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108th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 108-457
======================================================================
PENSION FUNDING EQUITY ACT OF 2004
_______
April 1, 2004.--Ordered to be printed
_______
Mr. Boehner, from the committee of conference, submitted the following
CONFERENCE REPORT
[To accompany H.R. 3108]
The committee of conference on the disagreeing votes of
the two Houses on the amendment of the Senate to the bill (H.R.
3108), to amend the Employee Retirement Income Security Act of
1974 and the Internal Revenue Code of 1986 to temporarily
replace the 30-year Treasury rate with a rate based on long-
term corporate bonds for certain pension plan funding
requirements, and for other purposes, having met, after full
and free conference, have agreed to recommend and do recommend
to their respective Houses as follows:
That the House recede from its disagreement to the
amendment of the Senate and agree to the same with an amendment
as follows:
In lieu of the matter proposed to be inserted by the
Senate amendment, insert the following:
1. SHORT TITLE.
This Act may be cited as the ``Pension Funding Equity Act
of 2004''.
TITLE I--PENSION FUNDING
SEC. 101. TEMPORARY REPLACEMENT OF 30-YEAR TREASURY RATE.
(a) Employee Retirement Income Security Act of 1974.--
(1) Determination of permissible range.--
(A) In general.--Clause (ii) of section
302(b)(5)(B) of the Employee Retirement Income
Security Act of 1974 is amended by
redesignating subclause (II) as subclause (III)
and by inserting after subclause (I) the
following new subclause:
``(II) Special rule for years 2004
and 2005.--In the case of plan years
beginning after December 31, 2003, and
before January 1, 2006, the term
`permissible range' means a rate of
interest which is not above, and not
more than 10 percent below, the
weighted average of the rates of
interest on amounts invested
conservatively in long-term investment
grade corporate bonds during the 4-year
period ending on the last day before
the beginning of the plan year. Such
rates shall be determined by the
Secretary of the Treasury on the basis
of 2 or more indices that are selected
periodically by the Secretary of the
Treasury and that are in the top 3
quality levels available. The Secretary
of the Treasury shall make the
permissible range, and the indices and
methodology used to determine the
average rate, publicly available.''.
(B) Secretarial authority.--Subclause (III)
of section 302(b)(5)(B)(ii) of such Act, as
redesignated by subparagraph (A), is amended--
(i) by inserting ``or (II)'' after
``subclause (I)'' the first place it
appears, and
(ii) by striking ``subclause (I)''
the second place it appears and
inserting ``such subclause''.
(C) Conforming amendment.--Subclause (I) of
section 302(b)(5)(B)(ii) of such Act is amended
by inserting ``or (III)'' after ``subclause
(II)''.
(2) Determination of current liability.--Clause (i)
of section 302(d)(7)(C) of such Act is amended by
adding at the end the following new subclause:
``(IV) Special rule for
2004 and 2005.--For plan years
beginning in 2004 or 2005,
notwithstanding subclause (I),
the rate of interest used to
determine current liability
under this subsection shall be
the rate of interest under
subsection (b)(5).''.
(3) Conforming amendment.--Paragraph (7) of section
302(e) of such Act is amended to read as follows:
``(7) Special rule for 2002.--In any case in which
the interest rate used to determine current liability
is determined under subsection (d)(7)(C)(i)(III), for
purposes of applying paragraphs (1) and (4)(B)(ii) for
plan years beginning in 2002, the current liability for
the preceding plan year shall be redetermined using 120
percent as the specified percentage determined under
subsection (d)(7)(C)(i)(II).''.
(4) PBGC.--Clause (iii) of section 4006(a)(3)(E) of
such Act is amended by adding at the end the following
new subclause:
``(V) In the case of plan years beginning after
December 31, 2003, and before January 1, 2006, the
annual yield taken into account under subclause (II)
shall be the annual rate of interest determined by the
Secretary of the Treasury on amounts invested
conservatively in long-term investment grade corporate
bonds for the month preceding the month in which the
plan year begins. For purposes of the preceding
sentence, the Secretary of the Treasury shall determine
such rate of interest on the basis of 2 or more indices
that are selected periodically by the Secretary of the
Treasury and that are in the top 3 quality levels
available. The Secretary of the Treasury shall make the
permissible range, and the indices and methodology used
to determine the rate, publicly available.''.
(b) Internal Revenue Code of 1986.--
(1) Determination of permissible range.--
(A) In general.--Clause (ii) of section
412(b)(5)(B) of the Internal Revenue Code of
1986 is amended by redesignating subclause (II)
as subclause (III) and by inserting after
subclause (I) the following new subclause:
``(II) Special rule for
years 2004 and 2005.--In the
case of plan years beginning
after December 31, 2003, and
before January 1, 2006, the
term `permissible range' means
a rate of interest which is not
above, and not more than 10
percent below, the weighted
average of the rates of
interest on amounts invested
conservatively in long-term
investment grade corporate
bonds during the 4-year period
ending on the last day before
the beginning of the plan year.
Such rates shall be determined
by the Secretary on the basis
of 2 or more indices that are
selected periodically by the
Secretary and that are in the
top 3 quality levels available.
The Secretary shall make the
permissible range, and the
indices and methodology used to
determine the average rate,
publicly available.''.
(B) Secretarial authority.--Subclause (III)
of section 412(b)(5)(B)(ii) of such Code, as
redesignated by subparagraph (A), is amended--
(i) by inserting ``or (II)'' after
``subclause (I)'' the first place it
appears, and
(ii) by striking ``subclause (I)''
the second place it appears and
inserting ``such subclause''.
(C) Conforming amendment.--Subclause (I) of
section 412(b)(5)(B)(ii) of such Code is
amended by inserting ``or (III)'' after
``subclause (II)''.
(2) Determination of current liability.--Clause (i)
of section 412(l)(7)(C) of such Code is amended by
adding at the end the following new subclause:
``(IV) Special rule for
2004 and 2005.--For plan years
beginning in 2004 or 2005,
notwithstanding subclause (I),
the rate of interest used to
determine current liability
under this subsection shall be
the rate of interest under
subsection (b)(5).''.
(3) Conforming amendment.--Paragraph (7) of section
412(m) of such Code is amended to read as follows:
``(7) Special rule for 2002.--In any case in which
the interest rate used to determine current liability
is determined under subsection (l)(7)(C)(i)(III), for
purposes of applying paragraphs (1) and (4)(B)(ii) for
plan years beginning in 2002, the current liability for
the preceding plan year shall be redetermined using 120
percent as the specified percentage determined under
subsection (l)(7)(C)(i)(II).''.
(4) Limitation on certain assumptions.--Section
415(b)(2)(E)(ii) of such Code is amended by inserting
``, except that in the case of plan years beginning in
2004 or 2005, `5.5 percent' shall be substituted for `5
percent' in clause (i)'' before the period at the end.
(5) Election to disregard modification for
deduction purposes.--Section 404(a)(1) of such Code is
amended by adding at the end the following new
subparagraph:
``(F) Election to disregard modified
interest rate.--An employer may elect to
disregard subsections (b)(5)(B)(ii)(II) and
(l)(7)(C)(i)(IV) of section 412 solely for
purposes of determining the interest rate used
in calculating the maximum amount of the
deduction allowable under this paragraph.''.
(c) Provisions Relating to Plan Amendments.--
(1) In general.--If this subsection applies to any
plan or annuity contract amendment--
(A) such plan or contract shall be treated
as being operated in accordance with the terms
of the plan or contract during the period
described in paragraph (2)(B)(i), and
(B) except as provided by the Secretary of
the Treasury, such plan shall not fail to meet
the requirements of section 411(d)(6) of the
Internal Revenue Code of 1986 and section
204(g) of the Employee Retirement Income
Security Act of 1974 by reason of such
amendment.
(2) Amendments to which section applies.--
(A) In general.--This subsection shall
apply to any amendment to any plan or annuity
contract which is made--
(i) pursuant to any amendment made
by this section, and
(ii) on or before the last day of
the first plan year beginning on or
after January 1, 2006.
(B) Conditions.--This subsection shall not
apply to any plan or annuity contract amendment
unless--
(i) during the period beginning on
the date the amendment described in
subparagraph (A)(i) takes effect and
ending on the date described in
subparagraph (A)(ii) (or, if earlier,
the date the plan or contract amendment
is adopted), the plan or contract is
operated as if such plan or contract
amendment were in effect; and
(ii) such plan or contract
amendment applies retroactively for
such period.
(d) Effective Dates.--
(1) In general.--Except as provided in paragraphs
(2) and (3), the amendments made by this section shall
apply to plan years beginning after December 31, 2003.
(2) Lookback rules.--For purposes of applying
subsections (d)(9)(B)(ii) and (e)(1) of section 302 of
the Employee Retirement Income Security Act of 1974 and
subsections (l)(9)(B)(ii) and (m)(1) of section 412 of
the Internal Revenue Code of 1986 to plan years
beginning after December 31, 2003, the amendments made
by this section may be applied as if such amendments
had been in effect for all prior plan years. The
Secretary of the Treasury may prescribe simplified
assumptions which may be used in applying the
amendments made by this section to such prior plan
years.
(3) Transition rule for section 415 limitation.--In
the case of any participant or beneficiary receiving a
distribution after December 31, 2003 and before January
1, 2005, the amount payable under any form of benefit
subject to section 417(e)(3) of the Internal Revenue
Code of 1986 and subject to adjustment under section
415(b)(2)(B) of such Code shall not, solely by reason
of the amendment made by subsection (b)(4), be less
than the amount that would have been so payable had the
amount payable been determined using the applicable
interest rate in effect as of the last day of the last
plan year beginning before January 1, 2004.
SEC. 102. ELECTION OF ALTERNATIVE DEFICIT REDUCTION CONTRIBUTION.
(a) Amendment of ERISA.--Section 302(d) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1082(d)) is
amended by adding at the end the following new paragraph:
``(12) Election for certain plans.--
``(A) In general.--In the case of a defined
benefit plan established and maintained by an
applicable employer, if this subsection did not
apply to the plan for the plan year beginning
in 2000 (determined without regard to paragraph
(6)), then, at the election of the employer,
the increased amount under paragraph (1) for
any applicable plan year shall be the greater
of--
``(i) 20 percent of the increased
amount under paragraph (1) determined
without regard to this paragraph, or
``(ii) the increased amount which
would be determined under paragraph (1)
if the deficit reduction contribution
under paragraph (2) for the applicable
plan year were determined without
regard to subparagraphs (A), (B), and
(D) of paragraph (2).
``(B) Restrictions on benefit increases.--
No amendment which increases the liabilities of
the plan 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 shall be adopted
during any applicable plan year, unless--
``(i) the plan's enrolled actuary
certifies (in such form and manner
prescribed by the Secretary of the
Treasury) that the amendment provides
for an increase in annual contributions
which will exceed the increase in
annual charges to the funding standard
account attributable to such amendment,
or
``(ii) the amendment is required by
a collective bargaining agreement which
is in effect on the date of enactment
of this subparagraph.
If a plan is amended during any applicable plan
year in violation of the preceding sentence,
any election under this paragraph shall not
apply to any applicable plan year ending on or
after the date on which such amendment is
adopted.
``(C) Applicable employer.--For purposes of
this paragraph, the term `applicable employer'
means an employer which is--
``(i) a commercial passenger
airline,
``(ii) primarily engaged in the
production or manufacture of a steel
mill product or the processing of iron
ore pellets, or
``(iii) an organization described
in section 501(c)(5) of the Internal
Revenue Code of 1986 and which
established the plan to which this
paragraph applies on June 30, 1955.
``(D) Applicable plan year.--For purposes
of this paragraph--
``(i) In general.--The term
`applicable plan year' means any plan
year beginning after December 27, 2003,
and before December 28, 2005, for which
the employer elects the application of
this paragraph.
``(ii) Limitation on number of
years which may be elected.--An
election may not be made under this
paragraph with respect to more than 2
plan years.
``(E) Notice requirements for plans
electing alternative deficit reduction
contributions.--
``(i) In general.--If an employer
elects an alternative deficit reduction
contribution under this paragraph and
section 412(l)(12) of the Internal
Revenue Code of 1986 for any year, the
employer shall provide, within 30 days
of filing the election for such year,
written notice of the election to
participants and beneficiaries and to
the Pension Benefit Guaranty
Corporation.
``(ii) Notice to participants and
beneficiaries.--The notice under clause
(i) to participants and beneficiaries
shall include with respect to any
election--
``(I) the due date of the
alternative deficit reduction
contribution and the amount by
which such contribution was
reduced from the amount which
would have been owed if the
election were not made, and
``(II) a description of the
benefits under the plan which
are eligible to be guaranteed
by the Pension Benefit Guaranty
Corporation and an explanation
of the limitations on the
guarantee and the circumstances
under which such limitations
apply, including the maximum
guaranteed monthly benefits
which the Pension Benefit
Guaranty Corporation would pay
if the plan terminated while
underfunded.
``(iii) Notice to pbgc.--The notice
under clause (i) to the Pension Benefit
Guaranty Corporation shall include--
``(I) the information
described in clause (ii)(I),
``(II) the number of years
it will take to restore the
plan to full funding if the
employer only makes the
required contributions, and
``(III) information as to
how the amount by which the
plan is underfunded compares
with the capitalization of the
employer making the election.
``(F) Election.--An election under this
paragraph shall be made at such time and in
such manner as the Secretary of the Treasury
may prescribe.''
(b) Amendment of 1986 Code.--Section 412(l) of the Internal
Revenue Code of 1986 (relating to applicability of subsection)
is amended by adding at the end the following new paragraph:
``(12) Election for certain plans.--
``(A) In general.--In the case of a defined
benefit plan established and maintained by an
applicable employer, if this subsection did not
apply to the plan for the plan year beginning
in 2000 (determined without regard to paragraph
(6)), then, at the election of the employer,
the increased amount under paragraph (1) for
any applicable plan year shall be the greater
of--
``(i) 20 percent of the increased
amount under paragraph (1) determined
without regard to this paragraph, or
``(ii) the increased amount which
would be determined under paragraph (1)
if the deficit reduction contribution
under paragraph (2) for the applicable
plan year were determined without
regard to subparagraphs (A), (B), and
(D) of paragraph (2).
``(B) Restrictions on benefit increases.--
No amendment which increases the liabilities of
the plan 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 shall be adopted
during any applicable plan year, unless--
``(i) the plan's enrolled actuary
certifies (in such form and manner
prescribed by the Secretary) that the
amendment provides for an increase in
annual contributions which will exceed
the increase in annual charges to the
funding standard account attributable
to such amendment, or
``(ii) the amendment is required by
a collective bargaining agreement which
is in effect on the date of enactment
of this subparagraph.
If a plan is amended during any applicable plan
year in violation of the preceding sentence,
any election under this paragraph shall not
apply to any applicable plan year ending on or
after the date on which such amendment is
adopted.
``(C) Applicable employer.--For purposes of
this paragraph, the term `applicable employer'
means an employer which is--
``(i) a commercial passenger
airline,
``(ii) primarily engaged in the
production or manufacture of a steel
mill product or the processing of iron
ore pellets, or
``(iii) an organization described
in section 501(c)(5) and which
established the plan to which this
paragraph applies on June 30, 1955.
``(D) Applicable plan year.--For purposes
of this paragraph--
``(i) In general.--The term
`applicable plan year' means any plan
year beginning after December 27, 2003,
and before December 28, 2005, for which
the employer elects the application of
this paragraph.
``(ii) Limitation on number of
years which may be elected.--An
election may not be made under this
paragraph with respect to more than 2
plan years.
``(E) Election.--An election under this
paragraph shall be made at such time and in
such manner as the Secretary may prescribe.''
(c) Effect of Election.--An election under section
302(d)(12) of the Employee Retirement Income Security Act of
1974 or section 412(l)(12) of the Internal Revenue Code of 1986
(as added by this section) with respect to a plan shall not
invalidate any obligation (pursuant to a collective bargaining
agreement in effect on the date of the election) to provide
benefits, to change the accrual of benefits, or to change the
rate at which benefits become nonforfeitable under the plan.
(d) Penalty for Failing To Provide Notice.--Section
502(c)(3) of the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1132(c)(3)) is amended by inserting ``or who
fails to meet the requirements of section 302(d)(12)(E) with
respect to any person'' after ``101(e)(2) with respect to any
person''.
SEC. 103. MULTIEMPLOYER PLAN FUNDING NOTICES.
(a) In General.--Section 101 of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1021) is amended by
inserting after subsection (e) the following new subsection:
``(f) Multiemployer Defined Benefit Plan Funding Notices.--
``(1) In general.--The administrator of a defined
benefit plan which is a multiemployer plan shall for
each plan year provide a plan funding notice to each
plan participant and beneficiary, to each labor
organization representing such participants or
beneficiaries, to each employer that has an obligation
to contribute under the plan, and to the Pension
Benefit Guaranty Corporation.
``(2) Information contained in notices.--
``(A) Identifying information.--Each notice
required under paragraph (1) shall contain
identifying information, including the name of
the plan, the address and phone number of the
plan administrator and the plan's principal
administrative officer, each plan sponsor's
employer identification number, and the plan
number of the plan.
``(B) Specific information.--A plan funding
notice under paragraph (1) shall include--
``(i) a statement as to whether the
plan's funded current liability
percentage (as defined in section
302(d)(8)(B)) for the plan year to
which the notice relates is at least
100 percent (and, if not, the actual
percentage);
``(ii) a statement of the value of
the plan's assets, the amount of
benefit payments, and the ratio of the
assets to the payments for the plan
year to which the notice relates;
``(iii) a summary of the rules
governing insolvent multiemployer
plans, including the limitations on
benefit payments and any potential
benefit reductions and suspensions (and
the potential effects of such
limitations, reductions, and
suspensions on the plan); and
``(iv) a general description of the
benefits under the plan which are
eligible to be guaranteed by the
Pension Benefit Guaranty Corporation,
along with an explanation of the
limitations on the guarantee and the
circumstances under which such
limitations apply.
``(C) Other information.--Each notice under
paragraph (1) shall include any additional
information which the plan administrator elects
to include to the extent not inconsistent with
regulations prescribed by the Secretary.
``(3) Time for providing notice.--Any notice under
paragraph (1) shall be provided no later than two
months after the deadline (including extensions) for
filing the annual report for the plan year to which the
notice relates.
``(4) Form and manner.--Any notice under paragraph
(1)--
``(A) shall be provided in a form and
manner prescribed in regulations of the
Secretary,
``(B) shall be written in a manner so as to
be understood by the average plan participant,
and
``(C) may be provided in written,
electronic, or other appropriate form to the
extent such form is reasonably accessible to
persons to whom the notice is required to be
provided.''
(b) Penalties.--Section 502(c)(1) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1132(c)(1))
is amended by striking ``or section 101(e)(1)'' and inserting
``, section 101(e)(1), or section 101(f)''.
(c) Regulations and Model Notice.--The Secretary of Labor
shall, not later than 1 year after the date of the enactment of
this Act, issue regulations (including a model notice)
necessary to implement the amendments made by this section.
(d) Effective Date.--The amendments made by this section
shall apply to plan years beginning after December 31, 2004.
SEC. 104. ELECTION FOR DEFERRAL OF CHARGE FOR PORTION OF NET EXPERIENCE
LOSS.
(a) Employee Retirement Income Security Act of 1974.--
(1) In general.--Section 302(b)(7) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1082(b)(7)) is amended by adding at the end the
following new subparagraph:
``(F) Election for deferral of charge for
portion of net experience loss.--
``(i) In general.--With respect to
the net experience loss of an eligible
multiemployer plan for the first plan
year beginning after December 31, 2001,
the plan sponsor may elect to defer up
to 80 percent of the amount otherwise
required to be charged under paragraph
(2)(B)(iv) for any plan year beginning
after June 30, 2003, and before July 1,
2005, to any plan year selected by the
plan from either of the 2 immediately
succeeding plan years.
``(ii) Interest.--For the plan year
to which a charge is deferred pursuant
to an election under clause (i), the
funding standard account shall be
charged with interest on the deferred
charge for the period of deferral at
the rate determined under section
304(a) for multiemployer plans.
``(iii) Restrictions on benefit
increases.--No amendment which
increases the liabilities of the plan
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 shall be adopted during any
period for which a charge is deferred
pursuant to an election under clause
(i), unless--
``(I) the plan's enrolled
actuary certifies (in such form
and manner prescribed by the
Secretary of the Treasury) that
the amendment provides for an
increase in annual
contributions which will exceed
the increase in annual charges
to the funding standard account
attributable to such amendment,
or
``(II) the amendment is
required by a collective
bargaining agreement which is
in effect on the date of
enactment of this subparagraph.
If a plan is amended during any such
plan year in violation of the preceding
sentence, any election under this
paragraph shall not apply to any such
plan year ending on or after the date
on which such amendment is adopted.
``(iv) Eligible multiemployer
plan.--For purposes of this
subparagraph, the term `eligible
multiemployer plan' means a
multiemployer plan--
``(I) which had a net
investment loss for the first
plan year beginning after
December 31, 2001, of at least
10 percent of the average fair
market value of the plan assets
during the plan year, and
``(II) with respect to
which the plan's enrolled
actuary certifies (not taking
into account the application of
this subparagraph), on the
basis of the actuarial
assumptions used for the last
plan year ending before the
date of the enactment of this
subparagraph, that the plan is
projected to have an
accumulated funding deficiency
(within the meaning of
subsection (a)(2)) for any plan
year beginning after June 30,
2003, and before July 1, 2006.
For purposes of subclause (I), a plan's
net investment loss shall be determined
on the basis of the actual loss and not
under any actuarial method used under
subsection (c)(2).
``(v) Exception to treatment of
eligible multiemployer plan.--In no
event shall a plan be treated as an
eligible multiemployer plan under
clause (iv) if--
``(I) for any taxable year
beginning during the 10-year
period preceding the first plan
year for which an election is
made under clause (i), any
employer required to contribute
to the plan failed to timely
pay any excise tax imposed
under section 4971 of the
Internal Revenue Code of 1986
with respect to the plan,
``(II) for any plan year
beginning after June 30, 1993,
and before the first plan year
for which an election is made
under clause (i), the average
contribution required to be
made by all employers to the
plan does not exceed 10 cents
per hour or no employer is
required to make contributions
to the plan, or
``(III) with respect to any
of the plan years beginning
after June 30, 1993, and before
the first plan year for which
an election is made under
clause (i), a waiver was
granted under section 303 of
this Act or section 412(d) of
the Internal Revenue Code of
1986 with respect to the plan
or an extension of an
amortization period was granted
under section 304 of this Act
or section 412(e) of such Code
with respect to the plan.
``(vi) Notice.--If a plan sponsor
makes an election under this
subparagraph or section 412(b)(7)(F) of
the Internal Revenue Code of 1986 for
any plan year, the plan administrator
shall provide, within 30 days of filing
the election for such year, written
notice of the election to participants
and beneficiaries, to each labor
organization representing such
participants or beneficiaries, to each
employer that has an obligation to
contribute under the plan, and to the
Pension Benefit Guaranty Corporation.
Such notice shall include with respect
to any election the amount of any
charge to be deferred and the period of
the deferral. Such notice shall also
include the maximum guaranteed monthly
benefits which the Pension Benefit
Guaranty Corporation would pay if the
plan terminated while underfunded.
``(vii) Election.--An election
under this subparagraph shall be made
at such time and in such manner as the
Secretary of the Treasury may
prescribe.''
(2) Penalty.--Section 502(c)(4) of such Act (29
U.S.C. 1132(c)(4)) is amended to read as follows:
``(4) The Secretary may assess a civil penalty of
not more than $1,000 a day for each violation by any
person of section 302(b)(7)(F)(vi).''
(b) Internal Revenue Code of 1986.--Section 412(b)(7) of
the Internal Revenue Code of 1986 (relating to special rules
for multiemployer plans) is amended by adding at the end the
following new subparagraph:
``(F) Election for deferral of charge for
portion of net experience loss.--
``(i) In general.--With respect to
the net experience loss of an eligible
multiemployer plan for the first plan
year beginning after December 31, 2001,
the plan sponsor may elect to defer up
to 80 percent of the amount otherwise
required to be charged under paragraph
(2)(B)(iv) for any plan year beginning
after June 30, 2003, and before July 1,
2005, to any plan year selected by the
plan from either of the 2 immediately
succeeding plan years.
``(ii) Interest.--For the plan year
to which a charge is deferred pursuant
to an election under clause (i), the
funding standard account shall be
charged with interest on the deferred
charge for the period of deferral at
the rate determined under subsection
(d) for multiemployer plans.
``(iii) Restrictions on benefit
increases.--No amendment which
increases the liabilities of the plan
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 shall be adopted during any
period for which a charge is deferred
pursuant to an election under clause
(i), unless--
``(I) the plan's enrolled
actuary certifies (in such form
and manner prescribed by the
Secretary) that the amendment
provides for an increase in
annual contributions which will
exceed the increase in annual
charges to the funding standard
account attributable to such
amendment, or
``(II) the amendment is
required by a collective
bargaining agreement which is
in effect on the date of
enactment of this subparagraph.
If a plan is amended during any such
plan year in violation of the preceding
sentence, any election under this
paragraph shall not apply to any such
plan year ending on or after the date
on which such amendment is adopted.
``(iv) Eligible multiemployer
plan.--For purposes of this
subparagraph, the term `eligible
multiemployer plan' means a
multiemployer plan--
``(I) which had a net
investment loss for the first
plan year beginning after
December 31, 2001, of at least
10 percent of the average fair
market value of the plan assets
during the plan year, and
``(II) with respect to
which the plan's enrolled
actuary certifies (not taking
into account the application of
this subparagraph), on the
basis of the acutuarial
assumptions used for the last
plan year ending before the
date of the enactment of this
subparagraph, that the plan is
projected to have an
accumulated funding deficiency
(within the meaning of
subsection (a)) for any plan
year beginning after June 30,
2003, and before July 1, 2006.
For purposes of subclause (I), a plan's
net investment loss shall be determined
on the basis of the actual loss and not
under any actuarial method used under
subsection (c)(2).
``(v) Exception to treatment of
eligible multiemployer plan.--In no
event shall a plan be treated as an
eligible multiemployer plan under
clause (iv) if--
``(I) for any taxable year
beginning during the 10-year
period preceding the first plan
year for which an election is
made under clause (i), any
employer required to contribute
to the plan failed to timely
pay any excise tax imposed
under section 4971 with respect
to the plan,
``(II) for any plan year
beginning after June 30, 1993,
and before the first plan year
for which an election is made
under clause (i), the average
contribution required to be
made by all employers to the
plan does not exceed 10 cents
per hour or no employer is
required to make contributions
to the plan, or
``(III) with respect to any
of the plan years beginning
after June 30, 1993, and before
the first plan year for which
an election is made under
clause (i), a waiver was
granted under section 412(d) or
section 303 of the Employee
Retirement Income Security Act
of 1974 with respect to the
plan or an extension of an
amortization period was granted
under subsection (e) or section
304 of such Act with respect to
the plan.
``(vi) Election.--An election under
this subparagraph shall be made at such
time and in such manner as the
Secretary may prescribe.''
TITLE II--OTHER PROVISIONS
SEC. 201. 2-YEAR EXTENSION OF TRANSITION RULE TO PENSION FUNDING
REQUIREMENTS.
(a) In General.--Section 769(c) of the Retirement
Protection Act of 1994, as added by section 1508 of the
Taxpayer Relief Act of 1997, is amended--
(1) by inserting ``except as provided in paragraph
(3),'' before ``the transition rules'', and
(2) by adding at the end the following:
``(3) Special rules.--In the case of plan years beginning
in 2004 and 2005, the following transition rules shall apply in
lieu of the transition rules described in paragraph (2):
``(A) For purposes of section 412(l)(9)(A)
of the Internal Revenue Code of 1986 and
section 302(d)(9)(A) of the Employee Retirement
Income Security Act of 1974, the funded current
liability percentage for any plan year shall be
treated as not less than 90 percent.
``(B) For purposes of section 412(m) of the
Internal Revenue Code of 1986 and section
302(e) of the Employee Retirement Income
Security Act of 1974, the funded current
liability percentage for any plan year shall be
treated as not less than 100 percent.
``(C) For purposes of determining unfunded
vested benefits under section
4006(a)(3)(E)(iii) of the Employee Retirement
Income Security Act of 1974, the mortality
table shall be the mortality table used by the
plan.''
(b) Effective Date.--The amendments made by this section
shall apply to plan years beginning after December 31, 2003.
SEC. 202. PROCEDURES APPLICABLE TO DISPUTES INVOLVING PENSION PLAN
WITHDRAWAL LIABILITY.
(a) In General.--Section 4221 of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1401) is amended by
adding at the end the following new subsection:
``(f) Procedures Applicable to Certain Disputes.--
``(1) In general.--If--
``(A) a plan sponsor of a plan determines
that--
``(i) a complete or partial
withdrawal of an employer has occurred,
or
``(ii) an employer is liable for
withdrawal liability payments with
respect to the complete or partial
withdrawal of an employer from the
plan,
``(B) such determination is based in whole
or in part on a finding by the plan sponsor
under section 4212(c) that a principal purpose
of a transaction that occurred before January
1, 1999, was to evade or avoid withdrawal
liability under this subtitle, and
``(C) such transaction occurred at least 5
years before the date of the complete or
partial withdrawal,
then the special rules under paragraph (2) shall be
used in applying subsections (a) and (d) of this
section and section 4219(c) to the employer.
``(2) Special rules.--
``(A) Determination.--Notwithstanding
subsection (a)(3)--
``(i) a determination by the plan
sponsor under paragraph (1)(B) shall
not be presumed to be correct, and
``(ii) the plan sponsor shall have
the burden to establish, by a
preponderance of the evidence, the
elements of the claim under section
4212(c) that a principal purpose of the
transaction was to evade or avoid
withdrawal liability under this
subtitle.
Nothing in this subparagraph shall affect the
burden of establishing any other element of a
claim for withdrawal liability under this
subtitle.
``(B) Procedure.--Notwithstanding
subsection (d) and section 4219(c), if an
employer contests the plan sponsor's
determination under paragraph (1) through an
arbitration proceeding pursuant to subsection
(a), or through a claim brought in a court of
competent jurisdiction, the employer shall not
be obligated to make any withdrawal liability
payments until a final decision in the
arbitration proceeding, or in court, upholds
the plan sponsor's determination.''.
(b) Effective Date.--The amendments made by this section
shall apply to any employer that receives a notification under
section 4219(b)(1) of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1399(b)(1)) after October 31, 2003.
SEC. 203. SENSE OF CONGRESS REGARDING DEFINED BENEFIT PENSION SYSTEM
REFORM.
It is the sense of the Congress that the Congress must
ensure the financial health of the defined benefit pension
system by working to promptly implement--
(1) a permanent replacement for the pension
discount rate used for defined benefit pension plan
calculations, and
(2) comprehensive funding reforms for all defined
benefit pension plans aimed at achieving accurate and
sound pension funding to enhance retirement security
for workers who rely on defined pension plan benefits,
to reduce the volatility of contributions, to provide
plan sponsors with predictability for plan
contributions, and to ensure adequate disclosures for
plan participants in the case of underfunded pension
plans.
SEC. 204. EXTENSION OF TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE
HEALTH ACCOUNTS.
(a) Amendment of Internal Revenue Code of 1986.--Paragraph
(5) of section 420(b) of the Internal Revenue Code of 1986
(relating to expiration) is amended by striking ``December 31,
2005'' and inserting ``December 31, 2013''.
(b) Amendments of ERISA.--
(1) Section 101(e)(3) of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1021(e)(3)) is
amended by striking ``Tax Relief Extension Act of
1999'' and inserting ``Pension Funding Equity Act of
2004''.
(2) Section 403(c)(1) of such Act (29 U.S.C.
1103(c)(1)) is amended by striking ``Tax Relief
Extension Act of 1999'' and inserting ``Pension Funding
Equity Act of 2004''.
(3) Paragraph (13) of section 408(b) of such Act
(29 U.S.C. 1108(b)(3)) is amended--
(A) by striking ``January 1, 2006'' and
inserting ``January 1, 2014'', and
(B) by striking ``Tax Relief Extension Act
of 1999'' and inserting ``Pension Funding
Equity Act of 2004''.
SEC. 205. REPEAL OF REDUCTION OF DEDUCTIONS FOR MUTUAL LIFE INSURANCE
COMPANIES.
(a) In General.--Section 809 of the Internal Revenue Code
of 1986 (relating to reductions in certain deduction of mutual
life insurance companies) is hereby repealed.
(b) Conforming Amendments.--
(1) Subsections (a)(2)(B) and (b)(1)(B) of section
807 of such Code are each amended by striking ``the sum
of (i)'' and by striking ``plus (ii) any excess
described in section 809(a)(2) for the taxable year,''.
(2)(A) The last sentence of section 807(d)(1) of
such Code is amended by striking ``section
809(b)(4)(B)'' and inserting ``paragraph (6)''.
(B) Subsection (d) of section 807 of such Code is
amended by adding at the end the following new
paragraph:
``(6) Statutory reserves.--The term `statutory
reserves' means the aggregate amount set forth in the
annual statement with respect to items described in
section 807(c). Such term shall not include any reserve
attributable to a deferred and uncollected premium if
the establishment of such reserve is not permitted
under section 811(c).''
(3) Subsection (c) of section 808 of such Code is
amended to read as follows:
``(c) Amount of Deduction.--The deduction for policyholder
dividends for any taxable year shall be an amount equal to the
policyholder dividends paid or accrued during the taxable
year.''
(4) Subparagraph (A) of section 812(b)(3) of such
Code is amended by striking ``sections 808 and 809''
and inserting ``section 808''.
(5) Subsection (c) of section 817 of such Code is
amended by striking ``(other than section 809)''.
(6) Subsection (c) of section 842 of such Code is
amended by striking paragraph (3) and by redesignating
paragraph (4) as paragraph (3).
(7) The table of sections for subpart C of part I
of subchapter L of chapter 1 of such Code is amended by
striking the item relating to section 809.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2004.
SEC. 206. CLARIFICATION OF EXEMPTION FROM TAX FOR SMALL PROPERTY AND
CASUALTY INSURANCE COMPANIES.
(a) In General.--Section 501(c)(15)(A) of the Internal
Revenue Code of 1986 is amended to read as follows:
``(A) Insurance companies (as defined in section
816(a)) other than life (including interinsurers and
reciprocal underwriters) if--
``(i)(I) the gross receipts for the taxable
year do not exceed $600,000, and
``(II) more than 50 percent of such gross
receipts consist of premiums, or
``(ii) in the case of a mutual insurance
company--
``(I) the gross receipts of which
for the taxable year do not exceed
$150,000, and
``(II) more than 35 percent of such
gross receipts consist of premiums.
Clause (ii) shall not apply to a company if any
employee of the company, or a member of the employee's
family (as defined in section 2032A(e)(2)), is an
employee of another company exempt from taxation by
reason of this paragraph (or would be so exempt but for
this sentence).''.
(b) Controlled Group Rule.--Section 501(c)(15)(C) of the
Internal Revenue Code of 1986 is amended by inserting ``,
except that in applying section 831(b)(2)(B)(ii) for purposes
of this subparagraph, subparagraphs (B) and (C) of section
1563(b)(2) shall be disregarded'' before the period at the end.
(c) Definition of Insurance Company for Section 831.--
Section 831 of the Internal Revenue Code of 1986 is amended by
redesignating subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:
``(c) Insurance Company Defined.--For purposes of this
section, the term `insurance company' has the meaning given to
such term by section 816(a)).''.
(d) Conforming Amendment.--Clause (i) of section
831(b)(2)(A) of the Internal Revenue Code of 1986 is amended by
striking ``exceed $350,000 but''.
(e) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after December 31, 2003.
(2) Transition rule for companies in receivership
or liquidation.--In the case of a company or
association which--
(A) for the taxable year which includes
April 1, 2004, meets the requirements of
section 501(c)(15)(A) of the Internal Revenue
Code of 1986, as in effect for the last taxable
year beginning before January 1, 2004, and
(B) on April 1, 2004, is in a receivership,
liquidation, or similar proceeding under the
supervision of a State court,
the amendments made by this section shall apply to
taxable years beginning after the earlier of the date
such proceeding ends or December 31, 2007.
SEC. 207. CONFIRMATION OF ANTITRUST STATUS OF GRADUATE MEDICAL RESIDENT
MATCHING PROGRAMS.
(a) Findings and Purposes.--
(1) Findings.--Congress makes the following
findings:
(A) For over 50 years, most United States
medical school seniors and the large majority
of graduate medical education programs
(popularly known as ``residency programs'')
have chosen to use a matching program to match
medical students with residency programs to
which they have applied. These matching
programs have been an integral part of an
educational system that has produced the finest
physicians and medical researchers in the
world.
(B) Before such matching programs were
instituted, medical students often felt
pressure, at an unreasonably early stage of
their medical education, to seek admission to,
and accept offers from, residency programs. As
a result, medical students often made binding
commitments before they were in a position to
make an informed decision about a medical
specialty or a residency program and before
residency programs could make an informed
assessment of students' qualifications. This
situation was inefficient, chaotic, and unfair
and it often led to placements that did not
serve the interests of either medical students
or residency programs.
(C) The original matching program, now
operated by the independent non-profit National
Resident Matching Program and popularly known
as ``the Match,'' was developed and implemented
more than 50 years ago in response to
widespread student complaints about the prior
process. This Program includes on its board of
directors individuals nominated by medical
student organizations as well as by major
medical education and hospital associations.
(D) The Match uses a computerized
mathematical algorithm, as students had
recommended, to analyze the preferences of
students and residency programs and match
students with their highest preferences from
among the available positions in residency
programs that listed them. Students thus obtain
a residency position in the most highly ranked
program on their list that has ranked them
sufficiently high among its preferences. Each
year, about 85 percent of participating United
States medical students secure a place in one
of their top 3 residency program choices.
(E) Antitrust lawsuits challenging the
matching process, regardless of their merit or
lack thereof, have the potential to undermine
this highly efficient, pro-competitive, and
long-standing process. The costs of defending
such litigation would divert the scarce
resources of our country's teaching hospitals
and medical schools from their crucial missions
of patient care, physician training, and
medical research. In addition, such costs may
lead to abandonment of the matching process,
which has effectively served the interests of
medical students, teaching hospitals, and
patients for over half a century.
(2) Purposes.--It is the purpose of this section
to--
(A) confirm that the antitrust laws do not
prohibit sponsoring, conducting, or
participating in a graduate medical education
residency matching program, or agreeing to do
so; and
(B) ensure that those who sponsor, conduct
or participate in such matching programs are
not subjected to the burden and expense of
defending against litigation that challenges
such matching programs under the antitrust
laws.
(b) Application of Antitrust Laws to Graduate Medical
Education Residency Matching Programs.--
(1) Definitions.--In this subsection:
(A) Antitrust laws.--The term ``antitrust
laws''--
(i) has the meaning given such term
in subsection (a) of the first section
of the Clayton Act (15 U.S.C. 12(a)),
except that such term includes section
5 of the Federal Trade Commission Act
(15 U.S.C. 45) to the extent such
section 5 applies to unfair methods of
competition; and
(ii) includes any State law similar
to the laws referred to in clause (i).
(B) Graduate medical education program.--
The term ``graduate medical education program''
means--
(i) a residency program for the
medical education and training of
individuals following graduation from
medical school;
(ii) a program, known as a
specialty or subspecialty fellowship
program, that provides more advanced
training; and
(iii) an institution or
organization that operates, sponsors or
participates in such a program.
(C) Graduate medical education residency
matching program.--The term ``graduate medical
education residency matching program'' means a
program (such as those conducted by the
National Resident Matching Program) that, in
connection with the admission of students to
graduate medical education programs, uses an
algorithm and matching rules to match students
in accordance with the preferences of students
and the preferences of graduate medical
education programs.
(D) Student.--The term ``student'' means
any individual who seeks to be admitted to a
graduate medical education program.
(2) Confirmation of Antitrust Status.--It shall not
be unlawful under the antitrust laws to sponsor,
conduct, or participate in a graduate medical education
residency matching program, or to agree to sponsor,
conduct, or participate in such a program. Evidence of
any of the conduct described in the preceding sentence
shall not be admissible in Federal court to support any
claim or action alleging a violation of the antitrust
laws.
(3) Applicability.--Nothing in this section shall
be construed to exempt from the antitrust laws any
agreement on the part of 2 or more graduate medical
education programs to fix the amount of the stipend or
other benefits received by students participating in
such programs.
(c) Effective Date.--This section shall take effect on the
date of enactment of this Act, shall apply to conduct whether
it occurs prior to, on, or after such date of enactment, and
shall apply to all judicial and administrative actions or other
proceedings pending on such date of enactment.
And the Senate agree to the same.
From the Committee on Education and the
Workforce, for consideration of the House bill
and the Senate amendment, and modifications
committed to conference:
John Boehner,
Howard ``Buck'' McKeon,
Sam Johnson,
Patrick J. Tiberi,
From the Committee on Ways and Means, for
consideration of the House bill and the Senate
amendment, and modifications committed to
conference:
William Thomas,
Rob Portman,
Managers on the Part of the House.
Chuck Grassley,
Judd Gregg,
Mitch McConnell,
Managers on the Part of the Senate.
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at
the conference on the disagreeing votes of the two Houses on
the amendment of the Senate to the bill (H.R. 3108), to amend
the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986 to temporarily replace the 30-
year Treasury rate with a rate based on long-term corporate
bonds for certain pension plan funding requirements, and for
other purposes, submit the following joint statement to the
House and the Senate in explanation of the effect of the action
agreed upon by the managers and recommended in the accompanying
conference report:
The Senate amendment struck all of the House bill after
``SECTION'' (page 2, line 3) and inserted a substitute text.
The House recedes from its disagreement to the amendment
of the Senate with an amendment that is a substitute for the
House bill and the Senate amendment. The differences between
the House bill, the Senate amendment, and the substitute agreed
to in conference are noted below, except for clerical
corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clarifying
changes.
CONTENTS
Page
Joint Explanatory Statement of the Committee of Conference....... 21
A. Temporary Replacement of Interest Rate Used for Certain
Pension Plan Purposes and Alternative Deficit Reduction
Contribution for Certain Plans (sec. 3 of the House bill, secs.
2-3 of the Senate amendment, secs. 302 and 4006 of ERISA, and
secs. 404, 412 and 415 of the Code)............................ 22
B. Multiemployer Plan Funding Notices (sec. 4 of the Senate
amendment and secs. 101 and 502 of ERISA)...................... 36
C. Election for Deferral of Charge for Portion of Net Experience
Loss of Multiemployer Plans (sec. 5 of the Senate amendment,
sec. 302(b)(7) of ERISA and sec. 412(b)(7) of the Code)........ 39
D. Two-Year Extension of Transition Rule to Pension Funding
Requirements for Interstate Bus Company (sec. 6 of the Senate
amendment, and sec. 769(c) of the Retirement Protection Act of
1994 (as added by sec. 1508 of the Taxpayer Relief Act of
1997))......................................................... 43
E. Procedures Applicable to Disputes Involving Pension Plan
Withdrawal Liability (sec. 7 of the Senate amendment and sec.
4221 of ERISA)................................................. 45
F. Modify Qualification Rules for Tax-Exempt Property and
Casualty Insurance Companies (sec. 10 of the Senate amendment
and secs. 501 and 831 of the Code)............................. 47
G. Definition of Insurance Company for Property and Casualty
Insurance Company Tax Rules (sec. 11 of the Senate amendment
and sec. 831 of the Code)...................................... 49
H. Repeal of Reduction of Deductions for Mutual Life Insurance
Companies (sec. 809 of the Code)............................... 51
I. Sense of Congress Regarding Defined Benefit Pension System
Reform (sec. 2 of the House bill and sec. 8 of the Senate
amendment)..................................................... 52
J. Extension of Provision Permitting Qualified Transfers of
Excess Pension Assets to Retiree Health Accounts (sec. 9 of the
Senate amendment, sec. 420 of the Code, and secs. 101, 403, and
408 of ERISA).................................................. 54
K. Confirmation of Antitrust Status of Graduate Medical Resident
Matching Programs.............................................. 56
L. Tax Complexity Analysis....................................... 57
A. Temporary Replacement of Interest Rate Used for Certain Pension Plan
Purposes and Alternative Deficit Reduction Contribution for Certain
Plans
(Sec. 3 of the House bill, secs. 2-3 of the Senate amendment, secs. 302
and 4006 of ERISA, and secs. 404, 412 and 415 of the Code)
PRESENT LAW
In general
Under present law, the interest rate on 30-year Treasury
securities is used for several purposes related to defined
benefit pension plans. Specifically, the interest rate on 30-
year Treasury securities is used: (1) in determining current
liability for purposes of the funding and deduction rules; (2)
in determining unfunded vested benefits for purposes of Pension
Benefit Guaranty Corporation (``PBGC'') variable rate premiums;
and (3) in determining the minimum required value of lump-sum
distributions from a defined benefit pension plan and maximum
lump-sum values for purposes of the limits on benefits payable
under a defined benefit pension plan.
The IRS publishes the interest rate on 30-year Treasury
securities on a monthly basis. The Department of the Treasury
does not currently issue 30-year Treasury securities. As of
March 2002, the IRS publishes the average yield on the 30-year
Treasury bond maturing in February 2031 as a substitute.
Funding rules
In general
The Internal Revenue Code (the ``Code'') and the Employee
Retirement Income Security Act of 1974 (``ERISA'') impose
minimum funding requirements with respect to defined benefit
pension plans.\1\ Under the funding rules, the amount of
contributions required for a plan year is generally the plan's
normal cost for the year (i.e., the cost of benefits allocated
to the year under the plan's funding method) plus that year's
portion of other liabilities that are amortized over a period
of years, such as benefits resulting from a grant of past
service credit.
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\1\ Code sec. 412; ERISA sec. 302. The Code also imposes limits on
deductible contributions, as discussed below.
---------------------------------------------------------------------------
Additional contributions for underfunded plans
Under special funding rules (referred to as the ``deficit
reduction contribution'' rules),\2\ an additional contribution
to a plan is generally required if the plan's funded current
liability percentage is less than 90 percent.\3\ A plan's
``funded current liability percentage'' is the actuarial value
of plan assets \4\ as a percentage of the plan's current
liability. In general, a plan's current liability means all
liabilities to employees and their beneficiaries under the
plan.
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\2\ 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.
\3\ 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.
\4\ The actuarial value of plan assets is the value determined
under an actuarial valuation method that takes into account fair market
value and meets certain other requirements. The use of an actuarial
valuation method allows appreciation or depreciation in the market
value of plan assets to be recognized gradually over several plan
years. Sec. 412(c)(2); Treas. reg. sec. 1.412(c)(2)-1.
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The amount of the additional contribution required under
the deficit reduction contribution rules is the sum of two
amounts: (1) the excess, if any, of (a) the deficit reduction
contribution (as described below), over (b) the contribution
required under the normal funding rules; and (2) the amount (if
any) required with respect to unpredictable contingent event
benefits.\5\ The amount of the additional contribution cannot
exceed the amount needed to increase the plan's funded current
liability percentage to 100 percent.
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\5\ 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. An additional contribution is generally not required with
respect to unpredictable contingent event benefits unless the event
giving rise to the benefits has occurred.
---------------------------------------------------------------------------
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.\6\ The
``unfunded old liability amount'' is the amount needed to
amortize certain unfunded liabilities under 1987 and 1994
transition rules. The ``unfunded new liability amount'' is the
applicable percentage of the plan's unfunded new liability.
Unfunded new liability generally means the unfunded current
liability of the plan (i.e., the amount by which the plan's
current liability exceeds the actuarial value of plan assets),
but determined without regard to certain liabilities (such as
the plan's unfunded old liability and unpredictable contingent
event benefits). The applicable percentage is generally 30
percent, but is reduced if the plan's funded current liability
percentage. is greater than 60 percent.
---------------------------------------------------------------------------
\6\ If the Secretary of the Treasury prescribes a new mortality
table to be used in determining current liability, as described below,
the deficit reduction contribution may include an additional amount.
---------------------------------------------------------------------------
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. The interest rate used to determine a
plan's current liability must be within a permissible range of
the weighted average \7\ of the interest rates on 30-year
Treasury securities for the four-year period ending on the last
day before the plan year begins. The permissible range is
generally from 90 percent to 105 percent.\8\ The interest rate
used under the plan must be consistent with the assumptions
which reflect the purchase rates which would be used by
insurance companies to satisfy the liabilities under the
plan.\9\
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\7\ 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.
\8\ 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.
\9\ Code sec. 412(b)(5)(B)(iii)(II); ERISA sec.
302(b)(5)(B)(iii)(II). Under Notice 90-11, 1990-1 C.B. 319, the
interest rates in the permissible range are deemed to be consistent
with the assumptions reflecting the purchase rates that would be used
by insurance companies to satisfy the liabilities under the plan.
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The Job Creation and Worker Assistance Act of 2002 \10\
amended the permissible range of the statutory interest rate
used in calculating a plan's current liability for purposes of
applying the additional contribution requirements. Under this
provision, the permissible range is from 90 percent to 120
percent for plan years beginning after December 31, 2001, and
before January 1, 2004.
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\10\ Pub. L. No. 107-147.
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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.\11\ The Secretary of the Treasury has required the
use of the 1983 Group Annuity Mortality Table.\12\
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\11\ Code sec. 412(1)(7)(C)(ii); ERISA sec. 302(d)(7)(C)(ii).
\12\ Rev. Rul. 95-28, 1995-1 C.B. 74. The IRS and the Treasury
Department have announced that they are undertaking a review of the
applicable mortality table and have requested comments on related
issues, such as how mortality trends should be reflected. Notice 2003-
62, 2003-38 I.R.B. 576; Announcement 2000-7, 2000-1 C.B. 586.
---------------------------------------------------------------------------
Full funding limitation
No contributions are required under the minimum funding
rules in excess of the full funding limitation. In 2004 and
thereafter, the full funding limitation is the excess, if any,
of (1) the accrued liability under the plan (including normal
cost), over (2) the lesser of (a) the market value of plan
assets or (b) the actuarial value of plan assets.\13\ However,
the full funding limitation may not be less than the excess, if
any, of 90 percent of the plan's current liability (including
the current liability normal cost) over the actuarial value of
plan assets. In general, current liability is all liabilities
to plan participants and beneficiaries accrued to date, whereas
the accrued liability under the full funding limitation may be
based on projected future benefits, including future salary
increases.
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\13\ For plan years beginning before 2004, the full funding
limitation was generally defined as the excess, if any, of (1) the
lesser of (a) the accrued liability under the plan (including normal
cost) or (b) a percentage (170 percent for 2003) of the plan's current
liability (including the current liability normal cost), over (2) the
lesser of (a) the market value of plan assets or (b) the actuarial
value of plan assets, but in no case less than the excess, if any, of
90 percent of the plan's current liability over the actuarial value of
plan assets. Under the Economic Growth and Tax Relief Reconciliation
Act of 2001 (``EGTRRA''), the full funding limitation based on 170
percent of current liability is repealed for plan years beginning in
2004 and thereafter. The provisions of EGTRRA generally do not apply
for years beginning after December 31, 2010.
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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.\14\ The amount of each required installment is 25 percent
of the lesser of (1) 90 percent of the amount required to be
contributed for the current plan year or (2) 100 percent of the
amount required to be contributed for the preceding plan
year.\15\
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\14\ Code sec. 412(m); ERISA sec. 302(e).
\15\ In connection with the expanded interest rate range available
for 2002 and 2003, special rules apply in determining current liability
for the preceding plan year for purposes of applying the quarterly
contributions requirements to plan years beginning in 2002 (when the
expanded range first applies) and 2004 (when the expanded range no
longer applies). In each of those years (``present year''), current
liability for the preceding year is redetermined, using the permissible
range applicable to the present year. This redetermined current
liability will be used for purposes of the plan's funded current
liability percentage for the preceding year, which may affect the need
to make quarterly contributions, and for purposes of determining the
amount of any quarterly contributions in the present year, which is
based in part on the preceding year.
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Funding waivers
Within limits, the IRS is permitted to waive all or a
portion of the contributions required under the minimum funding
standard for a plan year.\16\ A waiver may be granted if the
employer (or employers) responsible for the contribution could
not make the required contribution without temporary
substantial business hardship and if requiring the contribution
would be adverse to the interests of plan participants in the
aggregate. Generally, no more than three waivers may be granted
within any period of 15 consecutive plan years.
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\16\ Code sec. 412(d); ERISA sec. 303.
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If a funding waiver is in effect for a plan, subject to
certain exceptions, no plan amendment may be adopted that
increases the liabilities of the plan by reason of any increase
in benefits, any change in the accrual of benefits, or any
change in the rate at which benefits vest under the plan. In
addition, the IRS is authorized to require security to be
granted as a condition of granting a funding waiver if the sum
of the plan's accumulated funding deficiency and the balance of
any outstanding waived funding deficiencies exceeds $1 million.
Excise tax
An employer is generally subject to an excise tax if it
fails to make minimum required contributions and fails to
obtain a waiver from the IRS.\17\ The excise tax is generally
10 percent of the amount of the funding deficiency. In
addition, a tax of 100 percent may be imposed if the funding
deficiency is not corrected within a certain period.
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\17\ Code sec. 4971.
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Deductions for contributions
Employer contributions to qualified retirement plans are
deductible, subject to certain limits. In the case of a defined
benefit pension plan, the employer generally may deduct the
greater of: (1) the amount necessary to satisfy the minimum
funding requirement of the plan for the year; or (2) the amount
of the plan's normal cost for the year plus the amount
necessary to amortize certain unfunded liabilities over ten
years, but limited to the full funding limitation for the
year.\18\ However, the maximum amount of deductible
contributions is generally not less than the plan's unfunded
current liability.\19\
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\18\ Code sec. 404(a)(1).
\19\ Code sec. 404(a)(1)(D). In the case of a plan that terminates
during the year, the maximum deductible amount is generally not less
than the amount needed to make the plan assets sufficient to fund
benefit liabilities as defined for purposes of the PBGC termination
insurance program (sometimes referred to as ``termination liability'').
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PBGC premiums
Because benefits under a defined benefit pension plan may
be funded over a period of years, plan assets may not be
sufficient to provide the benefits owed under the plan to
employees and their beneficiaries if the plan terminates before
all benefits are paid. The PBGC generally insures the benefits
owed under defined benefit pension plans (up to certain limits)
in the event a plan is terminated with insufficient assets.
Employers pay premiums to the PBGC for this insurance coverage.
PBGC premiums include a flat-rate premium and, in the
case of an underfunded plan, a variable rate premium based on
the amount of unfunded vested benefits.\20\ In determining the
amount of unfunded vested benefits, the interest rate used is
85 percent of the annual yield on 30-year Treasury securities
for the month preceding the month in which the plan year
begins.
---------------------------------------------------------------------------
\20\ ERISA sec. 4006.
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Under the Job Creation and Worker Assistance Act of 2002,
for plan years beginning after December 31, 2001, and before
January 1, 2004, the interest rate used in determining the
amount of unfunded vested benefits for PBGC variable rate
premium purposes is increased to 100 percent of the annual
yield on 30-year Treasury securities for the month preceding
the month in which the plan year begins.
Lump-sum distributions
Accrued benefits under a defined benefit pension plan
generally must be paid in the form of an annuity for the life
of the participant unless the participant consents to a
distribution in another form. Defined benefit pension plans
generally provide that a participant may choose among other
forms of benefit offered under the plan, such as a lump-sum
distribution. These optional forms of benefit generally must be
actuarially equivalent to the life annuity benefit payable to
the participant.
A defined benefit pension plan must specify the actuarial
assumptions that will be used in determining optional forms of
benefit under the plan in a manner that precludes employer
discretion in the assumptions to be used. For example, a plan
may specify that a variable interest rate will be used in
determining actuarial equivalent forms of benefit, but may not
give the employer discretion to choose the interest rate.
Statutory assumptions must be used in determining the
minimum value of certain optional forms of benefit, such as a
lump sum.\21\ That is, the lump sum payable under the plan may
not be less than the amount of the lump sum that is actuarially
equivalent to the life annuity payable to the participant,
determined using the statutory assumptions. The statutory
assumptions consist of an applicable mortality table (as
published by the IRS) and an applicable interest rate.
---------------------------------------------------------------------------
\21\ Code sec. 417(e)(3); ERISA sec. 205(g)(3).
---------------------------------------------------------------------------
The applicable interest rate is the annual interest rate
on 30-year Treasury securities, determined as of the time that
is permitted under regulations. The regulations provide various
options for determining the interest rate to be used under the
plan, such as the period for which the interest rate will
remain constant (``stability period'') and the use of
averaging.
Limits on benefits
Annual benefits payable under a defined benefit pension
plan generally may not exceed the lesser of (1) 100 percent of
average compensation, or (2) $165,000 (for 2004).\22\ The
dollar limit generally applies to a benefit payable in the form
of a straight life annuity beginning no earlier than age 62.
The limit is reduced if benefits are paid before age 62. In
addition, if the benefit is not in the form of a straight life
annuity, the benefit generally is adjusted to an equivalent
straight life annuity. In making these reductions and
adjustments, the interest rate used generally must be not less
than the greater of (1) five percent; or (2) the interest rate
specified in the plan. However, for purposes of adjusting a
benefit in a form that is subject to the minimum value rules
(including the use of the interest rate on 30-year Treasury
securities), such as a lump-sum benefit, the interest rate used
must be not less than the greater of: (1) the interest rate on
30-year Treasury securities; or (2) the interest rate specified
in the plan.
---------------------------------------------------------------------------
\22\ Code sec. 415(b).
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HOUSE BILL
Interest rate for determining current liability and PBGC premiums
The House bill changes the interest rate used for plan
years beginning after December 31, 2003, and before January 1,
2006, in determining current liability for funding and
deduction purposes and in determining PBGC variable rate
premiums. For these purposes, the House bill replaces the
interest rate on 30-year Treasury securities with the rate of
interest on amounts conservatively invested in long-term
corporate bonds.
For purposes of determining a plan's current liability
for plan years beginning after December 31, 2003, and before
January 1, 2006, the interest rate used must be within a
permissible range of the weighted average of the rates of
interest on amounts conservatively invested in long-term
corporate bonds during the four-year period ending on the last
day before the plan year begins, as determined by the Secretary
of the Treasury on the basis of one or more indices selected
periodically by the Secretary. The permissible range for these
years is from 90 percent to 100 percent. The Secretary of the
Treasury is directed to publish the interest rate within the
permissible range.
In determining the amount of unfunded vested benefits for
PBGC variable rate premium purposes for plan years beginning
after December 31, 2003, and before January 1, 2006, the
interest rate used is 85 percent of the annual yield on amounts
conservatively invested in long-term corporate bonds for the
month preceding the month in which the plan year begins, as
determined by the Secretary of the Treasury on the basis of one
or more indices selected periodically by the Secretary. The
Secretary of the Treasury is directed to publish such annual
yield.
Interest rate used to apply benefit limits to lump sums
No provision.
Alternative deficit reduction contribution for certain plans
No provision.\23\
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\23\ Section 2002 of H.R. 3521, the ``Tax Relief Extension Act of
2003,'' as passed by the House of Representatives on November 20, 2003,
provides for a reduced deficit reduction contribution for plan years
beginning after December 27, 2003, and before December 28, 2005, in the
case of plans maintained by commercial passenger airlines. For each
year of these years, the reduced contribution is 20 percent of the
otherwise required additional contribution.
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Effective date
The House bill is generally effective for plan years
beginning after December 31, 2003. For purposes of applying
certain rules (``lookback rules'') to plan years beginning
after December 31, 2003, the amendments made by the provision
may be applied as if they had been in effect for all years
beginning before the effective date. For purposes of the
provision, ``lookback rules'' means: (1) the rule under which a
plan is not subject to the additional funding requirements for
a plan year if 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; and (2) the rule under which
quarterly contributions are required for a plan year if the
plan's funded current liability percentage was less than 100
percent for the preceding plan year.
SENATE AMENDMENT
Interest rate for determining current liability and PBGC premiums
The Senate amendment is the same as the House bill, with
the following modifications.
The Senate amendment replaces the interest rate on 30-
year Treasury securities with a conservative long-term bond
rate reflecting the rates of interest on amounts invested
conservatively in long term corporate bonds and based on the
use of two or more indices that are in the top two quality
levels available reflecting average maturities of 20 years or
more. The Secretary of the Treasury is directed to prescribe by
regulation a method for periodically determining conservative
long-term corporate bond rates.\24\
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\24\ The Senate amendment also repeals the present-law rule under
which, for purposes of applying the quarterly contributions
requirements to plan years beginning in 2004, current liability for the
preceding year is redetermined.
---------------------------------------------------------------------------
Under the Senate amendment, an employer may elect to
disregard the temporary interest rate change for purposes of
determining the maximum amount of deductible contributions to a
defined benefit pension plan (regardless of whether the plan is
subject to the deficit reduction contribution requirements). In
such a case, the present-law interest rate rules apply, i.e.,
the interest rate used in determining current liability for
that purpose must be within the permissible range (90 to 105
percent) of the weighted average of the interest rates on 30-
year Treasury securities for the preceding four-year period.
Interest rate used to apply benefit limits to lump sums
Under the Senate amendment, in the case of plan years
beginning in 2004 or 2005, in adjusting a form of benefit that
is subject to the minimum value rules, such as a lump-sum
benefit, for purposes of applying the limits on benefits
payable under a defined benefit pension plan, the interest rate
used must be not less than the greater of: (1) 5.5 percent; or
(2) the interest rate specified in the plan.
Alternative deficit reduction contribution for certain plans
In general
The Senate amendment allows certain employers
(``applicable employers'') to elect a reduced amount of
additional required contribution under the deficit reduction
contribution rules (an ``alternative deficit reduction
contribution'') with respect to certain plans for applicable
plan years. An applicable plan year is a plan year beginning
after December 27, 2003, and before December 28, 2005, for
which the employer elects a reduced contribution. If an
employer so elects, the amount of the additional deficit
reduction contribution for an applicable plan year is the
greater of: (1) 20 percent (40 percent in the case of a plan
year beginning after December 27, 2004) of the amount of the
additional contribution that would otherwise be required; or
(2) the additional contribution that would be required if the
deficit reduction contribution for the plan year were
determined as the expected increase in current liability due to
benefits accruing during the plan year.
An election of an alternative deficit reduction
contribution may be made only with respect to a plan that was
not subject to the deficit reduction contribution rules for the
plan year beginning in 2000. An election may not be made with
respect to more than two plan years. An election is to be made
at such time and in such manner as the Secretary of the
Treasury prescribes. An election does not invalidate any
obligation pursuant to a collective bargaining agreement in
effect on the date of the election to provide benefits, to
change the accrual of benefits, or to change the rate at which
benefits vest under the plan.
An applicable employer is an employer that is: (1) a
commercial passenger airline; (2) primarily engaged in the
production or manufacture of a steel mill product, or in the
mining or processing of iron ore or beneficiated iron ore
products; or (3) an organization described in section 501(c)(5)
that established the plan for which an alternative deficit
reduction contribution is elected on June 30, 1955. In
addition, an employer not described in the preceding sentence
is treated as an applicable employer if the employer files an
application (at such time and in such manner as the Secretary
of the Treasury prescribes) to be treated as an applicable
employer. However, an employer making such an application is
not treated as an applicable employer if, within 90 days of the
application, the Secretary determines (taking into account the
application of the provision) that there is a reasonable
likelihood that the employer will be unable to make required
future contributions to the plan in a timely manner.
Restrictions on amendments
Certain plan amendments may not be adopted during an
applicable plan year (i.e., a plan year for which an
alternative deficit reduction contribution is elected). This
restriction applies to an amendment that increases the
liabilities of the plan by reason of any increase in benefits,
any change in the accrual of benefits, or any change in the
rate at which benefits vest under the plan. The restriction
applies unless: (1) the plan's funded current liability
percentage as of the end of the applicable plan year is
projected to be at least 75 percent (taking into account the
effect of the amendment); (2) the amendment provides for an
increase in benefits under a formula that is not based on a
participant's compensation, but only if the rate of the
increase does not exceed the contemporaneous rate of increase
in average wages of participants covered by the amendment; (3)
the amendment is required by a collective bargaining agreement
that is in effect on the date of enactment of the provision;
(4) the amendment is determined by the Secretary of Labor to be
reasonable and provides for only de minimis increases in plan
liabilities; or (5) the amendment is required as a condition of
qualified retirement plan status.
If a plan is amended during an applicable plan year in
violation of the provision, an election of an alternative
deficit reduction contribution does not apply to any applicable
plan year ending on after the date on which the amendment is
adopted.
Notice requirement
The Senate amendment amends ERISA to provide that, if an
employer elects an alternative deficit reduction contribution
for any applicable plan year, the employer must provide written
notice of the election to participants and beneficiaries within
30 days of filing the election (120 days in the case of an
employer that files an application to be treated as an
applicable employer). The notice to participants must include:
(1) the due date of the alternative deficit reduction
contribution; (2) the amount by which the required contribution
to the plan was reduced as a result of the election; (3) a
description of the benefits under the plan that are eligible
for guarantee by the PBGC; and (4) an explanation of the
limitations on the PBGC guarantee and the circumstances in
which the limitations apply, including the maximum guaranteed
monthly benefits that the PBGC would pay if the plan terminated
while underfunded. An employer that fails to provide the
required notice to a participant or beneficiary may (in the
discretion of a court) be liable to the participant or
beneficiary in the amount of up to $100 a day from the date of
the failure, and the court may in its discretion order such
other relief as it deems proper.
The Senate amendment also amends ERISA to require that an
employer electing an alternative deficit reduction contribution
for any year must provide written notice of the election to the
PBGC within 30 days of the election (120 days in the case of an
employer that files an application to be treated as an
applicable employer). The notice to the PBGC must include: (1)
the due date of the alternative deficit reduction contribution;
(2) the amount by which the required contribution to the plan
was reduced as a result of the election; (3) the number of
years it will take to restore the plan to full funding if the
employer makes only the required contributions; and (4)
information as to how the amount by which the plan is
underfunded compares with the capitalization of the employer.
Effective date
Interest rate for determining current liability and PBGC
premiums
The Senate amendment is generally effective for plan
years beginning after December 31, 2003. For purposes of
applying certain rules (``lookback rules'') to plan years
beginning after December 31, 2003, the amendments made by the
provision may be applied as if they had been in effect for all
years beginning before the effective date. For purposes of the
provision, ``lookback rules'' means: (1) the rule under which a
plan is not subject to the additional funding requirements for
a plan year if 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; and (2) the rule under which
quarterly contributions are required for a plan year if the
plan's funded current liability percentage was less than 100
percent for the preceding plan year.
Interest rate used to apply benefit limits to lump sums
The Senate amendment is generally effective for plan
years beginning after December 31, 2003. Under a special rule,
in the case of a distribution made to a participant or
beneficiary after December 31, 2003, and before January 1,
2005, in a form of benefit that is subject to the minimum value
rules, such as a lump-sum benefit, and that is subject to
adjustment in applying the limit on benefits payable under a
defined benefit pension plan, the amount payable may not,
solely by reason of the Senate amendment, be less than the
amount that would have been payable if the amount payable had
been determined using the applicable interest rate in effect as
of the last day of the last plan year beginning before January
31, 2004.
Alternative deficit reduction contribution for certain
plans
The Senate amendment is effective on the date of
enactment.
CONFERENCE AGREEMENT
Interest rate for determining current liability and PBGC premiums
The conference agreement follows the House bill with
modifications.
Under the conference agreement, the interest rate used
for plan years beginning after December 31, 2003, and before
January 1, 2006, in determining current liability for funding
and deduction purposes and in determining PBGC variable rate
premiums is generally the rate of interest on amounts invested
conservatively in long-term investment-grade corporate
bonds.\25\
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\25\ The conference agreement also repeals the present-law rule
under which, for purposes of applying the quarterly contributions
requirements to plan years beginning in 2004, current liability for the
preceding year is redetermined.
---------------------------------------------------------------------------
For purposes of determining a plan's current liability
for plan years beginning after December 31, 2003, and before
January 1, 2006, 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 interest rate on long-term corporate bonds shall be
calculated pursuant to a method, prescribed by the Secretary of
the Treasury, which relies on publicly available indices of
high-quality bonds (i.e., the top three quality levels). The
Secretary may use bonds with average maturities of 20 years or
more in determining the rate. The Secretary of Treasury may
prescribe that two thirds of the rate may be based on two or
more indices that are in the top three quality levels, and one
third of such rate may be based on two or more indices that are
in the third quality level. The Secretary shall have discretion
to determine which publicly available indices to use.
The Secretary is directed to make the permissible range
of the interest rate, as well as the indices and methodology
used to determine the average rate, publicly available. The
methodology used by the Secretary to arrive at a single rate
shall be publicly available (including for a subscription fee
or other charge). The Secretary shall publish the rate on a
monthly basis, along with an updated four-year weighted average
of the rate and an updated permissible range. The Secretary
shall consider and monitor the current marketplace indices to
produce the specified rate to ensure that the indices continue
to be appropriate for this purpose. Through regulations, the
Secretary shall, as appropriate, make prospective changes in
the indices used to determine the rate.
For purposes of determining the four-year weighted
average of interest rates under the temporary provision, the
weighting applicable under present law applies (i.e., 40
percent, 30 percent, 20 percent and 10 percent, starting with
the most recent year in the four-year period). In addition,
consistent with current IRS guidance, the interest rates in the
permissible range under the temporary provision are deemed to
be consistent with the assumptions reflecting the purchase
rates that would be used by insurance companies to satisfy the
liabilities under the plan. Thus, any interest rate in the
permissible range may be used in determining current liability
while the temporary provision is in effect.
The temporary interest rate generally applies in
determining current liability for purposes of determining the
maximum amount of deductible contributions to a defined benefit
pension plan (regardless of whether the plan is subject to the
deficit reduction contribution requirements). However, under
the conference agreement, an employer may elect to disregard
the temporary interest rate change for purposes of determining
the maximum amount of deductible contributions (regardless of
whether the plan is subject to the deficit reduction
contribution requirements). In such a case, the present-law
interest rate rules apply, i.e., the interest rate used in
determining current liability for that purpose must be within
the permissible range (90 to 105 percent) of the weighted
average of the interest rates on 30-year Treasury securities
for the preceding four-year period. This is intended solely as
a temporary provision to ensure that, pending long-term reform
of the funding and deduction rules, the deduction limit is
neither increased nor decreased so that employers are not
penalized for fully funding their plans. Because the 30-year
Treasury rate is an obsolete rate, its use must be revisited
promptly in the context of long-term funding and deduction
reform. However, the use of the 30-year Treasury rate for the
purposes of determining maximum deduction limits should not be
considered precedent for the determination of other pension
plan calculations. Furthermore, the use of different interest
rates for certain pension plan calculations in the context of
this temporary bill should not be considered precedent for the
use of different discount rates to measure pension plan
liabilities.
Under the conference agreement, in determining the amount
of unfunded vested benefits for PBGC variable rate premium
purposes for plan years beginning after December 31, 2003, and
before January 1, 2006, the interest rate used is 85 percent of
the annual rate of interest determined by the Secretary of the
Treasury on amounts invested conservatively in long-term
investment-grade corporate bonds for the month preceding the
month in which the plan year begins (subject to the same
requirements applicable to the determination of the interest
rate used in determining current liability).
Interest rate used to apply benefit limits to lump sums
The conference agreement follows the Senate amendment.
Under the conference agreement, in the case of plan years
beginning in 2004 or 2005, in adjusting a form of benefit that
is subject to the minimum value rules, such as a lump-sum
benefit, for purposes of applying the limits on benefits
payable under a defined benefit pension plan, the interest rate
used must be not less than the greater of: (1) 5.5 percent; or
(2) the interest rate specified in the plan.
Plan amendments
The conference agreement permits certain plan amendments
made pursuant to the interest rate provision of the bill to be
retroactively effective. If certain requirements are met, the
plan will be treated as being operated in accordance with its
terms, and the amendment will not violate the anticutback rules
(except as provided by the Secretary of the Treasury).\26\ In
order for this treatment to apply, the plan amendment must be
made on or before the last day of the first plan year beginning
on or after January 1, 2006. In addition, the amendment must
apply retroactively as of the date on which the interest rate
provision became effective with respect to the plan and the
plan must be operated in compliance with the interest rate
provision until the amendment is made.
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\26\ Code sec. 411(d)(6); ERISA sec. 204(g).
---------------------------------------------------------------------------
A plan amendment will not be considered to be pursuant to
the interest rate provision of the bill if it has an effective
date before the effective date of the interest rate provision.
Similarly, relief from the anticutback rules does not apply for
periods prior to the effective date of the interest rate
provision or the plan amendment.
Alternative deficit reduction contribution for certain plans
In general
The conference agreement follows the Senate amendment
with modifications.
The conference agreement allows certain employers
(``applicable employers'') to elect a reduced amount of
additional required contribution under the deficit reduction
contribution rules (an ``alternative deficit reduction
contribution'') with respect to certain plans for applicable
plan years. An applicable plan year is a plan year beginning
after December 27, 2003, and before December 28, 2005, for
which the employer elects a reduced contribution. If an
employer so elects, the amount of the additional deficit
reduction contribution for an applicable plan year is the
greater of: (1) 20 percent of the amount of the additional
contribution that would otherwise be required; or (2) the
additional contribution that would be required if the deficit
reduction contribution for the plan year were determined as the
expected increase in current liability due to benefits accruing
during the plan year.
An election of an alternative deficit reduction
contribution may be made only with respect to a plan that was
not subject to the deficit reduction contribution rules for the
plan year beginning in 2000.\27\ An election may not be made
with respect to more than two plan years. An election is to be
made at such time and in such manner as the Secretary of the
Treasury prescribes. Guidance relating to the time and manner
in which an election is made is to be issued expeditiously. An
election does not invalidate any obligation pursuant to a
collective bargaining agreement in effect on the date of the
election to provide benefits, to change the accrual of
benefits, or to change the rate at which benefits vest under
the plan.
---------------------------------------------------------------------------
\27\ Whether a plan was subject to the deficit reduction
contribution rules for the plan year beginning in 2000 is determined
without regard to the rule that allows the temporary interest rate
based on amounts invested conservatively in long-term investment-grade
corporate bonds to be used for lookback rule purposes, as discussed
below.
---------------------------------------------------------------------------
An applicable employer is an employer that is: (1) a
commercial passenger airline; (2) primarily engaged in the
production or manufacture of a steel mill product, or the
processing of iron ore pellets; or (3) an organization
described in section 501(c)(5) that established the plan for
which an alternative deficit reduction contribution is elected
on June 30, 1955.
Restrictions on amendments
Certain plan amendments may not be adopted during an
applicable plan year (i.e., a plan year for which an
alternative deficit reduction contribution is elected). This
restriction applies to an amendment that increases the
liabilities of the plan by reason of any increase in benefits,
any change in the accrual of benefits, or any change in the
rate at which benefits vest under the plan. The restriction
applies unless: (1) the plan's enrolled actuary certifies (in
such form and manner as prescribed by the Secretary of the
Treasury) that the amendment provides for an increase in annual
contributions that will exceed the increase in annual charges
to the funding standard account attributable to such amendment;
or (2) the amendment is required by a collective bargaining
agreement that is in effect on the date of enactment of the
provision.
If a plan is amended during an applicable plan year in
violation of the provision, an election of an alternative
deficit reduction contribution does not apply to any applicable
plan year ending on after the date on which the amendment is
adopted.
Notice requirement
The conference agreement amends ERISA to provide that, if
an employer elects an alternative deficit reduction
contribution for any applicable plan year, the employer must
provide written notice of the election to participants and
beneficiaries and to the PBGC within 30 days of filing the
election. The notice to participants and beneficiaries must
include: (1) the due date of the alternative deficit reduction
contribution; (2) the amount by which the required contribution
to the plan was reduced as a result of the election; (3) a
description of the benefits under the plan that are eligible
for guarantee by the PBGC; and (4) an explanation of the
limitations on the PBGC guarantee and the circumstances in
which the limitations apply, including the maximum guaranteed
monthly benefits that the PBGC would pay if the plan terminated
while underfunded. The notice to the PBGC must include: (1) the
due date of the alternative deficit reduction contribution; (2)
the amount by which the required contribution to the plan was
reduced as a result of the election; (3) the number of years it
will take to restore the plan to full funding if the employer
makes only the required contributions; and (4) information as
to how the amount by which the plan is underfunded compares
with the capitalization of the employer.
An employer that fails to provide the required notice to
a participant, beneficiary, or the PBGC may (in the discretion
of a court) be liable to the participant, beneficiary, or PBGC
in the amount of up to $100 a day from the date of the failure,
and the court may in its discretion order such other relief as
it deems proper.
Effective date
Interest rate for determining current liability and PBGC
premiums
The conference agreement is generally effective for plan
years beginning after December 31, 2003. For purposes of
applying certain rules (``lookback rules'') to plan years
beginning after December 31, 2003, the amendments made by the
provision may be applied as if they had been in effect for all
years beginning before the effective date. For purposes of the
provision, ``lookback rules'' means: (1) the rule under which a
plan is not subject to the additional funding requirements for
a plan year if 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; and (2) the rule under which
quarterly contributions are required for a plan year if the
plan's funded current liability percentage was less than 100
percent for the preceding plan year. The amendments made by the
provision may be applied for purposes of the lookback rules,
regardless of the funded current liability percentage reported
for the plan on the plan's annual reports (i.e., Form 5500) for
preceding years.
Interest rate used to apply benefit limits to lump sums
The conference agreement is generally effective for plan
years beginning after December 31, 2003. Under a special rule,
in the case of a distribution made to a participant or
beneficiary after December 31, 2003, and before January 1,
2005, in a form of benefit that is subject to the minimum value
rules, such as a lump-sum benefit, and that is subject to
adjustment in applying the limit on benefits payable under a
defined benefit pension plan, the amount payable may not,
solely by reason of the conference agreement, be less than the
amount that would have been payable if the amount payable had
been determined using the applicable interest rate in effect as
of the last day of the last plan year beginning before January
31, 2004.
Alternative deficit reduction contribution for certain
plans
The conference agreement is effective on the date of
enactment.
B. Multiemployer Plan Funding Notices
(Sec. 4 of the Senate amendment and secs. 101 and 502 of ERISA)
PRESENT LAW
Under present law, defined benefit plans are generally
required to meet certain minimum funding rules. These rules are
designed to help ensure that such plans are adequately funded.
Both single-employer plans and multiemployer plans are subject
to minimum funding requirements; however, the requirements are
different for each type of plan.
Similarly, the Pension Benefit Guaranty Corporation
(``PBGC'') insures certain benefits under both single-employer
and multiemployer defined benefit plans, but the rules relating
to the guarantee vary for each type of plan. In the case of
multiemployer plans, the PBGC guarantees against plan
insolvency. Under its multiemployer program, PBGC provides
financial assistance through loans to plans that are insolvent
(that is, plans that are unable to pay basic PBGC-guaranteed
benefits when due).
Employers maintaining single-employer defined benefit
plans are required to provide certain notices to plan
participants relating to the funding status of the plan. For
example, ERISA requires an employer of a single-employer
defined benefit plan to notify plan participants if the
employer fails to make required contributions (unless a request
for a funding waiver is pending).\28\ In addition, in the case
of an underfunded plan for which variable rate PBGC premiums
are required, the plan administrator generally must notify plan
participants of the plan's funding status and the limits on the
PBGC benefit guarantee if the plan terminates while
underfunded.\29\
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\28\ ERISA sec. 101(d).
\29\ ERISA sec. 4011. Multiemployer plans are not required to pay
variable rate premiums.
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HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The Senate amendment requires the administrator of a
defined benefit plan which is a multiemployer plan to provide
an annual funding notice to: (1) each participant and
beneficiary; (2) each labor organization representing such
participants or beneficiaries; and (3) each employer that has
an obligation to contribute under the plan.
Such a notice must include: (1) identifying information,
including the name of the plan, the address and phone number of
the plan administrator and the plan's principal administrative
officer, each plan sponsor's employer identification number,
and the plan identification number; (2) a statement as to
whether the plan's funded current liability percentage for the
plan year to which the notice relates is at least 100 percent
(and if not, a statement of the percentage); (3) a statement of
the value of the plan's assets, the amount of benefit payments,
and the ratio of the assets to the payments for the plan year
to which the report relates; (4) a summary of the rules
governing insolvent multiemployer plans, including the
limitations on benefit payments and any potential benefit
reductions and suspensions (and the potential effects of such
limitations, reductions, and suspensions on the plan); (5) a
general description of the benefits under the plan which are
eligible to be guaranteed by the PBGC and the limitations of
the guarantee and circumstances in which such limitations
apply; and (6) any additional information which the plan
administrator elects to include to the extent it is not
inconsistent with regulations prescribed by the Secretary of
Labor.
The annual funding notice must be provided no later than
two months after the deadline (including extensions) for filing
the plan's annual report for the plan year to which the notice
relates. The funding notice must be provided in a form and
manner prescribed in regulations by the Secretary of Labor.
Additionally, it must be written so as to be understood by the
average plan participant and may be provided in written,
electronic, or some other appropriate form to the extent that
it is reasonably accessible to persons to whom the notice is
required to be provided.
The Secretary of Labor is directed to issue regulations
(including a model notice) necessary to implement the provision
no later than one year after the date of enactment.
Sanction for failure to provide notice
In the case of a failure to provide the annual
multiemployer plan funding notice, the Secretary of Labor may
assess a civil penalty against a plan administrator of up to
$100 per day for each failure to provide a notice. For this
purpose, each violation with respect to a single participant or
beneficiary is treated as a separate violation.
Effective date
The Senate amendment is effective for plan years
beginning after December 31, 2004.
CONFERENCE AGREEMENT
In general
The conference agreement follows the Senate amendment,
with the following modification. The administrator of a defined
benefit plan which is a multiemployer plan is also required to
provide an annual funding notice to the PBGC.
The conference agreement requires the administrator of a
defined benefit plan which is a multiemployer plan to provide
an annual funding notice to: (1) each participant and
beneficiary; (2) each labor organization representing such
participants or beneficiaries; (3) each employer that has an
obligation to contribute under the plan; and (4) the PBGC.
Such a notice must include: (1) identifying information,
including the name of the plan, the address and phone number of
the plan administrator and the plan's principal administrative
officer, each plan sponsor's employer identification number,
and the plan identification number; (2) a statement as to
whether the plan's funded current liability percentage for the
plan year to which the notice relates is at least 100 percent
(and if not, a statement of the percentage); (3) a statement of
the value of the plan's assets, the amount of benefit payments,
and the ratio of the assets to the payments for the plan year
to which the report relates; (4) a summary of the rules
governing insolvent multiemployer plans, including the
limitations on benefit payments and any potential benefit
reductions and suspensions (and the potential effects of such
limitations, reductions, and suspensions on the plan); (5) a
general description of the benefits under the plan which are
eligible to be guaranteed by the PBGC and the limitations of
the guarantee and circumstances in which such limitations
apply; and (6) any additional information which the plan
administrator elects to include to the extent it is not
inconsistent with regulations prescribed by the Secretary of
Labor.
The annual funding notice must be provided no later than
two months after the deadline (including extensions) for filing
the plan's annual report for the plan year to which the notice
relates. The funding notice must be provided in a form and
manner prescribed in regulations by the Secretary of Labor.
Additionally, it must be written so as to be understood by the
average plan participant and may be provided in written,
electronic, or some other appropriate form to the extent that
it is reasonably accessible to persons to whom the notice is
required to be provided.
The Secretary of Labor is directed to issue regulations
(including a model notice) necessary to implement the provision
no later than one year after the date of enactment.
Sanction for failure to provide notice
In the case of a failure to provide the annual
multiemployer plan funding notice, the Secretary of Labor may
assess a civil penalty against a plan administrator of up to
$100 per day for each failure to provide a notice. For this
purpose, each violation with respect to a single participant or
beneficiary is treated as a separate violation.
Effective date
The conference agreement is effective for plan years
beginning after December 31, 2004.
C. Election for Deferral of Charge for Portion of Net Experience Loss
of Multiemployer Plans
(Sec. 5 of the Senate amendment, sec. 302(b)(7) of ERISA, and sec.
412(b)(7) of the Code)
PRESENT LAW
General funding requirements
The Code and ERISA impose minimum funding requirements
with respect to defined benefit plans.\30\ Under the minimum
funding rules, the amount of contributions required for a plan
year is generally the plan's normal cost for the year (i.e.,
the cost of benefits allocated to the year under the plan's
funding method) plus that year's portion of other liabilities
that are amortized over a period of years, such as benefits
resulting from a grant of past service credit.\31\ A plan's
normal cost and other liabilities must be determined under an
actuarial cost method permissible under the Code and ERISA.
---------------------------------------------------------------------------
\30\ Code sec. 412; ERISA sec. 302.
\31\ Under special funding rules (referred to as the ``deficit
reduction contribution'' rules), an additional contribution may be
required to a single-employer plan if the plan's funded current
liability percentage is less than 90 percent. The deficit reduction
contribution rules do not apply to multiemployer plans.
---------------------------------------------------------------------------
Funding standard account
As an administrative aid in the application of the
funding requirements, a defined benefit plan is required to
maintain a special account called a ``funding standard
account'' to which specified charges and credits (including
credits for contributions to the plan), plus interest, are made
for each plan year. If, as of the close of a plan year, the
account reflects credits equal to or in excess of charges, the
plan is generally treated as meeting the minimum funding
standard for the year. Thus, as a general rule, the minimum
contribution for a plan year is determined as the amount by
which the charges to the account would exceed credits to the
account if no contribution were made to the plan. 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.'' \32\
---------------------------------------------------------------------------
\32\ In addition to the funding standard account, a reconciliation
account is sometimes used to balance certain items for purposes of
reporting actuarial information about the plan on the plan's annual
report (Schedule B of Form 5500).
---------------------------------------------------------------------------
Experience gains and losses
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, such as increases or decreases in asset
values. The actuarial assumptions are required to be reasonable
and may be subject to other restrictions. If, on the basis of
these assumptions, the contributions made to the plan result in
actual unfunded liabilities that are less than those
anticipated by the actuary, then the excess is an experience
gain. If the actual unfunded liabilities are greater than those
anticipated, then the difference is an experience loss.
If a plan has a net experience gain, the funding standard
account is credited with the amount needed to amortize the net
experience gain over a certain period. If a plan has a net
experience loss, the funding standard account is charged with
the amount needed to amortize the net experience loss over a
certain period. In the case of a multiemployer plan, the
amortization period for net experience gains and losses is 15
years.
Funding waivers
Within limits, the IRS is permitted to waive all or a
portion of the contributions required under the minimum funding
standard for a plan year.\33\ A waiver may be granted if the
employer (or employers) responsible for the contribution could
not make the required contribution without temporary
substantial business hardship and if requiring the contribution
would be adverse to the interests of plan participants in the
aggregate. In the case of a multiemployer plan, no more than
five waivers may be granted within any period of 15 consecutive
plan years.
---------------------------------------------------------------------------
\33\ Sec. 412(d).
---------------------------------------------------------------------------
If a funding waiver is in effect for a plan, subject to
certain exceptions, no plan amendment may be adopted that
increases the liabilities of the plan by reason of any increase
in benefits, any change in the accrual of benefits, or any
change in the rate at which benefits vest under the plan.
Excise tax
An employer is generally subject to an excise tax if it
fails to make minimum required contributions and fails to
obtain a waiver from the IRS.\34\ The excise tax is 10 percent
of the amount of the funding deficiency (five percent in the
case of a multiemployer plan). In addition, a tax of 100
percent may be imposed if the funding deficiency is not
corrected within a certain period.
---------------------------------------------------------------------------
\34\ Sec. 4971.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment allows certain multiemployer plans
to elect to defer the beginning of the amortization of certain
net experience losses for up to three plan years. The period
during which the amortization of a net experience loss is
deferred by reason of such an election is referred to as a
``hiatus period.'' The Senate amendment applies to a
multiemployer plan that has a net experience loss for any plan
year beginning after June 30, 2002, and before July 1, 2006.
Such a plan may elect to begin the 15-year amortization period
with respect to such a loss in any of the three immediately
succeeding plan years as selected by the plan. A plan may elect
to delay the beginning of the amortization of net experience
losses with respect to net experience losses occurring for only
two plan years beginning after June 30, 2002, and before July
1, 2006 (regardless of the number of plan years in that period
for which the plan has net experience losses). An election
under the Senate amendment is to be made at such time and in
such manner as the Secretary of Labor prescribes, after
consultation with the Secretary of the Treasury.
If an election is made, the net experience loss is
treated, for purposes of determining any charge to the funding
standard account (or interest) with respect to the loss, in the
same manner as if the net experience loss occurred in the year
selected by the plan for the amortization period to begin
(without regard to any net experience loss or gain otherwise
determined for such year). Interest accrued on any net
experience loss during a hiatus period is charged to a
reconciliation account and not to the funding standard account.
Certain plan amendments may not take effect for any plan
year in the hiatus period. This restriction applies to an
amendment that increases the liabilities of the plan by reason
of any increase in benefits, any change in the accrual of
benefits, or any change in the rate at which benefits vest
under the plan. The restriction applies unless: (1) the plan's
funded current liability percentage as of the end of the plan
year is projected to be at least 75 percent (taking into
account the effect of the amendment); (2) the plan's actuary
certifies that, due to an increase in the rates of
contributions to the plan, the normal cost attributable to the
benefit increase or other change is expected to be fully funded
in the year following the year in which the increase or other
change takes effect, and any increase in the plan's accrued
liabilities attributable to the benefit increase or other
change is expected to be fully funded by the end of the third
plan year following the end of the plan hiatus period of the
plan; (3) the amendment is determined by the Secretary of Labor
to be reasonable and provides for only de minimis increases in
plan liabilities; or (4) the amendment is required as a
condition of qualified retirement plan status. The restriction
on amendments does not apply to an increase in benefits for a
group of participants resulting solely from a collectively
bargained increase in the contributions on their behalf.
Failure to comply with this restriction is a violation of ERISA
and of the qualification requirements of the Code.
If a plan elects to defer the beginning of an
amortization period, the plan administrator must provide
written notice of the election within 30 days to participants
and beneficiaries, to each labor organization representing
participants and beneficiaries, and to each employer that has
an obligation to contribute under the plan. The notice must
include: (1) the amount of the net experience loss to be
deferred under the election and the period of the deferral; and
(2) the maximum guaranteed monthly benefits that the PBGC would
pay if the plan terminated while underfunded. If a plan
administrator fails to comply with the notice requirement, the
Secretary of Labor may assess a civil penalty of not more than
$1,000 a day for each violation.
Effective date.--The Senate amendment is effective on the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement allows the plan sponsor of an
eligible multiemployer plan to elect to defer certain charges
to the funding standard account that would otherwise be made to
the plan's funding standard account for a plan year beginning
after June 30, 2003, and before July 1, 2005. The charges may
be deferred to any plan year selected by the plan sponsor from
either of the two plan years immediately succeeding the plan
year for which the charge would otherwise be made. An election
may be made with respect to up to 80 percent of the charge to
the funding standard account attributable to the amortization
of a net experience loss for the first plan year beginning
after December 31, 2001. An election is to be made at such time
and in such manner as the Secretary of the Treasury prescribes.
For the plan year to which a charge is deferred under the plan
sponsor's election, the funding standard account is required to
be charged with interest at the short-term Federal rate on the
deferred charge for the period of the deferral.
An eligible multiemployer plan is a multiemployer plan:
(1) that, for the first plan year beginning after December 31,
2001, had an actual net investment loss of at least 10 percent
of the average fair market value of plan assets during the plan
year; and (2) with respect to which the plan's enrolled actuary
certifies that (not taking into account the deferral of charges
under the provision and based on the actuarial assumptions used
for the last plan year before date of enactment of the
provision), the plan is projected to have an accumulated
funding deficiency for any plan year beginning after June 30,
2003, and before July 1, 2006. In addition, a plan is not
treated as an eligible multiemployer plan if: (1) for any
taxable year beginning during the ten-year period preceding the
first plan year for which an election is made under the
provision, any employer required to contribute to the plan
failed to timely pay an excise tax imposed on the plan for
failure to make required contributions; (2) for any plan year
beginning after June 30, 1993, and before the first plan year
for which an election is made under the provision, the average
contribution required to be made to the plan by all employers
does not exceed 10 cents per hour, or no employer is required
to make contributions to the plan; or (3) with respect to any
plan year beginning after June 30, 1993, and before the first
plan year for which an election is made under the provision, a
funding waiver or extension of an amortization period was
granted to the plan.
Certain plan amendments may not be adopted during the
period for which a charge is deferred. This restriction applies
to an amendment that increases the liabilities of the plan by
reason of any increase in benefits, any change in the accrual
of benefits, or any change in the rate at which benefits vest
under the plan. The restriction applies unless: (1) the plan's
enrolled actuary certifies (in such form and manner as
prescribed by the Secretary of the Treasury) that the amendment
provides for an increase in annual contributions that will
exceed the increase in annual charges to the funding standard
account attributable to such amendment; or (2) the amendment is
required by a collective bargaining agreement that is in effect
on the date of enactment of the provision. If a plan is amended
in violation of the provision, an election under the provision
does not apply to any plan year ending on after the date on
which the amendment is adopted.
If a plan sponsor elects to defer charges attributable to
a net experience loss, the plan administrator must provide
written notice of the election within 30 days to participants
and beneficiaries, to each labor organization representing
participants and beneficiaries, to each employer that has an
obligation to contribute under the plan, and to the PBGC. The
notice must include: (1) the amount of the charges to be
deferred under the election and the period of the deferral; and
(2) the maximum guaranteed monthly benefits that the PBGC would
pay if the plan terminated while underfunded. If a plan
administrator fails to comply with the notice requirement, the
Secretary of Labor may assess a civil penalty of not more than
$1,000 a day for each violation.
Effective date.--The conference agreement is effective on
the date of enactment.
D. Two-Year Extension of Transition Rule to Pension Funding
Requirements for Interstate Bus Company
(Sec. 6 of the Senate amendment, and sec. 769(c) of the Retirement
Protection Act of 1994 (as added by sec. 1508 of the Taxpayer
Relief Act of 1997))
PRESENT LAW
Under present law, defined benefit plans are required to
meet certain minimum funding rules. In some cases, additional
contributions are required if a defined benefit plan is
underfunded. Additional contributions generally are not
required in the case of a plan with a funded current liability
percentage of at least 90 percent. A plan's funded current
liability percentage is the value of plan assets as a
percentage of current liability. In general, a plan's current
liability means all liabilities to employees and their
beneficiaries under the plan. 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.
The PBGC insures benefits under most single-employer
defined benefit plans in the event the plan is terminated with
insufficient assets to pay for plan benefits. The PBGC is
funded in part by a flat-rate premium per plan participant, and
a variable rate premium based on the amount of unfunded vested
benefits under the plan. A specified interest rate and a
specified mortality table apply in determining unfunded vested
benefits for this purpose.
Under present law, a special rule modifies the minimum
funding requirements in the case of certain plans. The special
rule applies in the case of plans that (1) were not required to
pay a variable rate PBGC premium for the plan year beginning in
1996, (2) do not, in plan years beginning after 1995 and before
2009, merge with another plan (other than a plan sponsored by
an employer that was a member of the controlled group of the
employer in 1996), and (3) are sponsored by a company that is
engaged primarily in interurban or interstate passenger bus
service.
The special rule treats a plan to which it applies as
having a funded current liability percentage of at least 90
percent for plan years beginning after 1996 and before 2005 if
for such plan year the funded current liability percentage is
at least 85 percent. If the funded current liability of the
plan is less than 85 percent for any plan year beginning after
1996 and before 2005, the relief from the minimum funding
requirements applies only if certain specified contributions
are made.
For plan years beginning after 2004 and before 2010, the
funded current liability percentage will be deemed to be at
least 90 percent if the actual funded current liability
percentage is at least at certain specified levels. The relief
from the minimum funding requirements applies for a plan year
beginning in 2005, 2006, 2007, or 2008 only if contributions to
the plan for the plan year equal at least the expected increase
in current liability due to benefits accruing during the plan
year.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the special funding rules
for plans sponsored by a company engaged primarily in
interurban or interstate passenger bus service by providing
that, for plan years beginning in 2004 and 2005, the funded
current liability percentage of the plan will be treated as at
least 90 percent for purposes of determining the amount of
required contributions (100 percent for purposes of determining
whether quarterly contributions are required). As a result, for
these years, additional contributions and quarterly
contributions are not required with respect to the plan. In
addition, for these years, the mortality table used under the
plan is used in determining the amount of unfunded vested
benefits under the plan for purposes of calculating PBGC
variable rate premiums.
Effective date.--The Senate amendment is effective for
plan years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
The conference agreement modifies the special funding
rules for plans sponsored by a company engaged primarily in
interurban or interstate passenger bus service by providing
that, for plan years beginning in 2004 and 2005, the funded
current liability percentage of the plan will be treated as at
least 90 percent for purposes of determining the amount of
required contributions (100 percent for purposes of determining
whether quarterly contributions are required). As a result, for
these years, additional contributions and quarterly
contributions are not required with respect to the plan. In
addition, for these years, the mortality table used under the
plan is used in determining the amount of unfunded vested
benefits under the plan for purposes of calculating PBGC
variable rate premiums.
Effective date.--The Senate amendment is effective for
plan years beginning after December 31, 2003.
E. Procedures Applicable to Disputes Involving Pension Plan Withdrawal
Liability
(Sec. 7 of the Senate amendment and sec. 4221 of ERISA)
PRESENT LAW
Under ERISA, when an employer withdraws from a
multiemployer plan, the employer is generally liable for its
share of unfunded vested benefits, determined as of the date of
withdrawal (generally referred to as the ``withdrawal
liability''). Whether and when a withdrawal has occurred and
the amount of the withdrawal liability is determined by the
plan sponsor. 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
clearly erroneous. A similar standard applies in the event the
amount of the plan's unfunded vested benefits is challenged.
The first payment of withdrawal liability determined by
the plan sponsor is due no later than 60 days after demand,
even if the employer contests the determination of liability.
Disputes between an employer and plan sponsor concerning
withdrawal liability are resolved through arbitration, which
can be initiated by either party. Even 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.
For purposes of withdrawal liability, all trades or
businesses under common control are treated as a single
employer. In addition, the plan sponsor may disregard a
transaction in order to assess withdrawal liability if the
sponsor determines that the principal purpose of the
transaction was to avoid or evade withdrawal liability. For
example, if a subsidiary of a parent company is sold and the
subsidiary then withdraws from a multiemployer plan, the plan
sponsor may assess withdrawal liability as if the subsidiary
were still part of the parent company's controlled group if the
sponsor determines that a principal purpose of the sale of the
subsidiary was to evade or avoid withdrawal liability.
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the Senate amendment, a special rule may apply if a
transaction is disregarded by a plan sponsor in determining
that a withdrawal has occurred or that an employer is liable
for withdrawal liability. If the transaction that is
disregarded by the plan sponsor occurred before January 1,
1999, and at least five years before the date of the
withdrawal, then (1) the determination by the plan sponsor that
a principal purpose of the transaction was to evade or avoid
withdrawal liability is not presumed to be correct, (2) the
plan sponsor, rather than the employer, has the burden to
establish, by a preponderance of the evidence, the elements of
the claim that a principal purpose of the transaction was to
evade or avoid withdrawal liability, and (3) if an employer
contests the plan sponsor's determination through an
arbitration proceeding, or through a claim brought in a court
of competent jurisdiction, the employer is not obligated to
make any withdrawal liability payments until a final decision
in the arbitration proceeding, or in court, upholds the plan
sponsor's determination. The provision does not modify the
burden of establishing other elements of a claim for withdrawal
liability other than whether the purpose of the transaction was
to evade or avoid withdrawal liability.
Effective date.--The provision applies to an employer
that receives a notification of withdrawal liability and demand
for payment under ERISA section 4219(b)(1) after October 31,
2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Under the conference agreement, a special rule may apply
if a transaction is disregarded by a plan sponsor in
determining that a withdrawal has occurred or that an employer
is liable for withdrawal liability. If the transaction that is
disregarded by the plan sponsor occurred before January 1,
1999, and at least five years before the date of the
withdrawal, then (1) the determination by the plan sponsor that
a principal purpose of the transaction was to evade or avoid
withdrawal liability is not presumed to be correct, (2) the
plan sponsor, rather than the employer, has the burden to
establish, by a preponderance of the evidence, the elements of
the claim that a principal purpose of the transaction was to
evade or avoid withdrawal liability, and (3) if an employer
contests the plan sponsor's determination through an
arbitration proceeding, or through a claim brought in a court
of competent jurisdiction, the employer is not obligated to
make any withdrawal liability payments until a final decision
in the arbitration proceeding, or in court, upholds the plan
sponsor's determination. The provision does not modify the
burden of establishing other elements of a claim for withdrawal
liability other than whether the purpose of the transaction was
to evade or avoid withdrawal liability.
Effective date.--The provision applies to an employer
that receives a notification of withdrawal liability and demand
for payment under ERISA section 4219(b)(1) after October 31,
2003.
F. Modify Qualification Rules for Tax-Exempt Property and Casualty
Insurance Companies
(Sec. 10 of the Senate amendment and secs. 501 and 831 of the Code)
PRESENT LAW
A property and casualty insurance company generally is
subject to tax on its taxable income (sec. 831(a)). The taxable
income of a property and casualty insurance company is
determined as the sum of its underwriting income and investment
income (as well as gains and other income items), reduced by
allowable deductions (sec. 832).
A property and casualty insurance company is eligible to
be exempt from Federal income tax if its net written premiums
or direct written premiums (whichever is greater) for the
taxable year do not exceed $350,000 (sec. 501(c)(15)).
A property and casualty insurance company may elect to be
taxed only on taxable investment income if its net written
premiums or direct written premiums (whichever is greater) for
the taxable year exceed $350,000, but do not exceed $1.2
million (sec. 831(b)).
For purposes of determining the amount of a company's net
written premiums or direct written premiums under these rules,
premiums received by all members of a controlled group of
corporations of which the company is a part are taken into
account. For this purpose, a more-than-50-percent threshhold
applies under the vote and value requirements with respect to
stock ownership for determining a controlled group, and rules
treating a life insurance company as part of a separate
controlled group or as an excluded member of a group do not
apply (secs. 501(c)(15), 831(b)(2)(B) and 1563).
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the requirements for a
property and casualty insurance company to be eligible for tax-
exempt status, and to elect to be taxed only on taxable
investment income.
Under the Senate amendment, a property and casualty
insurance company is eligible to be exempt from Federal income
tax if (a) its gross receipts for the taxable year do not
exceed $600,000, and (b) the premiums received for the taxable
year are greater than 50 percent of its gross receipts. For
purposes of determining gross receipts, the gross receipts of
all members of a controlled group of corporations of which the
company is a part are taken into account. The Senate amendment
expands the present-law controlled group rule so that it also
takes into account gross receipts of foreign and tax-exempt
corporations.
A company that does not meet the definition of an
insurance company is not eligible to be exempt from Federal
income tax under the Senate amendment. For this purpose, the
term ``insurance company'' means any company, more than half of
the business of which during the taxable year is the issuing of
insurance or annuity contracts or the reinsuring of risks
underwritten by insurance companies (sec. 816(a) and new sec.
831(c)). A company whose investment activities outweigh its
insurance activities is not considered to be an insurance
company for this purpose.\35\ It is intended that IRS
enforcement activities address the misuse of present-law
section 501(c)(15).
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\35\ See, e.g., Inter-American Life Insurance Co. v. Comm'r, 56
T.C. 497, aff'd per curiam, 469 F.2d 697 (9th Cir. 1972).
---------------------------------------------------------------------------
The Senate amendment also provides that a property and
casualty insurance company may elect to be taxed only on
taxable investment income if its net written premiums or direct
written premiums (whichever is greater) do not exceed $1.2
million (without regard to whether such premiums exceed
$350,000) (sec. 831(b)). As under present law, for purposes of
determining the amount of a company's net written premiums or
direct written premiums under this rule, premiums received by
all members of a controlled group of corporations (as defined
in section 831(b)) of which the company is a part are taken
into account.
It is intended that regulations or other Treasury
guidance provide for anti-abuse rules so as to prevent improper
use of the provision, including, for example, by attempts to
characterize as premiums any income that is other than premium
income.
Effective date.--The Senate amendment provisions are
effective for taxable years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
with modifications.
Under the conference agreement, an additional special
rule provides that a mutual property and casualty insurance
company is eligible to be exempt from Federal income tax under
the provision if (a) its gross receipts for the taxable year do
not exceed $150,000, and (b) the premiums received for the
taxable year are greater than 35 percent of its gross receipts,
provided certain requirements are met. The requirements are
that no employee of the company or member of the employee's
family is an employee of another company that is exempt from
tax under section 501(c)(15). The limitation to mutual
companies and the limitation on employees are intended to
address the conferees' concern about the inappropriate use of
tax-exempt insurance companies to shelter investment income,
including in the case of companies with gross receipts under
$150,000. For example, it is intended that the provision not
permit the use of small companies with common owners or
employees to shelter investment income for the benefit of such
owners or employees.
Effective date.--The provision generally is effective for
taxable years beginning after December 31, 2003.
Under the conference agreement, a special transition rule
applies with respect to certain companies. This transition rule
applies in the case of a company that, (1) for its taxable year
that includes April 1, 2004, meets the requirements of present
law section 501(c)(15)(A) (as in effect for the taxable year
beginning before January 1, 2004), and (2) on April 1, 2004, is
in a receivership, liquidation or similar proceeding under the
supervision of a State court. Under the transition rule, in the
case of such a company, the general rule of the provision in
the conference agreement applies to taxable years beginning
after the earlier of (1) the date the proceeding ends, or (2)
December 31, 2007.
For such a company, present-law limitations on the
carryover of net operating losses to or from years in which the
company was not subject to tax (including section 831(b)(3))
continue to apply. A company that is not otherwise eligible for
tax-exempt status under present-law section 501(c)(15) (e.g., a
company that is or becomes a life insurance company, or a
company with net (or, if greater, direct) written premiums
exceeding $350,000 for the taxable year) is not eligible for
the transition rule.
G. Definition of Insurance Company for Property and Casualty Insurance
Company Tax Rules
(Sec. 11 of the Senate amendment and sec. 831 of the Code)
PRESENT LAW
Present law provides specific rules for taxation of the
life insurance company taxable income of a life insurance
company (sec. 801), and for taxation of the taxable income of
an insurance company other than a life insurance company (sec.
831) (generally referred to as a property and casualty
insurance company). For Federal income tax purposes, a life
insurance company means an insurance company that is engaged in
the business of issuing life insurance and annuity contracts,
or noncancellable health and accident insurance contracts, and
that meets a 50-percent test with respect to its reserves (sec.
816(a)). This statutory provision applicable to life insurance
companies explicitly defines the term ``insurance company'' to
mean any company, more than half of the business of which
during the taxable year is the issuing of insurance or annuity
contracts or the reinsuring of risks underwritten by insurance
companies (sec. 816(a)).
The life insurance company statutory definition of an
insurance company does not explicitly apply to property and
casualty insurance companies, although a long-standing Treasury
regulation \36\ that is applied to property and casualty
companies provides a somewhat similar definition of an
``insurance company'' based on the company's ``primary and
predominant business activity.'' \37\
---------------------------------------------------------------------------
\36\ The Treasury regulation provides that ``the term `insurance
company' means a company whose primary and predominant business
activity during the taxable year is the issuing of insurance or annuity
contracts or the reinsuring of risks underwritten by insurance
companies. Thus, though its name, charter powers, and subjection to
State insurance laws are significant in determining the business which
a company is authorized and intends to carry on, it is the character of
the business actually done in the taxable year which determines whether
a company is taxable as an insurance company under the Internal Revenue
Code.'' Treas. Reg. sec. 1.801-3(a)(1).
\37\ Court cases involving a determination of whether a company is
an insurance company for Federal tax purposes have examined all of the
business and other activities of the company. In considering whether a
company is an insurance company for such purposes, courts have
considered, among other factors, the amount and source of income
received by the company from its different activities. See Bowers v.
Lawyers Mortgage Co., 285 U.S. 182 (1932); United States v. Home Title
Insurance Co., 285 U.S. 191 (1932). See also Inter-American Life
Insurance Co. v. Comm'r, 56 T.C. 497, aff'd per curiam, 469 F.2d 697
(9th Cir. 1972), in which the court concluded that the company was not
an insurance company: ``The . . . financial data clearly indicates that
petitioner's primary and predominant source of income was from its
investments and not from issuing insurance contracts or reinsuring
risks underwritten by insurance companies. During each of the years in
issue, petitioner's investment income far exceeded its premiums and the
amounts of earned premiums were de minimis during those years. It is
equally as clear that petitioner's primary and predominant efforts were
not expended in issuing insurance contracts or in reinsurance. Of the
relatively few policies directly written by petitioner, nearly all were
issued to [family members]. Also, Investment Life, in which [family
members] each owned a substantial stock interest, was the source of
nearly all of the policies reinsured by petitioner. These facts,
coupled with the fact that petitioner did not maintain an active sales
staff soliciting or selling insurance policies . . ., indicate a lack
of concentrated effort on petitioner's behalf toward its chartered
purpose of engaging in the insurance business. . . . For the above
reasons, we hold that during the years in issue, petitioner was not `an
insurance company . . . engaged in the business of issuing life
insurance' and hence, that petitioner was not a life insurance company
within the meaning of section 801.'' 56 T.C. 497, 507-508.
---------------------------------------------------------------------------
When enacting the statutory definition of an insurance
company in 1984, Congress stated, ``[b]y requiring [that] more
than half rather than the `primary and predominant business
activity' be insurance activity, the bill adopts a stricter and
more precise standard for a company to be taxed as a life
insurance company than does the general regulatory definition
of an insurance company applicable for both life and nonlife
insurance companies . . . Whether more than half of the
business activity is related to the issuing of insurance or
annuity contracts will depend on the facts and circumstances
and factors to be considered will include the relative
distribution of the number of employees assigned to, the amount
of space allocated to, and the net income derived from, the
various business activities.'' \38\
---------------------------------------------------------------------------
\38\ H.R. Rep. 98-432, part 2, at 1402-1403 (1984); S. Prt. No. 98-
169, vol. I, at 525-526 (1984); see also H.R. Rep. No. 98-861 at 1043-
1044 (1985) (Conference Report).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that, for purposes of
determining whether a company is a property and casualty
insurance company, the term ``insurance company'' is defined to
mean any company, more than half of the business of which
during the taxable year is the issuing of insurance or annuity
contracts or the reinsuring of risks underwritten by insurance
companies. Thus, the Senate amendment conforms the definition
of an insurance company for purposes of the rules taxing
property and casualty insurance companies to the rules taxing
life insurance companies, so that the definition is uniform.
The Senate amendment adopts a stricter and more precise
standard than the ``primary and predominant business activity''
test contained in Treasury Regulations. A company whose
investment activities outweigh its insurance activities is not
considered to be an insurance company under the Senate
amendment.\39\ It is not intended that a company whose sole
activity is the run-off of risks under the company's insurance
contracts be treated as a company other than an insurance
company, even if the company has little or no premium income.
---------------------------------------------------------------------------
\39\ See Inter-American Life Insurance Co. v. Comm'r, supra.
---------------------------------------------------------------------------
Effective date.--The Senate amendment provision applies
to taxable years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Effective date.--The Senate amendment provision applies
to taxable years beginning after December 31, 2003.
H. Repeal of Reduction of Deductions for Mutual Life Insurance
Companies
(Sec. 809 of the Code)
PRIOR AND PRESENT LAW
In general, a corporation may not deduct amounts
distributed to shareholders with respect to the corporation's
stock. The Deficit Reduction Act of 1984 added a provision to
the rules governing insurance companies that was intended to
remedy the failure of prior law to distinguish between amounts
returned by mutual life insurance companies to policyholders as
customers, and amounts distributed to them as owners of the
mutual company.
Under the provision, section 809, a mutual life insurance
company is required to reduce its deduction for policyholder
dividends by the company's differential earnings amount. If the
company's differential earnings amount exceeds the amount of
its deductible policyholder dividends, the company is required
to reduce its deduction for changes in its reserves by the
excess of its differential earnings amount over the amount of
its deductible policyholder dividends. The differential
earnings amount is the product of the differential earnings
rate and the average equity base of a mutual life insurance
company.
The differential earnings rate is based on the difference
between the average earnings rate of the 50 largest stock life
insurance companies and the earnings rate of all mutual life
insurance companies. The mutual earnings rate applied under the
provision is the rate for the second calendar year preceding
the calendar year in which the taxable year begins. Under
present law, the differential earnings rate cannot be a
negative number.
A company's equity base equals the sum of: (1) Its
surplus and capital increased by 50 percent of the amount of
any provision for policyholder dividends payable in the
following taxable year; (2) the amount of its nonadmitted
financial assets; (3) the excess of its statutory reserves over
its tax reserves; and (4) the amount of any mandatory security
valuation reserves, deficiency reserves, and voluntary
reserves. A company's average equity base is the average of the
company's equity base at the end of the taxable year and its
equity base at the end of the preceding taxable year.
A recomputation or ``true-up'' in the succeeding year is
required if the differential earnings amount for the taxable
year either exceeds, or is less than, the recomputed
differential earnings amount. The recomputed differential
earnings amount is calculated taking into account the average
mutual earnings rate for the calendar year (rather than the
second preceding calendar year, as above). The amount of the
true-up for any taxable year is added to, or deducted from, the
mutual company's income for the succeeding taxable year.
For taxable years beginning in 2001, 2002, or 2003, the
differential earnings amount is treated as zero for purposes of
computing both the differential earnings amount and the
recomputed differential earnings amount (true-up).
HOUSE BILL
No provision.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement repeals the rule requiring
reduction in certain deductions of a mutual life insurance
company (section 809).
Effective date.--The provision is effective for taxable
years beginning after December 31, 2004. Thus, for taxable
years beginning in 2003, the differential earnings amount is
treated as zero under present law; for taxable years beginning
in 2004, this rule does not apply and section 809 is in effect
(including the true-up applicable with respect to taxable years
beginning in 2004).
I. Sense of Congress Regarding Defined Benefit Pension System Reform
(Sec. 2 of the House bill and sec. 8 of the Senate amendment)
PRESENT LAW
No provision.
HOUSE BILL
The House bill makes various findings and expresses the
sense of the Congress with respect to the interest rate used to
value pension plan liabilities.
Specifically, the House bill provides that the Congress
finds the following:
The defined benefit pension system has recently
experienced severe difficulties due to an unprecedented
economic climate of low interest rates, market losses
and an increased number of retirees;
The discontinuance of the issuance of 30-year
Treasury securities has made the interest rate on such
securities an inappropriate and inaccurate benchmark
for measuring pension liabilities;
Using the current 30-year Treasury bond interest
rate has artificially inflated pension liabilities and
adversely affected employers offering defined benefit
pension plans and working families who rely on the safe
and secure benefits these plans provide;
There is consensus among pension experts that an
interest rate based on long-term, conservative
corporate bonds would provide a more accurate benchmark
for measuring pension plan liabilities; and
A temporary replacement for the 30-year Treasury
bond interest rate should be enacted while the Congress
evaluates permanent and comprehensive funding reforms.
In addition, the House bill provides that it is the sense
of the Congress that the Congress must ensure the financial
health of the defined benefit pension system by working to
promptly implement: (1) a permanent replacement for the
discount rate used for defined benefit pension plan
calculations; and (2) comprehensive funding reforms aimed at
achieving accurate and sound pension plan funding to enhance
retirement security for workers who rely on defined benefit
pension plan benefits, to reduce the volatility of
contributions, to provide plan sponsors with predictability for
plan contributions, and to ensure adequate disclosures for plan
participants in the case of underfunded plans.
Effective date.--The provision is effective on the date
of enactment.
SENATE AMENDMENT
The Senate amendment makes various findings of the
Congress relating to the private pension system and the Pension
Benefit Guaranty Corporation (``PBGC'') and expresses the sense
of the Senate with respect to future legislative action.
Specifically, the Senate amendment provides that the
Congress makes the following findings:
The private pension system is integral to the
retirement security of Americans, along with individual
savings and Social Security.
The PBGC is responsible for insuring the nation's
private pension system, and currently insures the
pensions of 34,500,000 participants in 29,500 single-
employer plans, and 9,700,000 participants in more than
1,600 multiemployer plans;
The PBGC announced on January 15, 2004, that it
suffered a net loss in fiscal year 2003 of
$7,600,000,000 for single-employer pension plans,
bringing the PBGC's deficit to $11,200,000,000. This
deficit is the PBGC's worst on record, three times
larger than the $3,600,000,000 deficit experienced in
fiscal year 2002.
The PBGC also announced that the separate insurance
program for multiemployer pension plans sustained a net
loss of $419,000,000 in fiscal year 2003, resulting in
a fiscal year-end deficit of $261,000,000. The 2003
multiemployer plan deficit is the first deficit in more
than 20 years and is the largest deficit on record.
The PBGC estimates that the total underfunding in
multiemployer pension plans is roughly $100,000,000,000
and in single-employer plans is approximately
$400,000,000,000. This underfunding is due in part to
the recent decline in the stock market and low interest
rates, but is also due to demographic changes. For
example, in 1980, there were four active workers for
every one retiree in a multiemployer plan, but in 2002,
there was only one active worker for every one retiree.
This pension plan underfunding is concentrated in
mature and often-declining industries, where plan
liabilities will come due sooner.
Neither the Senate Committee on Finance nor the
Senate Committee on Health, Education, Labor and
Pensions (``HELP''), the committees of jurisdiction
over pension matters, has held hearings this Congress
nor reported legislation addressing the funding of
multiemployer pension plans.
The Senate is concerned about the current funding
status of the private pension system, both single and
multiemployer plans.
The Senate is concerned about the potential
liabilities facing the PBGC and, as a result, the
potential burdens facing healthy pension plans and
taxpayers.
In addition, the Senate amendment provides that it is the
sense of the Senate that the Committee on Finance and the
Committee on Health, Education, Labor and Pensions should
conduct hearings on the status of multiemployer pension plans
and should work in consultation with the Departments of Labor
and Treasury on permanent measures to strengthen the integrity
of the private pension system in order to protect the benefits
of current and future pension plan beneficiaries.
Effective date.--The Senate amendment is effective on the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, with
modifications. Under the conference agreement, it is the sense
of the Congress that the Congress must ensure the financial
health of the defined benefit pension system by working to
promptly implement: (1) a permanent replacement for the
discount rate used for defined benefit pension plan
calculations; and (2) comprehensive funding reforms for all
defined benefit pension plans aimed at achieving accurate and
sound pension plan funding to enhance retirement security for
workers who rely on defined benefit pension plan benefits, to
reduce the volatility of contributions, to provide plan
sponsors with predictability for plan contributions, and to
ensure adequate disclosures for plan participants in the case
of underfunded plans.
Effective date.--The conference agreement is effective on
the date of enactment.
J. Extension of Provision Permitting Qualified Transfers of Excess
Pension Assets to Retiree Health Accounts
(Sec. 9 of the Senate amendment, sec. 420 of the Code, and secs. 101,
403, and 408 of ERISA)
PRESENT LAW
Defined benefit plan assets generally may not revert to
an employer prior to termination of the plan and satisfaction
of all plan liabilities. In addition, a reversion may occur
only if the plan so provides. A reversion prior to plan
termination may constitute a prohibited transaction and may
result in plan disqualification. Any assets that revert to the
employer upon plan termination are includible in the gross
income of the employer and subject to an excise tax. The excise
tax rate is 20 percent if the employer maintains a replacement
plan or makes certain benefit increases in connection with the
termination; if not, the excise tax rate is 50 percent. Upon
plan termination, the accrued benefits of all plan participants
are required to be 100-percent vested.
A pension plan may provide medical benefits to retired
employees through a separate account that is part of such plan.
A qualified transfer of excess assets of a defined benefit plan
to such a separate account within the plan may be made in order
to fund retiree health benefits.\40\ A qualified transfer does
not result in plan disqualification, is not a prohibited
transaction, and is not treated as a reversion. Thus,
transferred assets are not includible in the gross income of
the employer and are not subject to the excise tax on
reversions. No more than one qualified transfer may be made in
any taxable year. A qualified transfer can be made only from a
single-employer plan.
---------------------------------------------------------------------------
\40\ Sec. 420.
---------------------------------------------------------------------------
Excess assets generally means the excess, if any, of the
value of the plan's assets \41\ over the greater of (1) the
accrued liability under the plan (including normal cost) or (2)
125 percent of the plan's current liability.\42\ In addition,
excess assets transferred in a qualified transfer may not
exceed the amount reasonably estimated to be the amount that
the employer will pay out of such account during the taxable
year of the transfer for qualified current retiree health
liabilities. No deduction is allowed to the employer for (1) a
qualified transfer or (2) the payment of qualified current
retiree health liabilities out of transferred funds (and any
income thereon).
---------------------------------------------------------------------------
\41\ The value of plan assets for this purpose is the lesser of
fair market value or actuarial value.
\42\ In the case of plan years beginning before January 1, 2004,
excess assets generally means the excess, if any, of the value of the
plan's assets over the greater of (1) the lesser of (a) the accrued
liability under the plan (including normal cost) or (b) 170 percent of
the plan's current liability (for 2003), or (2) 125 percent of the
plan's current liability. The current liability full funding limit was
repealed for years beginning after 2003. Under the general sunset
provision of EGTRRA, the limit is reinstated for years after 2010.
---------------------------------------------------------------------------
Transferred assets (and any income thereon) must be used
to pay qualified current retiree health liabilities for the
taxable year of the transfer. Transferred amounts generally
must benefit pension plan participants, other than key
employees, who are entitled upon retirement to receive retiree
medical benefits through the separate account. Retiree health
benefits of key employees may not be paid out of transferred
assets.
Amounts not used to pay qualified current retiree health
liabilities for the taxable year of the transfer are to be
returned to the general assets of the plan. These amounts are
not includible in the gross income of the employer, but are
treated as an employer reversion and are subject to a 20-
percent excise tax.
In order for the transfer to be qualified, accrued
retirement benefits under the pension plan generally must be
100-percent vested as if the plan terminated immediately before
the transfer (or in the case of a participant who separated in
the one-year period ending on the date of the transfer,
immediately before the separation).
In order for a transfer to be qualified, the employer
generally must maintain retiree health benefits at the same
level for the taxable year of the transfer and the following
four years.
In addition, the ERISA provides that, at least 60 days
before the date of a qualified transfer, the employer must
notify the Secretary of Labor, the Secretary of the Treasury,
employee representatives, and the plan administrator of the
transfer, and the plan administrator must notify each plan
participant and beneficiary of the transfer.\43\
---------------------------------------------------------------------------
\43\ ERISA sec. 101(e). ERISA also provides that a qualified
transfer is not a prohibited transaction under ERISA or a prohibited
reversion.
---------------------------------------------------------------------------
No qualified transfer may be made after December 31,
2005.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment allows qualified transfers of excess
defined benefit plan assets through December 31, 2013.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
The conference agreement allows qualified transfers of excess
defined benefit plan assets through December 31, 2013.
Effective date.--The provision is effective on the date
of enactment.
K. Confirmation of Antitrust Status of Graduate Medical Resident
Matching Programs
HOUSE BILL
No provision.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement confirms that the antitrust laws
do not prohibit the sponsorship, conduct, or participation in a
graduate medical education residency matching program and that
evidence of that conduct shall not be admissible to support any
claim or action alleging a violation of the antitrust laws.
Effective date.--The provision is effective on the date
of enactment. It applies to conduct whether it occurs prior to,
on, or after such date and applies to all judicial and
administrative actions or other proceedings pending on such
date.
L. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform
and Restructuring Act of 1998 (the ``IRS Reform Act'') requires
the Joint Committee on Taxation (in consultation with the
Internal Revenue Service and the Department of the Treasury) to
provide a tax complexity analysis. The complexity analysis is
required for all legislation reported by the Senate Committee
on Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
(the ``Code'') and has widespread applicability to individuals
or small businesses.
The staff of the Joint Committee on Taxation has
determined that a complexity analysis is not required under
section 4022(b) of the IRS Reform Act because the bill contains
no provisions that amend the Internal Revenue Code and that
have ``widespread applicability'' to individuals or small
businesses.
From the Committee on Education and the
Workforce, for consideration of the House bill
and the Senate amendment, and modifications
committed to conference:
John Boehner,
Howard ``Buck'' McKeon,
Sam Johnson,
Patrick J. Tiberi,
From the Committee on Ways and Means, for
consideration of the House bill and the Senate
amendment, and modifications committed to
conference:
William Thomas,
Rob Portman,
Managers on the Part of the House.
Chuck Grassley,
Judd Gregg,
Mitch McConnell,
Managers on the Part of the Senate.
