>The bill, known as the Pension Funding Equity Act (H.R. 3108), temporarily resets the interest rate used for valuing assets and liabilities and for figuring premiums payable to the Pension Benefit Guaranty Corporation for all single-employer defined benefit plans. Specifically, the bill would take the antiquated 30-year Treasury bond interest rate out of the pension funding formula and replace it with a “weighted average” of interest rates on “long-term investment grade corporate bonds.”
>It would also let plans of steelmakers and airlines cut their contributions toward deficit reduction by 80%. Additionally, multiemployer plans that can certify a likely funding deficiency would be eligible to defer accounting for some investment losses and thereby avoid payment of excise taxes for underfunding. All told, these stopgap measures are designed to provide employers with some interim relief until Congress and the administration can develop a longer-term solution – and maybe one that involves more than just the interest rate itself.
>As was the case the last time a fix for the 30-year Treasury rate was put in place, the current fix will only hold up for two years; 2004 and 2005. While the fix provides some relief – and some needed certainty – on employer contribution requirements relevant to their pension liabilities, it does not affect the calculation of pension plan benefits. The new rate must fall within a range of the weighted average of the rates of interest on amounts invested in long-term corporate investment-grade bonds, though the specifics are to be determined by the Treasury Secretary.
>Although contributions to satisfy the minimum funding requirements are due within 8½ months of the plan year, plans with funded current liabilities of less than 100% are required to estimate quarterly payments for the plan year, hence the concerns about the April 15 date (see Daschle Dawdles on Pension Relief ). Employers who fail to make those required payments are subjected to an excise tax under Code Sec. 4971.
>Companies currently use from 90% to 120% of the average interest rate for 30-year Treasury bonds maturing in 2031 when calculating their pension liabilities. In October 2001, the US Treasury Department discontinued the 30-year bonds, whose rate had been used for years as the benchmark for investment-earnings assumptions in calculating plan liabilities (see An Indecent Proposal? ). The elimination of new 30-year Treasury bonds served to inflate the value of the outstanding issues – and that, in turn, resulted in a sharp decline in the interest rate yield investors were forced to offer to entice buyers. That sharp decline in the rate, unrelated to the pension calculations that rely on it, has, in turn, dramatically increased the apparent size of pension liabilities (see Stop Gaps? Resurgent Markets Repair Some, but Not All, of the Damage ).
>A provision in the Job Creation and Worker Assistance Act of 2002 allows plans to expand the upper limit of the corridor of rates that plans may use from 105% to 120% of the weighted four-year average for the 30-year Treasury (see The Playing Field: Pension Funding , New and Improved ).
DRC " "
>Under current pension funding rules, companies that offer defined benefit pension plans are required to make additional contributions when they are less than 90% funded. Deficit reduction contribution rules require companies to close an underfunded gap on an accelerated basis, but that acceleration in funding flows can also impose a significant cash flow burden on a financially troubled employer since, during this period, they are also required to make their normally required pension contributions in addition to those imposed under the DRC requirements.
>As noted earlier, the new law gives special relief to airlines, steel companies, and the Transportation Communications Union pension plan. Plans that qualify and apply for this relief can reduce contributions by 80%, for two years only. However, the bill does not contain provisions that provide deficit reduction contributions (DRC) waivers for all other single employer plans. Companies that receive DRC relief will be required to contribute at least the amount necessary to fund the expected increase in current liability that results from benefits that have accrued during the year.
>Proponents argue that the relief helps companies that until recently had well-funded pensions a chance to regain a solid financial footing. Opponents (including, until very recently, the White House and the Pension Benefit Guaranty Corporation) caution that the "holiday" will only make a bad situation worse. Indeed, half of the 10 largest claims against the nation's private pension plan insurer have arisen in the past three years, and only the nation's steel industry has placed a larger burden on the pension insurance system than airlines (see Steel, Airlines Weigh on PBGC ).
>Some in the Senate (notably Senator Ted Kennedy, D-Massachusetts) had pushed for a comparable level of relief for multiemployer plans (see Senate Gives Thumbs Up to Pension Funding Bill ), but the final bill provides relief targeted to those "most in need." Under current law, if a multiemployer plan, which is usually found in unionized industries spread among many smaller businesses, has a net experience loss for a plan year, the plan's funding standard account is charged with the amount needed to amortize the net experience loss over 15 years. Under the new law, qualifying multiemployer plans could elect to delay the start of that amortization period for "experience losses" for up to three years.
>To qualify for relief, plans would have to meet specific thresholds and make a special election; specifically, according to the CRS Report for Congress, the plan must:
- have had a net experience loss of 10% or more of the average fair market value of assets in 2002;
- be certified by the plan's actuary as expected to have a funded deficiency in 2004, 2005, or 2006 (based on the actuarial assumptions for 2003);
- have paid on time any excise tax imposed by the IRS;
- not have had a plan year after June 30, 1993, when employers were required to contribute an average of less than 10 cents per hour;
- not have previously received a funding waiver from the Internal Revenue Service.
>Multiemployer plans that qualify (estimates are that as few as 4% of the 1,600 multiemployer plans will ) can defer amortization of up to 80% of 2002 net experience losses for two plan years.
>Those that do qualify and apply would be prevented from increasing benefits during the deferral period unless:
- the plan's enrolled actuary certifies that the contributions to the plan will exceed the annual charges to the plan's account which were attributable to the change, or
- the amendment is required by a collective bargaining agreement in effect on the date of enactment.
>The new law also extends the date by which plans can make "qualified transfers" of excess pension assets to retiree health accounts under Code Sec. 420 from December 31, 2005, to December 31, 2013.
>For plan years beginning after December 31, 2004, the conference agreement requires multiemployer plans to give an annual plan funding notice to each participant and beneficiary, to each labor organization representing participants and beneficiaries, to each employer that has an obligation to contribute under the plan, and to the Pension Benefit Guaranty Corporation (PBGC). The notice, which is to be provided no later than two months after the deadline (including extensions) for filing the plan's annual report for the plan year, will have to include:
- a statement as to whether the plan's funded current liability percentage for the plan year is at least 100% (or what the actual percentage is, if less than 100%);
- a statement as to the value of the plan's assets, the amount of benefit payments, and the ratio of assets to payments for the plan year;
- a summary of the rules governing insolvent multiemployer plans;
- a general description of the benefits guaranteed by the PBGC.
To view the text of the bill as approved by Congress, go to http://edworkforce.house.gov/issues/108th/workforce/pension/pensionconfrpt.pdf