Benefits January 27, 2004

Lawsuit Rings SBC Over Retirement Benefits

January 27, 2004 (PLANSPONSOR.com) - Former employees of an SBC Communications Inc subsidiary have filed suit against the telecommunications giant and its Cingular Wireless joint venture alleging they are owed about $123 million in retirement benefits.
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In the suit, the group contents the two telecommunications companies failed to honor agreements to protect older workers when their employer at the time, Southern New England Telephone Co, converted their traditional defined benefit pension to a cash balance plan in 1995. SBC acquired the telephone company in 1998, according to news sources.

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The suit alleges those commitments awarded long-serving employees, like the group filing the legal action, who have not yet retired the full pensions they would receive at age 65. Those commitments enticed workers into an early retirement arrangement with the promise of a lump sum payment.

Thomas Moukawsher the attorney representing the 16 former workers, said a benefits calculation for a sample of 12 workers found that the average loss of benefits was more than $243,000 a person. “The typical person worked over 30 years and a lump sum payment would be $500 ,000 ,” Moukawsher told the New Haven (Connecticut) Register.

The group is seeking class-action status on behalf of 500 workers in their suit filed in US District Court in Hartford.

Compliance January 26, 2004

S Corp ESOP Abuse Window Closed

January 26, 2004 (PLANSPONSOR.com) - On Friday the Treasury Department and the IRS issued a ruling to shut down what the agencies described as "abusive transactions involving S corporation ESOPs."
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>An employee stock ownership plan, or “ESOP,” is a type of retirement plan that invests primarily in employer stock.   Congress has allowed an “S corporation” to be owned by an ESOP, but only if the ESOP gives rank-and-file employees a meaningful stake in the S corporation.  

>According to a Treasury Department news release, when an ESOP owns an S Corporation, the profits of that corporation generally are not taxed until the ESOP makes distributions to the company’s employees when they retire or leave the job – an important tax break that allows the company to reinvest profits on a tax-deferred basis, for the ultimate benefit of employees who are ESOP participants.

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>However, Revenue Ruling 2004-4 makes these “listed transactions” for tax-shelter disclosure purposes, thus shutting down transactions that move business profits of the S corporation away from the ESOP, so that rank-and-file employees do not benefit from the arrangement. The news release notes that the ruling prohibits using stock options on a subsidiary to drain value out of the ESOP for the benefit of the S corporation’s former owners or key employees.

“Congress recognized the potential for attempts to circumvent the rules and specifically authorized Treasury and IRS to prevent it. This notice does just that, imposing a 50% excise tax on the option holders in cases where rank-and-file ESOP participants are deprived of the business profits,” stated Treasury Assistant Secretary for Tax Policy Pam Olson.

You can read MORE about the ruling at http://www.treas.gov/press/releases/reports/js1114attachment1.pdf

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