June 2009 Archives

June 30, 2009

Employment-IRS Confirms Availability Of Making Work Pay Credit For Married Couple Filing Jointly.

A letter by the IRS claries that the Making Work Pay Credit, which is generally a tax credit for individuals with earned income, is available to a married couple filing jointly, even if one of the spouses does not have earned income. The letter is here.

June 30, 2009

Employment-U.S. Supreme Court Rules That New Haven Discriminated Against White Firefighters

In Ricci v. DeStefano, No. 07-1428 (S. Ct. 2009), the U.S. Supreme Court ruled that, in throwing out the results of a promotional exam, the City of New Haven, Connecticut (the "City") has discriminated against its white firefighters, in violation of Title VII of the Civil Rights Act of 1964 ("Title VII").

In Ricci, the City had been using objective examinations to identify the best qualified candidates for promotion at its fire department. In 2003, 118 New Haven firefighters took examinations to qualify for promotion to the rank of lieutenant or captain. However, when the examination results showed that white candidates had outperformed minority candidates, the City discarded the test results. Certain white and hispanic firefighters, who likely would have been promoted based on their good test performance, sued the City and some of its officials, on the grounds that discarding the test results constitutes racial, "disparate treatment" discrimination in violation of Title VII. A claim was also made by the firefighters under the Fourteenth Amendment's equal protection clause, but that claim was dropped by the Court after finding that the firefighters could prevail on their Title VII claim.

Ricci involved a tension between "disparate treatment" discrimination, which is intentional discrimination, and "disparate impact" discrimination, which is a practice which has a disproportionately adverse effect on minorities (such as in Griggs v. Duke Power Company, 401 U.S. 424 (1971)). The Court ruled that the City's actions-discarding the test because white candidates had fared better than minority candidates- had violated the disparate treatment prohibition of Title VII, absent some valid defense. The defense offered by the City was that, if it did not discard the test, it would be committing "disparate impact" discrimination under Title VII against the minority candidates, and would be subject to suit on those grounds. However, the Court said that the City's actions, when based on race, would be permissible, and would provide the City with a valid defense, only where there is a strong evidence that remedial actions were needed. Thus, the City could not have discarded the tests, without violating the disparate treatment proscription of Title VII, absent strong evidence that the test was deficient, and that discarding the test results is necessary to avoid such violation. The Court held that, since there was not sufficiently strong evidence of the test's deficiency in the instant case, the firefighters can prevail on their claim of discrimination. The memorable quote from the opinion: "Fear of litigation alone cannot justify an employer's reliance on race to the detriment of individuals who passed the examinations and qualified for promotions."

Importantly, the Court indicated that mere statistical results, and nothing more, is not the strong evidence required to establish a defense against a claim of disparate treatment discrimination under Title VII. The Court indicated that the evidence would be strengthened by a showing that the City's test was flawed or not usable because it is not job-related, or because other, equally valid and less discriminatory tests were available to the City.

Ricci has very important implications. Although Ricci involves public employees, the anti-discrimination rules of Title VII apply to private employees as well. Consequently, the case provides instruction for public and private employers on whether and to what extent race may play a part in employment decisions, and on how testing may be used in hiring and promotion decisions at work.

June 29, 2009

Employment-IRS Reminds Taxpayers To Check Amounts Being Withheld As Federal Income Tax From Pay And Pensions

As a tax tip, the IRS has reminded taxpayers, particularly multiple job holders, families with two working spouses, workers who can be claimed as another's dependent and those receiving pensions, to check the amounts of federal income tax being withheld from their pay and/or pensions. Checking these amounts is advisable, since the Making Work Pay Credit lowered tax withholding rates, possibly resulting in lower tax refunds or tax being due in 2010.

Also, as to increasing withholding from pension payments, pension plan administrators or pension payors should be aware of the optional adjustment procedure for pension withholding announced in Notice 1036-P, Additional Withholding for Pensions for 2009.

The tax tip is here.

June 29, 2009

ERISA-7th Circuit Narrows Its Ruling In Hecker v. Deere On Scope Of Section 404(c) Protection

Section 404(c) of ERISA relieves the fiduciary of an individual account plan of liability for losses stemming from the plan's investments, when the plan allows the participants to exercise control over the investment of the assets in their plan accounts, and a number of requirements in the Department of Labor's regulations are met. As such, Section 404(c) provides an affirmative defense to a claim for breach of fiduciary duty under ERISA. In Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), the 7th Circuit Court of Appeals ruled that this affirmative defense protects plan fiduciaries from liability for the misconduct alleged in the case, namely the imprudent selection of mutual funds with excessively high fees. In so ruling, the Court said that it need not rule on whether the defense applies to the selection of investment options for a plan, since while Section 404(c) would not always shield a fiduciary from an imprudent selection of funds under "every circumstance that can be imagined", Section 404(c) does protect a fiduciary that satisfies its requirements and includes a sufficient range of options so that the participants have control over the risk of loss.

As indicated by the court, the plans at issue in Hecker provided a generous selection of investment options for the plans' participants, including 23 different Fidelity mutual funds, two investment funds managed by Fidelity Trust, a fund holding the employer's stock, and a Fidelity-operated facility called BrokerageLink, which gave the participants access to some 2,500 additional funds managed by different companies. Despite the cautionary language in the opinion that Section 404(c) would not apply to "every circumstance that can be imagined", Hecker raises the question as to whether simply offering plan participants a very large choice of investment options would automatically make the affirmative defense under Section 404(c) available to the plan's fiduciary (when the plan otherwise meets Section 404(c)'s requirements) against the claim of an imprudent selection of investments for the plan. The 7th Circuit Court of Appeals has now indicated that Section 404(c) might not go that far.

The 7th Circuit Court of Appeals has turned down a request to rehear Hecker. However, in doing so, it issued an addendum (Hecker v. Deere & Company, No. 06 C 719, 6/24/09) which attempts to narrow the potential scope of the protection afforded to fiduciaries by Section 404(c) against the claim of an imprudent selection of investments. In the addendum, the panel handling the request for the rehearing stated that the Secretary of Labor has made a number of points in her amicus brief that deserve a response. The panel noted the Secretary's apparent concern that Hecker may be read so that, if a fiduciary acts imprudently by selecting an overpriced portfolio of funds, Section 404(c), as applied in Hecker, will immunize the fiduciary from accountability for that decision. However, the panel stated that Hecker is not that broad, and is limited to the case presented before it.

The panel then noted that the Secretary also fears that Deere could be read as a sweeping statement that, under Section 404(c), a fiduciary can insulate itself from liability by the simple expedient of including a very large number of investment alternatives in its portfolio, and then shifting to the participants the responsibility for choosing among them. As to this, the panel stated that the Secretary is right to criticize such a strategy. It could result in the inclusion of many investment alternatives that a responsible fiduciary should exclude. It also would place an unreasonable burden on unsophisticated plan participants who do not have the resources to pre‚Äźscreen investment alternatives. Hecker, however, was not intended to approve this strategy, again being intended to deal with the facts before it.

Despite the efforts by the 7th Circuit Court of Appeals to narrow Hecker, it appears that if the fiduciaries of an individual account plan offer the participants a generous number of investment alternatives, which the fiduciaries select using prudent and reasonable procedures, and the plan otherwise complies with Section 404(c), those fiduciaries will have with a broad affirmative defense if the selection of investment alternatives should be challenged later.

June 26, 2009

Employment- A Reminder: New Jersey Paid Leave Starts On July 1!

Back on May 2, 2008, New Jersey Governor Corzine signed the New Jersey Family Leave Insurance Law. Funding the benefits payable under this Law began (by payroll deduction) in January 1, 2009. The Law will provide up to six (6) weeks of benefits-paid by the State- to a covered individual who takes a qualifying leave of absence that begins on or after July 1, 2009.

Generally, a "covered individual" is any individual who has a job which is covered by the New Jersey Unemployment Compensation Law. A "qualifying leave of absence" is any leave which is taken in order to:

--Bond with a child during the first 12 months after the child's birth, if the covered individual (or the domestic partner or civil union partner of the covered individual) is a biological parent of the child, or during the first 12 months after the placement of the child for adoption with the covered individual; or

--Care for a family member with a serious health condition, if supported by a certification provided by a health care provider. A "family member" is a child, spouse, domestic partner, civil union partner or parent of a covered individual.

More information on the New Jersey Family Leave Insurance Law may be found here, at the website of the New Jersey Department of Labor. Employers may have to develop new procedures to handle leaves taken under this Law. Those procedures should be coordinated with the employer's procedures for the federal Family and Medical Leave Act and the New Jersey Family Leave Act.

June 22, 2009

ERISA-District Court Rules That ERISA Section 404(c) Protects Employer And Plan Fiduciaries Against Liability For Continuing An Employer Stock Fund

In Lingis v. Motorola Inc., No. 03 C 5044 (N.D. Ill. 2009), the court ruled that Section 404(c) of ERISA protects an employer and the fiduciaries of a 401(k) plan against liability for continuing to maintain a fund offering investment in employer stock.

The 401(k) plan-an individual account plan-allowed it's participants to direct the investment of their plan accounts among nine different investment options, including an employer stock fund. The problem started with a default on a loan which the employer, Motorola, had made to a foreign entity, causing the price of Motorola's stock to plummet. This price decrease had an adverse effect on the value of the 401(k) plan's employer stock fund and the balances of the participants' accounts that were invested in that fund. The participants sued the employers and the 401(k) plan's fiduciaries, on the grounds that, among other things, they had breached their fiduciary duty under ERISA by continuing to offer the employer stock fund for investment under the 401(k) plan even though they knew about the problems with the loan.

In ruling against the participants, the court accepted the defendants' argument that Section 404(c) provides a safe harbor for plans-such as the one at issue-in which participants exercise control over their own investments, and, in the instant case, this safe harbor applies to relieve the defendants from any liability they may otherwise have under ERISA.

June 19, 2009

Employment-U.S. Supreme Court Makes It Harder For An Employee To Sue Under The ADEA

In Gross v. FBL Financial Services, Inc., No. 08-441 (S. Ct. 2009), the U.S. Supreme Court ruled in a 5 to 4 vote that, in order to prevail in a suit brought under the Age Discrimination in Employment Act (the "ADEA"), the employee must prove by a preponderance of the evidence that, "but-for" the employee's age, the employer would not have taken an adverse employment action against the employee. The burden of persuasion (that is, the ultimate burden of proving the case) stays with the employee. It does not shift to the employer, to require the employer to show that it would have taken the action complained of regardless of the employee's age, even when the employee has produced evidence that age was one motivating factor behind the action.

In so ruling, the Court noted the following:

-- The Court will not apply the burden-shifting framework of Title VII to ADEA claims.

--The ADEA does not allow a "mixed-motive" discrimination claim.

The plaintiff in the case is Jack Gross, who began working for the defendant, FBL Financial Group, Inc. ("FBL"), in 1971. Gross had been the claims administration director at FBL. But in 2003, at age 54, Gross was reassigned to the position of claims project coordinator. At that same time, FBL transferred many of Gross' job responsibilities to a newly created position--claims administration manager. That position was given to Lisa Kneeskern, who had previously been supervised by Gross and who was then in her early forties. Gross felt that the reassignment was a demotion because of the reallocation of his job responsibilities to Kneeskern. In 2004, Gross filed suit in District Court, alleging that his reassignment to claims project coordinator violated the ADEA, on the grounds that ADEA makes it unlawful for an employer to take adverse action against an employee on account of the employee's age.

By requiring a "but for" showing by a preponderance of the evidence, rejecting mixed motive theories and not allowing the burden of persuasion to shift to the employer, the Supreme Court has made it difficult for an employee to succeed on an ADEA claim. Gross also calls into question the continued validity of Price Waterhouse v. Hopkins, 490 U. S. 228 (1989) which dealt with shifting the burden of persuasion in a mixed motive Title VII case. Undermining this case will allow some interesting future developments in that area. The Gross case is here.

June 19, 2009

Employee Benefits-DOL Requests Additional Comments Pertaining To Procedures For Review Of Denial Of COBRA Subsidy

In connection with its procedure for reviewing denials of the new COBRA subsidy, the Department of Labor (the "DOL") is requesting additional comments on: (1) the application to be used to request review of the denial (the "Application") and (2) the letter it will send to the plan administrator of the group health plan, with respect to which the COBRA subsidy has been denied, to request information pertaining to the denial (the "Letter"). The Application and the Letter are here. The request for additional comments may be found here.

As indicated in the request for comments, on February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 ("ARRA"). ARRA provides a 65% subsidy on COBRA premiums paid by individuals ('assistance eligible individuals") who become eligible for COBRA coverage as a result of an involuntary termination of employment occurring during the period starting September 1, 2008 and ending December 31, 2009. ARRA also provides that if an assistance eligible individual is denied the subsidy by the group health plan which is required to provide him or her with the COBRA coverage, the individual may request that the DOL review this denial.

The Application is the form that an assistance eligible individual will use to request review of a subsidy denial by the DOL. All of the information requested on the Application must be completed, and the individual's claim for the COBRA subsidy may be denied if sufficient information is not provided. In certain situations, the DOL will have to contact the plan administrator for additional information concerning the subsidy denial. The Letter will be used for this purpose, if the DOL is otherwise unable to contact the plan administrator. On May 20, 2009, the Office of Management and Budget ("OMB") approved the Application and the Letter. The approval is scheduled to expire on November 30, 2009. Apparently motivated by the response it has received to the Application and the Letter, and in the context of the DOL's request to OMB for an extension of its approval, the DOL is now requesting additional comments on the Application and the Letter. Comments must be in writing and are due by August 14, 2009.

June 17, 2009

Employee Benefits-IRS Changes Its Position: No Tax On Personal Use of Employer-Provided Cell Phones

In a reverse of position, according to a statement by IRS Commissioner Doug Shulman, the Treasury will now ask Congress to act to eliminate any income tax arising from an employee's personal use of an employer-provided cell phone.

Under current law, generally, to the extent that an employer-provided cell phone is used for business purposes by the employee, the value of this use is not taxable to the employee, and the cost of providing the cell phone is deductible by the employer, provided that the business use is substantiated. On the other hand, to the extent the cell phone is used for personal purposes, or that business use is not substantiated, the value of the cell phone use is taxable to the employee, and the cost of providing the cell phone is not deductible by the employer.

Earlier, the IRS had proposed to adopt one of several methods to make it easier for an employer to substantiate business use of the cell phone by an employee, and therefore obtain the favorable tax treatment for business use. See my blog of June 15, 2009. Apparently, public objection to that proposal-many thought it was a guise to help identify and tax personal cell phone use-caused the IRS to change its mind, and simply ask Congress to eliminate any income tax arising from personal use of the cell phone.

June 16, 2009

ERISA-The Obligation To Collect Employer Contributions-Potential Liability For Trustees

Many plans subject to ERISA have an independent, third party trustee. Typically, this trustee holds the plan's assets pursuant to a trust agreement, entered into between the trustee and the employer. Almost as a matter of routine, the plan and/or the trust agreement will have language to the effect that "the trustee is not responsible for collecting any contribution which the employer is required to make to the plan". With this language in the plan and/or the trust agreement, the trustee would think that it is absolved from any obligation to collect employer contributions. But, is that so, after Solis v. Plan Benefit Service, Inc., No. 07-11474-DPW (D. Mass. 2009) ("Solis")?

In Solis, the Secretary of the Department of Labor (the "Secretary") brought an action against Plan Benefit Services, Inc. ("PBS"), which served as the plan sponsor and recordkeeper under the Contractors and Employees Retirement Plan (the "Master Plan"), and its accompanying trust, called the Contractors and Employees Retirement Plan Master Trust (the "Master Trust").Various employers had established plans and trusts, through the Master Plan and the Master Trust, that provide retirement benefits to employees working under certain public contracts. The Secretary alleged, among other matters, that a provisions in the Master Plan and the Master Trust, which relieve the trustee from the obligation to collect employer contributions, is void as against public policy. As plan sponsor, PBS is responsible for maintaining and amending the language in the Master Plan and the Master Trust.

In analyzing the Secretary's allegation, the court looked at two sections of ERISA: (1) Section 403 of ERISA, which states (with certain exceptions not applicable here) that all assets of a plan must be held in trust, and that the trustee has exclusive authority and discretion over the management of the plan's assets and (2) Section 410 of ERISA, which states that any provision of a plan or trust that relieves a fiduciary of its responsibilities is void as against public policy. The court opined that a plan's assets include the right to collect unpaid employer contributions, so that a provision eliminating trustee responsibility for collecting employer contributions does not comply with Section 403. Further, the provisions of the Master Plan and the Master Trust relieving the trustee of responsibility for collecting employer contributions violate Section 410 as being void against public policy, since these provisions determine that ultimately the right of collection will not be held in trust, thereby relieving the Trustee of its responsibilities under Section 403.

Interestingly, after concluding as it did, the court admonished the Secretary for attempting to do through this case what she has been unwilling to do under her rule-making authority, namely, effectively requiring all ERISA master plans and trust agreements to recognize the trustees' obligation to collect employer contributions. The court noted that its decision leaves a number of questions unanswered, for example, when an employer is delinquent in remitting contributions, how rapidly must the trustee move to commence recovery efforts, and when may the trustee exercise discretion to abandon claims which have the prospect of only limited recovery? In concluding, the court indicated that it is now up to the Secretary to address these questions by rule making.

Given the prevalence of provisions in plans and trust agreements which absolve a trustee from responsibility for collecting employer contributions, coupled with the court's own insistence that the Secretary now take up the treatment of these provisions through its rule making authority, this one district court case probably does not yet void all such provisions. Yet, it does increase a trustee's risk of incurring liability for failing to collect employer contributions, even when the trustee thought it was safe from such liability due to provisions in the plan and/or trust agreement relieving it from collection responsibility. Consequently, trustees may want to review this case with counsel to determine what other plan and/or trust agreement provisions, and what indemnification agreements and fiduciary insurance, might help to reduce their liability for the failure to collect employer contributions.

June 15, 2009

Employee Benefits-IRS Proposes To Simplify The Rules For Substantiating The Business Use of Employer-Provided Cell Phones

In Notice 2009-46, the IRS requests comments from the public regarding several proposals to simplify the rules by which an employer may substantiate an employee's business use of an employer-provided cell phone. Generally, when business use is substantiated, the employer can deduct the cost of the cell phone, and can also provide the cell phones to employees tax-free.

More specifically, when an employer acquires and provides a cell phone to an employee, and the employer pays the costs of acquiring and using the cell phone, the employee receives a fringe benefit. To the extent that the employee uses the cell phone for business purposes and the business use is substantiated (in accordance with Section 274(d) of the Internal Revenue Code (the "Code"), the value of such use qualifies as a working condition fringe benefit (under Section 132(d) of the Code) and is excludable from the employee's gross income. Also, the costs of acquiring and using the cell phone are deductible by the employer (under Section 162 of the Code). However, to the extent that the employee uses the cell phone for personal purposes, or to the extent that the business use is not substantiated, the value of such use is includable in the employee's gross income, and the related acquisition and use costs are not deductible by the employer.

To simplify the substantiation requirements as to business use of employer-provided cell phones-so that the employee can use the cell phone tax-free while the employer can deduct acquisition and use costs-the IRS is considering, and is requesting comments on, three alternative methods of substantiation.

Under the first method, called the "minimal personal use method", the employer may treat all of the employee's use of the cell phone as being business use, and this treatment will automatically meet the substantiation requirement, provided that the employee can furnish the employer with sufficient records to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for personal purposes during the employee's work hours. As a variant, the employer may define a specified amount or type of "minimal" personal use (e.g., a particular number of minutes) that would be disregarded in determining the amount of business use of an employer-provided cell phone.

Under the second method, called the "safe harbor substantiation method", the employer would treat a certain percentage of the employee's use of the cell phone (e.g., 75%) as business use, and this treatment will automatically meet the substantiation requirement. The remaining percentage of use would be treated as personal.

Under the third method, called the "statistical sampling method", the employer would use statistical sampling techniques to measure an employee's business use of the cell phone. In general, an employer could use a statistical sampling method similar to that provided in Rev. Proc. 2004-29, 2004-1 C.B. 918. The result of the sampling will be deemed to meet the substantiation requirement.

The IRS is also requesting suggestions for other methods to substantiate the business use of employer-provided cell phones. The IRS points out that an employer's use of which ever substantiation method the IRS selects in this process will be optional. An employer may use any other method of substantiation which satisfies Section 274(d). However, the IRS contemplates that any employer using another method of substantiation will have to implement a written policy which requires employees to carry and use the employer-provided cell phones in connection with the employer's trade or business, and which prohibits personal use of the cell phones, except for minimal personal use. Further, the employer must reasonably believe that the cell phone is not being used for personal purposes, except for such minimal personal use.

Comments and suggestions submitted in response to Notice 2009-46 should be made in writing and sent to the IRS on or before September 4, 2009. The Internal Revenue Bulletin containing the Notice is here.

June 15, 2009

Employee Benefits-IRS Adds More Information On New COBRA Subsidy To Its

The IRS has added some new Q & As to its website which contains information on the new COBRA subsidy (see Q & As 25 through 37, added on 6/04/09). The most interesting of these is Q &A 25, which deals with whether an individual's termination of employment is involuntary, so that the individual is entitled to the subsidy, and the employer is entitled to take a payroll tax credit for the subsidy. Specifically, the question asks under what circumstances will the IRS accept an employer's determination that an employee's termination of employment is involuntary for purposes of the employer's being able to claim the payroll tax credit. The answer given is that, if an employer determines that an employee's termination is involuntary, and the determination is consistent with a reasonable interpretation of the applicable statutory provisions and IRS guidance, the IRS will not challenge that determination. The employer must maintain supporting documentation of its determination that the termination is involuntary, including a written statement or other attestation by the employer of its conclusion.

This new Q & A is helpful to the employer. It reduces the risk that the employer's determination that a termination of employment is involuntary, and the employer's taking a corresponding payroll tax credit, could later be challenged by the IRS. The IRS website containing information on the new COBRA subsidy is here.

June 12, 2009

Executive Compensation-IRS Issues Guidance on TARP Rules For Executive Compensation and Corporate Governance

The IRS has issued interim final rules, under the Emergency Economic Stabilization Act of 2008, as amended ("EESA"), which provide guidance on the provisions of EESA pertaining to executive compensation and corporate governance, for financial institutions and other entities that receive financial assistance under the Troubled Asset Relief Program ("TARP").

The interim final rules include the following limits, provisions and requirements which generally apply to all TARP recipients (subject to certain exceptions for TARP recipients that do not hold outstanding obligations):

-- limits on compensation which encourage the senior executive officer ("SEO") to take unnecessary and excessive risks that threaten the value of the TARP recipient;

-- provisions for the recovery of any bonus, retention award, or incentive compensation paid to a SEO or the next twenty most highly compensated employees based on materially inaccurate statements of earnings, revenues, gains or other criteria;

-- a prohibition on making any golden parachute payment to a SEO or any of the next five most highly compensated employees;

--a prohibition on the payment or accrual of any bonus, retention award or incentive compensation to a SEO or certain highly compensated employees (subject to certain exceptions for payments made in the form of restricted stock);

--a prohibition on employee compensation plans that would encourage manipulation of earnings reported by the TARP recipient to enhance an employee's compensation;

-- the establishment of a compensation committee of independent directors to meet semi-annually to review employee compensation plans and the risks posed by these plans to the TARP recipient;

--the adoption of an excessive or luxury expenditures policy;

--the disclosure of perquisites offered to a SEO and certain highly compensated employees;

--a disclosure related to compensation consultant engagements;

--a prohibition on tax gross-ups to a SEO and certain highly compensated employees;

--rules on compliance with federal securities law regarding the submission of a non-binding resolution on SEO compensation to shareholders;

--the establishment of certain reporting and recordkeeping requirements regarding the foregoing compensation and corporate governance standards; and

--the establishment of the Office of the Special Master for TARP Executive Compensation, to address the application of the foregoing limits, provisions and requirements.

The interim final rules are effective as of June 15, 2009, except as they apply to certain statutory provisions with an earlier effective date, as explained in the preamble accompanying the rules. They replace certain earlier IRS guidance on EESA rules applying to TARP recipients (i.e., interim final rules issued in October, 2008, Notice 2008-PSSFI and Notice 2008-TAAP), as of the dates set forth in the rules and the accompanying preamble. The interim final rules and preamble are here.

June 11, 2009

Executive Compensation-Treasury Expresses Its Thoughts On How Executive Compensation Should Be Improved

A press release, dated June 11, 2009, contains a statement by Gene Sperling, Counselor to the Secretary of the Treasury, which outlines the Treasury Department's thoughts on how executive compensation should be improved to avoid further adverse effects on the economy. The statement was made at a hearing of the U.S. House of Representatives Committee on compensation practices.

The statement indicated that one contributing factor to the current economic crisis has been excessive risk taking, which is attributable to compensation practices at financial institutions that encourage short-term gains to be realized with little regard to the potential economic damage that could be caused. What is most important for the economy now is understanding how compensation practices contributed to the economic crisis, and what steps can be taken to ensure that these practices do not cause excessive risk-taking in the future.

The statement noted that Treasury Secretary Geithner has laid out a set of principles for moving forward with compensation reforms. The goal of these principles is to help ensure that there is a much closer alignment between compensation, sound risk management and long-term value creation for firms and the economy as a whole. These principles are the following:

--compensation plans should properly measure and reward performance

--compensation should be structured in line with the time horizon of risks;

--compensation practices should be aligned with sound risk management;

--golden parachutes and supplemental retirement packages should be reviewed and rewritten to align the interests of executives and shareholders; and

--transparency and accountability to shareholders should be promoted in setting compensation.

The statement discusses each principle in some detail. The press release containing the statement may be found here.

June 10, 2009

Executive Compensation: IRS ClarifiesThat TARP Transaction Is Not A Code Section 409A Payment Event

In Notice 2009-49, the IRS states that a transaction under the Troubled Asset Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008 ("EESA"), which involves the acquisition by the Treasury Department of stock or another type of equity in a financial institution or other entity, is not an event with respect to which a payment can be made under a nonqualified deferred compensation plan ("NQDCP) under Section 409A of the Internal Revenue Code and the underlying Treasury regulations. The Notice clarifies that, for purposes of those regulations, this type of transaction-a "TARP Transaction"- is not a change in ownership or effective control, or a change in the ownership of a substantial portion of the assets of the corporation, and therefore is not a permissible Section 409A payment event.

Accordingly, a NQDCP will fail to satisfy the requirements of Section 409A if it makes a payment on account of a TARP Transaction, and will not fail to satisfy those requirements merely because it fails to make a payment on account of a TARP Transaction. Further, a NQDCP will not fail to satisfy any requirement of Section 409A or the underlying regulations (e.g., the written plan requirement) merely because it fails to explicitly provide that a TARP Transaction will not trigger a payment, without regard to whether the plan incorporates the definition of a change in control event by reference to the regulations or sets forth a definition of a change in control event that is otherwise compliant.

The IRS intends to amend the regulations under Section 409A to incorporate the guidance set out in Notice 2009-49. The Notice and the amended regulations will apply to TARP transactions occurring on or after June 4, 2009. The Notice is here.

June 10, 2009

Employee Benefits-CMS Makes Available Application To Review Denials of COBRA Subsidy

Further to my entry of May 22, the Centers for Medicare & Medicaid Services ("CMS") has now made available its application to request a review of a denial of the new COBRA subsidy. This application is to be used by any individual who qualifies for the subsidy (that is, an individual who became eligible for COBRA coverage (including state law "mini-COBRA" coverage) due to an involuntary termination of employment (other than for gross misconduct) occurring from September 1, 2008 through December 31, 2009 ), and who was covered under the group health plan of a federal, state or local government, or under an insured arrangement which is subject to state law "mini-COBRA". The application may be found here.