IRS announces a "good faith" compliance rule for relative value disclosures through December 31, 2006. The relative value disclosure rules apply to all defined benefit plans and those few defined contribution plans subject to the qualified joint and survivor annuity rules. The relative value disclosure rules call for disclosure of relative value comparisons of the available optional forms of payment so participants may make informed decisions about which form to select.
Plans with optional benefit forms subject to the Code Section 417(e)(3) ("GATT") provisions specifying the interest rate and actuarial assumptions to be used in determining benefit amounts, such as lump sum distribution options, were required to comply with the relative value rules effective October 1, 2004. For all other optional forms, the IRS has advised that it will only require "good faith" compliance with revised final relative value rules that it expects to issue in the near future, beginning February 1, 2006. Full compliance will be required by January 1, 2007. (IRS Employee Plans News, Vol. 5, Winter 2006).
IRS issued proposed rules (71 Fed Reg 4320, January 26, 2006) regarding the taxation of distributions from Roth Section 401(k) and Section 403(b) accounts.
Roth 401(k) and 403(b) accounts hold after-tax contributions in plans that have been amended to permit such contributions. Qualified distributions from Roth accounts are completely tax-free. The proposed rules generally provide that Roth accounts follow the qualified plan rules for distributions and rollovers and also describe the taxing of nonqualified distributions.Pension reform legislation is getting closer to enactment but, so far, the "fix" for cash balance plans is prospective only.
The bills to watch are H.R. 2830 ("Pension Protection Act") and S. 1783 ("Pension Security and Transparency Act"). The Conference Committee to resolve the differences in the two bills is to be scheduled soon. Senate Finance Chair Grassley and House Education and Workforce Chair Boehner (just elected House Majority Leader) have indicated that pension legislation is likely to be completed by the March Congressional recess.Both bills validate cash balance plans but, so far, neither provides relief retroactively for the already existing 11,000 cash balance plans covering 7 million participants.
Key prohibited transaction class exemptions are broadened by the Department of Labor.
Prohibited Transaction Class Exemption 75-1 (issued in 1975) has been amended to permit a plan to engage in certain transactions with broker-dealers, reporting dealers, and banks that are plan fiduciaries as long as the institutions and their affiliates do not have investment authority over or provide investment advice with regard to the plan’s assets that are involved in the transaction. The Department granted similar relief under Prohibited Transaction Class Exemption 84-24 (issued in 1984) for insurance agents and brokers, pension consultants, and mutual fund principal underwriters to engage in transactions involving sales of insurance and mutual fund products and to receive related commissions. These modifications take into account the consolidation in the financial services industry, the Department noted.Employee Welfare Benefit Plans: January 2006 Developments
HIPAA privacy rules require periodic re-notification of Privacy Practices.
The HIPAA privacy regulations (164.520(c)(1)(ii)) require that every 3 years after April 14, 2003 (for large group health plans) and after April 14, 2004 (for small group health plans), any HIPAA-covered group health plan must provide notice to "individuals then covered by the plan of the availability" of the plan’s Notice of Privacy Practices and how to obtain the notice.The President’s State of the Union address called for expansion of Health Savings Accounts and increased access to high deductible health care plans.
In a subsequent release, the White House said the proposal would:- Make premiums for HSA-compatible insurance policies deductible from income tax when purchased by individuals outside of work.
- Provide an income tax credit to offset payroll taxes paid on premiums paid for HSA-compatible policies.
- Allow unemployed individuals, especially early retirees, to purchase non-group HSA-compatible policies using tax-free premiums from an HSA account.
- Eliminate all taxes on out-of-pocket spending through HSAs.
The proposal includes the ability for employers to be able to offer workers portable HSA-compatible insurance policies that the employee would own, control, and take wherever they go. Their premiums would be tax-free and would not increase based on their health status at the time they changed jobs, left the labor force, or moved. © 2006 Foley & Lardner Page 3 of 3 LLP Executive Compensation: January 2006 Developments
The SEC has released proposed executive compensation disclosure rules. SEC Release No. 33-8655 (January 27, 2006), is anticipated to apply initially to the 2007 proxy season. The proposed rules would require expanded disclosure of director compensation; a tally column disclosing total compensation of all named executive officers; separate disclosure of retirement benefits and nonqualified plan benefits (including SERPs and deferred compensation arrangements); projected severance benefits; and projected change in control benefits.
The SEC Release on executive compensation disclosure coincides with the need in 2006 to address compliance of deferred compensation plans with new Code Section 409A and the effective date of FAS-123R, which requires companies to recognize the financial expense for stock options that are granted or initially vest after December 31, 2005. At the same time, institutional shareholders and investors appear to be scrutinizing executive and director compensation far more closely than in prior years and companies seem to be moving towards far greater use of restricted stock, rather than stock options, as the equity incentive compensation vehicle of choice. A lot of changes are coming together at one time for executive compensation in 2006. It is very important that these programs be reviewed this year with all of these changes in mind.
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