Guest Article

(From the July 16, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Harkin Bill Would Require Employers With Nonqualified Deferred Compensation Plans to Maintain Defined Benefit Pensions for Employees

Employers that offer nonqualified deferred compensation plans would be required to sponsor and maintain a defined benefit pension plan for their employees under a bill introduced by Senator Tom Harkin (D-IA), a senior member of the Senate's Health, Education, Labor, and Pensions (HELP) Committee. The "Restoring Pension Promises to Workers Act" (S. 1725) also would amend ERISA to prevent pension plans from recovering benefit overpayments in certain circumstances, to allow participants affected by mergers and acquisitions to continue to earn service credits towards eligibility for subsidized early retirement benefits under certain circumstances, and to establish an office of pension participant advocacy within the Department of Labor.

Defined Benefit Plan Mandate

As noted, S. 1725 would amend IRC § 409A to require companies with nonqualified deferred compensation plans to sponsor and maintain one or more defined benefit pension plans for their employees. If a company failed to satisfy this requirement, all compensation deferred under the nonqualified plan for the taxable year of the failure and all preceding taxable years would be immediately included in each covered employee's gross income.

The defined benefit pension plan would have to meet certain minimum standards relating to participation, vesting, and benefits. Specifically, plans would have to satisfy the IRC § 410(b) minimum coverage requirements, the IRC § 416(b)(1) vesting requirements for top heavy plans, and a modified version of the IRC § 416(c)(1) minimum benefit requirements for top heavy plans. The Treasury Secretary would be required to issue guidance on applying the top heavy vesting and minimum benefit rules to non-top heavy plans.

Other Provisions

Senator Harkin's bill would amend ERISA to prevent pension plans from taking steps to recover benefit overpayments to participants in certain circumstances. The rule would apply only to benefit overpayments that are not due to any fault on the part of the participant, and only if the recovery "would be against equity and good conscience by reason of the hardship the recovery would impose on the participant or beneficiary, or ... is of an amount that the plan's actuary determines is actuarially insignificant." However, the bill also would prohibit plans from initiating any action to recover benefit overpayments more than three years after the overpayment was made. Fortunately, the bill would protect plan fiduciaries from fiduciary liability to the plan for failing to collect overpayments in accordance with these rules.

The bill also would amend ERISA and the IRC to allow employees to continue earning service credits towards eligibility for an early retirement subsidy after their employment has changed due to a corporate transaction. Basically, the employee's service with the successor employer would be counted towards eligibility for the prior employer's early retirement subsidy as if the corporate transaction never occurred.

Finally, the bill would establish an office of pension participant advocacy within the Department of Labor. This office would not appear to have any enforcement responsibility or authority, but instead would serve as an advocate for pension participants and beneficiaries by identifying systemic problems and working to develop ways the government and business can work together to correct those problems.

Outlook

Given Senator Harkin's status as a member of the Senate HELP Committee, which is one of the committees of jurisdiction over pension issues, his bill should be taken seriously. Some or all of his proposals could be in play if the Senate considers legislation relating to nonqualified deferred compensation in the near future, which is possible.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any 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, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.