Blogging Employee Benefits

February 28, 2006

Accounting Convergence Roadmap Includes Pension/OPEBs

Filed under: Accounting — Fuguerre @ 12:24 am

Employers’ accounting for pensions and other postemployment benefits is one of the destinations explicitly recognized in “A Roadmap for Convergence between IFRSs and US GAAP–2006-2008,” a Memorandum of Understanding between the FASB and the IASB jointly reached by the Financial Accounting Standards Board and the International Accounting Standards Board®. [News Release] Convergence of U.S. and international accounting standards has been a major influence known for some years inevitably to be bringing significant change of the nature now being pursued in FASB’s project on pension/OPEB accounting reform. Although the IASB does not yet have a corresponding active project, action from both standards authorities is anticipated by 2008.


February 27, 2006

Pre-ERISA Pre-22 Service Excludable for Vesting

Filed under: Litigation, Vesting — Fuguerre @ 6:03 pm

Pre-ERISA years of service prior to age 22 can be excluded in applying ERISA’s vesting standards, according to a 7th Circuit Court of Appeals decision affirming the district court’s ruling. [Silvernail v. Ameritech Pension Plan, CA7, 05-1535]

The plaintiff commenced employment at the company in February 1967 at age 18. Under all applicable pre-ERISA versions of the plan, the plaintiff would not have been vested in pension accruals when he left the company in January 1978 at age 29, although all plaintiff’s years would have been counted under one of the pre-ERISA vesting designs. The plan’s ERISA amendment adopted a 10-year cliff vesting schedule, but excluded years served prior to age 22, relying on ERISA §203(b)(1)(A), thereby leaving the individual 0% vested.

The individual sought to lean on excerpts from legislative history to contend that Congress had not intended the age-22 eligibility condition to strip away vesting credit he had earned under the plan’s pre-ERISA design. Not only did the appellate court reject the congressional intent argument where ERISA’s own language was found to be unambiguous, but the court seemed offended by the plaintiff’s version of legislative history, which the court characterized as “short, highly selective snippets that have been taken out of context.” Chides the court –

Such use of authority amounts at best to sloppy lawyering, and at worst it is an attempt to mislead us.

In one divertingly intriguing twist born out of very recently evolving precedent, the plaintiff sought to have the Supreme Court’s 2004 decision in Heinz carry water for him. The appellate court rejected that argument . . . but let’s quote the court again here, since we no doubt will visit this issue again –

[Plaintiff] apparently confuses a policy amendment that reduces a worker’s actual accrued benefits, which was the issue in Heinz and which ERISA prohibits, with an amendment that changes how an employee becomes vested. He believes, mistakenly, that since [the employer] was all the while paying into a pension trust on his behalf, denying him vesting credit between ages 18 and 22 was tantamount to depriving him of benefits he had earned during those years. Benefit accrual and vesting are related but different concepts.

(I’m curious, for instance, as to whether that distinction colors Example 4 under Prop. Reg. §1.411(d)-3(a)(4), included as part of the IRS reaction to Heinz.)

Medicare Part D Draft CY 2007 Formulary Guidance

Filed under: CMS, Medicare Part D — Fuguerre @ 3:41 pm

Draft CY 2007 Formulary Guidance on Medicare Part D prescription drug policies is available for public comment. CMS will be accepting comment through March 6, 2006. Part D plan formulary submissions must be made between 3/27/2006 and 4/17/2006. [CMS Formulary Guidance Webpage]

Several of the items worth noting in the draft 2007 formulary guidance, as compared with the 2006 guidance

  • Certain Classes of Clinical Concern – The 2006 guidance required Part D plan formularies to include “all or substantially all” drugs in six particular classes: immunosuppressant, antidepressant, antipsychotic, anticonvulsant, antiretroviral, and antineoplastic. Under the draft 2007 guidance, formularies would be required to include substantially all drugs in those classes available on 4/17/2006, with subsequent new drugs to be subject to the normal P&T committee review process. The draft guidance lists four explicit exceptions not subject to the “substantially all” requirement. Restrictions on prior authorization or step therapy requirements for drugs within the six classes are prescribed. CMS further solicits industry feedback on current managed care strategies that might be implemented within the context of CMS policy.
  • Multiple Formularies – Multiple formularies that have been submitted by a plan should have meaningful differences, so that confusion among beneficiaries is reduced. CMS may request withdrawal of a formulary if no meaningful difference from the plan’s other formulary or formularies can be demonstrated.
  • Formulary Key Drug Types – If a USP Formulary Key Drug Type only includes drugs primarily covered under Part B, over-the-counter, statutorily excluded drugs, or drugs determined by the FDA to be less than effective, then the formulary need not include those drug types.
  • Specialty Tiers – CMS will approve formularies and plan designs that include a specialty tier only if certain conditions are met –
    • Single Specialty Tier – Only one tier may be designated a specialty tier exempt from cost-sharing exceptions.
    • 25% Cost-Sharing Ceiling – Cost-sharing for the initial range (or actuarially equivalent, for plans with decreased or no deductible basic alternative benefit design) associated with the specialty tier is limited to 25%.
    • $500 Monthly Price Floor – Only Part D drugs with plan negotiated prices that exceed $500 per month may be included in the specialty tier.

February 26, 2006


Filed under: 415, Distributions — Fuguerre @ 1:33 pm

“415(b)(2)(E)(ii)” – Sole content of a recent somewhat esoteric websearch that brought a reader to Pen&Ben Weblog. I’m not the expert you want to see on that one; but as I’ve not seen any Internet traffic this year on it, I’ll pass along what little I know.

For purposes of adjusting any benefit under subparagraph (B) for any form of benefit subject to section 417(e)(3), the applicable interest rate (as defined in section 417(e)(3)) shall be substituted for “5 percent” in clause (i), except that in the case of plan years beginning in 2004 or 2005, “5.5 percent” shall be substituted for “5 percent” in clause (i).

Background – Benefits under a qualified defined benefit plan are limited under IRC §415(b)(a)(A) to $175,000 for 2006, expressed in terms of a life annuity. [IRC §415(b)(2)(A)] For other forms of benefit (other than qualified joint and survivor annuities), that dollar ceiling must be adjusted to the actuarial equivalent amount. [IRC §415(b)(2)(B)] For forms of benefit other than those subject to IRC §417(e)(3), the interest rate assumption for the actuarial equivalence assumptions is limited to the greater of 5 percent or the rate specified in the plan. [IRC §415(b)(2)(E)(i)]

Which brings us to IRC §415(b)(2)(E)(ii), the text of which I’ve quoted above. §101(b)(4) of the Pension Funding Equity Act of 2004 (P.L. 108-218) added the temporary 5.5% interest rate, meaning that for distributions with annuity starting dates in plan years that begin in 2004 or 2005, the interest rate assumption for the actuarial equivalence assumptions for forms of benefit subject to IRC §417(e)(3) is limited to the greater of 5.5 percent or the rate specified in the plan. Benefit forms subject to IRC §417(e)(3) most notably include lump sum distributions, but also include other non-level alternative distribution forms such as payment streams that include temporary Social Security supplements. See Notice 2004-78 for IRS guidance on the PFEA temporary 5.5% interest rate and Benefitsblog for discussion.

Pension Reform LegislationPending legislation carried over from congressional action during 2005 would essentially extend the PFEA phrase for 415(b)(2)(E)(ii) permanently, retroactive to years beginning on or after 1/1/06. See S. 1783 §302 and H.R. 2830 §303.

The House version would add an extra twist: rather than PFEA’s simple 5.5%, the interest rate would be required to be the greater of 5.5% or “the rate that provides a benefit of not more than 105 percent of the benefit that would be provided if the applicable interest rate (as defined in section 417(e)(3)) were the interest rate assumption,” or as always, the rate specified under the plan if greater. Noting that under both the House and Senate versions, the 417(e)(3) applicable rate itself would phase in to a yield-curve basis, the determination of the rate that would apply under 415(b)(2)(E)(ii) would turn into a bit of rocket science whenever interest rates rise above about 5.6%, that exact margin depending on the particular form of benefit being limited and the participant’s age. The simplified version essentially being that when interest rates rise high enough, the actuarially equivalent dollar ceiling under 415(b)(2)(E)(ii) becomes 105 percent of the accrued benefit amount determined under 417(e).

Meanwhile, Current Law – For plans with calendar plan years or non-calendar plan years beginning early in the year (e.g., 2/1), the expiration of the temporary PFEA rule combined with the delay in enactment of a permanent extension could pose a tough dilemma. If any participant takes a lump sum distribution or other 417(e)(3) distribution during the interim period, and if the 415(b)(2)(E)(ii) ceiling would restrict the benefit payment, then technically the interest rate under current-law 415(b)(2)(E)(ii) is the greater of the rate specified under the plan or the applicable interest rate under 417(e)(3), currently a shade below 5%. But determination using that rate produces a ceiling that is higher than the ceiling that would be in force if 5.5% is applied retroactively under compromise legislation. If the higher amount based on current law is paid out, then recovery by the plan of excess payout amounts from the participant might be necessary if the legislation produces a retroactively lower ceiling.

February 25, 2006

Administration Characterizes Pension Investment Policies as “Hazardous”

Filed under: Pensions, Retirement Policy — Fuguerre @ 3:14 pm

While market fluctuations appear to have been an important contributor to these woes [of defined benefit plan funded status declines], they could be made less so. To see why, recall from above [in the Economic Report of the President] that the PBGC manages the pension plans it receives from financially distressed employers. In doing so, it reduces exposure to interest-rate fluctuations by matching investment payoffs with the timing of employee benefits. The value of plan assets and liabilities will tend to move more closely under this strategy of duration matching than they would under the strategies that employers appear to have used.

– Page 77, Chapter 3 of the
Economic Report of the President

That is, the Administration wants defined benefit pension plans to dump their stock portfolios – amounting to about $1 trillion for private pension plans, plus hundreds of billions more held by public pension plans – in favor of duration-matched fixed income portfolios. In fact, the White House ventures over the line, characterizing common pension investment policy as “hazardous,” an unconscionable selection of terms absent evidence and charges of ERISA fiduciary violations. Although pending changes in accounting standards and various volatility-amplifying rules in proposed pension reform legislation will influence pension fund investing away from equities, the Administration itself does not yet explicitly propose a direct requirement to that end, but that lack of concrete initiative doesn’t rein in the Administration’s reliance on overly colorful adjectives.

When the report does finally get around to specifics, the Administration reiterates key terms of its Proposal for Pension Reform: curtailment of voluntary acceleration of funding by restricting reliance on credit balances; increasing the volatility of funding by reference to spot interest rates and asset values, regardless of the funded status of the pension, and elevation of funding targets. No word yet on how the Administration plans to meet its budget’s projection of PBGC income with the declining premium base that its policy will guarantee.

Summary Judgment Denied in CBA Retiree Health Case

Filed under: Collective Bargaining, Litigation, OPEBs — Fuguerre @ 12:20 pm

Language in an ERISA plan must be given its common and ordinary meaning, interpreted in the way that a reasonable person in the position of the plan participant would have understood the words.

A district court has denied an employer’s request for declaratory judgment that would have recognized the employer’s legal right to unilaterally modify or terminate retiree health benefits provided under a collective bargaining agreement. The court also denied union requests for summary judgment to compel arbitration and exclude the employer’s expert testimony. [Rexam v. USW and IAM et al, D. Minn., Civ. 03-2998 ADM/JJG]

Rexam is a large aluminum beverage can manufacturer that employs members of the United Steel Workers of America (USW) and the International Association of Machinists and Aerospace Workers (IAM) covered under collective bargaining agreements with Rexam’s predecessors. In 2002 Rexam decided to increase retirees’ out-of-pocket expenses under its retiree prescription drug benefit plan. When the USW and IAM objected to the proposed changes, Rexam filed a lawsuit seeking declaratory judgment that it had the legal right to make the amendment. The unions filed counterclaims, alleging violations of the Labor Management Relations Act and the Employee Retirement Income Security Act. In October 2003, the district court denied a USW motion to dismiss Rexam’s lawsuit. In May 2005 three subclasses of retirees were certified, denying a Rexam motion to certify a single class since at least 11 different collective bargaining agreements would need to be considered in judging the dispute. In August 2005, the court recommended a jury trial for the steelworkers’ LMRA claim but a bench trial for its ERISA claim.

In the latest round of this extended dispute, the district court has denied Rexam’s motion for declaratory judgment. Rexam argued that the retiree welfare benefits were not vested, pointing to the absence of express vesting language in plan documents, reservation of rights clauses, continuation clauses, coordination of benefits clauses, and duration clauses. The district court addressed each argument in detail –

  • Express Vesting Language – Rexam overstates 8th Circuit law, according to the district court, stating that the issue depends on whether the parties intended benefits to vest, a determination for which the absence of a specific word is relevant without being dispositive. Conversely, language in several plan documents and SPDs informing retirees that benefits would continue until death, while supporting the unions’ claim that benefits were vested, could not be viewed in a vacuum, rather needed to be considered in the context of all provisions of the plan documents and CBAs.
  • Reservation of Rights (RR) Clauses – Most (although not all) plan documents included a clause reserving the employer’s right to terminate or amend benefits, which Rexam argued to be settled law as being inconsistent with a claim of vested benefits. Here, however, the court found the RR clauses ambiguous, since they included qualifications that would be interpreted as restricting the company’s rights to situations where the modification was required by a change in the law. The most recent, less ambiguous RR clause was rejected, since it had not be adequately reflected in plan SPDs.
  • Continuation Clauses – CBAs between Rexam and the union included statements that the company would continue to pay the cost of the plan. Continuation clauses have been recognized by the 8th Circuit as evidence of non-vesting, since otherwise such continuation clauses would be duplicative promises. The district court views that evidence as “slight,” to be considered in the context of the entire contract.
  • Coordination of Benefits Clauses – Plan documents and CBAs included provisions allowing benefits to be reduced if a third party, such as Medicare, provided duplicate benefits. Although 8th Circuit law has viewed a coordination of benefits clause evidence of non-vesting, again the district court sees the provision to be only one factor to be considered in the context of all provisions of the plan documents and the CBAs.
  • Duration Clauses – CBAs between Rexam and the unions included explicit statements that retiree welfare benefits were to remain in effect only until a certain date, usually either the CBA termination date or 90 days thereafter. Although the 8th Circuit has found duration clauses to be evidence of non-vesting, again the district court sees the provision to be only one factor to be considered in the context of all provisions of the plan documents and the CBAs.

Considered in the context of the entirety of the plan documents and CBAs, the court found the record ambiguous on intent to vest. Although there existed no express vesting language, there was language suggesting that benefits continue until a retiree’s death. Neither did the duration and coordination of benefits clauses outweigh the until-death language, while the continuation and RR clauses were found too ambiguous to aid resolution. Although both sides offered extrinsic evidence for their positions, the district court ruled that sufficient disputed facts made the case inappropriate for summary judgment for Rexam.

The unions also sought summary judgment, moving to exclude portions of Rexam’s expert testimony, although they acknowledged that the request would normally be sought as a motion in limine at trial. The district court denied the motion, although the court did advise that it would generally restrict expert witnesses from testimony explaining what the law provides.

Finally, the district court denied an IAM motion for summary judgment on its counterclaim to compel arbitration of the vesting issue, finding that IAM had waived its rights to arbitration by delay and inconsistent actions.

Remedial Amendments for Weblog Errors

Filed under: P&B Blog — Fuguerre @ 9:24 am

Not making the error in the first place means it doesn’t have to be corrected.

Blog Business World

Applied to pension plan documents, my practice gags at that heresy! No matter how perfect the design, no matter how careful the language, there’s always need for one more plan amendment, isn’t there?

Says something, maybe, maybe not, about the distinctions between the professional style we adopt for the formalities, versus blogging style still in its early stages of evolution. Hell, is there even a blog equivalent to the authoritative Web Style Guide out there yet? Aren’t we all pretty much adopting our own journalistic standards, be it style or procedure or content, partly reflecting our own professional rituals, but with some vague new age blogfog making everything a little fuzzy?

So then, what to do with blogging errors? An actuarial blogger might pull the blogging equivalent of a reversion without blowing everything away on excise taxes, that being one acceptable way of dealing with actuarial error. As for this scrivener, from start to bitterest end, this weblog will remain primarily my own personal record, for my own purposes, to keep my own track of where I’ve been and where I’m going. I know I have others who will read over my shoulder from time to time, but if they overhear me reading out loud, I can’t be defending myself for mispronouncing some word I was only trying out for myself. Besides, as I probably ought disclaim more religiously and frequently (if that’s not too redundant), none of the traffic here is intended nor should ever be used for professional reliance.

That said, I’m sufficiently perfectionist that I can’t bear not to find any error in anything I’ve previously committed to print, much less bear to leave it imperfect once I’ve discovered any particular weakness. So were I to be left entirely to my own preferences, I’d continuously tweak postings back through the entire stream. Somewhere between revising it so much that the RSS feeds are bloated with repetition and leaving an obvious error or obsolete portion intact must be some balance that even this fresh medium ought be able to wear comfortably. Even this will be amended and extended as I proceed, but for now —

  • Simple Errata – Misspellings, grammatical mistakes, and the like, I’ll make every attempt to catch before or within the first 24 hours after posting. Apologies if tweaking within that period duplicates an RSS feed, but I’m not going to bother pointing out where any simple correction is made. And beyond 24 hours after a posting, just excuse any simple errata, as I won’t bother with it past then.
  • Broken Links – Sites like the CMS don’t seem to understand that web surfers don’t appreciate relearning navigation every other month and certainly can’t trust a link farther than one can throw a byte. But I won’t revise an entire entry just to update a link, rather will pop a comment to the entry to give the latest place the nomad target feels like casting its tent.
  • Updates – Simple updates I’ll also pass through comments to entries; in due course, as my portfolio of content grows, there may be many days when I post more through comments than through main entries, so would suggest that any reader syndicating this weblog consider picking up the comment rss feed along with the main feed. On major updates, where the new information deserves an entire posting in its own right, I’ll include a link to the previous posting, which will add a comment under the earlier entry, hopefully keeping everything closely enough coordinated.
  • Major Errors and Obsolescence – If I ever discover a major substantive error in an entry, or if new information completely reverses or obsoletes earlier posting, not only will I post a new entry identifying the error or update, but will not leave the previous entry dangerously intact. In revising the earlier entry, I will clearly identify the changed text, without deleting the original version (which I’ll typically switch to strikeout text).

* * * * * Practice of perfection makes perfect practice. * * * * *

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