Health Care Reform Declared Unconstitutional Again -- Should Anyone Care?

Are you bored? Here is a link to Judge Roger Vinson's 78 page opinion in State of Florida v US Department of Health and Human Services, also known as 26 states get together to challenge Health Care Reform (PPACA). http://www.scribd.com/doc/47905937/Health-Care-Ruling-by-Judge-Vinson

What does it all mean? I think that we are in about the same place as we were before. Federal courts are split, so it's heigh ho, heigh ho, off to the Supreme Court we go.

In any event, here are the significant highlights of Judge Vinson's ruling, at least as I see it:

• Summary judgment in favor of HHS was found on the claim that the massive expansion in Medicaid because of the increased costs to the states was unconstitutional. In other words, the claim of the states got thrown out here.
• With respect to the individual mandate, Vinson elected to look at the Commerce Clause and the Necessary and Proper Clause separately. Bottom line, he finds the individual mandate to be unconstitutional on both grounds.
• Finally, he has found that the individual mandate is not severable from the rest of PPACA. Therefore, he throws out the entire law.
• Plaintiffs had asked for injunctive relief, and Judge Vinson said that such relief was not needed in light of his ruling.

Stay tuned for more ...

Educating Our Youth and Young Workers about Saving and Retirement Plans

We're in the 21st century now. In fact, we have been for a while. And, as a group, our youth and our younger workers just don't get the concept of saving and of retirement plans. I'm not saying that all of the other generations have either, but teaching these people in today's world comes with different challenges than teaching, for example, my generation did.

Before I consider how we might do this, I am going to relate a conversation that I had with a highly intelligent 25-year old (if this individual is reading this, they will know it is them). I am going to refer to this person as Chris (it's an androgynous name, I don't know many people named Chris and I can alternate between he and she without changing meaning).Chris got a 4-year degree from an outstanding college, and he got a good job right out of college. But, when I was discussing her wonderful benefits program with her, she complained about the 401(k) plan. Chris said that while he knew it was right to be saving as much as he could in the plan, in his early 20s, he was afraid to be locking his money up for at least 35 years.

I explained about Roth 401(k) and after-tax money, but Chris' plan didn't have those options. She would like to own a home some day and start a family of her own. His 401(k) will be a detriment to that as all of his savings will be tied up. She makes valid points, but as a retirement plan professional, I say she doesn't quite get how important these savings are to being able to retire some day (I presume she wants to retire some day).

I don't know about Chris, but one of the things that I know about most 15 to 30 year olds is that they like games. They like video games, Wii, Xbox, PS3, and role-play games. And, they often learn from them. So, let's let them learn their way. We need video games and fantasy role play games that take people through work and life. They will react if their friends are enjoying their retirement, but they are still working at age 75 in these games.

It's the 21st century. While the basics remain the basics, the landscape of saving for retirement has changed. Career employment with one company is largely a thing of the past. The safety net of defined benefit plans is gone for most. And, in this new world, they need to learn their way.

Think about it.

I've Arrived, I'm So Excited

Benefits Link has picked up one of my articles. You can access Benefits Link at http://www.benefitslink.com

After 75 days or so of blogging, I now feel like I have rejoined the consulting establishment. Thanks to Dave Baker, the BL boss, for covering me.

Say on Pay Final Rules

If you're a follower of executive compensation issues, you undoubtedly know that Dodd-Frank Wall Street Reform and Consumer Protection Act became law last year. It made sweeping changes for most public companies. With regard to the executive compensation issues, the Securities and Exchange Commission (SEC) generally is responsible for interpreting the statute and writing the rules. In fact, they issued final rules for Shareholder Say on Pay (SSOP) and Shareholder Say on Golden Parachutes (SSOGP) earlier this week.

WARNING: This is really technical stuff and if you want the really technical version, you can read the briefings that virtually every major law firm is doing or already has done on this.

BENEFITS OF READING THIS INSTEAD: I think this is a pretty good summary of what's in there though. You may laugh a little bit, which probably won't happen if you read the law firm versions (I just have to pick on lawyers once in a while). I don't use fancy legal terms unless I have to. So, you won't see anything like estoppel, res ipse locutur, or aberemurdo.

I'm going to address them, hopefully from a practical standpoint, here, but first, as is my prerogative, I digress. This is a bad name for a law. It has no useful acronym. Back in the 70s and 80s, we got useful names for laws. They had great acronyms like ERISA, TEFRA, COBRA, and ERTA. I can pronounce all those things. I cannot for the life of me pronounce DFWSRCPA. Maybe you are more proficient with new diphthongs than I, but my tongue is twisted. And, yesterday, Congress showed they can still do it. A bill to enact medical malpractice reform was introduced with the catchy acronym of HEALTH Act. It's too bad that it has the full name of Help Efficient Accessible Low-Cost Timely Healthcare Act of 2011, but it last I can say the acronym.

OK, back to serious stuff. What are the differences between the Dodd-Frank final rules and the proposed rules and what stays the same?

Differences


Say on Pay

• SSOP votes are required only at meetings where directors are being elected. The vote may be more frequent, but it must occur no less frequently than once every three years.
• The only required vote is on the executive compensation of named executive officers (NEOs). Don't despair, though, companies may choose to solicit shareholder opinion on other compensation issues. Here's a guess that most companies won't do that.
• Companies with share value available to be traded by the public of less than $75 million (some people refer to this as the float) get a 2-year delay in needing to comply.

Say on Frequency of vote (SSOF)

• Again, these are required only with respect to annual or special meetings at which directors are being elected, and not less frequently than every six years. Is it ironic that votes on frequency do not need to occur frequently?
• Companies with a float of less than $75 million get a two-year delay here as well.
• Not less than 150 days after the annual meeting and not less than 60 days before shareholder proposals for the next annual meeting are due, the company must file an 8-K explaining how often it will hold SSOP votes in light of the results of the SSOF vote.
• If one of the three frequency alternatives (annual, biennial, triennial) gets a majority of the shareholder vote (more than 50% as compared to a plurality which is simply the largest vote-getter), and the company chooses to adopt that frequency of vote, then the company may reject any shareholder proposal calling for a SSOP or SSOF vote.
• Proxy statements must disclose the frequency and next occurrence of SSOP votes.

Say on Golden Parachutes

• Smaller companies (float < $75 million) get a 2-year delay
• These rules apply to any filings after April 24, 2011

The Song Remains the Same

These items are significant, IMHO, but unchanged, or largely unchanged from the proposed rules issued last October.

Say on Pay

• There is no specific language requirement. Companies should just make sure they do not mislead shareholders.
• Director compensation need not be voted on in the SSOP.
• The result of the SSOP vote must be disclosed to shareholders within 4 days after the meeting.
• The vote is non-binding. The proxy statement must disclose that it is non-binding. Editorially, of the shareholders who actually read the proxy information, I wonder how many will not realize that the non-binding nature is simply following the law, and will have a "why are they doing this" moment.
• In the next Compensation Discussion and Analysis (CD&A), companies must discuss whether and how they considered the most recent SSOP vote, and how that vote has affected their executive compensation, as well as their policies and decisions with respect to that compensation.
• Institutional investors are required to file their SSOP voting record with the SEC.
• Companies still under the auspices of TARP are exempt from these rules (until they have fully repaid and been released from TARP), but they are subject to the TARP SSOP rules.

Say on Frequency

• The same 8-K 4-day rule as applies for SSOP applies here.
• This is non-binding and the proxy must disclose such non-binding nature.
• There are no specific language requirements.
• Four and only four choices must be presented for the SSOP vote in the SSOF vote (I wonder what would happen if the majority vote were abstain. If that were the case, would the company by somehow adopting abstain be allowed to ignore shareholder SSOP and SSOF proposals? I don't even know what that means.):
• Annual
• Biennial
• Triennial
• Abstain

Say on Golden Parachutes

• The information already provided in the proxy entitled "Potential Payments upon Termination of Employment or Change in Control" (Item 402(t)) does not satisfy the Dodd-Frank requirement. However, they still have to provide that other information. Talk about overkill ...
• Item 402(t) disclosure is required whenever a proxy solicits change-in-control approval, whether or not the company is required to have a SSOGP vote
• Disclosure for the SSOGP vote must be in both tabular and narrative form. This way, both the verbally and the mathematically challenged get a second bite at the apple.
• Here are the goesintaz (that's what must go in) for the tables. The comeoutaz (what the executives get may be pretty massive). There is no de minimis exception:
• cash payments
• value of accelerated payments and stock awards
• payments in cancellation of options and stock awards
• enhancements to pension and nonqualified deferred compensation arrangements
• perqs and other personal benefits
• health and welfare benefits
• tax reimbursements and gross-ups
• any other comeoutaz (see above for what this means) that don't fit into any other category
• The aggregate amount
• Footnotes
• other pertinent information
• single or double trigger
• The narrative must disclose the specifics of the events that would trigger these payments, who would make the payments, whether they will be made in lump sums, installments, or some other way, and any restrictive covenants (such a fancy name for a non-compete or non-solicitation agreement) that apply.

A New Twist on Health Care Reform Litigation

Some lawsuits I just don't understand. I guess that's because I don't have the proper training. Surely three years of law school would have showed me why this one should move forward ... well perhaps surely is too strong a word.

Somewhere in the heart of Pennsylvania reside and work a presumably lovely self-employed couple -- Barbara Goudy-Bachman and Gregory Bachman. They have sued the US government in federal court to challenge the individual mandate under health care reform (PPACA). They believe that the government has exceeded its powers.

As it has in (I believe all of) these individual cases, the United States has argued that the Bachmans do not have standing to sue because personally, they could show no immediate individual harm. Well, hold on a second, United States. The Bachmans are alleging immediate economic challenges as a result of PPACA. You see, the Bachmans are planners and they have calculated that they cannot afford car payments and health care premiums come 2014 (currently, they have no health insurance).

Judge Christopher C. Conner, writing in the Central District of Pennsylvania wrote:

The economic impact is immediate: the Bachmans must forego the purchase of a new vehicle and rearrange their finances in anticipation of the statutory requirement that they purchase insurance. Although it is certainly true that the Bachman’s circumstances may change, they must undertake financial planning and budgeting decisions now in preparation for the implementation of the individual mandate. The mandate will likely require a significant financial investment by the Bachmans. Changes in their family budget are required now and are reasonably traceable to the mandate. The Bachmans have no crystal ball. They must engage in financial preparation and reduced spending based upon their present circumstances in light of the impending effective date of the individual mandate.

This is incredible logic. I fear that my personal taxes may be higher in 2014. And, my car is vintage 1999, so I should need a new one by 2014. I think I have a case, perhaps even better than the Bachmans. But, I don't think I am going to sue the US government over this one.

In any event, I googled Judge Conner. He is a Bush appointee, educated at Cornell University and the Dickinson School of Law. He was an Adjunct Professor at the Widener University School of Law about 10 years ago. You can go to this website and see that there are a bunch of people not real happy with him: http://www.impeachjudgeconner.com/

And, if you want to read about the case in gory detail, you can go here: http://docs.justia.com/cases/federal/district-courts/pennsylvania/pamdce/1:2010cv00763/80371/37/0.pdf

No Layoffs ... Ever!

15 of the 100 Top Companies to work for according to Fortune Magazine have never had a layoff. Never! How do they do it? How can they possibly stay in business?

You can read the whole article here: http://money.cnn.com/galleries/2011/pf/jobs/1101/gallery.no_layoffs.fortune/index.html , but if you'd rather get just some tidbits and commentary, read on.

• SAS instituted hiring freezes in all but growth positions to save money. Hmm! Lots of other companies instituted hiring freezes, period.
• Wegman's Foods has never had a layoff even when they have closed a store. Instead, it has kept the employees and retrained them for other positions. Management says that they would rather retain trained staff than have to invest in new hires later.
• Nugget Market offered more hours rather than hiring additional associates during the recession. They promote from within. Now, there's a concept.
• At Scottrade, the CEO says, "Scottrade is committed to sharing its profits with associates and, of course, keeping them employed and providing opportunities for advancement.
• Stew Leonard's finds work internally for employees who are no longer needed, even if it is as offbeat as painting old machinery so that it will look better. Management cites the workforce as having come up with many of the ideas for cost containment.
• The Container Store faced a difficult business decision where the solution for most companies would have been layoffs. According to CEO Kip Tindell: "While conventional wisdom may tell us downsizing automatically drives a company's stock price higher and increases productivity, it actually doesn't. Layoffs take a huge lasting toll on morale and productivity in the workplace. Laying off people is not the best way, it's the easy [emphasis added] way."

There are almost ten more stories about these companies. All are successful. All keep their employees happy. And, none have done layoffs. EVER!

• 
  

SEC Approves Final Say on Pay Rules ... Narrowly

Yesterday, by a 3-2 vote, the Securities and Exchange Commission (SEC) approved its new final rules implementing the Dodd-Frank 'Say on Pay' provisions. Before discussing the key provisions of the new rules, let me digress by saying that compared to other government agencies such as the IRS and DOL, the SEC has what I view as a strange process. Presumably with significant input from Commissioners, staffers write the rules which are then voted on (usually at an open meeting) by the five commissioners. At the open meeting, there is enough discussion that attendees (live or by some sort of conferencing medium) can get the gist of what is in the rules. Then, they publish the rules.

For those who don't normally play in this arena, 'say on pay' is the common term for allowing shareholders of an SEC registrant the right to, at least triennially, express their opinions (non-binding vote) via an up or down vote on the compensation of top executives.

In any case, here are the keys as I heard them:

• Proxy issuers must give shareholders all four available choices for a say-on-pay vote. That is, they must have a choice between annual, biennial, triennial, or abstention.
• Companies must explain in their Compensation Discussion and Analysis (CD&A) what consideration they gave to the shareholder's say on pay vote.
• Future shareholder proposals on say on pay or say on pay frequency may only be excluded if the company adopts the frequency indicated by the majority vote (NOTE: I'm not sure what happens if no choice gets a majority vote, it could be that there is only a plurality).
• The requirement to report the results of these shareholder votes is to be postponed to 150 days after the annual meeting, at which point it should be filed in Form 8-K.
• Small companies get a 2-year delay in effective date.

There is one other (in my view) strange thing about the way these SEC rules evolve. Periodically, the staffers will receive questions from registrants. They publish their answers on the SEC website, and once published, by some magical process, those answers appear to become part of the final rule.

Supreme Court Takes New View on Anti-Retaliation Cases

Yesterday, in an opinion written by Associate Justice Antonin Scalia, the United States Supreme Court ruled by a margin of 8-0 (Justice Kagan recusing herself) that the fiance of an employee who had complained of discrimination had standing to sue the company under anti-retaliation statutes. (Justices Ginsburg and Breyer voted with the majority, but Ginsburg wrote a concurring opinion in which Breyer joined.) You can read the opinion in Thompson v North American Stainless, LP yourself at http://www.supremecourt.gov/opinions/10pdf/09-291.pdf .

For those who choose not to read the opinion (surely your reading tastes must be very narrow if you don't find this sort of literature both bone-tingling and spell-binding he says with tongue planted firmly in cheek), I'll summarize it here, perhaps with a few editorial comments.

Mr. Thompson and his fiancée, Miriam Regalado, were employees of North American Stainless (NAS) when Ms. Regalado filed a gender discrimination charge against NAS. Subsequently, Mr. Thompson's employment was terminated by NAS. Mr. Thompson claims that he was terminated as retaliation for Ms. Regalado's complaint. Earlier, the 6th Circuit, relying on prior case law, had ruled that Mr. Thompson had no standing to sue in this regard, but the Supreme Court disagreed, essentially unanimously.

For infrequent or non-observers of the Supreme Court (frequently referred to as SCOTUS in the age of Twitter, but I will refrain here), it's time for some editorial relief. Most cases heard by the Supreme Court come from one of the 11 Circuit Courts of Appeals (the US Constitution provides that certain cases may go directly to the Supreme Court, but that discussion is better left for a high school civics class). The Theorem of the Wacky Threes reads as follows:

Most really wacky decisions that come out of the Circuit Courts come from a circuit whose enumeration is a multiple of three. Since the Ninth Circuit is enumerated as three times three, it will produce the wackiest decisions of all.

So, it's not surprising (at least not to me) that a case heard by the Sixth Circuit (six being a multiple of three) is one that would be overturned in unanimity. Now, we return to the case.

First, understand that this ruling does not mean that Mr. Thompson has prevailed in his action, but simply that he has standing to pursue his action. In order to prevail, the burden still lies with him to demonstrate that NAS took action against him that was retaliation for his fiancée's actions. The ruling focuses on Title VII of the Civil Rights Act. It prohibits any employer action " 'that well might have "dissuaded a reasonable worker from making or supporting a [discrimination] charge." ' " In regular English, if Ms. Regalado knew that Mr. Thompson would be fired if she filed her complaint, would she have been dissuaded from filing her complaint?

As I have said many times here, I am not an attorney. I have no formal legal training. But, while NAS argues that the burden placed on employers is too great here, to me this ruling makes sense. I don't think it extends so far as the employer needing to monitor every workplace relationship, but if there is no documentation of other reasons for which NAS terminated Mr. Thompson, then he deserves some protection. So, now, the case will return to the lower courts to be heard. The verdict may be interesting, but the really important part, in my mind, has already been decided.

Blog Status

For those of you who were concerned, my blog will continue post-February 1, although occasionally, an opinion that I might have expressed prior to then will have to be dampened ... or maybe not.

Senators to Introduce Legislation to Cut Spending, Raise Revenue

Senator John Warner (D-VA) and Senator Saxby Chambliss (R-GA) have announced that they will introduce a spending reduction and revenue raising bill in the Senate. Yes, you read that correctly -- that's one Democrat and one Republican.

While, the bill has not yet been introduced, the Warner camp has leaked enough information that we have some pretty good hints about what to look for. Here is a summary.

• Change the tax treatment for mortgage interest from a tax deduction to a tax credit and place a cap on it that would make it apply to only the first $500,000 of a loan. Further, it would eliminate any deductions related to homes other than principal residences.
• Lower marginal federal income tax rates, presumably to the levels recommended by the Debt Commission (see my earlier post on the topic here: http://johnhlowell.blogspot.com/2010/11/debt-commission-retirement-plans-and.html )
• Gradually increase the Social Security Normal (full) Retirement Age to 68 by 2050 (people born in 1982) and to 69 by 2075 (people born in 2006). 
• Increase the OASDI (Old Age, Survivors and Disability Insurance) portion of Social Security tax on high earners. Presumably this means that the 6.2% OASDI rate will be extended from the Social Security Wage Base to infinity (and beyond for you Buzz Lightyear fans).
• Reduce Medicare benefits.
• Reduce defense spending.

There are a lot of sacred cows in there. This is going to be controversial. But, according to comments from Warner's office, everything needs to be in one bill for an up or down vote. He says that individuals shouldn't pick and choose, but should either say that this bill is right or wrong. As of now, there appear to be roughly 10 co-sponsors for this bill from both sides of the aisle. We'll keep you apprised as we learn more and are able to untangle what this means for compensation and benefits issues.

Pension and OPEB Accounting - Immediate Gain and Loss Recognition

I read this morning that Verizon is changing its accounting methods for recognition of actuarial gains and losses. Rather than amortizing gains and losses outside of a corridor over an extended period of time (I could get really technical here, but suffice it to say that since roughly 1985-1987, virtually every American company with a defined benefit pension plan has been using an amortization method similar to the one I described here), they will be expensing all of these gains and losses in the year they occur. Presumably, this is to prepare for global accounting convergence.

To me, this is part of mark-to-market hysteria, and it is just wrong. Let's make the assumption that Verizon's current intention is to keep these plans going (if they intend to terminate, that's a whole different discussion). What happens then is that changes in a hypothetical bond portfolio that Verizon doesn't even own will have a direct effect on the company's annual earnings. And, to make it worse, this earnings effect will be based on the yield on that hypothetical portfolio on a specific day. So, if the yields on that bond portfolio increase on December 31 after a decrease on December 30, and then followed by a big decrease on January 2, then Verizon gets to book extra income (or less expense). Similarly, if the assets that the plan holds rise on December 31, that rise will be reflected in that year's income.

This makes no sense to me. The obligations under the plan are long-term obligations. Short-term deviations in the valuation of those liabilities should be irrelevant for most companies. Similarly, short-term deviations in the valuation of plan assets should be irrelevant. If the plan has a short remaining life span, or if the company is in a very bad financial position, these deviations become far more relevant, but for a solid company with ongoing plans, this is, IMHO, just foolhardy.

I don't know how many people, if any, will comment on this, but I feel certain that at least some readers will disagree with me. That's ok. You are entitled to your opinion. And, you know, I wouldn't be so adamant about this if, for example, companies got to pick a discount rate for valuation of these obligations based on some sort of moving average of bond yields (even a weighted moving average), but people shouldn't have to hang on tenterhooks waiting to see what is happening with bond rates on December 31, not in my world anyway.

I guess I think it's time for the JLASB (if you can't figure it out, I just might not tell you).

I Have a Job

I'm pleased to announce that effective February 1, I will be joining Cassidy Retirement Group http://www.cassidyretirement.com/

As a good part of my blog has focused on helping companies manage their benefits risks and CRG's tagline is "Helping Companies Manage Their Retirement Plan Risks", I think this a great opportunity, hopefully for both of us.

I'm not sure what direction this will take my blog, but in any event, I am as happy as could be.

3 Options ... Not Quite

I take you back to 1988 or 1989. Corporate travel budgets were higher. Webcasts were a pipe dream. Training was done in groups, in person. Personal interaction was valued.

I was attending a class at an old employer that had the words "consulting skills" in the title. It was a grueling class. That I recall, it started on a Wednesday and ended Saturday at noon. Yes, you read that correctly, it ended SATURDAY at noon. It had lots of role-playing, lots of videotaping and lots of humbling moments.

The last day or so went like this. Early afternoon on Friday, we were broken into three teams and given an assignment (the same assignment was given to all three teams). We received a mock RFP (request for proposal for those who don't know the lingo) for a consulting assignment. Each team was to make believe that they had made the finals and make their pitch to a mock Board of Directors on Saturday morning. Interestingly, our mock Board had a real live CFO on it.

Back to the three options, though. And before I give them to you, let me say that this is the single best thing that I have ever learned in a training class.

There are three distinct component to any consulting assignment (in alphabetical order):

• Price
• QUALITY
• Timing

The client can have any two of the three that they want, so long as one in particular is one of those two. I bet you can guess which one is which.

Your Benefits Center

I had a conversation the other day with an ex-colleague. She was lamenting that at her current employer, you can't just call a person to get a benefits question answered. Instead, you have to go through the maze of touch tones. You know how that goes ... you call an 800 number and a computer voice picks up. You listen to the menu and realize that none of the options fits your question. So, you press '0' and you hear "invalid option." So, you pick one of their options at random which takes you to another menu, and so forth. At one of these lovely prompts, you are asked to enter your social security number, your date of birth, and your maternal grandmother's shoe size.

Finally, you get to a real person. The first thing they do is ask you for your maternal grandmother's shoe size despite your having already answered that question.

STOP! If you are the caller, what are you thinking right now about your company? Somehow, I'm going to guess that at least one of the words is a variation of one of George Carlin's seven words you can never say on television.

That's not good for your company. When you get off the phone, you are probably going to go vent to a friend who works in your office. So, now as the result of the money-saving benefits center, two employees (at least) are unhappy and wasting time. And, you probably still didn't get your question answered properly.

The people who set up and staff these centers need to understand that they are serving clients. In this case, the clients are their own employees. Think about it, if you treated your clients that way, wouldn't you be losing most of them? Of course, you would.

You don't have to hire high-priced people to staff these centers. But, you do need to hire customer service oriented people to staff them. The people who work there should be:

• Friendly
• Positive
• Overachievers
• Happy
• Helpful by nature
• Willing to go the extra mile

Notice that I didn't say smart. Notice that I didn't say that they need a particular level of education. 

Companies measure the savings from benefits centers all wrong. They measure them in a micro world. But, business isn't a micro world. It's time to smell the coffee and smile, rather than causing your employees to use those 7 words.

Tax Reform -- Will We Get it? What Will it Look Like?

Oops, you read the title of this and you thought you were going to get answers from me? Readers certainly know that I am neither insightful enough to know nor bold enough to even make a prediction. But, both parties say that we need tax reform.

So, it should be easy, right? 51 Republicans have signed on to the Fair Tax. In the 2008 election, however, some Republican candidates who support the Fair Tax were pounded in commercials saying that they were proposing adding a 23% national sales tax. That was correct, to a point, but the same commercials didn't note that the same people were proposing an elimination of income taxes, FICA taxes, and other taxes under the Internal Revenue Code.

Republicans as a group favor the lowering of income taxes. Democrats as a group favor simplification of the Code and elimination of deductions frequently taken by high earners, but not available generally to lower earners. At the end of the day, methinks that each is simply staking out the position that will get them the most votes.

In 1986, the protagonists were these: President Ronald Reagan, Speaker of the House Tip O'Neill, House Ways and Means Chair Dan Rostenkowski, and Senate Finance Chair Bob Dole. It took them 3 or 4 years from when they started (memory tells me that the first proposal put forth that eventually morphed into TRA 86 was in late 1983 or early 1984), but they got something significant done.

People who have read about it may remember that we changed from a myriad of marginal tax rates to just two -- 15% and 28%. I think that lasted for a year.

In any event, the voters are calling for tax reform. Plenty of polls say so. And, if you want the down and dirty from the hill, check this out: http://blogs.ajc.com/jamie-dupree-washington-insider/2011/01/20/whither-tax-reform/

While you're at it, see if you can figure out where Jamie Dupree's biases are. I'll bet you can't. He is, in my estimation, the only unbiased political reporter in the United States. That's a mean feat.

Best Companies to Work For

Fortune just named its Top 100 companies to work for. You can see the list here: http://money.cnn.com/magazines/fortune/bestcompanies/2011/full_list/

Nothing is more indicative of what makes a great company to work for than this quote from an SAS (#1 on the list) manager:  "People stay at SAS in large part because they are happy, but to dig a little deeper, I would argue that people don’t leave SAS because they feel regarded -- seen, attended to and cared for. I have stayed for that reason, and love what I do for that reason."


As I look down the list, I do see some companies that are attractive to their employees because of pay, but it's not all about pay. It's about engagement. It's about providing benefits that appeal to THEIR employees, not the ones that appeal to other company's employees.


So, business leaders and heads of HR, you're smart people. THINK! That's part of what you get paid for. 


Again, when I look at the list, I don't only see happy companies, in general, I see very successful companies. These are organizations who have discovered that by spending money to engage their employees, their employees are happier and necessarily more productive and serve their clients/customers better. 


Consider this scenario. A consultant or salesperson is visiting your company. Their first stop is with the receptionist. As they arrive a bit early, they spend some time talking to the receptionist. Would your receptionist sell her company, or would she say it's ok or not bad?


Large law firms certainly have a reputation as sweat shops. Alston & Bird has its own private day care a block away from its facility. It subsidizes rates for its lower-salaried employees.


The list goes on, but certainly near the top of the list, you can find unique benefits that fit the company at each of the Top 100. So, think about it -- what do your employees want? Whatever it is, it may not cost much, and even if it does, it may not cost as much as either the savings you will generate or the productivity you will get.

Health Care Reform Debate -- 17 Years Ago

I'm not going to take a position on health care reform here. I'm sure you have one though, as I'm sure you know I have one. It's interesting, however, to note that during the Clinton administration and an earlier health care reform debate, the math used by the President and the math used by a CEO (who happens to have a math degree) were wildly disparate.

As with any other major change in the law, health care reform will have a huge effect on business. There will be some winners and there will be some losers. Ultimately, the losers are most likely to be the workers (or soon to be former workers) of the companies that are losers. The other choice is the consumer, who always seems to lose when government intervenes in business. The winners will be the previously uninsured or uninsurable.

I think what it comes down to is whether a company can afford the level of compassion being imposed on them. Each company does its calculations. Some think they will not be severely affected. Others know they will be.

In either case, you decide, but I think this 8-minute clip gives a very interesting perspective (if YouTube is blocked where you are, you'll have to wait until later).

http://tinyurl.com/47hoy29

The 401(k) Design Quandary

It's a question that is really in vogue these days: what is the optimal 401(k) design? Should you auto-enroll? Should you match? How big should the match be? How quickly should the match fully accrue?

I read an article yesterday that was written as if it had the authoritative answers. I was amused, to say the least. It said that if you are currently matching 100% on the first 3% of pay deferrals, you should switch to 50% on the first 6% of deferrals. People would still get the same match, but they would defer more in order to get it and the plan sponsor's cost wouldn't change.

Whoa! Hold on.

What are your goals? Can your typical participant afford to defer 6% of pay? If they are currently deferring 3% of pay to get the full match, how much will they have to change their use of their take-home pay in order to be comfortable deferring 6% of pay? Will this affect your ADP and ACP nondiscrimination testing?

Many of the fund houses that are recordkeepers write (and speak) as if they have all the answers. Don't they have an ulterior motive though? They want to get more assets under management. They make more money that way.

Don't get me wrong. This is not intended to say that participants shouldn't be encouraged to save more. They should save as much as possible. But, it's not fair to make blanket statements like the one that was made, and purport that they apply to a general situation.

Plan design studies should not be done based on articles found in internet searches. Just like any other study, they should start with an enunciation of parameters -- goals, constraints, and desired outcomes. And, don't forget risks. No new design should leave a company exposed to risks that are too extreme.

I'll give you a real-life example. I was working with a large company last year that was considering a change to their 401(k) plan. Fortunately, this is an extremely cash-rich company, so if they had decided to make the change they were contemplating, even though the cost increase would have been measured in 10s of millions of dollars, this would not have broken the bank.

Currently, the company offers a match of something like (I don't recall the details exactly) 100% on the first 5% of pay deferred either pre-tax or Roth. They also allow after-tax contributions. They were considering a change to match both (not either, but both) pre-tax (orRoth) and after-tax contributions dollar for dollar on the first 5% of pay. It didn't occur to them that their highly educated workforce would find a way to defer at least 5% of pay pre-tax (or Roth) AND 5% after-tax, to double their match. I'm not sure why.

In any event, do your work properly. Understand your goals, risks, constraints, and desired outcomes. And, just because a design is popular or written up in an article, that doesn't mean it's the right one for you.

Don't Tell Me About Replacement Ratios

I read an article this morning and I'm not going to link you to it, but I am going to tell you that it made my teeth itch. In it, a head of research from an institutional investment house that is also a defined contribution recordkeeper said that their database shows that only X (they actually stated what X was) % of the participants in their database (the plans that they recordkeep) are on track to retire with a replacement ratio of at least 75%, which is what the head of research said is necessary for retirement.

Bullhonky!

Who said 75% is right? Doesn't that vary by pay level? How many of those people have inheritances? How many have defined benefit plans? How many have plans with other employers? How many have IRAs? How many have significant other assets?

I've gotten 'advice' in the mail from the recordkeeper of one of the 401(k) plans in which I have an account balance. It told me that I need to save more in the plan. Then, I looked at the amount that I was deferring for the year. Based on what were, at the time, my current elections (and I didn't change them during that year), I was on track to defer $22,000 to the plan ($16,500 regular contributions plus $5,500 catch-up contributions). The plan is not allowed to let me defer more than that. Period!

But, the wonderful formula used by the recordkeeper in its calculations showed that based on that plan only, I would never be able to retire if I continued to defer such a pittance. Did they know that I have vested benefits in defined benefit plans? Did they know that I have other investments? Did they know that I plan to win the lottery soon, and it will be a really big one?

I am supportive of communications to plan participants that encourage saving. But, this is ridiculous. The good news is that most plan participants are not informed enough to understand why these communications may be wrong. The good news is that the communications, no matter how faulty, often cause plan participants to save more.

I guess my beef is with the improper usage of data and statistics. The fact is that many defined contribution consultants, communication experts, and even heads of research for these firms, do not have sufficient training in data handling and statistics to make these statements and to give this advice.

When I become Congress and President (likely not in this lifetime), I am going to pass a law that the misuse of data and statistics resulting in citing some outlandish outcome is a felony punishable by ... something that will be as annoying to the misuser as their misuse is to me. So, if they don't understand what they are saying, I wish they would keep it to themselves.

On The Dynamics of Investment Committee Decisions

In a September 2010 survey conducted by Vanguard, more than 80% of investment committee members surveyed said that the knowledge level of their committee was above average and more than 60% said their committee seldom makes a mistake.

Wow!

I could spend hours now harping on the US educational system as the reason for this (grade inflation where a 'C' meaning average is only given to the worst performing students, but that's for another day and another blog). This is amazing, though ... or is it?

Let's consider why, and then we'll look at a potential solution. Who chooses committee members? The CFO? The Treasurer? Someone similarly situated? The Committee Chair? No matter which one of those it is, it's probably one of them. Who do they choose for the committee? In most cases, they probably choose people that they view as being a lot like them -- their proteges, for example. If that's the case, then a lot of the people on the committee will have gotten a lot of their knowledge from the same place.

Hmm! That's not good. That means that they may have similar biases. They may be serving on this committee chaired by their boss.

Hmm! That's not good. Through peer pressure, group dynamics, inertia, and many other dynamics, people tend to think that their group's ideas are the best, especially if their group builds consensus. Building consensus  generally is good, but what happens if the consensus is wrong? What happens if the consensus is under-(or un)-informed? What happens if the Committee Chair steers the committee toward his or her bias?

I know. This never happens on your committee, but you do know that it happens on most other committees. In fact, I've attended committee meetings where this happens. Sometimes, it produces good results, but all too frequently, it produces bad results based on what the committee thinks were outstanding decisions.

Let's put this in a defined benefit plan context. In order to properly invest defined benefit assets, the committee needs to understand both the assets and the liabilities. (Not doing so increases risk for the enterprise.) Yet, in my experience, very few committee members understand both sides of the equation (plan assets and plan liabilities). These people have other jobs. This is not their area of expertise. That being said, there are plenty of committees and committee members out there who just don't care. They have their committee comprised of some of the smartest people they know (including them, of course). Because they are smart, they will make the right decisions.

Consider an analogue. Suppose WeFlyHigh Airlines was considering which type of airplane to buy to add to their fleet. Should they buy the newest Boeing jumbo jet or the competing Airbus. Do you think they would have the Investment Committee members making that decision? Why not? They are smart people. Surely, they would make the right decision, wouldn't they? No, those decisions are usually made, or at least informed, by true experts. Shouldn't these committees also be informed by experts?

I promised you a solution, didn't I? And perhaps I've already shown my cards.

Hire an expert. Don't bring them on full time. But, this is why consultants exist, isn't it?

How should you choose your consultant? Look for these criteria:

• As part of their engagement, the consultant will educate the committee.
• The consultant understands the asset side and the liability side.
• As part of the liability side, the consultant understands the subtle changes to the liability profile that plan design changes and employee population shifts can cause.
• The consultant has a track record of making changes to the thinking of the committee.
• The consultant will challenge the decisions of the committee.
• The consultant can demonstrate a track record of giving different advice for different plans because those plans had different characteristics and were sponsored by different companies with different goals.
• The consultant freely admits that they are serving in the role of fiduciary.

I expect I'll write more on this topic. In the meantime, I'd love your comments.

Some Companies Out There Really Care

Each year, The Principal highlights it's "10 Best Companies". You can read the report from Principal here: http://www.principal.com/theprincipal10best/documents/2010bpg.pdf

The companies that make this list typically have low turnover and high loyalty among their employees. These are employees who will go out of their way for their employers because their employers have shown that they care. This year, the Top 10 are in alphabetical order:

• American Immigration Lawyers Association in Washington, DC
• The Bolles School in Jacksonville, FL
• Clif Bar & Company in Berkeley, CA
• Davidson Technologies, Inc. in Huntsville, AL
• The Delp Company in Maumee, OH
• Farmers Mutual Insurance Company of Nebraska in Lincoln, NE
• Franklin International in Columbus, OH
• The Graham Company in Philadelphia, PA
• Red River Credit Union in Texarkana, TX
• RLI in Peoria, IL

Why are these companies so wonderful? Here's a capsule of some of their ideas.

• AILA focuses on bigger benefits in lieu of bigger pay to lure attorneys away from higher-paying for-profit law firms.
• The Bolles School focuses on continuous communication with its employees (mostly teachers).  During open enrollment, they held 8 open meetings on 4 campuses over 3 days. They continue to educate their employees throughout the year about their benefits. As a result, they boast these statistics:
• Open enrollment meeting attendance: 90%
• 401(k) plan participation: 90%
• Average 401(k) deferral rate among those who are participating: 10% of pay
• Voluntary turnover rate: 2%
• Clif Bar put in a multi-faceted wellness program because they thought it was the right thing to do. Later on, they learned it was saving them money. Here aree some key components:
• Contests and incentives for wellness activities
• Nutrition counseling
• Commuter bicycle allowance
• Subsidized organic lunches
• On-site gym with free personal training, class instructors and subsidized massages
• 30 minutes gym time for each employee each work day
• Davidson Technologies has kept its benefits consistent and very rich even during the down economy. Highlights include 10% of pay profit sharing and fully-paid medical.for employees and dependents. They understand that the medical costs have been a substantial hit, but they are of the belief that increased productivity from happy, secure employees more than makes up for it. In other words, they are looking at results, not counting beans.
• The Delp Company has true flexible compensation. They decide how much the rewards package for each employee should be and then tailor the package to them. So, an employee who needs health care benefits gets them, but one who doesn't need them (spousal coverage, for example) would have those dollars allocated elsewhere.
• Farmers Mutual Insurance uses its benefits program to promote tenure with the organization. They have kept their defined benefit plan and have been rewarded with low turnover.
• Franklin International has a flexible education benefit plan. It varies depending upon age and needs from a tuition reimbursement plan to a matching 529 plan to a textbook reimbursement plan depending on needs. They also offer phased retirement with full medical and dental benefits.
• The Graham Company put in a high-deductible health plan with an HSA that saves both the company and its employees money. Graham saves through the plan design. The employees save because Graham funds the entire deductible and family coverage through its savings.
• Red River Credit Union boasts a 3.7% turnover rate. They say their benefits are very responsible. They pay more than 95% of medical costs, have a 401(k) plan and profit sharing plan, and just last year began offering full-time benefits to employees working 30 hours per week.
• RLI is different from most companies these days in that it links benefits to profitability. Employees receive an automatic 3% employer contribution to the 401(k), but depending on profitability, the company may contribute up to an additional 15% of pay to the 401(k) and ESOP.

So, there you have it, some old ideas and some new ideas, but these are Principal's 10 Best for 2010.

Stock Drop Case to Move Forward

Last week, I wrote about "ignorance risk" http://johnhlowell.blogspot.com/2011/01/how-much-weight-do-you-give-to.html  Earlier, I wrote about being a singles hitter rather than swinging for the fences and hitting some home runs and striking out a bunch http://johnhlowell.blogspot.com/2010/12/two-key-words.html
In Veera v. Ambac Plan Administrative Committee, the plan committee may have struck out.

For several years now, participants have been suing plan sponsors in so-called stock drop cases, so named because the participants claimed that the sponsor violated their prudence requirement under ERISA by continuing to allow investment in company stock, even when the risk of precipitous loss had increased. In Ambac, the plaintiffs charge that the company significantly changed its business practices and strategies taking on a much higher risk profile between 2004 and 2007. During that period of time, the value of the company stock dropped from $96 to $1.

In most cases of this nature, judges have ruled that companies/administrators should be given the presumption that they acted prudently in stock drop cases. In this case, the judge has failed to do so.

Now, this doesn't mean that the plaintiffs have prevailed, or even will prevail, it simply means that the judge is allowing the case to move forward, on a more plaintiff favorable basis than was probably expected. While it's often a matter for discussion, the bar has been set very high for plaintiffs in ERISA prudence cases. We'll monitor this one to see where it goes.

Discounted Consulting Available

It's time to take a break from subject matter for a little self-promotion. When I've been with large consulting firms, I've had large consulting firm billing rates. I still have the same knowledge and skills, but my time is much less expensive.

I have particular expertise in

• Retirement plan design and compliance
• Nondiscrimination
• Nonqualified plans
• 409A
• Due diligence
• Pension accounting
• Executive benefits
• and many other topics

Please contact me and give me a try.

Thanks in advance.

Does Your Wellness Program Measure Up?

A survey by Buck Consultants shows that only 37% of employers measure the effectiveness of their wellness programs. In the US, 40% say they have looked at how their wellness program affects their cost of delivering health care benefits. From that group, 45% say that their wellness programs have reduced health care costs, most typically slowing the increases in health care costs by two to five percentage points.

If we look at this from a contrarian standpoint, that means that 63% don't seem to care about the effectiveness of their programs, but I guess they are glad that they have them. Do they have them because everybody else does? Are they just certain that they generate cost savings, but don't care how much the savings are? Do the savings outweigh the cost of the program?

Perhaps the problem is that they don't know how to measure the effect on costs. In the alternative, there may still be many who categorize a wellness program differently than others do. For example, do you have a wellness program if it consists solely of smoking cessation assistance? If that's it, how do you measure the savings as compared to the costs? Aren't you really trading short-term costs for longer term savings as it seems to me that more of the additional costs for smokers appear down the road. I guess I could also say the same things about other initiatives.

I've spoken to consultants at several major firms about measuring the savings from wellness initiatives. It's interesting; there is no standard method. Could it be that each firm has a measurement methodology that gives preference to its own style of wellness initiative?

Don't get me wrong. I'm not intending to belittle the value of wellness programs, but the dollars that an employer spends may result largely in savings ... for some other employer. A well-conceived wellness program should probably change the longer-term behaviors, and therefore the longer-term health of covered employees. Look at any large employer. On average, what is the tenure of their employees? Less than it used to be? Long enough for the savings from the wellness program to exceed its costs? Or are they simply passing their savings on to other employers?

I don't know. I don't really believe that anyone else does either. But, I'd like to see some thoughtful people figure this one out.

The Fair Tax and Benefits and Compensation

Representative Rob Woodall (R-GA) yesterday re-introduced (it was HR 25 in the 111th Congress as well) the so-called Fair Tax. Thus far, the bill has 47 co-sponsors, most Republican, but some Democrat. There have been whole books written on the topic, so its far too complex to explain here, but I'll give you the simple version.

• All existing federal taxes would be repealed
• The IRS would be abolished
• The federal government would get its revenues primarily from a 23% sales tax on finished products, but not on intermediate steps (so not a VAT tax)
• Basic necessities would be paid for with a prebate

Let's think about an employee's rewards package, currently. Typically, it includes all of these:

1. base compensation which may be a salary or may be based on hours worked
2. additional cash compensation (for some) in the form of sales commissions, a bonus, or overtime
3. health benefits
4. a 401(k) plan that may have an employer matching contribution
5. (perhaps) an additional retirement plan
6. (for the lucky few) equity compensation
7. some other benefits

Numbers 1 through 6 and parts of 7 are generally tax-deductible for an employer. That's a big reason that they are willing to offer these rewards. In fact, where the costs of certain parts of a rewards package may not be tax-deductible for an employer, they pay tax departments, tax advisers and sometimes lobbyists millions of dollars to make them tax-deductible.

So, what if there were no corporate income tax? Then, there would be no tax deductions. Would employees still get a similar rewards package? Probably not. But, what of the group purchasing power of various benefits? Perhaps employee groups would be formed that would be group purchasers. Perhaps, new methods of getting better deals would arise. But, in any event, the landscape would change.

So, if you are in favor of the Fair Tax, be ready to deal with the consequences as well, whether you consider them good or bad.

Time for Say on Pay

It's "say on pay" time, or at least that's just around the corner. Companies are struggling to decide (or maybe they are not struggling) how frequently to hold say on pay votes. According to a December 2010 Towers Watson survey, of 135 publicly traded respondents, 51% plan to hold annual say on pay votes, 10% biennial votes and 39% will hold their votes only as frequently as required -- once every three years.

What does it say about those various companies? In my opinion, in today's climate, a company that is not willing to hold an annual say on pay vote is just spitting in the collective faces of its shareholders. Of the companies who have decided how they will evaluate their shareholder votes, most, according to the survey, say that an 80% shareholder approval rate will be considered successful.

If we consider the typical shareholder profile of a typical publicly traded company, I suspect that significant numbers of shares are held by institutional investors. Of the shares held by regular old people like you and me, far more are higher-income individuals than not and will not be immediately scared off by currently reasonable levels of executive pay. If you can't get 80% approval annually, you are doing something wrong ... and you should change.

How Much Weight Do You Give to Ignorance Risk?

Yesterday, I was reading the judge's opinion in Ruppert v Alliant Energy Cash Balance Pension Plan. It may not be the adjective that you are expecting me to toss out, but I was amused.

First, I backtrack. The biggest issue in the case was the use of a proper interest crediting rate and lump sum basis to satisfy "whipsaw". Whipsaw essentially was (it was repealed prospectively by the Pension Protection Act (PPA)) a required technique for calculating lump sums in cash balance pension plans which usually resulted in a lump sum distribution that was larger than the participant's cash balance.

In my opinion, the phenomenon occurred because the framers of Code sections such as 417 did not contemplate cash balance plans when Section 417(e)(3) was added to the Internal Revenue Code. Just like many other provisions of the Code, this one did not (as it couldn't have) contemplate new defined benefit plan designs. So, when new designs start appearing, nobody is sure how to handle every last issue, and some eventually get decided by the courts.

Now, I am not going to question the intelligence of our judiciary, but I'm willing to bet that you can't find me a single United States judge who is an expert in all matters ERISA, or even in all matters pension. They are not accustomed to interpreting such things and, over time, they have made some rulings that I find incredible.

So, why am I blabbing about this? I take you back to a post from December: http://johnhlowell.blogspot.com/2010/12/two-key-words.html in which I suggested that clients are not looking for a combination of home runs and strikeouts from their consultants, but rather consistent singles. In other words, give us consistent results that keep us out of trouble.

Let's assume that Alliant Energy fully considered what they believed to be the attendant risks when they implemented their cash balance plan. There's one that I am sure that they didn't consider -- ignorance risk. What's that? It's the name that I am giving to the risk of ultimate decision makers (judges) not understanding the issues. Restated, when the existing rules are not completely clear, the ultimate decision could be left up to judges and they may not get it right. If they don't, how bad could it get?

Back to the instant case. I googled the case and found this link: http://scholar.google.com/scholar_case?case=897977023238459007&q=Ruppert+v.+Alliant+Energy+Cash+Balance+Pension+Plan&hl=en&as_sdt=80002&as_vis=1

I warn you. This is going to get pretty technical. In preparing documents for plaintiffs and the court, the court commanded that Towers Watson set up databases of materials that they had produced internally or externally related to Alliant Energy and its plan. They were to be searchable on 16 keywords, and I am going to bore you with those keywords selected by the court:

1. asset liability
2. asset-liability
3. asset/liability
4. capital market assumptions
5. capital market model
6. capital market outlook
7. capital market results
8. cap link
9. cap-link
10. cap:link
11. caplink
12. forecast assumptions
13. monte carlo
14. monte-carlo
15. simulations
16. stochastic

Wow! In my opinion, none of this has anything to do with the issues at hand in the case. I could go through the list of 16 and explain each one, but that would serve no purpose here.

The issue dealt with a choice of an interest rate. Plaintiff's expert argued for an 8.45% interest crediting rate. Alliant's expert argued for 7.63%. Without having access to their expert reports or testimony, or the plan document, I am guessing that one of those experts is correct. Yet, the judge chose a rate of 8.2%. Hmm! 8.2%? It's not the mean of the two recommendations produced by the experts. It's not the number chosen by either one. Where did it come from: a dart board? A Ouija Board? Or just plain ignorance?

I vote for the last. The judge is ignorant on the matter. I can't fault her. ERISA and the Internal Revenue Code are highly specialized technical documents. Frequently, even experts with no bias cannot agree on interpretations. 

But, my point is this. Alliant and many other companies went into uncharted waters. Because they were uncharted, there were issues subject to potential litigation. Where there's potential litigation, there's going to be a judge, and certainly on ERISA and Internal Revenue Code issues, that means there is significant uncertainty.

I call it ignorance risk, and it's a big risk.

Incompetent Managers

Here is a link to an article that I found on incompetent managers: http://www.stumbleupon.com/su/3iwq5H/www.fastcompany.com/resources/talent/heffernan/10-signs-incompetent-managers-102307.html%253Fpage%253D0%252C0

You may want to read the 10 habits, but in case you don't, I'll summarize here. Let it be said that we will all recognize at least some of these traits in managers that we have had ... and perhaps managers that we have been.

1. Inaction: the status quo is easier than change
2. Secrecy: we can't tell the staff
3. Over-sensitivity: it's easier to avoid a problem than to address it
4. Love of procedure: following rules to the exclusion of good business practice
5. Preference for weak candidates (I have to admit I've never seen this one): fear of hiring someone better than you
6. Focus on small tasks: covering up one's inability to do anything truly useful
7. Allergy to deadlines: Nuf Sed
8. Inability to hire former employees: none would want to work for that manager
9. Addiction to consultants: or inability to get things done by themselves
10. Working extra long hours: might this mean an inability to utilize staff?

Enjoy!

Republicans Take on Health Care Reform

Today, a group of Republicans in the House of Representatives (I'm not sure, it may have been all of them) introduced the "Repealing the Job-Killing Health Care Law Act" (I don't make up these names, I just report on them). It's only two pages long, but here's what it would do as I read it:

• Restore statutes to what they were before the health care reform legislation (PPACA) was passed
• Repeal the health care related provisions in the Reconciliation legislation that made some technical corrections to health care reform

That's it!

Separately, the Republicans are introducing legislation (as yet unnamed, but I can't wait to see what they call it) that will focus on 12 specific goals with respect to health care (when I can find the 12, I'll post them). In any event, 4 separate committees are directed to create health care legislation that will:

• Lower premiums through increased competition and choice
• Increase the number of Americans who are insured
• Protect the relationship between doctors and patients (I suspect that this has something to do with not having to change doctors and or confidentiality)
• Prohibit taxpayer funding of abortions
• Provide conscience protections of health care providers (somebody must have spent a lot of time crafting those words with the specific goal of confusing me)

Clearly, fun times are ahead for all!

May All the Procrastinators Bless Emancipation Day

If you have made it this far, then first, you are probably, like I often am, a procrastinator, and second, wondering what in the world is Emancipation Day, and finally, why do I care?

Emancipation Day is a holiday in the District of Columbia celebrating President Lincoln issuing the Emancipation Proclamation. It falls (normally) on April 16. This year, April 16 is a Saturday and the District is observing the holiday on April 15 -- tax day. And, of course, you knew that District holidays count as federal holidays for tax purposes.

So, since April 18 is the first business day in the District beginning on or after April 15 this year, the IRS has released Information Release 2011-1 officially postponing the regular tax filing deadline until April 18. Of course, all true procrastinators know that the extended tax filing deadline for 2011 is October 17 (October 15 falls on a Saturday).

Also, in the information release is a formal announcement that if you itemize deductions, you need to wait until mid-February, at least, to file (procrastinators don't care). Contrary to popular belief, this is not the fault of the IRS. Here's why.

The IRS works on a budget. Congress appropriates only so many dollars to them every year, and among other things, they find out what they can do with those dollars. During the late fall when the IRS was updating its software for the upcoming tax filing season, the law said that the tax cuts originally enacted as part of EGTRRA in 2001 (Bush era tax cuts) would sunset. So, the IRS not being able to read the collective minds of Congress and the President built their software around the law as written.

Of course, the law changed, and as a result, the IRS software is not ready to handle itemized deductions under the new (you may think of it as old) tax law.

So, pick your favorite whipping post to blame, but make it one from the political arena, not from the IRS.

Dealing With Employee Performance Problems

This isn't quite benefits or compensation, but it does fall under the purview of many of the same people who handle compensation and or benefits. So, with one caveat, here it goes.

CAVEAT: I am not an attorney and this does not constitute legal advice which can only be obtained from an attorney.

I wish I had a great acronym for this 6-step process, but PELSFO just isn't very memorable. In any event, here it goes.

1. PREPARE. Make sure before you meet that you know what the issues are, what you are going to say and how you are going to say it. Have any documentation that you need. When you start, you are going to tell the employee in question that you are going to go first and that they will have a chance to respond later.
2. EXPLAIN. Describe the performance shortcomings. Lead with facts, not opinions. Don't be wishy-washy. This is the first step in a process. The hope is that Step 2 is a discussion where the two of you agree that the employee's performance has, at the very least, returned to acceptable levels, and preferably, has risen to levels that are far better than that. Be careful to explain that while there is a problem, this is not fatal, at least not yet.
3. LISTEN. It's the employee's turn now. In most cases, he or she, if they are being honest with themselves, realizes that this performance problem exists. Perhaps they don't realize it's as severe as you think it is. Perhaps there are extenuating circumstances. Perhaps there is a root cause. Perhaps they think that you are to blame. At the end of the day, you may have some take-aways from this. It's their performance that needs to improve, but you will likely get more buy-in if you commit to certain things as well. Remember, you are not terminating this employee at this time, so if this meeting is productive, it will be beneficial for both of you.
4. SOLVE. Discuss a solution. Again, there is give and take here. Think about this, though. If the employee comes up with the solution, they are far more likely to live with it than if the solution is yours. Give your input, but let them be the solution, as compared to the problem.
5. FOLLOW UP. Make an appointment for a formal follow-up. Put it in writing. Also put in writing what your expectations are, what the employee's commitments by that date are and what yours are as well. There are a few really good reasons for this. 1) If the employee doesn't improve, you will need documentation of what he or she failed to do before you terminate him or her. 2) The employee will know what is expected. 3) The employee will know what you have committed to. When you have your follow-up meeting, start by going through what you each have committed to and see that (hopefully), each of you has held up your end of the bargain.
6. OUTCOME. Tell the employee what will happen if they don't meet these goals. But, before you do that, tell them that you know they can do it. Assure them that they are an important part of the team and that you are there for them, but that they need to hold up their part of the bargain. Recap what you have just discussed, including each of your commitments and the follow-up date. Part with a firm, but comforting handshake and a warm, reassuring smile.

Repeating CAVEAT: I am not an attorney and this does not constitute legal advice which can only be obtained from an attorney.

Is This What Was Intended By Health Care Reform -- Employers to Drop Coverage

Business Insurance recently co-sponsored a survey with the National Business Coalition on Health on employer-provided health care benefits. I found the results astounding.

22% of all employers and 14% of large employers said that it is either likely or very likely that they will drop employee health care coverage when the insurance exchanges become effective in 2014. 

11% of large employers expect their costs to increase by 1% or less. 42% expect increases in the range of 2% to 5% and 16% expect increases in the range of 6% to 10%.

We now pause for a brief editorial comment: Increasing the cost of employing an employee is not a good way to spur the economy and to promote hiring.

Now I feel better.

The survey did not bring all bad news for Health Care Reform. Slightly more than one-half of employers surveyed back the provision that all preventive services be fully covered.

Changes to flexible spending accounts (FSA) were not viewed positively, however. Nearly 3/4 would like the provision that disallows FSA reimbursements for over-the-counter medications to be repealed. Nearly 2/3 would like the $2500 per employee cap on employee FSA contributions repealed.

I wish I had cross-tabs of the data, but given that the profitability of this blog is currently non-existent, I am not inclined to spend $100 to get the full report. That having been said, it's clear to me that Health Care Reform is providing its fair share of angst for corporate HR and Finance types. As I have said before, we needed Health Care Reform, and we got it. The problem is that we still need Health Care Reform, just a new version. What we got was essentially conceived by a few people, and voted on with no meaningful discussion or debate. 

But, it is with us now, unless the law is changed or repealed. And so it goes ...

HR Issues in an M&A World

Do you work for a company that acquires other companies? Are you involved in the due diligence process? If so, I'd bet that you have encountered all sorts of outsiders during the process:

• Attorneys
• Accountants
• Investment Bankers
• IT Consultants

How about actuaries and HR consultants? If you've seen them, you might be in the minority. If they get called in at all, it's usually in the last day or two before a deal closes. Then, because they didn't find much in their limited time, they don't get used next time.

The other people that I mentioned above don't find everything. Their views are biased by their experiences. They tend to miss the things that they don't deal with every day.

Here is a short list of things that I have seen over the years that have been missed by the usual suspects:

• A poorly designed SERP that was due to pay out hundreds of billions of dollars to a single person upon change in control. The accountants missed it. The attorneys missed it.
• A valuation of retiree medical benefits that understated obligations by more than $25 million in a roughly $100 million deal. The accountants looked at the actuarial assumptions that they are familiar with. They missed a few biggies.
• 401(k) plans with lots of outstanding loans that could only be repaid by payroll deduction from the plan sponsor. What happened? Dozens of employees unknowingly defaulted on their plan loans resulting in adverse taxable events. The attorneys didn't look for administrative issues.
• A defined benefit plan that had less plan assets than 12 months of upcoming benefit payments, but no minimum required contributions. Nobody focused on this one.
• An acquisition that had a higher-paid employee group than the rest of the company and a much more generous retirement benefit structure. Everybody ignored this one, and in fact, since this was a top-secret acquisition, nobody in HR or HR Legal even new that this acquisition had happened until it was too late to properly assimilate this company's benefits into the corporate structure. A few million dollars later, this problem got fixed.

So, what's the message? Engage independent HR consultants and actuaries in the due diligence process. Compared to other advisers, their cost may be low, and they might not find anything, but if they do, it could save you a lot of money.

Employee Recognition

I found this page using Stumbleupon. Here is a link: http://www.stumbleupon.com/su/2Kw18y/www.washington.edu/admin/hr/roles/mgr/ee-recognition/award-ideas

It gives a laundry list of ideas for employee recognition. Why is this important? In these days of decreased benefits, lower pay, no bonuses and higher unemployment, employee morale is low. Search the internet. You can find survey upon survey that will confirm that employee morale is as low as it has been in years.

Perhaps your company doesn't have the money to spend to increase morale. The tips in this article are low cost or no cost. I don't agree with all of them, but plenty look good to me.

Check it out.

Make a New Year's Resolution: Get Your 409A Documents Cleaned Up

About a month ago, I wrote about a court case in which an incompletely worded 409A (nonqualified deferred compensation) plan document caused the court to award an executive more money than his previous employer thought he was entitled to. You can read my original piece on Graphic Packaging v Humphrey here: http://johnhlowell.blogspot.com/2010/12/its-extremely-important-to-have.html .

I've read more of these sorts of documents than most of you would prefer. And, the good news for employers is that most executives don't read those documents as carefully as I do. The bad news is that most that I have read do not satisfy (in some situations) the concept of definitely determinable (stealing the term from the qualified plan world).

What does that mean? The words speak for themselves ... I think the lawyers would call that res ipse locutur, although literally that means the thing speaks for itself (I see now why I took Latin in school about 40 years ago).  For a benefit to be definitely determinable, a person should be able to read the plan document and know what the amount of that benefit will be.

Let's return to 409A documents. If you've made it this far, there is a good chance that you know that "specified employees" (generally the highest-paid executives (not more than 10% of the company) making at least $150,000 as indexed, but it's actually far more complicated than that) may have a 6-month delay before than can receive certain benefits under a 409A plan.

Let's consider a simple situation. Suppose Ebby Scrooge is the CEO of No Holiday Corporation. Ebby retired just the other day on December 31, 2010. He had earlier made a bona fide initial deferral election in his SERP to take his benefit in a lump sum at termination (or 6 months later if he was a specified employee). Ebby's lump sum on December 31 would have been $10 million, but he was a specified employee.

Poor Bobby Cratchit needs to process the payment to dear old Ebby. He has a quandary -- how big should Ebby's check be? Does the $10 million get interest at some rate from December 31 until mid-2011? The plan document doesn't say. Does it get calculated using 12/2010 interest rates or 6/2011 interest rates, or some other rates? The plan document doesn't say. Does the annuity factor get calculated using Ebby's age as of 12/2010 or as of some other date? The plan document doesn't say.

Get the picture? In Humphrey, the 11th Circuit Court of Appeals (based in Atlanta and covering Alabama, Florida and Georgia) found that where the plan document (written by or under the control of the employer) is not clear, uncertainty should be decided in favor of the participant. Oops!

What do your plan documents say? Do you know?

I am about to be perhaps a little bit critical of some attorneys who write these plan documents. I'm sorry, some of you are my friends (but of course, my friends couldn't be the ones who are doing less than perfect work). Very few attorneys have ever worked in plan administration. They don't consider whether the language that they write is easy to administer, difficult to administer, or anywhere else on the spectrum. For many, it's just not in their DNA. Surely, you will see in the document that where found in the document, the male is to be considered the female and the singular the plural, but that inconsequential stuff about how much to pay the executive -- nowhere!

What's my suggestion? Attorneys are best at the legal mumbo jumbo, but where a plan must be administered, a company may save itself a lot of money by paying a little bit (relatively speaking) to have some non-attorney such as this author review the document to see if it can be accurately administered. Looking back to Ebby Scrooge, if it's an issue of a 5% annual rate of interest, then the increase in payment amount for the 6-month period would be $250,000. Of course, in some cases, the employer may not have the right to unilaterally amend this document, but that's an issue for another article on another day.

In the meantime, I'd love to take a look.