Compliance January 27, 2006

Gender Reassignment not a Deductible Medical Expense

January 27, 2006 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) issued a memorandum that costs for gender reassignment surgery and related medications, treatment, and transportation may not be deducted as medical expenses under IRC Section 213.
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The memo referred to a man who suffered from Gender Identity Disorder (GID) since childhood and, upon the diagnosis and recommendation of his therapist and a doctor, entered into hormone therapy, lived as a woman, and eventually had gender reassignment surgery to become a female.

The IRS said that IRC Section 213 does not include cosmetic surgery under the term medical care unless the procedure is necessary to correct a deformity directly related to a congenital abnormality, an injury resulting from an accident or trauma, or a disfiguring disease.   According to the IRS, the code defines cosmetic surgery as a procedure that is directed at improving a person’s appearance and does not promote the proper function of the body, or treat illness or disease, as the term medical care requires.

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The IRS concluded that, “Without an unequivocal expression of Congressional intent that expenses of this type qualify under section 213, allowing the medical expense deduction is not justified in this case.”

The IRS memo from the Office of the Chief Counsel is  here .

Benefits January 26, 2006

PA Insurer Latest in DB Freeze Parade

January 26, 2006 (PLANSPONSOR.com) - A Pennsylvania property and casualty insurer has become the latest in a growing line of companies freezing their defined benefit program in favor of a beefed-up 401(k) plan.
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Harleysville Group announced in a Web statement that the changes will affect alI of its 2,100 employees including going to an auto enrollment and default deferral amount for the salary deferral portion of the defined contribution program. As a result of these changes, the company expects to reduce annualized operating expenses by approximately $5 million, officials said.

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The statement said that the changes, scheduled to be put in place by April 1, 2006, “are part of the company’s continuing efforts to provide comprehensive and competitive compensation and benefits programs that are closely aligned with corporate performance, while adding greater predictability to its cost structure.”

The company said the changes include freezing the company’s defined benefit pension plan at current benefit levels and enhancing its 401(k) retirement savings plan. In the DB plan, the accrual of future benefits for eligible employees will cease on March 31, 2006, and all retirement benefits earned at that time will be fully preserved. Eligible employees not currently vested in the plan will become vested if they are employed by the company for a total of five qualifying years.

The company also unveiled a revised defined contribution plan, the Harleysville Retirement Savings Plus plan, which it said will provide employees with a company contribution ranging from 5% to 12.5% of salary each year, depending on company results and employee contributions.

According to the company statement, the plan also features:

  • a “company core contribution” equal to 5% of salary, which automatically will be contributed to all eligible employees’ accounts on a bi-weekly basis regardless of the employees’ salary deferral amounts
  • the option for employees to make bi-weekly, pre-tax deferrals from 1% to 100% of salary (subject to annual federal limits)
  • a “company guaranteed match” contribution equal to 50% of the first 6% of salary deferred by each employee
  • a “company performance match” contribution that provides employees making salary deferrals the opportunity to receive an additional company match of up to 75% of the first 6% of salary deferred. A company performance match will be made when the company’s operating return on equity exceeds 8%.

In order to ensure 100% participation in the plan, an account will be established for all eligible employees, effective April 1, 2006, to accept the automatic bi-weekly company contribution of 5% of salary. Employees hired after that date, also will be enrolled automatically in the salary deferral component of the plan at the rate of 3% of salary, unless they opt out.

“These changes reflect Harleysville Group’s ongoing efforts to strengthen the link between the company’s compensation programs and its performance – both at the individual and at the corporate level – while expanding these programs to ensure that all employees have the opportunity to benefit financially from strong company performance,” said Michael Browne, Harleysville Group’s president and chief executive officer, in the Web statement.

A number of other companies have followed a similar path in recent months (See Two More Companies Join DB Plan Freezing List ).

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