DOL Issues Revised Investment Advice Regulation

The DOL has announced two new rules to improve retirement security. As you may recall, the DOL announced final regulations in January 2009 in January 2009 before putting them on hold and ultimately withdrawing them in November 2009. One of the two new rules is a revised investment advice rule "limited to the implementation of the PPA statutory exemption relating to investment advice". Here is an overview of the proposed investment advice regulation:

Overview of Proposed Investment Advice Regulation

• After review, the Department decided to propose a revised rule limited to the implementation of the PPA statutory exemption relating to investment advice.
  
  
• The proposed regulation allows investment advice to be given under the statutory exemption in two ways. One is through the use of a computer model certified as unbiased. The other way is through an adviser compensated on a "level-fee" basis (i.e., fees do not vary based on investments selected by the participant).
  
  
• Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive. The regulation contains some key safeguards and conditions, including:
  
  
• Requiring that a plan fiduciary (independent of the investment adviser or its affiliates) select the computer model or fee leveling investment advice arrangement.
  
• Imposing recordkeeping requirements for investment advisers relying on the exemption for computer model or fee leveling advice arrangements.
  
• Requiring that computer models must be certified in advance as unbiased and meeting the exemption's requirements by an independent expert.
  
• Establishing qualifications and a selection process for the investment expert who must perform the above certification.
  
• Clarifying that the fee-leveling requirements do not permit investment advisers (including its employees) to receive compensation from affiliates on the basis of their recommendations.
  
• Establishing an annual audit of investment advice arrangements, including the requirement that the auditor be independent from the investment advice provider.
  
• Requiring disclosures by advisers to plan participants.

More Employee Engagement and Listening Ideas

We have recently discussed Creative Meeting Ideas and Using An Employee Committee to Informally Improve Communication. How to Make* Employees Listen explains that while you cannot force employees to listen, knowing your audience, setting an example, and trying to eliminate obstacles are three strategies to help you control your "communications team building culture" so that employees will decide to listen on their own. It also shares some engagement listening tools:

• Clearly communicate departmental objectives, and solicit input from your employees on what they can do to help achieve them.
  
  
  
• Ask employees for advice in areas where they have expertise.
  
  
  
• Create a committee of employees at different levels and areas of responsibility that has "New Ideas" in its title – and as its objective.
  
  
  
• Same as above, but with the title/objective of creating and implementing workplace team building activities.
  
  
• Implement "lunch & learns."
  
  
• If your firm is small enough – have your CEO conduct one-on-one career advancement meetings with those interested in a leadership role.
  
  
• "90 percent solution" – give employees 90% ownership in each project.
  
  
• Do 10-minute daily stand up meetings in departments.

Government – Get Involved! In Madison, Wisconsin

I will be the moderator of Government – Get Involved!, a panel presentation that will take a look at the current ESOP legislative environment. The session will be on Wednesday, March 3, as part of the Wisconsin Chapter Spring Conference and Awards Reception in Madison, Wisconsin:

Government – Get Involved!

This session will review current ESOP legislative and regulatory hot topics, the 2009 legislative efforts of Wisconsin ESOP Companies, and the 2010 plans for visiting congressional representatives in Washington D.C., as well as a discussion on how you and your company can help with ESOP advocacy.

Paul Karch from Godfrey & Kahn, Sherri McDermott from Sentry Equipment, and Sandy Paavola from Enterprise Services, Inc. will also be on the panel. In addition to gaining lots of valuable information, state chapter events offer a great opportunity to network with other ESOP companies and advisors. If you see me at the conference, I hope you will stop by and say hello. Please send me an email and let me know if you will be attending so I can look for you.

2009 RMD Withholding Rules

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) provided a waiver of the requirement to take Required Minimum Distributions (RMDs) for the 2009 plan year. The Retirement News for Employers – Winter 2010 Edition provides an example, noting that the first amounts distributed are RMDs from earlier years not yet distributed, followed by RMDs in the current year:

I am retired and I turned 70½ last year. I received a payment from my former employer's defined contribution (DC) plan on January 30, 2010. Can I roll over this payment?

Maybe. You may only roll over a payment from a DC plan if it is an eligible rollover distribution (ERD). Certain payments from qualified plans, such as required minimum distributions (RMDs) and substantially equal periodic payments (SEPPs), are not ERDs and, therefore, may not be rolled over.

Since you turned 70½ last year and are retired, under normal circumstances you would have had to receive an RMD for 2009 by April 1, 2010. However, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) waived 2009 RMDs from IRAs and most DC plans, such as profit-sharing, 401(k), 403(b) and governmental 457(b) plans. WRERA did not waive 2010 RMDs and, therefore, you must take a 2010 RMD based on your December 31, 2009, account balance by the end of 2010. To determine which payments from a plan during a calendar year are RMDs, Treasury Regulation §1.402(c)-2, Q&A-7 provides that the first amounts distributed are RMDs from earlier years not yet distributed, followed by RMDs for the current year, until the amount distributed equals RMDs due through the end of the current calendar year.

Applying this rule to your case, if the January 30 payment was the first payment you received from the plan in 2010, you must first apply the payment to the 2010 RMD (because, due to WRERA, there was no RMD for 2009). If the January 30 payment is more than your 2010 RMD, the excess may be rolled over, assuming it is not a SEPP.

Also note that ERDs are subject to mandatory 20% withholding, under Code §3405(c), on the amount includible in income if not rolled over in a trustee-to-trustee transfer.

Mandatory 20% Withholding Applies to 2009 RMDs Paid in 2010 notes that while all 2009 RMDs are eligible rollover distributions (ERDs), 2009 RMDs paid prior to January 1, 2010 are subject to the 10% optional withholding rules (per IRC Section 3405 - Special rules for pensions, annuities, and certain other deferred income) and 2009 RMDs paid in 2010 are subject to the mandatory 20% withholding rules (per IRC Section 3405 - Special rules for pensions, annuities, and certain other deferred income).

Mandatory 20% Withholding Applies to 2009 RMDs Paid in 2010

The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) permits participants in defined contribution plans to waive required minimum distributions (RMDs) for the 2009 plan year. Any recipient of a 2009 RMD can roll over that amount to an eligible retirement plan or an IRA. 2009 RMDs paid prior to January 1, 2010 were subject to optional withholding rules. However, RMDs paid between January 1, 2010 and April 1, 2010 are subject to the mandatory 20% federal income tax withholding that applies to eligible rollover distributions.

March 15 Employer Contribution Deadline (without extension)

The Retirement News for Employers – Winter 2010 Edition provides a reminder that the deadline to make ESOP contributions for a calendar-year filer is March 15. With a valid extension, that date can be extended until September 15:

Deadline for Making Employer Contributions

Employer contributions to a defined contribution (DC) plan can be made until the due date of the employer's tax return, including extensions, regardless of when the tax return is actually filed. For example, a calendar-year corporate income tax return is due on March 15, but, with a valid extension, the corporation has until September 15 to both file its tax return and deposit employer contributions into its DC plan's trust or IRA. If contributions are not deposited timely, the employer must amend its tax return and pay any tax, interest and penalties that may apply.

The employer's DC contributions for a year can be made until the extended due date of the tax return for that year if:

• the plan was established by the end of the calendar year; and
• the plan treats these contributions as though it had received them on the last day of the calendar year.

However, a SEP plan sponsor has until the due date of the year's income tax return, including extensions, to both set up and fund the SEP plan for the year.

It also provides some upcoming mandatory deadlines, noting that non-calendar-year plans will need to adjust some of the dates:

• March 1: Paper Forms 1099-R and Form 1096 for 2009 distributions due to IRS. Benefit Payment Government Filings (IRS Forms 1099-R, 1096, 945)
  
• March 15: Application of Waiver for 2009 Minimum Funding Standard for defined benefit plans due.
  
• March 15: ADP/ACP distributions of 2009 excess amounts, with earnings, due to highly compensated participants to avoid 10% excise tax (June 30, in the case of certain eligible automatic contribution arrangements.)
  
• March 15: Form 1042S, Foreign Person's U.S. Source Income Subject to Withholding, and Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, due to IRS to report retirement plan distributions and income tax withheld from distributions made to nonresident aliens.
  
• March 15: 2009 corporate employer contributions due to take tax deduction (with no corporate filing extension).
  
• March 31: Electronic filing of Forms 1099-R for 2009 distributions due to IRS. Benefit Payment Government Filings (IRS Forms 1099-R, 1096, 945)
  
• March 31: Last day for sponsors of single employer defined benefit plans to obtain AFTAP certification from enrolled actuary to avoid possible 10-percentage-point decrease in presumed AFTAP.
  
• April 1: Sponsors of single employer defined benefit plans that have not received a certified AFTAP from the enrolled actuary should review benefit restrictions under Code §436 to determine whether additional restrictions apply or whether other action is required.
  
• April 15: Deadline for returning 2009 participant deferrals, with earnings, in excess of $16,500 ($22,000, if 50 or older).
  
• April 15: Deadline to make 2009 traditional and Roth IRA contributions.
  
• April 15: First quarterly defined benefit contribution installment due for the 2010 plan year.
  
• April 15: 2009 self-employed individual and partnership contributions due to take tax deduction for 2009 (with no filing extension).
  
• April 30: Last day to adopt EGTRRA pre-approved defined contribution plans, and submit them for a determination letter, if desired, to the IRS.

Positive ESOP Legislation and Remaining Vigilant

There has been a lot of positive ESOP legislation introduced in the 111th United States Congress:

• S. 2914: United States Employee Ownership Bank Act
  
• S. 2909: WORK Act
  
• H. Con. Res. 204: Expressing continued support for employee stock ownership plans
  
• H.R. 3586: S Corporation ESOP Promotion and Expansion Act of 2009
  
• S. 1612: Employee Stock Ownership Plan Promotion and Improvement Act of 2009
  
• H.R. 692: To amend the Internal Revenue Code of 1986 to exclude from gross income compensation received by employees consisting of qualified distributions of employer stock

While the ESOP community certainly deserves to be proud of their hard work in Meeting with their Congressional Representatives and Visiting with their Elected Representatives in Washington DC, everyone should continue to be aware of some of the recent proposed ESOP cuts:

• The Bush Administration Presidential Panel on Federal Tax Reform proposed replacing the current retirement plan structure with Employee Retirement Savings Accounts (ERSAs). The original proposal did not specifically address ESOPs. The proposed 2008 version clarified that it did not include ESOPs, but many questions were unanswered. (February 2007).
  
• The Congressional Budget Office (CBO) recommended Repealing 404(k). (February 2007)
  
• A Treasury Conference on Business Taxation and Global Competitiveness proposed reducing the corporate tax rate by eliminating "tax loopholes". One of the "special provisions" mentioned is "Special ESOP Rules". (July 2007)
  
• President Bush considered a fresh plan to cut the corporate tax rate that would eliminate the above-mentioned "tax loopholes". (August 2007)
  
• Rangel's Corporate Tax Proposal proposed cutting the corporate tax rate by eliminating "tax loopholes". Like the July Treasury Department report, Rangel's tax proposal eliminated "Special ESOP Rules" and included a provision that would create an additional income tax on synthetic equity and negatively impact many S Corporation ESOPs. (October 2007)
  
• President Obama asked Paul Volcker to Lead a Panel on Tax-Code Overhaul by December 2009. It is possible that they will return with solutions to increase taxes by eliminating "tax loopholes", including the ESOP rules that have already been suggested. (March 2009)
  
• The Congressional Budget Office (CBO) again recommended repealing 404(k): CBO Option 22: End the Preferential Treatment of Dividends Paid on Stock Held in Employee Stock Ownership Plans (August 2009)
  
• White House Tax Panel Stays Out Of Public Eye noted that the task force has held no public meetings and has not revealed whom the panel has met with in private. (September 2009)
  
• Obama Picks Simpson, Bowles for Panel on Cutting the Deficit discusses how President Obama has signed an executive order creating a commission focused on reducing the federal debt. (February 2010)
  
• Uncertain future for Obama's tax reform panel discusses how the tax reform panel may be folded into the fiscal commission review. (February 2010)

Although many of the proposals have expired, Obama's tax reform panel (or its successor panel or commission) may utilize some or all of the "tax loopholes" identified above to "fund" their proposed tax changes. This is why it is essential that the ESOP community continue to find as many ESOP Allies in Congress as possible.

In related coverage, we have recently discussed how Capital Gains Rates will be increasing in 2010 and a Proposal to Repeal ESOPs.

National ESOP Coverage: Bob’s Red Mill Natural Foods

Although the ABC News coverage doesn't specifically mention the ESOP, Owner of Multi-Million Dollar Company Hands Over Business to Employees celebrates the fact that Bob Moore has sold Bob's Red Mill Natural Foods to his employees via an ESOP:

Employee-Run Business

Moore's work is a way of life and his employees are a second family, which is why he announced this week that he's handing over the keys to his 209 employees.

Moore said he's gotten countless buy-out offers over the years, but he couldn't envision selling the business to a stranger.

"It's the only business decision that I could make," he said. "I don't think there's anybody worthy to run this company but the people who built it. I have employees with me right now that have been with me for 30 years. They just were committed to staying with me now and they're going to own the company."

The company will now be run by an Employee Stock Ownership Plan (ESOP) -- the idea being that a company's stock is put in a retirement plan for its employees, but the stock is never held or bought directly by individuals. When a vested employee retires, he can pull out money from the trust.

On 81st birthday, Oregon man gives company to employees discusses how selling to an ESOP enables business owner(s) to have more control over the future of their company and reward the employees that helped build and grow it:

"This is Bob taking care of us," said Lori Sobelson, who helps run the business' retail operation. "He expects a lot out of us, but really gives us the world in return."

Moore declined to say how much he thinks the company is worth. In 2004, however, one business publication estimated that year's revenue at more than $24 million. A company news release issued this week stated that Bob's Red Mill has chalked up an annual growth rate of between 20 percent and 30 percent every year since.

"In some ways I had a choice," Moore said of what he could have done with the company he founded with his wife, Charlee, in 1978. "But in my heart, I didn't. These people are far too good at their jobs for me to just sell it."

It's not that the offers aren't there. Hardly a day goes by that Nancy Garner, Moore's executive assistant, doesn't field a call or letter from someone wanting to buy the privately held company or take it public.

"I had four messages waiting when I returned from a recent vacation," she said. "Three of them were buyout offers." Garner said she and other employees are floored by Moore's plan, under which any worker with at least three years tenure is now fully vested.

"We're still learning all of the details," Garner said, "but it's very humbling to be part of a company that cares this much about its employees."

Hat tips to Bill and Todd.

For more information on the benefits of ESOPs, read our discussions on how ESOPs Increase Employee Wealth and Wages and Provide Greater Employment Stability and Increase Job Satisfaction. We have also discussed how the tax benefits of selling to an ESOP will become more attractive with the upcoming 69% Increase in Capital Gains Rates.

Nestlé Purina Petcare Co. v. Commissioner of Internal Revenue, No. 09-1381 (8th Cir. 2010)

We have previously discussed how the IRS Will Continue to Litigate Deductible Redemptive Dividends and some related cases. In Nestlé Purina Petcare Co. v. Commissioner of Internal Revenue, No. 09-1381 (8th Cir. 2010), the U.S. Court of Appeals for the Eighth Circuit affirmed the Tax Court's ruling (Ralston Purina Co. v. Commissioner, 131 T.C. No. 4 (September 10, 2008)) that found that IRC Section 162(k) renders payments to an ESOP that were distributed to terminated participants nondeductible under IRC Section 404(k) because they are in connection with a redemption of stock.

For a history of Deductible Redemptive Dividends Litigation and discussions on how the courts originally allowed a company to use redemptive dividends to make distribution payments in Boise Cascade Corp. v. U.S. (9th Cir., No. 01-36086, 5/20/03) and General Mills v. United States, No. 06-3547 (D. Minn. 1/14/08), see Deductible Redemptive Dividends Used to Fund ESOP Distributions.

The Keeper of the Company Culture: The CEO

One of the themes in a recent The Ownership Culture Check-Up presentation was the importance of upper management's commitment to building a strong ownership culture. That commitment starts with the President and CEO. The CEO as Keeper of the Culture discusses the importance of strong leadership in developing and maintaining a strong ownership culture. By modeling and recognizing desired behaviors, the CEO of American Fidelity Assurance set the stage for a strong culture:

American Fidelity Assurance has built a strong culture of fairness and respect that looks to Bill, as the CEO, as an example for behavior and values. With a high degree of accountability for upholding the company values and a goal of maintaining people's confidence in the organization as a whole, Bill is well aware of his role in the culture of the organization and takes personal responsibility for upholding the culture already in place.

The CEO, a third generation leader, affects the culture via company security and fair practices:

When considering how a CEO's behavior can affect the culture of an entire organization and its success, Bill approaches the issue in two areas: company security and fair practices. He cites the positive, upbeat culture at American Fidelity as the source of people's confidence that the company is stable, especially since the company is privately held. Bill added, "I think when people can have a comfortable feeling about their jobs, it gives them the ability to focus on what they're doing as opposed to focusing on what their future looks like."

The article also discusses the company's five values ("AFs") of "always fair,... always flexible, future-oriented, focused on niche markets, and financially secure," and how they live out their AFs during their decision making process:

These values came into place 15 years ago after a process where the senior management team came together to conclude what American Fidelity was all about. Bill takes responsibility to adhere to these values – especially in decision making – even if it can be "uncomfortable," as he puts it. For him, there is no gap between corporate values and personal values: "It's important that the values you hold for yourself really are your values and not just something you are trying to do that's not real."

We previously discussed the importance of the Relationship Between the CEO and Human Resources in building, improving, and sustaining a strong company culture.

The Ownership Culture Check-Up at the Chicago Marriott Oak Brook Hotel

I will be presenting The Ownership Culture Check-Up on Thursday, March 4 at the Chicago Marriott Oak Brook Hotel as part of the Illinois ESOP Chapter Annual Conference: The Past, Present and Future of ESOP's:

THE OWNERSHIP CULTURE CHECK-UP

How does your ownership culture rate? Whether you are just starting to build an ownership culture or you have an ESOP communications committee and a fully engaged team, this session will evaluate and measure where you are at and identify action items to take your ownership culture to the next level.

Tony Lessmeister from Forsythe Technologies will also be presenting as part of a one-day, three-track conference. In addition to gaining lots of valuable information, state chapter events offer a great opportunity to network with other ESOP companies and advisors. If you see me at the conference, I hope you will stop by and say hello. Please send me an email and let me know if you will be attending so I can look for you.

DOL’s Amicus Brief re: Citigroup ERISA Litigation

The February 15, 2010 Employee Ownership Update is online and discusses the following

• Obama Budget Tax Proposals Could Help ESOP Formation
• AMT Would Be Changed Under Obama Proposal
• Labor Secretary Hilda Solis Files Amicus Brief in Citicorp Case
• NCEO Board Elections

The Update discusses In re Citigroup ERISA Litigation, No. 07 Civ. 9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009) and the four key points of the DOL's Amicus Brief:

• Nothing in ERISA overrides the duty of fiduciaries to act prudently with regard to all investments. Even if company stock is mandated as an investment option or part of a plan's assets, the fiduciaries cannot be per se exempted from any prudence requirements at all.
  
• The plan here required that stock be held in the plan as an option, but did not require fiduciaries to buy it. If the stock was, as alleged, purchased at a price the fiduciaries knew was inflated given Citicorp's situation (knowledge they may have had that the public did not), then ERISA would be violated by their purchasing shares.
  
• The Moench presumption is an inappropriate standard. According to the brief: "As an initial matter, this Court, which has neither considered nor adopted Moench, ought not adopt any presumption of prudence with regard to investment in employer stock." The brief goes on to contend that plans can avoid the requirement for diversification under ERISA in properly drafted 401(k) plans or ESOPs, but they cannot rely on this to hold or buy company stock even when it is imprudent to do so. "Moreover," the brief went on, "whatever its utility in other situations, there is no rationale for applying the Moench presumption where, as here, the fiduciaries allegedly knew or should have known that the stock was artificially overpriced. It is always imprudent for ERISA fiduciaries to knowingly overpay for stock and they are not entitled to any contrary presumption." The language on "whatever its utility" in reference to Moench may seem to be taking a more measured stance, but the rest of the brief takes a tougher one.
  
• Fiduciaries should disclose information needed for participants to make intelligent decisions. Fiduciaries should "not hide behind their corporate roles to evade this duty with impunity and mislead participants."

Note that the brief concerns only the district court's dismissal of the plaintiff's case; it does not argue that the plaintiffs were right. The standards for dismissal are more stringent than for a final ruling. If the courts ultimately approve the district court's ruling, it would give fiduciaries far greater leeway to hold and buy company stock; if the DOL view prevails, existing standards would be considerably tightened.

The Update also explains how the Obama Budget Proposal that Increases Capital Gains Rates by 69% could make Section 1042 Sales more desirable, ultimately making ESOPs a more attractive business transition alternative. It also discusses how the budget would index the alternative minimum tax (AMT) for inflation, permanently fixing the annually recurring problem.

In re Citigroup ERISA Litigation, No. 07 Civ. 9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009)

Citigroup Cleared in ERISA Fiduciary Duty Breach Case discusses how a court found that Citigroup did not breach its ERISA fiduciary duties in In re Citigroup ERISA Litigation, No. 07 Civ. 9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009):

The U.S. District Court for the Southern District of New York recently determined that Citigroup did not breach its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering its stock as a retirement plan investment option while its stock was incurring major losses. In re Citigroup ERISA Litigation, No. 07 Civ. 9790, 2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009). In this case, Citigroup employees who purchased Citigroup stock as part of their 401(k) retirement plans filed suit, claiming that the plans' fiduciaries breached their duties by purchasing the stock while it was losing value. The court rejected the plaintiffs' claim, finding that the retirement plans "unequivocally" required that Citigroup stock be offered as an investment option. Thus, the defendants were actually not acting as fiduciaries regarding the investment in Citigroup stock because they had no discretion to remove the stock as an option under the plan. Additionally, the court noted that the plan's fiduciaries were not at fault, even though there were losses, because they "were adhering to the mandatory terms of a plan that was designed not to guarantee income but to encourage employee stock ownership."

Plan Language and Design Make All the Difference in In re Citigroup ERISA Litigation illustrates how the case provides a roadmap for ERISA fiduciaries to protect themselves from breach of fiduciary duty claims, emphasizing the following takeaways:

• Plan Language Is Key
  
• ESOP Designation Is Critical (Plan Language Required Investment in Company Stock)
  
• Role Delineation Is Vital (Court: ERISA Does Not Require Plan Fiduciaries to Report on Financial Condition)

Employer Stock Litigation Update: United States Department of Labor Urges Second Circuit Court of Appeals to Reject "Moench" Presumption of Prudence in the Citigroup ERISA Litigation discusses how DOL has filed Gray Amicus Brief, in support of appellant requesting reversal. It discusses the history of stock drop litigation:

Companies that sponsor ESOPs, 401(k) and other forms of eligible individual account plans ("EIAPs") often are subjected to class action lawsuits under ERISA when the company stock held by the plan drops in value. Since the 2001 collapse of Enron Corporation, more than 200 such "stock drop" lawsuits have been filed under ERISA on behalf of alleged classes of plan participants. Historically, many defendants decided to settle these lawsuits – often for tens of millions of dollars – rather than run the risk of a trial.

In recent years, however, the federal courts have shown an increased willingness to dismiss ERISA stock drop lawsuits at an early pre-trial stage. One of the key bases for dismissal is the so-called "Moench" presumption of prudence. That presumption (named after a 1995 decision issued by the Third Circuit Court of Appeals) treats a fiduciary's decision to continue offering the company stock investment as being consistent with ERISA, unless the plaintiff can show that the fiduciary knew at a pertinent time of an imminent corporate collapse or other dire situation. Where pleading and proof of that kind of knowledge is absent from the plaintiffs' complaint – which typically is the case for non-bankrupt plan sponsors that remain economically viable – the lawsuit may be thrown out well before trial.

The article also notes that it would be unfortunate if the Second Circuit discarded the Moench presumption and provides some observations on the DOL's arguments.

Employee Engagement in Tough Times

The Economy Is Bad, Change Everything—Wait, Let's Talk discusses the importance of employee engagement, especially in tough economic times, and addresses three employee engagement fallacies:

1. The New Word Is Human Capital—People Are Just Assets – Think of employees as "borrowed assets":
   
   Please think of your employee owners as "borrowed assets" who are lending you their time and talent in exchange for a job and the rewards that go with it—pay, benefits, security. It is a bargain that needs both parties participating and fulfilling their obligations. If we forget to hold up our side of the agreement, they will leave us for more lucrative offers.
   
2. We Don't Need to Worry About Engaging People—They Are Lucky to Be Employed – True employee engagement cannot be faked and those who offer ideas are often the most engaged employees.
   
   
3. Are People Motivated to Work Harder in the Bad Economy? Is Money Really the Best Motivator? – Employees are more motivated by doing what they find to be challenging and fun than by money.

The article stresses the importance of taking advantage of what has worked well and being slow to make changes to how you treat your employees:

So please be slow to make changes in how you interact with and treat employee owners. Bad times and good times wax and wane, but people still need good treatment, positive relationships, and opportunities for engagement in order to be good employees.

The Importance of ESOP Allies in Congress

Good Developments in Worrisome Times provides an ESOP legislative update, focusing on the ESOP champions in the The 111th United States Congress and discussing the importance of having ESOP allies in Congress:

While a member of Congress co-sponsoring a bill that a private sector group likes does not guarantee that the member will vote to protect the group's interest in a difficultly negotiated committee bill to raise taxes for example, it is evidence that he or she is more than likely to be an ally in the crunch. For example, let's assume that the Senate Finance Committee is to raise taxes by $150 billion, and the Administration has made 25 proposals to raise the taxes, and one is to cutback on an ESOP tax benefit. There will be among the 24 other proposals some tax benefits that are near and dear to the men and women who have co-sponsored Senator Lincoln's bill. Will they, behind closed doors, fight against the ESOP proposal, or will they stand aside on the ESOP proposal in order to protect something among the other 24 near and dear to their state's interests? One never knows ahead of time. But someone who has publicly declared for ESOPs by co-sponsoring a bill promoting ESOPs, is more likely to stand for ESOP behind closed doors than someone who has not publicly indicated support for ESOPs. This observation is true in the House as well, and is the key point of TEA's strategy that the best defense be a good offence in the legislative struggles.

So, why is all of these new and renewed support for pro-ESOP bills from members of Congress important? Well, back to the big picture—Congress and the Administration will soon be raising taxes to close the Federal deficit, as was the case in the 80s. And, as was the case in the 80s, cynics about ESOPs working in key staff positions for Congressional committees, and in key Federal agencies that regulate ESOPs, will propose cutting back, or eliminating ESOP tax incentives. So, crunch time may be around the corner, and the ESOP community will urge its publicly declared champions to stay the course for ESOPs.

It also provides a recap of the current ESOP legislation:

• S. 2914: United States Employee Ownership Bank Act
• S. 2909: WORK Act
• H. Con. Res. 204: Expressing continued support for employee stock ownership plans
• H.R. 3586: S Corporation ESOP Promotion and Expansion Act of 2009
• S. 1612: Employee Stock Ownership Plan Promotion and Improvement Act of 2009
• H.R. 692: To amend the Internal Revenue Code of 1986 to exclude from gross income compensation received by employees consisting of qualified distributions of employer stock

ERISA Insights for Internal Trustees

10 ERISA Insights for Employers shares some fiduciary insights from a recent ERISA litigation conference:

1. Make the most of the administrative claims appeal process
2. Coordinate and communicate with your third-party vendors
3. Create facts lessening the "conflict of interest" identified in the U.S. Supreme Court case Glenn v. MetLife
4. Educate the judge
5. Prepare for the "employer stock-drop case"
6. Be diligent in monitoring and evaluating plan fees
7. Be diligent in monitoring your plan's investments
8. Know whether you have the attorney-client privilege
9. Make sure your ERISA fiduciaries are covered by insurance
10. If hit with ERISA litigation, hire an ERISA litigator

The stock-drop litigation discussion is more geared towards having employer stock as a 401(k) investment. Some of the notable takeaways from the article include:

• "Demand that plan fiduciaries pay attention to the stock in the plan, and create a record of procedural due diligence surrounding the stock".
  
• "Finally, if trouble or crisis looms, consider engaging help—both outside counsel to advise the fiduciaries and an independent fiduciary if critical inside information could create conflicts of interest."
  
• Be aware of the administrative claims appeal process as defined in your plan document and explained to the employees in the SPD.
  
• For inside trustees, including an item on their performance appraisal and review process that "makes it clear they are expected to follow their fiduciary duties and not deny claims out of hand or improperly."
  
• Provide fiduciaries with training and guidance on their fiduciary duties.
  
• Consider hiring outside counsel separate from your benefit plan counsel for your plan fiduciaries.
  
• "A common mistake of employers (and many benefits attorneys) is assuming the attorney-client privilege will apply, even if the communications at issue may be subject to the fiduciary exception to the attorney-client privilege." Make sure the plan isn't paying for outside counsel if you want to claim attorney-client privilege.
  
• Be sure you have adequate Fiduciary Liability Insurance.

Educating and Communicating Benefits in a Cost-Effective Manner

Four Creative, Low-Cost Ways to Educate Employees About Benefits discusses the challenges of educating and communicating the additions and changes to your employee benefits:

One of the biggest challenges employers face when adding new benefits or conducting open enrollment is finding the time to educate employees about the changes or options, according to a recent Aflac study. But at the same time, many HR executives agree that there's a need to better inform the workforce. They also know the potential payoff that education will have in the form of reduced turnover. Forty-nine percent of employers strongly agree that their employees need to have a better understanding of their benefits, and 43 percent believe a well-communicated benefits program leads to reduced turnover—and they are right. Two out of five employees agree that a well-communicated benefits program would make them less likely to leave their jobs.

Although geared more toward health insurance plans, the article provides four best practices for rolling out benefits initiatives in a cost-effective manner:

1. Make benefits more accessible
2. Communicate all year round, not just during open enrollment
3. Consider providing in-person meetings with HR or insurance carriers
4. Identify areas to promote preventive care

Sustaining a Strong Company Culture: The Relationship Between the CEO and Human Resources

The CEO, President / VP HR relationship's impact on company culture discusses how the relationship between the CEO and HR are essential to building, improving, and sustaining a strong company culture. The article shares some changes that were implemented by Acuity to address the fact that employees did not feel connected and talked to by management:

• "Lunches of 12" which allow each employee an opportunity at least one time per year to have lunch and informal discussion with the company's officers.

• "Ben's Gossip Line" where each week, CEO Ben Salzmann records a two to three minute voicemail that is sent to all employees covering current events, and company or industry news. At the end of each message he includes a catch phrase or tag line and two days after the message is sent, randomly chooses an employee to call on to deliver that catch phrase. If that employee can report it, he/she receives a $50 gift card to a local restaurant or retailer as an incentive and encouragement of participation.

• All-company Town Hall meetings held four times per year include a departmental update from each officer, information sharing about the company, and an opportunity for Q&A.

Lincoln Plating focuses on their Beliefs & Drivers to build and sustain their company culture. They begin each meeting with a recital of their beliefs and drivers and measure all employees on them twice each year. The article explores some of the things that they do:

The organization is currently in a period of rapid growth with a goal of "staying small as we get big." As Lincoln Plating undergoes growth and expansion, the company plans to preserve its culture through the continuation of existing programs, while allowing these initiatives to grow with the company. Some of great things the people of Lincoln Plating currently enjoy are:

• Roundtable discussions with Hank and the executive team where informal conversation and Q&A are encouraged. Each employee is afforded this opportunity one time per year in small settings of 15-20 people at a time.

• "One Company, One Voice" meetings where two times per year, the entire company gathers for an update on "the good, the bad, and the ugly." The senior team shares their plans and welcomes recommendations.

• Champion lunches where employees on all shifts get a free meal once per month with senior officers. This serves as an opportunity to formally and informally recognize performance, achievement, and behaviors that support the beliefs and drivers.

• Wellness program where each person undergoes a mandatory physical exam four times per year and awards and company-sponsored celebrations are given for high achievement in the area of wellness.

Update on Automatic Enrollment IRA Initiative

Last May we discussed the Required Automatic Enrollment in IRAs Treasury Proposal that would require, effective January 1, 2012, "Employers in business for at least two years that have 10 or more employees would be required to offer an automatic IRA option to employees on a payroll-deduction basis, under which regular payroll-deduction contributions would be made to an IRA."

February 2010 pension legislative outlook – Administration and Congressional initiatives discusses President Obama's middle-class initiatives and raises some questions on the details of the automatic workplace IRA initiative:

Below is the description of the automatic workplace IRA proposal provided in the fact sheet released by the White House on January 25:

The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families. The Administration is also streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers.

How will this affect larger employers that already sponsor one or more retirement plans? One would expect that, generally, large employers who maintain a retirement plan will be exempt. However, the devil is in the details. For example: What about a company that covers most employees but excludes one division – would an automatic workplace IRA have to be set up for that division? What about a company that excludes part-time or temporary employees? What about a company that makes employees wait one year to participate?

There are, as yet, no official answers to these questions, and they may be an element of the debate when this proposal is taken up by Congress. A mandate to provide excluded or part-time employees with an automatic workplace IRA may create an administrative burden for some employers who currently maintain broad-based retirement plans. How onerous that burden will be also remains to be seen. Basically, we need more detail before the effect of this proposal on larger employers can be evaluated.

Here is the language from the retirement security section of the Fact Sheet: Supporting Middle Class Families:

Establishing Automatic IRAs. Currently, 78 million working Americans—roughly half the workforce—lack employer-based retirement plans. Fewer than 60 percent of working heads of families were eligible to participate in any type of job-related pension or retirement plan in 2007. The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families. The Administration is also streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers. New tax credits would help pay employer administrative costs and the smallest firms would be exempt.

Simplifying and Expanding the Saver's Credit. The struggle to save enough to ensure a secure retirement became particularly pronounced in the wake of the recent financial crisis, which delivered a major hit to the savings on which workers rely for their retirement security. The Administration proposes to help working families save for retirement by expanding and simplifying the Saver's Credit to match 50 percent of the first $1,000 of contributions by families earning up to $65,000 and providing a partial credit to families earning up to $85,000. The Administration will also make this tax credit refundable to ensure that millions of additional middle-income families can take advantage of it even though they have no income tax liability.

Updating 401(k) Regulations to Improve Transparency and Reliability. A majority of American workers rely on 401(k)-style plans to finance their retirements, making it critical that the 401(k) system be safe, transparent, and well-regulated. Even workers who save significant amounts may see their returns eaten away by fees and expenses. We need to do more to give families better choices to reach a secure retirement. The Administration is:

• Improving the transparency of 401(k) fees to help workers and plan sponsors make sure they are getting investment, record-keeping, and other services at a fair price.

• Encouraging plan sponsors to make unbiased investment advice available to workers, helping workers avoid common errors that undermine retirement security, while providing strong protections against conflicts of interest.

• Promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees' living standards will be eroded by investment losses or inflation.

• Reviewing and requiring clear disclosure regarding target-date funds, which automatically shift assets among a mix of stocks, bonds, and other investments over the course of an individual's lifetime. Due to their rapidly growing popularity, these funds should be closely reviewed to help ensure that employers that offer them as part of 401(k) plans can better evaluate their suitability for their workforce and that workers have access to good choices in saving for retirement and receive clear disclosures about the risk of loss.

Here is the press release:

The White House

Office of the Press Secretary

For Immediate Release

January 25, 2010

President Obama and Vice President Biden Preview Initiatives for Middle Class Families

Discussion Previews a Key Theme for State of the Union Address

Washington, DC – Today, President Barack Obama and Vice President Joe Biden will hold a meeting of the Middle Class Task Force, where they will lay out key investments for middle class families. Today's discussion will preview one of the key themes of the President's State of the Union address, which include creating good jobs, addressing the deficit, changing Washington, and fighting for middle class families.

President Obama said, "We are fighting every single day to put Americans back to work, create good jobs, and strengthen our economy for the long-term. The additional steps laid out today focus on easing the burdens on middle class families who are struggling in this economy, and providing the help they need to get ahead."

"Every day, middle class families go to work and help make this country great. For a year, our Task Force has been hearing that they are struggling with soaring costs and squeezed family budgets. These common sense initiatives will help these families cope with these challenges," said Vice President Biden.

After traveling across the country the past year talking with families, caregivers, educators, students, seniors, as well as policy makers and experts, Chair of the White House Task Force on Middle Class Families Vice President Joe Biden will join President Obama to announce several recommendations of the Task Force. These initiatives, borne out of the meetings, travel and work of the Task Force, are aimed at helping middle class families afford soaring child care costs; care for their aging relatives; cope with the challenge of saving for retirement; and pay for their children's college tuition.

Since its creation one year ago this week, the Middle Class Task Force has held 11 meetings around the country and at the White House. At these meetings, Vice President Biden heard from parents who were grappling with the costs of child care; students coming out of college drowning in debt; children of elderly relatives struggling to care for them; and workers who were barely able to pay their mortgage, much less save for retirement.

As a result of these meetings, conversations and feedback from around the country, the Vice President and the Task Force will propose several policy initiatives to help middle class families:

1. Nearly Doubling the Child and Dependent Care Tax Credit for middle class families making under $85,000 a year. This is accomplished by increasing their tax credit rate from 20% to 35% of qualifying expenses. The value of the tax credit nearly doubles for all families making under $85,000 a year, and every family that makes under $115,000 will see their tax credit increase.
   Additionally, for families struggling to join the middle class, the administration will provide a $1.6 billion increase in child care funding, the largest one-year increase in 20 years, to help an additional 235,000 children.
   
2. Limiting a student's federal loan payments to 10 percent of his or her income above a basic living allowance. This will lower payments for hundreds of thousands of students, who are struggling to make ends meet coming out of college.
   
3. Creating a system of automatic workplace IRAs, requiring all employers to give the option for employees to enroll in a direct-deposit IRA.
   
4. Expanding tax credits to match retirement savings and enacting new safeguards to protect retirement savings, making it easier for families to plan for retirement.
   
5. Expanding support for families balancing work with caring for elderly relatives, helping them manage their multiple responsibilities and allowing seniors to live in the community for as long as possible.

The Task Force's final report, and full recommendations, will be released in February.

Additional information about these Middle Class Task Force initiatives is included in the attached fact sheet.

About the Middle Class Task Force: The Task Force, Chaired by Vice President Joe Biden, is a group of top-level administration policy makers, charged with the mission of focusing on developing policies aimed at raising the living standards of middle-class, working families in America.

Since its creation on January 30, 2009, the Middle Class Task Force has held 11 meetings around the country and at the White House:

• February 27, 2009: Green Jobs (Philadelphia, PA)
• March 17, 2009: American Recovery and Reinvestment Act and Middle Class Families (St. Cloud, MN)
• April 17, 2009: College Affordability (St. Louis, MO)
• May 26, 2009: Green Jobs (Denver, CO)
• June 23, 2009: Manufacturing in the 21st Century (Perrysburg, OH)
• July 10, 2009: Health Reform Roundtable (The White House)
• July 16, 2009: AARP/Health Care Reform Discussion (Arlington, Virginia)
• September 9, 2009: Access to College (Syracuse, NY)
• October 19, 2009: Middle Class Recovery Through Retrofit (The White House)
• November 5, 2009: Roundtable with Policy Experts (Washington, DC)
• December 16, 2009: Roundtable with Leaders in Manufacturing Sector (The White House)
  

  Members of the Task Force include: Vice President Biden, Chair; the Secretaries of Labor, Health and Human Services, Education, Energy, Treasury, Commerce, Housing and Urban Development, Transportation, and Agriculture; the Administrator of the Environmental Protection Agency; as well as the Directors of the National Economic Council, the Office of Management and Budget, the Domestic Policy Council, and the Chair of the Council of Economic Advisors.

The IRS and Frivolous Tax Arguments

The IRS has released the 2010 report that debunks many of the common frivolous tax arguments:

WASHINGTON — The Internal Revenue Service today released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.

When Representations are Actionable under ERISA

Earlier this week we discussed ESOP Litigation that found that participants can pursue a fiduciary breach when a fiduciary Omits or Provides Misleading Financial Information to Participants. When Representations Regarding the Financial Condition of the Plan Sponsor Become Actionable Under ERISA provides additional analysis and discusses when intentionally connecting statements is actionable under ERISA:

Previous case law established upon similar facts warns companies against "intentionally" connecting statements regarding the financial health of the company to statements about the future of benefits. Doing so may result in "[the company's] intended communication about the security of benefits [being] rendered 'materially misleading' and 'an act of plan administration'." In light of this prior case law, the Delta Star court found that "when the allegations are viewed in a light most favorable to Plaintiff, as required at this stage of the proceedings, they suggest that [Plaintiff] was encouraged to accept the lump-sum distribution based on the December 31, 2006 stock valuation in part because Delta Star had a questionable financial future that might or would preclude a future lump-sum offer." So the allegations made by the plaintiff "reflect an intentional connection between the lump-sum offer to [the plaintiff] and the financial outlook of [the Company] and are therefore actionable under ERISA."

In addition, the court determined that the alleged misrepresentation that the ESOP would not offer a lump-sum option in the future is also actionable since the terms of the ESOP allow the trustees to determine each year whether to allow lump-sum distributions.

February and March Upcoming Deadlines

Last month we explored the Benefit Payment Government Filings (IRS Forms 1099-R, 1096, 945). All IRS Forms 1099-R should have been furnished to the participants by February 1, 2010. 2010 Compliance Calendar shares some upcoming deadlines (assuming 12/31 plan year end):

FEB 16 / Quarterly Benefit/Disclosure Statement for Participant-Directed DC Plans: Good Faith Compliance due 45 days after the end of the quarter. Note: Usually due February 15, which is a holiday in 2010.

MAR 1 / Deadline for filing form 1099-R with the IRS to report distributions made in the previous year (if not filed electronically). Note: The deadline is usually February 28, which falls on a Sunday in 2010.

MAR 1 / PBGC Form 1-ES Estimated Premium Payment (flat-rate premium for plans with >500 participants) due. Note: This is due by the last day of the second month in the premium payment year.

MAR 15 / Employer contributions due for 12/31 fiscal year-ends in order to take deduction with no corporate tax extension.

MAR 15 / Forms 1042S and 1042 due to IRS to report retirement plan distributions made to nonresident aliens and income tax withheld from distributions made to nonresident aliens.

MAR 15 / Deadline for ADP/ACP refunds without 10% excise tax on employer (due 2½ months following plan year end).

MAR 15 / Application of Waiver for Minimum Funding Standard for DB and Money Purchase Pension Plans (due no later than the 15th day of the third month after the close of the plan year for which the waiver is requested).

MAR 31 / Electronic filing of 1099Rs for 2009 distributions due to IRS.

Restarting Matching Contributions

Last year we discussed how some companies reduced or eliminated a Traditional Match, a Mid-Year Safe Harbor Match, or a Mid-Year Safe Harbor Nonelective Contribution, though there were Conflicting Surveys about the extent of the reduction. We also explored Communicating 401(k) Benefit hows and how Making 401(k) and Financial Education and Advice Available was a Top Priority.

Some Considerations When Reinstating Your 401k Match discusses some key area to consider when determining when to restart your match:

• Benchmarking Around Peers and Goals
• Breaking Down Demographics
• The Plan's Match Ceiling
• Investment Education
• Automatic Savings Rate Increases