February 26, 2004
BB 04—22

In this issue:

  • U.S. Supreme Court Rules for Employer in Age Discrimination Case
  • Key Members of Congress Urge EEOC to Finalize Erie Regs
  • Hard 4:00 Close Discussed at Senate Banking Hearing
  • House Bill Eliminates 12b-1 Fees for Closed Funds
  • IRS Provides Guidance on 412(i) Plans

U.S. Supreme Court Rules for Employer in Age Discrimination Case

On February 24, the Supreme Court found in favor of the employer in General Dynamics Land Systems v. Cline, affirming that federal age-discrimination laws do not allow younger workers to sue over workplace policies that favor older workers. The Council had filed an amicus brief on behalf of General Dynamics in this case.

As a result of a new collective bargaining agreement, General Dynamics had revised its retiree health plan providing retiree health benefits only to employees who had reached 50 years of age (under the prior agreement the company had provided such benefits to employees with 30 years seniority). A group of employees between the ages of 40 and 50 then sued the company alleging that the limitation of retiree health benefits to employees 50 and older constituted age discrimination and thus violated ADEA.

The Court of Appeals for the 6th Circuit had reversed a lower court ruling and held that the Age Discrimination in Employment Act (ADEA) barred employment discrimination against any individual 40 or older on the basis of age, regardless of whether older or younger workers received more favorable treatment. The Supreme Court's ruling reverses the Appeals court decision.

In some respects, this case serves as the mirror-image of the Erie County Retirees Association v. County of Erie case, which addressed benefits that were greater for younger retirees than older retirees. In the wake of the troubling Erie County ruling, the Supreme Court's decision in the General Dynamics case provides some comfort for employers who sponsor retiree health benefits, and is therefore an important and favorable decision. For more information, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.

Key Members of Congress Urge EEOC to Finalize Erie Regs

In a related matter, Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Judd Gregg (R-NH) and Senate Finance Committee Chairman Charles Grassley (R-IA) sent a letter to the Equal Employment Opportunity Commission (EEOC) on February 18, 2004, stating their support for the Commission's proposed regulations on this issue. The proposed regulations, first proposed on July 14, 2003, would clarify that it is not a violation of the Age Discrimination in Employment Act of 1967 (ADEA) for employer-sponsored retiree health benefits to be altered, reduced or eliminated when a retiree becomes eligible for coverage under Medicare. The senators urged the Commission to make the regulation final, and asserted that the regulation is "essential" for achieving their goal of improving retiree health benefits and ensuring "that public policy does not cause further loss of coverage." House Education and the Workforce Committee Chairman John Boehner (R-OH) and Employer-Employee Relations Subcommittee Chairman Sam Johnson (R-TX) and Ranking Member Rob Andrews (D-NJ) sent a similar letter to the EEOC in December 2003.

The EEOC cited as the basis for the new regulation its broad authority under Section 9 of the ADEA to establish "reasonable exceptions" from any provisions of the age discrimination statute "as it may find necessary and proper in the public interest".

The Council, other employer organizations and union representatives have been meeting with EEOC commissioners and their staffs to urge them to finalize the proposed rule. The Commission's agenda is set by EEOC Chairwoman Cari Dominguez and it is unclear when she will put this issue to a vote. For more information, contact Maria Ghazal, Council director, health policy, at (202) 289-6700.

Hard 4:00 Close Discussed at Senate Banking Hearing

Continuing its series of hearings on current investigations and regulatory actions regarding the mutual fund industry, the Senate Committee on Banking, Housing and Urban Affairs received testimony on February 25 on "understanding the fund industry from the investor's perspective." The Committee heard testimony from:

  • Tim Berry, Treasurer, State of Indiana
  • Gary Gensler, Former Under Secretary of the Treasury for Domestic Finance
  • James K. Glassman, Resident Fellow, American Enterprise Institute
  • Don Phillips, Managing Director, Morningstar, Inc.
  • Jim Riepe, Vice Chairman of the Board of Directors , T. Rowe Price Group, Inc.

All of the witnesses were in agreement that investor education should be a high priority for the industry and the government and that mutual funds should provide clearer, more concise information to investors. They also agree that mutual funds play an important role in retirement savings.

However, while the witnesses generally believe that recent fund abuses are being addressed quickly and appropriately, Gensler and Phillips believe that reforms beyond those proposed by the SEC are needed (such as restrictions on 12b-1 payments and other proposals detailed in their statements) and Glassman and Riepe believe that some of the SEC's recommendations go too far. Riepe specifically expressed concern about mandating that all fund boards have an independent chair, as Glassman argued that a rule requiring a hard 4 p.m. market close on all trading activity (including reconciling trades from financial intermediaries) hurts small investors.

Senator Jon Corzine (D-NJ) used the question-and-answer period to make a statement covering several issues, including late trading. Most notably, he referenced the "hard 4 p.m. close" provision in the bill that he introduced with Senator Christopher Dodd (D-CT) (S. 1971, the Mutual Fund Investor Confidence Restoration Act), and said that he believes it is necessary to listen to investors and see if a more appropriate response can be found. He then asked the panelists to comment on third parties and 401(k) investments. Mr. Gensler did not have a specific suggestion, but stated that a hard deadline is too harsh. Mr. Glassman proposed (1) a rule requiring that all orders be placed by buyers and sellers before 4 p.m. (and stamped accordingly), with the understanding that execution of those orders may not occur until after that time and (2) a comprehensive clearinghouse responsible for verifying the time of the orders. Mr. Riepe said that the mutual fund industry originally had supported the hard deadline as the best way of protecting account holders. He now believes that an electronic solution is the correction solution. However, he does not believe that such a system currently exists, and he is concerned about the length of time it would take to develop an appropriate electronic system.

The witnesses urged the Committee to proceed cautiously, and the committee members said they intended to do so. The Committee has scheduled further hearings on fund operations and governance on February 26 and March 2. Additional hearings are expected to be scheduled later this Spring. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

House Bill Eliminates 12b-1 Fees for Closed Funds

On February 25, the House Committee on Financial Services approved by voice vote an amendment to the Securities Fraud Deterrence and Investor Restitution Act (H.R. 2179), which would prohibit 12b-1 fees on mutual funds that have been closed to new investors. The revised H.R. 2179, which grants additional powers to the Securities and Exchange Commission to fight securities fraud and was amended to include several mutual fund provisions, was passed by the full committee. The bill was authored by Capital Markets Subcommittee Chairman Richard H. Baker (R-LA) and the 12b-1 amendment was introduced by Representative Michael Castle (R-Del.).

Under rule 12b-1, which was issued under the Investment Company Act of 1940, fees can be assessed against the assets of mutual funds to cover advertising and distribution costs. Critics of the fee argue it should not be imposed on a fund closed to new investors because there should not be any advertising and distribution costs. However, these fees are commonly used to pay for the services of retirement plan administrators and recordkeepers. The amendment added to H.R. 2179 makes an exception to the prohibition for "shareholder servicing activities the costs of which are collected directly and transparently to the investor." The full meaning of this language is unclear at this time.

Other mutual fund amendments added to H.R. 2179 would require:

  • that mutual fund management companies and underwriters inform the mutual fund board of any of their practices that are not in the best interest of the funds' investors;
  • increased investor access to broker disciplinary information; and
  • that mutual funds designate lead independent directors.

As the Council reported in the February 12 Benefits Byte, the Securities and Exchange Commission recently voted to propose rules which make some changes to 12b-1 fees and asks for comments on additional changes, including possible elimination of 12b-1 fees. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

IRS Provides Guidance on 412(i) Plans

On February 13, the Internal Revenue Service (IRS) announced the issuance of proposed regulations and three revenue rulings designed to shut down what have been termed "abusive transactions" involving 412(i) plans — tax-qualified retirement plans funded by life insurance policies on individual participants. The employer claims tax deductions for the premium payments and either holds the contract (policy) until the employee dies, or distributes or sells the contract to the employee at a specific point, such as when the employee retires.

The proposed regulations clarify that the participant must include the true fair market value of the policy in income when distributed and specifically rejects use of tax reserves or net surrender value where they are significantly less than premiums paid. If the policy is sold to the participant in a bargain sale, the bargain sale element is treated as a distribution from the plan.

The IRS also released three revenue rulings to address specific issues. These rulings:

  • provide interim rules on determining the fair market value of a life insurance policy pending final regulations (Rev. Rul. 2004-16);
  • provide that if the employer claims the full deduction for premiums paid for individual life insurance policies that provide benefits at retirement of $100,000 or more in excess of the benefits provided under the plan to the individual, the plan will be treated as a tax shelter (Rev. Rul. 2004-20); and
  • indicate that the plan will be discriminatory if the rights under the plan for nonhighly compensated employees to purchase policies from the plan prior to retirement are not of inherently equal or greater value that those of highly compensated employees (Rev. Rul. 2004-21).

For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.