California Public Pension Ballot Initiative Would Eliminate Vested Right to Future Benefit Accruals
(Posted on October 16, 2013 by )


CaliforniaA California statewide ballot initiative proposal, The Pension Reform Act of 2014 was filed on October 15, 2013. The proposal if passed would amend the California constitution to provide that employees have no vested rights in future pension and retiree health benefit accruals, but only to benefits accrued based on past employment. As such, it would cause the vesting of public retirement plans in California to be more comparable to the vesting of private retirement plans under the Employee Retirement Income Security Act of 1974 (“ERISA”). The proposal, if adopted, would be particularly significant inasmuch as California has historically been a leader in the recognition of the right of public employees to vesting in future benefit accruals.

Read more.

California Superior Court Finds Vested Right to Retiree Health Benefits
(Posted on September 23, 2013 by )


CaliforniaPension plans of businesses and most tax-exempt organizations are subject to federal rules which permit them to discontinue accruals of benefits at any time, so long as previously accrued benefits are preserved. (Internal Revenue Code section 411.) By contrast, pension plans of governmental employers are typically subject to protections under court decisions based on federal or state constitutions provisions forbidding the “impairment of contracts,” which may require the preservation of not only past but future benefit accruals. The leading cases in this area come from California, although courts in other states have often looked to them in interpreting similar constitutional provisions in other states. See, e.g., Betts v. Board of Administration, 21 Cal.3d 859, 864 (1978).

Starting in 2011, California courts have begun applying similar reasoning to the provision of retiree health benefits, as well as pension benefits. In Retired Employees v. Co. of Orange, 52 Cal. 4th 1171, 266 P.3d 287, 134 Cal. Rptr. 3d 779 (2011), the California Supreme Court held that

under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution. Whether those circumstances exist in this case is beyond the scope of the question posed to us by the Ninth Circuit.

A recent case from the Los Angeles Superior Court, Los Angeles City Attorneys Association v. City of Los Angeles has provided additional guidance on this issue, although it seems to raise as many questions as it answers.

Read more.

Carol V. Calhoun Quoted in Tax Notes Article, “Unreleased Technical Advice Memoranda Illuminate IRS Position on Pension Deferral Plans”
(Posted on August 8, 2013 by )


Internal Revenue ServiceThe article (the full text of which is available only to Tax Notes subscribers) deals with the fact that the IRS failed to release two 2007 Technical Advice Memoranda (TAMs), which indicated that the annual contributions to a defined benefit plan under a deferred retirement option plan (“DROP“) will be treated as a contribution to a separate defined contribution plan (and thus subject to an annual additions limitation) if the contribution is credited with actual plan earnings. While this position was one we had taken in an article back in 1998, it apparently came as news to many local governments. The article also raises questions about the IRS authority to withhold release of TAMs.

Detroit’s Bankruptcy Highlights Risks, Benefits of Governmental Pensions
(Posted on July 30, 2013 by )


BankruptcyCourtDetroit’s bankruptcy has brought to the fore issues faced by participants in underfunded public (governmental) retirement plans. As explained in an article on CNN, “Just how generous are Detroit’s pensions?”, Detroit’s pension promises as a whole are in line with pensions provided to nongovernmental workers in the area. Nevertheless, as CNN summarizes the situation, “Detroit’s workers and retirees face big cuts.” Why are public workers so vulnerable to the financial troubles of their employers?

Read more.

IRS Issues Guidance on Vesting Standards to Be Followed By Governmental, Church Plans
(Posted on July 15, 2013 by )


Internal Revenue ServiceWe have just obtained a copy of an internal IRS memorandum issued a little over a year ago, describing the vesting standards the IRS will apply in reviewing determination letter applications by governmental retirement plans. A copy of it can be found at this link. The memorandum states that determination letters will not be issued unless governmental plans include vesting schedules at least as favorable as safe harbors set forth in the memorandum, which appear to be intended to preclude discrimination in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. And while the memorandum was primarily directed toward governmental plans, it suggested that the same standards would apply to church plans.

Read more.

Federal District Court Blocks Michigan Law Eliminating Health Benefits for Domestic Partners of Public Employees
(Posted on July 4, 2013 by )


US District Court, Eastern District of MichiganMichigan Public Act 297 (“Act”) prohibits public employers from providing medical and other fringe benefits to any person cohabitating with a public employee unless that person is legally married to the employee, or is a legal dependent, or eligible to inherit under the State’s intestacy laws. In a June 28 decision, U.S. District Judge David Lawson (E.D. Mich.) has issued a preliminary injunction blocking enforcement of the Act based on a finding that the plaintiffs (same-sex couples of which one works for a Michigan local government) “have stated a viable claim based on the Equal Protection Clause on which they are likely to succeed.”

Read more.

District Court: QDRO Cannot Change Existing Beneficiary of Joint and Survivor Annuity
(Posted on June 11, 2013 by )


US District Court of the District of ColumbiaIt’s a plan administrator’s nightmare: John is married to Melissa, and designates her as beneficiary of his qualified joint and survivor annuity (QJSA). John and Melissa then get divorced, and the divorce decree says that John is awarded “as his sole and separate property” all rights “related to any . . . pension plan . . . existing by reason of [his] past, present, or future employment.” John marries Gaylyn. John then goes to court, and based on that language in the divorce decree, gets a purported qualified domestic relations order (QDRO) substituting Gaylyn for Melissa as the beneficiary under the QJSA. Who is now the beneficiary: Melissa or Gaylyn?

And the winner is…

Governmental Workers Retiring in Greater Numbers
(Posted on May 30, 2013 by )


Retirement SavingsBoth the federal and state governments are reporting increases in the pace of employee retirements in recent years. The causes are complex, including everything from a bulge of workers hired in the 1960s and now retiring to flattened public sector salaries and furloughs. However, in at least some instances, part of the motivation is that employees who have maxed out on their pensions may have a financial incentive to retire (or even find jobs in the private sector) in order to begin collecting retirement benefits.

In some instances, the increasing pace of retirements may even be welcome. For governments facing budget shortfalls, they may result in opportunities to shrink the workforce, or at least to replace highly paid senior employees with junior employees paid at lower rates. However, in at least some instances, the surge in retirements has caused shortages in employees with much needed experience, and/or transitional issues when senior employees are not able to train more junior people before leaving.

Read more

Checklist of Federal Tax Law Rules Applicable to Public Retirement Systems Updated
(Posted on May 21, 2013 by )


Internal Revenue ServiceThe Checklist of Federal Tax Law Rules Applicable to Public Retirement Systems has now been extensively updated. The chart, which identifies each of the Internal Revenue Code sections that does and does not apply to governmental plans, now includes links to each of the Internal Revenue Code sections referenced, as well as various updates to reflect recent legislative and administrative developments.