Pension Reform Stalls on Tax Break Provisions

July 28, 2006 ( - A Senate aide told reporters that House and Senate negotiators had agreed on pension bill details, but had not been able to agree on whether to include in the measure several extensions of popular tax cuts, Reuters reports.

The aide said the House will move two measures separately before leaving this week: the pension bill and a tax measure combining the tax cut extensions with a cut in the estate tax. Aides from both the Senate and House said the tax bill may possibly include an increase in the minimum wage, according to Reuters. The Senate will take the measures up next week.

According to Bloomberg, Republican House Representatives from the committee negotiating the pension reform boycotted a Thursday night meeting and were accused by Senator Charles Grassley of avoiding a public vote showing their intent to omit the $35 billion in tax breaks from the legislation.

House leaders and Senate Majority Leader Bill Frist wanted to combine the tax breaks in a separate measure with a provision to reduce the estate tax, Bloomberg reports. Grassley and Senator Max Baucus said the tax breaks may fail if coupled with the estate tax exemption and wanted to keep them on the pension measure.

Tax breaks in the legislation include a federal deduction for state and local sales taxes, renewal of a research tax credit for businesses, breaks for college tuition, and incentives for employers to hire former welfare recipients, according to Bloomberg. Also included are an extension of a deduction for teachers who buy their own classroom supplies, a $5,000 credit for people who buy a home in the District of Columbia for the first time, and a tax credit for people who buy certain types of electric vehicles.

Agreements Made

The current compromise measure would give companies a three-year phase-in period to replenish their pension funds, according to the news report. After that, they must reach 100% funding in seven years or face penalties.

The measure also provides that companies will have to use a lower interest rate to calculate the return on their funding investments which will force them to put more money into the plans because future returns would be lower. Older companies that have more retirees than workers will also have to pay more into their plans using higher rates for young workers and lower rates for older workers instead of a uniform rate they currently use.

A double test would be used for determining which companies are most likely to fall short of their pension obligations and have to put more money into their funds. A company would have to fail both tests to be designated “at risk.” A company whose pension plan is funded at less than 70% of its liabilities in a worst-case scenario in which every employee retires early at maximum benefits would flunk the first test. A plan funded at less than 80% of liabilities using standard retirement calculations would fail the second test.

Companies that fail both tests would have a year to accelerate payments to pass them. The 80% test would be phased in over three years, starting at 65% in 2008.

Additionally, only companies that are above 80% funded will be able to count credit balances, or money paid into pension plans early, toward quarterly pension payments.

Additional provisions in the compromise measure include:

  • Clarification of the law so that companies can offer hybrid (cash balance) plans in the future without fear of lawsuits. The agreement does not include a retroactive liability shield for companies that have already been sued for switching to hybrid plans.
  • Special pension aid to four airlines: American Airlines, Delta Air Lines Inc., Continental Airlines Inc., and Northwest Airlines Corp.

A provision that would have allowed employers and health insurers to claim money from employees who received compensation from a third party for an illness or accident was removed from the measure.