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39-006

109TH CONGRESS

Rept. 109-232

HOUSE OF REPRESENTATIVES

1st Session

Part 1

--PENSION PROTECTION ACT OF 2005

September 22, 2005- Ordered to be printed

Mr. BOEHNER, from the Committee on Education and the Workforce, submitted the following

R E P O R T

together with

MINORITY VIEWS

[To accompany H.R. 2830]

SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.

Sec. 1. Short title and table of contents.
TITLE I--REFORM OF FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS
Subtitle A--Amendments to Employee Retirement Income Security Act of 1974
Sec. 101. Minimum funding standards.
Sec. 102. Funding rules for single-employer defined benefit pension plans.
Sec. 103. Benefit limitations under single-employer plans.
Sec. 104. Technical and conforming amendments.
Subtitle B--Amendments to Internal Revenue Code of 1986
[See introduced bill, page 71, line 1 through page 140, line 13].
Subtitle C--Other provisions
Sec. 121. Modification of transition rule to pension funding requirements.
Sec. 122. Treatment of nonqualified deferred compensation plans when employer defined benefit plan in at-risk status [See introduced bill, page 142, line 3 through page 143, line 16].
TITLE II--FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS
Subtitle A--Amendments to Employee Retirement Income Security Act of 1974
Sec. 201. Funding rules for multiemployer defined benefit plans.
Sec. 202. Additional funding rules for multiemployer plans in endangered or critical status.
Sec. 203. Measures to forestall insolvency of multiemployer plans.
Sec. 204. Withdrawal liability reforms.
Sec. 205. Removal of restrictions with respect to procedures applicable to disputes involving withdrawal liability.
Subtitle B--Amendments to Internal Revenue Code of 1986
[See introduced bill, page 200, line 8 through page 251, line 15].
TITLE III--OTHER PROVISIONS
Sec. 301. Interest rate assumption for determination of lump sum distributions.
Sec. 302. Interest rate assumption for applying benefit limitations to lump sum distributions [See introduced bill, page 254, line 6 through page 255, line 7].
Sec. 303. Distributions during working retirement.
Sec. 304. Other amendments relating to prohibited transactions.
Sec. 305. Correction period for certain transactions involving securities and commodities.
Sec. 306. Government Accountability Office pension funding report.
TITLE IV--IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS
Sec. 401. Increases in PBGC premiums.
TITLE V--DISCLOSURE
Sec. 501. Defined benefit plan funding notices.
Sec. 502. Additional disclosure requirements.
Sec. 503. Section 4010 filings with the PBGC.
TITLE VI--INVESTMENT ADVICE
Sec. 601. Amendments to Employee Retirement Income Security Act of 1974 providing prohibited transaction exemption for provision of investment advice.
Sec. 602. Amendments to Internal Revenue Code of 1986 providing prohibited transaction exemption for provision of investment advice [See introduced bill, page 287, line 15 through page 298, line 23].
TITLE VII--BENEFIT ACCRUAL STANDARDS
Sec. 701. Improvements in benefit accrual standards.
TITLE VIII--DEDUCTION LIMITATIONS
[See introduced bill, page 299, line 1 through page 305, line 20].

TITLE I--REFORM OF FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS

Subtitle A--Amendments to Employee Retirement Income Security Act of 1974

SEC. 101. MINIMUM FUNDING STANDARDS.

`MINIMUM FUNDING STANDARDS

`Sec. 302. Minimum funding standards.'.

SEC. 102. FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS.

`MINIMUM FUNDING STANDARDS FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS



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`In the case of a plan year beginning in calendar year: The applicable percentage is: 


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2006                                                                       92 percent 


2007                                                                       94 percent 


2008                                                                       96 percent 


2009                                                                      98 percent. 


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`In the case of the following required installment:          The due date is: 


                                                       1st                         April 15 


                                                       2nd                          July 15 


                                                       3rd                       October 15 


                                                       4th January 15 of the following year 


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`Sec. 303. Minimum funding standards for single-employer defined benefit pension plans.'.





SEC. 103. BENEFIT LIMITATIONS UNDER SINGLE-EMPLOYER PLANS.












































































































SEC. 104. TECHNICAL AND CONFORMING AMENDMENTS.






















































































Subtitle B--Amendments to Internal Revenue Code of 1986


SEC. 111. [SEE INTRODUCED BILL, PAGE 71, LINE 1 THROUGH PAGE 140, LINE 13].


Subtitle C--Other Provisions


SEC. 121. MODIFICATION OF TRANSITION RULE TO PENSION FUNDING REQUIREMENTS.
































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In the case of a plan year beginning in calendar year: The applicable percentage is: 


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2006                                                                      90 percent 


2007                                                                      92 percent 


2008                                                                      94 percent 


2009                                                                      96 percent 


2010                                                                     98 percent. 


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SEC. 122. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS WHEN EMPLOYER DEFINED BENEFIT PLAN IN AT-RISK STATUS.




TITLE II--FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS


Subtitle A--Amendments to Employee Retirement Income Security Act of 1974


SEC. 201. FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS.




`MINIMUM FUNDING STANDARDS FOR MULTIEMPLOYER PLANS




























































































































































































































































`Sec. 304. Minimum funding standards for multiemployer plans.'.





SEC. 202. ADDITIONAL FUNDING RULES FOR MULTIEMPLOYER PLANS IN ENDANGERED OR CRITICAL STATUS.




`ADDITIONAL FUNDING RULES FOR MULTIEMPLOYER PLANS IN ENDANGERED STATUS OR CRITICAL STATUS






















































































































































































































































































































`Sec. 305. Additional funding rules for multiemployer plans in endangered status or critical status.'.





SEC. 203. MEASURES TO FORESTALL INSOLVENCY OF MULTIEMPLOYER PLANS.










SEC. 204. WITHDRAWAL LIABILITY REFORMS.






































SEC. 205. REMOVAL OF RESTRICTIONS WITH RESPECT TO PROCEDURES APPLICABLE TO DISPUTES INVOLVING WITHDRAWAL LIABILITY.


































Subtitle B--Amendments to Internal Revenue Code of 1986


SEC. 211. [SEE INTRODUCED BILL, PAGE 200, LINE 8 THROUGH PAGE 251, LINE 15].


TITLE III--OTHER PROVISIONS


SEC. 301. INTEREST RATE ASSUMPTION FOR DETERMINATION OF LUMP SUM DISTRIBUTIONS.
























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`In the case of plan years beginning in: The applicable percentage is: 


                                           2006                           20 percent 


                                           2007                           40 percent 


                                           2008                           60 percent 


                                           2009                        80 percent.'. 


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SEC. 302. INTEREST RATE ASSUMPTION FOR APPLYING BENEFIT LIMITATIONS TO LUMP SUM DISTRIBUTIONS.




SEC. 303. DISTRIBUTIONS DURING WORKING RETIREMENT.






SEC. 304. OTHER AMENDMENTS RELATING TO PROHIBITED TRANSACTIONS.






























































































SEC. 305. CORRECTION PERIOD FOR CERTAIN TRANSACTIONS INVOLVING SECURITIES AND COMMODITIES.






















SEC. 306. GOVERNMENT ACCOUNTABILITY OFFICE PENSION FUNDING REPORT.












TITLE IV--IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS


SEC. 401. INCREASES IN PBGC PREMIUMS.


































----------------------------------------------------------


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`If the plan year begins in: The amount is: 


                               2006                $21.20 


                               2007                $23.40 


                               2008                $25.60 


                               2009            $27.80; or 


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`If the plan year begins in:                 The amount is: 


                               2006                                $22.67 


                               2007                                $26.33 


                       2008 or 2009 the amount provided under clause (i). 


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TITLE V--DISCLOSURE


SEC. 501. DEFINED BENEFIT PLAN FUNDING NOTICES.








































































SEC. 502. ADDITIONAL DISCLOSURE REQUIREMENTS.
























































































































SEC. 503. SECTION 4010 FILINGS WITH THE PBGC.






















































TITLE VI--INVESTMENT ADVICE


SEC. 601. AMENDMENTS TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVIDING PROHIBITED TRANSACTION EXEMPTION FOR PROVISION OF INVESTMENT ADVICE.




































































































SEC. 602. AMENDMENTS TO INTERNAL REVENUE CODE OF 1986 PROVIDING PROHIBITED TRANSACTION EXEMPTION FOR PROVISION OF INVESTMENT ADVICE.




TITLE VII--BENEFIT ACCRUAL STANDARDS


SEC. 701. IMPROVEMENTS IN BENEFIT ACCRUAL STANDARDS.






























TITLE VIII--DEDUCTION LIMITATIONS


SEC. 801. [SEE INTRODUCED BILL, PAGE 299, LINE 1 THROUGH PAGE 305, LINE 20].


PURPOSE


The purpose of H.R. 2830, the `Pension Protection Act of 2005' (PPA), is to ensure the health and future of the voluntary, employer-sponsored defined benefit pension system through comprehensive reforms intended to protect the interests of workers, retirees, and taxpayers. H.R. 2830 includes new funding requirements to ensure employers adequately and consistently fund their pension plans, provides workers with meaningful disclosure about the financial status of their benefits, and protects taxpayers from a potential multi-billion dollar bailout of the Pension Benefit Guaranty Corporation (PBGC).

COMMITTEE ACTION


On June 9, 2005, Committee on Education and the Workforce Chairman John A. Boehner, Subcommittee on Employer-Employee Relations Chairman Sam Johnson and Vice Chairman John Kline, and Committee on Ways and Means Chairman Bill Thomas introduced H.R. 2830, the Pension Protection Act of 2005. H.R. 2830 represents the culmination of legislative activity, begun in the 106th Congress and continuing through the 109th Congress, intended to fix outdated pension laws that threaten the fiscal well-being of taxpayers, workers, and retirees, and to improve the pension security of all American workers.

106TH CONGRESS


In the 106th Congress, the Committee on Education and the Workforce (the `Committee') began a comprehensive review of the federal law governing private pensions, the Employee Retirement Income Security Act (`ERISA'), and its relevance to the needs of participants, beneficiaries, and employers in the 21st century.

On March 11, 1999, Representatives Rob Portman and Benjamin Cardin introduced H.R. 1102, the `Comprehensive Retirement Security and Pension Reform Act of 1999.' The bill was jointly referred to the Committee on Education and Workforce and the Committee on Ways and Means. On June 29, 1999, the Subcommittee on Employer-Employee Relations held a hearing entitled `Enhancing Retirement Security: A Hearing on H.R. 1102, the `Comprehensive Retirement Security and Pension Reform Act of 1999.' Testimony was received from the bill's sponsors, Representatives Portman and Cardin.

On July 14, 1999, the Committee discharged the Subcommittee on Employer-Employee Relations from consideration of the bill, approved H.R. 1102, and ordered it favorably reported to the House of Representatives by voice vote. On July 19, 2000, the House of Representatives passed the bill by a vote of 401 yeas to 25 nays. 1

 [Footnote]  The Senate did not complete consideration of H.R. 1102 prior to the adjournment of the 106th Congress.

[Footnote 1: Fifteen provisions of Title VI of H.R. 1102 subsequently were included in H.R. 2488, the `Taxpayer Refund and Relief Act of 1999,' which passed the House and Senate on August 5, 1999, but was vetoed by then-President Clinton. The following year, twenty-two ERISA provisions from H.R. 1102 were included in the `Retirement Savings and Pension Coverage Act of 2000,' which was included in H.R. 2614, the `Taxpayer Relief Act of 2000.' The conference report on H.R. 2614 was adopted by the House on October 26, 2000, by a vote of 237 yeas, 174 nays, and one present. The conference report was not adopted by the Senate prior to adjournment of the 106th Congress.]

On February 15, 2000, the Subcommittee on Employer-Employee Relations continued its examination of issues arising under ERISA at a hearing entitled `The Evolving Pension and Investment World After 25 Years of ERISA.' The following individuals testified before the Subcommittee: Professor John H. Langbein, Chancellor Kent Professor of Law and Legal History, Yale Law School; Michael S. Gordon, Esq., Law Offices of Michael S. Gordon; Dr. John B. Shoven, Charles R. Schwab Professor of Economics, Stanford University; and Dr. Teresa Ghilarducci, Associate Professor of Economics, University of Notre Dame.

On March 9th and 10th, 2000, the Subcommittee on Employer-Employee Relations held a two days of hearings entitled `More Secure Retirement for Workers: Proposals for ERISA Reform.' Testifying on March 9th were: W. Allen Reed, President, General Motors Investment Management Company, testifying on behalf of the Committee on Investment of Employee Benefit Assets (CIEBA) of the Financial Executives Institute; Daniel P. O'Connell, Corporate Director for Employee Benefits and HR Systems, United Technologies Corporation, testifying on behalf of the ERISA Industry Committee (ERIC); Damon Silvers, Esq., Associate General Counsel, AFL-CIO; Professor Joseph A. Grundfest, William A. Franke Professor of Law and Business, Stanford Law School, and co-founder of Financial Engines, Inc.; Eula Ossofsky, President, Board of Directors, Older Women's League; and Margaret Raymond, Esq., Assistant General Counsel, Fidelity Investments, testifying on behalf of the Investment Company Institute. During the second day of hearings on March 10th, the Subcommittee heard testimony from Kenneth S. Cohen, Esq., Senior Vice President and Deputy General Counsel, Massachusetts Mutual Life Insurance Company, testifying on behalf of the American Council of Life Insurers; Marc E. Lackritz, President, Securities Industry Association; David Certner, Senior Coordinator, Department of Federal Affairs, American Association of Retired Persons; Louis Colosimo, Managing Director, Morgan Stanley Dean Witter & Company, Inc., testifying on behalf of the Bond Market Association; John Hotz, Deputy Director, Pension Rights Center; and Deedra Walkey, Esq., Assistant General Counsel, Frank Russell Company.

On March 16, 2000, the Subcommittee on Employer-Employee Relations held a hearing entitled `The Wealth Through the Workplace Act: Worker Ownership in Today's Economy.' The hearing focused on H.R. 3462, introduced by then-Subcommittee Chairman John A. Boehner, which made stock options more readily available to ERISA participants. Testifying before the Subcommittee were: Jane F. Greenman, Esq., Deputy General Counsel (Human Resources), Honeywell, Inc., testifying on behalf of the American Benefits Counsel; Tim Byland, Senior Sales Executive, INTERVU, Inc.; and Patrick Von Bargen, Executive Director, National Commission on Entrepreneurship.

On April 4, 2000, the Subcommittee on Employer-Employee Relations continued its examination of ERISA reform in a hearing entitled `Modernizing ERISA to Promote Retirement Security.' The following individuals testified at the hearing: the Honorable Leslie Kramerich, Acting Assistant Secretary of Labor for Pension and Welfare Benefits, U.S. Department of Labor; and David M. Strauss, Executive Director, Pension Benefit Guaranty Corporation.

On June 26, 2000, then-Subcommittee on Employer-Employee Relations Chairman Boehner introduced H.R. 4747, the Retirement Security Advice Act of 2000. On July 19, 2000, the Subcommittee on Employer-Employee Relations ordered H.R. 4747 favorably reported, as amended, by voice vote. There was no further action taken on the legislation prior to the conclusion of the 106th Congress.

Concluding its legislative activity for the 106th Congress, the Subcommittee held a hearing on September 14, 2000 entitled `How to Improve Pension Coverage for American Workers.' The Subcommittee heard testimony from Theodore Groom, Esq., Groom Law; Michael Calabrese, Director, Public Assets Program, New America Foundation; and Ed Tinsley, III, President and CEO, K-Bob's Steakhouse.

107TH CONGRESS


Building upon the activity of the previous Congress, the Committee continued its efforts to examine and improve upon the private pension system. On March 14, 2001, Representatives Portman and Cardin introduced H.R. 10, which was very similar to the House passed H.R. 1102 of the previous Congress. The Subcommittee on Employer-Employee Relations held a legislative hearing on the bill on April 5, 2001. At the hearing, entitled `Enhancing Retirement Security: A Hearing on H.R. 10, The `Comprehensive Retirement Security and Pension Reform Act of 2001,' testimony was received from the bill's sponsors, Representatives Portman and Cardin, Nanci S. Palmintere, Director of Tax, Licensing and Customs, Intel Corporation, testifying on behalf of the American Benefits Council; Richard Turner, Esq., Associate General Counsel, American General Financial Group, testifying on behalf of the American Council of Life Insurers; Judith Mazo, Senior Vice President, Segal Co., testifying on behalf of the Building and Construction Trades Department, AFL-CIO and the National Coordinating Committee for Multiemployer Plans; and Karen Ferguson, Director, Pension Rights Center.

On April 26, 2001, the Committee on Education and the Workforce approved H.R. 10, as amended, by voice vote and ordered the bill favorably reported to the House of Representatives. On May 5, 2001, the House of Representatives passed H.R. 10 by a vote of 407 yeas to 24 nays. On May 16, 2001, the provisions of H.R. 10 were included in H.R. 1836, the Economic Growth and Tax Relief Reconciliation Act, and passed by the House of Representatives on a vote of 230 yeas to 197 nays. The House passed the conference report on the measure on May 26, 2001, by a vote of 240 yeas to 154 nays. On December 5, 2001, the Senate adopted the conference report, as amended, by a vote of 90 yeas and nine nays. On December 11, 2001, the House agreed to the Senate amendments by a roll call vote of 369 yeas and 33 nays. The President signed the bill into law on December 21, 2001; it became public law 107-90.

On June 21, 2001, Committee on Education and the Workforce Chairman Boehner introduced H.R. 2269, the `Retirement Security Advice Act of 2001,' a bill to promote the provision of retirement investment advice to workers regarding the management of their retirement income assets. The bill was referred to the Committee on Education and the Workforce and the Committee on Ways and Means.

On July 17, 2001, the Subcommittee on Employer-Employee Relations held a hearing on H.R. 2269. Testifying before the Subcommittee were the Honorable Ann L. Combs, Assistant Secretary for Pension and Welfare Benefits, U.S. Department of Labor; Betty Shepard, Human Resources Administrator, Mohawk Industries, Inc.; Damon Silvers, Esq., Associate General Counsel, AFL-CIO; Richard A. Hiller, Vice President, Western Division, TIAA-CREF; Joseph Perkins, Immediate Past Present, American Association for Retired Persons; and Jon Breyfogle, Principal, Groom Law Group, testifying on behalf of the American Council of Life Insurers.

On August 2, 2001, the Subcommittee on Employer-Employee Relations approved H.R. 2269, without amendment, by voice vote and ordered the bill favorably reported to the full Committee. On October 3, 2001, the Committee approved H.R. 2269, as amended, and ordered the bill favorably reported to the House of Representatives by a roll call vote of 29 yeas to 17 nays. The Committee on Ways and Means considered and marked up the bill on November 7, 2001, and reported it to the House on November 13, 2001. The bill, as amended, passed the House of Representatives on November 15, 2001 by a roll call vote of 280 yeas to 144 nays. The Senate did not consider the measure prior to the adjournment of the 107th Congress.

On February 6th and 7th, 2002, the Committee held two days of hearings entitled `The Enron Collapse and Its Implications for Worker Retirement Security.' On February 6th, the sole witness was U.S. Secretary of Labor Elaine Chao. On the second day, the witnesses were Thomas O. Padgett, Senior Lab Analyst, EOTT; Cindy K. Olson, Executive Vice President, Human Resources and Community Relations and Building Services, Enron Corporation; Mikie Rath, Benefits Manager, Enron Corporation; Scott Peterson, Global Practice Leader for Defined Contribution Services, Hewitt Associates; and Dr. Teresa Ghilarducci, Associate Professor, Department of Economics, University of Notre Dame.

The Subcommittee on Employer-Employee Relations held a hearing on February 13, 2002 entitled `Enron and Beyond: Enhancing Worker Retirement Security.' The Subcommittee heard testimony from Jack L. VanDerhei, Ph.D., CEBS, Professor, Department of Risk, Insurance, and Healthcare Management, Fox School of Business and Management, Temple University, testifying on behalf of the Employee Benefit Research Institute; Douglas Kruse, Ph.D., Professor, School of Management and Labor Relations, Rutgers University; Norman Stein, Douglas Arant Professor of Law, University of Alabama School of Law; and Rebecca Miller, CPA, Partner, McGladrey & Pullen, LLP.

On February 14, 2002, Chairman Boehner and Subcommittee on Employer-Employee Relations Chairman Sam Johnson introduced H.R. 3762, the `Pension Security Act.'

On February 27, 2002, the Subcommittee on Employer-Employee Relations held a hearing entitled `Enron and Beyond: Legislative Solutions.' The witnesses were Dave Evans, Vice President, Retirement and Financial Services, Independent Insurance Agents of America; Angela Reynolds, Director, International Pension and Benefits, NCR Corporation; Erik Olsen, Member, Board of Directors, American Association of Retired Persons; Dr. John H. Warner, Jr., Corporate Executive Vice President, Science Applications International Corp., testifying on behalf of the Profit Sharing Council of America; Richard Ferlauto, Director of Pensions and Benefits, American Federation of State County, and Municipal Employees (AFSCME), testifying on behalf of AFSCME and AFL-CIO; and John M. Vine, Esq., Partner, Covington and Burling, testifying on behalf of the ERISA Industry Committee.

On March 20, 2002, the Committee on the Education and the Workforce approved H.R. 3762, as amended, and ordered the bill favorably reported to the House of Representatives by a roll call vote of 28 yeas to 19 nays. On April 11, 2003 the House passed H.R. 3762 by a recorded vote of 255 yeas to 163 nays. No further action was taken on the measure prior to the adjournment of the 107th Congress.

108TH CONGRESS


Building on the success of corporate reform and the foundation of the pension reform principles established during the 107th Congress, the Subcommittee on Employer-Employee Relations held a hearing on February 13, 2003, `The Pension Security Act: New Pension Protections to Safeguard the Retirement Savings of American Workers.' Testifying before the Subcommittee were the Honorable Ann L. Combs, Assistant Secretary, Employee Benefits Security Administration, United States Department of Labor; Ed Rosic, Esq., Vice President and Managing Assistant General Counsel, Marriott International, Inc., testifying on behalf of the American Benefits Council; Nell Minow, Editor, The Corporate Library, testifying on behalf of Robert Monks, Lens Governance Advisors; and Scott Sleyster, Senior Vice President and President of Retirement Services and Guaranteed Products, Prudential Financial.

On February 27, 2003, Chairman Boehner and Subcommittee on Employer-Employee Relations Chairman Sam Johnson introduced H.R. 1000, the `Pension Security Act of 2003.' This bill incorporated the provisions of H.R. 2269 from the previous Congress, and contained a number of ERISA provisions from H.R. 10 in the 107th Congress that were dropped prior to that bill's final passage.

On March 5, 2003, the Committee on Education and the Workforce approved H.R. 1000, as amended, and ordered the bill favorably reported to the House of Representatives by a roll call vote of 29 yeas to 19 nays. On May 14, 2003, the House of Representatives passed H.R. 1000 by a roll call vote of 271 yeas to 157 nays. The Senate did not complete consideration of the bill before the adjournment of the 108th Congress.

On June 4, 2003, as part of a series of hearings that would focus on the challenges that faced the future of defined benefit plans, and highlight obstacles in federal law that discourage employers from offering these plans, the Subcommittee on Employer-Employee Relations held a hearing entitled `Strengthening Pension Security: Examining the Health and Future of the Defined Benefit Plan.' The Subcommittee heard testimony from Dr. Jack Van Derhei, Professor, Fox School of Business Management, Temple University, testifying on behalf of the Employee Benefits Research Institute; Dr. John Leary, Esq., Partner, O'Donoghue and O'Donoghue; Ron Gebhardtsbauer, Senior Pension Fellow, American Academy of Actuaries; and J. Mark Iwry, Esq., Non-Resident Senior Fellow, The Brookings Institution.

On July 15, 2003, the Subcommittee on Employer-Employee Relations and the Ways and Means Subcommittee on Select Revenue Measures held a joint hearing entitled `Examining Pension Security and Defined Benefit Plans: The Bush Administration's Proposal to Replace the 30-Year Treasury Rate.' The following witnesses testified on the Bush Administration's proposal to replace the discontinued 30-year Treasury interest rate that was used as the benchmark for defined benefit pension plan funding: The Honorable Ann Combs, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor; The Honorable Peter Fisher, Under Secretary for Domestic Finance, U.S. Department of Treasury; Kenneth Porter, Director of Corporate Insurance and Global Benefits Financial Planning, DuPont Company; Ashton Phelps, Publisher, The Times-Picayune; Kenneth Steiner, Resource Actuary, Watson Wyatt Worldwide; and Christian Weller, Economist, Economic Policy Institute.

On September 4, 2003, the Committee on Education and the Workforce held the third in a series of hearings to examine the future of defined benefit pension plans entitled `Strengthening Pension Security and Defined Benefit Plans: Examining the Financial Health of the Pension Benefit Guaranty Corporation.' The witnesses included David Walker, Comptroller General, General Accounting Office, and Steven Kandarian, Executive Director, Pension Benefit Guaranty Corporation.

On September 17, 2003, Chairman Boehner, joined by Senior Democrat Member George Miller, Subcommittee on Employer-Employee Relations Chairman Sam Johnson, Committee on Ways and Means Chairman Bill Thomas, Ways and Means Committee Senior Democrat Member Charles Rangel, and Representative Rob Portman introduced H.R. 3108, the `Pension Funding Equity Act of 2003.' On October 8, 2003, the House passed the bill, as amended, by a vote of 397 yeas and two nays. On January 28, 2004, the Senate approved an amended version of H.R. 3108 by a roll call vote of 86 yeas and nine nays. The House adopted the conference report on the bill on April 2, 2004, by a vote of 336 yeas and 69 nays. On April 8, 2004, the Senate adopted the conference report by a vote of 78 yeas and 19 nays. On April 10, 2004 President Bush signed the bill into law; it became public law 108-218.

Immediately following House passage of H.R. 3108, Chairman Boehner and Employer-Employee Relations Subcommittee Chairman Sam Johnson announced that the Committee would proceed with its work to implement permanent, long-term solutions to the pension underfunding crisis. On October 29, 2003, the Committee held a hearing entitled `The Pension Underfunding Crisis: How Effective Have Reforms Been?' Testifying before the Committee were Barbara Bovbjerg, Director of Education, Workforce, and Income Security Issues, General Accounting Office; Robert Krinsky, Chairman, Segal Company; Michael S. Gordon, Esq., General Counsel, National Retiree Legislative Network, testifying on behalf of the American Benefits Council; J. Mark Iwry, Esq., Non-Resident Senior Fellow, Brookings Institution; and David John, Research Fellow, Thomas A. Roe Institute for Economic Policy Studies, Heritage Foundation.

On February 25, 2004, the Committee held a hearing entitled `Strengthening Pension Security for All Americans: Are Workers Prepared for a Safe and Secure Retirement?' Testifying before the Committee were Ben Stein, Honorary Chairperson, National Retirement Planning Coalition; Dan McCaw, Chairman and CEO, Mercer Human Resource Consulting; C. Robert Henrikson, President, U.S. Insurance and Financial Services, MetLife; and Peter R. Orszag, Joseph A. Pechman Senior Fellow, Brookings Institution.

On March 18, 2004, the Subcommittee on Employer-Employee Relations held a hearing entitled, `Reforming and Strengthening Defined Benefit Plans: Examining the Health of the Multiemployer Pension System.' Testifying before the Subcommittee were Barbara Bovbjerg, Director of Education, Workforce, and Income Security Issues, General Accounting Office; John McDevitt, Senior Vice President, United Parcel Service; Scott Weicht, Executive Vice President, Adolfson and Peterson Construction, testifying on behalf of the Associated General Contractors; and Randy G. DeFrehn, Executive Director, National Coordinating Committee for Multiemployer Plans.

On April 29, 2004, the Subcommittee on Employer-Employee Relations held a hearing entitled `Examining Long-Term Solutions to Reform and Strengthen the Defined Benefit Pension System.' Testifying before the Subcommittee were Kenneth A. Kent, Academy Vice President, Pension Issues, American Academy of Actuaries; Greg Heaslip, Vice President, Benefits, PepsiCo, Inc.; J. Mark Iwry, Esq., Non-Resident Senior Fellow, the Brookings Institution; Timothy Lynch, President and CEO, Motor Freight Carriers Association; John S. `Rocky' Miller, Esq., Partner, Cox, Castle & Nicholson, L.L.P.; and Dr. Teresa Ghilarducci, Ph.D., Associate Professor of Economics and Director of the Monsignor Higgins Labor Research Center, University of Notre Dame.

On July 7, 2004, the Committee held its eighth hearing in the 108th Congress, focusing on issues relating to cash balance pension plans. The hearing was entitled `Examining Cash Balance Pension Plans: Separating Myth from Fact.' The Committee heard testimony from James Delaplane, Jr., Esq., Attorney, American Benefits Council; Ellen Collier, Director of Benefits, Eaton Corporation; Dr. Robert Clark, Professor, College of Management, North Carolina State University; Robert Hill, Esq., Partner, Hill & Robbins; and Nancy Pfotenhauer, President, Independent Women's Forum.

109TH CONGRESS


In the 109th Congress, the Committee continued its efforts focusing on comprehensive reform of the defined benefit pension system. On March 2, 2005, the Committee held a hearing entitled `The Retirement Security Crisis: The Administration's Proposal for Pension Reform and Its Implications for Workers and Taxpayers.' Testifying before the Committee were the Honorable Ann L. Combs, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor; the Honorable Mark Warshawsky, Assistant Secretary for Economic Policy, U.S. Department of Treasury; Bradley Belt, Executive Director, Pension Benefit Guaranty Corporation; Kenneth Porter, Director of Corporate Insurance and Global Benefits Financial Planning, the DuPont Company, testifying on behalf of the American Benefits Council; Norman Stein, Douglas Arant Professor, University of Alabama School of Law; and Dr. Janemarie Mulvey, Chief Economist, Employment Policy Foundation.

On June 9, 2005, Chairman Boehner, Employer-Employee Relations Subcommittee Chairman Sam Johnson, Employer-Employee Relations Vice-Chairman John Kline and Committee on Ways and Means Chairman Bill Thomas introduced H.R. 2830, the `Pension Protection Act of 2005.' On that same day, Chairman Boehner also introduced H.R. 2831, the `Pension Preservation and Portability Act of 2005.'

On June 15, 2005, the Committee held a legislative hearing on H.R. 2830. Testifying before the Committee were Lynn Franzoi, Vice President for Human Resources, Fox Entertainment Group, testifying on behalf of the U.S. Chamber of Commerce; Bart Pushaw, Actuary, Milliman, Inc.; Dr. Teresa Ghilarducci, Professor of Economics, University of Notre Dame; Timothy Lynch, President and CEO, Motor Freight Carriers Association; Judy Mazo, Senior Vice President/Director of Research, The Segal Company; and Andy Scoggin, Vice President for Labor Relations, Albertsons, Inc.

On June 22, 2005, the Subcommittee on Employer-Employee Relations approved H.R. 2830, as amended, and ordered the bill favorably reported to the full Committee, by voice vote. On June 30, 2005, the full Committee approved H.R. 2830, as amended, and ordered the bill favorably reported to the House of Representatives by a roll call vote of 27 yeas, 0 nays, and 22 present. H.R. 2830, as amended and reported to the House, included several provisions contained within H.R. 2831.

SUMMARY


TITLE I--SINGLE EMPLOYER REFORMS


The main component of H.R. 2830, the Pension Protection Act, changes the way plan sponsors calculate their plan liabilities, which in turn determines the amount of minimum required contributions they must make to their plans. There are a number of technical features to the funding rule changes, including:

Determining Plan Liabilities with a Modified Yield Curve. H.R. 2830 includes a modified yield curve approach that provides a permanent interest rate for employers to calculate their pension contributions and more accurately measure current pension liabilities as they come due. This replaces the composite corporate bond interest rate which is currently scheduled to expire at the end of 2005.

Generally speaking, under H.R. 2830, each pension plan has a unique schedule of future benefit payments that depends on the characteristics of the plan's demographics. For example, plans with more retirees and older workers, more lump sum pension payments, and shrinking workforces will make a greater percentage of their pension payments in the near future, while plans with younger workers, fewer retirees, fewer lump sums, and growing workforces will make a greater percentage of payments in later years as these obligations come due. The comprehensive funding reforms included in H.R. 2830 recognize the different timing of various pension payments and require plan sponsors to fund for such payments accordingly. This change will ensure that employers progressively make more contributions to pension plans as participant demographics mature, so that they can meet their pension promises when workers retire. It also provides greater certainty and predictability for employers as they make financial decisions and budget to meet their future pension obligations.

The modified yield curve interest rate that employers will use under H.R. 2830 to calculate their required contributions is based on the future date at which a pension plan's benefit obligations come due, as defined in three categories or `segments:' liabilities due within five years, liabilities due between six and twenty years, and liabilities due after twenty years until the estimated end of the plan's obligations. For purposes of calculating a plan's total liabilities for a plan year, otherwise known as the plan's `funding target,' employers will use the plan's effective interest rate. The effective interest rate of a plan is the rate of interest which, if used to determine the present value of the plan's liabilities, would result in an amount equal to the total plan liabilities of the plan each year.

For purposes of determining the plan's liabilities for short-term, mid-term, and long-term durations, the interest rates to be used are based on the three segment rates applied to a plan's liabilities for each duration segment. The segment rates are determined by the Secretary of the Treasury on the basis of the portion of the corporate bond yield curve for yields of bonds maturing in each short-term, mid-term, and long-term segment. The segment rates should reflect the average of all AAA, AA, and A bonds for each year on the yield curve. The Committee intends for the Secretary of the Treasury to develop one corporate bond yield curve based on a three-year weighted average of yields on investment grade corporate bonds reflecting AAA, AA, and A bonds.

The modified yield curve approach in H.R. 2830 is designed to ensure employers more accurately measure and fund their short-term, mid-term, and long-term pension obligations with greater predictability and certainty about their future pension costs. The use of the modified yield curve for calculating plan liabilities is phased in over three years.

Special Rules For At-Risk Plans. Special funding rules apply to certain severely underfunded plans that are considered `at-risk,' which are plans that have a funding target of less than 60%. These plans not only represent a financial risk to the PBGC, but the retirement security of the participants and beneficiaries in these plans is also threatened. For at-risk plans, a plan's actuary would have to assume that all participants would elect benefits at the earliest available time and in the forms that will result in the highest present value of liabilities. In other words, a plan's at-risk funding target is the sum of the present value of all liabilities of participants and beneficiaries under the plan for the plan year determined using additional assumptions that assume all participants will elect benefits at the times and in the forms that will result in the highest possible present value of liabilities. At-risk plans are also subject to an additional `loading factor' equal to $700 per participant plus 4 percent of at-risk liability. However, it is the Committee's intent that once a plan's funded status is at 60 percent or greater, it is no longer considered at-risk; therefore, all future shortfall amortization payments are based on the plan's funding target liability shortfall.

The transition between a plan's normal funding target and its at-risk funding target is five years. In other words, if a plan is less than 60 percent funded for a consecutive period of fewer than five plan years, the plan must pay 20 percent of its at-risk required contribution multiplied by the number of plan years that the plan is less than 60 percent funded. The purpose of the at-risk liability assumption changes and loading factor is to recognize that these plans pose a greater risk to the PBGC and that there is a greater likelihood the plan may have to pay benefits on an accelerated basis or terminate.

Ensuring Underfunded Pension Plans Make Up Shortfalls. Under current law, pension funding rules permit underfunded plans to make up funding shortfalls over too long a period of time, putting workers at risk of having their plans terminate without adequate funding. The current rules contain several amortization periods for making up a shortfall, which in some cases can be up to 30 plan years. Moreover, today's rules generally only require plans to meet a 90 percent funded status target, or in some cases only 80 percent. 2

 [Footnote]

[Footnote 2: See ERISA Sec. 302(d).]

It is the view of the Committee that extended amortization schedules increase the risk of plan termination because smaller payments are made to a plan each year. H.R. 2830 requires employers to make sufficient and consistent contributions to ensure that plans meet a 100 percent funding target. If a plan has a funding shortfall, the bill requires employers to make additional contributions to erase the shortfall over a seven-year period. A plan has a funding shortfall for a plan year if the plan's funding target for the year exceeds the value of the plan's assets. If a plan has established a funding shortfall in any year, the remaining present values of the amortization payments that are due are included in plan assets. Any new amortization shortfall, which is determined as of the valuation date of the plan, requires a new, seven-year level payment schedule to be established. The present value of any shortfall payment made to a plan is determined by using the appropriate segment rates for the plan year.

The minimum required contribution required under H.R. 2830 is the sum of a plan's target normal cost for the plan year, which is the present value of all benefits that a plan is expected to accrue or to be earned during the plan year, and any required shortfall amortization charge for a plan that is less than 100 percent funded. However, for plans that were not subject to the deficit reduction contribution for the 2005 plan year, the 100 percent funding target is phased in over a five-year period, and a plan is required to be 100 percent funded by 2010. These new funding requirements will ensure employers have strong incentives to properly and adequately fund their plans in a timely manner.

Making Smoothing More Effective for Plans and Participants. Under current law, interest rates used to calculate pension assets and liabilities are `smoothed,' or averaged, over approximately five years for assets and four years for liabilities. Such smoothing is intended to reduce pension funding volatility and help make employer contribution requirements more predictable. However, some have expressed concern that this is too long a period to smooth these interest rates and assets. H.R. 2830 reduces the smoothing of interest rates to calculate liabilities using a weighted average of the three most recent plan years (50 percent from the most recent plan year, 35 percent from the second year, and 15 percent from the third year). Asset smoothing is also reduced to a maximum of three years; however, the smoothed value of plan assets may not vary more or less than 10 percent of the fair market value of such assets. The overall reduced smoothing method protects pension plans against market and funding volatility on an annual basis while providing plan sponsors the ability to predict and budget their pension contributions.

Prohibiting Underfunded Plans from Using Credit Balances. In general, a plan accumulates a credit balance if an employer contributes more than the minimum required contribution in any plan year. However, the credit balance rules under current law contribute to plan underfunding by allowing employers with underfunded plans to replace cash contributions with credit balances accrued in previous years. In addition, current law allows the credit balance to accrue additional interest based on a plan's rate of return regardless of the actual market performance of a plan's general assets. These provisions allow underfunded plans to skip pension payments, even if the plans are severely underfunded, by using artificially inflated credit balances that mask the true funded status of plans.

H.R. 2830 prohibits employers from using credit balances to offset minimum required contributions if their pension plans are funded at less than 80 percent of the plan's funding target. The bill further requires that old credit balances (funding standard carryover balance) as well as any new credit balance (pre-funding balance, which is any credit balance accumulated after the 2005 plan year), reflect actual market gains and losses based on a plan's net asset gains and losses. In order to determine whether a plan is at least 80 percent funded, any credit balance accumulated prior to plan year 2006 is not subtracted from plan assets; any new credit balance, however, is subtracted from plan assets. All credit balances may be used to determine whether a plan has a funding shortfall. If a plan does have a funding shortfall for any plan year, credit balances must be subtracted from plan assets in order to determine the actual shortfall. A plan may elect to reduce its credit balances and assume that such balance is part of the general plan assets for any reason; however, the credit balance may no longer be used to offset any minimum required contribution. With respect to ordering, any pre-funding balance may not be used to satisfy a minimum required contribution until all of the funding standard carryover balance is used. Finally, if a plan is 100 percent funded or more (including plan assets as well as any funding standard carryover balance and pre-funding balance), the benefit restriction provisions under the bill do not apply.

Restricting the use of credit balances for plans that are below 80 percent funded will ensure that plan sponsors are making actual cash contributions to their plans consistently. This provision will increase a plan's funded status as well as protect participants and beneficiaries in the future.

Mortality Table Changes. Under current law, plans are generally required to use the 1983 Group Annuity Mortality (`GAM') Table in calculating plan liabilities. The use of this table assumes that the actual mortality experience of a plan has not changed since 1983. The use of the 1983 GAM table to calculate plan liabilities is outdated and may cause certain plans to appear better funded with fewer liabilities. H.R. 2830 requires plans to use an updated mortality table, the RP-2000 Combined Mortality Table, using Scale AA, in order to calculate plan liabilities. The use of the RP-2000 Table should result in a more accurate measure of plan liabilities by reflecting an updated mortality experience and the projected trends for plans. H.R. 2830 directs that the Secretary of the Treasury update the table every 10 years. Additionally, H.R. 2830 allows a plan to apply to the Secretary of the Treasury to use a substitute mortality table if the Secretary determines that the substitute table reflects the actual experience and projected trends in experience of the plan and that the use of the RP-2000 Combined Mortality Table is inappropriate for the plan. The Department of the Treasury has 180 days to determine whether the substitute table is not appropriate and that, therefore, a plan must use the RP-2000 Combined Mortality Table. This provision includes a five-year phase-in. The use of the RP-2000 mortality table will ensure that pension plans are adequately funding for their liabilities based on reasonable and updated mortality assumptions which will result in better plan funding overall.

Timing of Plan Contribution and Valuation Date. Under current law, plans that have a current liability percentage of less than 100 percent are required to make quarterly contributions, which are due on the 15th day following the end of each quarter in a plan year. The amount of the quarterly contributions is 25 percent of the lesser of 90 percent of the plan's current year minimum funding requirements or 100 percent of the plan's minimum funding requirements for the preceding plan year. 3

 [Footnote]  It is the Committee's intent that the required annual payment for plan year 2006 is to be based on 90 percent of the minimum funding requirements under H.R. 2830. Furthermore, it is the intent of the Committee that, for plan years beginning after 2006, the amount of quarterly contributions is 25 percent of the lesser of 90 percent of the plan year's current minimum funding requirements or 100 percent of the plan's minimum funding requirements for the preceding plan year.

[Footnote 3: See ERISA Sec. 302(e).]

H.R. 2830 requires plans to use the first day of the plan year for a plan's valuation date. However, plans with 500 or fewer participants may use any valuation date. Contributions made after the valuation date are to be credited against the minimum required contribution for the year based on its present value as of the valuation date, discounted from the date the contribution is actually made using a plan's effective interest rate.

Limits on Benefit Increases and Accruals for Underfunded Plans. Too often, employers and union leaders have negotiated benefit increases when plans are underfunded, which ultimately results in increasing plan underfunding. This, in turn, results in an even greater likelihood that the PBGC will be forced to assume responsibility for paying the benefits, often at reduced levels, of terminated plans. H.R. 2830 restricts the ability of employers and union leaders to promise additional benefits when a plan is underfunded. Specifically, the bill prohibits employers and union leaders from increasing benefits or providing lump sum distributions if a pension plan is less than 80 percent funded for the prior year, unless the plan sponsor immediately makes the necessary contribution to fund the entire increase. If a plan is greater than 80 percent funded, but adopts a plan amendment which results in a plan with a funded status of less than 80 percent, the plan sponsor must immediately make the necessary contribution to ensure that the plan's funded status is at least 80 percent. The restriction for lump sum distributions does not apply to plans that have previously adopted amendments that effectively freeze all future accruals. H.R. 2830 also prohibits future benefit accruals for severely underfunded plans, which effectively freezes the plan. Plan amendments are required in order to resume any lump sum distributions or plan accruals once the plan is above the respective thresholds.

In addition to these limitations, H.R. 2830 also prohibits the payment of shutdown benefit and other unpredictable contingent event benefits. The Committee believes that because such benefits are not funded and cannot reasonably be funded with any accuracy, these unfunded benefits are more similar to severance benefits than pension benefits. Shutdown benefits have increased PBGC's deficit when the agency assumes the liabilities of terminated plans that include such unfunded promises. It is the Committee's view that shutdown benefits and other unpredictable contingent event benefits should not be considered pension benefits and should not be payable from plan assets.

The effective date of the benefit restriction provisions set forth above is 2006. However, in the case of a collectively bargained plan, the effective date applies to any plan year beginning the earlier of: (1) the date on which the last collective bargaining agreement expires, or (2) 2009. This effective date ensures that any current collective bargaining agreements are not disrupted and that employees are given ample time to discuss the effects of the benefit restrictions with their respective unions and employers.

Prohibiting Executive Compensation Arrangements If Rank-and-File Plans Are Severely Underfunded. H.R. 2830 addresses a problem recently seen in the airline industry where executives of companies in financial difficulty are given generous nonqualified deferred compensation arrangements while the retirement security of rank-and-file workers is at risk due to poorly funded qualified plans. The Committee believes that it is inappropriate for companies with underfunded qualified defined benefit pension plans to fund nonqualified deferred compensation plans covering executives. While rank-and-file employees have little control over a company's decision to fund its pension plans, executives often have control in determining whether nonqualified deferred compensation plans will be funded. In addition, executives who are covered by a nonqualified deferred compensation plan may also be instrumental in deciding how much to contribute to the defined benefit pension plan, thus determining the funded status of the pension plan. The Committee believes that if any defined benefit pension plan of an employer is not sufficiently funded, executives should be required to recognize current income inclusion (i.e., be taxed) upon the funding of their nonqualified deferred compensation plans.

H.R. 2830 provides that if an employer's defined benefit pension plan is in at-risk status and the employer sets aside amounts for purposes of paying deferred compensation under a nonqualified deferred compensation plan, the amounts set aside are treated as property transferred in connection with the performance of services. Thus, participants for whom such amounts are set aside would be subject to current income inclusion under the provision. In addition, interest and an additional 20 percent tax would apply.

H.R. 2830 specifically provides that if during any period in which a qualified defined benefit pension plan of an employer is below 60 percent funded, any assets that are set aside, directly or indirectly, in a trust or other arrangement as determined by the Secretary of the Treasury, or transferred to such a trust or other arrangement, for purposes of paying deferred compensation, such assets are treated as property transferred in connection with the performance of services, regardless of whether or not such assets are available to satisfy the claims of general creditors. Furthermore, if a nonqualified deferred compensation plan of an employer provides that assets will be restricted to the provision of benefits under the qualified plan, such assets are treated as property transferred in connection with the performance of services, regardless of whether or not such assets are available to satisfy the claims of general creditors. If the plan sponsor's qualified defined benefit plan is below 60 percent funded, any subsequent increases in the value of, or any earnings with respect to, transferred or restricted assets are treated as additional transfers of property to the individual. In addition to current income inclusion, interest at the underpayment rate plus one percentage point is imposed on the underpayments that would have occurred had the amounts been includible in income for the taxable year in which first deferred or, if later, the first taxable year not subject to a substantial risk of forfeiture. The amount required to be included in income is also subject to an additional 20 percent tax.

H.R. 2830 requires the plan administrator to provide notice to plan participants and beneficiaries within 30 days after the plan has become subject to any of the above benefit restrictions. Any failure to provide notice will automatically result in a civil penalty.

TITLE II--FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS


Multiemployer pension plans are defined benefit pension plans maintained by two or more employers in a particular trade or industry, such as trucking or construction, which are collectively bargained between an employer and a labor union. These plans are managed by a board of trustees, which must be comprised of an equal number of employer and union representatives. While multiemployer and single employer pension plans have some similarities, there are also fundamental differences. While single employer plan sponsors generally may adjust their pension contributions to meet funding requirements, the contributions of individual employers in multiemployer plans cannot be easily modified because their benefit contributions are fixed by the terms of a collective bargaining agreement.

Multiemployer contributions are tied directly to the total number of hours worked by active workers; thus, any reduction in the number of active participants results in lower contributions to multiemployer plans. One of the major challenges facing the multiemployer system is that these pension plans are funded by a declining number of employers making contributions on behalf of a declining number of active workers, while paying benefits to a rapidly growing number of retirees. This `risk pooling' pension funding concept was designed for a 1940s era workforce that expected the multiemployer labor base to continue to grow; in reality, it has not. Indeed, only five new multiemployer plans have been formed since 1992. This has resulted in funding problems the Committee believes must be immediately addressed.

Multiemployer Funding Reforms. H.R. 2830 establishes a structure for identifying troubled multiemployer pension plans by providing appropriate triggers for determining when plans are underfunded as well as quantifiable benchmarks for measuring a plan's funding improvement. The bill quantifies the health of certain underfunded multiemployer pension plans and separates them into two broad categories: (1) endangered plans, which are plans that are not in immediate financial danger, but are not considered well-funded plans; and (2) critical plans, which are plans in serious financial trouble and are expected to experience an accumulated funding deficiency in the near future. Present-law reorganization and insolvency rules continue to apply.

H.R. 2830 provides that, in general, a plan's actuary must certify to the Secretary of the Treasury, within 90 days after the first day of the plan year, whether the plan is in endangered or critical status. If the certification is not made within this period, the plan is presumed to be in critical status. In making the determination whether a plan is in endangered or critical status, the plan actuary must make projections for the current and succeeding plan years, using reasonable actuarial assumptions and methods, of the current value of plan assets and the present value of liabilities, as set forth in the actuarial statement for the preceding plan year. If a plan is certified to be in endangered or critical status for the plan year or is presumed to be in critical status because no certification was made, notice must be provided within 30 days to participants, beneficiaries, bargaining parties, the PBGC, and the Secretaries of Labor and the Treasury.

Endangered Multiemployer Plans. H.R. 2830 requires that, if a plan is less than 80 percent funded or will experience a funding deficiency in the next seven years, the plan is considered to be in endangered status. The plan's trustees must design and adopt a program, within 240 days after a plan is certified as endangered, that will improve the health of the plan by one-third within 10 years, unless the plan's actuary certifies that the plan cannot meet that improvement benchmark. If the plan cannot meet the one-third improvement benchmark within 10 years, the plan must develop a program to improve the health of the plan by one-fifth within fifteen years; however, the plan's actuary must certify each year, until the expiration of the collective bargaining agreement, that the plan is unable to meet the  1/3  improvement benchmark within 10 years.

For endangered plans that are funded between 65 and 70 percent, the trustees must create a program to improve the funded status of the plan by one-fifth within fifteen years. In addition, the bill prohibits trustees from increasing benefits if the increase would cause the plan to fall below 65 percent funded status. Plan trustees also must adopt certain other measures for increasing contributions and restricting benefit increases until the plan meets the one-third benchmark.

The funding improvement period for the plan to reach the required benchmarks is the 10 year period beginning on the earlier of: (1) the second anniversary of the date of adoption of the funding improvement plan, or (2) the first day of the first plan year following the year in which collective bargaining agreements covering at least 75 percent of active participants have expired.

Pending approval of the funding improvement plan, the plan sponsor must take all actions (consistent with the terms of the plan and present law) to ensure an increase in the plan's funded percentage and a postponement of an accumulated funding deficiency for at least one additional plan year. These applications include, but are not limited to, applications for extensions of amortization periods, use of the shortfall funding method in making funding standard account computations, amendments to the plan's benefit structure, and reductions in future benefit accruals.

Pending approval of a funding improvement plan, the plan may not be amended to provide for the following: (1) a reduction in the level of contributions for participants who are not in pay status; (2) a suspension of contributions with respect to any service; or (3) any new direct or indirect exclusion of younger or newly hired employees from plan participation.

Critical Multiemployer Plans. H.R. 2830 includes a series of requirements to address multiemployer plans that are severely underfunded and face significant and immediate funding problems. H.R. 2830 strengthens the funding requirements for critical plans and requires trustees to develop and adopt, within 240 days from the plan's critical status certification, a rehabilitation plan to exit the critical zone within 10 years. A plan is considered to be in critical status if it meets one of the following tests: (1) as of the beginning of the plan year, the funded percentage of the plan is less than 65 percent and the sum of the market value of plan assets plus the present value of reasonably anticipated contributions for the current and six succeeding plan years is less than the present value of all nonforfeitable benefits for all participants and beneficiaries projected to be payable under the plan during the current and six succeeding plan years; (2) as of the beginning of the plan year, the sum of the market value of plan assets plus the present value of the reasonably anticipated contributions for the current and four succeeding plan years (assuming the same collective bargaining agreement is in effect) is less than the present value of all nonforfeitable benefits for participants and beneficiaries projected to be payable under the plan during the current and four succeeding plan years; (3) as of the beginning of the plan year, the funded percentage of the plan is less than 65 percent and the plan has an accumulated funding deficiency for the current or four succeeding plan years (taking into account any amortization extension); (4) the plan's normal cost for the year, plus interest (determined at the rate used for determining costs under the plan) for the current plan year on the amount of unfunded benefit liabilities under the plan as of the last date of the preceding plan year exceeds the present value, as of the beginning of the plan year, of the reasonably anticipated contributions for the year plus the present value of the nonforfeitable benefits of the inactive participants is greater than the present value, as of the beginning of the plan year, of the nonforfeitable benefits of active participants, and the plan is projected to have an accumulated funding deficiency for the current or four succeeding plan years; or (5) the funded percentage of the plan is greater than 65 percent for the current plan year and the plan is projected to have an accumulated funding deficiency for the current or three succeeding plan years.

The rehabilitation period for the plan to reach the required benchmarks is the 10 year period beginning on the earlier of: (1) the second anniversary of the date of adoption of the rehabilitation plan, or (2) the first day of the first plan year following the year in which collective bargaining agreements covering at least 75 percent of active participants have expired.

H.R. 2830 requires that a rehabilitation plan for a critical plan must include a combination of employer contribution increases, expense reductions, funding relief measures, restrictions on future benefit accruals, and benefit reductions of certain ancillary benefits. These changes must be adopted by all bargaining parties. The bill also provides for a surcharge to the plan by employers until the parties adopt a rehabilitation plan and allows the trustees of the plan, in the most dire circumstances, to reduce certain ancillary benefits. If the plan cannot emerge from the critical zone within 10 years, the rehabilitation plan must describe alternatives, explain why emergence from the critical zone is not feasible, and develop actions that the trustees must take to postpone insolvency. Until a rehabilitation plan is adopted, a critical plan is subject to the same restrictions as an endangered plan; however, subject to certain exceptions, no amendment may be adopted which increases the liabilities of the plan by reason of any increase in benefits, any change in accrual of benefits, or any change in the rate at which benefits become nonforfeitable.

Other Multiemployer Plan Reforms: In addition to the new funding reforms, H.R. 2830 includes new requirements for multiemployer pension plans irrespective of funding status. Specifically, the bill streamlines all amortization payments to a maximum of 15 years. However, the new amortization periods do not apply to amounts attributable to amortization schedules established for plan years beginning before 2006. H.R. 2830 increases the maximum deductible limit up to the excess of 140 percent of current liability, providing additional funding flexibility for plans each year in order to respond to different economic markets.

Amortization Extensions: H.R. 2830 provides that upon a plan's application, the Secretary of the Treasury shall grant an extension of the amortization period for up to five plan years for any unfunded past service liability, investment loss, or experience loss. An applicant must demonstrate to the satisfaction of the Secretary that the notice of the application has been provided to each organization representing employees covered by the plan and to the PBGC. The Secretary may also grant an amortization extension for an additional five years beyond the automatic extension. The standard for determining whether an additional extension may be granted is the same as under present law; however, the rate applicable to the waived funding deficiencies and extensions of amortization periods is the greater of: (1) 150 percent of the federal mid-term rate, or (2) the rate of interest used under the plan in determining costs.

Finally, H.R. 2830 also includes withdrawal liability reforms in order to strengthen and clarify current law withdrawal rules and provide certain privately-held, small employers with the ability to grow and/or modify their business to meet the needs of a dynamic economy. Such reforms may not, however, be made with any attempt to evade or avoid any obligations to contribute to a multiemployer plan. The Committee believes that withdrawal liability reforms are needed in order to ensure the future of these plans, and that employers continue to participate in the multiemployer pension system.

TITLE III--INTEREST RATE FOR LUMP SUM DISTRIBUTIONS


H.R. 2830 requires employers to use the three appropriate segment rates under the modified yield curve to calculate minimum lump sum distributions for participants. In other words, the modified yield curve must be applied to each projected annuity payment in converting to a lump sum.

In general, current law requires lump sum distributions to be calculated using the artificially-low 30-year Treasury rate; this has the effect of inflating lump sum distributions, which drains plan assets and represents a major source of systemic pension underfunding. Using the same interest rates to calculate both employer pension contributions and lump sum distributions will ensure that these benefits are calculated and funded properly and fairly without having an adverse impact on the remaining workers and retirees in the plan. It is the Committee's intent that employers use the RP-2000 Combined Mortality Table in calculating lump sum distributions and use the assumption that an equal number of men and women will take lump sum distributions. There is a five-year phase-in of the modified yield curve rate from the 30-year Treasury rate for the purpose of calculating lump sum distributions. If a plan offers lump sum distributions, however, the assumption regarding the probability of when payments will be made is required to be taken into account for funding purposes.

Amendment to the ERISA Prohibited Transaction Rules Adopted by the Committee: H.R. 2830 outlines eight prohibited transaction exemptions to facilitate easier, faster, and less expensive transactions between private pension plans and service providers. The purpose of this provision is to ensure that pension plans are not denied certain investment opportunities or overburdened by unnecessary or duplicative regulatory structures that result in higher administrative costs. The eight exemptions include the following:

Definition of `Amount Involved.' This provision clarifies the term `amount involved' with respect to certain types of investment which is used in calculating the civil penalties imposed and the appropriate amount for correcting a prohibited transaction. The `amount involved' in a transaction is clarified as the amount of money and the fair market value of property either given or received as of the date on which the prohibited transaction occurs.

Exemption for Block Trading. This provision allows pension assets to be included in block trades in order to achieve better execution and reduced costs and provides for more efficient plan asset transactions.

Bonding Relief. This provision amends ERISA's bonding rules to reflect the regulation of broker-dealers and investment advisers under federal securities law.

Conforming ERISA's Prohibited Transaction Provision to the Federal Employees' Retirement System Act (FERSA). This provision exempts fair market value exchanges from the prohibited transaction requirements to reduce pension plan costs.

Relief for Foreign Exchange Transactions. This provision allows broker-dealers and affiliates to provide ancillary services to plans (such as currency conversions) which results in overall lower administrative costs and burdens.

Definition of Plan Asset Vehicle. This provision excludes the underlying assets of entities which hold less than 50 percent of plan assets from the fiduciary rules under ERISA to allow plans the flexibility to participate in greater investment opportunities.

Exemption for Electronic Communication Network. This provision allows plans to conduct transactions on electronic trading networks that are owned in part or whole by any plan service provider, which will result in reduced plan costs and enhanced efficiency.

Correction Period for Certain Transactions Involving Securities and Commodities. This provision provides a 14-day `correction' period for any transactions that occur by mistake between a plan and a party-in-interest or fiduciary.

TITLE IV--IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS


Two important steps are essential to improving the financial condition of the PBGC and ensuring its long-term solvency: (1) reforming pension funding rules to ensure pensions are more adequately and consistently funded; and (2) increasing premiums paid by employers to the PBGC in a responsible fashion. It is important to note that ensuring employers fund their plans appropriately will prove more helpful to the overall defined benefit system than additional premiums paid to the PBGC. However, Congress has not raised premiums since 1991, so a reasonable increase is both prudent and necessary.

Flat-Rate Premiums. The Pension Protection Act raises flat-rate, per participant premiums employers pay to the PBGC, but phases the increases in over time instead of increasing them immediately. For pension plans that are less than 80 percent funded, the bill raises the flat per-participant rate premium from the current $19 to $30 over three years. For plans funded at more than 80 percent, the premium increase is phased in over five years. The bill indexes the flat-rate premium annually to worker wage growth.

Variable Rate Premiums. Under H.R. 2830, variable rate premiums are charged to a plan based on the amount of plan underfunding below 100 percent. Employers are required to pay $9 for every $1000 dollars of unfunded vested benefits to the PBGC.

TITLE V--DISCLOSURE


While ERISA includes a number of reporting and disclosure requirements that provide workers with information about their benefits, the timeliness and usefulness of this information should be improved. Too often in recent years, participants have mistakenly believed that their pension plans were well funded, only to receive a shock when the plan is terminated. Without basic information, workers, contributing employers, lawmakers, and the federal agencies that oversee pension plans are left without the most complete and accurate information about the true funded status of these pension plans. This has troubling implications for workers who are relying on this information for their retirement, and taxpayers who ultimately face the risk of bailing out these plans. The Pension Protection Act provides workers, investors, and lawmakers more timely and useful information about the status of defined benefit pension plans to ensure greater transparency and accountability.

New Notice to Workers and Retirees. Within 90 days after the close of the plan year, H.R. 2830 requires both single and multiemployer pension plans to notify participants and beneficiaries of the actuarial value of assets and projected liabilities and the funded percentage of their plan. Such notice must also include the plan's funding policy and asset allocations based on a percentage of overall plan assets. This notice is due for plan years beginning after 2005.

For multiemployer plans already subject to this provision, such notice must also include a statement of the ratio of inactive participants to active participants in a plan, as of the end of the plan year to which the notice relates. Inactive participants are considered those participants who are not in covered service under the plan and are in pay status or have a nonforfeitable right to benefits under the plan. It is the Committee's intent that covered service includes a period of service of no less than 12 consecutive months.

With respect to multiemployer plan disclosure under current law, contributing employers of multiemployer plans have little access to any information regarding the health of the pension plan to which they contribute. H.R. 2830 requires multiemployer plans to make available certain information within 30 days of a request by contributing employers or labor organizations, including: (1) copies of all actuary reports received by the plan for a plan year; and (2) copies of all financial reports prepared by plan fiduciaries, including plan investment managers and advisors, and/or plan service providers.

Enhancing Form 5500 Notice Requirements. The principal source of information about private sector defined benefit plans is the Form 5500, the equivalent of a pension plan's federal tax return. H.R. 2830 requires both single and multiemployer plans to include more information on their Form 5500 filings. Specifically, if plans merge and file one Form 5500, the plan must provide the funded percentage for the preceding plan year and the new funded percentage after the plan merger. In addition, a plan's enrolled actuary must explain the basis for all plan retirement assumptions on the Schedule B, which is the actuarial statement filed along with Form 5500 that provides information on the plan's assets, and liabilities. Finally, H.R. 2830 requires multiemployer plans to include on Form 5500 filings the number of contributing employers in the plan as well as the number of employees in the plan that no longer have a contributing employer on their behalf.

Making Form 4010 Disclosure Publicly Available. Under current law, employers who sponsor single employer defined benefit plans that are underfunded, in the aggregate, by more than $50 million must disclose to the PBGC certain information annually on Form 4010. H.R. 2830 provides for certain information included in a plan sponsor's Form 4010 filing to be disclosed to participants and beneficiaries.

Under the bill, if a plan is less than 60 percent funded, H.R. 2830 requires employers to provide certain additional information to workers and retirees within 90 days after Form 4010 is due. This new notice must include: (1) notice that a plan has made a Form 4010 filing for the year; (2) the aggregate amount of assets, liabilities, and funded ratio of the plan; (3) the number of plans maintained by the employer that are less than 60 percent funded (`at-risk' liability); and (4) the assets, liabilities, and funded ratio for those at-risk plans that are less than 60 percent funded.

The PBGC may also request that a plan sponsor file a 4010 and provide notice to its participants if a plan is less than 75 percent funded and such plan is sponsored by an employer in an industry that is experiencing substantial unemployment or underemployment and in which sales and profits are depressed or declining.

Multiemployer Withdrawal Liability Notice. H.R. 2830 requires a multiemployer plan to notify a contributing employer of its withdrawal liability amount within 180 days of a written request. The notice may only be provided once within a 12-month period and may be subject to a reasonable fee. The notice must also include the cost of all participants and beneficiaries in the plan without a contributing employer.

Summary Annual Report. The summary annual report (SAR) provides basic disclosure of information from the Form 5500 to workers and retirees. However, under current law, because this notice isn't required until 110 days after the Form 5500 is filed, the information is often out of date. The bill requires both single and multiemployer pension plans to provide this notice within 15 days following the Form 5500 filing deadline. The bill also requires the Department of Labor to publish a model SAR notice for plans sponsors.

TITLE VI--INVESTMENT ADVICE


The Pension Protection Act includes a comprehensive investment advice proposal that has passed the House three times in the last several years with significant Democrat support (twice in the 107th Congress and once in the 108th Congress). It allows employers to provide rank-and-file workers with access to a qualified investment adviser who can inform them of the need to diversify and help them choose appropriate investments. The bill also includes tough fiduciary and disclosure safeguards to ensure that advice provided to employees is solely in their best interest.

Important Fiduciary Safeguards. H.R. 2830 includes important fiduciary safeguards and new disclosure protections to ensure that workers receive quality advice that is solely in their best interests. Under the bill, only qualified `fiduciary advisers' who are fully regulated by applicable banking, insurance, and securities laws may offer investment advice; this ensures that only qualified individuals may provide advice. Under the bill, investment advisers who breach their fiduciary duty are personally liable for any failure to act solely in the interest of the worker, and may be subject to civil and criminal penalties by the Labor Department and civil penalties by the worker, among other sanctions. In addition, existing federal and state laws that regulate individual industries will continue to apply.

Comprehensive Disclosure Protections. In order to provide advice under H.R. 2830, advice providers must disclose in plain, easy-to-understand language any fees or potential conflicts. The bill requires advisers to make these disclosures when advice is first given, at least annually thereafter, whenever the worker requests the information, and whenever there is a material change to the adviser's fees or affiliations. The disclosure must also be reasonably contemporaneous with the advice so that employees can make informed decisions with the advice they receive.

Clarifies the Role of the Employer. H.R. 2830 clarifies that employers are not responsible for the individual advice given by professional advisers to individual participants; this liability is assumed by the individual adviser. Under current law, employers are discouraged from providing this benefit because liability issues are ambiguous and employers may be held liable for specific advice that is provided to their employees. Under the bill, employers will remain responsible under ERISA fiduciary rules for the prudent selection and periodic review of any investment adviser and the advice given to employees.

Voluntary Process. The bill does not require any employer to contract with an investment adviser nor is any employee under any obligation to accept or follow any advice. Workers, not the adviser, will have full control over their investment decisions.

TITLE VII--BENEFIT ACCRUAL STANDARDS


Hybrid pension plans generally combine the best features of both defined benefit and defined contribution plans by providing a meaningful retirement benefit to all employees, regardless of age. Hybrid plans are similar to defined benefit plans because they are funded by employers and the benefits are protected by the PBGC. In addition, employers bear the responsibility for any market gains and losses. However, these plans are also similar to defined contribution plans, such as 401(k) plans, because benefits are provided through individual `hypothetical accounts.'

In recent years, the legality of these plans has been challenged as violating the age discrimination provisions in ERISA. H.R. 2830 ends the legal uncertainty surrounding cash balance pension plans and ensures that such plans remain a viable retirement security option for workers and employers. In general, the bill establishes a simple age discrimination standard for all defined benefit plans that clarifies current law with respect to age discrimination requirements under ERISA on a prospective basis. The age discrimination clarification in the bill specifies that if a participant's entire accrued benefit, as of any date under the formula for determining benefits as set forth in the text of the plan documents, is equal to or greater than that of a similarly situated, younger employee, or provides for lump sum distributions equal to a participant's hypothetical account, the plan is not considered age discriminatory under ERISA. Two employees are considered similarly situated if they are, and always have been, identical in every respect, including but not limited to, any period of service, compensation, position, date of hire, or work history, except for age.

In determining the entire accrued benefit of a participant, the subsidized portion of any early retirement benefit (including any early retirement subsidy that is fully or partially included or reflected in an employee's opening account balance or other transition benefits, in the case of a hybrid pension plan) shall be disregarded.

As stated above, it is the intent of the Committee to confirm the legality of all defined benefit plans, including certain plans that index benefits for inflation. As such, H.R. 2830 provides that a plan formula does not fail to satisfy the requirements of this provision if the formula provides for the indexing of pre- or post-retirement benefits. For example, a plan may index benefits to protect the economic value of a participant's benefit by providing for a cost-of-living adjustment. However, it is the intent of the Committee to prohibit any pre-retirement indexing which results in a cumulative negative adjustment in a participant's benefit.

With respect to lump sum distributions, it is the Committee's intent that if a defined benefit plan determines a participant's benefit by reference to the balance in a hypothetical account (or by reference to a current value equal to an accumulated percentage of a participant's final average of compensation), the plan does not fail to meet the requirements of this provision if a lump sum distribution is made equal to the participant's nonforfeitable accrued benefit expressed as the value of a hypothetical account (or of the present value of the accumulated percentage of final average compensation).

TITLE VIII--INCREASING MAXIMUM DEDUCTIBLE CONTRIBUTIONS


Current pension funding rules often force employers into the difficult position of being unable to make additional contributions to pension plans during good economic times, but then subject to accelerated contribution requirements during an economic downturn or market fluctuation. H.R. 2830 permits employers to make additional contributions up to a new higher maximum deductible amount equal to the greater of: (1) the excess of the sum of 150 percent of the plan's funding target plus the target normal cost over the value of plan assets, or (2) the excess of the sum of the plan's at-risk normal cost and at-risk funding target for the plan year over the value of plan assets. In determining the maximum deductible amount, plan assets are not reduced by any pre-funding balance or funding standard carryover balance. The Committee believes that giving employers more flexibility to make generous contributions during good economic times will help provide workers and retirees greater retirement security by increasing the assets available to finance retirement benefits.

In the case of a multiemployer defined benefit plan, the maximum deductible amount is not less than 140 percent of current liability over the value of plan assets.

COMMITTEE VIEWS


The defined benefit pension system is rapidly declining due to a complex statutory and regulatory structure, expensive administrative costs, and changing workforce demographics. The financial health of defined benefit plans is a critical issue for the millions of workers that participate in these plans. Moreover, the funding of these plans has become more challenging for many employers because of a climate of low interest rates, a lackluster economy, stock market losses, and an increasing number of retirees. As a result, the number of employers offering defined benefit pension plans has declined and some employers have frozen or terminated their traditional pension plans altogether.

The Committee believes that the defined benefit pension system must be strengthened in order to ensure a protected and reliable retirement system. Employees need greater pension security in order to prepare for retirement. Employers must have the ability to accurately measure and predict pension liabilities and other funding issues in order to properly determine their capital allocations and expenditures for business planning purposes. The Committee recognizes that pensions are voluntary benefits provided by employers and that Congress must take a balanced approach to reforming the system that addresses current failings without overburdening plan sponsors to the extent that it becomes impractical for them to provide such benefits to their employees. Peter R. Fisher, Under Secretary for Domestic Finance, U.S. Department of Treasury, testified on the need for a balanced approach to comprehensive reforms of the defined benefit pension system, and in particular, to funding reforms, in order to protect the interest of workers and retirees:

 Americans have broadly shared interest in adequate funding of employer-provided defined benefit pensions. Without adequate funding, the retirement income of America's workers will be insecure. This by itself is a powerful reason to pursue improvements in our pension system. At the same time, we must remember that the defined benefit pension system is a voluntary system. Firms offer defined benefit pensions to their workers as an employee benefit, as a form of compensation. Our pension rules should thus be structured in ways that encourage, rather than discourage, employer participation. Key aspects of the current system frustrate participating employers while also failing to produce adequate funding. We thus have multiple incentives to improve our pension system, and to thus better ensure both the availability and the viability of worker pensions. We owe it to the nation's workers, retirees, and companies to roll up our sleeves and to create a system that more clearly and effectively funds pension benefits. 4

 [Footnote]

[Footnote 4: Joint Hearing on `Examining Pension Security and Defined Benefit Plans: The Bush Administration's Proposal to Replace the 30-Year Treasury Rate,' before the Subcommittee on Employer-Employee Relations of the Committee on Education and the Workforce and the Subcommittee on Select Revenue Measures of the Committee on Ways and Means, U.S. House of Representatives, 108th Congress, First Session, July 15, 2003, Serial No. 108-26.]

The Committee believes that the current defined benefit pension system does not contain appropriate rules, including funding and disclosure rules, to ensure that pension plans are properly funded and that participants and beneficiaries receive sufficient information. Maintaining the status quo is clearly unacceptable to the remaining 44 million workers and retirees participating in the defined benefit pension system. Ann L. Combs, Assistant Secretary of the Employee Benefits Security Administration (EBSA), U.S. Department of Labor, testified on the need for comprehensive reforms to the current defined benefit pension rules:

 Defined benefit plans are intended to provide a secure source of retirement income that lasts a lifetime. Recent volatility in the stock market has reminded workers of the value of such plans where corporate plan sponsors bear investment risk. As our aging workforce begins to prepare for retirement and think about how to manage its savings wisely, there is a renewed interest in guaranteed annuity payouts that last a lifetime. If we do nothing but paper over the problems facing defined benefit plans and the companies and unions that sponsor them, we will ill-serve America's workers threatened by unfunded benefits and potentially broken promises. 5

 [Footnote]

[Footnote 5: Id.]

SINGLE EMPLOYER PENSION PLANS


Title I of ERISA addresses the rules and required conduct for the establishment, operation, and termination of qualified pension plans. 6

 [Footnote]  The minimum funding requirements under ERISA permit an employer to fund defined benefit plans over a certain period of time, regardless of whether a plan is considered fully funded. 7

 [Footnote]  As a result, pension plans may be terminated when plan assets are not sufficient to provide for all benefits accrued by employees under the plan. In order to protect participants from losing retirement benefits if a plan terminates without sufficient assets to pay vested, accrued benefits, the PBGC, a corporation within the Department of Labor, was created in 1974 under ERISA to provide an insurance program for the payment of benefits from certain terminated pension plans maintained by private employers. 8

 [Footnote]

[Footnote 6: See ERISA Sec. 4(b). There are certain types of pension plans which are not covered under Title I of ERISA and thus are not qualified ERISA plans. For example, plans sponsored by a government or a church are not qualified ERISA plans.]

[Footnote 7: See ERISA Sec. 302. In general, the funding requirements under ERISA provide that a plan is considered fully funded at 90 percent, and in some cases, 80 percent.]

[Footnote 8: See ERISA Sec. 4021(b)(13). Plans sponsored by professional service employers, such as physicians and lawyers, with 25 or fewer employees are not covered by the PBGC single-employer insurance program.]

The need for legislation

It is the view of the Committee that the role of the PBGC in protecting the retirement benefits of over 44 million Americans participating in both single employer and multiemployer defined benefit plans is crucial. 9

 [Footnote]  However, the current system does not contain appropriate funding rules to ensure that pension plans are adequately funded. Over the past few years, the terminations of severely underfunded pension plans have threatened the retirement security of the participants and beneficiaries who earned these benefits. Furthermore, the recent terminations of several notable and chronically underfunded pension plans has placed an increasing financial strain on the PBGC single employer pension insurance program, and has threatened its long-term viability.

[Footnote 9: The PBGC currently guarantees payment of basic pension benefits of participants in approximately 31,000 defined benefit plans.]

In fact, recent statistical evidence suggests that PBGC's long-term financial health may be in jeopardy. The Executive Director of the PBGC, Bradley D. Belt, testified on the financial condition of the PBGC:

 The pension insurance programs administered by the PBGC have come under severe pressure in recent years due to an unprecedented wave of pension plan terminations with substantial levels of underfunding. This was starkly evident in 2004, as the PBGC's single employer insurance program posted its largest year-end shortfall in the agency's 30-year history. Losses from completed and probable pension plan terminations totals $14.7 billion for the year, and the program ended with a deficit of $23.3 billion. That is why the Government Accountability Office has once again placed the PBGC's single employer insurance program on its list of `high risk' government programs in need of attention. 10

 [Footnote]

[Footnote 10: Hearing on `The Retirement Security Crisis: The Administration's Proposal for Pension Reform and Its Implications for Workers and Taxpayers,' before the Committee on Education and the Workforce, U.S. House of Representatives, 109th Congress, First Session, March 2, 2005, Serial No. 109-3.]

The latest plan sponsor filings with the PBGC reveal an unprecedented and systematic pension underfunding problem within the defined benefit pension system. On June 7, 2005, the PBGC issued a press release stating that companies with underfunded pension plans reported a record shortfall of $353.7 billion in their filings with the PBGC, which represents a 27 percent increase from the previous year. The 2004 reports, filed with the PBGC by April 15, 2005, were submitted by 1,108 pension plans covering approximately 15 million workers and retirees. In total, the filings indicated that underfunded plans had only $786.8 billion in assets to cover more than $1.14 trillion in liabilities, for an average funded ratio of approximately 69 percent.

It is important to note that the PBGC has acknowledged that it has the adequate resources to continue paying benefits into the future; however, its financial condition will continue to deteriorate without comprehensive reforms made to the entire defined benefit pension system. Mr. Belt specifically testified on the current financial condition of the PBGC as well as its ability to pay benefits in the future:

 Notwithstanding our record deficit, I want to make clear that the PBGC has sufficient assets on hand to continue paying benefits for a number of years. However, with $62 billion in liabilities and only $39 billion in assets as of the end of the past fiscal year, the single employer program lacks the resources to fully satisfy its benefit obligations. 11

 [Footnote]

[Footnote 11: Id.]

The PBGC is required through statutory mandates to maintain premiums at the lowest levels consistent with carrying out the agency's statutory obligations. However, these premiums have not been increased in over fourteen years and are simply not adequate for the payment of guaranteed benefits. H.R. 2830 responsibly increases flat-rate premiums paid by plan sponsors maintaining certain qualified defined benefit pension plans by phasing-in the current $19 per participant to $30 over a maximum period of 5 years, depending upon the plan's funded status. This increase is needed in order to assist the PBGC in continuing to provide benefits to participants and beneficiaries in terminated pension plans.

It is the view of the Committee that comprehensive funding rule changes are needed in order to address the systematic pension underfunding crisis that continues to threaten the financial security of millions of participants. Ann Combs, Assistant Secretary of EBSA, testified this year on the need for funding reform changes:

 The increasing PBGC deficit and high levels of plan underfunding are themselves a cause for concern. More importantly, they are symptomatic of serious structural problems in the private defined benefit system. It is important to strengthen the defined benefit pension system now. 12

 [Footnote]

[Footnote 12: Id.]

Assistant Secretary Combs also testified on the inadequacies of the current funding rules:

 Under the current funding rules, financially weak companies can promise new benefits and make lump sum payments that the plan cannot afford. Workers, retirees, and their families who rely on these empty promises can face serious financial hardship if the pension plan is terminated. 13

 [Footnote]

[Footnote 13: Id.]

The need for pension reform has been echoed further by professional organizations that performs services for all defined benefit plans. Kenneth A. Kent, Academy Vice-President, American Academy of Actuaries, testified from the perspective of professional pension actuaries on the need for comprehensive reforms:

 Do we need reform? The need is evident by the continuing decline in the number of defined benefit pension plans. Defined benefit programs are a fundamental vehicle for providing financial security for millions of Americans. Unlike other programs, they provide lifetime benefits to retirees, no matter how long they live and regardless of how well they do on their individual investments. However, recent market conditions of low interest rates and low market returns have caused more dramatic declines in the number of covered employees. There are many contributing factors, including regulatory and administrative burdens derived from years of amendments to ERISA, which have had a long-term detrimental impact. These programs need your support through major reform of the current laws. 14

 [Footnote]

[Footnote 14: Hearing on `Examining Long-Term Solutions to Reform and Strengthen the Defined Benefit Pension System,' before the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, U.S. House of Representatives, 108th Congress, Second Session, April 29, 2004, Serial No. 108-55.]

In addition to the Administration, Congress, and professional associations, corporations, business groups, and trade associations also recognize the need for comprehensive pension reforms. Kenneth W. Porter, Director of Corporate Insurance and Global Benefits Financial Planning for the DuPont Company, testifying on behalf of the American Benefits Council, the American Council of Life Insurers, the Business Roundtable, the ERISA Industry Committee, the National Association of Manufacturers, and the U.S. Chamber of Commerce, testified on the need for overall comprehensive reforms to the single employer defined benefit pension system:

 Not only do we agree that funding rules need to be strengthened, we also agree that broader, more timely disclosure to plan participants is needed, and the proposals to allow employers to make larger contributions during good economic times is long overdue. 15

 [Footnote]

[Footnote 15: Hearing on `The Retirement Security Crisis: The Administration's Proposal for Pension Reform and Its Implications for Workers and Taxpayers,' before the Committee on Education and the Workforce, U.S. House of Representatives, 109th Congress, First Session, March 2, 2005, Serial No. 109-3.]

Modified yield curve

The Committee believes that in order to protect the retirement security interests of participants, beneficiaries, and retirees, comprehensive reforms must include permanent interest rate reforms that generally reflect the timing of when such liabilities are to be paid out. The general matching of discount rates of differing maturities to pension obligations is the most accurate and practical way to measure today's cost of meeting pension obligations. Therefore, a yield curve concept represents one of the most important reforms to the defined benefit pension system. Bart Pushaw, an actuary for Milliman, Inc., testified on the appropriateness of using a modified yield curve to measure pension liabilities:

 The bill . . . updates ERISA greatly and simplifies relevant provisions and fixes some of these weaknesses. The yield curve is not a widely familiar concept, and it has only recently begun to enter into use by the pension industry. Thirty years after ERISA was enacted, pension plans now have a wide range of maturity from new plans with hordes of new hires at young ages to plans which have retired populations and liabilities on their balance sheets which dwarf that of the plan sponsor. These vastly differing plan profiles have, in the past, all been treated identically for valuation purposes, grossly and materially erring relative to the market value. Erroneous, inaccurate valuations mean no money to pay benefits. Using yield curves is the right answer. The market, arguably, incorporates more information about expectations in the yield curve than any other single measure . . . leading to higher levels of benefit security for participants and thus strengthening the financial security of millions. 16

 [Footnote]

[Footnote 16: Hearing on `H.R. 2830, the Pension Protection Act,' before the Committee on Education and the Workforce, U.S. House of Representatives, 109th Congress, First Session, June 15, 2005 (to be published).]

Mr. Pushaw further testified on the simplicity of the modified yield curve approach:

 The modified yield curve approach in this bill is a good simplification to ease administrative implementation by small plans but rigorous to develop market-based valuations for the largest of plans, reflective of their plan's liability profiles and, hence, emerging cash flow needs. 17

 [Footnote]

[Footnote 17: Id.]

It is the view of the Committee that the Secretary of the Treasury should construct one yield curve representing the three-year weighted average of AAA, AA, and A bond markets. The three segment rates, which are to be used for each of the three duration periods in the modified yield curve, should reflect the average of all AAA, AA, and A bonds for each year in each respective segment. The Committee believes these markets are interrelated; therefore, the modified yield curve should incorporate the interrelated connection between these markets.

Lump sum distribution rates

The Committee also believes that the modified yield curve should be used to calculate the value of lump sum distributions to participants, and the prevalence of lump sum distributions must be assumed when determining a plan's funding target. In addition, the mortality table that must be used for calculating lump sums is the same table required for minimum funding purposes (the RP-2000 Combined Mortality Table, as published by the Society of Actuaries). The mortality assumptions should also take into account an equal number of men and women receiving lump sums. Currently, lump sum distributions are calculated using the artificially-low 30-year Treasury rate; this has the effect of inflating lump sum distributions, which drains plan assets and represents a major source of systemic pension underfunding. Using the same interest rates to calculate both employer pension contributions and lump sum distributions will ensure these benefits are calculated and funded properly and fairly without having an adverse impact on the rest of the workers and retirees in the plan. Robert D. Krinsky, A.S.A, E.A., Chairman, The Segal Company, on behalf of the American Benefits Council, testified on the impact of the current rate used to determine lump sum distributions and the need for it to be changed:

 [T]he payment of lump sum distributions to defined benefit plan participants exacerbates funding problems for many plans. In part, because lump sum calculations are currently based on the obsolete 30-year Treasury rate, lump sum payments are artificially inflated, and inappropriately drain plan assets. It is important to address the growing prevalence and use of the lump sum distribution option and determine whether this necessitates changes in the funding rules. 18

 [Footnote]

[Footnote 18: Hearing on `The Pension Underfunding Crisis: How Effective Have Reforms Been?' before the Committee on Education and the Workforce, U.S. House of Representatives, 108th Congress, First Session, October 29, 2003, Serial No. 108-40.]

Reducing volatility and ensuring predictability

The Committee understands that plan sponsors need the ability to predict and budget for pension contributions in order for defined benefit plans to remain a practical pension plan to offer to its employees. The Committee considered the need for contribution predictability with less volatility in the multiple hearings on defined benefit pension reform. As a result, the Committee believes that a modified yield curve concept which incorporates smoothing techniques 19

 [Footnote]  is appropriate for calculating pension contributions and plan assets. Mr. Greg Heaslip, Vice President of Benefits, PepsiCo, Inc., testified on the need for companies to predict and budget for pension contributions:

[Footnote 19: In general, smoothing refers to averaging of interest rates used to calculate plan liabilities as well as the averaging of plan assets. Smoothing generally is used to allow plan fiduciaries to predict future pension contributions. It also is used to mitigate short-term market fluctuations. Since pension obligations are considered long-term obligations, it is the view of the Committee that such fluctuations need not be recognized as they occur. Under current law, interest rates are smoothed over four years and assets are generally smoothed over six years.]

 Certainty, predictability, and stability are things that you'll hear me reiterate . . . At PepsiCo and at other plan sponsors, defined benefit pension plans have grown to a size where they have a material impact on the company's overall financial results. Our pension expense impacts our profits, our share price. Funding impacts our balance sheet and our credit rating. For any expense . . . companies have to know in advance for the next three to five years what costs and funding requirements will be with reasonable certainty . . . It is really not the cost of defined benefit pension plans that scares companies. We understand that and that's what we signed up for while we implemented them. It's the unpredictability, the volatility, and the uncertainty surrounding them that make them very, very difficult and challenging to sponsor. 20

 [Footnote]

[Footnote 20: Hearing on `Examining Long-Term Solutions to Reform and Strengthen the Defined Benefit Pension System,' before the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, U.S. House of Representatives, 108th Congress, Second Session, April 29, 2004, Serial No. 108-55.]

Limiting the use of credit balances

In addition to implementing a permanent interest rate, the Committee believes that companies should be required to adequately and consistently fund their pension plans. Under current law, plan sponsors are allowed to take advantage of `contribution holidays' instead of making actual contributions to their plans by using a `credit balance.' A credit balance can be either actual assets or an accounting credit that is used to increase plan assets and offset future contributions. However, the use of credit balances has contributed greatly to the current funding problems. Bradley D. Belt, Executive Director of the Pension Benefit Guaranty Corporation, testified on how the current law use of credit balances negatively impacts the financial status of the PBGC as well as participants and beneficiaries:

 The funding rules allow contribution holidays for seriously underfunded plans. Bethlehem Steel made no cash contributions to its plan for three years prior to termination, and US Airways made no cash contributions to its pilots' plan for four years before termination. One reason for contribution holidays is that companies build up a `credit balance' for contributions above the minimum required amount. They can treat the credit balance as a payment of future required contributions, even if the assets in which the extra contributions were invested have lost much of their value. Indeed, some companies have avoided making cash contributions for several years through the use of credit balances, heedlessly ignoring the substantial contributions that may be required when the balances are used up. 21

 [Footnote]

[Footnote 21: Hearing on `The Retirement Security Crisis: The Administration's Proposal for Pension Reform and Its Implications for Workers and Taxpayers,' before the Committee on Education and the Workforce, U.S. House of Representatives, 109th Congress, First Session, March 2, 2005, Serial No. 109-3.]

Limiting benefit increases

In addition to comprehensive reforms to the funding rules, it is the view of the Committee that plan sponsors should not be able to continue to increase benefits when a plan is underfunded. This practice perpetuates systematic underfunding and is a moral hazard which threatens the retirement security of the participants and beneficiaries as well as the future of the defined benefit pension system. David C. John, Research Fellow of the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation, testified on the negative effects of increasing benefits in underfunded plans:

 Companies that are in severe financial trouble often try to keep their workers happy by promising them higher pension benefits. Similarly, companies in bankruptcy sometimes seek to improve pension benefits in return for salary concessions. In both cases, these higher pension promises often get passed on to the PBGC, and thus to the taxpayers, for payment when the company seeks to terminate its pension plan. 22

 [Footnote]

[Footnote 22: Hearing on `The Pension Underfunding Crisis: How Effective Have Funding Reforms Been?' before the Committee on Education and the Workforce, U.S. House of Representatives, 108th Congress, First Session, October 29, 2003, Serial No. 108-40.]

Ann Combs, Assistant Secretary of EBSA, also testified on the need for limitations on benefit increases, as well as the prohibition on lump sum distributions, for underfunded plans:

 The current rules encourage some plans to be chronically underfunded, in part, because they shift potential losses to third parties. This is what economists refer to as a `moral hazard.' Under current law, sponsors of underfunded plans can continue to provide for additional accruals and, in some situations, even make new benefit promises, while pushing the cost of paying for those benefits off into the future. For this reason, some companies have an incentive to provide generous pension benefits that they cannot currently finance, rather than increase wages. The company, its workers, and any union officials representing them know that at least some of the additional benefits will be paid, if not by their own plan, then by other plan sponsors in the form of PBGC guarantees . . . If a company's plan is poorly funded, the company should be precluded from adopting further benefit increases unless it fully funds them, especially if it is in a weak financial position. If a plan is severely underfunded, retiring employees should not be able to elect lump sums and similar accelerated benefits. The payment of those benefits allows those participants to receive the full value of their benefits while depleting the plan assets for the remaining participants. 23

 [Footnote]

[Footnote 23: Hearing on `The Retirement Security Crisis: The Administration's Proposal for Pension Reform and Its Implications for Workers and Taxpayers,' before the Committee on Education and the Workforce, U.S. House of Representatives, 109th Congress, First Session, March 2, 2005, Serial No. 109-3.]

Prohibiting shutdown and unpredictable contingent event benefits

In addition to limitations on benefit increases and certain distributions, the Committee believes that shutdown benefits and other unpredictable contingent event benefits, should be eliminated. Unpredictable contingent event benefits are benefits that become payable under special circumstances relating to the closure of a plant, division or facility, or to layoffs of employees of a certain group or class; because they are a severance-type subsidy payment, they may trigger significantly disproportionate increases in plan liabilities. The PBGC guarantees all nonforfeitable benefits, other than benefits that become nonforfeitable solely on account of the termination of a plan. Shutdown benefits become nonforfeitable when the shutdown or layoff occurs, not when the plan terminates. As a result, shutdown benefits may be guaranteed by the PBGC if the shutdown occurs before the termination date, but they are not guaranteed if the shutdown occurs after plan termination.

Shutdown benefits are not funded. Indeed, precisely because a plant shutdown is inherently unpredictable, it is extremely difficult to recognize the costs of these benefits in advance so funding for shutdown benefits is nearly impossible. Thus, upon shutdown, a plan's liabilities may be increased dramatically. The PBGC is responsible for paying these unfunded benefits, yet employers are not obligated to contribute money to pay for them.

Plant shutdown benefits increase plan terminations and impose unreasonable costs on the PBGC, and should not be permitted. A recurring problem in pension funding has been that a plan may provide special benefits that are only payable in the event that the location at which workers are employed ceases operations. Such events are inherently unpredictable, such that it is difficult to recognize the costs of these benefits in advance. Current law does not include in any current liability calculation the cost of benefits arising from future unpredictable contingent events. Yet these benefits can dramatically increase the level of underfunding in a plan and by themselves have been a considerable source of pension funding problems. Moreover, allowing and guaranteeing plant shutdown benefits raises fairness issues, since other participants and plan sponsors may bear the burden of paying for these unfunded benefits.

It is the view of the Committee that shutdown benefits are not similar to pension benefits. Shutdown benefits are not paid upon retirement from a plan. They are more like severance pay benefits provided to an employee upon termination from employment. Accordingly, HR 2830 prohibits a plan from providing benefits payable due to a plant shutdown or any other unpredictable contingent event. The bill defines `unpredictable contingent event' as an event other than the attainment of any age, the performance of any service, the receipt or derivation of any compensation, the occurrence of death or disability, or any other event which is reasonably and reliably predictable (as determined by the Secretary of Treasury).

Bradley D. Belt, Executive Director of the PBGC shares the Committee's concerns, and testified on April 26, 2005, before the Subcommittee on Retirement Security and Aging, Committee on Health, Education, Labor, and Pensions, United States Senate. Mr. Belt stated:





Improving disclosure

Another crucial aspect of comprehensive pension reform is improved disclosure to participants and beneficiaries. The Committee believes that additional and timely disclosure of plan information is imperative for employees to have in order to understand the financial status of their pension plan for their retirement security. In general current law requires plan sponsors to disclose `current liability' to participants and beneficiaries, which is not an accurate proxy for the disclosure of the financial health of a plan. 24

 [Footnote]  Participants and beneficiaries should be provided information on the general health of their pension plan, including an estimate of plan assets, liabilities, and the funded ratio, on a timely basis. Barbara D. Bovbjerg, Director of Education, Workforce, and Income Security Issues, U.S. General Accounting Office, testified on the need for additional disclosure of pension plan information:

[Footnote 24: Current liability means the present value of all accrued liabilities attributable to participants and beneficiaries under the plan.]

 In addition, only participants in plans below a certain funding threshold receive annual notices of the funding status of their plans. As a result, many plan participants, including participants of the Bethlehem Steel pension plan, did not receive such notifications in the years immediately preceding the termination of their plans. Expanding the circumstances under which sponsors must notify participants of plan underfunding might give sponsors an additional incentive to increase plan funding and would enable more participants to better plan their retirement. 25

 [Footnote]

[Footnote 25: Hearing on `The Pension Underfunding Crisis: How Effective Have Reforms Been?' before the Committee on Education and the Workforce, U.S. House of Representatives, 108th Congress, First Session, October 29, 2003, Serial No. 108-40.]

Increasing the maximum deductible amount

It is the view of the Committee that the rules relating to the maximum amount of deductible contributions that plan sponsors may make to a qualified pension plan must be reformed in order to encourage plan sponsors to make additional contributions. The current rules prohibit plan sponsors from making additional contributions to pension plans during good economic times, but impose accelerated contribution requirements on plan sponsors during an economic downturn or even a slight market fluctuation. Additionally, employers are generally subject to an excise tax for making contributions in excess of the maximum deductible amount.

H.R. 2830 permits employers to make additional contributions up to a new higher maximum deductible of up to the greater of: (1) the excess of the sum of 150 percent of a plan's funding target plus the normal cost for the plan year over the value of plan assets, or (2) the excess of the sum of the plan's at-risk funding target plus the at-risk normal cost for the plan year over the value of plan assets. Giving employers more flexibility to make generous contributions during good economic times will help provide workers and retirees greater retirement security by increasing the assets available to finance retirement benefits.

In a report released to the Committee on Education and the Workforce on October 29, 2003, the General Accounting Office indicated that raising the level of tax deductible contributions was one of the steps that could be taken to enhance incentives to increase funding of plans:

 IRC and ERISA restrict tax-deductible contributions to prevent plan sponsors from contributing more to their plan than is necessary to cover accrued future benefits. This can prevent employers from making plan contributions during periods of strong profitability. Raising these limitations might result in pension plans being better funded, decreasing the likelihood that they will be underfunded should they terminate. 26

 [Footnote]

[Footnote 26: United States General Accounting Office, `Private Pensions: Changing Funding Rules and Enhancing Incentives Can Improve Plan Funding,' No. GAO-04-176T.]

In recent years, plan sponsors have also expressed their concern that market volatility limits their ability to make additional contributions. Increasing the level of maximum deductible contributions is an important incentive to encourage plan sponsors to make additional contributions to their plans, which will ultimately result in a system with plans that are better funded. Lynn Franzoi, Senior Vice President of Benefits for Fox Entertainment Group, recently testified on the need for increasing the maximum deductible amount of contributions to pension plans:

 [I]ncreasing the maximum deductible contribution limit is long overdue. Employers should be able to contribute more to their plans in good times and not be forced to increase contributions during bad economic times. Some employers with plans that are now experiencing funding deficiencies would have liked to have increased contributions when they had cash on hand. However, they were limited by the maximum deductibility rules. Not only would their additional contributions have been nondeductible, but they would have had to pay a significant excise tax on the contributions. This cap on contributions works against companies and plan participants by requiring contributions when companies are financially strapped and prohibiting contributions when companies are prosperous. Thus, companies cannot insulate themselves and their plan participants against cyclical changes in the economy. Therefore, we fully support the increases to the maximum deductible contributions for defined benefit plans. 27

 [Footnote]

[Footnote 27: Hearing on H.R. 2830, the `Pension Protection Act of 2005,' before the Committee on Education and the Workforce, U.S. House of Representatives, 109th Congress, First Session, June 15, 2005 (to be published).]

Ensuring the viability of hybrid pension plans

Recent statistics show that the traditional defined benefit pension system is declining. Although the PBGC provides insurance protection to approximately 29,000 single employer pension plans covering 34.6 million people, the percentage of private sector workers covered by a defined benefit pension plan has dropped from 39 percent in 1975 to 21 percent in 2004. 28

 [Footnote]  The Committee believes that hybrid pension plans, such as cash balance plans, may reverse this trend if the rules surrounding these plans are clarified. It is the view of the Committee that hybrid pension plans represent the future of the defined benefit pension system and are a valuable tool in providing benefits that are not subject to market fluctuations and guaranteed by the PBGC.

[Footnote 28: `The Future of the Defined Benefit System and the Pension Benefit Guaranty Corporation,' General Accounting Office, Report No. GAO-05-578SP.]

Under hybrid plans, participants earn portable benefits more evenly over a career span, not just at the very end of a participant's career. This can result in greater retirement savings for workers who do not remain with the same employer for their entire career. As a result, a broader group of participants, including lower-income employees and women, earn greater benefits with shorter service under hybrid plans than traditional plans. On June 22, 2004, the Committee released a fact sheet which shows the benefits of hybrid plans and dispels some of the myths surrounding these plans:

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 `For example, if an employer wanted to offer employees a more portable retirement benefit through a cash balance formula that provides annual credits of five percent of pay, mandatory choice might lead the employer to instead freeze its defined benefit plan and adopt a 401(k) plan that provides contributions of five percent of pay. Under the 401(k) plan, employees would bear the entire risk of stock market declines.' Mitchell & Mulvey, Pension Research Council, Wharton School, University of Pennsylvania, Possible Implications of Mandating Choice in Corporate Defined Benefit Plans (2003).

Nancy M. Pfotenhauer, President, Independent Women's Forum, testified on the impact of hybrid plans on the retirement security of women:

 In the opinion of the Independent Women's Forum, traditional retirement and pension approaches simply fail to meet the needs of our changing society. Succinctly, they do not reflect the work patterns and demographics of American women. Whether it's the Wall Street Journal or Family Circle magazine, today's commentators agree that movement in and out of the workforce for American mothers has become the `new normal.' In fact, many are noting a current trend of mothers going back home when their children become teenagers . . . Luckily, pension innovations in the private sector hold promise. Cash balance, pension equity, and other hybrid plans combine attractive features of a traditional defined benefit plan (employer funding, employer assumption of risk of poor investment, government insurance and spousal protections) with attractive features of a defined contribution plan (individual accounts, an easily understood benefit formula and portability). 29

 [Footnote]

[Footnote 29: Hearing on `Examining Cash Balance Pension Plans: Separating Myth From Fact,' before the Committee on Education and the Workforce, U.S. House of Representatives, Second Session, July 7, 2004, Serial No. 108-67.]

It is the view of the Committee that the clarification of the current age discrimination rules under ERISA preserves the current ability of plan sponsors to amend or modify their pension plans prospectively in order to maximize plan sponsor flexibility and ensure the future of these valuable defined benefit plans for participants and beneficiaries. The private, employer-sponsored employee benefit system is voluntary; therefore, placing restrictions on plan sponsors regarding plan design or conversion approaches and mandating that plan sponsors guarantee a certain level of benefits, even benefits that have not been earned by participants, should be prohibited. Ms. Pfotenhauer also testified on the importance of maintaining a voluntary pension system:

 [A]ny adoption of restrictions that effectively limit the ability of companies to transition to hybrid plans places the financial well-being of the relatively few employees who have had the luxury of staying with one company for a long period of time (decades), have had the luxury of taking early retirement, and have had the luxury of taking their pension benefits in the form of an annuity rather than as a lump sum, ahead of all the employees who do not have these options. Regardless of one's perspective, any discussion about transition is appropriately done within the context of a clear understanding that these plans are voluntarily sponsored by employers. As such, an employer currently could decide to freeze benefit accruals or completely terminate plans altogether if costs become too burdensome. 30

 [Footnote]

[Footnote 30: Id.]

The need for clarification of the hybrid age discrimination issue is critical to the future of the defined benefit pension system. Congress must clarify the existing rules to ensure that companies continue to offer these valuable benefits. Ellen Collier, Director of Benefits, Eaton Corporation, testified on the issues and concerns that many plan sponsors face surrounding the uncertainty of sponsoring a hybrid pension plan:

 Now that the basic hybrid designs have been called into question, employers facing a set of circumstances similar to ours would have far fewer options. One choice would be to stay with the traditional pension design, which tends to deliver meaningful retirement benefits to a relatively small number of career-long workers, has limited value as a recruitment device in today's marketplace, and makes integration of new employees difficult. The other alternative would be to exit the defined benefit system and provide only a defined contribution plan, which while an important and popular benefit offering, provides none of the security guarantees inherent in defined benefit plans. Clearly, it is employees that lose out as a result of today's uncertainty surrounding hybrid plans. 31

 [Footnote]

[Footnote 31: Id.]

Providing for personalized investment advice

In addition to comprehensive defined benefit reforms, the Committee believes that all defined contribution participants, regardless of their income, net worth, or position, should be afforded the opportunity to receive personalized investment advice in order to strengthen the retirement security of the millions of American workers participating in these plans. The ability to provide workers with individualized investment advice has passed the house three times with bipartisan support. Most recently, investment advice legislation passed the House of Representatives on May 14, 2003, by a vote of 271-157, including 49 Democrats, as part of H.R. 1000, the `Pension Security Act.'

Assistant Secretary of EBSA Ann Combs addressed the importance of the investment advice provisions in the Pension Security Act:

 It's clear that people who participate in 401(k) plans want their employers and plans to provide more investment advice. According to a survey recently released by CIGNA Retirement and Investment Services, 89 percent of 401(k) investors want `specific information on investment decision-making.'

 Investment advice also encourages participation in employer-provided retirement plans. Studies conducted on behalf of the investment advisory firm Power show workers who receive advice are more likely to participate in savings plans and to save more than workers who never get any guidance . . . For many workers, investment advice decisions are intimidating. The Department is encouraged to see growing interest in the adoption of an alternative method sanctioned by the advisory opinion where workers turn over their decision making to the financial services firm who manages their accounts in accordance with the independent adviser's decisions. 32

 [Footnote]

[Footnote 32: Hearing on `The Pension Security Act: New Pension Protections to Safeguard the Retirement Savings of American Workers,' before the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, U.S. House of Representatives, 108th Congress, First Session, February 13, 2003, Serial No. 108-2.]

Scott Sleyster, Senior Vice President and President of Retirement Services and Guaranteed Products, Prudential Financial, testified about the importance of investment advice and addressed the so-called `conflict' issue claimed by opponents of individualized investment advice:

 [F]irst and foremost, you need to remember that the choices, the options that are being offered in DC [defined contribution] plans have already been reviewed by the plan sponsor. The industry has demanded open architecture for some time. So you typically have 11 to 15 choices and in most cases, our funds and any company's funds would probably only represent about a third of that. Second, the most important decision here isn't the individual fund or even fund manager. The most important issue in managing a portfolio is asset allocation. And models are built to design asset allocation, and that is really what designs the choices you have. So, that if you have 15 funds, you don't have 15 growth funds; you have some that are growth, some that are international, some that are small capped, some that are fixed income, [and] some that are stable value. And I think that what really drives this is asset allocation.

 [T]he issue here is how are we going to get advice to people in a cost effective manner. While you can probably come up with more esoteric and elegant solutions that seem pure, if you are asking the company to fund that or you are asking the participant to pay an additional fee for that, then you are going to end up with what we have ended up with already, which is tools out there that aren't utilized or options that plan sponsors don't want to pay for. Any you know, quite frankly, that is really the issue: How do we get investment advice to the average employee--remember, the average 401(k) balance, 45 percent of plan participants have less than $10,000. People aren't typically trying to go after those customers to sell them other products. The real question is, how do we get them advice that is as close to unbiased as possible, but also in a very cost efficient and simple manner. 33

 [Footnote]

[Footnote 33: Id.]

Additional prohibited transaction reforms

In addition to investment advice, it is the view of the Committee that, in general, the prohibited transaction rules under ERISA, which were passed over 30 years ago, must be updated in order for pension plans to provide the best retirement benefits to participants and beneficiaries. America's financial markets are the most efficient, dynamic, and transparent in the world. The dynamic marketplace of today is extremely different than it was 30 years ago with the introduction of electronic trading, new financial products, and faster execution. Furthermore, the financial services industry has dramatically consolidated, which makes the current prohibited transaction rules onerous and detrimental to the entire employee benefits system. In order to improve the overall operation and maintenance of pension plans, which will ultimately result in greater efficiency and, therefore, lower costs and fees paid by these plans, while continuing to protect the interests of participants and beneficiaries, the prohibited transaction rules should be safely updated to ensure that all pension plans are able to function with ease and efficiency in our current marketplace. Representative John Kuhl (R-NY) addressed the need for specific changes to the current prohibited transaction system:

 [T]hese are very targeted changes that will help solve many of the most pressing issues our financial markets are facing because of ERISA. They will benefit our pension plans and those who rely on efficient investment for their retirement security without undercutting important protections for investors. 34

 [Footnote]

[Footnote 34: Consideration of H.R. 2830, the `Pension Protection Act of 2005,' by the Committee on Education and the Workforce, U.S. House of Representatives, June 29, 2005.]

Representative Rob Andrews (D-NJ) also addressed the need to reform the prohibited transaction exemption rules within the current framework of ERISA in order to ensure the protections currently afforded to participants and beneficiaries:

 [T]hese changes will lower some transaction costs by eliminating redundant bonding; eliminating some other administrative responsibilities that really don't add any protection or value from the point of view of the pensioner, but do add costs, and therefore reduce return. 35

 [Footnote]

[Footnote 35: Id.]

MULTIEMPLOYER REFORMS


There is considerable attention surrounding single employer defined benefit reforms because of the recent and notable terminations of several large, underfunded traditional defined benefit pension plans as well as the PBGC's $23.3 billion deficit. However, it is the view of the Committee that the multiemployer pension system must also be reformed in order to ensure that all stakeholders, including participants, beneficiaries, and contributing employers, are protected from the possible negative consequences currently facing the system.

The need for legislation

There are currently 9.8 million workers and retirees participating in 1,587 multiemployer plans. Unfortunately, the major provisions in ERISA that govern multiemployer plans have not been amended since 1980. Until 2003, the PBGC's multiemployer insurance program had shown growing financial strength since enactment of the 1980 amendments. During 2003, however, the program (which is vulnerable to the same economic and demographic pressures that have threatened the single-employer program) sustained a net loss of $419 million, the largest one-year drop in the program's history. As a result, the program reported a year-end deficit of $261 million, the program's largest shortfall ever and its first year-end deficit in over 20 years. By the end of 2004, that deficit had declined to $236 million as the program reported net income of $25 million.

Since 1980, PBGC has received requests for financial assistance from 39 multiemployer plans. During 2004, 27 of these plans received assistance. At the end of fiscal year 2004, the multiemployer program had assets of $1.07 billion and total liabilities of $1.306 billion. Most of these liabilities--$1.295 billion--represent non-recoverable future financial assistance to the 27 plans currently receiving financial assistance and to other plans expected to receive such assistance in the future.

A March 2004 GAO report to the Subcommittee on Employer-Employee Relations discussed problems in multiemployer pension system:

 Following two decades of relative financial stability, multiemployer plans as a group appeared to have suffered recent and significant funding losses, while long-term declines in participation and new plan formation continued unabated. At the close of the 1990s, the majority of multiemployer plans reported assets exceeding 90 percent of total liabilities. Recently, however, stock market declines, coupled with low interest rates and poor economic conditions, appear to have reduced assets and increased liabilities for many plans. PBGC reported an accumulated net deficit of $261 million for its multiemployer program in 2003, the first since 1981. Meanwhile, since 1980, the number of plans has declined from over 2,200 to fewer than 1,700 plans, and there has been a long-term decline in the total number of active workers. PBGC monitors those multiemployer plans, which may, in PBGC's view, present a risk of financial insolvency. 36

 [Footnote]

[Footnote 36: `Private Pensions: Multiemployer Plans Face Short- and Long-Term Challenges,' General Accounting Office, Report No. GAO-04-423.]

The PBGC does not trustee the administration of insolvent multiemployer plans as it does with single-employer plans; however, it provides technical and financial assistance to troubled plans and guarantees a minimum level of benefits to participants in insolvent plans. PBGC loans have been rare, with loans to only 33 plans totaling $167 million since 1980.

Challenges facing the multiemployer pension system

The GAO report revealed several factors that pose challenges to the long-term prospects of the multiemployer system. Some are inherent to the multiemployer regulatory framework, such as the greater perceived financial risk and reduced flexibility for employers compared to other plan designs, which suggest that fewer employers will find these plans attractive. Furthermore, the long-term decline of collective bargaining results in fewer new participants to expand or create new multiemployer plans. Other factors threaten all defined benefit plans, including multiemployer plans: the growing trend among employers to choose defined contribution plans; the increasing life expectancy of workers, which raises the cost of plans; and continuing increases in employer health insurance costs, which compete with pensions for employer funding. 37

 [Footnote]

[Footnote 37: See id.]

It is the Committee's view that the multiemployer system has had a history of financial stability due to the fact that these plans pool their risk and that retiree benefits are not generally dependent upon the economic viability of one company. However, despite these facts, the multiemployer system faces some serious long-term structural issues. It is the Committee's view that the multiemployer pension system must be self sustaining for the long-term on behalf of workers and employers.

Barbara D. Bovbjerg, Director of Education, Workforce, and Income Security Issues at the General Accounting Office, echoed those concerns, citing the facts that individual employers in multiemployer plans cannot easily adjust their plan contributions in response to the firm's own financial circumstances, the long-term decline in collective bargaining growth, and an increasing number of retirees in comparison to active workers in the system:

 Although available evidence suggests that multiemployer plans are not experiencing anywhere near the magnitude of the problems that have recently afflicted the single employer plans, there is cause for concern . . . a number of factors pose challenges to the multiemployer plan system over the long term. 38

 [Footnote]

[Footnote 38: Hearing on `Reforming and Strengthening Defined Benefit Plans: Examining the Health of the Multiemployer Pension System,' before the Subcommittee on Employer-Employee Relations, U.S. House of Representatives, 108th Congress, Second Session, March 18, 2004, Serial No. 108-49.]

John McDevitt, Senior Vice President, United Parcel Service, noted the need for long-term reform:

 It is important to understand that the underlying problems are not simply caused by economic swings in the stock markets, which could be cured by `waiting out' the downturn. The problems are structural to the trucking industry, to the labor market in general, and to the past management of multiemployer pension plans. Short-term fixes dependent on market changes will not correct the financial solvency problems of multiemployer pension plans; therefore a need for real multiemployer pension plan reform is urgently needed. Doing nothing is not an option. 39

 [Footnote]

[Footnote 39: Id.]

Scott Weicht, Executive Vice President of Adolfson and Peterson Construction, talked about the importance of strengthening multiemployer plans on behalf of workers:

 I believe that these plans are a secure and viable way . . . to provide pension benefits to workers. In the construction arena, workers follow the job, not necessarily the company, and these plans provide the proverbial third leg of the retirement stool for people who would otherwise be left with only Social Security and whatever savings that they could muster. I know that Congress is extremely interested in retirement security, and I believe that these plans are an essential part of that discussion. 40

 [Footnote]

[Footnote 40: Id.]

Improving and preserving the multiemployer pension system

The Committee believes that the multiemployer pension funding and benefit structure needs to be reformed as soon as possible, including the addition of quantifiable measures of improvement and adjustments to the benefit structures for severely underfunded plans, in order to maintain the health of the plans that are in existence. Timothy Lynch, President and CEO of the Motor Freight Carriers Association, testified on the need for overall reforms which plan trustees should consider in order to improve the financial health of multiemployer plans:

 As multiemployer legislation is considered, serious consideration should be given to whether additional procedural or legal controls over the management of the plans could prevent serious funding issues. Something as simple as imposing funding policy guidelines that mandate clear targets for the plan's unfunded liability. The Teamsters Western Pension Fund has long had a funding policy that established the funding levels and requires the trustees to adjust benefits based on the levels. Plan modifications are virtually automatic.

 Additionally, consideration should be given to requiring that the level of plan benefits be more closely tied to the level of plan contributions and available assets. This may require a hard look at anti-cutback provisions. If trustees want to increase benefits during good times, there should be less restriction on their ability to reduce benefits during bad times. 41

 [Footnote]

[Footnote 41: Hearing on `Examining Long-Term Solutions to Reform and Strengthen the Defined Benefit Pension System,' before the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, U.S. House of Representatives, 108th Congress, Second Session, April 29th, 2004, Serial No. 108-55.]

It is the Committee's view that H.R. 2830 includes the much-needed reforms for multiemployer pension plans. As noted previously, the bill provides for quantifiable measures of improvement for plans that are underfunded at certain levels. A wide-ranging coalition of employer and labor groups have made significant progress in reaching consensus on proposals for reforms, and the H.R. 2830 includes many of these reforms. Andy Scoggin, Vice President for Labor Relations at supermarket retailer Albertsons, Inc., praised the Committee for addressing the problem:

 We believe that it provides a reasonable and rational framework for multiemployer pension plans to work through the problems now facing all pension plans. The reforms in H.R. 2830 are not a government bailout . . . instead, the proposed legislation will provide the tools which will allow multiemployer plans to solve our own pension problems without direct government intervention and without putting additional financial pressure on the Pension Benefit Guaranty Corporation . . . we believe, if Congress acts now, multiemployer plans can solve their own problems so that they do not become a burden on the federal government or the taxpayer. 42

 [Footnote]

[Footnote 42: Hearing on H.R. 2830, the `Pension Protection Act of 2005,' before the Committee on Education and the Workforce, U.S. House of Representatives, 109th Congress, First Session, June 15, 2005 (to be published).]

Timothy Lynch, President and CEO of the Motor Freight Carriers Association, agreed and testified on the need for Congress to act on reforming the multiemployer pension system in order to protect the pension benefits of workers and retirees could be at risk:

 [E]mployers are concerned about the current framework for multiemployer pension plans and strongly believe that if not properly addressed, the problems will increase and possibly jeopardize the ability of contributing employers to finance the pension plans. The end result could put at risk the pension benefits of their employees and retirees . . . we believe that H.R. 2830 meets the overall objective of alleviating the short-term consequences of funding deficits while promoting long-term funding reform for multiemployer pension plans. 43

 [Footnote]

[Footnote 43: Id.]

Judy Mazo, Senior Vice President and Director of Research for The Segal Company provides consulting services for many of the nation's multiemployer plans, said the status quo was unacceptable:

 Our aim is to make sure that, in the end, the environment for multiemployer plans will be improved, so that they, their contributing employers and their participants are all well-served . . . the alternative is not the continuation of the status quo, but a much worse fate that includes: the loss not only of accrued ancillary benefits, but a substantial portion of a participant's normal retirement benefit as plans are assumed by the PBGC; the demise of potentially large numbers of small businesses and the loss, not only of pension benefits, but the jobs from which such benefits stem; and an increase in taxpayer exposure at the PBGC, an agency that is already overburdened. 44

 [Footnote]

[Footnote 44: Id.]

It is the view of the Committee that multiemployer plans provide valuable, guaranteed benefits to union workers and retirees. The reforms included in H.R. 2830 will help to ensure the continuation of these plans by providing much-needed restrictions for underfunded plans and additional requirements for all parties with a vested interest in the health and future of these plans.

PRESENT LAW


SINGLE EMPLOYER PENSION PLANS


Minimum Funding Rules. Single employer defined benefit pension plans are subject to minimum funding requirements under ERISA and the Internal Revenue Code (`IRC'). 45

 [Footnote]  In general, the amount of contributions required for a plan year under the minimum funding rules is the amount needed to fund benefits earned during a plan year, which is considered a plan's `normal cost' for the year, plus that year's portion of other liabilities that are amortized over a period of years, such as investment losses or increased benefits related to past service credit. 46

 [Footnote]  The amount of required annual contributions is determined under one of a number of acceptable actuarial cost methods. Additional contributions are required under the deficit reduction contribution rules in the case of certain underfunded plans (described below). No contribution is required under the minimum funding rules in excess of the full funding limit (described below).

[Footnote 45: See ERISA Sec. 301-308 and IRC 412. Under section four of ERISA, certain plans are not subject to the minimum funding rules, including governmental plans, certain church plans, foreign plans, excess benefit plans, and certain plans maintained for the purpose of complying with applicable workers' compensation, unemployment compensation, or disability insurance laws.]

[Footnote 46: See ERISA3(28). The term `normal cost' is defined as the annual cost of future pension benefits and administrative expenses assigned, under an actuarial cost method, to years subsequent to a particular valuation date of a plan.]

Funding Standard Account. As an administrative aid in the application of the funding requirements, a defined benefit pension plan is required to maintain a special account called a `funding standard account' to which specified charges and credits are made for each plan year, including a charge for normal cost and credits for contributions to the plan. Other credits or charges may apply as a result of increases or decreases in past service liability as a result of plan amendments, experience gains or losses, gains or losses resulting from a change in actuarial assumptions, or a waiver of minimum required contributions.

In determining plan funding under an actuarial cost method, a plan's actuary generally makes certain assumptions regarding the future experience of a plan. These assumptions typically involve rates of interest, mortality, disability, salary increases, and other factors affecting the value of assets and liabilities. If the plan's actual unfunded liabilities are less than those anticipated by the actuary on the basis of these assumptions, then the excess is an experience gain. If the actual unfunded liabilities are greater than those anticipated, then the difference is an experience loss. Experience gains and losses for a year are generally amortized as credits or charges to the funding standard account over five years. If the actuarial assumptions used for funding a plan are revised and, under the new assumptions, the accrued liability of a plan is less than the accrued liability computed under the previous assumptions, the decrease is a gain from changes in actuarial assumptions. If the new assumptions result in an increase in the accrued liability, the plan has a loss from changes in actuarial assumptions. The accrued liability of a plan is the actuarial present value of projected pension benefits under the plan, including projected future benefit increases, which will not be funded by enough future contributions to meet the plan's normal cost. The gain or loss for a year from changes in actuarial assumptions is amortized as credits or charges to the funding standard account over ten years.

If minimum required contributions are waived, in accordance with the waiver rules and procedures established by the Secretary of the Treasury, the waived amount (referred to as a `waived funding deficiency') is credited to the funding standard account. The waived funding deficiency is then amortized over a period of five years, beginning with the year following the year in which the waiver is granted. Each year, the funding standard account is charged with the amortization amount for that year unless the plan becomes fully funded. If, as of the close of the plan year, charges to the funding standard account exceed credits to the account, then the excess is referred to as an `accumulated funding deficiency.'

If, as of the close of a plan year, the funding standard account reflects credits at least equal to charges, the plan is generally treated as meeting the minimum funding standard for the year and there is no required contribution.

In applying the funding rules, all costs, liabilities, interest rates, and other factors are required to be determined on the basis of actuarial assumptions and methods, each of which is reasonable (taking into account the experience of the plan and reasonable expectations), or which, in the aggregate, result in a total plan contribution equivalent to a contribution that would be obtained if each assumption and method were reasonable. In addition, the assumptions are required to offer the actuary's best estimate of anticipated experience under the plan.

Normal costs and other required amortization payments under a plan are determined on the basis of an actuarial valuation of the assets and liabilities of a plan. An actuarial valuation of plan assets and liabilities is required annually and is made as of a date within the plan year or within one month before the beginning of the plan year. However, a valuation date within the preceding plan year may be used if, as of that date, the value of a plan's assets is at least 100 percent of a plan's current liability. 47

 [Footnote]  For funding purposes, the actuarial value of plan assets may be used, rather than fair market value. The actuarial value of plan assets is the value determined under a reasonable actuarial valuation method that takes into account fair market value and is permitted under Department of Treasury regulations. However, any actuarial valuation method used must result in a value of plan assets that is not less than 80 percent of the fair market value of the assets and not more than 120 percent of the fair market value. In addition, if the valuation uses the average value of the plan assets, the values may not be averaged for more than the five most recent plan years, including the current year.

[Footnote 47: Current liability is generally defined as the present value of all liabilities attributable to participants and beneficiaries accrued to date under the plan.]

Credit Balances. If credits to the funding standard account exceed charges, the plan is considered to have a `credit balance.' Typically, a plan maintains a credit balance if contributions are made in excess of minimum required contributions or a plan experiences significant investment gains. The amount of the credit balance increases each year with interest at the rate used under the plan to determine costs, regardless of whether other plan assets experience investment losses. Credit balances can be used to reduce future required contributions.

Additional Contributions for Underfunded Plans. Under special funding rules known as the deficit reduction contribution rules, an additional charge to a plan's funding standard account is generally required for a plan year if the plan's funded current liability percentage for the plan year is less than 90 percent. 48

 [Footnote]  A plan's funded current liability percentage is generally the actuarial value of plan assets as a percentage of the plan's current liability. 49

 [Footnote]  As stated above, a plan's current liability means the present value of all liabilities to employees and their beneficiaries under the plan.

[Footnote 48: Under an alternative test, a plan is not subject to the deficit reduction contribution rules for a plan year if: (1) the plan's funded current liability percentage for the plan year is at least 80 percent, and (2) the plan's funded current liability percentage was at least 90 percent for each of the two immediately preceding plan years or each of the second and third immediately preceding plan years. The deficit reduction contribution rules apply to single employer plans, other than single employer plans with no more than 100 participants on any day in the preceding plan year. Single employer plans with more than 100 but not more than 150 participants are generally subject to lower contribution requirements under these rules.]

[Footnote 49: In determining a plan's funded current liability percentage for a plan year, the value of the plan's assets is generally reduced by the amount of any credit balance under the plan's funding standard account. However, this reduction does not apply in determining the plan's funded current liability percentage for purposes of whether an additional charge is required under the deficit reduction contribution rules.]

The deficit reduction contribution is the sum of: (1) the `unfunded old liability amount;' (2) the `unfunded new liability amount;' and (3) the expected increase in current liability due to benefits accruing during the plan year. The `unfunded old liability amount' is the amount needed to amortize certain unfunded liabilities under 1987 and 1994 transition rules. 50

 [Footnote]  The `unfunded new liability amount' is the applicable percentage of the plan's unfunded new current liability, which is the amount by which the plan's current liability exceeds the actuarial value of plan assets. The applicable percentage is generally 30 percent, but decreases by .4 of one percentage point for each percentage point by which the plan's funded current liability percentage exceeds 60 percent. 51

 [Footnote]  A plan may provide for unpredictable contingent event benefits, which are benefits that depend on contingencies that are not reliably and reasonably predictable, such as facility shutdowns or reductions in workforce due to company layoffs. The value of any unpredictable contingent event benefit is not considered in determining additional contributions until the event has occurred. As a result, plan sponsors are not able or required to fund for these benefits.

[Footnote 50: The transition rules were included in the 1987 Pension Protection Act and the 1994 Retirement Protection Act.]

[Footnote 51: For example, if a plan's funded current liability percentage is 85 percent (i.e., it exceeds 60 percent by 25 percentage points), the applicable percentage is 20 percent (30 percent minus 10 percentage points (25 multiplied by .4)). Under this calculation, the value of the plan's assets is reduced by the amount of any credit balance accumulated in the plan's funding standard account.]

The amount of the additional charge required under the deficit reduction contribution rules is the sum of two amounts: (1) the excess, if any, of (a) the deficit reduction contribution over (b) the contribution required under the normal funding rules; and (2) the amount (if any) required with respect to unpredictable contingent event benefits. The amount of the additional charge cannot exceed the amount needed to increase the plan's funded current liability percentage to 100 percent, taking into account any expected increase in current liability due to benefits accruing during the plan year.

Required Interest Rate and Mortality Table. Specific interest rate and mortality assumptions must be used in determining a plan's current liability for purposes of the special funding rule. For plan years beginning before January 1, 2004, the interest rate used to determine a plan's current liability must be within a permissible range of the weighted average of the interest rates on 30-year Treasury securities for the four-year period ending on the last day before the plan year begins. 52

 [Footnote]  The permissible range is generally from 90 percent to 105 percent (120 percent for plan years beginning in 2002 or 2003). 53

 [Footnote]  The interest rate used under the plan generally must be consistent with the assumptions which reflect the group annuity purchase rates which would be used by insurance companies to satisfy the liabilities under the plan. 54

 [Footnote]

[Footnote 52: The weighting used for this purpose is 40 percent, 30 percent, 20 percent and 10 percent, starting with the most recent year in the four-year period. Notice 88-73, 1988-2 C.B. 383.]

[Footnote 53: If the Secretary of the Treasury determines that the lowest permissible interest rate in this range is unreasonably high, the Secretary may prescribe a lower rate, but not less than 80 percent of the weighted average of the 30-year Treasury rate.]

[Footnote 54: See ERISA Sec. 302(b)(5)(B)(iii)(II).]

Under the Pension Funding Equity Act of 2004 (`PFEA'), a special interest rate applies in determining current liability for plan years beginning in 2004 or 2005. 55

 [Footnote]  For these plan years, the interest rate used must be within a permissible range of the weighted average of the rates of interest on amounts invested conservatively in long-term investment-grade corporate bonds during the four-year period ending on the last day before the plan year begins. The permissible range for these years is from 90 percent to 100 percent. The interest rate is to be determined by the Secretary of the Treasury on the basis of two or more indices that are selected periodically by the Secretary and are in the top three quality levels available. The Secretary of the Treasury is required to prescribe mortality tables and to periodically review, at least every five years, and update such tables to reflect the actuarial experience of pension plans and projected trends in such experience. 56

 [Footnote]  The Secretary of the Treasury has required the use of the 1983 Group Annuity Mortality Table. 57

 [Footnote]

[Footnote 55: Pub. L. No. 108-218. In addition, if certain requirements are met, reduced contributions under the deficit reduction contribution rules apply for plan years beginning after December 27, 2003, and before December 28, 2005, for plans maintained by commercial passenger airlines, employers primarily engaged in the production or manufacture of a steel mill product or in the processing of iron ore pellets, or a certain labor organization.]

[Footnote 56: See ERISA Sec. 302(d)(7)(C)(ii).]

[Footnote 57: Rev. Rul. 95-28.]

Deduction Limit. Contributions to single employer pension plans are deductible up to certain limits. In general, a plan sponsor may deduct the greater of: (1) the amount necessary to satisfy the minimum funding requirement for the plan year; or (2) the amount of the plan's normal cost for the year plus the amount necessary to amortize certain unfunded liabilities over 10 years, subject to the full funding limitation for the year (see explanation of a plan's full funding limitation below). The maximum deductible amount is not less than the present value of the plan's unfunded current liability. 58

 [Footnote]

[Footnote 58: In general, single employer plans are subject to a maximum deductible amount of not less than 120 percent of current liability over the value of plan assets.]

If an employer sponsors both a defined benefit and a defined contribution plan that includes the same participants, the total deduction allowable for the employer in a year is the greater of: (1) 25 percent of employee compensation; or (2) the contribution necessary to meet the defined benefit plan's minimum funding requirement.

In general, employers are subject to a 10 percent excise tax for the amount of any nondeductible contributions made to a plan in a plan year.

Full Funding Limitation. Under ERISA, no contributions are required under the minimum funding rules in excess of the full funding limitation. The full funding limitation is the excess, if any, of the accrued liability under the plan, including normal cost, over the lesser of (a) the market value of plan assets, or (b) the actuarial value of plan assets. However, the full funding limitation may not be less than the excess, if any, of 90 percent of the plan's current liability over the actuarial value of plan assets.

Timing of Plan Contributions. In general, plan contributions required to satisfy the funding rules must be made within 8 1/2  months after the end of the plan year. If the contribution is made by such due date, the contribution is treated as if it were made on the last day of the plan year. In the case of a plan with a funded current liability percentage of less than 100 percent for the preceding plan year, estimated contributions for the current plan year must be made in quarterly installments during the current plan year. 59

 [Footnote]  As stated above, the amount of each required installment is 25 percent of the lesser of 90 percent of the amount required to be contributed for the current plan year or 100 percent of the amount required to be contributed for the preceding plan year.

[Footnote 59: See ERISA Sec. 302(e).]

Failure to Make Required Contributions. An employer is generally subject to an excise tax of 10 percent of the amount of the funding deficiency if it fails to make minimum required contributions and fails to obtain a waiver from the Internal Revenue Service. 60

 [Footnote]  In addition, a tax of 100 percent may be imposed if the funding deficiency is not corrected within a certain period. If the total of the contributions the employer fails to make, with interest, exceeds one million dollars and the plan's funded current liability percentage is less than 100 percent, a lien arises in favor of the plan with respect to all property of the employer and the members of the employer's controlled group. The amount of the lien is the total amount of the missed contributions, including interest.

[Footnote 60: See ERISA Sec. 303. In general, the Secretary of the Treasury is permitted to waive all or a portion of a plan's minimum required contributions or extend the amortization periods applicable to any net experience loss.]

Limitations on Benefit Increases, Distributions, and Accruals. ERISA provides that a defined benefit plan may not adopt an amendment which results in an increase in the plan's current liability if the funded current liability percentage of a plan is less than 60 percent, including any amendment that would cause a plan's current liability percentage to fall below 60 percent, unless the plan sponsor provides security, such as real property or equities. 61

 [Footnote]  Other than the above limitation, ERISA only provides for a prohibition on benefit increases if a plan is involved in a bankruptcy proceeding. ERISA also limits certain benefit payments if a plan has a liquidity shortfall, which occurs if a plan's liquid assets are less than the disbursements from the plan in the preceding plan year.

[Footnote 61: See ERISA Sec. 307.]

Under current law, plans are not permitted to provide severance benefits; however, plans may provide for subsidized early retirement benefits and unpredictable contingent event benefits. Unpredictable contingent event benefits are benefits that depend on certain events or other contingencies that are not reasonably predictable, such as a facility shutdown. These benefits are considered protected benefits under ERISA and may not be eliminated.

Disclosure. ERISA requires plan administrators/fiduciaries to file an annual report with the Secretary of Labor, known as a Form 5500. This report includes certain plan information, including an actuarial report containing plan asset and liability information, information regarding participant distributions, and plan contributions. This form is due on the last day of the seventh month after the end of the plan year. The summary of this report, otherwise known as a plan's summary annual report, must be provided to participants within two months after the due date of the annual report.

Single employer defined benefit plan participants have the right to certain notices regarding their plan's funded status. In general, if an employer is subject to a variable rate premium (discussed below) because the plan is underfunded, participants are entitled to receive a notice regarding the plan's funded status and PBGC benefit guarantee limits. 62

 [Footnote]  The employer is also required to notify plan participants if it fails to make the required contributions. 63

 [Footnote]  In addition, the PFEA requires multiemployer plans to provide an annual funding notice to participants, contributing employers, labor organizations, and the PBGC regarding the plan's funded status. 64

 [Footnote]

[Footnote 62: See ERISA Sec. 4011.]

[Footnote 63: See ERISA Sec. 101(d).]

[Footnote 64: See ERISA Sec. 101(f).]

Executive Compensation. Amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includable in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are satisfied. 65

 [Footnote]  For example, distributions from a nonqualified deferred compensation plan may be allowed only at certain times and upon certain events. Rules also apply for the timing of elections. If the requirements are not satisfied, in addition to current income inclusion, interest at the underpayment rate plus one percentage point is imposed on the underpayments that would have occurred had the compensation been includable in income when first deferred, or if later, when not subject to a substantial risk of forfeiture. The amount required to be included in income is also subject to a 20 percent additional tax.

[Footnote 65: See IRC Sec. 409A.]

In the case of assets set aside in a trust (or other arrangement) for purposes of paying nonqualified deferred compensation, such assets are treated as property transferred in connection with the performance of services under Internal Revenue Code section 83 at the time set aside if such assets (or trust or other arrangement) are located outside of the United States or at the time transferred if such assets (or trust or other arrangement) are subsequently transferred outside of the United States. A transfer of property in connection with the performance of services under Code section 83 also occurs with respect to compensation deferred under a nonqualified deferred compensation plan if the plan provides that upon a change in the employer's financial health, assets will be restricted to the payment of nonqualified deferred compensation. In addition to current income inclusion, interest at the underpayment rate plus one percentage point is imposed on the underpayments that would have occurred had the compensation been includable in income when first deferred, or if later, when not subject to a substantial risk of forfeiture. The amount required to be included in income is also subject to a 20 percent additional tax.

Benefit Accruals. ERISA provides that benefit accruals may not decrease on account of the attainment of any age. Under a defined benefit plan, an employee's benefit accrual may not cease or be reduced because of the attainment of any age. 66

 [Footnote]  Furthermore, accrued benefits may not decrease on account of increasing age or service. 67

 [Footnote]  However, a plan does not fail to satisfy the benefit accrual rules by imposing a limitation on the amount of benefits that a plan provides or a limitation on the number of years of service or participation that are taken into account in determining accrued benefits. Furthermore, a plan does not fail the benefit accrual rules because the subsidized portion of an early retirement benefit is disregarded in determining benefit accruals. Finally, ERISA does not prohibit the modification of any benefit formula on a prospective basis. In other words, ERISA does not require a plan to provide a minimum benefit level or vest participants in benefits that have not been earned under the plan's formula.

[Footnote 66: See ERISA Sec. 204(b)(1)(H).]

[Footnote 67: See ERISA Sec. 204(b)(1)(G).]

PBGC Premiums. ERISA requires all single employer plans covered by the PBGC insurance program to pay flat-rate premiums. Flat-rate premiums are based on the number of plan participants. Under current law, the premium is set at $19 per participant. ERISA also requires certain underfunded plans to pay a variable rate premium. The amount of the variable rate premium is also set by statute and is $9 per $1000 of unfunded vested benefits; however, there is an exemption from this requirement if the plan meets its full funding limit. In determining the amount of unfunded vested benefits, the interest rate used is 85 percent of the annual rate of interest of the corporate bond rate provided under the PFEA. 68

 [Footnote]

[Footnote 68: The PFEA rate will expire on December 31, 2005. The interest rate to be used after the expiration of the PFEA is 85 percent of the interest rate on 30-year Treasury bonds.]

MULTIEMPLOYER PENSION PLANS


As stated above, multiemployer pension plans are defined benefit pension plans maintained by two or more employers in a particular trade or industry, such as trucking or construction, that are collectively bargained between an employer and a labor union. While single employer plan sponsors generally may adjust their pension contributions to meet funding requirements, the contributions of individual employers in multiemployer plans cannot be easily modified because level of contributions to such plans is generally set as part of the bargaining process, and the level of benefits is determined by the plan trustees.

Multiemployer plans have certain characteristics that are different from single employer plans. While multiemployer plans are subject to many of the same rules as single employer plans, present law also applies special rules to such plans in recognition of their differing features.

Multiemployer Funding Rules. In general, multiemployer plans are subject to the same general minimum funding rules as single employer plans. However, special rules apply to multiemployer plans in some instances. For example, the amortization of a plan's experience gains and losses is extended over a longer period of time. Furthermore, multiemployer plans are not subject to the additional deficit reduction contribution rules if a plan becomes underfunded by a certain percentage.

Like single employer plans, multiemployer plans are required to maintain a funding standard account to which specified charges and credits are made for each plan year, including a charge for normal cost and credits for contributions to the plan as well as charges and credits for any decreases or increases in past service liability 69

 [Footnote]  as a result of plan amendments or experience gains or losses, gains or losses resulting from a change in actuarial assumptions, or a waiver of minimum required contributions.

[Footnote 69: Past service liability is a term used to describe different amortization charges to the funding standard account. For plans in existence on January 1, 1974, past service liability is amortized over 40 years. For plans in existence after January 1, 1974, past service liability is amortized over 30 years. Any plan amendments which result in past service liabilities to a plan are amortized over 30 years.]

A multiemployer pension plan is required to use an acceptable actuarial cost method to determine the above factors included in the plan's funding standard account each year. Generally, an actuarial cost method divides the cost of benefits under the plan into annual charges consisting of two elements for each plan year which include the plan's normal cost and the amortized portions of any additional costs of the plan. The plan's normal cost for a plan year represents the cost of current and future benefits allocated to the year by the funding method used by the plan for active and inactive employees. The amortized portions of any additional costs of the plan for a plan year are the cost of future benefits that would not be met by future normal costs, including any costs that may be attributable to net experience losses, changes in actuarial assumptions, and amounts necessary to make up funding deficiencies for which a waiver was obtained.

In general, the portion of the cost of a plan that is required to be paid for a particular year depends upon the nature of the cost. The normal cost for a year is generally required to be funded currently; however, many plans today cannot afford to do this. The other costs associated with the plan are amortized over a period of years. In the case of a multiemployer plan, past service liability is amortized over 40 or 30 years depending on how the liability arose, experience gains and losses 70

 [Footnote]  are amortized over 15 years, gains and losses from changes in actuarial assumptions 71

 [Footnote]  are amortized over 30 years, and waived funding deficiencies are amortized over 15 years. The above plan costs, which are charged to the funding standard account, require an offsetting credit by employer contributions.

[Footnote 70: Experience gains and losses are determined by a plan actuary's assumptions regarding the future experience of a plan. These assumptions generally include interest rates, mortality, disability, salary increases, and other factors affecting the value of assets and liabilities.]

[Footnote 71: Gains and losses from changes in actuarial assumptions generally arise if the plan's assumptions are modified. A plan will have a gain if the accrued liability of a plan using the new assumptions is less than the accrued liability calculated using the previous assumptions. A plan will have a loss if the accrued liability of a plan using the new assumptions is greater than the accrued liability calculated using the previous assumptions. Accrued liabilities are the excess of the present value of all projected future benefits cost and administrative expenses for all plan participants and beneficiaries over the present value of all future contributions for the normal cost to a plan.]

As with single employer plans, if, as of the close of the plan year, charges to the funding standard account exceed credits to the account, then the excess is referred to as an accumulated funding deficiency. If credits to the funding standard account exceed charges, the plan has a credit balance which can be used to reduce future required contributions.

Similar to single employer plans, the actuarial value of plan assets may be used, rather than fair market value, with the same applicable valuation methods that must result in a value of plan assets that is not less than 80 percent of the fair market value of the assets and not more than 120 percent of the fair market value or an average value that may not be averaged over more than the five most recent plan years, including the current year. In applying the funding rules to a multiemployer plan, all costs, liabilities, interest rates, and other factors are required to be determined on the basis of actuarial assumptions and methods, which in the aggregate, are reasonable (taking into account the experiences of the plan and reasonable expectations). In addition, the assumptions are required to offer the actuary's best estimate of anticipated experience under the plan.

Funding waivers and amortization of waived funding deficiencies

In general, the Secretary of the Treasury is permitted to waive all or a portion of the contributions required under the minimum funding standard for the year. In the case of a multiemployer plan, a waiver may be granted if 10 percent or more of the contributing employers cannot make the required contribution without substantial business hardship and if requiring the contribution would be adverse to the interests of plan participants in the aggregate. The minimum funding requirements may not be waived with respect to a multiemployer plan for more than five out of any 15 consecutive years.

If a funding deficiency is waived for a multiemployer plan, the waived amount is credited to the funding standard account and amortized over a period of 15 years. Each year, the funding standard account is charged with the amortization amount for that year unless the plan becomes fully funded. 72

 [Footnote]

[Footnote 72: See IRC Sec. 1274. The rate used to determine the amortization on the waived amount is 150 percent of the federal mid-term rate.]

Extension of Amortization Periods. The Secretary of the Treasury may extend any amortization periods for up to 10 years if the Secretary finds that the extension would carry out the purposes of ERISA and would provide adequate protection for participants under the plan and if such Secretary determines that the failure to permit such an extension would: (1) result in a substantial risk to the voluntary continuation of the plan or a substantial curtailment of pension benefit levels or employee compensation; and (2) be adverse to the interests of plan participants in the aggregate. 73

 [Footnote]

[Footnote 73: The interest rate with respect to extensions of amortization periods is the same as that used with respect to waived funding deficiencies.]

Withdrawal Liability. The Multiemployer Pension Plan Amendments Act of 1980 (`MEPPA') amended ERISA to require that employers pay withdrawal liability to a multiemployer plan if the employer withdraws from the plan. 74

 [Footnote]  Prior to the enactment of the withdrawal liability rules, employers who had an obligation to contribute to the plan within five years of the plan's termination were liable to the PBGC for a share of unfunded benefits; however, certain employer withdrawals from a multiemployer plan would not necessarily impair the financial health of the plan if the industry was stable and the contributing employer was replaced by a new employer or by an expansion of covered employment by other contributing employers. However, concerns were raised that the withdrawal of larger contributing employers may result in increased financial burdens on remaining contributing employers. Therefore, the withdrawal liability rules included in MEPPA were designed to address these concerns and help promote the financial health of multiemployer plans by requiring certain withdrawing employers to pay a portion of unfunded benefits for their employees that exist at the time of withdrawal.

[Footnote 74: See Public Law No. 96-364.]

Determination of Withdrawal Liability. In general, contributing employers may withdraw from a multiemployer plan either by a `complete' or a `partial' withdrawal liability. Current law requires that certain employers who withdraw from a multiemployer plan in a complete or partial withdrawal are liable to the plan in the amount determined to be the employer's withdrawal liability. 75

 [Footnote]  In general, a `complete withdrawal' occurs when the contributing employer has permanently ceased operations under the plan or has permanently ceased to have an obligation to contribute. 76

 [Footnote]  In determining if there is a complete withdrawal, special rules apply in the case of the building and construction industry, the entertainment industry, and employers primarily engaged in the long and short haul trucking industry, the household goods moving industry, or the public warehousing industry. 77

 [Footnote]

[Footnote 75: See ERISA Sec. 4201.]

[Footnote 76: ERISA Sec. 4203.]

[Footnote 77: In the case of employers engaged in the long and short haul trucking industry, the household goods moving industry, or the public warehousing industry, a complete withdrawal occurs only if: (1) an employer permanently ceases to have an obligation to contribute under the plan or permanently ceases all covered operations under the plan; and (2) the PBGC determines that the plan has suffered substantial damage to its contribution base as a result of such cessation, or the employer fails to furnish a bond or amount held in escrow in an amount equal to 50 percent of the withdrawal liability of the employer.]

A `partial withdrawal' occurs if, on the last day of a plan year, there is a 70 percent contribution decline by contributing employers for such plan year or there is a partial cessation of an individual employer's contribution obligation. 78

 [Footnote]  A partial cessation of the employer's obligation occurs if: (1) the employer permanently ceases to have an obligation to contribute under one or more, but fewer than all, collective bargaining agreements under which obligated to contribute, but the employer continues to perform work in the jurisdiction of the collective bargaining agreement; or (2) an employer permanently ceases to have an obligation to contribute under the plan with respect to work performed at one or more, but fewer than all, of its facilities, but continues to perform work at the facility of the type for which the obligation to contribute ceased. 79

 [Footnote]

[Footnote 78: See ERISA Sec. 4205(a).]

[Footnote 79: See ERISA Sec. 4205(b)(2).]

When a contributing employer withdraws from a multiemployer plan, the plan sponsor is required to calculate the amount of the employer's withdrawal liability, notify the employer of the amount of the withdrawal liability, and collect the amount of the withdrawal liability from the employer. The contributing employer's withdrawal liability is based on the plan's unfunded vested benefits for the plan years preceding the withdrawal. After the withdrawal, the plan sponsor must notify the contributing employer of the amount of liability and schedule of payments. In general, amounts are required to be paid over the period of years necessary to amortize the amounts in level annual payments; however, in certain instances where the amortization period exceeds 20 years, the employer's liability is limited to the first 20 annual payments. 80

 [Footnote]

[Footnote 80: See ERISA Sec. 4219(c).]

Current law provides rules limiting withdrawal liability in certain instances. The amount of unfunded vested benefits allocable to an employer is limited in the case of certain sales of all or substantially all of the employer's assets and in the case of an insolvent employer undergoing liquidation or dissolution. 81

 [Footnote]  A multiemployer plan, other than a plan which primarily covers employees in the building and construction industry, may adopt a rule that an employer who withdraws from the plan is not subject to withdrawal liability if: (1) the employer first had an obligation to contribute to the plan after the date of enactment of MEPPA; (2) contributed to the plan for no more than the lesser of six plan years or the number of years required for vesting under the plan; (3) was required to make contributions to the plan for each year in an amount equal to less than two percent of all employer contributions for the year; and (4) never avoided withdrawal liability because of the special rule. 82

 [Footnote]

[Footnote 81: See ERISA Sec. 4225.]

[Footnote 82: See ERISA Sec. 4210.]

Under ERISA, the plan sponsor's assessment of withdrawal liability is presumed correct unless the employer shows by a preponderance of the evidence that the plan sponsor's determination of withdrawal liability was unreasonable or erroneous. In other words, the employer has the burden of proof to show that his withdrawal from the plan was not to evade or avoid withdrawal liability. 83

 [Footnote]  Disputes between an employer and plan sponsor concerning withdrawal liability are resolved through arbitration, which can be initiated by either party. The first payment of withdrawal liability determined by the plan sponsor is generally due no later than 60 days after demand, even if the employer contests the determination of liability. If the employer contests the determination, payments of withdrawal liability must be made by the employer until the arbitrator issues a final decision with respect to the determination submitted for arbitration. 84

 [Footnote]

[Footnote 83: See ERISA Sec. 4212(c).]

[Footnote 84: See ERISA Sec. 4221(f). The plan sponsor has the burden of proof that the principal purpose of a transaction that occurred before January 1, 1999, was to evade or avoid withdrawal liability if the transaction occurred at least 5 years before the date of withdrawal. Employers are not obligated to make withdrawal liability payments until a final decision is rendered.]

Multiemployer Plan Reorganization and Insolvency. If a multiemployer plan experiences severe financial problems, certain modifications to the single-employer plan funding rules apply and these plans are considered to be in `reorganization status.' A plan is in reorganization status if contributions needed to equal the charges and credits to its funding standard account exceed the amount of a plan's vested benefits charge. 85

 [Footnote]  The plan's vested benefits charge is generally the amount needed to amortize, in equal annual installments, unfunded vested benefits under the plan over: (1) 10 years in the case of obligations attributable to participants in pay status; and (2) 25 years in the case of obligations attributable to other participants. A plan in reorganization status must increase funding to specified levels and may reduce benefits to the level guaranteed by the PBGC. A cap on year-to-year contribution increases and other relief is available to employers that continue to contribute to the plan. Any failure to make the required contributions results in a funding deficiency.

[Footnote 85: See ERISA Sec. 4241.]

The plan sponsor must provide notice that the plan is in reorganization status and that, if contributions to the plan are not increased, accrued benefits under the plan may be reduced and/or an excise tax may be imposed. 86

 [Footnote]  Notice must be provided to every employer who has an obligation to contribute under the plan and to each employee organization representing plan participants.

[Footnote 86: See id.]

Benefit limitations and adjustments also apply to plans in reorganization status including limitations on lump sum distributions 87

 [Footnote]  and adjustments in accrued benefits. 88

 [Footnote]

[Footnote 87: See ERISA Sec. 4241(c).]

[Footnote 88: See ERISA Sec. 4244A.]

In addition, the law presumes there is an increased likelihood that a plan in reorganization will become insolvent. 89

 [Footnote]  In general, insolvent plans do not have sufficient resources to pay benefits under the plan when they are due. If a multiemployer plan is insolvent, benefit payments must be reduced to level of benefits that the plan can pay with its available resources.

[Footnote 89: See ERISA Sec. 4245.]

PBGC's Role. PBGC's insurance programs were created as part of ERISA in 1974 to assure retirees pension benefit protection. In 1980, MEPPA strengthened the pension protection program for multiemployer plans. As stated above, the amendments established mandatory requirements for financially weak multiemployer plans in reorganization and imposed new financial requirements on employers withdrawing from multiemployer plans.

PBGC's multiemployer program is funded and maintained separately from the single employer program. Each multiemployer plan pays an annual insurance premium of $2.60 per participant to the PBGC. Under the multiemployer program, PBGC provides financial assistance through loans to plans that are insolvent. Before a plan receives financial assistance from PBGC, it must suspend payment of all benefits in excess of the guaranteed level.

MEPPA established a benefit guarantee limit for participants in multiemployer plans equal to the participant's years of service multiplied by the sum of: (1) 100 percent of the first five dollars of the monthly benefit accrual rate; and (2) 75 percent of the next fifteen dollars of the accrual rate. For a participant with 30 years of service under the plan, the maximum PBGC-guaranteed benefit was $5,850 per year. This benefit guarantee formula remains in effect for participants in multiemployer plans that received financial assistance from PBGC at any time during the period from December 22, 1999, to December 21, 2000. The Consolidated Appropriations Act of 2001, 90

 [Footnote]  signed into law on December 21, 2000, increased the benefit guarantee in multiemployer plans to the product of a participant's years of service multiplied by the sum of: (1) 100 percent of the first $11 of the monthly benefit accrual rate; and (2) 75 percent of the next $33 of the accrual rate. For someone with 30 years of service, this raised the guaranteed limit to approximately $13,000.

[Footnote 90: Public Law No. 106-554.]

ERISA's Prohibited Transaction Rules. ERISA prohibits certain transactions between a qualified plan and a party-in-interest. 91

 [Footnote]  Under current law, a party-in-interest to a plan includes plan fiduciaries, plan service providers, an employer, employee organizations with members participating in a plan, and certain persons with an ownership interest in the plan sponsor.

[Footnote 91: See ERISA Sec. 3(14).]

In general, for a party-in-interest, the transaction rules prohibit: (1) the sale, exchange, or leasing of property; (2) the lending of money or extension of credit; (3) the furnishing of goods, services, or facilities; and (4) the transfer to or use by or for the benefit of the income or assets of the plan. 92

 [Footnote]  Fiduciaries are also subject to additional rules which include: (1) any self-dealing with the plan's assets in his own interest or account; (2) any transactions for himself or on behalf of another party whose interests are adverse to the interest of the plan or its participants and beneficiaries; or (3) the receipt of any consideration for his own personal account from any party dealing with the plan.

[Footnote 92: See ERISA Sec. 406(a).]

An excise tax and, in certain instances, a civil penalty is assessed against any person who engages in a prohibited transaction.

SECTION-BY-SECTION


Sec. 1. Short title and table of contents

This Act may be cited as the Pension Protection Act of 2005.

TITLE I--REFORM OF FUNDING RULES FOR SINGLE EMPLOYER DEFINED BENEFIT PENSION PLANS


SUBTITLE A--AMENDMENTS TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974


Sec. 101. Minimum funding standards

Section 101 repeals sections 302-308 of the Employee Retirement Income Security Act of 1974 and establishes new minimum funding standards that single employer defined benefit plans must meet. Minimum required contributions must be paid by the employer(s) responsible for making contributions to the plan. The bill also provides for waivers to the minimum funding standards in the case of business hardship when an employer is operating at an economic loss, when there is substantial unemployment or under employment in the trade or business, when the sales and profits of the industry concerned are depressed or declining, and when it is reasonable to conclude the plan will be continued only if the waiver is granted. The application for a waiver must be submitted to the Secretary of the Treasury no later than 2 1/2  months after the close of the plan year. Prior to the granting of a waiver, a notice is required to be provided to each participant, beneficiary, and employee organization of the filing of the application of the waiver.

Sec. 102. Funding rules for single-employer defined benefit pension plans

Under section 102, a single employer plan's minimum required contribution for a plan year is the target normal cost of the plan for the year plus any shortfall amortization charge (if applicable) for the plan year and any waiver amortization charge (if applicable) for the plan year. The target normal cost of a plan for a plan year is the present value of all liabilities attributable to benefits which are expected to accrue or to be earned under the plan during the plan year. If a plan's assets (not including any pre-funding balance and funding standard carryover balance) are greater than the plan's funding target (the present value of all liabilities under the plan for the plan year), 93

 [Footnote]  the minimum required contribution for a plan year is the target normal cost minus any excess assets held by the plan. A shortfall amortization charge applies if a plan has any unfunded liability shortfall as of the first day of any plan year. The shortfall amortization charge for any plan year is the amount necessary to amortize any unfunded liability shortfall for a plan year over the current and six succeeding plan years in level payments, using the effective rate of interest for the plan. Unfunded liability shortfall, otherwise known as a funding shortfall, is defined as the excess (if any) of a plan's funding target for the plan year over the value of plan assets for any plan year (not including the value of any assets held in a plan's pre-funding balance and carryover balance). If a plan's assets for any plan year (including any funding standard carryover balance attributable to the funding rules in effect prior to January 1, 2006, plus any assets held in the plan's pre-funding balance, unless the pre-funding balance is intended to be used to reduce the minimum required contribution for the plan year) exceed the plan's liabilities for the plan year, any shortfall amortization charge applicable for any previous plan year is reduced to zero.

[Footnote 93: A plan's funding target attainment percentage is the ratio, expressed as a percentage, which the value of plan assets for the year bears to the funding target for the year.]

For purposes of determining whether a plan has a funding shortfall and is, therefore, subject to the variable rate premium requirements, a funding target transition rule shall apply to any plan that was not subject to the deficit reduction contribution requirements for the plan year beginning in 2005. The applicable percentage of the funding target is as follows.





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In the case of a plan year beginning in calendar year: The applicable percentage is: 


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2006                                                   92 percent.                   


2007                                                   94 percent.                   


2008                                                   96 percent.                   


2009                                                   98 percent.                   


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Credit for excess assets: If the value of plan assets which are held by the plan immediately before the valuation date exceed the funding target of the plan for the plan year, the minimum required contribution with respect to the plan is the target normal cost, reduced by the excess assets.

Funding target: The funding target of a plan for a plan year is the present value of all liabilities attributable to participants and beneficiaries under the plan for the plan year.

Waiver amortization charge: A waiver amortization charge (if any) for a plan year is the aggregate total of the waiver amortization installments for such plan year with respect to the waiver amortization bases for each of the five preceding plan years. The plan sponsor determines, with respect to the waiver amortization base of the plan for any plan year, the amounts necessary to amortize the waiver amortization base in five level, annual installments, using the applicable segment rates determined under the modified yield curve. The waiver amortization base of a plan for a plan year is the amount of the waived funding deficiency.

Reduction of minimum required contribution by pre-funding balance and funding standard carryover balance: Any plan assets that are included in a plan's funding standard account as a positive balance as a result of contributions made in excess of a plan's required minimum contribution prior to the date of enactment of the bill remain intact. These additional plan assets are referred to as a funding standard carryover balance. Any new contributions made in excess of the minimum required contribution for a plan will be credited to a pre-funding balance. Each year, the pre-funding balance and the funding standard carryover balance must reflect the same fair market value of gains and losses as the plan assets experience for each year. 94

 [Footnote]  In other words, the actual rate of return is the net fair market value gain or loss experienced by all plan assets, taking into account plan contributions, distributions and other payments in accordance with regulations issued by the Secretary of the Treasury.

[Footnote 94: The plan assets will continue to be actuarially adjusted.]

Application of balances: To determine whether a plan meets its funding target for a plan year, plan assets will not be reduced by the value of any carryover credit balance or any new pre-funding balance. Plan assets are required to be reduced by both the carryover credit balance and the pre-funding account balance for the following calculations: (a) to determine whether the plan's target normal cost can be reduced by any excess assets credit for a plan that is over 100 percent funded; (b) to determine the shortfall amortization charge for a plan year (if required to be made); (c) to determine whether the plan is in at-risk status; (d) to determine whether there is an increase in quarterly payments of a plan; and (e) to determine whether any benefit limitations apply. However, if all plan assets (including a plan's funding standard carryover balance and pre-funding balance) equal the plan's funding target, the benefit limitations provided under this bill do not apply. In addition, a plan may elect to apply the balances against a plan's minimum required contribution. However, a plan may not elect to reduce its minimum required contribution for a plan year if the plan's target liability for the preceding plan year is less than 80 percent. For purposes of determining whether a plan's funding target is at least 80 percent funded and can apply the pre-funding balance to offset its minimum required contribution for a plan year, such pre-funding balance is subtracted from the plan's assets. Plan assets are not reduced by any funding standard carryover balance in determining whether a plan's funding target is at least 80 percent funded. Plan assets are not reduced by any funding standard carryover balance for purposes of calculating a plan's target normal cost for the plan year if the plan is funded above 80 percent. Any balance in the pre-funding account, as well as any carryover credit balance, is reduced each year by the amount of reduction of the minimum required contribution.

A plan cannot use the carryover balance to reduce the minimum required contribution for a plan if it is also used to increase plan assets in order to avoid any shortfall amortization charge in the same plan year. In addition, no amount of the pre-funding balance may be used to offset a plan's minimum required contribution if the plan has a funding standard carryover balance greater than zero.

Valuation date for plan assets and liabilities: The valuation date for plans with greater than 500 participants is the first day of the plan year. If a plan has less than 500 participants, the plan may choose any day during the plan year as its valuation date. For plans that were not in existence prior to the enactment of this bill, the plan shall take into account the number of participants that the plan is reasonably expected to have on days during the first plan year.

Determining value of plan assets: The value of plan assets is determined on the basis of any reasonable actuarial method of valuation which takes into account the fair market value of assets. If assets are averaged, any method used by the plan may not provide for averaging of such values over more than three plan years. In addition, the averaging method used by the plan may not result in a valuation of averaged assets greater than 110 percent or lower than 90 percent of the fair market value of the plan's assets.

Accounting for contribution receipts: For purposes of determining the value of plan assets for any current plan year, any contributions allocable to amounts owed for the previous year that are made after the plan's valuation date for the current plan year are taken into account, except that any contribution made during any current plan year beginning after 2006 are taken into account only in an amount equal to its present value (determined using the plan's effective interest rate for the preceding plan year) as of the valuation date of the plan for the current plan year. However, any contributions made to any plan for the current plan year are not taken into account and any interest earned on such contributions must be disregarded for calculating the value of plan assets.

Accounting for plan liabilities: In determining the value of liabilities under a plan for a plan year, liabilities attributable to benefits accrued as of the first day of the plan year are taken into account. Any benefits which are expected to accrue during a plan year are not taken into account. If a plan is collectively bargained, any anticipated benefit increases scheduled to take effect during the plan year are included as part of a plan's liabilities for the plan year.

Actuarial assumptions and methods: For purposes of calculating a plan's liabilities for a plan year, the effective interest rate of a plan must be used. The effective interest rate of a plan is the rate of interest which, if used to determine the present value of the plan's liabilities, would result in an amount equal to the funding target of the plan for a plan year.

For purposes of determining the plan's funding target, the interest rates used in calculating the present value of the plan's liabilities are based on three segment rates applied to a plan's short-term, mid-term, and long-term liabilities. Short-term liabilities are plan liabilities which are payable within five years. Mid-term liabilities are plan liabilities which are payable in between six and twenty years. Long-term liabilities are plan liabilities which are payable after twenty years. The segment rates, with respect to any month, are determined by the Secretary of the Treasury on the basis of the appropriate corporate bond yield curve. The first segment rate is based on the portion of the corporate bond yield curve for yields of bonds maturing in five years or less; the second segment rate is based on the portion of the corporate bond yield curve for yields of bonds maturing between six and 20 years; and the third segment rate is based on the corporate bond yield curve for yields of bonds maturing over 20 years.

The Secretary of the Treasury will develop the corporate bond yield curve which is based on a 3-year weighted average of yields on investment grade corporate bonds. 95

 [Footnote]  The term `3-year weighted average' means an average determined by using a methodology under which the most recent year's rates are weighted 50 percent, the preceding year's rates are weighted 35 percent, and the second preceding year's rates are weighted 15 percent. The Secretary must publish each month the corporate bond yield curve and each segment rate. The Secretary must also publish a description of the methodology used to determine the corporate bond yield curve and the segment rates which is sufficiently detailed to enable plans to make reasonable projections regarding the yield curve and segment rates for future months based on the plan's projection of future interest rates.

[Footnote 95: Under current law, interest rates used to calculate pension assets and liabilities are `smoothed,' or averaged, over four years. Such smoothing is intended to reduce pension funding volatility and help make contribution requirements more predictable.]

Transition period: The interest rate transition will be the following: For plan year 2006, a plan is required to use of  1/3  of the modified yield curve and  2/3  of the current rate. For plan year 2007, a plan is required to use of  2/3  of the modified yield curve and  1/3  of the current rate. For plan year 2008, all plans must use the modified yield curve for calculating pension liabilities.

Mortality table: In order to determine the present value of liabilities for a plan, the plan must use the RP 2000 Combined Mortality Table using scale AA. The Secretary of the Treasury is required to make projected improvements to the table to reflect the actual experience of plans and projected trends in such experience at least once every ten years. The use of the RP 2000 Combined Table is phased in ratably over a five year period.

Upon request by the plan sponsor and approval by the Secretary of the Treasury, a plan may use a different mortality table if the Secretary determines that the table reflects the actual experience of the pension plan and that it is significantly different from the RP 2000 Combined Mortality Table. The Secretary has 180 days, beginning on the date of submission, to disapprove of the use of a table other than the RP 2000 Combined Mortality Table if the table fails to meet the above requirements.

Probability of benefit payments in the form of lump sum or other optional forms: For purposes of determining the present value of a plan's liabilities, the probability that future benefit payments under the plan, including lump sums and other optional forms of benefits, must be taken into account and included in the plan's funding target.

Special rules for at-risk plans: A plan is considered to be `at-risk' if its funding target is less than 60 percent. At-risk liability is based on the same benefits and assumptions as a plan's normal funding target, except that the valuation of those benefits would require the use of certain actuarial assumptions that would take into account the fact that there is a greater likelihood the plan may have to pay benefits on an accelerated basis or terminate. These modified actuarial assumptions are acceleration in retirement rates using the earliest retirement age, and benefits being distributed in a lump sum payment (or in whatever form results in the most valuable benefit). At-risk liability also includes a `loading factor' of $700 per participant plus four percent of the at-risk liability before the loading factor to reflect the additional administrative cost of purchasing a group annuity if the plan were to terminate. At-risk normal cost is the same as ongoing normal cost, except that at-risk normal cost is calculated using the assumptions that are used for determining at-risk liability. The transition between a plan's normal funding target and its at-risk funding target is five years. In other words, if a plan has a funding target of less than 60 percent for a consecutive period of fewer than five plan years, the plan must pay 20 percent of its at-risk required contribution multiplied by the number of plan years that the plan is less that 60 percent funded.

Payment of minimum required contributions: The due date for the payment of minimum required contribution for any plan year is 8 1/2  months after the close of the plan year. Any minimum contribution payment made after the valuation date is increased by the effective rate of interest for a plan from the valuation date to the payment date.

Accelerated quarterly contributions: If a plan is less than 100 percent funded in the prior plan year, quarterly contributions are required to be paid by the plan. The minimum required quarterly contribution is increased by the amount equal to the interest on the amount of underpayment for the period of the underpayment. The interest rate used is the excess of 175 percent of the federal mid-term rate over the effective rate of the plan. 96

 [Footnote]  The amount of the underpayment is the excess of the required installment over the amount of the installment contributed to or under the plan on or before the due date for the installment. The amount of the required installment is 25 percent of the required annual payment. The required annual payment is 90 percent of the minimum required contribution (without regard to any waiver) or, for a plan year beginning after 2006, 100 percent of the minimum required contribution to the plan for the preceding plan year (without regard to any waiver). The deadline for the final contribution for the year is 8 1/2  months after the end of the plan year. A contribution made after the valuation date for the year would be credited against the minimum required contribution for the year based on its present value as of the valuation date, discounted from the date actually contributed and determined using the average effective interest rate that applied in the determination of the plan's liabilities. A plan is treated as failing to pay the full amount of any required installment to the extent that the value of the liquid assets paid in the installment is less than the liquidity shortfall, regardless of whether the liquidity shortfall exceeds the amount of the installment required to be paid. 97

 [Footnote]

[Footnote 96: See ERISA Sec. 302(e). The rate of interest used is equal to the greater of: (1) 175 percent of the federal mid-term rate, or (2) the rate of interest used under the plan in determining costs.]

[Footnote 97: A liquidity shortfall is defined, with respect to any required installment, as an amount equal to the excess (as of the last day of the first quarter for which the installment is made) of the base amount of the quarterly installment (three times the sum of the adjusted disbursements from the plan for the 12 months ending on the last day of the quarter) over the value of the plan's liquid assets as of the last day of the quarter.]

Imposition of lien where failure to make required contributions: For plans covered by the PBGC insurance program, any plan sponsor who fails to make a required contribution to the plan before the due date of a payment where the unpaid balance of the payment (including interest), when added to the aggregate balance of all prior payments not made before the due date (including interest) exceeds $1,000,000, a lien is imposed in favor of the plan upon all property and rights to property, whether real or personal, belonging to the plan sponsor and any other controlled group member in the amount equal to the total aggregate unpaid balance of the contributions. The plan sponsor must notify the PBGC of such failure within 10 days of the due date for the required contribution. The lien begins on the due date for the required contribution payment and continues until the last day of the first plan year in which the plan ceases to have an aggregate balance of prior missed payments in excess of $1,000,000. Any lien may be perfected and enforced only by or at the direction of the PBGC.

Qualified transfers to health benefit accounts: This section allows any plan assets over 100 percent of a plan's funding target but not above 125 percent of the sum of the target liability amount and the target normal cost to be transferred to a qualified welfare benefit plan for the purpose of providing certain health benefits. Any transfer of plan assets made shall result in a reduction of plan assets by the amount of the transfer.

Sec. 103. Benefit limitations under single employer plans

Section 103 prohibits benefits payable due to a plant shutdown or any other unpredictable contingent event. An unpredictable contingent event is defined as any event other than the attainment of any age, performance of any service, receipt or derivation of any compensation, the occurrence of death or disability, or any event which is reasonably and reliably predictable, as determined by the Secretary of Treasury.

This section further provides that if a plan's funding target is less than 80 percent as of the plan's valuation date, the plan may not adopt an amendment that has the effect of increasing the plan's liabilities by reason of increases in benefits, establishment of new benefits, a change in the rate of benefit accrual, or any change in the rate at which benefits become non-forfeitable. Subject to this general rule, a plan may avail itself of the following exceptions: (a) if a plan's funding target is less than 80 percent in a plan year, as of the plan's valuation date, a plan sponsor may adopt an amendment which increases plan liabilities only if the plan sponsor makes a contribution to the plan in that year equal to the amount of the increase in the minimum required contribution attributable to the plan amendment and the amount of the increase in the plan's funding target; or (b) if a plan's funding target is over 80 percent in a plan year, as of the plan's valuation date, a plan sponsor may adopt an amendment which increases plan liabilities to the extent that the plan's funding target is no longer at 80 percent if the plan sponsor makes a contribution in the amount necessary to ensure that the plan's funding target is at least 80 percent. This provision is not applicable to a new plan for the first five years.

Section 103 prohibits lump sum distributions or any other accelerated form of benefits if a plan's funding target is less than 80 percent as of the plan's valuation date. However, this provision does not apply to any plan for any plan year if the terms of the plan (as in effect prior to or beginning on June 29, 2005) provide for no benefit accruals with respect to any participant.

The bill prohibits all future benefit accruals for plans that have a funding target of less than 60 percent. This provision does not apply to a new plan for the first five plan years. If a plan is subject to any of the above benefit limitations and restrictions, the plan must provide notice of same to all participants and beneficiaries within such time that the plan sponsor knew or should have know that the plan would be subject to the benefit limitations.

Timing rules to implement limitations: A series of special timing rules apply for determining whether a plan's funded percentage is below one of the thresholds for applying the benefit limitation thresholds, based on annual certifications that are to be provided by the plan actuary. If a plan was subject to a benefit limitation in the prior year, then the funding percentage is presumed not to have improved in the current year until the plan actuary certifies that the funded status at the valuation date for the current plan year has improved sufficiently so that the benefit limitation does not apply for the current year. If a benefit limitation did not apply in the prior year, but the funding percentage for that year was no more than 10 percentage points above the threshold for applying that benefit limitation, then the plan's funding percentage is automatically presumed to have been reduced by 10 percentage points for the current plan year as of the first day of the fourth month of the plan year unless and until the actuary certifies that the funded status is such that the benefit limitation does not apply for the current plan year. If an actuarial certification fails to be completed by the first day of the 10th month of the plan year, then the plan's funding percentage for the plan year is presumed not to exceed 60 percent for the current year for purposes of the benefit limitations.

Restoration of plan benefits: Plans that are frozen or for which lump sums or other accelerated benefit forms are prohibited would be permitted to resume accruals and accelerated benefit forms in a subsequent plan year only by a plan amendment. The plan amendment may be adopted at any time after the first valuation date on which the plan's assets exceed the applicable threshold percentage. If a plan's accruals are ceased by reason of a failure of its actuary to make an appropriate certification, the restoration of such plan benefits does not require a plan amendment.

Notice requirement: The plan administrator must provide written notice to plan participants and beneficiaries within 30 days after the plan has become subject to any of the above restrictions. Any failure to provide notice will automatically result in a civil penalty.

Effective date: The benefit limitation provisions apply to a plan after 2006, with the exception that in the case of a collectively bargained plan, the benefit limitation provisions apply to plan years beginning the earlier of: (1) the date on which the last collective bargaining agreement expires; or (2) 2009. A plan does not fail to meet the requirements of the anti-cutback rule under ERISA or the IRC solely by reason of compliance with the requirements of this section. 98

 [Footnote]

[Footnote 98: See ERISA Sec. 204(g) and IRC 411(d)(6).]

SUBTITLE B--AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986


SUBTITLE C--OTHER PROVISIONS


Sec. 121. Modification of transition rule to pension funding requirements

Section 121 creates a transition rule to the pension funding requirements for any plan sponsored by a company that is engaged primarily in the interurban or interstate passenger bus service for any plan year beginning after 2005. For purposes of the quarterly contributions requirement, the plan is treated as not having a funding shortfall for any plan year; therefore, no quarterly contributions are required. The plan may also use its own mortality table and not the standard table prescribed under the bill for purposes of determining any present value or making any calculation under the minimum funding rules for the plan and the amount of unfunded vested benefits under the plan for purposes of calculating PBGC variable rate premiums.

For the purpose of calculating the plan's funding target under this section, the applicable percentage is determined in accordance with the following table:





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In the case of a plan year beginning in calendar year: The applicable percentage is: 


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2006                                                   90 percent.                   


2007                                                   92 percent.                   


2008                                                   94 percent.                   


2009                                                   96 percent.                   


2010                                                   98 percent.                   


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Sec. 122. Treatment of nonqualified deferred compensation plans when employer defined benefit plan is in at-risk status

Section 122 provides that, if during any period in which a defined benefit pension plan of an employer is in at-risk status, assets are set aside (directly or indirectly) in a trust (or other arrangement as determined by the Secretary of the Treasury), or transferred to such a trust or other arrangement, for purposes of paying deferred compensation, such assets are treated as property transferred in connection with the performance of services (whether or not such assets are available to satisfy the claims of general creditors) under section 83 of the Internal Revenue Code.

If a nonqualified deferred compensation plan of an employer provides that assets will be restricted to the provision of benefits under the plan in connection with the at-risk status (or other similar financial measure determined by the Secretary of Treasury) of any defined benefit pension plan of the employer, or assets are so restricted, such assets are treated as property transferred in connection with the performance of services (whether or not such assets are available to satisfy the claims of general creditors) under section 83 of the Internal Revenue Code.

Any subsequent increases in the value of, or any earnings with respect to, transferred or restricted assets are treated as additional transfers of property. In addition to current income inclusion, interest at the underpayment rate plus one percentage point is imposed on the underpayments that would have occurred had the amounts been includable in income for the taxable year in which first deferred or, if later, the first taxable year not subject to a substantial risk of forfeiture. The amount required to be included in income is also subject to an additional 20 percent tax.

The provision is effective for transfers and other restrictions of assets on or after January 1, 2006. Assets set aside or transferred before January 1, 2006, for purposes of paying nonqualified deferred compensation, are not subject to the provision.

TITLE II--FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS


SUBTITLE A--AMENDMENTS TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974


Sec. 201. Funding rules for multiemployer defined benefit plans

Minimum funding standards for multiemployer plans: Section 201 provides that any amounts attributable to unfunded past service liability (for plans established after 1974), plan amendments, investment gains and losses, actuarial changes, and any waived funding deficiency are to be amortized over a fifteen year period. These new amortization periods apply to any amortization bases established after the date of enactment of the bill. Each plan is required to establish a funding standard account, which will be charged or credited with the normal cost of the plan and any amortization shortfall amount. The value of a plan's assets shall be determined on the basis of reasonable actuarial methods of valuation which offer the best estimate of anticipated experience under the plan. Interest must be charged or credited to the funding standard account (as prescribed by the Secretary of the Treasury) at an appropriate rate consistent with the rate or rates of interest used to determine costs under the plan.

Extension of amortization periods: Section 201 provides that the Secretary of the Treasury shall, upon application, automatically extend the period of years required to amortize any unfunded liability of a plan for a period of time not in excess of five years if the Secretary determines that, absent the extension, the plan would have an accumulated funding deficiency in any of the next 10 plan years, the plan sponsor has adopted a plan to improve the plan's funded status, and the plan is projected to have sufficient assets to timely pay its expected benefit liabilities and other anticipated expenses. Prior to the Secretary granting the automatic extension, each applicant is required to provide notice of the filing of the application for such extension to each contributing employer, employee organization, and the PBGC. The notice must also include a description of the extent to which the plan is funded for benefits which are guaranteed by the PBGC and for benefit liabilities.

The Secretary may grant an additional amortization extension for cause, for a period of time not in excess of five years, if he determines that the failure to permit the extension would result in a substantial risk to the voluntary continuation of the plan or a substantial curtailment of pension benefit levels or employee compensation, and would be adverse to the interests of plan participants in the aggregate.

Interest rate for extensions: The rate of interest applicable in connection with an extension granted is the greater of: (1) 150 percent of the federal mid-term rate, or (2) the rate of interest used under the plan for determining costs.

Sec. 202. Additional funding rules for multiemployer plans in endangered or critical status

Certification: Beginning on the first day of each plan year, the plan actuary must certify within 90 days to the Secretary of the Treasury whether a plan is in endangered or critical status for a plan year. If certification is not made before the end of the 90-day period, the plan is presumed to be in critical status until the actuary makes a contrary certification. Any certification must take into account any reasonable actuarial assumptions and methods of the current value of plan assets and the present value of all liabilities for the current and succeeding plan years as well as any reasonably anticipated employer and employee contributions for the current and succeeding plan years. If certification is not made before the end of the 90-day period, the plan is presumed to be in critical status for the plan year until such time as the plan actuary makes a contrary certification.

Notice requirements: If a plan is determined to be an endangered or critical plan, notice must be given no later than 30 days after certification is made that the plan is in endangered or critical status. The notice must be provided to the participants, contributing employers, unions, the Secretary of Labor, and the Secretary of the Treasury.

Funding improvement plan: If a plan is certified to be in endangered status for a plan year, the plan sponsor must amend the plan to include a funding improvement plan upon approval by the bargaining parties within 240 days after the date on which the plan is certified to be in endangered status. The funding improvement plan must result in a  1/3  projected improvement in the plan's funded percentage and a prevention of an accumulated funding deficiency during the funding improvement period, taking into account any extension of amortization periods. A summary of the funding improvement plan, as well as any modifications to the plan, must be included in the plan's annual report.

Endangered status: A plan is considered an endangered plan if the plan has a funded liability percentage of less than 80 percent, or there is a projected deficiency in the any of the next seven plan years (including the current plan year).

Standard funding improvement period: Unless the special rules for certain seriously underfunded plans apply, the funding improvement period is the 10-year period beginning on the earlier of the second anniversary of the date of adoption of the funding improvement plan or the first day of the first plan year in which collective bargaining agreements covering at least 75 percent of active participants have expired.

Special rule for seriously underfunded plans: A plan is also considered to be an endangered plan if the plan has a funded liability percentage of 70 percent or less; for such plans, the funding improvement plan must result in a  1/5  projected improvement in the plan's funded percentage and a prevention of an accumulated funding deficiency during the funding improvement period, taking into account any extension of amortization periods. For purposes of this paragraph, the funding improvement period is the 15 year period beginning on the earlier of the second anniversary of the date of adoption of the funding improvement plan or the first day of the first plan year in which collective bargaining agreements covering at least 75 percent of active participants have expired.

A plan is also considered to be an endangered plan if the plan has a funded percentage of greater than 70 percent but less than 80 percent and the plan actuary certifies within 30 days after the plan is certified to be an endangered plan that the plan is not able to meet the standard  1/3  projected improvement in the plan's funded percentage and a prevention of an accumulated funding deficiency during the funding improvement period, taking into account any extension of amortization periods within the 10 year period. However, such plan meeting this special rule must adopt a funding improvement plan that will improve the plan's funded percentage by  1/5  during the funding improvement period. For purposes of this paragraph, the funding improvement period is the 15 year period beginning on the earlier of the second anniversary of the date of adoption of the funding improvement plan or the first day of the first plan year in which collective bargaining agreements covering at least 75 percent of active participants have expired.

Actions taken by plan sponsor pending approval: A plan sponsor must take all permitted action (under the terms of the plan and applicable law) necessary to increase the plan's funded liability percentage, and postpone an accumulated funding deficiency by at least one additional year. Such actions may include requesting an amortization extension, use of the shortfall method, modification of the plan's benefit structure and/or the reduction of future benefit accruals, and any other reasonable action consistent with the terms of the plan and applicable law.

Recommendations by a plan sponsor: Within 90 days following a plan's certification, the plan sponsor shall develop and provide to the bargaining parties alternative proposals for revised benefit and contribution structures which, if adopted, may reasonably be expected to meet the funding improvement benchmarks. Proposals by the plan sponsor must include: (1) at least one proposal for reductions in the amount of future benefit accruals necessary to achieve the benchmarks, assuming no amendments increasing contributions under the plan (other than amendments increasing contributions necessary to achieve the benchmarks after amendments have reduced future benefit accruals to the maximum extent permitted by law); and (2) at least one proposal for increases in contributions necessary to achieve the benchmarks, assuming no amendments reducing future benefit accruals under the plan.

Upon the request of any bargaining party who employs at least five percent of the active plan participants or represents an employee organization representing at least five percent of active participants, the plan sponsor shall provide the parties with information as to other combinations of increases in contributions and reductions in future benefit accruals which would result in achieving the benchmarks. A plan sponsor may prepare and provide the bargaining parties with any additional information relating to the contribution or benefit structures or any other information relevant to the funding improvement plan.

Maintenance of contributions pending approval: Pending approval of a funding improvement plan by the bargaining parties, a plan may not be amended to reduce the level of contributions for participants not in pay status, to suspend contributions, or to directly or indirectly exclude any younger or newly hired employees from plan participation.

Benefit restrictions pending approval of funding improvement plan: Pending approval of a funding improvement plan, a plan may not be amended to distribute, as a lump sum distribution or as any other accelerated form, the present value of a participant's accrued benefit exceeding $5,000. In addition, the plan may not adopt any amendment that would result in an increase of plan liabilities by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan, unless the amendment is required as a condition of plan qualification under the Internal Revenue Code.

Default if no funding improvement plan adoption: If no funding improvement plan is adopted by the end of the 240-day period, the plan is considered in critical status as of the first day of the succeeding plan year.

Restrictions upon approval of funding improvement plan: Once a funding improvement plan has been adopted by the bargaining parties, the plan may not be amended so as to be inconsistent with the funding improvement plan or to increase future benefit accruals, unless the plan actuary certifies, after taking into account the proposed increase, that the plan is reasonably expected to meet the funding improvement benchmarks.

Critical status: A plan is considered to be in critical status if it is an endangered plan that does not comply with requirements appertaining to such plans, or if it is projected to meet one of several tests: (1) if, as of the first day of the plan year, the plan's funded liability percentage is less than 65 percent, and the sum of the market value of assets plus anticipated contributions for the current and each of the six succeeding plan years is less than the present value of all nonforfeitable benefits for all participants and beneficiaries projected to be payable under the plan during the current and each of the six succeeding plan years plus administrative expenses; (2) if, as of the first day of the plan year, the plan's market value of assets plus anticipated contributions for the current and each of the four succeeding plan years equals less than the present value of all nonforfeitable benefits projected to be payable during the current and each of the four succeeding plan years; (3) if, as of the first day of the plan year, the plan is less than 65 percent funded and will have an accumulated funding deficiency for any of the four succeeding plan years (taking into account any amortization extensions); (4) if the plan's normal cost for the year plus interest (determined at the rate used for determining costs under the plan) for the current plan year on the amount of unfunded benefit liabilities under the plan as of the last date of the preceding plan year exceeds the present value, as of the beginning of the current plan year, of the projected contributions for the current plan year, and the present value of the nonforfeitable benefits of inactive participants is greater than the present value of nonforfeitable benefits of active participants, and the plan is projected to have an accumulated funding deficiency in the current or any of the 4 succeeding plan years; or (5) if the funded liability percentage of the plan is greater than 65 percent for the current plan year and the plan is projected to have an accumulated funding deficiency during either of the following three plan years, not taking into account any extension of amortization periods.

In any case in which a plan is certified to be in critical status for a plan year, the plan sponsor must amend the plan to include a rehabilitation plan upon approval by the bargaining parties within 240 days after the date on which the plan is certified to be in endangered status.

Rehabilitation plan: A rehabilitation plan shall consist of plan amendments that would take the plan out of critical status within 10 plan years. The rehabilitation plan may include a combination of contribution increases, expense reductions (including possible mergers), funding relief measures, and/or benefit reductions. These changes must be adopted by all bargaining parties. If the plan cannot emerge from reorganization within 10 years, the rehabilitation plan must describe alternatives, explain why emergence from reorganization is not feasible, and develop actions that the trustees must take to postpone insolvency. A summary of the rehabilitation plan, as well as any modifications to the plan, must be included in the plan's annual report.

Rehabilitation period: The rehabilitation period is the 10-year period beginning on the earlier of the second anniversary of the date of adoption of the rehabilitation plan or the first day of the first plan year in which collective bargaining agreements covering at least 75 percent of active participants have expired.

Development of rehabilitation plan: Within 90 days following a plan's certification, the plan sponsor shall develop and provide to the bargaining parties proposals for revised benefit and contribution structures which, if adopted, reasonably would be expected to ensure that the plan is no longer a critical plan. Proposals by the plan sponsor shall include: (1) at least one proposal for reductions in the amount of future benefit accruals necessary to cause the plan to cease to be in critical status, assuming no amendments increasing contributions under the plan; and (2) at least one proposal for increases in contributions necessary to cause the plan to cease to be in critical status, assuming all future benefit accruals were reduced to the maximum extent permitted by law.

Upon the joint request of all bargaining parties who employ at least five percent of the active plan participants or represent at least five percent of active participants, the plan sponsor shall provide the parties with information as to other combinations of increases in contributions and reductions in future benefit accruals as may be specified by the bargaining parties.

Limitation on reduction in rates of future accruals: Any schedule must not reduce the rate of future accruals below the lower of: (1) a monthly benefit equal to one percent of the contributions required to be made with respect to a participant or the equivalent standard accrual rate for a participant or group of participants under the collective bargaining agreement in effect as of the first day of the plan year in which the plan enters critical status; or (2) if lower, the accrual rate under the plan on such date. The equivalent standard accrual rate shall be determined by the trustees based on the standard or average contribution base units that they determine to be representative for active participants and such other factors as they determine to be relevant.

Default schedule: If no default schedule is adopted by the end of the 240 day period following certification, the plan sponsor shall amend the plan to implement one of the proposals for reductions in the amount of future benefit accruals necessary to cause the plan to cease to be in critical status, assuming no amendments increasing contributions under the plan are made.

Allocation of reductions in future benefit accruals: Any schedule containing reductions in future benefit accruals is applicable to active participants in proportion to the extent to which increases in contributions under the schedule apply to such bargaining party.

Maintenance of contributions pending approval: Pending approval of a rehabilitation plan by the bargaining parties, the plan may not be amended to reduce the level of contributions for participants not in pay status, to suspend contributions, or to directly or indirectly exclude any younger or newly hired employees from plan participation.

Special rules--automatic employer surcharge: For the first plan year in which the plan is in critical status, each contributing employer in the plan is obligated to pay to the plan a surcharge equal to five percent of the contribution otherwise required under the collective bargaining agreement in effect (or other agreement pursuant to which the employer contributes). For each consecutive plan year thereafter in which the plan is in critical status, the surcharge is 10 percent of the contribution otherwise required under the collective bargaining agreement in effect (or other agreement pursuant to which the employer contributes). The surcharges are required to be paid to the plan on the same schedule as the plan contributions. Any failure to pay the surcharge is treated as a delinquent contribution. The requirement to pay the surcharge ceases on the date on which the agreement is renegotiated to include the rehabilitation plan. The amount of any surcharge shall not be the basis for any benefit accruals under the plan.

Special rules--benefit adjustments: The trustees of a plan in critical status may not reduce adjustable benefits of any participant or beneficiary in pay status at least one year before the first day of the first plan year in which the plan enters into critical status. The trustees shall include in the schedules provided to the bargaining parties an allowance for funding the benefits of participants with respect to whom contributions are not currently required to be made, and shall reduce their benefits to the extent permitted and considered appropriate based on the plan's then current overall funding status and its future prospects in light of the results of the parties negotiations.

An adjustable benefit is defined as any benefit, right, or feature (other than the accrued benefit payable at normal retirement age, except as otherwise provided under this bill), such as post-retirement death benefits, 60-month guarantees, disability benefits not yet in pay status and similar benefits, retirement-type subsidies, early retirement benefits and benefit payment options (other than the 50 percent qualified joint-and-survivor benefit and single life annuity), and benefit increases that would not be eligible for a guarantee by the PBGC on the first day of the first plan year in which the plan enters into critical status because they were adopted, or if later, took effect less than 60 months before reorganization.

Any benefit reductions shall be disregarded in determining a plan's unfunded vested benefits and any surcharges shall be disregarded for purposes of determining an employer's withdrawal liability.

Benefit restrictions pending approval of rehabilitation plan: Pending approval of the funding improvement plan, the plan may not be amended to distribute, as a lump sum distribution or as any other accelerated form, the present value of a participant's accrued benefit exceeding $5,000. In addition, the plan may not adopt any amendment that would result in an increase of plan liabilities by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan, unless the amendment is required as a condition of plan qualification under the Internal Revenue Code.

Deemed withdrawal: The failure of any contributing employer to make the required contributions in compliance with the rehabilitation plan may, at the discretion of the plan sponsor, be treated as a partial or complete withdrawal by that contributing employer from the plan.

Sec. 203. Measures to forestall insolvency of multiemployer plans

Section 203 provides that if a plan sponsor makes a determination that the plan will be insolvent in any of the next five plan years, the plan sponsor shall make an annual assessment of the current rehabilitation plan and take any steps necessary within the limitations of this bill until a determination is made that the plan will not be insolvent in any of the next five plan years.

Sec. 204. Withdrawal liability reforms

Repeal of ERISA section 4225: The current law provision reduces or subordinates withdrawal liability claims involving employer liquidation and insolvency. The liability of insolvent employers is capped at 50 percent of withdrawal liability plus 50 percent of the remaining liquidation value under current law. H.R. 2830 repeals this provision.

Repeal of ERISA section 4219(c): The current law provision arbitrarily limits an employer's withdrawal liability payments to twenty years of payments. H.R. 2830 repeals this provision.

Partial withdrawal by means of outsourcing: This provision clarifies that an employer who performs the same work formerly covered by a pension plan incurs partial (or complete) withdrawal liability from the plan if contractor employees are performing the same work as any former employees for whom contributions in the plan used to be made.

Repeal of special trucking industry rule: The current law rules created a withdrawal liability exemption for those companies in the long and short haul trucking industry. H.R. 2830 repeals this provision.

Application of forgiveness rule to plans in building and construction: The bill allows certain plans covering employees in the building and construction industry to elect to adopt a rule under which an employer who withdraws from the plan in a complete or partial termination is not liable to the plan if the employer was a contributing employer for less than five years. This rule is applicable to plans in other industries under current law.

Effective Date: The amendments made by this subsection apply to plan withdrawals occurring on or after January 1, 2006.

Sec. 205. Removal of restrictions with respect to procedures applicable to disputes involving withdrawal liability

Section 205 provides that a plan sponsor may only make a claim against an employer alleging that the principle purpose of a transaction was to evade or avoid withdrawal liability for transactions occurring in the previous five plan years or two plan years in the case of a small employer. A small employer is any employer who (immediately before the transaction) employs not more than 500 employees and is required to make contributions to the plan for not more than 250 employees.

SUBTITLE B--AMENDMENTS TO INTERNAL REVENUE CODE OF 1986


TITLE III--OTHER PROVISIONS


Sec. 301. Interest rate assumption for determination of lump sum distributions

Section 301 amends the ERISA and the Internal Revenue Code to provide applicable mortality tables and interest rate assumptions for determination of lump sum distributions. The mortality table used for determination of lump sum distributions must be the same mortality table used under section 102 of the bill; however, plans must consider that an equal number of male and female participants will take a lump sum distribution. The three segment rates determined by the Secretary of Treasury's modified yield curve used to calculate a plan's liability under section 102 of the Pension Protection Act must also be used to calculate minimum lump sum distributions for participants. The applicable segment rate used for calculating a participant's lump sum distribution is the same rate that is used to fund for the pension liability of that individual. There is a five-year phase-in of this provision.

Sec. 302. Interest rate assumption for applying benefit limitations to lump sum distributions

Section 302 provides that in adjusting a lump sum benefit for purposes of applying the limits on benefits payable under a defined benefit plan, the interest rate used must be not less than the greater of 5.5 percent or the rate that provides a benefit of not more than 105 percent of the benefit that would be provided by the applicable segment rate or the rate of interest specified under the plan.

Sec. 303. Distributions during working retirement

Section 303 amends the definition of an employee pension plan to include that a distribution from a plan, fund, or program shall not be treated as made in a form other than retirement income or as a distribution prior to termination of covered employment solely because such distribution is made to an employee who has attained age 62 and who is not separated from employment at the time of the distribution.

Sec. 304. Other amendments relating to prohibited transactions

Section 304 amends ERISA to clarify certain prohibited transaction rules:

Definition of `Amount Involved.' The `amount involved' in a transaction is clarified to mean the amount of money and/or the fair market value of property either given or received as of the date on which the prohibited transaction occurs. The definition of `amount involved' is clarified to provide that the civil penalties imposed for any prohibited transaction may not exceed 5 percent of the amount involved.

Exemption for Block Trading. This exemption includes any transaction involving the purchase or sale of securities between a plan and a party in interest (other than a fiduciary with respect to the plan) if the transaction involves a block trade, if at the time of the transaction, the interests of the plan (together with the interests of any other plans maintained by the same plan sponsor) does not exceed 10 percent of the aggregate size of the block trade, and if the terms of the transaction, including the price, are at least as favorable to the plan as an arm's length transaction.

Bonding Relief. This exemption amends ERISA's bonding rules to reflect the regulation of broker-dealers and investment advisers under federal securities law;

Conforming ERISA's Prohibited Transaction Provision to Federal Employee Retirement System Act (FERSA). This provision exempts certain transactions between a plan and a party in interest solely by reason of providing services, but only if in connection with such transaction, the plan receives no less and pays no more than adequate consideration. Adequate consideration is the price of a security prevailing on a national securities exchange registered under the Securities Exchange Act of 1934, taking into account factors such as the size of the transaction and marketability. If the security is not traded on a national securities exchange, a price not less favorable to the plan than the offering price for the security must be used as established by the current bid and asked prices quoted by persons independent of the issuer and party in interest, taking into account factors such as the size of the transaction and marketability. In the case of an asset other than a security for which there is a generally recognized market, the fair market value of the asset shall be determined in good faith by a fiduciary in accordance with regulations prescribed by the Secretary of the Treasury.

Exemption for Electronic Communication Network. This exemption allows for any transaction involving the purchase or sale of securities or other property between a plan and a party in interest if the transaction is executed through an exchange, electronic communications network, alternative trading system, or similar execution system or trading venue subject to regulation and oversight by the applicable governmental regulating entity, provided that the identity of the parties in the execution of the transaction are not taken into account and the transaction is effected pursuant to rules designed to match purchases and sales at the best price available through the communications network.

Definition of Plan Asset Vehicle. This provision excludes the underlying assets of entities which hold less than 50 percent of plan assets from the fiduciary rules under ERISA. For purposes of determining the 50 percent threshold, the value of any equity interest owned by a person (other than the employee benefit plan) who has discretionary authority or control with respect to the assets of the entity or any person who provides investment advice for a fee (direct or indirect), is disregarded.

Exemption for Foreign Exchange Transactions. This provision exempts any foreign transactions between a bank or broker-dealer, or any affiliate, and a plan to which any bank or broker-dealer, or any affiliate, is a trustee, custodian, fiduciary, or other party in interest, provided that the transaction is in connection with the purchase or sale of securities, at the time the transaction is entered into and the terms of the transaction are not less favorable to the plan than the terms generally available or afforded in a comparable arm's length foreign exchange transaction between unrelated parties. In addition, the exchange rate used by the bank or broker-dealer for a foreign exchange transaction must be at a rate no less favorable than the rate quoted for transactions of similar size at the time of the transaction as displayed on an independent service that reports rates of exchange, and there is no investment discretion or advice provided by the bank or broker-dealer, or any affiliate with respect to the transaction.

Sec. 305. Correction period for certain transactions involving securities and commodities

This provision provides a 14-day correction period, beginning on the date on which the fiduciary or party in interest or other person discovers or reasonably should have discovered the prohibited transaction, for any transactions that occurs by mistake between a plan and a party-in-interest or fiduciary.

Sec. 306. GAO study

This provision calls upon the Comptroller General of the Government Accountability Office to transmit to the Congress a pension funding report not later than one year after the date of enactment of the bill that will include an analysis of the feasibility, advantages, and disadvantages of requiring an employee pension benefit plan to insure a portion of such plan's total investments; requiring an employee pension benefit plan to adhere to uniform solvency standards set by the PBGC which are similar to those applied on a state level in the insurance industry; and amortizing a single-employer defined benefit pension plan's shortfall amortization base over various periods of not more than seven years.

TITLE IV--IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS


Sec 401. Increases in PBGC premiums

This section provides for an increase in the PBGC yearly insurance premium paid by plans to the PBGC. Plans with a funding target percentage less than 80 percent will have a three year phase-in of premiums from the current $19 dollars to $30 dollars per participant per year, including an inflation adjustment each year to the national wage index. Plans with a funding target percentage of 80 percent or higher funded will have a five year phase-in of $19 dollars to $30, including inflation adjustment each year to the national wage index.

TITLE V--DISCLOSURE


Sec. 501. Defined benefit plan funding notices

Section 501 amends section 101(f) of ERISA to apply such notices to all defined benefit (single employer and multiemployer) plans. The notice is now due 90 days after the end of the plan year. The notice must include a statement of the ratio of inactive participants to active participants in the plan. This section also requires that plan sponsors include in the notice a statement of a reasonable estimate of the value of plans assets and projected liabilities as well as the plan's funded ratio. The notice must also include a statement of the plan's funding policy and the asset allocation of investment under the plan (as expressed as a percentage of the total assets).

For multiemployer plans, this notice shall include a summary of any funding improvement plan or rehabilitation plan as well as the statement of the ratio, as of the end of the plan year to which the notice relates, of the number of participants who are not in covered service and are in pay status under the plan or have a nonforfeitable right to benefits under the plan to the number of participants who are in covered service under the plan.

Sec. 502. Additional disclosure requirements

Section 502 provides new requirements for plans filing a Form 5500 report with the Department of Labor. Specifically, this section provides that defined benefit plans (both single and multiemployer plans) will be required to file the ratio of the number of inactive participants to the number of active participants as of the end of the plan year. If plans have merged and are making one filing, the funded percentage of the preceding plan year and the new funded percentage after the plan merger must also be reported. On the Schedule B, the plan's enrolled actuary must provide an explanation detailing the basis for all plan retirement assumptions. With respect to multiemployer plans, the plan sponsor must include in the filing the number of contributing employers in a plan as well as the number of employees in the plan who no longer have a contributing employer on their behalf must also be reported. The deadline for filing the annual report for any plan year is 275 days after the close of the plan year. The Secretary of Labor may grant an extension only in cases of hardship in accordance with regulations.

Summary Annual Report: A Summary Annual Report must be filed within 15 days after the deadline for the filing of the Annual Report.

Information to be made available: Section 502 requires that the trustees of a multiemployer plan make available upon request by any contributing employer, participant, or beneficiary, within 30 days of receipt by the plan sponsor, copies of all actuary reports and financial reports received by the plan for a plan year. Plans are permitted to charge reasonable fees for copying and mailing this information. The bill also provides that the Secretary of Labor shall identify alternative methods of disclosure within 90 days from the date of enactment of the bill.

Withdrawal liability notice: This section gives contributing employers the right to a notice of the amount of their withdrawal liability. Only one notice can be provided within any 12-month period. The plan sponsor may make any reasonable charge to cover copying, mailing, and other costs attributable to furnishing such notice. This information must be provided within 180 days after a written request.

Sec. 503. Section 4010 filings with the PBGC

Section 503 makes changes to the requirements under Section 4010 of ERISA which require the reporting of actuarial and financial information by certain controlled groups with plans that have significant unfunded vested benefits. Additional requirements are established for single employer plans that will require the sponsoring employer to notify all participants and beneficiaries (including those participants and beneficiaries that are members of the sponsoring employer's controlled group), within 90 days after the 4010 filing is due, of the following information: (1) notification that a 4010 filing has been made for the plan year; (2) the number of plans maintained by the sponsoring employer (including plans maintained by any controlled group member) that are less than 60 percent funded, and (3) the assets, liabilities, and funded ratio for those plans that are less than 60 percent funded. The notice must also include, in the aggregate, the total values of plan assets and funding targets of such plans, taking into account only those benefits to which participants and beneficiaries have a nonforfeitable right as well as the aggregate funding target attainment percentage of the plan.

The requirements for filing a 4010 are amended to require a filing if the aggregate funding target percentage of the plan, taking into account all plans maintained by the contributing sponsor and the members of its controlled group as of the end of the applicable plan year, is less than 60 percent; or the aggregate funding target of a plan, taking into account the aggregate values of plan assets and funding targets of all plans maintained by the contributing sponsor and the members of its controlled group as of the end of the applicable plan year, is less than 75 percent and the plan sponsor is in an industry, determined by the PBGC, in which there is substantial unemployment or underemployment and in which the sales and profits are depressed or declining.

TITLE VI--INVESTMENT ADVICE


Sec. 601. Amendments to Employee Retirement Income Security Act of 1974 providing prohibited transaction exemption for provision of investment advice

Section 601 provides a statutory exemption from the prohibited transaction rules of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (a new 408(b)(14) of ERISA and a new 4975(d)(14) of the IRC) for: (1) the provision of investment advice regarding plan assets subject to the direction of plan participants and beneficiaries plan to a plan, its participants and beneficiaries; (2) the sale, acquisition, or holding of securities or other property pursuant to such investment advice; and (3) the direct or indirect receipt of fees or other compensation in connection with providing the advice.

In order to qualify for the exemption, an entity must be a `fiduciary adviser' and must meet a series of detailed requirements. The bill defines the following regulated entities to qualify as fiduciary advisers: registered investment advisers, the trust department of banks or similar institutions, insurance companies, registered broker-dealers, and the affiliates, employees, agents, or registered representatives of those entities who satisfy the requirements of the applicable insurance, banking and securities laws with respect to the provision of such advice.

The fiduciary adviser, at a time reasonably contemporaneous with the initial delivery of investment advice on a security or other property, must provide a clear and conspicuous written (including electronic) disclosure of: (1) the fees or other compensation that the fiduciary adviser and its affiliates receive relating to the provision of investment advice or a resulting sale or acquisition of securities or other property (including from third parties); (2) any interest of the fiduciary adviser (and its affiliates) in any security or other property recommended, purchased or sold; (3) any limitation placed on the fiduciary's ability to provide advice; (4) the advisory services offered; (5) the fact that the adviser is acting as a fiduciary of the plan in connection with the provision of such advice; (6) any information required to be disclosed under applicable securities laws; and (7) the plan participant's right to seek advice from an unaffiliated adviser. This disclosure must be written in a way that the average plan participant could understand the information. This material must be maintained in currently accurate form. The Secretary of Labor will issue a model disclosure form.

Any investment advice provided to participants or beneficiaries may be implemented (through a purchase or sale of securities or other property) only at their direction. The terms of the transaction must be at least as favorable to the plan as an arm's length transaction would be, and the compensation received by the fiduciary adviser (and its affiliates) in connection with any transaction must be reasonable. The fiduciary adviser must also provide a written acknowledgement that it is acting as a fiduciary of the plan to the plan sponsor.

Fiduciary advisers must comply with a six-year record-keeping requirement (for records necessary to determine whether the conditions of the exemption have been met).

A plan sponsor or other fiduciary that arranges for a fiduciary adviser to provide investment advice to participants and beneficiaries has no duty to monitor the specific investment advice given by the fiduciary adviser to any particular recipient of advice. The plan sponsor or other fiduciary retains the duty of prudent selection and periodic review of the fiduciary adviser. The fiduciary adviser must acknowledge in writing to the plan sponsor that it is acting as a fiduciary of the plan with respect to the advice provided. Plan assets may be used to pay for the expenses of providing investment advice to participants and beneficiaries.

Sec. 602. Amendments to Internal Revenue Code of 1986 providing prohibited transaction exemption for provision of investment advice

Section 602 conforms the Internal Revenue Code to allow for the provision of certain investment advice.

TITILE VII--BENEFIT ACCRUAL STANDARDS


Sec. 701. Improvements in benefit accrual standards

Section 701 clarifies the rules relating to the reduction in accrued benefits under ERISA. A plan is not treated as failing to meet plan requirements under ERISA section 204(b)(1)(H) if a participant's entire accrued benefit, as determined as of any date under the formula for determining benefits as set forth in the text of the plan documents would be equal to or greater than that of any similarly situated, younger individual. An individual is similarly situated to another participant if such individual is identical in every respect (including period of service, compensation, position, date of hire, work history, and any other respect) except for age. In determining the entire accrued benefit, the subsidized portion of any early retirement benefit (including any early retirement subsidy that is fully or partially included or reflected in an employee's opening account balance or other transition benefits) shall be disregarded.

A plan to which the accrued benefit payable under the plan upon distribution (or any portion thereof) is expressed as the balance of a hypothetical account does not fail to meet the requirements under ERISA section 204(b)(1)(H) because interest accruing on the account balance is taken into account.

A plan does not fail to meet the requirements under ERISA section 204(b)(1)(H) because the plan provides allowable offsets against those benefits under the plan which are attributable to employer contributions, based on benefits which are provided under title II of the Social Security Act, the Railroad Retirement Act of 1974, or another plan described in IRC section 401(a), and are maintained by the same employer, or under any retirement program or officers or employees of the Federal or State government or one of its political subdivisions. Allowable offsets consist of offsets equal to all or part of the actual benefit payment amounts, or reasonable projections or estimations of such benefit payment amounts.

A plan does not fail to meet the requirements under ERISA section 204(b)(1)(H) because the plan provides a disparity in contributions or benefits with respect to which the requirements of IRC section 401(l) are met.

A plan does not fail to meet the requirements under ERISA section 204(b)(1)(H) because the plan provides for pre-retirement indexing of accrued benefits under the plan. Pre-retirement indexing is the periodic adjustment of the accrued benefit by means of the application of a recognized index or methodology so as to protect the economic value of the benefit against inflation prior to distribution.

Determinations of accrued benefit as balance of benefit account: A defined benefit plan under which the accrued benefit payable under the plan upon distribution (or any portion thereof) is expressed as the balance of the hypothetical account for each participant may make available for such distribution under the terms of the plan the balance of the account, calculated by using the applicable interest rate that would be used under the terms of the plan to project the amount of the participant's account balance to normal retirement age, so long as the interest rate used does not provide for a return that is greater than a market rate of return, as determined by the Secretary of the Treasury.

The effective date of this provision applies to periods beginning on or after June 29, 2005.

TITLE VIII--DEDUCTION LIMITATIONS


Sec. 801. Increase in deduction limit for single-employer plans

Section 801 provides for an increase in the deduction limit for single-employer plans up to a new higher maximum deductible amount equal to the greater of: (1) the excess of the sum of 150 percent of the plan's funding target plus the target normal cost over the value of plan assets, or (2) the excess of the sum of the plan's at-risk normal cost and at-risk funding target for the plan year over the value of plan assets to 150 percent of the plan's funding target plus the target normal cost.

The increase in the deduction limit for multiemployer plans is the excess of 140 percent of the plan's current liability over the value of plan assets.

The provision also modifies the rules relating to the limitation on deductions for plan sponsors maintaining both defined benefit and defined contribution plans. The bill provides that in the case of employer contributions to one or more defined contribution plans, the limit shall only apply to the extent that such contributions exceed six percent of the compensation otherwise paid or accrued during the year to beneficiaries under the plan.

EXPLANATION OF AMENDMENTS


The provisions of the Amendment in the Nature of a Substitute are explained in this report.

APPLICATION OF LAW TO THE LEGISLATIVE BRANCH


Section 102(b)(3) of Public Law 104-1 requires a description of the application of this bill to the legislative branch. This Bill allows amends the Employee Retirement Income Security Act (ERISA) to provide for pension security. Since ERISA excludes governmental plans, the bill does not apply to legislative branch employees. As public employees, legislative branch employees are eligible to participate in the Federal Employee Retirement System.

UNFUNDED MANDATE STATEMENT


Section 423 of the Congressional Budget and Impoundment Control Act (as amended by Section 101(a)(2) of the Unfunded Mandates Reform Act, P.L. 104-4) requires a statement of whether the provisions of the reported bill include unfunded mandates. This bill amends the voluntary pension system provided under the Employee Retirement Income Security Act (ERISA). As such, the bill does not contain any unfunded mandates. In compliance with this requirement, the Committee has received a letter from the Congressional Budget Office included herein.

Insert offset folio 142 here HR232.006

Insert offset folio 143 here HR232.007

Insert offset folio 144 here HR232.008

Insert offset folio 145 here HR232.009

Insert offset folio 146 here HR232.010

Insert offset folio 147 here HR232.011

Insert offset folio 148 here HR232.012

CORRESPONDENCE


Congress of the United States,


House of Representatives,


Washington, DC, July 12, 2005.


Hon. JOHN BOEHNER,

Chairman, Committee on Education and the Workforce,

Rayburn House Office Building, Washington, DC.

DEAR MR. CHAIRMAN: Due to a Base Realignment and Closure (BRAC) Regional Hearing in Atlanta regarding a possible closure in my district, I was unable to attend the Committee's mark-up of H.R. 2830, `Pension Protection Act of 2005'. Consequently, I was unable to vote on the following amendments: Representative Tierney's amendment regarding defined benefit terminations; Representatives Wu and Van Hollen's amendment regarding shutdown benefits; Representatives Woolsey and Van Hollen's amendment regarding executive parity in benefit restrictions; and Representative Miller's amendment regarding cash  balance plans. Had I been present, I would have voted in favor of each of these amendments.

I would appreciate your including this letter in the Committee Report to accompany H.R. 2830. Thank you for your attention in this matter.

Sincerely,

JOHN BARROW.

STATEMENT OF OVERSIGHT FINDINGS AND RECOMMENDATIONS OF THE COMMITTEE


In compliance with clause 3(c)(1) of rule XIII and clause (2)(b)(1) of rule X of the Rules of the House of Representatives, the Committee's oversight findings and recommendations are reflected in the body of this report.

BUDGET AUTHORITY AND CONGRESSIONAL BUDGET OFFICE COST ESTIMATE


With respect to the requirements of clause 3(c)(2) of rule XIII of the House of Representatives and section 308(a) of the Congressional Budget Act of 1974 and with respect to requirements of 3(c)(3) of rule XIII of the House of Representatives and section 402 of the Congressional Budget Act of 1974, the Committee has received the following cost estimate for H.R. 2830 from the Director of the Congressional Budget Office:

U.S. Congress,


Congressional Budget Office,


Washington, DC, September 9, 2005.


Hon. JOHN A. BOEHNER,

Chairman, Committee on Education and the Workforce,

U.S. House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: As you requested, the Congressional Budget Office has prepared the enclosed cost estimate for H.R. 2830, the Pension Protection Act of 2005.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is Geoffrey Gerhardt.

Sincerely,

Douglas Holtz-Eakin,

Director.

Enclosure.

H.R. 2830--Pension Protection Act of 2005

Summary: H.R. 2830 would make changes to the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) that would affect the operations of private pension plans. It would do so mostly by changing the funding requirements for tax-qualified, defined-benefit pension plans and the premiums paid to the Pension Benefit Guaranty Corporation (PBGC).

The budgetary effects of the bill would result from:

 Increased income to the PBGC from premiums paid by the sponsors of pension plans--totaling an estimated $5.1 billion over the next 10 years.

 A loss of federal income tax revenue, primarily because more rigorous funding rules would be imposed on plans' sponsors; the Joint Committee on Taxation (JCT) estimates that enacting H.R. 2830 would reduce federal revenues by $5.5 billion over the 2006-2015 period.

 Additional benefit payments--totaling an estimated $0.5 billion over 10 years--that the PBGC would have to make as a result of a number of changes made by the bill.

In combination, those effects would add $0.8 billion to federal budget deficits over the 2006-2015 period, CBO estimates. The additional premium income would have another effect: it would increase the balances in the PBGC's on-budget revolving fund and therefore forestall the need for significant transfers to that revolving fund from the PBGC's nonbudgetary trust fund in order pay insured benefits. Because those transfers are treated in the budget as offsetting collections (that is, offsets to outlays), smaller transfers would result in higher net outlays for PBGC's on-budget revolving fund. The improvement in the financial condition of that fund would eliminate the need for $7.4 billion in transfers to the fund from 2013 through 2015, CBO estimates, thereby increasing on-budget outlays by that amount. Adding that effect to the other impacts of the bill, CBO projects that enacting H.R. 2830 would increase federal budget deficits by $8.2 billion over the 2006-2015 period.

The bill would improve the budget outlook in the near term but would increase budget deficits in later years because of the way some of the provisions would phase in and because the reduction in transfers to the on-budget revolving fund would occur towards the end of the 10-year period. CBO estimates that enacting the bill would reduce federal deficits by $5.7 billion over the 2006-2008 period, but would add $13.9 billion to budget shortfalls from 2009 through 2015.

Major provisions of H.R. 2830 would:

 Require sponsors of single-employer pension plans to meet a funding target that is at least 100 percent of current liabilities;

 Specify that the discount rate used to calculate the present value of current pension liabilities be based on a segmented yield curve of corporate bonds rather than the interest rate on 30-year Treasury bonds;

 Restrict the use of credit balances to offset required pension contributions;

 Place limits on benefit accruals for participants in certain underfunded plans;

 Increase the limits on the tax-deductible contributions sponsors may make to plans;

 Increase the per-participant premium paid to the PBGC for single-employer plans;

 Change the funding rules for multiemployer pension plans;

 Enhance disclosure requirements for both single-employer and multiemployer pension plans; and

 Address the legal status of so-called hybrid defined-benefit pension plans.

Not all of these policies would directly affect federal spending or revenues.

Pursuant to section 407 of H. Con. Res. 95 (the Concurrent Resolution on the Budget, Fiscal Year 2006), CBO estimates that enacting H.R. 2830 would not cause an increase in direct spending greater than $5 billion in any of the 10-year periods between 2016 and 2055.

CBO has reviewed the nontax portions of H.R. 2830 and determined that they contain no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would impose no costs on state, local, or tribal governments. Those provisions would impose a number of mandates on sponsors and administrators of single-employer and multiemployer private pension plans. CBO estimates that the direct cost of those private-sector mandates, less the direct savings from those mandates, would exceed the annual threshold specified in UMRA ($123 million in 2005, adjusted annually for inflation) in 2009 and subsequent years.

JCT has determined that the tax provisions of H.R. 2830 contain no intergovernmental or private-sector mandates as defined in UMRA.

Estimated cost the Federal Government: The estimated budgetary impact of H.R 2830 is shown in the following table. The costs of this legislation would fall within budget function 600 (income security).

Basis of estimate: H.R. 2830 contains changes to both ERISA and the Internal Revenue Code that would affect sponsors of defined-benefit pension plans. Under current law, the funding rules are exactly the same in both ERISA and IRC. In certain instances, however, changes made by the bill to the pension funding requirements of ERISA are inconsistent with changes made to the funding rules in the IRC. CBO's and JCT's budget estimates assume that, if H.R. 2830 is enacted, additional changes would be made to the IRC to make it consistent with those changes made to ERISA by H.R. 2830. Those estimates also assume that H.R. 2830 and the corresponding changes to the IRC will be enacted by December 2005.





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                                                          By fiscal year, in millions of dollars--                                                              


                                                                                              2006   2007   2008   2009   2010   2011   2012   2013  2014  2015 


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CHANGES IN DIRECT SPENDING                                                                                                                                      


Changes in Flat-Rate Premiums Paid to PBGC:                                                                                                                     


Estimated Budget Authority                                                                     -79   -158   -240   -314   -552   -586   -655   -690  -759  -828 


Estimated Outlays                                                                              -79   -158   -240   -314   -552   -586   -655   -690  -759  -828 


Changes in Variable Premiums Paid to PBGC:                                                                                                                      


Estimated Budget Authority                                                                       0    -25   -170   -246   -255   -191    -68     66   237   360 


Estimated Outlays                                                                                0    -25   -170   -246   -255   -191    -68     66   237   360 


Changes in Net Benefit Payments:                                                                                                                                


Estimated Budget Authority                                                                      -1      *      6     19     35     54     72     88   101   112 


Estimated Outlays                                                                               -1      *      6     19     35     54     72     88   101   112 


Subtotal:                                                                                                                                                       


Estimated Budget Authority                                                                     -80   -184   -404   -541   -771   -722   -651   -536  -421  -356 


Estimated Outlays                                                                              -80   -184   -404   -541   -771   -722   -651   -536  -421  -356 


Changes in Transfers from PBGC's Nonbudgetary Trust Fund:                                                                                                       


Estimated Budget Authority                                                                       0      0      0      0      0      0      0  1,068 3,092 3,222 


Estimated Outlays                                                                                0      0      0      0      0      0      0  1,068 3,092 3,222 


Total Changes in Direct Spending:                                                                                                                               


Estimated Budget Authority                                                                     -80   -184   -404   -541   -771   -722   -651    532 2,671 2,866 


Estimated Outlays                                                                              -80   -184   -404   -541   -771   -772   -651    532 2,671 2,866 


CHANGES IN REVENUES                                                                                                                                             


Changes to Funding Rules for Single-Employer Plans                                             778  2,584  1,761 -1,420 -2,502 -2,185 -1,757 -1,070  -758  -659 


Changes to Funding Rules for Multiemployer Plans                                                 *     -2     -8    -18    -28    -34    -40    -46   -52   -58 


Changes to Benefit Accrual Standards                                                           -24     -9      1      6     -3     -8      6     25    29    13 


Total Changes in Revenue                                                                       754  2,573  1,754 -1,432 -2,533 -2,227 -1,791 -1,091  -781  -704 


NET INCREASE OR DECREASE (-) IN BUDGET DEFICITS                                                                                                                 


Net of Transfers from PBGC's Nonbudgetary Trust Fund                                          -834 -2,757 -2,158    891  1,762  1,505  1,140  1,623 3,452 3,570 


Excluding Transfers from PBGC's Nonbudgetary Trust Fund                                       -834 -2,757 -2,158    891  1,762  1,505  1,140    555   360   348 


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Direct spending

Increase in Flat-Rate Premium. Under current law, sponsors of single-employer pension plans insured by the PBGC are required to pay the agency a premium of $19 per participant. H.R. 2830 would increase the flat-rate premium to $30 per participant in 2006 and index it to wage growth starting in 2007. However, no plans would pay the full increase immediately. The bill would phase in the rate increase differently depending on whether the ratio of a plan's assets to its liabilities (known as its funding ratio) is above or below 80 percent. For plans that have a funding ratio of 80 percent or higher, the increased rate would be phased in over a five-year period; for plans with a funding ratio of less than 80 percent, the rate increase would be phased in over a three-year period. Both phase-in periods would begin in 2006 and the premium rate for all single-employer plans would be the same--approximately $35 per participant--by 2010.

About 35 million people currently participate in tax-qualified, single-employer pension plans. This figure includes active workers, former workers who are vested but have not started collecting retirement benefits, and annuitants. The number of participants in single-employer plans insured by the PBGC has remained nearly constant for the past decade, and CBO assumes it would remain steady for the next 10 years.

The current premium of $19 per participant generates about $650 million in premium income annually for the PBGC. CBO estimates changes to the flat-rate premiums made by H.R. 2830 would increase receipts by $1.3 billion over the 2