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R&I Update
Director's Note New Contracts Legislative Update Court Decisions Negotiations Other News

 
CONTENTS:

Negotiations Update
Delta  •  US Airways  •  United Airlines
American Eagle  •  Alaska Airlines
Hawaiian Airlines  •  Continental

Legislative & Legal Update
New Tax Code Provisions Place Restrictions on...
Automatic Rollover Requirements Go Into Effect...
HIPAA Portability Rules Further Clarified
COBRA Period Extended for Veterans
New Rules: Expensing of Stock Options

Other News
United Bankruptcy Case Developments
 Legislative & Legal Update

New Tax Code Provisions Place Restrictions on Nonqualified Deferred Compensation Plans

The American Jobs Creation Act of 2004, signed by President Bush on October 22, 2004, made sweeping changes to the tax code, including the addition of Section 409A providing rules for the inclusion in income of deferred compensation under nonqualified plans. The new rules apply to amounts deferred after December 31, 2004 (including related earnings). Vested deferred compensation plan balances as of December 31, 2004 are not subject to the new rules as long as the plan is not significantly amended after October 3, 2004.

Highlights of the provisions affecting nonqualified plans include:

  1. Elections for the deferral of compensation during a taxable year must be made before the close of the preceding taxable year.
  2. In the case of the first year of eligibility, elections for the deferral of compensation (with regard the services to services performed after the election) may only be made within 30 days after the participant becomes eligible to participate in the plan.
  3. Elections to delay the timing of or change the form of payment must follow specific guidelines.
  4. Distributions from the plan will be made no earlier than
    • separation from service;
    • the date the participant becomes disabled;
    • the participant's death;
    • at a time (or pursuant to a fixed schedule) specified under the plan at the time of the deferral;
    • the occurrence of a change in ownership or effective control of the corporation sponsoring the plan (or in the ownership of a substantial portion of the assets of such corporation);
    • the occurrence of an unforeseeable emergency.

Failure to satisfy the requirements of Section 409A will result in all compensation deferred under the plan, and related earnings, to be included in the income of the plan participant(s) to whom the failure relates. In addition, affected participants are liable for interest, and a penalty equal to 20% of the compensation required to be included in income as a result of the failure to comply with the requirements of Section 409A.

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Automatic Rollover Requirements Go Into Effect for Involuntary Cash-Outs

Under current law, qualified retirement plans are permitted to automatically cash-out participants whose benefits have a present value of less than $5,000 (the current involuntary cash-out limit) without the participant's consent unless the participant elects to have such amounts rolled over into another qualified plan or IRA. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) amended the Internal Revenue Code to require that mandatory distributions from a qualified plan of more than $1,000, but less than or equal to the applicable involuntary cash-out limit, must be automatically rolled over into an IRA designated for the participant unless the participant elects to take the distribution in cash, or authorizes a rollover to another qualified plan or IRA. EGTRRA directed that these automatic rollover provisions would go into effect after the Department of Labor issued regulations providing safe harbors under which the plan administrator's designation of a financial institution and selection of the default investment option for the rolled-over funds would satisfy the fiduciary responsibility provisions of ERISA. The applicable safe harbor regulations were finalized effective March 28, 2005. Therefore, all involuntary cash-outs of more than $1,000 after March 27, 2005 must automatically be rolled over into an IRA unless the participant affirmatively elects to receive the distribution or roll it over into a different IRA.

To qualify for the safe harbor, the following conditions must be met:

Plan sponsors wishing to avoid the new rollover rules have the option of completely eliminating the automatic cash-out provisions in their plans or reducing the cash-out limit to benefits worth $1,000 or less.

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HIPAA Portability Rules Further Clarified

Regulations on the portability provisions of the Health Insurance Portability and Accountability Act, first issued in April 1997, were finalized, effective January 1, 2006, with additional clarification in certain areas. With regard to creditable coverage, important to new plan participants seeking to reduce or eliminate any preexisting condition limitations in their plan, the final regulations add state health insurance plans and coverage received under foreign national plans to the list of plans that constitute creditable coverage. The special enrollment provisions of HIPAA, which provide individuals with enrollment rights under certain circumstances, are expanded and clarified by the final regulations to provide as follows:

In addition, new rules have been proposed changing the 63-day break in coverage rules for individuals who drop coverage during a period of FMLA leave, and those who do not immediately receive a certificate of creditable coverage from their prior health plan. The proposed regulations provide that the 63-day period is tolled under these circumstances until the earlier of:

  • The date a certificate of creditable coverage is provided by the prior health plan or 44 days following the date coverage terminates, or
  • In the case of an individual who drops coverage during an FMLA leave, until the end of the FMLA leave, or, if the individual has not been provided with a certificate of creditable coverage by that time, 44 days after the end of such leave.

In addition, if a certificate of creditable coverage is not issued upon termination of coverage, the proposed rules call for an extension of the 30-day special enrollment period until the HIPAA certificate is provided or 44 days after coverage ceases, if earlier.

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COBRA Period Extended for Veterans

On December 10, 2004, President Bush signed into law the Veteran's Benefits Improvement Act of 2004 (the "Act"), improving housing, education and other benefits for veterans. Also included in the Act are a couple of provisions affecting employers' obligations under the Uniformed Services Employment and Reemployment Rights Act (USERRA). The Act requires that employers provide notice to all employees of their rights, benefits and obligations under USERRA. Employers may comply with this requirement by posting the DOL model notice where other notices are customarily posted for employees. The Act requires that a model notice be made available by the Secretary of Labor on or before March 10, 2004.

The Act further amends USERRA by requiring that COBRA be extended for a period of 24 months instead of 18 months to employees called in to active service. This provision is effective for COBRA elections made on or after December 10, 2004.

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New Rules Issued Regarding Expensing of Stock Options

On December 16, 2004, the Financial Accounting Standards Board (FASB) finalized rules requiring public companies to account on their financial statements for the stock options, stock appreciation rights and restricted stock issued to employees. The rules do not specify a particular method for valuing options, only that companies develop reasonable and supportable assumptions based on expected volatility, dividends, terms and expected exercise patterns

Many companies have traditionally used options as a part of the compensation package to attract, retain and motivate employees. Under current rules, companies issuing options need only disclose their costs in a footnote to the financial statement. Beginning with the first annual reporting period after June 15, 2005, the new rules will require these companies to actually deduct these expenses from earnings.

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 Other News

United Bankruptcy Case Developments

On Friday, February 18th, Judge Wedoff of the US Bankruptcy Court in Chicago granted ALPA's motion to compel the Company to continue paying benefits under the pilot non-qualified pension program. The non-qualified program pays pension benefits in excess of the limits on benefits payable from tax-qualified defined benefit pension plans under Section 415(b) of the Internal Revenue Code, as well as benefits attributable to the portion of pilot compensation in excess of the maximum amount which can be taken into account by tax-qualified plans under Section 417(a) of the Code. United had announced on February 3rd, three days after the Restructuring Agreement between it and ALPA had been ratified by pilots and approved by the Bankruptcy Court, that it was unilaterally "suspending" payment of non-qualified benefits. Under the Restructuring Agreement, United is required to maintain the pilot defined benefit pension plan in full force and effect and to take no action to terminate the plan prior to April 11, 2005.

ALPA responded to the Company's unilateral action by filing an expedited grievance under its collective bargaining agreement with United and by filing an emergency motion in the Bankruptcy Court under Section 1113(f) of the Bankruptcy Code. Section 1113(f) rohibits Chapter 11 debtors from unilaterally modifying the terms of a collective bargaining agreement without first complying with a statutory procedure requiring negotiations and a court hearing. The Restructuring Agreement was the result of negotiations under Section 1113, but the issue of termination of the non-qualified program prior to termination of the qualified defined benefit plan was never raised by United during the course of the negotiations and the Restructuring Agreement contained no provision authorizing such action by the Company. ALPA's motion requested that the Bankruptcy Court order the Company to continue non-qualified payments.

ALPA's motion was heard on February 18th. Judge Wedoff rejected the Company's argument that ALPA was required to arbitrate the dispute before the System Board of Adjustment under the collective bargaining agreement. The Judge stated that the Company's action "lacked any colorable basis" under the Restructuring Agreement and the collective bargaining agreement, in effect holding that the Company's argument that the agreements allowed it to stop non-qualified benefit payments was frivolous. There was therefore no legitimate issue for an arbitrator to decide. The Judge also rejected several technical arguments under the Bankruptcy Code. The Court accordingly granted ALPA's motion and ordered the Company to continue paying non-qualified pension benefits.

The Company has now announced that it will abide by the Court's order.

On other matters, the retired pilots group and the Pension Benefit Guaranty Corporation have appealed the Bankruptcy Court's January 31 order approving the Restructuring Agreement. The Agreement remains in effect while those appeals are pending in the United States District Court. The PBGC's lawsuit seeking involuntary termination of the pilot defined benefit plan under Section 4042 of ERISA, filed in US District Court on December 30th, has been transferred to the Bankruptcy Court by the District Judge. The PBGC has asked the District Judge to reconsider her ruling but, in the meantime, the case is pending before the Bankruptcy Judge. ALPA has been granted party status and the right to participate fully in the case, as has the retired pilot group. The parties are engaged in working out the schedule for pretrial preparation of the case.

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MARCH 2005
Negotiations Update

DELTA (Restructuring LOA, Effective 12/1/2004-12/31/2009)

Retirement

Disability

  • Disability benefit is reduced to 50% of the lesser of monthly FAE (highest 12 during last 36), or 80 times pilot's composite hourly rate in effect on the event date.
  • Offset added for the annuity equivalent of the defined contribution plan at age 62 or when distributed, if earlier.
  • Duration of disability benefits limited to 24 months for disabilities caused or contributed to by mental illness or substance abuse.
  • Modifications apply to disability event dates after November 11, 2004.

Medical

  • Under optional pilot-only medical plan, premium sharing instituted for active pilots at 31% of cost in 2005, increasing annually to 40% of cost in 2008 and thereafter.
  • Pilots retiring at age 60 after January 1, 1997 will pay 22% of the base premium, increasing annually to 33% in 2009 and thereafter, plus prorated amount based on years of service.
  • Pilots hired after November 11, 2004 will pay 100% of the cost of post-Medicare retiree medical coverage.

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US AIRWAYS (Transformation Agreement, generally effective 10/15/04)

Retirement & Profit Sharing

Long-Term Disability

  • One-year waiting period implemented
  • Benefits limited to 24 months for disabilities caused or contributed to by mental illness or substance abuse.
  • Benefit determinations and reviews to be conducted by third party administrator thereby eliminating the duties and responsibilities of the Retirement Board in this regard.
  • Pilot contributions established at 25% of cost, not to exceed $100/month.

Retiree Health

  • Pre-Medicare retiree medical plan modified for pilots retiring after December 31, 2004:
    • Company contribution eliminated for pilots retiring after December 31, 2004.
    • Company will offer a low cost catastrophic plan to be paid 100% by the pilot.
    • Pilots may use accrued sick pay to offset cost of pre-Medicare coverage at a maximum of 25 sick hours, valued at $18.50/hour.
  • Post-Medicare medical plan eliminated for all pilots retiring after December 31, 2004. Prescription coverage only available through January 1, 2006, to be eliminated thereafter.
  • Retiree dental plan eliminated.

Note: The Transformation Agreement modified retiree health benefits for pilots retiring after December 31, 2004. Separate negotiations occurred between the Retiree Committee, representing union and non-union retirees that retired prior to January 1, 2005. With respect to pilots, the resulting agreement provides for continuation of Company-paid medical and dental coverage for pre-age 65 retirees until the pilot's attainment of age 65. At that time, the pilot's spouse and dependents, if any, will be offered COBRA continuation coverage, with 50% of the cost subsidized by the Company while the spouse and dependents remain eligible for COBRA. Retiree medical and dental coverage for non-pilot retirees under age 65 and all retirees age 65 and over is discontinued.

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UNITED AIRLINES (Tentative Agreement, generally effective 1/1/05)

Following rejection by the bankruptcy court of the first Tentative Agreement reached in early January, a new Tentative Agreement was reached between the pilots and the Company, subject to ratification by the membership. The Agreement is generally effective on January 1, 2005, with certain provisions going into effect upon the Company's exit from bankruptcy. In the R & I area, the Agreement provides as follows:

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AMERICAN EAGLE (CBA effective 9/1/97, as amended effective 1/1/05)

Retirement

Retiree Health

  • Pilots retiring at age 60 who elect COBRA continuation for the full 18-month period may continue participation in the plan until Medicare eligibility at the COBRA rate then in effect.

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ALASKA AIRLINES

As the parties failed to reach an agreement on all issues presented under Section 6 of the Railway Labor Act by the December 15, 2004 deadline, the remaining unresolved issues defined by both parties will be submitted to arbitration March 1-10.

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HAWAIIAN AIRLINES

The MEC approved a tentative agreement at Hawaiian Airlines on February 22, 2005, subject to pilot ratification. Details of the agreement will be provided in the next Update.

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CONTINENTAL

As this issue of the Update goes to "press", a tentative agreement has been reached at Continental Airlines on February 28, subject to MEC approval and ratification by the pilots. Details of the agreement will be provided in next Update.

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Air Line Pilots Association, International
1625 Massachusetts Avenue NW, Washington, DC 20036 (703) 689-2270