plans within a system. Specifically,
it was understood at the time the law was amended that credit was to
be available for purchase in order to qualify for an increased benefit
(e.g. a higher tier/formula in the same plan) even if it was for service
technically already credited by that plan.
In this instance, the employer planned to amend its plan to permit participants
the opportunity to elect to have their benefits calculated under a new,
enhanced formula. Participants who elected to purchase this new benefit
formula (sometimes referred to as "buying up" the multiplier)
would be required to contribute an amount equal to the difference between
the rate determined by the plan actuary as necessary to purchase the
new formula and the amount the participant actually had contributed
to the plan over the prior three years of service. Participants could
make the purchase by either authorizing an additional withholding from
current compensation, by making an after-tax contribution, or by authorizing
the transfer of money from their 457 accounts. The employer wanted to
know whether a participant who elected to make the purchase using the
participant's 457 plan could do so by making a trustee to trustee transfer
that would qualify as the purchase of permissive service credits and
would therefore not be included in the participant's gross income.
"No," said the IRS. The participant would be purchasing this
credit based in part on the amount the participant had contributed to
the employer's plan for his or her prior three years of service, which
was "service for which he or she has already received credit for"
under the terms and provisions of the plan. Therefore, the additional
contribution would be purchasing additional benefits for service that
had already been recognized. Accordingly, the IRS ruled, the credit
would not amount to permissive service credit, and therefore any trustee
to trustee transfer would be included in the participant's taxable gross
income.
To address this and other extremely restrictive interpretations of 415(n)
being taken or discussed by the IRS, the Senate-passed Pension Security
and Transparency Act (S. 1783) currently in conference would make the
following clarifications:
* Service credit may be purchased for periods for which there is no
performance of service (e.g. airtime);
* Credit may be purchased in order to qualify for an increased benefit
(e.g. a higher tier/formula in the same plan);
* A trustee-to-trustee transfer of 403(b) and 457 funds into a governmental
defined benefit plan to purchase service credit does not need to be
tested under the 415(n) limits on after-tax contributions to the plan;
* Once 403(b)/457 funds are transferred to a governmental defined benefit
plan, they take on the distribution rules of such a plan (i.e. must
be tested under 415(b), etc); and
* Transfers need not be made between plans maintained by same employer.
While it appears from meetings with key staff that conferees are inclined
to include the Senate's language in any conference report that may finally
be approved, remember the cautionary statement of Congressman McKeon
noted in the above story on the pension conference: until everything
is settled, nothing is settled. Therefore, if this PLR would be problematic
for your plan, and you have not yet contacted your members of Congress
and Senators (whether or not they are on the pension conference committee)
about the importance of this Senate provision, please do so as soon
as possible.
* New PLR Ruling <http://www.irs.gov/pub/irs-wd/0617038.pdf>
SEC Rules out SOX Section 404 Exemptions For
Now
Ignoring the advice of its Advisory Committee on Smaller Public Companies,
the SEC announced on May 17, 2006, that while it was making "a
brief further postponement of the Section 404 requirements for the smallest
company filers," ultimately "all public companies will be
required to comply with the internal control reporting requirements
of Section 404" of the Sarbanes-Oxley Act of 2002 (SOX). On April
23, 2006, the Advisory Committee had endorsed an exemption for small
public companies. In addition, the SEC had been under intense pressure
to provide such an exemption on its own initiative, provoking a flurry
of dueling letters and statements from Congress and securities law experts
opining on whether or not it had the authority to do so without further
Congressional authorization. Sidestepping the specifics of that issue,
the SEC release lays out the next steps in the Commissions rulemaking
process in this area, which do not apparently include any exemptions
at least for now.
However, the question of exemptions from the costly requirements of
Section 404 is far from settled. On the same day that the SEC was making
its announcement, Congressman Tom Feeney (R-FL) and Senator Jim DeMint
(R-SC) were introducing companion measures known as the "COMPETE
Act" (H.R. 5405 and S. 2824) to "reduce the burdens"
of Section 404 implementation. The bills would exempt companies with
less than $700 million in market value from the Section 404 requirements
of proof of independent auditors and strong internal controls against
fraud. The bills also seek to promote clarity in what constitutes "material
weakness" in internal controls, set a standard for negative audits
at a mistake greater than 5% of the firm's net profits, and make other
changes to ease the audit requirement on companies not exempted entirely.
More communication would also be allowed between a company and its auditors.
Congressman Feeney argues that Section 404 simply imposes more costs
than it is worth. Since enactment of Sarbanes-Oxley, foreign capital
has flocked to non-American exchanges, with the London Stock Exchange
billing itself as a "SOX Free Zone," according to Feeney.
He asserts that the COMPETE Act aims to advance the reasonable application
of Sarbanes-Oxley and to keep that which is a net advantage to investors
while eliminating those provisions which are a net disadvantage.
Feeney has managed to attract 20 cosponsors, including a Democrat, Greg
Meeks (D-NY), and several supporters of his bill serve on the jurisdictional
House Financial Services Committee. In the Senate, there are 7 cosponsors,
all Republicans, one of whom (Mel Martinez from Florida) serves on the
Senate Banking Committee. A number of trade associations have also already
announced their strong support, including the Mortgage Bankers Association,
Biotechnology Industry Association, Financial Services Forum, Independent
Community Bankers of America, and America's Community Bankers and many
more can be expected. While action on such legislation is unlikely,
with House Financial Services Committee Chairman Michael Oxley (R-OH)
already having indicated that he has no intention at this time of considering
more legislation to tweak the law which bears his name, clearly the
groundwork is being laid for a full assault on SOX in the next Congress.
With Oxley's retirement, a new Financial Services Committee Chairman
could make such a course of action much more likely.
* SEC Section 404 release <http://www.sec.gov/news/press/2006/2006-75.htm>
* Text of H.R. 5405 <http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.5405:>
* Feeney Statement on Section 404 <http://www.house.gov/feeney/soxtestimony.htm>
Point Made, New Points to Score on Medicare
Extension
The May 15th deadline for enrollment in the Medicare Part D drug plan
came and went amid much hue and cry from both Capitol Hill and the White
House. While Democrats urged that the deadline be pushed back until
next year "to give seniors time to figure out what's best for them
and their families," according to House Minority Whip Steny Hoyer
(D-MD), House Majority Leader John Boehner (R-OH) excoriated "Nancy
Pelosi and her band of Democrats" for having voted against delivering
seniors the prescription-drug benefit, openly advocated its failure,
and yet "now they have the temerity to ask for an enrollment extension
to a program they have sought to sabotage."
Meanwhile, down the Hill at 1600 Pennsylvania Avenue, the Administration
touted the success of Medicare Part D, claiming that 90% of eligible
seniors had enrolled by the cut-off date. During numerous speeches held
to promote the program, the President said that a firm deadline helped
people focus on making their decisions and he therefore opposed any
change in that regard, although the Administration did cancel the late
enrollment penalty for the poorest seniors prior to the deadline. The
GOP majority held in both chambers in support of the President, and
no extension was approved.
Now, however, having made their point, Congressional leaders in both
chambers hope to move a quick bill to provide a $1.7 billion remedy
for those seniors who missed the enrollment period. A mere two days
after the deadline passed, Congresswoman Nancy Johnson (R-CT), Chairman
of the House Ways and Means Subcommittee on Health, introduced H.R.
5399 to provide for an effective extension of the enrollment deadline.
Supporters include a good smattering of Members from the two committees
with jurisdiction, Ways and Means and Energy and Commerce, including
GOP Members who had bitterly resisted an extension previously.
In the Senate, no less a leader than Finance Committee Chairman Chuck
Grassley (R-IA) introduced S. 2810, to specifically waive the penalty
for any beneficiary that missed the May 15 sign-up deadline and seeks
to enroll starting in November, literally hours after the open enrollment
period ended. He was joined by a bipartisan group of 17 cosponsors led
by Ranking Democrat Max Baucus (D-MT). The White House wants to hold
hearings on overall implementation before considering support for such
an extension, and House Ways and Means Committee Chairman Bill Thomas
has already promised to do so. However, it is likely that the legislation
will have smooth sailing particularly considering that earlier in the
year, Senator Ben Nelson (D-FL) failed by a only a single vote to win
an extension against the wishes of the Finance Committee and GOP leadership
in that body.
* Text of S. 2810 <http://wrg.wmmercer.com/blurb/72833/article/20066389/>
* AARP Support S.2810/H.R. 5399 <http://www.aarp.org/research/press-center/presscurrentnews/medicare_statement.html>
Constitutionality of State "Foreign Policy"
Toward Sudan Questioned
According to the National Foreign Trade Council (NFTC), the Illinois
state law imposing sanctions on Sudan and requiring Illinois retirement
systems to divest from companies that do business with Sudan is unconstitutional,
and they plan on going to court to prove it. The NFTC believes that
state laws like those passed in Illinois undercut the ability of Congress
to act in a consistent manner on foreign policy matters related to the
conflict in the Darfur region of Sudan, and conflict with the authority
Congress has given the President in this area.
The Supreme Court unanimously held in Crosby v. National Federal Trade
Council, 530 U.S. 363 (2000), that when the Federal government has taken
a foreign policy position, the supremacy clause of the U.S. Constitution
pre-empts States from acting on their own in conflict with it. As William
Reinsch, president of the NFTC put it in a January 30, 2006, letter
to the Chicago Tribune, "Just because the federal government did
not act in the manner the state may have wished, the fact that a federal
policy is in place precludes states from making their own foreign policy
on the subject." The 2000 case involved sanctions by the State
of Massachusetts against Burma that raised Constitutional issues generally
similar to those in the Illinois law. The NFTC argues that divestiture
is just as much an attempt to usurp a federal prerogative as was the
case with selective purchasing (which was at issue in the Crosby case).
The NFTC held a number of meetings earlier in the year with companies
and financial institutions about the Illinois law and has decided to
proceed with litigation challenging its constitutionality. A meeting
was held in Washington, D.C. in May to explain to interested parties,
including representatives of public plans, how the lawsuit will proceed.
According to some reports, the lawsuit could be filed as early as this
month.
For some time now, many NCTR members and other public retirement systems
have been confronted with efforts that, in various ways, would restrict
investment in companies that do business or have financial ties with
Sudan. However, as the implementation of the Illinois law has underscored,
there is a lack of adequate information to determine whether companies
in which public pension funds are invested are doing business in Sudan
so that plan fiduciaries can make informed investment decisions. In
June of 2005, a number of public plans accordingly wrote to Federal
officials pointing out that no comprehensive list or report of such
companies has been created. Their letter urged public disclosure of
the identity of companies that, by virtue of their business or business
ties in terrorist sponsoring countries, are acting contrary to U.S.
foreign policy and humanitarian interests, and that such disclosure
include any information on such companies that will enhance investors'
capability to make prudent investment decisions. Despite follow-up meetings
by NCTR and other public plan representatives with the State Department
and others, no such disclosures have been provided.
* Reinsch Letter <http://www.usaengage.org/MBR0088-USAEngage/default/news/01-30-2006.htm>
* Public Plans June 2005 Letter to State/Treasury/Commerce/SEC <http://www.nasra.org/resources/terrorism/Joint%20Sanctions%20Letter.pdf>
Small Business Health Plans Die, but Health
IT Legislation's Vital Signs Improving
Although, to date, 2006 has not been a banner year for health legislation
coming out of the Congress, there does seem to be some signs of life
in connection with legislation to provide for better health information
technology, popularly referred to as Health IT. Policy experts from
all points of the political spectrum and virtually all participants
in the sprawling health care system support most basic points of such
legislation, which seeks to boost the use of technology in health administration.
HHS estimates suggest that broad use of interoperable electronic health
records could save as much as $140 billion annually in health care costs.
The Senate's so-called "Health Week," (5/8-5/12) was generally
agreed to have been a failure, with its centerpiece, legislation that
would have allowed small businesses to join together and create small
business health plans (SBHPs), falling victim to a Democratic filibuster.
The bill, S. 1955, sponsored by Senate Health, Education, Labor and
Pensions (HELP) Committee Chairman Mike Enzi (R-WY), was intended to
allow small business to pool together to purchase insurance coverage,
but would do so largely by exempting these new pools from virtually
all State regulation. Since the new plans would not be required to community-rate,
critics charged that the likely results would be adverse selection and
insurance market segmentation, with insurance providers free to "cherry-pick"
the healthiest, lowest cost people for some plans, leaving an older,
sicker population for other, much costlier plans.
The bill was unclear as to whether public entities could qualify to
form or join SBHPs, but some felt that, if adopted, the law would be
interpreted to permit them to qualify as eligible "associations."
It was feared that this ability to form or join SBHPs could result in
a significant erosion in existing public healthcare program membership
and create adverse impacts on existing risk pools. This in turn could
have a negative effect on existing public employee healthcare costs.
State government groups opposed the bill, as did 41 state attorneys
general. The AARP also spoke out in opposition.
Now the House GOP plans to move forward with its own "Health Week,"
tentatively scheduled to begin June 19th, with malpractice reform and
Health Savings Accounts (HSA's) on the program. Although the White House
endorses these measures, most of the GOP healthcare agenda is strongly
opposed by the Democrats and a potential reprise of the Senate's inability
to obtain passage of any healthcare measures could be in the works.
Furthermore, given the defeat of virtually all of this agenda in the
Senate, it is effectively dead for the year since the bills, even if
cleared by the House, would lack Senate-approved companion measures
to go to conference with.
One notable exception is Health IT. For example, on May 24, 2006, the
House Ways and Means Health Subcommittee approved H.R. 4157, the Health
Information Technology Promotion Act of 2006, sponsored by Health Subcommittee
Chair Nancy Johnson (R-CT). The bill essentially codifies the Office
of the National Coordinator for Health Information Technology within
the Department of Health and Human Services (HHS). The current office
exists by virtue of an executive order from the President.
However, according to Democrats, that's about all it does, and amendments
from the minority to provide more explicit privacy standards and a firm
deadline for Medicare providers to use the system by 2015 or lose their
reimbursements failed. The Johnson bill also does not provide funding
authorization to further its goals.
While many healthcare reform proponents therefore view the Johnson legislation
as less than desirable and more a reflection of her political needs
(she is facing a serious challenge for the first time in many years)
than a real attempt at reform, it is nevertheless a start. Furthermore,
it is more likely that the House Energy and Commerce Committee, which
held a hearing on health IT issues in March of this year, will also
produce a bill of its own in the near future. This bill, most observers
think, will more likely resemble the Senate's version of health IT,
S.1418, the Wired for Health Care Quality Act by HELP Committee Chairman
Michael Enzi (R-WY), which the Senate unanimously approved on November
18, 2005.
The Senate-passed bill incorporates provisions of S. 1262, the Health
Technology to Enhance Equity Act, introduced by Senators Frist (R-TN)
and Clinton (D-NY) in 2005. This legislation is strongly supported by
the Public Sector HealthCare Roundtable, a new organization representing
public sector healthcare purchasers and including several public pension
plans, with NCTRs president-elect, Meredith Williams (Colorado Public
Employees' Retirement Association) on its board of directors. It is
believed that an Energy and Commerce bill could provide the basis for
a conference with the Senate that would produce a successful compromise.
* Johnson Bill -- H.R. 4157 <http://waysandmeans.house.gov/news.asp?formmode=release&id=398>
* Public Sector HealthCare Roundtable Position Paper on Health IT <http://www.healthcareroundtable.org/public/department59.cfm#health>
Institutional Investors Support Executive
Comp Reform
The public pension community was well-represented at a recent hearing
on executive compensation before the House Financial Services Committee
on May 25, 2006. Representatives of the Council of Institutional Investors
(CII) as well as the California Public Employees Retirement System (CalPERS)
both testified in support of H.R. 4291, legislation introduced by Congressman
Barney Frank (D-MA) that would provide full disclosure of the compensation
of top executives, including pensions, golden parachute agreements,
the use of private jets and company apartments, and other compensation
now hidden. It would also require disclosure of short- and long-term
performance targets used to determine a top executives compensation,
and whether such measures were met in the preceding year.
The hearing was the result of a unanimous demand by Committee Democrats
for an additional day of hearings when they were denied the right to
call witnesses on May 3rd when SEC Chairman Cox appeared before the
Committee. In addition to CII and CalPERS, the Business Roundtable and
the AFL-CIO also testified. Rounding out the witness list were Nell
Minow with the Corporate Library and Frederic W. Cook, founding director,
Frederic W. Cook & Co.
Ann Yerger told the hearing that CII was supportive of paying top executives
well for superior performance. "However," she cautioned, "Council
members and other investors are harmed when poorly structured executive
pay packages waste shareowners' money, excessively dilute their ownership
in portfolio companies and create inappropriate incentives that may
reward poor performance or even damage a company's long-term performance."
Christy Wood, CalPERS' Senior Investment Officer for Global Equity,
stated: "Let me be very clear: CalPERS does not believe that it
is appropriate for shareowners to approve individual contracts at the
company specific level. However, CalPERS does believe that companies
should formulate executive compensation policies that tie executive
compensation to company performance and then seek shareowner approval
for those policies on a periodic basis."
The Business Roundtable (BRT) argued instead that the current system
functioned well, and that independent boards and shareholders already
have the tools they need to deal with "extreme cases" of excessive
executive compensation. The BRT said that the approach of HR 4291 was
"a slippery slope that should be avoided" and warned that
"if this model were applied to CEOs, then, by extension, the public
would determine salaries for news anchors, movie stars, athletes, and
elected officials."
After the hearing, Congressman Frank told NCTR's representative that
he hoped to be able to move for a mark-up of his legislation in the
near future, but based on the Committee Republicans' comments at the
hearing, this will not be an easy task. At best, they seem more inclined
to agree with the BRT suggestion that the SEC's new regulatory reform
proposals for executive compensation should be allowed to be implemented
before Congress takes action in this area.
* Summary of H.R. 4291 <http://www.house.gov/frank/fscexeccomp.html>
* Links to Witness Statements <http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=473>
IRS Updates Employee Plans Compliance Resolution
System
The Internal Revenue Service (IRS) has updated the Employee Plans
Compliance Resolution System (EPCRS), which permits plan sponsors to
correct failures to satisfy plan qualification requirements without
triggering plan disqualification. Significant changes, announced May
5, 2006, include:
* adding correction methods to correct plan loan failures and the
failure to obtain spousal consent;
* revising the correction method for the failure to correct for a failure
to include an eligible employee in a 401(k) plan; and
* reducing the compliance fee for a plan where the sole failure is the
failure to timely adopt certain plan amendments.
For Section 403(b) plans, there are new rules applying to "excess
amounts" resulting from violations of statutory limits. (Previously,
excess amounts could be retained under certain circumstances.) The definition
of the term "Excess Amount" is revised to mean any amount
returned to ensure that the plan satisfies the requirements of 401(a)(30),
415, or 403(b)(2) (for plan years prior to January 1, 2002). In addition,
the term "Excess Amount" is to include any distributions required
to ensure that the plan complies with the applicable requirements of
403(b). The term "Total Sanction Amount" relating to 403(b)
plans has been deleted in the new Revenue Procedure and replaced with
a new term, "Maximum Payment Amount."
The new procedures have also created a potential problem for governmental
457 plans regarding the application of the 180-day rule in Treasury
Regulation 1.457-9, according to the American Society of Pension Professionals
& Actuaries (ASPPA). In May 24th comments filed with the IRS, ASPPA
raises concerns with the new revenue procedure's statement that submissions
relating to 457(b) eligible governmental plans will be accepted by the
IRS on a provisional basis outside of EPCRS through standards that are
similar to EPCRS. "It is not clear, however, what happens if a
plan sponsor corrects under EPCRS (or similar standards) before or after
the 180-day period or if a plan sponsor simply corrects in accordance
with the IRS notification under the IRC 457(b) regulations," the
ASPPA letter points out. It is also not clear if the same protections
are available under both programs. Therefore, ASPPA requests guidance
on applying the 180-day rule, including the types of errors and excise
tax and penalties that are covered, and the interplay with EPCRS. "This
issue is critical for all governmental 457(b) plan sponsors to maintain
their plans tax-favored status," the comments stress.
The new Revenue Procedure 2006-27 is effective September 1, 2006. However,
for certain provisions (use of Acknowledgement Letters; assembly of
submission packages; and the fee schedule for nonamenders discovered
during the determination letter process), the effective date is May
30, 2006.
* IRS Revenue Procedure 2006-27 <http://www.irs.gov/pub/irs-drop/rp-06-27.pdf>
* ASPPA Comments <http://www.aspa.org/government/comment05-24-06.html>
New DROP Decision in SC of Interest
Wayne Schneider, General Counsel with the New York State Teachers
Retirement System, reports that counsel for funds having or considering
deferred retirement option plans (DROPS) may want to take a look at
a recent decision of the Supreme Court of South Carolina, Layman v.
State, 2006 S.C. LEXIS 154 (May 4, 2006).
The case involves the South Carolina Retirement System's DROP, the Teacher
and Employee Retention Program (TERI), established in 2001. Under the
original TERI program, participants could retire, but continue to work
for the State for up to five years following their retirement. During
these five years, the State withheld the normal pension benefits due
TERI participants. Under the original TERI program the State paid these
accrued benefits either as a lump sum at the end of five years or the
participant could roll the accrued benefits over into a qualifying retirement
fund. TERI participants made no further employee contributions to the
retirement system, and did not accrue further service credit during
their participation in TERI.
However, on July 1, 2005, the TERI program was amended to require TERI
participants to begin making an employee contribution to the South Carolina
Retirement System as if they were an active contributing member (but
gaining no additional service credit). The State claimed that such action
was necessary to maintain the actuarial soundness of the retirement
system. TERI participants sued, alleging breach of contract, and the
South Carolina Supreme Court agreed, finding that the provision of the
old TERI statute created a binding contract and that the State breached
that contract by applying the requirements of the new law to TERI participants
enrolled prior to the new law's date of enactment.
Wayne points out that the court discounted the State's argument by suggesting
(but not deciding) the imposition of the contribution requirement would
not be a breach of contract with respect to members who had not yet
entered the TERI program. "Such a subsequent amendment to a DROP
in states like New York could not be applied to future participants
who were active members of a retirement system at the time the DROP
was initially enacted," Wayne notes.
On June 1, 2006, the South Carolina Supreme Court denied the South Carolina
Retirement Systems' request for a rehearing of its decision.
* South Carolina DROP Ruling <http://www.sccounties.org/FridayReport/2006/S_C_%20Judicial%20Department%20-%20Opinion%20Number%2026146.pdf>
EBRI, AARP: The Employment-Based Pension
System -- Evolution or Revolution?
On May 15, 2006, AARP and the Employee Benefit Research Institute
(EBRI) held a one-day conference in Washington, D.C., on the employer-based
pension system. Topics related to the changing nature of pensions and
personal savings, the role of both employers and individuals in establishing
retirement security, and potential systemic changes that could help
more Americans achieve financial security in retirement were discussed.
The keynote speaker at the May 15 conference was Hedrick Smith, producer
and correspondent of a PBS Frontline series documentary entitled "Can
You Afford to Retire?" that was broadcast on May 16. If you have
not yet viewed this broadcast and its documentation of the inadequacy
of the current DC pension system for many Americans, it is well worth
watching.
* "Can You Afford to Retire?" <http://www.pbs.org/wgbh/pages/frontline/retirement/>
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