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Guest Article

Deloitte logo

(From the August 1, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Senate Finance Committee Unanimously Approves Pension Funding Reform Bill


The Senate Finance Committee on July 26, 2005 unanimously approved the National Employee Savings and Trust Equity Guarantee (NESTEG) Act, a comprehensive pension reform bill sponsored by Committee Chairman Charles Grassley (R-IA) and Ranking Democrat Max Baucus (D-MT). This version of the NESTEG Act includes comprehensive funding reform proposals for single- and multi-employer defined benefit plans. The committee-approved bill also includes proposals relating to cash balance and other hybrid plans.

The following summary is based on the Joint Committee on Taxation's description of the committee-reported bill. Additional updates will be provided in future editions of Washington Bulletin as the Finance Committee releases more details.

Single-Employer Funding Reforms, Etc.

The NESTEG bill's proposed pension funding reforms for single-employer plans appear to be based primarily on the Administration's proposals. However, the NESTEG proposals have features in common as well with H.R. 2830, which the House Committee on Education & the Workforce reported on June 30, 2005.

Similar to the Administration's proposals, NESTEG would--

  • establish funding targets based on the plan sponsor's financial health;
  • require plan sponsors to amortize unfunded liabilities over seven years;
  • require plans to use a yield curve to value liabilities and calculate lump sum distribution amounts;
  • require plans to use current market rates to value plan assets;
  • prohibit benefit increases when the plan is at or below 80 percent funded;
  • prohibit lump sums or other accelerated benefit forms when the plan is at or below 60 percent funded;
  • prohibit direct or indirect funding of nonqualified deferred compensation for executives when the plan sponsor is financially weak and the plan is at or below 80 percent funded (the Administration's proposal sets the funding threshold at 60 percent for this purpose);
  • increase the PBGC flat-rate premium to $30 per participant; and
  • freeze the PBGC guarantee when a plan sponsor enters bankruptcy.

There also are significant differences between the NESTEG and Administration proposals. For example, the NESTEG proposal would permit plan sponsors to continue using credit balances to offset minimum required contributions. (H.R. 2830 also would permit plan sponsors to continue using credit balances to offset contributions, but only if the plan is at least 80 percent funded.) Like H.R. 2830, the NESTEG would require plan sponsors to reduce the value of plan assets by any credit balance for purposes of determining the minimum required contribution. But plan sponsors would not be required to reduce the value of plan assets by any credit balance for purposes of determining if any special rules for underfunded plans apply.

All three proposals would increase the maximum deduction limit for contributions to single-employer plans. The Administration's proposal would increase the maximum deduction limit to 130 percent of current liability. By comparison, the NESTEG and H.R. 2830 would permit sponsors of well-funded plans to deduct contributions up to what their funding targets would be if their plans were at risk. H.R. 2830 generally would permit other plan sponsors to fund up to 150 percent of current liability, and the NESTEG generally would permit such plan sponsors to fund up to 180 percent of current liability.

Unlike the Administration's proposals and H.R. 2830, the NESTEG would not prohibit shutdown benefits. Instead, the bill would limit the PBGC guarantee with respect to shutdown benefits by treating them as plan amendments adopted on the date the shutdown or other triggering event occurs.

Cash Balance Plans

The NESTEG Act would prospectively clarify that cash balance and other hybrid plans do not violate federal age discrimination laws just because younger employees have more time to earn interest, but only if the plan's pay credits and interest credits do not decrease because a participant attains any age. The Administration's proposals and H.R. 2830 include similar provisions. Also, like H.R. 2830, the NESTEG Act would eliminate whipsaw prospectively by permitting cash balance and other hybrid plans to pay lump sums equal to participants' account balances so long as the plans' interest credit rates are not greater than a market rate of return.

The NESTEG Act would require plan sponsors to satisfy one of three specific transition requirements when converting a traditional defined benefit plan to a cash balance or other hybrid plan. It also would require cash balance plans to pay interest credits at least equal to the Federal mid-term interest rate, and establish a three-year vesting requirement for cash balance and other hybrid plans.

Other Issues

The NESTEG Act includes numerous other proposals relating to defined benefit and defined contribution plans. For example, the bill would require 401(k) plans to allow participants with three or more years of service to diversify their employer stock holdings. Other provisions would--

  • permit eligible rollover distributions to be deposited directly to a Roth IRA (such rollovers would be subject to tax immediately);
  • extend to all governmental plans the current moratorium on applying certain nondiscrimination and minimum participation rules to state and local government plans;
  • increase from 90 days to 180 days the maximum number of days for providing certain pre-distribution notices, including the 402(f) notice, to participants and beneficiaries;
  • extend the PBGC's missing participants program to multiemployer plans and defined contribution plans;
  • permit automatic rollovers of involuntary distributions to be transferred to PBGC instead of an IRA;
  • authorize the PBGC to pay interest on premium overpayment refunds;
  • apply the current vesting schedule for employer matching contributions (3-year cliff or 6-year graded) to all employer contributions to defined contribution plans;
  • direct the Treasury Secretary to issue regulations providing governmental plans comply with the minimum distribution rules so long as they comply with a good faith interpretation of the statutory requirements;
  • direct the Labor Secretary to issue regulations clarifying that a domestic relations order issued subsequent to a divorce can be a Qualified Domestic Relations Order (QDRO);
  • raise the asset limit for the 5500-EZ to $250,000, and require the Treasury and Labor Departments to develop simplified 5500 forms for plans with 25 or fewer participants; and
  • prohibit states from treating rollovers as income for purposes of determining unemployment compensation.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595.

Copyright 2005, Deloitte.


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