Colorado Government Immunity Act Does Not Protect Plan Trustees

Trustees of Colorado governmental pension and benefit plans should take note of a recent Colorado Court of Appeals decision, which ruled that the Colorado Government Immunity Act does not apply to protect trustees of an employee benefits trust. The Colorado Court of Appeals issued its opinion in Casey v. Colorado Higher Education Insurance Benefits Alliance Trust on August 16, 2012.

In response to this decision, trustees of Colorado governmental pension and benefit plans should review their fiduciary liability protections, including fiduciary liability policies. Trustees should be sure they understand the exact scope and limits of their potential fiduciary liability. Fiduciary liability insurance provisions that expose the trustees to potential liability should be identified, discussed and renegotiated.

American Bar Association Proposals To Simplify Pension Tax Laws

As my previous blog installment explained, major simplification of federal tax laws is universally desired but unlikely in the near future due to political gridlock. Piecemeal simplification of pension laws and regulations appears more feasible. In October, the American Bar Association Tax Section submitted recommendations to Congress that would simplify selected tax laws affecting pension and benefit plans. The ABA recommendations deserve attention because past ABA proposals of this type have convinced Congress to eliminate some very unwieldy pension laws, such as the impossibly complex “combined plan” limit of Code section 415(e). (I worked on the ABA committee that urged Congress to eliminate Code section 415(e).)

The ABA proposes a variety of changes, most significantly:

•  Simplification of the age 70 1/2 required minimum distribution rules to

–  exempt taxpayers whose tax qualified plan benefits are $250,000 or less and whose IRAs have combined values under $250,000, and

–  require post-death distributions within five years after the death of the individual and spouse or, if the beneficiary is a child of the decedent or his or her spouse, the beneficiary’s attainment of age 26.

These changes deserve Congressional approval, because they would allow more flexibility in the timing of distributions from smaller retirement accounts and would streamline post-death distribution rules.

•  Liberalization of pension rules to allow employees to receive pension benefits while continuing to work as early as age 55, rather than the current minimum age 62.

Although this proposal would simplify distribution rules for pension plans, I question the choice of age 55. It adds potential confusion because it does not coordinate with laws prohibiting in service withdrawals from 401(k) and 403(b) plans before age 59 1/2.

Political Gridlock and Pension Law

The Presidential campaigns rarely mention pension issues, but pension law is shaped by politics. What do current political trends mean for the future of pension law? A recent book by two prominent congressional scholars tells us that the political gridlock in Washington is Even Worse Than It Looks. The authors, Thomas E. Mann and Norman J. Ornstein, explain that the causes for this include:

•  Political parties that are polarized and “vehemently oppositional”;  

•  The “checks and balances” in the U.S. constitutional system, which present “more structural impediments to action than any other major democracy”;

•  Redistricting that allows politicians to run in “safe” districts, not requiring them to respond to diverse political views;

•  Splintered media sources that narrow their ideology to viewers’ preferences, promoting extremism rather than centrism; and

•  Campaign finance laws that allow huge sums of money to buy negative, polarizing ads.

What does this portend for tax simplification proposals that would affect pension laws? It suggests that no comprehensive changes are imminent. In some ways, this is good. It delays the possible disruption that could be caused by major “simplification” of the kind proposed by the Bush administration, which would consolidate various retirement plans (457, 403(b), 401(k)) into a single form called an Employer Retirement Savings Plan. The American Society of Pension Professionals and Actuaries has stated that such reforms would “not be simplification” and “would disrupt saving, and force state and local government and nonprofits to modify their retirement savings plans and procedures.” Gridlock would also forestall proposals to reduce retirement plan tax benefits in order to raise revenue, such as the “20/20” proposal of the National Commission on Fiscal Responsibility and Reform that would limit annual contributions to the lesser of $20,000 or 20% of compensation.

The good news is that vast complexities of pension law could be simplified by administrative action and piecemeal legislation. Progress on simplifying pension law is possible despite a political situation that may remain Even Worse Than It Looks.