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Federal Report: January 2002
SummaryNinth Circuit Holds that Individuals May Sue State for FMLA Violations House Passes Stimulus Package; Bill Contains Displaced Worker Health Tax Credit Bush Signs Railroad Pension Legislation CBO Director: Social Security Accounts May Not Benefit Economy Study: Investment Firms Doing a Lousy Job of Investing Their Own Fund Ninth Circuit Holds that Individuals May Sue State for FMLA ViolationsBreaking rank with the seven other federal circuits that have addressed the issue, the Ninth Circuit in the case of Hibbs v. Dept of Human Resources (9th Cir. 2001) recognized an individual’s right to sue a state under the Family and Medical Leave Act (FMLA). In the case, the individual (an employee of the Nevada Department of Human Resources) took several leaves of absence to care for his sick wife. When he was unable to resolve a dispute with his employer about how FMLA should apply to the leave, he filed suit. The employer argued, and the trial court agreed, that the suit was barred under the Eleventh Amendment, which generally prohibits federal suits by individuals against states. But Congress can override a state’s Eleventh Amendment immunity if it (1) has unequivocally declared an intent to do so; and (2) has acted pursuant to a valid exercise of power. In the case, the Ninth Circuit distinguished the circuit court cases going the other way, on the grounds that this case involved leave to care for a sick family member (not “ordinary sick leave” due to the employee’s own illness). The purpose of the leave is important, the court said, because ensuring that leave to care for a family member is available on a gender-neutral basis furthers congressional efforts to remedy gender discrimination resulting from the traditional female role as caregiver. Because sex discrimination is subject to higher scrutiny under the Constitution than is discrimination on the basis of age or disability, the court also found this provision of the FMLA distinguishable from the Americans with Disabilities Act (ADA) and the Age Discrimination in Employment Act (ADEA), two statutes under which the U.S. Supreme Court has found states to be immune from suit. With the uncertainty raised by this holding, state employers should not rely on state immunity for protection from individual lawsuits for FMLA violations. Political subdivisions of states (e.g., counties, cities, and school districts) are not generally immune from individual lawsuits, because the Eleventh Amendment does not apply to them (the determination of when an employer is a political subdivision is typically made under state law). And many states have enacted state family and medical leave laws that continue to leave states (and their health plans) open to lawsuits by individuals. House Passes Stimulus Package; Bill Contains Displaced Worker Health Tax CreditAfter debate that lasted until well into the morning of Dec. 20, the House of Representatives approved a revised economic stimulus package (H.R. 3529) by a vote of 224-193. The package, which was not taken up by the Senate before adjournment, contains a tax credit for displaced workers to purchase health insurance. Philosophical differences between Democrats and Republicans over how best to assist displaced workers obtain health insurance coverage have been key hurdles to crafting a compromise on the economic stimulus package. Democrats want to provide subsidies solely for COBRA coverage and Republicans prefer a tax credit that could be used for either individual insurance market products or COBRA coverage. Another key difference between the Democrats and Republicans related to the size of any health insurance subsidy. Democrats wanted a 75% subsidy for displaced workers’ COBRA costs while the latest House GOP plan contained a 60% subsidy. Finally, the House bill would have only allowed those who were involuntarily separated from their job to qualify for the health subsidy while Democrats would have assisted those both voluntarily and involuntarily separated. Under H.R. 3529, all involuntarily displaced workers eligible for unemployment insurance (between March 15, 2002 and January 1, 2004) who are not otherwise eligible for health insurance would be eligible for a temporary (12-month) tax credit for 60 percent of the cost of health insurance purchased. This tax credit would be available to purchase COBRA coverage or insurance in the individual market. The bill provides for the credit to be either refundable or issued on an advance basis pursuant to a program that will be established by the Secretary of the Treasury. Presumably regulations would address key issues of concern to employers and health plans, such as how the credit would be implemented and what obligations would be imposed on employers for COBRA coverage and health plans operating in the individual market. Whether an economic stimulus package is ever presented to the president, the issue of how to help the uninsured — particularly recently-displaced workers — purchase health insurance coverage is certain to be a key health care concern for Congress in early 2002. To assist policymakers understand employers’ concerns over how best to develop federal assistance for displaced workers, the American Benefits Council recently released a document outlining key principles. Absent the proper safeguards, the extended health coverage provisions could add tremendous complexity and cost to the administration of health plans. As expected, the House-passed economic stimulus package also included pension interest rate relief (located in Section 605 of H.R. 3529). Since the Senate opted not to take up the House-passed bill, however, and with the supply of other possible vehicles nearly exhausted, enactment of interest rate relief this year appears impossible. Despite strong support from congressional champions and the diligent work of many groups, pension interest rate relief will remain an outstanding legislative issue for next year. Bush Signs Railroad Pension LegislationPresident Bush has signed legislation permitting $15.3 billion in railroad pension funds to be invested on Wall Street. The move, announced by the White House in a brief statement, allows the federally administered railroad pension system to take the assets out of U.S. Treasury bonds and invest the money in private securities instead. The measure would cut the railroads’ payroll taxes while aiming to boost the benefits of retirees and their widows or widowers. The measure was backed by rail companies and their unions. Proponents said it was important to help tens of thousands of rail retirees, who are not covered by Social Security, as well as the rail companies. But it was scorned by a small group of Republicans who charged that railroads and their workers had colluded against the taxpayer, who would be expected to foot the bill if the new private investments go sour. Rep. Ed Whitfield (R-Ky.) hailed the passage of H.R. 10, the Railroad Retirement and Survivors’ Improvement Act of 2001 as a major victory for railroad retirees and their spouses. The legislation allows workers who put in 30 years of service to fully retire at age 60 and the vesting period will be reduced from 10 years to five years. In addition, the medical retiree health insurance plan would be expanded to age 60 with increases in the lifetime benefit maximum indexed to the medical inflation rate. The Tier II system would be allowed to invest in the equity markets, which could lead to a higher rate of return on investments and subsequently benefit increases for retirees and lower taxes on the rail companies. In the event that these investments did not produce an adequate rate of return, the companies would be mandated to absorb any necessary tax increases in the future. CBO Director: Social Security Accounts May Not Benefit EconomyPrivate Social Security investment accounts backed by President Bush may not contribute to overall economic growth as much as supporters say, the congressional budget director said on Dec. 10. In testimony to the Senate Special Committee on Aging, Congressional Budget Office Director Dan Crippen said it was important to consider the impact of Social Security reform on the overall economy and that the baby boom generation will likely have to consume less, save more and accept some cuts in retirement benefits to help ease the burden of the aging population on the federal budget, economy and future generations. “Investing in the stock market — either through private accounts or through government purchases of stock for the Social Security trust funds — is no panacea,” Crippen said in testimony to the committee. “Simply raising the average rate of return on assets by taking on more risk would not change the economic fundamentals,” he added. “Only if the investment proposal increased national saving and enlarged the economy would it reduce future burdens.” The aging population will consume an increasing amount of the federal budget and domestic economy, Crippen said. Spending for the Social Security retirement program and Medicare and Medicaid health care programs that help the elderly will rise from the current 7 percent of gross domestic product (GDP) to 15 percent by 2030, Crippen said. Lawmakers will have to raise taxes, cut spending or borrow more money in financial markets to cover the cost of the baby boomers’ retirement. In 2016, Social Security will no longer take in more in tax revenues than it pays out in benefits and by 2038 the trust fund will become exhausted. Supporters of Bush’s plan to allow workers to invest part of the 12.4 percent Social Security tax in investment accounts argue the current system is unsustainable and that private accounts will provide future retirees with a higher benefit than they might otherwise receive. They also argue that investing the money in stocks and bonds will also improve savings and help economic growth. But Crippen said that depends on where the money comes from to finance the private accounts. Borrowing the money to finance private Social Security accounts would provide no benefit to the overall economy, he said. A return to budget deficits, after four years of surpluses, to fight a war against terrorism and help the nation recover from the Sept. 11 attacks on New York and Washington will force even tougher choices on lawmakers, said Barbara Bovbjerg, director of education and work force issues at the General Accounting Office (news - web sites), the congressional watchdog agency. “If we assume that the 10-year surpluses CBO projected in August are eliminated by 2030 — absent changes in the structure of Social Security and Medicare — there would be virtually no room for any other federal spending priorities, including national defense, education and law enforcement,” she said. The CBO has yet to revise its budget forecasts in the wake of the Sept. 11 attacks and subsequent spending increases. But White House budget director Mitch Daniels says budget deficits will likely continue at least until 2005. A commission created by Bush to recommend ways to establish private accounts through which workers could invest some of Social Security in stocks and bonds was set to release a draft of its final report. The bipartisan panel has said there is no painless way to reform Social Security and that it is considering three proposals to set up private accounts and improve Social Security’s financial outlook. Two of the proposals include benefit cuts and transfer of general revenues to make up for the retirement system’s financial shortfall, while a third is silent on the issue of how to shore up the system’s finances. Study: Investment Firms Doing a Lousy Job of Investing Their Own FundsEmployees of major financial services firms that want to invest your money for retirement, or advise you how to invest those funds, often do a terrible job of investing their own, according to a study released Dec. 10 by the National Center for Policy Analysis (NCPA). The study analyzed the performance of companies that either invest retirement funds or offer investment advice for employers and their employees. Over a four-year period ending in 1998 (the latest year for which figures are available):
The NCPA’s findings are consistent with other studies showing that 401(k) plans generally perform less well than the market as a whole. “If changes are not made, many workers will experience a major decline in their standard of living during their golden years,” said NCPA President John C. Goodman. One reason for the poor performance of many 401(k) plans is that employees, especially low-income workers, don’t know how to invest 401(k) funds and employers are discouraged from giving them investment advice, according to the study’s co-authors, Dallas benefits consultant Brooks Hamilton and Dallas Morning News financial columnist Scott Burns. Too often workers are conservative and choose the default option for their 401(k) dollars, which usually invests their retirement money into low-returning money-market or other fixed-income funds. Over long periods of time returns from fixed investments are too low to fund retirement. In addition, many 401(k) plan options have high administrative and management fees that further reduce the rate of return. The study proposes a solution called the American Freedom 401(k) model. Unlike current 401(k)s, the NCPA’s model would correct many of the current flaws in retirement programs. Among other features, it would allow employees to invest in plans that are managed by investment professionals selected and monitored by the plan sponsor; increase portability of funds by prohibiting cash-outs and allowing all funds to be rolled over into other qualified plans; and require plan sponsors to pay all fees and expenses, and fully disclose them. In exchange for sponsoring 401(k)s under this model, employers would receive safe harbor from suits alleging lack of fiduciary responsibility.
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