Compliance October 26, 2007

Deere Fee Suit Decision Stands

A federal judge has refused to reconsider his earlier ruling that Deere&Co. was not obligated to disclose the revenue sharing arrangements in its 401(k) plan, clearing the company of fiduciary breach allegations.
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U.S. District Judge John C. Shabaz of the U.S. District Court for the Western District of Wisconsin issued the ruling in response to a plea from three employees of the heavy equipment manufacturer to take another look at his June 2007 decision that no violation of the Employee Retirement Income Security Act (ERISA) had occurred (See Deere and Fidelity Fee Lawsuit Thrown Out).

Shabaz also asserted in his June ruling that Deere was protected by the safe harbor of 404(c) for its selection of investment options.

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In their class action suit, the employees alleged that Deere and the Fidelity Management Trust Co. provided investment options with excessive and unreasonable fees and did not properly disclose information about plan fees to participants.

The move by Shabaz to stand behind his earlier ruling came after employees’ claim they had discovered “new evidence” of the company’s ERISA wrongdoing. Shabaz accused the plaintiffs of merely rehashing their earlier arguments.

“Plaintiffs effectively collect policy arguments for requiring some form of disclosure of revenue sharing,” Shabaz wrote. “There are contrary arguments that such disclosure would be of limited practical use to participants and that information concerning a non-fiduciary fund manager’s disposition of its profits is generally unavailable to the plan administrator. It was not Deere’s obligation to sort out these conflicts.”

The court likewise refused to reconsider its earlier conclusion about 404(c) protections. Declared Shabaz: “The point of the safe harbor provision is to preclude claims that, although there was a broad array of fully described options in which to invest, participants might have achieved a better return (or lost less) if only the plan sponsor had chosen different options with better returns or lower costs.”

The case is Hecker v. Deere & Co., W.D. Wis., No. 06-C-719-S, 10/19/07.

Compliance October 26, 2007

Rangel Bill Would Tax Stock Option Exercise in S Corps. With ESOPs

U.S. Representative Charles Rangel (D-New York) has unveiled a bill requiring the recognition of ordinary income on the exercise of stock options in an S corporation with an Employee Stock Ownership Plan (ESOP).
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According to the summaryof The Tax Reduction and Reform Act of 2007 by Rangel, chairman of the House Ways and Means Committee, the bill would require S corporation option holders “to recognize income when an option is recognized or sold in an amount equal to the amount of income that was shifted to the ESOP” during the time the taxpayers held the options. Interest will be assessed at the underpayment rate on any amounts included under this provision.

Under current law, the summary said, an individual that holds an option in an S corporation is not subject to tax on the income of the S corporation until such individuals exercise their option and become a shareholder in the S corporation. During the time in which an individual holds an option in an S corporation, taxes on the income earned by the S corporation are intended to be paid by the other shareholders in the S corporation.

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The general tax reductions also proposed by Rangel include:

  • An extension for one year special rules that permit active duty reservists to make penalty-free withdrawals from retirement plans.
  • An extension for one year a $100 per day excise tax on group health plans that impose limits on mental health benefits that are not imposed on medical and surgical benefits.
  • An extension for one year the current-law provision that permits tax free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year, which is estimated to cost $452 million over 10 years.

The full text of the bill can be found here.

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