February 02, 2012

Some Disabled Delta pilots have elected to delay receiving distributions from the PBGC related to the terminated Delta Pilots Retirement Plan. There may be valid reasons for delaying retirement from Delta, but there are some potentially serious income tax ramifications that could arise if receipt of distributions from the PBGC is delayed beyond age 70 & ½ years.

IRS Publication 575, pages 32-33 provides information on required distributions from a qualified pension plan. The required beginning date is defined as the later of

1. April 1st of the calendar year after reaching age 70 & ½ years or
2. “The calendar year in which you retire from employment with the employer maintaining the plan.”

There is a qualifying statement under the next sentence of Publication 575 which reads, “However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70 ½, even if you have not retired.” This qualifying statement may present a problem in attempting to use #2 above as the guideline for the beginning date for required distributions for the following reasons:

First, the Delta Pilots Retirement Plan (DPRP) stated that distributions to the Participant shall commence no later than April 1 following the calendar year in which the Participant attains age 70-1/2. Because the Plan language did not state an exception to the required distribution if the Participant had not retired, delaying required distributions until you retire from Delta (option 2 above) probably is not applicable under IRS regulations.

Second, the Delta Pilots Retirement Plan defined “Employee” as “Any person classified as a pilot by an Employing Company, who is regularly employed by an Employing Company and who is covered by a collective bargaining agreement between the Air Line Pilots Association, International and the Company. This definition also may pose a problem in using option 2 above for determining the required beginning date.

Third, it must be noted that after turning the plan over to the PBGC, Delta is no longer the employer maintaining the plan; therefore, the provision allowing for the delay of distributions until you retire from employment with the employer maintaining the plan (option 2 above) may not be applicable.

Finally, pilots who had not retired, but were at least age 60 and no longer on the Delta pilot seniority list as of 6/1/06 were represented under Section 1114 bankruptcy proceedings, the section of the bankruptcy code that addresses retiree benefits. Accordingly, such pilots were treated as retired pilots for the purposes of bankruptcy proceedings. If they had not been treated as retired pilots, they may have been subject to the provisions negotiated by ALPA and Delta that terminated Long Term Disability Benefits upon reaching the FAA mandatory retirement age.

In view of the foregoing, it may well be that the IRS will conclude that required distributions from the PBGC should commence no later than April 1 of the calendar year after you reach age 70 & ½ years.

What are the possible ramifications of further delay in receiving distributions from the PBGC?
The IRS defines the penalty for failure to receive required distributions from a Plan as 50% of the amount that should have been received as required distributions. This penalty is in addition to the amount of taxation of gross income received from the Plan. A waiver may be granted if there is a reasonable excuse for not receiving the required distribution; however, there is no guarantee that such a waiver will be granted. Often, decisions within the IRS are based upon the opinion of the IRS agent who is reviewing a case. Such decisions can be unpredictable. If a pilot received notification from the PBGC relating to the provisions of the Plan, the reasonability of his excuse may be questionable and his request for a waiver could be denied.

What happens when a pilot begins receiving distributions from the PBGC?
The amount received from the PBGC relating to the terminated Delta Pilots Retirement Plan becomes an offset to the Long Term Disability benefits paid by the D&S Plan. If the pilot receives a lump sum payment from the PBGC for benefits that should have been paid previously, the D&S Plan will calculate the amount of overpayments that previously have been made by the D&S Plan and demand repayment for such amounts. In such case, repayment to the D&S Plan can be arranged over a 48 month period without a charge for interest.

Can a pilot commence distributions from the PBGC without retiring from Delta?
Some active Delta pilots who are over age 60 currently are receiving benefits from the PBGC before retirement from Delta. It seems possible that disabled/not retired pilots could do likewise.

Conclusion

Pilots should do their own risk/reward analysis of delaying the receipt of distributions from the PBGC. The worst case scenario for delaying the receipt of such required distribution appears to be as follows:

1. The IRS assesses a 50% penalty on the gross amount that the pilot should have received as distributions dating back to the 70 & ½ year old threshold for required distributions.
2. The pilot is required to pay income tax on the gross amount of the receipt that he eventually receives from the PBGC in addition to the 50% penalty that has been assessed on the required distributions that he should have received.
3. The pilot is required to repay the D&S Plan the amount of benefits that he receives from the PBGC.

January 19, 2012

PRESENTATION AT WALLYBIRD LUNCHEON—JANUARY 19, 2012 Click Here

December 20, 2011

THE PBGC’S FINAL DETERMINATION OF BENEFITS UNDER THE DELTA PILOTS RETIREMENT PLAN ONCE AGAIN HAS REQUIRED ADJUSTMENTS OF LONG TERM DISABILITY (LTD) BENEFITS AND REPAYMENT TO THE D&S PLAN OF PREVIOUS EXCESS BENEFIT PAYMENTS.

THE FOLLOWING ANSWERS TO FREQUENTLY ASKED QUESTIONS (FAQ’s) ABOUT THE REPAYMENT OF EXCESS LTD PAYMENTS MAY PROVIDE FOR A BETTER UNDERSTANDING OF THE ISSUE.

Drafted 12/17/2011

The answers to the following questions are based upon the research and opinions of the author. Although the information is deemed to be accurate, no warranties are made or implied as to the accuracy of the answers. Furthermore, the answers are not intended or to be relied upon as tax advice. Your professional tax advisors should assist you in making decisions relating to filing your tax returns.

1.         How are payments from the PBGC related to my LTD benefits?

The D&S Plan specifies that retirement benefits actually received from the Delta Pilots Retirement Plan (DPRP) reduce LTD benefits on a dollar for dollar basis. Following termination of the DPRP, the PBGC became responsible for making payments relating to that plan. Therefore, benefits paid by the PBGC serve as an offset to the LTD benefit.

2.         The term SLA is used in correspondence from Delta. What does it mean?

SLA is an acronym for Single Life Annuity. The D&S Plan specifies that if retirement benefits are received in a manner other than the form of a single life annuity, the amount of offset for that benefit will be converted to the actuarial equivalent of a single life annuity. For example, lump sum distributions from the DPRP and the Money Purchase Pension Plan (MPPP) were converted to a monthly benefit that was the actuarial equivalence of the lump sum distribution. That actuarially equivalent monthly benefit was included as part of the SLA offset to the LTD benefit. Additionally, amounts received from the DPRP were incorporated into the SLA offset to the LTD benefit (if a pilot elected a joint life annuity from the DPRP, the actuarial equivalent of that joint life annuity was incorporated into the SLA).

3.         Why was I overpaid by the D&S Plan?

As part of the process of terminating the DPRP and turning the Plan over to the PBGC, Delta made an estimate of the benefits that would be paid by the PBGC. If the estimated benefit was less than the amount that the pilot had been receiving from the DPRP, Delta reduced the retirement offset to the LTD benefit, thereby increasing the amount of the LTD benefit paid to the disabled pilot. In many cases, the PBGC made subsequent increases in benefit payments, but did not inform Delta of those increases. Those increases should have increased the retirement offset to the LTD benefit and decreased the net amount of the LTD benefit paid to the pilot. However, such adjustments did not occur. Consequently, pilots received LTD benefit payments from the D&S Plan that were in excess of the benefit to which they were entitled.

4.         When was the discrepancy discovered?

In some cases, pilots informed Delta of the changes to the benefits received from the PBGC and Delta made the appropriate adjustments to their LTD benefit payments. However, in many cases the overpayment was not discovered until the PBGC completed final benefit determinations. Unfortunately, the aggregate amount that some pilots have been overpaid by the D&S Plan during the past four years is substantial.

5.         What are the options for making the repayment of excess payments from the D&S Plan?

Section 26. N. of the Pilot Working Agreement between Delta and ALPA effective September 1, 2001, is quoted for reference.

“In the event of an overpayment from the D&S Plan or any retirement plan, a pilot will be notified in writing of the circumstances resulting in the overpayment and the amount of the overpayment. The pilot will be informed that he has 45 days from the date of the letter to contact the Company to make arrangements for repayment. The letter will advise the pilot that if contact is not made within the 45 day period the Company will recoup the overpayment in equal installments over the next six months from payments due from the applicable plans, without interest. If requested by the pilot during the 45 day period, an alternate arrangement will be made to permit repayment in equal monthly installments over a period of up to 48 months, without interest. In the event that there are insufficient future monthly payments due from the applicable plan, repayments will be made by the pilot in equal monthly installments over the established repayment period (six months or up to 48 months), without interest. In the event of default of payment of one or more installments, the entire amount will become immediately due and the Plan Administrator may pursue collection of such amount (including interest and collection fees) to the full extent permitted by law. This procedure will apply to overpayments with respect to which the plan initiates the repayment and/or recoupment process on or after the Effective Date.” 

6.         What are the income tax ramifications of repayment to the D&S Plan?

Internal Revenue Service regulations do not allow Delta to reduce the amount of income paid in the current year by the amount of repayment made relating to overpayments from previous years. The following is an excerpt from IRS Publication 15:

“The wages paid in error in the prior year remain taxable to the employee for that year. This is because the employee received and had use of those funds during that year. The employee is not entitled to file an amended return (Form 1040X) to recover the income tax on these wages. Instead, the employee is entitled to a deduction (or credit in some cases) for the repaid wages on his or her income tax return for the year of repayment.”

IRS Publication 525, pages 36-37, details the manner in which the repayment can be reported. You may want to have your income tax professional refer to that section.

If the repayment is less than $3,000 in a given year, the individual may have difficulty recovering all of the excess taxes that were paid previously. According to IRS Pub 525, repayments of less than $3,000 are entered under a section of Schedule A (itemized deductions) that is subjected to an offset in the amount of 2% of adjusted gross income.   

If the repayment amount in a given year exceeds $3,000, IRS Pub 525 indicates that there are two options for recovering the taxes paid on overpayments received in previous years.

a.         The $3,000+ amount of repayment can be entered on Schedule A, line 28 (which is not subject to offset by 2% of adjusted gross income). In the event that overall itemized deductions are limited as a result of taxpayer’s adjusted gross income, the previous overpayment of taxes possibly will not be fully recovered under this option.

b.         The alternative procedure outlined in IRS publication 525 may be cumbersome if the overpayments were received over several tax years.  The amount of overpayment for a given year can be deducted from taxable income of that given year and a revised tax liability calculated for that year. The differential between the taxes that were paid for that year and the revised tax liability for that year becomes a tax credit for the year in which repayment is made. The same process in used to determine tax credits relating to each year that overpayments were received. This process may require recalculating tax liabilities for years 2006 through 2010.

July 25, 2011

LATEST FINANCIAL REPORT ON THE D&S TRUST--Form 5500 filed 4/6/11 (including Notes to Financial Statement).
To view CLICK HERE

February 11, 2011

Insurance Deductions for February 2011:
Employee Service Center has provided information concerning the missing deductions for insurance on the February 1, 2011 LTD pay stubs.  The problem is isolated to the LTD group and it is a software problem that needs to be resolved.  Fortunately, there will be no loss of insurance coverage.  Delta expects to double bill the appropriate insurance deductions on March 1, 2011, to true-up the accounts.

Survivors and PBGC Benefits Determination Letters:
Some survivors have recently received letters from the PBGC stating that their benefits have been terminated.  Confusion created by these letters may lead someone into believing that this means a loss of their D&S survivors benefits.  The PBGC only has jurisdiction over the terminated Delta Pilots Retirement Plan and not over the D&S Plan.  The D&S survivor's benefits are lifetime benefits that continue to be paid from the D&S Trust.
 

October 16, 2010

NEWS ALERT: Social Security Payments Won't Increase Next Year

The Social Security Administration said there will be no increase in benefits next year -- the second year in a row without an increase for more than 58 million retirees and disabled Americans. The announcement marks only the second year without an increase since automatic adjustments for inflation were adopted in 1975. The first year was this year.

REPAYMENT TO THE D&S PLAN
TRYING TO SOLVE THE TAX PROBLEM
By Ev Gost
Ret. Capt. 767 LAX
DDPSA Vice Chairman
9/2/10
This article relates only to pilots receiving LTD benefits from the D&S Plan

The final benefit determination by the Pension Benefit Guaranty Corporation (PBGC) has revealed that a number of pilots were underpaid by the PBGC in previous years; therefore, the PBGC will make a lump sum payment of the aggregate underpayment to date and increase the amount of future benefit payments. Because Delta retirement benefits reduce LTD benefits on a dollar for dollar basis, the adjustment by the PBGC necessitates repayment of amounts that were “overpaid” from the D&S Plan.

There is a potential taxation problem that should be discussed with your tax professional. Without giving tax advice, this article will discuss issues relating to the taxation problem.

PROBLEM:

1. In past years, LTD pilots were overpaid by the D&S Plan and paid federal and state taxes (where state taxes were applicable) on that income.
    
2. Make-up payments from the PBGC are taxed as income for the year in which they are received even though an equivalent amount has to be repaid the D&S Plan.
    
3. IRS Publication 15 indicates that the repayment of overpayments received in previous years cannot legally be deducted from this year’s W-2 income. Additionally, filing amended tax returns for previous years is not the appropriate remedy to recover previous excess tax payments.

The following is an excerpt from IRS Publication:

“The wages paid in error in the prior year remain taxable to the employee for that year. This is because the employee received and had use of those funds during that year. The employee is not entitled to file an amended return (Form 1040X) to recover the income tax on these wages. Instead, the employee is entitled to a deduction (or credit in some cases) for the repaid wages on his or her income tax return for the year of repayment.”

IRS Publication 525, pages 36-37, details the manner in which the repayment can be reported. You may want to have your income tax professional refer to that section.

If the repayment is less than $3,000 in a given year, the individual may have difficulty recovering all of the excess taxes that were paid previously. According to IRS Pub 525, repayments of less than $3,000 are entered under a section of Schedule A (itemized deductions) that is subjected to an offset in the amount of 2% of adjusted gross income.    

If the repayment amount in a given year exceeds $3,000, IRS Pub 525 indicates that there are two options for recovering the taxes paid on overpayments received in previous years.  

1. The $3,000+ amount of repayment can be entered on Schedule A, line 28 (which is not subject to offset by 2% of adjusted gross income). In the event that overall itemized deductions are limited as a result of taxpayer’s adjusted gross income, the previous overpayment of taxes possibly will not be fully recovered under this option.
    
2. The alternative procedure outlined in IRS publication 525 may be cumbersome if the overpayments were received over several tax years.  The amount of overpayment for a given year can be deducted from taxable income of that given year and a revised tax liability calculated for that year. The differential between the taxes that were paid for that year and the revised tax liability for that year becomes a tax credit for the year in which repayment is made. The same process in used to determine tax credits relating to each year that overpayments were received. In the cases most LTD pilots who received overpayments, this process requires recalculating tax liabilities for years 2006, 2007, 2008 and 2009.

It certainly would be easier if Delta could reduce D&S Plan taxable income for the year in which repayment is made by the amount of such repayment. Apparently, the IRS will not allow such a process.

This article is not giving tax advice as is not to be relied upon as such. Some of the information in the article may be useful in understanding problems relating to overpayment from the D&S Plan; however, your professional tax advisors should assist you in making decisions relating to filing your tax returns.

May 7, 2010

Recently, one of our retired WAL/DAL pilots requested an update on the amount that his wife would receive from the Delta Pilots Disability and Survivorship (D&S) Plan if he were to die this year.  Delta estimated a monthly survivor’s benefit of $1,943.15.  This figure was significantly less than the estimate of $3,705.92 that he received from Delta 3 years ago.

Although the variable amount of the survivors’ benefit has declined along with declines in the equity markets, the amount of decrease in his case could not be reconciled.  He challenged the accuracy of the figure recently provided by Delta and eventually received a letter of apology with an indication that the estimated survivor benefit currently is $3,043.05.

This alert calls your attention to the fact that the folks at Delta can and do make errors when calculating benefit estimates. Hopefully, there won’t be errors in the calculation when we fly west and our surviving spouses apply for survivor’s benefit from the D&S Plan.