The U.S. Treasury Department has announced that the protocol amending the existing bilateral income tax treaty with Mexico entered into force on July 3, 2003. The protocol was signed in Mexico City on November 26, 2002. The protocol, among other things, includes provisions that modernize the treaty to take account of developments in the tax laws and treaty policies of both countries since the treaty entered into force in 1993. Under its terms, each country was required to notify the other when its constitutional and statutory requirements for entry into force had taken place, and the protocol was to enter into force upon the second of such notifications. This process was completed by delivery of the second such notification on July 3, 2003. Most of the provisions of the protocol will be effective with respect to tax periods beginning on or after January 1, 2004.

Pay increases projected to stay below 4 percent. Pay increase projections for 2004 tell the story of an uneven economy and employers reluctant to commit to more than they afford. The new "2003/2004 US Compensation Planning Survey" from Mercer Human Resource Consulting reveals that pay increases will average 3.3 percent in 2003 and will be 3.5 percent in 2004.

This would mark the third consecutive year-corresponding to the economic downturn-that annual pay increases have been less than 4.0 percent. For a stretch of eight years prior to 2002, annual pay increases averaged 4.1 percent to 4.4 percent before dipping to 3.8 percent in 2002.

These figures include data from employers who are planning to freeze salaries for at least part of their employee population. When these 0 percent pay increases are removed from the calculations, pay increases average 3.6 percent for both 2003 and 2004 among employers who are planning to grant a pay increase of some level.

Projected 2004 pay increases vary by employee group. Executives are slated to receive the largest increases next year (3.7 percent) and non-union hourly employees slated to receive the smallest increases (3.4 percent).

Employers are maintaining a cautious approach. "In the current environment, employers are less concerned with 'chasing the market' in terms of pay," said Steven E. Gross, a compensation consulting leader at Mercer. "Today, they are more internally focused on what they can afford. They can do this because the balance of labor supply and demand has tilted in their favor, at least temporarily."

Performance-based compensation increasing. However, lower pay-increase budget levels have created a new challenge for employers-allocating the pay-increase "pie" based on employee performance. "With a budget of just over 3.0 percent, it's hard to make a meaningful differentiation between a top performer and a low performer, and it forces employers to make hard choices," Gross said. "In order to give their outstanding employees a 5.0-plus percent raise, employers may need to consider giving no pay increase at all to employees with sub-par performance."

Some employers use salary freezes. A small but significant minority of employers (12 percent) indicated that they froze salaries for at least some of their employees in 2003 (for instance, executives received no pay increase but all other employee groups did). The figure for salary freezes was 16 percent in 2002. Few employers indicated they will freeze employee pay in 2004.

Prevalence of salary freezes varies by industry. For executives, salary freezes were most common in 2003 for the computer software/services industry (28 percent froze executive pay in 2003) and real estate (25 percent). At the other end of the spectrum, executives in research and development and pharmaceutical/biotechnology firms were unaffected by salary freezes.

CCH, September 2003

A successor employer breached its fiduciary duty by failing to disclose to an employee its "actively at work" requirement for long-term disability benefits eligibility because such information was material to the employee's circumstances, according to the U.S. Court of Appeals in Denver (CA-10).

Employee never informed of requirement. An employee was on short-term disability leave when her employer was acquired by another company. Due to the severity of the employee's medical problems, she needed to be on leave from work longer than the time permitted under the short-term disability plan. The successor company's long-term disability plan required that employees be "actively at work" for at least one day to be eligible for the benefit. However, the employee was never informed of this requirement. The successor employer terminated the employee after her short-term disability benefits expired and denied her long-term disability benefits because she had not satisfied the "actively at work" requirement. The employee filed suit against the successor employer, alleging breach of fiduciary duty for failure to disclose the "actively at work" requirement. The district court held there was no breach of fiduciary duty.

Duty to disclose material information. Upon review, the Tenth Circuit reversed the lower court and concluded that the successor employer had breached its fiduciary duty to the employee by not informing her of the long-term disability plan's "actively at work" provision. The successor employer, through its benefits committee, was the plan administrator. Thus, it had a fiduciary duty to disclose any material information regarding the long-term disability plan. In order to satisfy its obligation, the employer was required to communicate to the employee any eligibility requirement, which was material to her individual circumstances. The employee was given materials that indicated she was eligible for long-term disability benefits as of the date of the merger, even though she was on leave. However, only after the employee's termination did the employer provide information regarding the "actively at work" requirement. The employee could not be bound by plan terms of which she had no notice, the court explained. If the employee had been given notice of the requirement, she could have made an informed decision about returning to work for one day.

Three states have recently amended their Unemployment Insurance Law. The following is the outline of these changes:
Kansas - on domestic violence
Arkansas - on disclosure of information
Indiana - various subjects including wage credits
Idaho - on failing to return to work after layoff and internet reporting
Washington - changes to the unemployment insurance taxes paid by employers and the unemployment insurance benefits paid to individuals
New York - appellate court held that a Florida telecommuter is ineligible for NY unemployment insurance benefits.
Visit the states' websites for more details.

CCH, September 2003

70% of retirees who take Social Security before age 65.

39% of retirees who left the workforce earlier than they planned, mostly due to health problems and layoffs.

16.5% of per-employee compensation that employer contributions to health plans could constitute by 2010, versus 7,3 percent today.

24% of workers have stopped making 410(k) contributions.

13.2 % of people 65 or older either were working or looking for work in 2002 versus 11.9% in 1990.

7 in 10 are odds that a person reaching age 65 will suffer a disability or cognitive impairment.

Financial Planning Magazine, August-September 2003