BNA Pension and Benefits Blog

Today's decision on the merits by the 9th Circuit in the Golden Gate Restaurant Association v. San Francisco case upholding the employer spending requirements of the San Francisco ordinance as not preempted by ERISA is a most interesting read. 

For most of the decision, the unanimous three-judge panel methodically describes and then disposes of all the arguments made by the GGRA and its numerous amici (including the Department of Labor) in favor of preemption.  The opinion is written as if the court is perfectly aware that its decision is likely to wind up on the steps of the Supreme Court and therefore the court is careful to leave no "t" uncrossed and no "i" undotted.  And yet the final portion of the opinion when the court addresses the 4th Circuit's decision which came to a contrary conclusion regarding the Maryland law (RILA v. Fielder) seems to go in the other direction. 

ERISA preemption groupies will remember that in January when the same panel of the 9th Circuit granted the City's motion to stay pending appeal the District Court's judgment holding the ordinance preempted and ordered the ordinance to go into effect, it was roundly criticized by many commentators for ignoring the impact of the Fielder case.  These commentators obviously expected that the court would fall into line and adopt the 4th Circuit reasoning that an employer expenditure requirement was the same as a benefit mandate (such as that required under the Washington statute found in Egelhoff, one of the key Supreme Court cases that the majority of the 4th Circuit relied on in holding the Maryland law preempted).  However, this time in addressing the merits of the case, the 9th Circuit panel did not ignore the Fielder case. 

GGRA had contended that if the 9th Circuit upheld the San Francisco ordinance, it would create a split among the circuits.  Not so, says the 9th Circuit, the 4th Circuit's analysis is not inconsistent with its analysis of the San Francisco ordinance.  "We neither adopt or reject the analysis of the Fourth Circuit in Fielder.  ... But even under the reasoning of the panel majority, San Francisco's Ordinance is valid."  What distinguishes the Maryland statute from the San Francisco ordinance in the eyes of the 9th Circuit is that "The Maryland law gave nothing in return - either to an employer or its employees - for the employer's payment to the State."  In Maryland, the taxes collected would have gone to the State Medicaid program and presumably only those employees of covered employers (ostensibly Wal-Mart) who were Medicaid beneficiaries would benefit. By contrast, any uninsured individual, including employers who chose not to have ERISA plans, would be covered under the San Francisco program and employees whose employers chose to pay into the program would be eligible for free or discounted enrollment in the HAP (health access plan). 

What do you think of this argument and does the 9th Circuit decision create a conflict in the circuits or not?

For those of you who have not yet listened to the oral argument in this case and want to, you can find it on the 9th Circuit's website - one way to locate it is to know that the argument was held on April 17, 2008 - and this "no conflict in the circuits" question was addressed by the City Attorney during that argument.

Phyllis Borzi

Full compliance with Section 409A is scheduled to be required in less than four months, by January 1, 2009. This deadline is the result of the considered and responsive review by personnel from Treasury, the IRS and the legislative branch last year, as 2007 ran its course. At that time, an extension sought by the market from an impending December 31, 2007 deadline was gratefully granted, ostensibly on the basis that compliance by year-end 2007 would be difficult to achieve, would result in inordinate corporate distraction and would produce a less-than-optimal quality of compliance.

It may be time to review the present state of Section 409A transition. Market circumstances have changed (AC/DC, still alive and rockin', might say things are "all screwed up"), and the financial crisis has thrown a wide range of institutions into total disarray. That situation is not one that was present as little as several weeks ago, and was not so much as a glimmer in anyone's eye when the year-end 2008 extended deadline was established.

It is submitted here that these unexpected and changed circumstances may well justify a reconsideration of the current deadline generally - not because the existing deadline did not confer sufficient time, but because things, simply put, have changed. The need to devote significant attention to Section 409A compliance may be inconsistent with the attention that will have to be devoted to the economic crisis. And, notwithstanding the ongoing bail-out efforts, query whether any exacerbation of the current crisis in the coming weeks might make broader relief downright necessary.

It is worthy of note that a client memorandum from Wachtell, Lipton distributed earlier today (September 24) suggests that it may be time for a reexamination of Section 409A transition. As unfortunate as it may seem, reconsideration of the deadline may indeed now be appropriate.

Regardless of whether a general reconsideration of the Section 409A compliance deadline takes place, it seems as though some continued permitted good-faith compliance would be appropriate. (Wachtell's memorandum makes a similar point here, too.) In this regard, several things have become evident:

- As a result of the complexity inherent (as is now apparent) in Section 409A itself, the 409A Regulations have turned out to be extraordinarily complex, giving rise to an innumerable number of difficult and sometimes imponderable issues. It seems as though every crevice of the rules gives rise to issues and analyses that are much more interesting than one would expect or hope.

- Experts seem consistently to disagree on a host of issues. Reasoning balanced on the head of a pin comes out one way for one practitioner and another way for another practitioner. One wonders whether there aren't important issues as to which there isn't even unanimity among Treasury and IRS personnel.

- New issues continue to arise. It seems as though issue after issue, some sending shockwaves through the practitioner community, continues to emerge on points that hadn't even been widely identified in the market as being problematic.

- Indications are that, as to matters covered by the existing 409A Regulations, further official guidance will not soon be forthcoming. The existing voluntary compliance program does not generally extend to documentary compliance, thus making compliance more challenging, and, as a further indication of how difficult the issues are to deal with, it looks as though it is going to take Treasury and the IRS considerable time just to develop a more extensive voluntary compliance program.

- Key new authority on income inclusion, reporting and withholding, once hoped for in the early part of the summer, is still not out, presumably because of substantive complexity generally, as well as, possibly, the interrelationship between Section 409A and other provisions.

Against this backdrop of substantive uncertainty, complete and total compliance by December 31, 2008, however desirable it may be, seems almost unattainable. One possible approach could be that, for 2009, good-faith compliance with Section 409A and the existing final authority thereunder would be considered compliance with Section 409A. It is not suggested here that the effectiveness of the final rules would be suspended; rather, the suggestion is that reasonable interpretations of the rules should be sufficient to forestall punitive tax results. Essentially, it would be recognized that, against a landscape riddled with substantive uncertainty, taxpayers should not be punished for taking fair positions under incredibly challenging rules, merely because some theoretical ultimate interpretation of those rules might turn out to be adverse.

Thus far, regulatory consideration of extended relief apparently is not being actively considered (see, e.g., the lead Washington Item in the September 5, 2008 TMCPJ ); given the responsive and substantial extensions that have been previously conferred, that result is arguably understandable. But market conditions have changed, and the substantive analyses just have not sorted out, and it is suggested here that, for both of these reasons, it may unfortunately be time for the transition question to be reopened.

While December is when most of us look back on the year coming to end and make plans and resolutions for the year about to begin, September is another one of those times for me. After all, it’s an important month in its own right—the start of the academic year (even if classes now begin in August), the official beginning of the race in election years like this one, the unofficial end of summer with Labor Day and lest we forget, the anniversary of ERISA’s passage.

September also brings a couple of personal anniversaries: Labor Day marks the beginning of another year as a self-described ERISA “geek” and in the middle of month, my third year in Washington at the AFL-CIO begins.

My anniversary musings this year, as you might expect, were influenced by the work of the past year and the significance of the election to come in November

Health care reform is clearly important with many polls ranking it, together with the economy, among the top issues of concern. But, one issue that’s talked about less outside the benefits community is just as critical--the pending retirement security crisis.

Here are just a few facts to consider, most of which are familiar to benefits professionals. Pension coverage remains at about 50 percent of the workforce. The shift from defined benefit to defined contribution plans, primarily 401(k) plans, is leading to a decline in pension wealth. And, according to the latest Retirement Confidence Survey from the Employee Benefit Research Institute, only 18 percent of workers are very confident about having sufficient money for retirement. The 9 point drop from the 2007 survey was the biggest one-year drop in the survey’s history. One bright spot is the continued vibrancy of defined benefit plans in the public sector.

So far, the conventional wisdom seems to be that individual account defined contribution plans or individual retirement accounts (IRAs) are the best way for workers to provide for their retirement. But, is this really true? Should we consider different approaches to defined benefit coverage?

When I was introduced to ERISA more than 25 years ago, there was talk of setting a national retirement income policy. Is it finally time for all of us to have that conversation?

A front page article in the August 4th edition of the Wall Street Journal outlines a method by which companies are transferring portions of their non-qualified deferred compensation obligations of senior executives into their qualified plans. As reported by the Journal: “In recent years, companies from Intel Corp. to CenturyTel, Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives’ supplemental benefits and compensation.”

In order for a pension plan to qualify for favorable tax treatment (current deduction of employer contributions and tax-deferral on any investment gains), the plan must meet certain requirements set forth in the Internal Revenue Code, including the requirement that neither contributions nor benefits under the plan discriminate in favor of highly compensated employees. According to the Journal article, “benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.”

There are significant tax advantages if a company can provide more of an executive’s pension under a qualified plan rather than a non-qualified deferred compensation arrangement. In Intel’s case, according to the Journal, it contributed $187,000 to the qualified plan to fund $200,000 of its deferred compensation liability. The ability to immediately deduct the $187,000 allowed Intel to save $65,000 in taxes according to the Journal. While these benefits were being provided under a non-qualified deferred compensation arrangement, Intel would not be entitled to a tax deduction until the benefits were actually received by an executive.

The pension system in the United States is a voluntary system and unless an employer deems it to be in its best interest to establish a plan, it will not do so. Therefore, the tax system provides incentives for employers to establish plans for their employees, including the highly compensated employees. The anti-discrimination and other rules set forth in the Code are designed to assure that the non-highly compensated received adequate benefits vis-à-vis the highly compensated before an employer qualifies for the tax advantages of a qualified plan. The program outlined in the Journal article may very well be reasonable. The IRS should examine this practice to determine whether it violates the anti-discrimination rules. If it does, the IRS should eliminate it administratively or request Congress to pass clarifying legislation. For example, Congress enacted IRC Section 401(a)(19) in order to prevent a perceived abuse of the comparability procedures for testing compliance with the nondiscrimination rules.