Month: September 2003

Yesterday, I noted a Wall Street Journal article discussing FASB’s decision to review the rules on how companies measure benefit obligations under cash balance pension plans. More articles on the subject today:

• Wall Street Journal: “Cash-Balance-Plan Accounting Could Be Overhauled by FASB”
• Reuters.com: “FASB to address controversial pension plan”
• New York Times: “Changes Discussed in Accounting for Pension Fund Obligations”

Quote of note from the New York Times article: “The board’s work is at a preliminary stage, but actuaries said it seemed to be heading toward a new accounting method that would require most companies with cash-balance plans to increase their pension obligations. Mr. Lofgren, of Watson Wyatt, said some companies’ pension obligations stood to increase about 20 percent if the changes were adopted. An increase in pension obligations can indirectly reduce profit.”

Benefitslink.com has posted Alvin D. Lurie’s very lively article on the cash balance plan litigation and controversy: “Murphy’s Law Has IBM Singing the Big Blues.” (You can read more about the cash balance plan litigation in links over on the right as well as in posts at Benefitsblog which you can access here.)

House Education & the Workforce Committee Chairman John Boehner (R-OH) last week introduced the Pension Funding Equity Act (H.R. 3108), legislation that would replace the current 30-year Treasury bond interest rate with a rate based on long-term corporate bonds for certain pension plan funding requirements. The bill reportedly will be considered on the House floor by the end of the month, and appears to benefit from strong support from a bipartisan group of co-sponsors. For the text of the legislation, you may continue reading . . .

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 other provisions, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

September 17, 2003
Mr. BOEHNER (for himself, Mr. THOMAS, Mr. GEORGE MILLER of California, Mr. RANGEL, Mr. SAM JOHNSON of Texas, and Mr. PORTMAN) introduced the following bill; which was referred to the Committee on Education and the Workforce, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

——————————————————————————–

A BILL
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 other provisions, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Pension Funding Equity Act of 2003′.

SEC. 2. FINDINGS; SENSE OF CONGRESS.

(a) FINDINGS- The Congress finds the following:

(1) 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.

(2) The discontinuation 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.

(3) Using the current 30-year Treasury bond interest rate has artificially inflated pension liabilities and therefore adversely affected both employers offering defined benefit pension plans and working families who rely on the safe and secure benefits that these plans provide.

(4) 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.

(5) A temporary replacement for the 30-year Treasury bond interest rate should be enacted while the Congress evaluates permanent and comprehensive funding reforms.

(b) SENSE OF CONGRESS- 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 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. 3. 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 conservatively invested in long-term 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 one or more indices selected periodically by the Secretary, and the Secretary shall make the permissible range 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) 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 yield determined by the Secretary of the Treasury on amounts conservatively invested in long-term 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 yield on the basis of one or more indices selected periodically by the Secretary, and the Secretary shall make such yield 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 conservatively invested in long-term 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 one or more indices selected periodically by the Secretary, and the Secretary shall make the permissible range 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- Section 415(b)(2)(E)(ii) of such Code is amended by inserting before the period at the end `, except that in the case of years beginning in 2004 or 2005, `5.5 percent’ shall be substituted for `5 percent’ in clause (i)’.

(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.

In the case of a governmental plan (as defined in section 414(d) of the Internal Revenue Code of 1986), this paragraph shall be applied by substituting `2008′ for `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 DATE-

(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to years beginning after December 31, 2003.

(2) LOOKBACK RULES- For purposes of applying subsections (l)(9)(B)(ii) and (m)(1) of section 412 of the Internal Revenue Code of 1986 and subsections (d)(9)(B)(ii) and (e)(1) of section 302 of the Employee Retirement Income Security Act of 1974 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 years beginning before such date.

(3) NO REDUCTION REQUIRED- In the case of any participant or beneficiary, the amount payable under any form of benefit subject to section 417(e)(3) of the Internal Revenue Code of 1986 shall not be required to be reduced below the amount determined as of the last day of the last plan year beginning before January 1, 2004, merely because of the amendments made by subsection (b)(3).

As an answer to the U.K. pension crises, Britains were urged to go forth and multiply according to this report by the U.K. Guardian: “Pensions crisis? Just have babies.” Also, the BBC News reports: “Tories fear ‘birth dearth.'” According to the articles, shadow work and pensions secretary David Willetts gave a speech on Tuesday to launch a pamphlet for the Centre for European Reform called “Old Europe? Demographic Change and Pensions Reform.” He argued that the European Union would see in the next half-century an extra 40 million people aged over 60, along with a reduction of 40 million in those aged 15-60. Quote of Note: “Europe faces a birth dearth. Nobody wants to force women to have more children than they wish. . . But we have created an environment in which people are having fewer children than they aspire to.”

The Wall Street Journal is reporting today that the “Financial Accounting Standards Board has voted today to review the rules on how companies measure benefit obligations in cash-balance pension plans” in this article: “FASB to Review Regulations On Cash-Balance Pensions.” (Subscription required.) According to the article, this cash balance plan review by FASB is separate from a wider-ranging pension initiative currently under way by the board to increase the amount of information companies report about their traditional pension plans. The board earlier this month issued a set of draft rules for increasing disclosure, and has said it wants to put them into place by the end of the year.

Today’s Journal also has a great article: “Choosing a College-Savings Plan.” Unfortunately if you want a copy of the nifty chart featuring the different kinds of college savings plans (that comes with the article) you will have to buy a hard copy of today’s issue, i.e. the online version does not have the chart.

“State treasurers and pension fund leaders urged the New York Stock Exchange to make sweeping changes in governance Wednesday following a pay scandal that forced the resignation of chairman Dick Grasso last week”: The Seattle Post-Intelligencer is reporting in this article entitled “Pension funds want big changes at NYSE.” In a related article, Newsday.com reports: “Pension Fund Managers Urge NYSE Reforms.”

More later . . .

I have added the following to the Cash Balance Plan Litigation Links over on the right:

Buck Consultants: Court Rulings Question the Legality of Cash Balance and Pension Equity Plans

Watson Wyatt: Court Rules That Cash Balance and PEP Plans Are Age Discriminatory

No posts here last Friday due to Isabel and a power outage . . .

The Wall Street Journal reports on the growing power of public pension funds: “Pension Funds’ Growing Power Is Evident in Grasso Departure.”

“Pa. Court Abolishes Common-Law Marriage“: Law.com discusses this case which was reported on here at Benefitsblog in this post and at How Appealing in this post. Quote of Note:

“It is the view of many public interest law centers that common-law marriage is a long-standing practice in Pennsylvania, and the concern with elimination is the potential impact on the ability of poor individuals to obtain certain types of services and benefits based on their marriages,” said Joseph Sullivan, director of the pro bono program at Schnader Harrison Segal & Lewis and co-chair of the Philadelphia Bar Association’s delivery of legal services committee. “Many of us are also concerned that certain individuals married under common law will not become aware of the change in the law and suffer as a result.”

Slate had this interesting article late last week: “Take Your Money and Leave: The growing war between public pension funds and private equity firms.” (Thanks to a reader for alerting me.)

“Retirement Plan Loans“: The Motley Fool discusses the pitfalls of taking out a retirement plan loan.

“Health care bill poses legal thicket“: The Sacramento Bee reports on the ERISA implications of the new California health care bill and how the controversy is expected to reach the U.S. Supreme Court. The article also reports:

Gov. Davis has not decided whether he will sign the bill, said his health care adviser, Daniel Zingale. Davis first needs to determine just how much SB 2 will cost companies and how many uninsured Californians will get coverage, Zingale said.

BenefitsNext has this as well: “Bill Requiring Health-Care Insurance Before CA’s Davis.”

Benefitslink.com has posted a Press Release today entitled “Labor Department Announces Proposed Effective Date of COBRA Regulations Will Be Delayed” which states:

In response to questions about complying with the department’s proposed COBRA notice rules, Assistant Secretary of EBSA Ann L. Combs said, “The department intends to give group health plans six months after adoption of final rules to implement administrative changes required by the new rules. Allowing sufficient time for orderly and efficient implementation of the new requirements will help ensure compliance,” added Combs. The final rules are expected to be issued early next year, according to Combs. “In the interim, plan administrators may use the model notices contained in the proposed regulation to satisfy their COBRA notice obligations, although they are not required to do so,” said Combs.

The proposed COBRA regulations which were issued May 28, 2003, were supposed to take effect January 1, 2004, and the DOL had also announced in the regulations that any old COBRA notices which were modeled after the one issued in ERISA Technical Release 86-2 (June 26, 1986) would no longer satisfy good-faith compliance requirements beginning May 28, 2003. Presumably using the model notice provided by the DOL in the proposed regulations was to constitute good-faith compliance. However, this statement by Combs indicates that EBSA has decided that there should be a later effective date and has backed off from requiring employers to immediately begin using the new model notice as provided in the proposed regulations. As many of you may recall, many of the comments received by the DOL regarding the proposed COBRA regulations requested a more reasonable effective date (as discussed in this post).

A couple of the significant changes to be brought about by the proposed regulations would be the additional notice requirements for plan administrators:

• The proposed regulations would require a notice be given to employees and qualified beneficiaries, who notify the plan administrator of a “qualifying event” but who are not otherwise entitled to COBRA coverage, of the reason such coverage is unavailable. The plan administrator would have to provide this information within 14 days of receiving notice of the “qualifying event.”
• The proposed regulations would also require that a qualified beneficiary be sent notice of termination of COBRA coverage when that termination occurs before the end of the maximum period of COBRA coverage.

RothCPA.com discusses an interesting 8th Circuit Court of Appeals case which allowed an employer to deduct certain expenses associated with employee fishing outings. According to the case, in order to deduct these expenses, the company must show:

• it had ‘more than a general expectation of deriving some income or other specific trade or business benefit’ from the fishing trips;
• that active business discussions, meetings, negotiations or other business transactions were conducted on the fishing trips;
• that the ‘principal character or aspect’ of the fishing trips was the active conduct of business, although it is not necessary that more time was devoted to business than to entertainment; and
• the expenditures were allocable to the employees’ conduct of business and the other people on the fishing trip with which business was conducted.

< . . < . . <