ERIC memorandum template
ERIC Updates


<nobr>Sep 9, 2005</nobr>

ERIC: Report and Alert on HELP Committee Actions

The Senate Health Education Labor and Pensions (HELP) Committee, yesterday, as expected, approved their version of pension funding and hybrid plan legislation. The "Defined Benefit Security Act of 2005" was approved by a vote of 18-2, with several Senators from both sides of the aisle praising Committee Chairman Mike Enzi (R-WY) for his leadership and detailed consultations with Committee members in assembling the compromise package.

Sen. Richard Burr (R-NC) voted no because the bill's hybrid provisions did not provide sufficient protection for and imposed mandates on employers, and Sen. Tom Harkin (D-IA) voted no because these same provisions could restrict future litigation and failed to force companies to provide sufficient additional benefits for employees subject to past conversions. Sen. Hillary Clinton (R-NY), while voting for the bill, raised questions at the mark-up about the scope of the hybrid plan provisions and their impact.

Of the four committees of jurisdiction, only the House Ways and Means Committee has yet to act. The House Education and Workforce Committee June 30 approved a revised version of H.R.2830 on a party-line vote and the Senate Finance Committee July 26 unanimously approved a revised version of the Committee's "National Employee Savings and Trust Equity Guarantee Act of 2005" (NESTEG) bill.

In comparison with these earlier bills, in general, the new HELP Committee bill appears to be more favorable to plan sponsors regarding funding rules, but deepens and broadens the mire of difficult issues surrounding hybrid plans. Chairman Enzi is the first to provide a committee bill that would validate hybrid plan designs for existing plans. However, because he also was seeking to have a bipartisan bill and a united front on the funding provisions, very troubling provisions that limit the scope of the validation and impose requirements on conversions also were included.

Members are strongly urged to study these provisions whether or not you have a hybrid plan. They incorporate provisions that could have the impact of "vesting" benefits not yet accrued and could increase, rather than decrease, causes for litigation. Moreover, members who do have hybrid plans should NOT assume that they qualify for the retroactive "safe harbors" provided in the bill, even if choice was provided, because of the many restrictions and requirements placed on them. We urge that both your benefits experts and your legal staff review these hybrid plan provisions in some detail.

Please let Janice Gregory of the ERIC staff know (on a confidential basis) whether or not your company would meet the bill's "safe harbors."

In addition -- plan sponsors should take note that the HELP Committee provisions regarding multiemployer plans appear to impose new funding rules on ALL multiemployer plans, not just those with current funding difficulties. Companies who contribute to any multiemployer pensions will want to be sure their multiemployer experts review those provisions.

Regarding Pension Funding Rules:

REQUIRED CONTRIBUTIONS: The HELP Committee bill generally follows H.R.2830 -- including three-year averaging of the required interest rate and three-year smooting of assets -- regarding amounts that employers are required to contribute to pension plans. Important differences include:

  • ten-year amortization of unfunded amounts (instead of seven);
  • five-year limit imposed on assumptions when computing an "at risk" liability; and
  • rules for credit balances (or pre-funding balances) similar to the more favorable rules in the NESTEG bill.
Like H.R.2830, the HELP bill also imposes "at risk" liability on the basis of the funded status of the plan -- not the credit rating of the employer. It also provides for plan-specific mortality assumptions.

In addition, the HELP bill's transition allowances include:
  • delaying changes in the funding rules until 2007;
  • a ten-year phase in of the 100% funding target for plans not paying the DRC in 2006;
  • a five-year phase in of new mortality assumptions;
  • a five-year phase in of including lump sums in the calculation of liability;
  • a five-year phase in of the "at risk" liability.
ALLOWED CONTRIBUTIONS: The HELP bill generally follows the more generous provisions of NESTEG in setting deduction limits for plan contributions, including allowing contributions up to 180% of liability plus future salary or benefit projections and, after a phase-out, eliminating the combined plan limit.

BENEFIT CUT OFFS: The HELP bill generall follows the more generous provisions of the NESTEG bill, including preserving shut-down benefits.

LUMP SUM DISTRIBUTIONS: After a five-year phase-in, like the previous bills, the HELP bill mandates use of the yield curve.

PBGC PREMIUM: The premium is set at $30 -- but, importantly, would not be automatically indexed for the future.

Regarding Hybrid Plan Provisions:
VALIDATION OF PLAN DESIGN: Provides a prospective and retroactive validation of hybrid plan designs.

CONVERSION SAFE HARBORS: Plans that met, or provide additional credits to employees in order to meet, certain safe harbors also would have litigation protection. A conversion must have followed one of four alternatives, as outlined below:
  1. No wear away of early and normal retirement AND
    • greater of for everyone for five years OR
    • greater of at retirement for employees age 40 or with a combination of age and service of 65 at the time of the conversion OR
    • informed choice for the same group (age 40 or age-service of 65) OR
    • a determination letter.
  2. No wear away of normal retirement AND
    • grandfather all over age 40 OR
    • greater of at retirement for employees age 40 or with a combination of age-service of 60 at the time of the conversion OR
    • informed choice for the same group (age 40 or age-service of 60) OR
    • the conversion was bargained OR
    • the conversion was from a career average pay plan
  3. Informed choice for all participants.
  4. Something that is actuarially equivalent to these criteria (under regulations).
LITIGATION CARVEOUT: Plans are not protected under the bill if a claim or actoin has been filed with an administrative agency or court prior to August 1, 2005, alleging a violation of age discrimination and related laws. [It is anticipated that Committee Report language may also provide groundwork for disparate impact claims under ADEA.]

WHIPSAW: The HELP bill provides a prospective only fix for whipsaw.

FUTURE CONVERSIONS: The HELP bill imposes restrictions on future conversion methods similar to those of the NESTEG bill.

VESTING AND INTEREST CREDITS: The HELP bill imposes vesting and interest credit requirements similar to those of the NESTEG bill.

For questions, comments, or additional information, contact:
Janice Gregory, Senior Vice President

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