We've made several trips to Washington, D.C. this year, attending board meetings with the American Society of Pension Actuaries; visiting representatives of the DOL and IRS; and meeting members of congress who are sensitive to employee benefit issues.  Below is a commentary of what we believe the future holds for our industry in the coming year.

401(k) Plan Developments

This year, in the wake of Enron and the resulting increased scrutiny of 401(k) plans, the Sarbanes-Oxley bill was passed, addressing limited issues relating to employer stock holdings within 401(k) plans.

Most notable in the Sarbanes-Oxley bill is the requirement of a 30-day advance notice requirement to plan participants for "black out" periods on 401(k) trading.  The bill also tightens insider trading and reporting rules.  This issue of our newsletter covers these rules in more detail.

More legislation is almost certain to follow from the legislative proposals on 401(k) plans introduced this year.  We think the following areas will be addressed in 2003:

• Investment Education/Advice - We need clear guidance on what constitutes investment education vs. advice to participants; who is deemed a plan fiduciary in the process; and in defining the employer, service provider, trustee, and participant roles in the investment education and decision-making process.
  

• Trustee/Fiduciary Activities - More guidance should be forthcoming from the DOL on the role and responsibilities of plan sponsors; directed trustees vs. discretionary trustees; and plan advisors, concerning what services constitute fiduciary activities under ERISA with respect to qualified plans.
  

• Fee Disclosure - Many industry sessions and DOL regulations have increased their focus on fee disclosure, and we expect to see additional activity on full and proper fee disclosure, especially on the use of insurance annuity products in 401(k) plans.
  

• Company Stock In 401(k) Plans - Additional legislative activity should resurface on a participant's right to diversify stock holdings, and possibly on accelerated vesting on employer-matching company stock.  Also, more financial disclosures to participants investing in employer securities may also be required.

• Cash Balance Plan Regulations - We expect more guidance for the establishment of new cash balance plans by mid-year, and see further regulations on Defined Benefit - Cash Balance conversions on the horizon.  (Cash balance plans are technically defined benefit plans with many of the benefits, rights and features of a defined contribution plan.)
  

• Defined Benefit/Cash Balance Plans - Increased benefit limits for plan sponsors for both Defined Benefit and Cash Balance plans has sparked a renewed interest in these plans, which guarantee retirement benefits.  The new limits allow employees to accumulate substantial wealth (at age 62, the lump sum is in excess of 1.8 million) and employers are allowed increased tax advantages.  The IRS and plan providers are seeing an increase in employers adopting these plans for retirement security.
  

• Defined Benefit Plan Relief - With the adverse stock market performance many plan sponsors are facing an increase in funding requirements and liabilities.  While many plan sponsors and actuaries have asked for some type of relief, there is no single proposal currently pending to solve these problems.  However, we are ready to consult on all alternatives available in an effort to lower plan costs to employers, including the review of actuarial assumptions, changes in funding methods, and asset smoothing techniques.  Plan sponsors are encouraged to look at their 2002 funding requirements prior to January 1, 2003 (or the beginning of their next plan year) to properly budget for next year's increased cost, if applicable.

• Flex/Health And Welfare - With the dramatic increase in healthcare costs and the inability for many companies to continue to fund the increases, employees will bear the lion's share of the increase in the cost of health insurance.  These increased "out-of­pocket" expenses are given some tax relief in a Section 125 (Cafeteria) Plan and in Health Reimbursement Accounts.  New developments pertaining to these plans may include:

• "Use It Or Lose It" Relief - Allowing employees to carry-forward account balances in cafeteria plans to the following plan year, however, legislation may limit the amount.

• Debit Cards - With the increased frequency of claims and higher medical expenses being reimbursed inside cafeteria plans, a growing number of employers may start offering debit cards.  The debit cards, specifically designed for 125 Plans, will facilitate automated payments for medical expense reimbursements, but will still be subject to claims substantiation scrutiny.

Overall, we expect 2003 to be an active year for continued congressional scrutiny and administrative guidance, which should foster the growth of well-designed employee benefit plans.  We invite our clients to explore with us how 2003 can offer new and creative ways for expanding existing benefit plans, increasing employee participation, and inspiring appreciation of employer-sponsored benefits.

By Shawn J. Koch

Are you looking for a great employee retention tool and a way to lower your medical insurance premiums at the same time?  If so, you may want to consider implementing a Health Reimbursement Arrangement (HRA) or 105 plan.  Under the Internal Revenue Code (IRC), Section 105, an employer is able to establish a HRA plan even with a Cafeteria Plan in place.

Now, the company has funded $1,500 per year for each employee, which in essence, leaves the employee with the same out-of-pocket expenses deductible as before.  If the employee incurs minimal health expenses, the unused amount can be carried forward from year-to-year. If an employee stays with the company for ten years, and uses less than $500 a year from the 105 account, the employee would have over $10,000 saved in his 105 account for future qualified expenses.

A 105 HRA plan operates in a similar manner, with a few notable exceptions.  First, the contributions are from the employer, not through an employee's payroll deduction.  Second, the money is not subjected to the "use it or lose it" provision, but is still reimbursed tax-free. Third, the rules and requirements vary slightly in that there is a more liberal discrimination test, different reporting requirements, and different plan document requirements.

You may wonder how a Health Reimbursement Arrangement can help you decrease your health insurance premiums.

It allows you to increase the deductible under your health plan without significantly impacting your employees.  By increasing the deductible, you will reduce your insurance premiums.  You can then take a portion of the premium decrease and fund a HRA account for each employee. This will help bridge the gap for your employees between the old deductible, and the increased deductible.

• Example:  Assume your current health plan has a deductible of $500.  As such, we will also assume a monthly premium of $1,200 for employee and family coverage.  If the deductible were raised from $500 to $2,000, the premiums would decrease to $800 per month.  That is a savings of $400 per employee per month.  In this example, the company would fund $125 per employee per month into the Health Reimbursement Arrangement or 105 account to bridge the gap between the original $500 deductible and the new $2,000 deductible.  That would net a savings to the company of $275 per employee per month.

In our example, an employee who stayed with the company for twenty years could save up to $30,000, which could be used for various qualified expenses.  Second, if the employee were to terminate, the accumulated amount could default back to the company, thus providing another incentive for the employee to stay.

If you would like to learn more about the advantages of a Health Reimbursement Arrangement and how it can help your company, contact a Hand Benefits & Trust account executive.  We will help you design a plan that is appropriate for you and your employees.

By Stephen S. Hand

The market has cycles when either value-style or growth-style investment strategies are favored over the other.  Investment consulting professionals and well-known firms like Morningstar and Lipper Analytical will typically categorize an investment manager as value or growth oriented.  The following is a list of broad characteristics for stock selection, generally used by each style of manager.

 

Value Style	Growth Style
Dividend paying stocks	Non-dividend paying stocks
Low price to earnings ratio	Reinvestment of revenue back into growth of company
Low price to book value ratio	Higher price to earnings ratios
Low price to cash flow ratio	Higher price to book ratios
Buying stocks at a discount	Higher price to cash flow ratios
	Paying a premium for stocks
PROMINENT INDUSTRIES: financial and utilities	PROMINENT INDUSTRIES: technology and healthcare

A prudent investor should incorporate both styles of investing into his or her portfolio.  This advice may sound simple to follow, but during the 1990s, value investing was not the place to be.  In that decade, growth stocks outperformed large-cap large-cap value stocks in excess of 5%, annually.  However, according to Ibbotson Associates, large-cap value investing has outperformed large-cap growth invest­ing during the previous four decades.  The out-performance of large growth stocks over large value stocks in the 1990s is unusual from a historical perspective, given that the only other decade where this occurred was in the 1930s. The emergence of technology and Internet-related companies with high growth rates dominated headlines in the 90s, and propelled that decade's investment mania.  However, the growth has slowed in the new millennium.  And, from a historical perspective, value investing has clearly outperformed growth investing.

The value managers--who were often ridiculed for outdated analytical methods and investment choices in the 90s--are currently providing some of the best overall returns.  Long-term history favors the value investor. Short-term history favors the growth investor.  From 1927 to 2001, value investing returned 12.2% versus 9.6% for growth investing.

A value manager would argue that the superior performance is due to the market realizing the full value of a company's under-valued securities.  A growth manager would argue that technology-driven and innovative companies would continue to domi­nate into the next century as the Internet changes the way the world communicates and does business.

Since it is nearly impossible to predict investment cycles, a combination of value and growth investing should be considered.  Fortunately, the debate between value and growth is alive and well, and optimism from both sides strengthens the market.

Stephen N. Mueller

2003 Employee Benefit Plan Limits

The IRS recently released employee benefit plan benefit and contribution limits for 2003 OR Release No. 2002-111). Generally, the limitations will not change for 2003 as the increase in the cost-of-living index fell below the statutory thresholds that would otherwise trigger an upward adjustment in dollar amounts. However, some limits set forth under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (for example 401(k) deferral limits) are scheduled to increase in 2003 as noted below:

A Reminder - Deposit 401(k) Employee Deferrals Timely

As if the rules governing 401(k) plan administration weren't confusing enough, there remains a fair amount of ambiguity regarding how soon a Plan Sponsor must deposit 401(k) employee salary deferrals into the Plan.  DOL Regulations provide that the deferrals have to be put in the Plan as of the earliest date on which the contributions can reasonably be segregated from the employer's general assets.  While the DOL indicated an "outer limit" of deposit by the 15th business day of the month following the month the deferrals are withheld, this is NOT the deadline that a Plan Sponsor must satisfy.  In almost all cases we've seen with the DOL on plan audits the time for depositing salary deferrals is much quicker and sometimes only a few days should pass from withholding deferrals to actual plan deposit.  The facts and circumstances of each case are looked at individually by the DOL.  Due to the substantial penalties and make-up of investment losses the DOL will impose for late remittance, Plan Sponsors are urged to carefully review their existing deposit practice to ensure compliance.  If you have any questions, please contact your Hand Benefits & Trust, Inc. account executive to review your existing practice.

New Reporting/Trading Rules Under Sarbanes-Oxley Act

Blackout Period Notice Requirements:

Under the Sarbanes-Oxley Act of 2002 (PL. 107-204), a Plan Administrator of an individual account plan (such as a 401(k) plan permitting participant direction of investments) must provide advance notice of any "blackout" period where a participant's right to change investments will be temporarily suspended.  The DOE has now issued final rules governing the notice requirements, and these rules will become effective on January 26, 2003.  The Act and the DOL rules generally require the following:

• "Blackout Period" notice must be provided at least thirty (30) days before a Blackout Period (defined as a period of more than 3 consecutive business days of suspended investment direction or ability to make plan loans).

• The DOE rules elaborate that the thirty (30) day notice period runs from the date participants would be affected by the Blackout Period (which may occur in certain circumstances earlier than the date the Blackout Period actually commences).

• The Notice must contain reasons for the Blackout Period, identifica­tion of investments, and other rights affected.

• The expected beginning date and length of Blackout Period and a statement that participants should evaluate current investments in view of pending blackout must be provided.

• The Notice can be written or electronically transmitted if reasonably accessible to participants.

• The name and address of a person who can be contacted with questions about the Blackout Period must be included.

The DOL has provided a "sample notice" for guidance to comply with the Blackout Period notice requirements.

Exceptions To 30-Day Notice:

There are several exceptions to the thirty (30) day notice requirements where circumstances would dictate a lesser time period available for deliver­ing the notice.  These include blackouts occurring due to mergers, acquisition, dissolution or similar transactions.  Additionally, if deferral of a blackout period would violate ERISA fiduciary duties or the thirty (30) day notice is not possible due to unforeseeable events, the notice can be provided in a shorter time frame based on a reason­able determination by a plan fiduciary.  Reasons for delay in providing the Notice should be well documented by the Plan fiduciary.

Changes Affecting Executives

• Trading Prohibitions:  Besides the Blackout Period notice requirements, the Sarbanes-Oxley Act prohibits directors and officers from selling company stock acquired in connection with their employment during any period of more than three (3) consecutive business days, if at least fifty (50%) percent of the participants or beneficiaries under the company's individual account plan offering company stock as an investment options are precluded by the issue or plan fiduciary from buying or selling company stock.

• Reporting Requirements for Stock Transactions:  In conjunction with the passage of Sarbanes-Oxley, the SEC issued new regulations effective for transactions occurring after August 28, 2002 which will require faster reporting of stock trades by greater than ten (10%) percent shareholders, corporate directors, and executive officers inside a 401(k) plan.  Previously, reporting of changes in ownership, purchases, and sales were required on a monthly basis within ten (10) days after the close of each calendar month in which the purchase/sale occurred.

Now an insider has to make a report for changes in ownership before the end of the 2nd business day after the "execution" date of the sale.  However, 401(k) trades would appear to meet the discretionary transaction rules of the SEC regulations where the reporting person (the participant) does not necessarily select the date of execution which would toll the two (2) day reporting period.  Instead, the Plan Administrator is required to notify the participant that the transaction has been executed no later than the 3rd business day following the trade date.  That date of notification from the Plan Administrator then becomes the deemed execution date that starts the 2nd day notice period running for the participant to file Form 4 with the SEC.

According to the announcement from the SEC on the Final Rule, the SEC said "we expect the reporting person (the participant in our case) will make special arrangements for the broker; dealer, or Plan Administrator to provide the participant actual notice of transaction execution as quickly as feasible.  By deeming the notification date to be the 3rd business day following the trade date if actual notification does not occur by then, the rule limits the potential delay permitted for reporting these transac­tions on a timely basis."

The Rule goes on to provide that the broker or dealer will also have an obligation to provide the participant with a transaction confirmation under 10b-10 of the Exchange Act, but the confirmation may not arrive soon enough to give the participant the information needed for reporting purposes.  Broker/dealers will probably need to provide the information either electronically or by telephone.  There are some discussions about whether the Act prohibits 401(k) loans to the same insiders.  Some commentaries say that such a limitation on 401(k) loans is a far reaching interpretation and others say a conservative interpretation would mean no loans.  The language is ambiguous at best, and we are hoping for additional clarification on this important issue.

There are a couple of interesting updates regarding health care reimbursement plans.  This year, the IRS announced that it will recognize a medical doctor's diagnosis of obesity as a disease, paving the way for those eligible expenses associated with the treatment of obesity to be reimbursed under a health care reimbursement plan.  This would include such expenses as prescription drugs and membership fees to an organization such as Weight Watchers.  It will not include the cost of diet foods, or membership fees to a health club.

In addition, because expenses incurred for the diagnosis of medical conditions are eligible for reimbursement the IRS has clarified that expenses such as pregnancy kits and ovulation monitors are also eligible for reimbursement.  This would also include the cost of diagnostic MRIs.

It was recently announced that transportation expenses associated with the receipt of medical care will be reduced as of January 1, 2003.  While the rate is currently $.13 per mile, for those expenses incurred in 2003, it will be reduced to $.12 per mile.  We are currently updating our paper forms to indicate the new rate, and will be updating the Web site form as well.

You will recall that a prior issue of the newsletter addressed the changes that EGTRRA would make to the dependent care tax credit for tax year 2003.  We had hoped at the time that dependent care assistance plans would receive comparable changes, however, that did not occur.  Therefore, in some cases, for those employees with two or more eligible dependents, it may be more financially advantageous to utilize the year end tax credit rather than the dependent care assistance plan.  Each employee should check with his/her tax consultant prior to making that decision.  We have updated our dependent care worksheets with the new tax credit tables.

By now you are aware of the Health Insurance Portability and Accountability Act's (HIPAA) Privacy Rules, which were recently finalized by the Department of Health and Human Services. Flex Corp will be a "Business Associate" of the health care reimbursement plan.  While the current Administrative Services Agreement will suffice as the required "contract" between Flex Corp and the health care reimbursement plan, we will be amending the services agreement to include the new privacy language.  The deadline for compliance is April 14, 2004 for existing clients unless the current Administrative Services Agreement is modified before that date.  For new clients, the required privacy language is already included.

Stay tuned...there are always interesting changes that will affect your cafeteria plan.

Matt Manis, Controller
Bryan Wilson, Vice President, Actuarial Consulting
Connie Lin, Actuarial Assistant
Lisa Kottler, Vice President of Marketing

• Congratulations to Mary Leong for her promotion to account manager.
• Congratulations to Sergio Garcia for his promotion to processor.
• Congratulations to Kelli Hill for passing her Series 7 and Series 66 exams.

We have several employees preparing for various exams to gain additional designations, and we want to wish them all the best of luck.