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A Better Partnership


Oct 2007
October 26, 2007

Human Resources Alert - Fall 2007

Topics included in this newsletter:



by Justin W. Stemple

The IRS recently issued additional guidance under the new deferred compensation rules of Section 409A of the Internal Revenue Code. The guidance confirms the Dec. 31, 2007, deadline for all deferred compensation plans to provide a time and form of payment that complies with Section 409A. Some relief has been granted to allow documentation of certain details by Dec. 31, 2008, but the guidance is far from a full one-year extension. In general, the guidance provides the following:

  • A plan subject to Section 409A must designate a Section 409A compliant time and form of payment in writing no later than Dec. 31, 2007. Determining whether any specific plan or agreement contains a Section 409A compliant time and form of payment means each plan and agreement subject to Section 409A must be reviewed. After Jan. 1, 2008, the time and form of payment may not be changed except under strict restrictions provided by Section 409A.

  • Certain technical documentary requirements, such as revising the definitions of disability and change in control, may be made retroactively during 2008. However, operational compliance with the final regulations under Section 409A is required beginning Jan. 1, 2008.

  • The IRS stated that it intends to create a limited voluntary compliance program under which taxpayers could correct unintentional errors with reduced penalties.

So what does this mean for you?

  • It means that all plans and agreements that are subject to Section 409A must be reviewed, and probably revised, no later than Dec. 31, 2007.

  • Beginning Jan. 1, 2008, taxpayers may no longer rely on a reasonable, good-faith interpretation of Section 409A and will be held to compliance with the final regulations. Taxpayers will also lose the ability to use transition rules that provide significant flexibility to change distribution elections after the end of 2007.

  • In most cases, by the end of the year there will be design decisions that have to be made and time will be needed to draft compliant documents and obtain the necessary approvals from the appropriate individuals, committees or boards.

We are concerned that employers will be unable to complete the actions necessary under the guidance by Dec. 31, 2007. The time needed to identify, review, revise and implement plans and agreements that comply with Section 409A will make compliance by that date a challenge for taxpayers that have not begun that process.

If you have any questions about Section 409A, please contact me by e-mail at, or call 616.752.2375, or contact any member of our Section 409A task force.



George L. Whitfield, Chair



Sue O. Conway



Anthony J. Kolenic, Jr.



Norbert F. Kugele



John H. McKendry, Jr.



Vernon P. Saper



Justin W. Stemple



by Jonathan P. Kok

In response to a recent case involving an individual is being arrested for utilizing a coffee shop's wireless Internet network from his car outside the shop, a number of our clients have asked whether their employees' unauthorized use of other companies' wireless networks could result in liability for the employer.

Since this is an emerging area of the law, there are no hard and fast rules, but there are several issues that employers should be aware of and steps employers can take to ensure that any potential liability does not reach the employer.

Piggybacking Is a Crime

Under the Michigan Fraudulent Access to Computers, Computer Systems and Computer Networks Act, it is a crime to intentionally access a computer network without authorization. This activity is often called "piggybacking."

The penalties for piggybacking are steep. Unauthorized use of computer access is a felony punishable by up to five years' imprisonment and/or a $10,000 fine.

Recently, an individual was arrested in Sparta, Mich., for piggybacking outside a local coffee shop. The individual routinely parked his car outside the shop to access its wireless network from his laptop. He did not purchase anything from the shop and did not request permission to use the network. He was subsequently arrested for unauthorized use of computer access in violation of the state law. Ultimately, the Kent County Prosecutor's Office decided to forego prosecution pending the individual's successful completion of community service through the Kent County Diversion Program.

This is the first case in Michigan involving the arrest of an individual accessing a wireless network without authorization. Consequently, there are many unresolved issues regarding this violation.

For example, a court might impute authorization on a network host that took no effort to secure its network. A clever lawyer might argue that a business's unsecured wireless network is akin to a sports bar having satellite television that can be seen through giant windows facing the street.

Should someone face criminal charges for watching TV from the street?

Employers' Criminal Liability

The only party criminally responsible for unauthorized use of computer access is the individual perpetrating the offense.

An employee's violation of the act, however, could still have repercussions for the employer. In addition to the potential of negative public exposure, any computer equipment, software or personal property "known by the owner to have been used in violation of the Act" is subject to lawful seizure.

Presumably, an employer could intervene to prevent the disclosure of confidential information, but it could take some time before the employer becomes aware of the seizure. Until this issue is addressed by courts, it is best to assume that an employer's computer could be seized and the information contained therein could be at risk.

Civil Liability

Under certain circumstances, employers can be held civilly liable for the actions of their employees. To date, however, there have been no civil cases brought under Michigan law regarding unauthorized wireless network access.

The nearest examples involve conversion claims brought by satellite television companies against individuals who intercept the company's digital signal. Conversion is the act of wrongfully exerting domain over another's personal property.

Arguably, a piggybacker is wrongfully exerting domain over the host's wireless network because he or she is using it without the host's permission. In the satellite television cases, the conversion claim was brought along with other claims, such as violation of the Electronic Communications Privacy Act. This is likely due to the fact that damages for conversion, such as lost profits, would be miniscule in the context of a consumer's intercepting a satellite signal.

Similarly, lost profits would likely be small in the context of piggybacking. For example, in the Sparta case, the lost profits suffered by the coffee shop might be limited to the loss of several weeks' worth of potential sales. Although the cost of my personal Starbucks addiction seems to be continually on the rise, it is highly unlikely that anyone would sue under such circumstances.

Academic commentators have also suggested "trespass to chattels" as a theory of liability for interference with wireless networks. A trespass to chattels is an interference with another's personal property that causes injury.

In the context of piggybacking, however, it would be difficult to identify the injury. Even if a plaintiff could articulate injury, such as overburdening the network, it would be difficult to quantify the damages for this injury in monetary terms. That being said, I still advise my clients to avoid trespassing on anyone's chattels. (I'm not sure what chattels are, but they sound like something to be respected.)

Piggybacking Policy

Although the likelihood of significant exposure is remote, employers who expect their employees to use wireless Internet access in carrying out their job duties should consider adding a policy against piggybacking. Such a policy will serve a couple of important functions.

First, it will make employees aware of the risk of individual criminal prosecution. This factor alone should decrease the number of employees engaging in piggybacking, and consequently decrease an employer's potential liability.

Second, such a policy can be shown to third parties, should the need arise. If an employee is caught piggybacking in the same manner as the Sparta individual, an employer would be able to demonstrate that it took protective measures to prevent such behavior.



by Troy M. Cumings

Legislation has been introduced in both the House and Senate that would extend the smoking ban in Michigan to certain private areas.

On July 24, 2007, the House Commerce Committee approved the legislation, which is now on the House floor awaiting the full chamber's consideration. Currently, the Public Health Code bans smoking at a meeting of a public body or in "public places," which include privately owned indoor areas that are used by the general public and government-owned indoor areas. The House legislation amends the Health Code to also ban smoking in any food service establishment and any "place of employment," which includes any indoor area containing a work area for persons employed by a public or private employer.

There are three exceptions to this ban: a cigar bar, a tobacco specialty store, and a structure used primarily as the residence of an owner or lessee if that owner or lessee also uses the structure as an office.

In addition to the expanded smoking ban, the legislation also imposes additional requirements on owners, operators, managers, or persons having control over an area where smoking is prohibited, including the following:

  • Must clearly post "no smoking" signs at the entrance of each area where smoking is prohibited.
  • Must remove all ashtrays and smoking paraphernalia from each area where smoking is prohibited.
  • Must inform persons smoking in prohibited areas that they are violating state law and are subject to penalties.

Also, the legislation imposes the following prohibition and additional requirements on employers and food service establishments:

  • May not take any retaliatory or adverse personnel action against an employee or applicant for employment for the exercise or attempt to exercise any rights under the statute.
  • Must create and maintain a written nonsmoking policy; prominently post the policy in the workplace; disseminate the policy to each employee within three weeks after adoption and to new employees when hired; and supply the policy upon request to an employee, applicant for employment, and the Department of Community Health.

We expect the Democrat-controlled House to approve the legislation this fall. We anticipate, however, that the legislation will stall in the Senate as it is unlikely the Senate will take it up.

If you would like any further information about this legislation or any other activity in the Michigan legislature or Congress, please contact Troy Cumings at, 517.679.7411 or Jim Cavanagh at, 517.679.7410. We are both located in Warner's new Lansing office.


by George L. Whitfield

The current regulations under 403(b) of the IRS Code were published around the time that The Beatles first traveled to the U.S. and appeared on The Ed Sullivan Show. Proposed new regulations were issued in 2004, but final regulations didn't appear until July 26, 2007.

Many of these changes reduce the differences between the rules governing 403(b) plans and the rules governing other arrangements that include salary reduction contributions (401(k) plans and 457(b) plans for state and local governmental entities).

In connection with these regulations, the IRS also has addressed determination of controlled group relationships among tax-exempt entities.

As detailed below, the final regulations confirmed some positions issued or acquiesced to by the IRS over the years. They also include a lot of new guidance.

Effective Dates

The final regulations are generally effective for taxable years of the employer/sponsor beginning after Dec. 31, 2008. There are a number of exceptions that delay the effective date. While a plan may choose to follow the final regulations earlier, there are no exceptions that mandate an earlier effective date except that separate life insurance and noncompliant transfers were prohibited after Sept. 24, 2007. The requirement that the program must be maintained pursuant to a written plan is immediately effective on Jan. 1, 2009.

Delayed effective dates are available for churches, collective bargaining situations, governmental plans (for limited universal availability exclusions), and the removal of certain permissively excluded groups for universal availability purposes.

Put It in Writing

A 403(b) program now must be maintained pursuant to a written defined contribution plan. All terms and conditions must be in the plan, specifically including eligibility, benefits and limitations. There is no requirement to have a single or master plan document. A written plan may be composed of a number of component documents including contracts and other documentation from the providers. There is no specified requirement or limitation on the number or subject matter of component documents. For example, a salary reduction agreement could be a separate component. Under coordinated Department of Labor guidance, the existence of a written plan will not automatically cause the 403(b) program to be subject to ERISA.

Vesting Confirmed

The final regulations confirm that a vesting schedule that complies with the requirements of 411 may be imposed on employer contributions.

Ordering of Elective Contributions Confirmed

The basic elective deferral limit is specified in 402(g)(1) and for 2007 is $15,500. Only if and when that amount is exceeded for the year can an eligible employee make the special 403(b) catch-up contributions of up to $3,000 per year. These amounts may be contributed for up to five years by an employee who has worked for the employer for more than 15 years. The actual amount of the contribution is determined by a formula set forth in the regulations and explained in Publication 571. If the basic elective deferral limit and the limit on special catch-up contributions, if applicable, have been met, an eligible participant then may make age 50 catch-up contributions. To be eligible, the participant must be age 50 or older by the end of the year. The limit on age 50 catch-up contributions for 2007 is $5,000.

Post-Retirement Contributions

Employer contributions may continue for the duration of the year in which there is a severance of employment and for each of the five successive taxable years. The final regulations confirm that no additional contributions may be made after death. These contributions may not be made at the election of the employee.

Post-retirement employer contributions by a tax-exempt (nongovernmental) employer may not discriminate in favor of former employees who are highly compensated employees.

Hardship Distributions

It appears that a 403(b) plan may be required to allow hardship distributions from elective deferrals. Hardship distributions will be governed by the 401(k) rules and safe harbors. Hardship distributions are not allowed from earnings on elective deferrals or from employer contributions and attributable earnings.

Universal Availability

Subject to certain exceptions, the opportunity to make elective deferral contributions must be universally and effectively available. The requirement of universal availability generally applies separately to each common law entity. The exceptions are nonresident aliens, students, those who normally work less than 20 hours per week, and those eligible under other elective deferral plans of the employer.

The regulations confirm that effective universal availability requires a reasonable advance communication of the opportunity to make elective deferral contributions. Examples suggested by the IRS include a component of a communications package for new employees, directed e-mails or a newsletter. The universal availability rule applies only to those who would contribute $200 or more for the year. As with 401(k) plans, elective deferral contributions cannot be based upon other conditions.

Although permitted in interim guidance, the final regulations do not allow exclusion from universal availability for collective bargaining employees, visiting professors, employees who have taken a vow of poverty, or employees who make a one-time election to participate in a governmental plan other than a 403(b) plan.

Nondiscrimination Changes

The final regulations incorporate the nondiscrimination standards for employer contributions to qualified plans. The final regulations, therefore, do not continue the good faith reasonable compliance standards set forth in Notice 89-23. The nondiscrimination rules are not applicable to governmental plans.

Distribution Restrictions

Distributions from custodial accounts (mutual funds) and elective deferrals and earnings are generally restricted to attainment of age 59½, severance from employment, death or disability as defined by the plan. Distributions also may be made in the case of financial hardship but are limited to elective deferrals only and may not include income attributable to those contributions. There is also an exception for distributions to participants on military absence.

Amounts attributable to employer contributions that are not subject to the distribution restrictions on custodial accounts and elective deferrals may be distributed only after severance of employment, the occurrence of an event (such as elapse of a fixed number of years), attainment of a stated age, or disability.

Transfer of Contributions

Elective deferral (payroll deduction) contributions must be transferred by the employer to providers within a period that is reasonable for proper plan administration. The final regulations provide a safe harbor: Transfer within 15 business days following the end of the month in which the amounts otherwise would have been paid to the participant will comply. However, if the plan is subject to Title I of ERISA, the more restrictive DOL standards will apply. Under those standards, transfer must occur as soon as reasonably feasible following the payroll deduction but no later than the 15th day of the following month. Under the DOL ERISA rules, the absolute deadline of the 15th day of the following month is not a safe harbor.

Life Insurance Prohibited

Separate contracts of incidental life insurance are no longer permitted. This rule takes effect 60 days after publication of the regulations. Separate life insurance contracts issued within that 60-day period and those issued prior to publications of the final regulations are grandfathered. Annuity contracts issued under the plan may continue to include incidental death or disability benefits.

Plan Termination

A 403(b) plan now may permit plan termination with distributions, including eligible rollover distributions, in cases where there is no successor 403(b) arrangement for 12 months. Termination means distribution of all accumulated benefits to the extent administratively feasible. This includes distribution of fully paid individual annuity contracts. Under current guidance, an employer may freeze a plan but cannot force distributions due to plan termination.


Under Revenue Ruling 90-24, if not prohibited by the employer, a participant could transfer from an annuity contract offered by an approved vendor to a product of an outside vendor. However, amounts transferred to an outside vendor were not subject to control and monitoring by the employer with respect to compliance requirements such as required minimum distributions, loans and hardships. In a significant departure from current rules, the final regulations establish new rules for transfers. Transfers within the same plan must be permitted by the plan document. The amount of the benefit may not be reduced or diluted by the transfer, and the applicable distribution restrictions must continue to apply fully. If the recipient provider is not an authorized vendor under the plan, the employer and the provider must enter into an information-sharing agreement. Transfers under 90-24 were prohibited after Sept. 24, 2007.

For plan-to-plan transfers, the participant must be an employee or former employee of the employer sponsoring the recipient plan. Both plans must permit the transfer. Again, the amount of the benefit cannot be reduced and all applicable distribution restrictions must continue to apply.

Control Issues

The basic control test is an 80% director/trustee common control. There is also permissive aggregation for tax-exempt entities with a common exempt purpose. The regulations contain examples. These rules do not apply to governmental entities or certain churches. For 403(b) plans, aggregation of controlled entities is relevant for discrimination testing, application of 415 limits, the special 403(b) catch-up contribution limits and required minimum distributions.

Action Required

Fortunately, the final regulations provide ample time for plan sponsors to review their programs and make decisions about required and discretionary changes. Employers should not only review the requirements but also should take this opportunity for a complete review of the design and operation of their 403(b) plans. We look forward to working with plan sponsors to be sure that their plans are achieving the intended objectives and are fully compliant with the new rules.



by Sue O. Conway

Leave donation programs are a popular way for companies to allow employees to donate paid leave time for the benefit of other employees. But a company establishing a leave donation program must consider the tax consequences to the donating employee, the recipient employee, and the employer.

Under basic income tax principles, income is taxed to the person who earned it. For example, Joe is entitled to a $500 paycheck at the end of the pay period. He tells his employer, "Instead of paying me $500, pay it to my coworker, Sally." Although Joe never saw a penny of that $500, in the world of tax law, it is considered Joe's income and taxable to Joe. The same applies if, instead of giving $500 to Sally directly, Joe decides to transfer some paid time off. Suppose Sally is ill for an extended period of time and has exhausted her sick leave, and Joe tells his employer, "I have some extra paid sick days; just give them to Sally." Under general rules of taxation, the pay that Sally receives from using Joe's sick days will be taxable to Joe.

The IRS has specifically carved out two exceptions to these principles of taxation. Both exceptions allow the donor (Joe) to shift the tax liability for the donated leave to the recipient (Sally) who benefits from the leave. The first exception allows leave-sharing arrangements for medical emergencies. The second exception allows an employer-sponsored leave bank for employees adversely affected by a major disaster declared by the President. In 2005, the IRS also created a special temporary exception for leave time donated to nonprofits assisting Hurricane Katrina victims, but that program expired at the end of 2006.

Leave donated under circumstances that do not meet the requirements of either of the two exceptions will ordinarily be taxed to the donor employee.

Medical Emergencies

A properly structured, bona fide employer-sponsored leave-sharing arrangement for medical emergencies will shift income tax and employment tax consequences from the donating employee to the leave recipient; however, the leave donor may not claim an expense, charitable contribution, or loss deduction for any leave donated.

What exactly is a "bona fide employer-sponsored leave-sharing arrangement"? The IRS has not explicitly defined such an arrangement, but has provided some guidance on what the program should look like in Revenue Ruling 90-29:

  • Be in writing.

  • Create a leave bank for the deposit of donated leave from which the leave will be distributed. A "one-on-one" plan, where one employee directs donated leave to a specific employee, is more likely to be viewed as income to the donor, followed by a gift to the recipient.

  • Restrict eligibility to medical emergencies, such as a major illness or medical condition of the employee or a family member that requires prolonged absence of the employee from work.

  • Have a formal application procedure. The applicant employee should be eligible to receive leave from the bank only after the application is approved and the applicant has exhausted all paid leave.

  • Limit the amount of paid leave time that may be surrendered by a given donor per year.

The leave transferred under the donation plan must actually be used as medical leave by the recipient. If the program simply liquidates the donated leave and pays cash to the recipient, when the recipient is not actually taking legitimate medical leave, the plan will not be viewed as a qualified program.

Presidential Declaration

Last year, the IRS issued Notice 2006-59 setting forth the tax consequences of programs that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster as declared by the President of the United States. The leave-sharing plan must be in writing and if it meets eight specific requirements outlined in the notice, tax liability will shift from the donor employee to the recipient employee, the same as under a donation program for medical emergencies.

- Wayne State University law student and WNJ summer associate Thomas Amon contributed to this article.


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