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.

Having Your Pension and Working Too—A Strict IRS Ruling Contrasts with New Laws for Federal Employees

A new law (the 2012 Highway Investment Act) allows a phased retirement program for federal employees. In contrast, an IRS private letter ruling severely restricts pension plans from paying benefits to retirees who return to work before age 62. This difference in laws governing federal pensions and other pension plans is illogical.

The new law allows federal employees to work part time at 20% to 80% of their full-time schedule, receive pay and pension credit for that working percentage, and also receive a pension for the other (nonworking) percentage of their full-time schedule. No termination of employment is required to start this combination of work and pension.   

In contrast, tax laws prohibit all other “pension plans” (money purchase pension plans and defined benefit pension plans) from providing benefits to an employee who is under age 62 and has not retired or separated from employment (unless the employee has reached the plan’s “normal retirement age”). Internal Revenue Code section 401(a)(36), Treas. Reg. sections 1.401(a)-1(a)(2) and 1.401-1(b)(1)(i). Because the meaning of key terms such as “retired” and “separated from employment” is open to varying interpretations, the practical impact of these laws has been uncertain. Just how long must an employee be absent from work to make a pension payment permissible before age 62? Under what circumstances may the employee return to work without jeopardizing the tax qualified status of the pension plan?

The IRS letter ruling (201147038) states that an absence from employment for a week or less is not a bona fide separation or retirement. The ruling refers to Treasury Regulations interpreting Code section 409A to define “retirement” and “separation.” (The ruling notes that “although section 409A and its regulations address a nonqualified plan arrangement the definitions regarding termination and separation from service are consistent with” the definitions for purposes of pension plan qualification.) The 409A regulations apply very strict rules. For example, the 409A regulations generally require that the employer and employee reasonably anticipate that after the date of termination the employee will either perform no further services, or services at a level of no more than 20 percent of the average services performed over the immediately preceding 36 month period. The regulations also list other relevant factors, such as whether the employee continues to be eligible for other employee benefit programs, whether the employee is permitted and available to perform service for others in the same line of business and whether a change in business circumstances, such as termination of the employee’s replacement, causes the employee to return to employment.

The result is:  Plans that pay pensions to retirees under age 62 who are rehired after a short absence face possible disqualification if the IRS determines that the retirement was a sham, because the retiree returns to work at more than 20% of his prior work schedule. In contrast, the new law allows federal employees (including IRS employees) to switch to 20% to 80% part-time work and receive federal pensions before age 62 without terminating their employment.

These differences in laws for federal employee pensions and other pensions make no sense.

Supreme Court Justice Roberts’ 1935 Opinion on Pension and Health Care Reform

“Those who cannot remember the past are condemned to repeat it.”

–George Santayana 

This quote came to mind recently while I read Supreme Power by Jeff Shesol. This fascinating book recounts the legal standoff between Franklin Roosevelt and the Supreme Court over the constitutionality of FDR’s “New Deal” legislation. In a key decision, the Supreme Court struck down the Railroad Retirement Act as unconstitutional on May 6, 1935. The author’s explanation of this decision (Railroad Retirement Board v. Alton) initially peaked my interest because it involved pension legislation that, similar to ERISA, was intended to safeguard pensioners in dying industries. The laws mandated employer and employee contributions to pensions for retirees of failing railroads. But the interesting parallels to current legal issues did not end there. The name of the Supreme Court Justice who wrote the 1935 opinion was Roberts (although the 1935 Justice was named Owen Roberts, not John Roberts). Even more striking, the 1935 opinion discussed not only employer‑provided pensions but also employer‑provided medical benefits. Justice Roberts opined that the federal government could not force the railroads to provide pensions because this was not within the federal powers to regulate interstate commerce. As the book explains, Justice Roberts reasoned that if Congress could mandate employer‑provided pensions, then “there was no limit to the field of so-called regulation”: Congress could order employers to provide employees “a hundred other matters” including, “say, free medical care for employees.”  (Emphasis added, Supreme Power, page 118.)

As this illustrates, current legal controversies surrounding employer‑provided pension and medical benefits have occurred in the past. And they will undoubtedly continue into the future (perhaps even with other Justices named Roberts).