Compliance August 25, 2015

Teachers File Lawsuit Against Kentucky Retirement System

The lawsuit alleges violations of state law, the Fair Labor Standards Act and the U.S. Constitution.
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Several teachers have filed a lawsuit on behalf of current and former members of the Kentucky Teachers’ Retirement System (KTRS) alleging that KTRS trustees, staff and advisers created a “corrupted system.” 

According to the complaint, KTRS allowed the state legislature to underfund the employer portion of required contributions for years, and increased the employee portion of required contributions from 9% of pay to 13%. The teachers argue that this effectively results in employees being underpaid, in violation of the Fair Labor Standards Act, and violates the contract clause of the U.S. Constitution. The complaint calls the decision to increase the employee portion of pension contributions a “back-room deal” with state officials because, it says, KTRS members were not notified about the increase. 

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The lawsuit alleges that KTRS violated its fiduciary duty by not lobbying the legislature aggressively for full funding. The budget of the general assembly shorted the actuarially required contributions by $1.8 billion over the past five years, in violation of state laws, according to the complaint. The lawsuit says the KTRS board also has a fiduciary duty under state law to inform members of material issues or problems with the plan, and it did not. As of June 2013, the pension system’s funded ratio was 51.9%. The teachers say KTRS covered up the fact that it is one of the worst funded pension system’s in the country. 

The teachers also accuse KTRS of not being vigilant in its investment policies, investing with managers that were on the American Federation of Teachers caution list, and investing with alternative investment managers, which the complaint says “have been criticized extensively in the nation press for underperformance, excessive fees, excessive risks and lack of transparency.” 

Among other things, the teachers want the court to find the increase in employee pension contributions a violation of contract rights and the Fair Labor Standards Act and order that they be refunded. They are asking the court to order that KTRS demand from the legislature full funding of required contributions, and if full funding is not provided within a year, to take legal action against the Kentucky General Assembly. They are also asking that KTRS be ordered to amend its investment guidelines to allow only certain investments. 

The complaint may be viewed here.

Compliance August 25, 2015

Certain Identity Theft Benefits Not Considered Taxable

The IRS says identity protection received as a result of a data breach will not be considered taxable benefits.
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In Announcement 2015-22, the Internal Revenue Service (IRS) notes that data breaches at organizations’ recordkeeping systems can, and do, happen, and in response to such events, customers and/or employees are offered identity protection services.

The IRS says it will not assert that an individual whose personal information may have been compromised in a data breach must include in gross income the value of the identity protection services provided by the organization that experienced the data breach. Additionally, the agency will not assert that an employer providing identity protection services to employees whose personal information may have been compromised in a data breach of the employer’s (or employer’s agent or service provider’s) recordkeeping system must include the value of the identity protection services in the employees’ gross income and wages. The IRS will also not assert that these amounts must be reported on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to such individuals. 

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The agency says the announcement does not apply to cash received in lieu of identity protection services, or to identity protection services received for reasons other than as a result of a data breach, such as identity protection services received as part of an employee’s compensation benefit package. The announcement also does not apply to proceeds received under an identity theft insurance policy; the treatment of insurance recoveries is governed by existing law.

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