Disabled persons who have not yet attained the age of 59-1/2 may take a distribution from a qualified retirement account without paying a 10% tax penalty.
During 2005, petitioners Elizabeth Dart and Mr. Dart became disabled and unable to work due to medical problems that had become increasingly worse over the years.
In April 2005, Mr. Dart applied to the Social Security Administration (“SSA”) for disability benefits. He received written notification from the SSA approving his application for disability benefits, which stated “We found that you became disabled under our rules on December 2, 2005.” On November 11, 2005, Mr. Dart made a withdrawal from his retirement account in order to be able to pay mounting bills including those for their home mortgage and medical expenses. This distribution was a withdrawal from a qualified retirement account in the name Mr. Dart, who had not yet reached the age of 59-1/2 at the time. Section 72(t) of the tax code mandates a 10% additional tax penalty where a person under the age of 59-1/2 withdraws money from a qualified retirement account unless that person falls within an enumerated exception. One of the exceptions is for distributions attributable to the employee being disabled. An individual is considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual is not considered to be disabled unless he furnishes proof that he is disabled. The court found that Mr. Dart’s medical condition was so severe that he was unable to work for almost all of 2005 and has been unable to work ever since. On the basis of the information that Mr. Dart submitted to the SSA in April 2005, the SSA found that Mr. Dart became disabled on December 2, 2005. The Commissioner of Internal Revenue argued that because December 2, 2005 is 21 days after Mr. Dart’s withdrawal from his retirement account, he has not shown that he was disabled at the time of the withdrawal. The court stated that this argument ignores the evidence, including the testimony of petitioners, and the fact that the SSA based its disability determination on facts that Mr. Dart submitted in April 2005. The court held that Mr. Dart was disabled within one of the exceptions, and that petitioners are not liable for the 10% additional tax under section 72(t).
Dart v. C.I.R., T.C. Summ.Op. 2008-158, 2008 WL 5233290 (U.S. Tax Ct. 2008)
Former police officer alleging discrimination under the American’s with Disabilities Act must provide evidence of the discrimination. Further, a governmental entity may not be estopped as they are not subject to the rules of estoppel when performing a governmental function. An equal protection claim cannot be established by merely stating that the government could find a better means of achieving its purpose.
A former police officer began contributing to the Ohio Police and Fire Pension Fund (“OPFPF”), and less than a year later, he suffered severe injuries while in the line of duty and was no longer able to work as a full-time police officer. As a result of those injuries, the officer applied for and began to receive a maximum partial disability retirement benefit from OPFPF. As a public employee, the officer was required to contribute to OPERS. At the time he began making these contributions, the officer was considered an “other system retirant” as defined by the pension code. As an “other system retirant,” his contributions went into a money purchase annuity account with OPERS. Throughout his employment, the Gahanna police department also made employer contributions to OPERS on his behalf. The officer voluntarily resigned at age 38 from his position as a dispatcher for the Gahanna police department due to his disabilities. OPERS informed him prior to his resignation that he would be ineligible to receive the matching portion of his employer’s contributions until he attained the age of 65. The officer later applied for and received a lump-sum distribution of his contributions to OPERS with interest, but he was denied payment of the employer contributions. At the time of his application for payment, the officer had not yet reached the age of 65. After receiving this distribution, the officer filed a charge of disability discrimination against OPERS with the United States Equal Employment Opportunity Commission. The officer asserted claims Title I and Title II of the ADA. The officer claimed that as the result of a devastating knee injury that occurred while in pursuit of a criminal, he could no longer perform the duties of a police officer; he has had to undergo multiple surgeries on his knee and continues to have difficulty walking, standing, lifting, and bending. With reasonable accommodations afforded him by the Gahanna police department, the officer stated that he was able to work as a dispatcher until his PTSD made it impossible for him to continue. The court stated if the officer’s claims were supported by any of the evidentiary materials, that would satisfy his burden as to the first element of a prima facie case of disability discrimination, however, he did not submit any evidence that he was disabled for purposes of the ADA. The court stated that the officer could not merely rely on the allegations set forth in his complaint and memoranda, but he must respond with affidavits or other evidence to set out facts demonstrating a genuine issue for trial. By failing to respond in this manner as to an element for which he bears the burden of proof at trial, the officer risked the entry of summary judgment in favor of OPERS on his claim under the ADA. Next the officer argued that since OPERS did not inform him at the time he was hired by the Gahanna police department that he would be considered an “other system retirant,” OPERS should be equitably estopped from denying his eligibility for a lump-sum payment of his employer’s contributions. The court stated that as a general rule, a state or its agencies are not bound by the doctrine of equitable estoppel in exercising a governmental function. Since OPERS was exercising a governmental function when it determined that the officer was eligible for a lump-sum payment of only his contributions plus interest. Accordingly, the court held that the officer could not invoke equitable estoppel particularly where, as here, OPERS made no representations to induce him to accept employment with the Gahanna police department. The court also held that the officer failed to establish a claim under the Rehabilitation Act of 1973 in the same way he failed to establish a claim under the ADEA. The officer did not submit any evidence. The court also held that the officer’s equal protection claim failed. The officer had the burden of negating all conceivable justifications for the fact that he, as a disabled employee, was allegedly treated less favorably under the laws governing OPERS than other non-disabled public employees who had fewer years of service, but who may have attained the age of 65. OPERS had no obligation to come forward with evidence to uphold the rationality of its statutory scheme. The officer failed to sustain his burden as it is insufficient as a matter of law simply to say that the State of Ohio could find a better means of achieving its purpose.
Evans v. Ohio Public Employee Retirement System, 2008 WL 4849119 (S.D. Ohio 2008).
The plain language of Florida law permits a corporation to be a beneficiary of a pay-on-death account because the definition of the term “person” includes corporations.
A deceased left two sons as his only heirs-at-law, leaving two bank accounts: an individually held account in the name of the decedent only, and a pay-on-death account in the name of the decedent. The accounts were held “In Trust for The Salvation Army.” The deceased’s estate notified The Salvation Army of its intention to have the beneficiary designation of “The Salvation Army” in the pay-on-death account declared invalid on the basis that only a natural person may be the beneficiary of such an account. The estate also proposed a resolution of the issue, offering a 50-50 split of the funds, prior to instituting a formal lawsuit. The Salvation Army indicated that its Board of Trustees would take the proposal under consideration at its next meeting. However, without notifying the estate, the trustees passed a resolution authorizing The Salvation Army to present a death certificate to the bank and retrieve the funds, and it presented the death certificate to the bank and retrieved the sums held in both the individual account and the pay-on-death account. The estate received a monthly bank statement from the bank indicating that both accounts had been depleted and the funds disbursed to The Salvation Army. The estate then brought suit to recover the funds alleging unjust enrichment and conversion as to the funds in both accounts. Since the term “person” is not defined within section describing pay-on-death accounts, the court turns to any related statutory provisions that define the word “person.” The Florida Statutes, in another section, defines the word “person” as individuals, children, firms, associations, joint adventures, partnerships, estates, trusts, business trusts, syndicates, fiduciaries, corporations, and all other groups or combinations. The estate argued that there is an ambiguity which would not permit the application of the definition of “person” to pay-on-death accounts. The ambiguity, as explained by the estate, is that the legislature repeatedly uses terms throughout the statute referring to conditions normally attributed only to natural persons. However, the court disagreed stating that the statute at issue contemplates that some beneficiaries of pay-on-death accounts will be natural persons. The court stated the legislature did not intend to exclude corporations from being beneficiaries of a pay-on-death account as statutes may address circumstances that apply to natural persons without implicitly excluding non-natural persons. The estate then argued that the Florida Legislature defined “person” to include corporations in section 711.501, but did not define “person” in the pay-on-death account section, meaning that the legislature intended either to exclude corporations from the definition of “person”, or to limit the definition of “person” to natural persons only. The court stated that there is no limitation on the term “person” in the pay-on-death account section indicating that the legislature was not relying on Florida’s general definition of “person”. The estate also argued that the term “beneficiary” in the context of the pay-on-death account section must refer to natural persons only since the common law doctrine regarding Totten trusts has always referred to bank accounts that are set up in trust for individuals, not corporations. However, the Florida legislature formally repealed this view of Totten trusts in 1991, and the court concluded that pay-on-death accounts are not limited to natural persons only.
Belanger v. Salvation Army, ____F.3d ____, 2009 WL 223884 (11th Cir. 2009)
The court recognized that a former wife, from a quasi-marital relationship, had interest in an ERISA pension benefit even though there was no legal marriage because she met the definition of an alternate payee, or a dependent.
A couple lived together as husband and wife for more than 30 years in a quasi-marital relationship in the State of Washington. The couple was never legally married, but they raised two sons together, bought a home together, held themselves out to be a married couple, and even filed joint tax returns where they listed each other as husband and wife. During their relationship, they jointly acquired real property and other assets. The husband also acquired an interest in an ERISA plan. The husband and wife later separated, sold their house, and settled other debts. The former wife filed a petition for equitable distribution of the property rights acquired during their relationship, claiming that she was entitled to half of the husband’s monthly pension benefits. The former husband and wife participated in an arbitration hearing and the arbitrator issued an order in favor of the former wife, stating that the former wife was entitled to half of the former husband’s monthly benefit payments based on their quasi-marital relationship. The ERISA plan notified the former wife that the order was not a Qualified Domestic Relations Order (“QDRO”), and they refused to pay the former wife her share of the pension benefits, and she filed a petition for a declaratory judgment. The court held that pension benefits can be assigned under a QDRO as an exception to the ERISA prohibition on the assignment of pension benefits. A court order can only be a QDRO if it creates or recognizes the existence of the right of an alternate payee to receive benefits with respect to a plan participant. Further, a QDRO must relate to the provision of child support, alimony, or marital property rights to a spouse, former spouse, or other dependent of a participant. Since ERISA does not explicitly define the term “marital property rights,” the QDRO must be made pursuant to state domestic relations laws. The State of Washington does not recognize common law marriage, but Washington courts recognize quasi-marital relationships for purposes of property division. A quasi-marital relationship is a stable, marital-like relationship where both parties cohabit with the knowledge that a lawful marriage between them does not exist. Washington law provides for the distribution of property following a quasi-marital relationship as if the property would have been characterized as community property had the parties been married. Since the former husband’s interest in the ERISA plan would have been community property, it was subject to division after termination of the quasi-marital relationship. However, the ERISA plan contended that the former wife was not an alternative payee because she was not the spouse, former spouse, or other dependent. The former wife argued that she was an alternate payee because they filed jointly on their tax returns, she was listed as the former husband’s wife and beneficiary on his life insurance application, and she pointed out her undisputed financial dependence on the former husband during their 30-year relationship. The court noted that the former wife lived together with the former husband in a quasi-marital relationship for more than 30 years, she was a homemaker who devoted her time to caring for her husband and raising their two boys, and the former husband served as the household’s primary wage earner. The court held that the Order satisfied both requirements for a valid QDRO because it related to marital property rights, and the former wife qualified as an alternate payee because she was clearly a “dependent” as defined by the Tax Code.
Owens v. Automotive Machinists Pension Trust, 551 F.3d 1138 (9th Cir. 2009)
The period for filing an EEOC charge begins when the discrete act of discrimination occurs; a new charge period does not begin each time subsequent nondiscriminatory acts occur that result in adverse effects from the past discrimination.
The El Paso Corporation (“El Paso”) converted its defined benefit pension plan, that was based on a final average pay formula, to a plan based on a cash balance formula. Under the old plan, the amount of a retiree’s monthly pension was based upon their years of credited service and a final average of salary. Under the new plan, the amount is based upon credits the employees accumulate throughout their years of service. During a transition period between January 1, 1997, and December 31, 2001, participating employees accrued benefits under both the new and old plans, and retiring employees could elect whichever option benefitted them the most. Once this transition period expired, retirees could still choose either option, but the old plan was “frozen” at whatever benefits the employee had earned as of December 31, 2001, and benefits would continue to accrue under the new cash balance formula. A retiree alleged that El Paso set the initial cash balance accounts for older employees at levels significantly below the value of their accumulated annuities under the old plan. One effect of the transition was that overall benefits did not grow until the cash balance benefits caught up to and exceeded the “frozen” benefits due under the old formula, referred to as a “wear away.” Participants were notified of the changes to the plan by way of a letter and brochure, which informed participants that the amendments to the plan would take effect January 1, 1997. A retiree filed a charge of discrimination with the EEOC on July 16, 2004. The retiree’s claim for relief was based on the allegation that the freezing of old plan accruals discriminated against older workers in violation of the Age Discrimination in Employment Act (“ADEA”). El Paso argued that the retiree did not file a discrimination charge with the Equal Employment Opportunity Commission (“EEOC”), a requirement for making an ADEA claim, and therefore his claim was untimely. El Paso argued that a timely administrative charge is a prerequisite to an ADEA action, and must be filed within 300 days of the date that the discriminatory practice occurred. The retiree’s charge of age discrimination was filed on July 16, 2004; he also filled out an intake questionnaire on June 16, 2004. Giving the retiree the benefit of the earliest possible filing date, June 16, 2004, his charge would have to encompass discriminatory conduct occurring in the previous 300 days, or after August 20, 2003. El Paso argued that all the relevant alleged discriminatory acts occurred, and were known by the retiree long before this date, and that the ADEA claim is time-barred. The retiree argued that the cash balance conversion was a pattern and practice of age discrimination, which occurred each time benefits were calculated. However, the court stated that the period for filing an EEOC charge begins when the discrete act of discrimination occurs; a new violation does not occur, and a new charge period does not begin each time subsequent nondiscriminatory acts occur that result in adverse effects form the past discrimination. The court found that the cash balance conversion was the discrete act, and not a continuing discriminatory pattern and practice, which occurred more than 300 days prior to the filing of the claim.
Tomlinson v. El Paso Corp., 2009 WL 151532 (D.Colo. 2009)
Congress intended that ERISA and ADEA be read together in a consistent manner and to have an identical meaning. No interpretation should construe these provisions differently.
The United Way Corporation maintained a traditional defined benefit pension plan for its employees. Due to concerns about the defined benefit plan’s under funding, the United Way decided to convert its plan into a cash balance plan. Under the cash balance plan, each participant’s accrued benefit was converted into a cash balance account, which was then increased by the interest credits and contribution credits. For participants in the previous defined benefit plan, the cash balance plan provided that their accrued benefits would become the opening balance in their new cash balance account, thus leaving all of the participants’ benefits unaffected with respect to the amount of their benefits in the defined benefit plan. A participant filed a charge of discrimination with the EEOC. The participant alleged that the United Way discriminated against him because of his age. The participant argued that the cash balance plan did not reduce costs and investment risks with respect to the assets, and that the plan had a larger negative impact on older employees, specifically alleging that the cash balance plan was used by United Way to pay down the retirement fund’s deficit instead of increasing retirement income. United Way responded arguing that every circuit court that considered similar challenges has held that cash balance accounts are not discrimination per se, and has upheld these plans as being permissible under the ADEA and ERISA, and the court agreed. The United Way argued that the participant could not recover under age discrimination because once the cash balance account was found not to have violated ERISA, it could not violate the ADEA. The court stated that Congress, in enacting the ERISA and ADEA provisions, intended that they be consistent and have an identical meaning. The court noted that the district courts have interpreted these provisions as precluding recovery under ADEA if a litigant’s ERISA claim is unsuccessful. The court stated that the participant cannot recover under ERISA, and it therefore follows that he may not recover under the ADEA; a contrary holding would render ERISA meaningless.
Rosenblatt v. United Way of Greater Houston, 2008 WL 5396291 (SD Tex. 2008)
An attorney seeking fees asserted that the common fund doctrine permitted an injunction against an ERISA plan administrator’s ability to pay pension benefits. However, the court held that the common fund doctrine is insufficient to avoid the anti-alienation provision of ERISA.
The Kodak Retirement Income Plan (“the Plan”), appealed from the decision that granted a preliminary injunction in favor of Kickham Hanley P.C. (“Kickham”) that prevented the Plan from making pension benefit payments to plan participants unless they place 15% of the payments in escrow pending adjudication of Kickham’s entitlement to an attorney’s fee award from these benefits. Kickham sought fees from the affected plan participants under the equitable “common fund” doctrine. In asserting a claim directly against the plan participants’ vested, but undistributed pension benefits, Kickham could not avoid ERISA’s anti-alienation provision. ERISA’s anti-alienation provision mandates that each pension plan must provide that plan benefits may not be assigned or alienated. The Supreme Court has indicated that this provision erects a general bar to the garnishment of pension benefits from plans covered by the Act. The principal rationale behind ERISA’s anti-alienation provision is the prohibition of involuntary levies by third party creditors on vested plan benefits. This prohibition supports Congress’s primary objective of ensuring through ERISA that, if a worker has been promised a defined pension benefit upon retirement, and if he has fulfilled whatever conditions are required to obtain a vested benefit, the worker receives the promised benefit. Kickham attempted to avoid the anti-alienation provision by asserting that the common fund doctrine grants Kickham an interest in that portion of the Plan’s benefit funds that it allegedly helped to create or preserve and that, accordingly, the plan participants have no claim to Kickham’s part. Even assuming, arguendo, that Kickham accurately described the effects of the common fund doctrine, the court stated his purported interest in the funds is insufficient to negate the operation of ERISA’s anti-alienation provision. The Supreme Court stated that the anti-alienation provision reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners even if that decision prevents others from securing relief for the wrongs done them. The court stated that there was no meaningful distinction between the claim to undistributed pension funds that Kickham asserts and other claims indisputably barred by the anti-alienation provisions. Regardless of how Kickham describes the unique facts this case presented, the court held that Kickham cannot avoid the statutory protection ERISA extends to pension benefits while they are held by the plan administrator. The court concluded that Kickham’s claim to attorney’s fees drawn from undistributed vested pension benefits violates ERISA’s anti-alienation provision, and they reversed the decision of the district court.
Kickham Hanley P.C. v. Kodak Retirement Income Plan, ___ F.3d ___, 2009 WL 468266 (2nd Cir. 2009)
A waiver that meets the requirements of the OWBPA effectively waives all claims of age discrimination under the ADEA. The court also held that in order to avoid liability under the ADEA, an early retirement incentive must only be voluntary and consistent with the ADEA’s relevant purposes. The court further adopted the view of the Supreme Court in holding that a retirement plan may discriminate between members based on pension status as long as the pension status is not a proxy for age.
A City’s retirement plan provided a Deferred Retirement Option Program (“DROP”), where officers were eligible to enter into the DROP upon 20 years of service and reaching the age of 47. Upon becoming eligible, an officer remained eligible for DROP for 36 months. Although an officer was able to enter DROP any time during the 36 months following his or her first date of eligibility, the period of DROP participation was measured from the first date of eligibility. In other words, every month that an officer delayed entering DROP upon reaching eligibility was a month that the officer would not be eligible to participate in the DROP. If an officer waited 24 months after initial eligibility to enter DROP, he was only entitled to participate in DROP for 12 months. In order to enter into the DROP, officers were required to sign a waiver that released the City from all claims under the Age Discrimination in Employment Act (“ADEA”). The plan also provided a maximum accrual rate of 75%, which an officer may attain only after 27 years of credited service. Subsequently, the City amended the retirement plan (“2000 Agreement”), which provided that officers with 20 years of service are eligible for the DROP, regardless of age, and extended the eligibility from 36 months to 60 months. The 2000 Agreement changed the DROP so that time was deducted from the officer’s DROP participation upon the attainment of 20 years of service and 45 years of age. The 2000 Agreement also increased the maximum accrual rate to 81%, which an officer may attain after only 24 years of creditable service. A group of 14 officers brought suit claiming that the DROP was discriminatory under the ADEA claiming that the younger officers have an opportunity to attain the maximum pension accrual rate of 81%, and then enter the drop for a full 60 months, thereby accruing the full benefit under the DROP. The officers claim that the older officers face the choice of entering the DROP for a full 60 months, but with a reduced pension benefit accrual rate; or work long enough to attain the maximum pension rate of 81%, and then enrol in the DROP if the term of eligibility had not yet been exhausted. Under either scenario, the officers argue that older officers stand to lose a significant amount of money. The City responded by arguing that the officer’s signed a valid waiver and it was entitled to summary judgment. The Older Workers Benefit Protection Act (“OWBPA”) provides the courts with eight factors when considering the validity of a waver. These factors include: (1) the language must be calculated to be understood by the average police officer, (2) it must reference to the ADEA, (3) it must not attempt to waive prospective claims; claims arising after it is signed, (4) new consideration or benefits must be provided, (5) it must advise the signer to consult an attorney or a tax advisor before signing the document, (6) signer must be given 45 days to consider signing the document, (7) the signer must be given 7 days to revoke his consent to waive, and (8) the signer must be given proper notice of the any and all affected rights. The court found that the waiver signed by 13 of the officers satisfied all of these requirements, and that the officers effectively waived their claims against the City. For the remaining officer, who did not sign the waiver, the court found that the DROP was not discriminatory holding that an early retirement incentive must only be voluntary and consistent with the ADEA’s relevant purposes; a retirement plan may discriminate between members based on pension status as long as the pension status is not a proxy for age. The court found that the DROP adhered to the ADEA’s safe harbor provisions for early retirement provisions, and dismissed the remaining officer’s complaint.
Lerman v. City of Fort Lauderdale, 2008 WL 5378127 (S.D. Fla. 2008)
The Mandatory Victims Restitution Act supersedes anti-alienation provisions for public pension funds, and such benefits may be garnished by the federal government.
After their respective guilty pleas, the court rendered a restitution judgment against Decay and Barre in the amount of $1,064,662.15. This judgment was in the context of the Mandatory Victims Restitution Act (“MVRA”). In conjunction with this judgment, the government filed for and was granted writs of garnishment against the Louisiana Sheriff’s Pension and Relief Fund’s (“LSPRF”) in connection with property and/or monies believed to be due to Decay and Barre. The LSPRF’s answers to the garnishment interrogatories in the Decay garnishment indicate that Decay is not currently owed any amount by the LSPRF, but is eligible for retirement benefits as of 2010 or 2015 and is also entitled to request an immediate return of $77,898 worth of his employee contributions. The Government in these garnishment proceedings seeks only the $77,898 amount that Decay is entitled to request immediately. The LSPRF’S answers to the Barre garnishment interrogatories indicate a monthly benefit of $2464.72 payable to Barre. However, the LSPRF claims various exemptions from garnishment despite the outstanding judgments against Decay and Barre, and despite the LSPRF’s admitted retention of property belonging to the judgment debtors. The LSPRF argued that the Congress made a policy choice to safeguard a stream of income for pensioners even if the decision prevents others from securing relief for the wrong done to them, and that Decay and Barre’s benefits cannot be garnished. LSPRF also argued that Louisiana law only allows garnishment for child support payments. Because Decay does not receive any benefits, and is only entitled to request return of his contributions, there is no statutory grounds for garnishment in these circumstances. Further, and as to both Decay and Barre, there is no criminal restitution exception to the non-garnishment rule. Therefore, the LSPRF asserts that the present garnishment proceedings are improper. In addition, the LSPRF contends that the Louisiana Constitution governs these garnishment proceedings. First, as to both Decay and Barre, the LSPRF argues that under the Tenth Amendment of the United States Constitution, as well as under federal statutory and jurisprudential law, Louisiana retains broad police powers, which include the power to administer governmental retirement plans free of federal interference. The LSPRF argued that for the MVRA to supercede Louisiana’s Tenth Amendment powers to administer the LSPRF, the MVRA would have to clearly state its intention to overrule state law. However, the court stated that under the plain language of the MVRA, no state exemptions are applicable to an enforcement action arising from a restitution judgment. This conclusion has been reached by several courts that have addressed the question of whether the MVRA’s enforcement provisions preempt state law pension plan anti-alienability provisions. The plain language of the MVRA indicates that the only exemptions for the criminal debtor owing restitution are set out in the referenced provisions of 26 U.S.C. § 6334(a) of the Internal Revenue Service Code. More specifically the legislative history makes it clear that § 3613(a) was intended to provide a federal collection procedure independent of State laws. Therefore, under the plain language of the MVRA and the relevant jurisprudence, Decay and Barre’s pension benefits and/or contributions are not exempt from garnishment in connection with this Court’s restitution order.
U.S. v. De Cay, 2009 WL 36623 (E.D.La. 2009)
Florida Forfeiture Law Does Not Violate Federal Constitution.
The U.S. Court of Appeals for the 11th Circuit considered an appeal of a civil rights case brought by the officer in connection with a forfeiture. The officer sued the city and pension plans claiming that the failure of the pension funds to guarantee the appearance of certain FBI agents with whom the officer had cooperated at his pension forfeiture hearings, following his conviction for federal obstruction of justice charges, denied him due process of law. The officer also contended that suffering a forfeiture for his conviction after testifying against other officers violated his First Amendment rights. Lastly, the officer contended that the crime of conspiracy to deprive civil rights did not fall into the “catch-all” provisions of the Florida Statutes. In a unanimous opinion, the Court of Appeals rejected all of the arguments and upheld the dismissal of the civil rights claim. The lower court ruling that commencement of forfeiture proceedings was mandatory was upheld. Moreover, the Court held that the absence of the witnesses was the fault of the officer. Even if the witnesses had appeared, however, their testimony would not have changed the fact of the forfeiture.
Hames v. City of Miami, 2008 WL 2097659 (11th Cir. 2008)(unpublished)
Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”)
Once an individual reaches 70-½, the tax code requires such an individual to make minimum withdrawals from their retirement accounts called “required minimum distributions” (“RMDs”). The purpose of these RMDs are to make sure that retirement accounts and IRAs are used primarily for the owner’s retirement, and not as a tax-sheltered nest egg for the family. The IRS places a substantial penalty on the failure to make an RMD. On December 18, 2008, Congress passed an important pension and tax bill entitled Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”). Section 201 of the WRERA (IRC Section 401(a)(9)) provides relief for someone who is 70-½ or older who would otherwise have been required to take distribution from their retirement accounts. In essence, the WRERA waives required RMDs for the 2009 tax year. If this waiver was not granted, many individuals with retirement accounts would have been forced to sell assets, which most likely lost value, to make RMDs this year.
The WRERA has an impact on three distinct groups of people. The first is a group of older individuals who are retirement plan and traditional IRA owners. RMDs begin once an individual attains the age of 70-½, and these distributions are made following an IRS schedule over your life or over the lives of you and the person you designate as a beneficiary of the retirement account. For example, if a 74-year old rolled over his 401(k) account into an IRA account, he would have to make an RMD of 4.2% of the balance for 2008, whether or not the retiree needs the money, or pay a substantial penalty to the IRS. WRERA allows this retiree to skip the RMD for 2009 without penalty. However, WRERA does not allow a retiree to waive a 2008 RMD that was deferred until April 1, 2009. This means that if a retiree did not take an RMD in 2008 and deferred this RMD until April 1, 2009, he is still required to take an RMD for 2008.
The second group that is affected by WRERA is beneficiaries of a retirement plan account or an IRA. If a person dies before exhausting the funds in the employer retirement plan or IRA, the balance may be left to an individual designated as a beneficiary. This beneficiary (or beneficiaries) is also subject to the RMD. Suppose a retiree was 74 when he died, and he left a balance in his retirement account. The beneficiary(ies) must still take out a RMD or pay a penalty to the IRS. WRERA waives this requirement for the 2009 tax year.
Beneficiaries of Roth IRA’s is the third group that is affected. The owners of Roth IRA’s are not affected because they do not have to make RMDs from this type of account. However, the beneficiaries of Roth IRA’s must take RMDs after the account owner dies. WRERA also waives the RMD requirement for 2009.
2009 IRS Work Plan
The IRS’ Employee Plans Division released a 2009 Work Plan detailing its operating priorities. The second item on the list of priorities was to “raise awareness in the governmental plan sector through education/outreach, voluntary compliance and enforcement efforts of the need to comply with tax qualification requirements.”
The Director of Employee Plans (“Director”) met with NASRA and NCTR members at the Federal Legislative Workshop on July 26th 2008. The Director along with EP Senior Technical Advisor (“Advisor”) outlined the strategies that would be employed, including the release of a questionnaire to 25 governmental plans and it posted it on the IRS’ website for public comment. The Director and the Advisor both made assurances that the pilot questionnaire would reflect input received from the governmental plan community and they would take into account additional comments before sending a final questionnaire to roughly 200 governmental plans. They said that the responses to the questionnaire would be summarized and published in a report outlining areas where they felt more focused education, guidance and outreach is needed.
NASRA and NCTR representatives have offered to lend assistance on development of a governmental plans compliance manual. The Director urged the completion of such a manual as a prerequisite to any enforcement actions.
The Work Plan also noted the following goals:
- Publication of guidance relating to the definition of a “governmental plan” for both traditional governments and Indian Tribal Governments followed by a series of town hall meetings at numerous sites throughout the United States, as well as follow-up guidance on Notice 2007-69 relating to the definition of normal retirement age.
- Continued development of a dedicated website to governmental plans, including FAQs, articles in TE/GE and EP newsletters, a dedicated email address for governmental plan questions, videos and other educational resources. Additional communication and educational materials will be designed, as appropriate.
- Continued outreach to the governmental plan community through presentations at meetings of national trade associations and other organizations that represent them, development of another IRS Governmental Plans Roundtable, and other web-based communication alternatives.
- Development and delivery of an internal educational program for tax law specialists and revenue agents to provide assistance in working with the governmental plan community when these plans use EP compliance programs (e.g., the determination letter program or the voluntary compliance program).
New Wage Withholding and Advanced Earned Income Credit
The American Recovery and Reinvestment Act of 2009 required the development of new income tax withholding percentage and wage bracket method tables. The IRS asked employers to use these new tables in lieu of the applicable previously published tables as soon as possible. The new tables reflect the Making Work Pay Credit and other changes resulting from the American Recovery and Reinvestment Act of 2009. As a result, the new withholding tables may reduce the amount of tax withheld from an employee’s wages. Employee’s do not have to submit any forms as the changes are automatic.
The IRS has confirmed that pension plans must use these new withholding tables for pension distributions, and therefore a retired member in pay status may receive higher pension distributions. However, the IRS stated that pension plan distributions are not earned income for the purposes of the Making Work Pay Credit. Since pension distributions would not qualify for the Making Work Pay Credit, and the new withholding tables would automatically increase a retiree’s distribution amount, a retiree may incur an increased tax liability. The IRS requires employers to provide the form Notice to Employees. The IRS has not decided whether a pension plan must issue this form to its members. A suggestion has been made that a revised version of the Notice to Employees be compiled in order to prevent retirees from incurring additional tax liabilities. Pension recipients may not want to have their withholdings reduced and they may submit a new Form W-4 to their pension administrator.
IRS ISSUES MUCH AWAITED PUBLIC PLAN SURVEY QUESTIONNAIRE
In February, 2009 the IRS issued a 65 question information request to 25 state and local government plans as part of its increased scrutiny of the public retirement programs. This pilot program also solicits public comment on the questionnaire.
The purported reason for the increased attention is the stated belief of the IRS that it failed to give enough attention to public plans to the detriment of the covered members. As the IRS points out in the preface to the questionnaire, failure to comply with qualification rules has an adverse impact only on the participants, who lose the advantage of rollovers, deferred taxation on contributions, etc. State and local governments are already tax exempt and do not have the same incentive as private businesses which seek to deduct employer costs from taxable income.
One of the biggest problems in dealing with the IRS has been the disconnect over what constitutes the “plan document.” In private sector plans, there is a customary trust agreement setting forth all of the plan benefits. Government plans, however, are a combination of constitutional, statutory, and administrative enactments and rarely are embodied in a single document.
The IRS also seems ignorant of the many state laws regulating pension funding and fiduciary standards on an even stricter standard than ERISA. In addition, the concept of a constitutionally guaranteed benefit is also lost on the service.
In the questionnaire itself, the IRS asks for a detailed description of plan benefits, vesting, and benefit accruals. It is uncertain why this information is being requested. Firstly, the Bureau of the Census already maintains the same information. Secondly, the IRS has no regulatory authority over benefits. Here are several federal appeals court decisions noting that Congress has no authority to regulate state and local plan benefits (and similarly, neither does the IRS).
The IRS also asked about early retirement programs. This gives rise to concern about the information being shared with the EEOC which has taken a very aggressive and hostile stance vis-a-vis public plans on age-related issues. A number of early retirement programs have been struck down on the basis of age discrimination.
There are also questions relating to the purchase of service credits (air-time), COLA’s and DROP plans, all of which have been areas of sensitivity. The IRS, surprisingly, also asked a significant number of questions about plan administration, conflicts of interest and benefit formulas. None of these are really subject to IRS control (beyond the exclusive benefits rule, and maximum earning/benefit provisions). The rationale for the questions is not clearly explained. See http://www.irs.gov/retirement/article/0,,id=204168,00.html.
IF YOU HAVE ANY QUESTIONS OR COMMENTS CONCERNING THIS PRESENTATION, CONTACT KLAUSNER & KAUFMAN, P.A., 10059 NW 1ST COURT, PLANTATION, FLORIDA 33324, (954) 916-1202, FAX (954) 916-1232, WEBSITE, www.robertdklausner.com.