Compliance March 8, 2006

Participant's Estate Must Include IRA Balance for Tax Purposes

March 8, 2006 (PLANSPONSOR.com) - A federal judge in Indiana has ruled that the executrix of a deceased participant's estate must include in the estate's value for the purpose of determining tax liability an individual retirement account (IRA) rolled over from a qualified employer plan.
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US District Judge Rudy Lozano of the US District Court for the Northern District of Indiana ruled that plaintiff Walter Mucha’s IRA proceeds should be counted when totaling his estate because the proceeds were not from a qualified plan. The court noted that the government conceded that if Mucha had retained his funds in the qualified pension plan, the value of that interest would have been excluded from his estate.

The court said the 1986 Tax Reform Act treated IRAs differently from qualified plans because inherent in a qualified plan is the concept of employment and retirement or separation from service. However, the proceeds of an IRA do not meet the “separation from service” requirement even though the proceeds may have been transferred from a qualified plan, the court said.

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According to Lozano, Mucha worked for Amoco Oil Co. and participated in its pension plan. Mucha chose a lump-sum settlement distribution from the plan when he retired in 1981 instead of receiving an annuity. He then rolled the funds into an IRA account and began taking a $1,000 monthly distribution from the IRA.

After Mucha’s death, the executrix of his estate sought to have the IRA account value kept apart from the rest of his estate for the purposes of fixing the estate’s income tax bill, an effort that eventually proved unsuccessful. The executrix filed a protest with IRS Office of Appeals, which disallowed the request for a refund, and the executrix turned to the courts.

The case is Sherrill v. United States, N.D. Ind., No. 2:04-CV-509, 1/27/06.

Benefits March 7, 2006

Canadian Employers Feel the Health Care Burden Too

March 7, 2006 (PLANSPONSOR.com) - Just as rising health care costs and the impending wave of baby boomer retirees have caused US employers to initiate cost-cutting changes for retiree health care coverage, a Hewitt Associates survey found that Canadian employers are considering changes too.
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In a press release, Hewitt said its survey of 218 Canadian organizations reveals that only 4% say they plan to eliminate post-retirement health care benefits entirely. However, 57% say they intend to reduce the level of benefits over the next three years. Reasons cited for the change include the rising cost of health care (95%), accounting costs (67%), and the large number of employees planning to retire in the next decade (43%).

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In addition, 55% of Canadian companies absorb the additional costs created by cutbacks in provincial health care benefits, the release said. Only 25% of surveyed respondents said they plan to absorb future costs. Also in response to political changes, while 63% of companies have not decided how they would respond to making private health care available to Canadian employees, 59% of those who have decided say they do not intend to cover the costs of private health care under any circumstances.

Naveen Kapahi, a senior benefits consultant in Hewitt’s Vancouver office, said in the release, “Escalating health care costs, combined with the economic and political changes currently underway in Canada, will force many to actively look at strategies beyond traditional cost-shifting to manage rising health care costs.”

Strategies survey respondents said they plan to utilize include:

  • Stricter eligibility requirements– According to Hewitt’s survey, 14% plan to adopt stricter eligibility requirements for workers to qualify for retiree health care benefits. In 2004, one-third of organizations (34%) did not require a minimum number of years of service before employees qualified for post-retirement health care benefits. Today, 33% of companies responding to the survey require six to 10 years of service before employees are eligible for benefits, an increase of 7% since 2004.
  • Reductions in medical coverage –Eighteen percent of organizations said they plan to reduce medical coverage for their retirees in the next three years, including eliminating medical services, increasing deductibles/co-payments and capping certain healthcare services.
  • Increased cost- sharing – Approximately one in three (30%) companies said they plan to add or increase retiree contributions to their retiree health care programs.
  • Increased flexible retiree benefit plans– As a way to control costs, many companies are now offering flexible retiree benefit programs, which enable companies to control their future benefit spending by paying for benefits through a monetary allowance instead of funding the benefits directly. Sixteen percent of companies now offer flexible benefit programs to retirees, up from 8% in 2004.

Copies of the study, “Postretirement Health Care Benefits in Canada 2006,” can be obtained by calling 416-225-5001 or emailing infocan@hewitt.com .

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