Compliance July 31, 2006

Pension Reform Takes an Unexpected Detour

July 31, 2006 (PLANSPONSOR.com) - Pension reform legislation took another interesting turn late Friday night.
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After conference committee negotiations got bogged down on Thursday (see  Pension Reform Stalls on Tax Break Provisions ), the House leadership decided to separate the pension provisions from non-related provisions (including a federal deduction for state and local sales taxes, renewal of a research tax credit for businesses, breaks for college tuition, and incentives for employers to hire former welfare recipients) introduced by Senate negotiators, and passed the former (in what is now called the Pension Protection Act of 2006) by a  279-131 vote  just ahead of its five-week August recess.   The Senate, which is still in session, is expected to take up the measure this week.

What remains unclear is what this all means for plan sponsors.   Republicans stripped out some $35 billion in tax incentives noted earlier whose passage Senate Democrats had tried to help ensure by bundling them with the pension provisions.   Instead, Republicans put those incentives in a separate bill that also includes reductions in the estate tax and an increase in the minimum wage – and then passed that second bill by a 230-180 vote.

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What’s Next?

Procedurally, since the pension reform bill was not approved by the conference committee, the Senate could amend the bill, effectively leaving matters where they stood last April when the Senate and House versions still had to be reconciled.   Nor is that a remote possibility.   While House and Senate negotiators were said to be in general agreement on the pension issues, published reports indicate that there were still details to be worked out on two of the bill’s more controversial provisions – the treatment of troubled airline pensions and participant-level investment advice (see  Advice, Airline Relief Hold Up Pension Bill ).   The Los Angeles Times reported that, while House aides said their legislation reflected previous agreements with the Senate on pension issues, many of the supposed agreements were based on “handshakes and understandings,” rather than legislative language.

Alternatively, the Senate could postpone a vote on the pension reform bill until it votes on the estate tax/minimum wage/tax incentives bill.    The Democratic leadership in the Senate is very committed to the tax incentives package, and traditionally supportive of increases in the minimum wage - but adamantly opposed to reductions in the estate tax.   Senate Minority Leader Harry Reid (D-Nevada) vowed last week that Democrats would kill the hybrid bill, noting, "The Senate has rejected fiscally irresponsible estate tax giveaways before and will reject them again."   Unable to resolve the conflict, the Senate might well forestall a vote on pension reform.   

Uncertain Future

Ultimately, of course, even if the Senate votes on and passes the pension reform bill, there is no assurance that President Bush will sign it.   Earlier this year, Bush Administration officials expressed concerns about some of the bill's pension provisions (see  Official Reiterates Concerns about Pension Reform Bill ).   Additionally, last week the Pension Benefit Guaranty Corporation (PBGC), the nation's insurer of private pension plans and a presumed beneficiary of some of the reform proposals, said that the reforms being debated could actually exacerbate the financial challenges confronting the agency (see  PBGC Estimates Costly Impact of Pension Reform ).

Plan sponsors who were hoping for- or perhaps fearing - resolution of these issues will simply have to wait.

Compliance July 28, 2006

Pension Reform Stalls on Tax Break Provisions

July 28, 2006 (PLANSPONSOR.com) - A Senate aide told reporters that House and Senate negotiators had agreed on pension bill details, but had not been able to agree on whether to include in the measure several extensions of popular tax cuts, Reuters reports.
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The aide said the House will move two measures separately before leaving this week: the pension bill and a tax measure combining the tax cut extensions with a cut in the estate tax. Aides from both the Senate and House said the tax bill may possibly include an increase in the minimum wage, according to Reuters. The Senate will take the measures up next week.

According to Bloomberg, Republican House Representatives from the committee negotiating the pension reform boycotted a Thursday night meeting and were accused by Senator Charles Grassley of avoiding a public vote showing their intent to omit the $35 billion in tax breaks from the legislation.

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House leaders and Senate Majority Leader Bill Frist wanted to combine the tax breaks in a separate measure with a provision to reduce the estate tax, Bloomberg reports. Grassley and Senator Max Baucus said the tax breaks may fail if coupled with the estate tax exemption and wanted to keep them on the pension measure.

Tax breaks in the legislation include a federal deduction for state and local sales taxes, renewal of a research tax credit for businesses, breaks for college tuition, and incentives for employers to hire former welfare recipients, according to Bloomberg. Also included are an extension of a deduction for teachers who buy their own classroom supplies, a $5,000 credit for people who buy a home in the District of Columbia for the first time, and a tax credit for people who buy certain types of electric vehicles.

Agreements Made

The current compromise measure would give companies a three-year phase-in period to replenish their pension funds, according to the news report. After that, they must reach 100% funding in seven years or face penalties.

The measure also provides that companies will have to use a lower interest rate to calculate the return on their funding investments which will force them to put more money into the plans because future returns would be lower. Older companies that have more retirees than workers will also have to pay more into their plans using higher rates for young workers and lower rates for older workers instead of a uniform rate they currently use.

A double test would be used for determining which companies are most likely to fall short of their pension obligations and have to put more money into their funds. A company would have to fail both tests to be designated “at risk.” A company whose pension plan is funded at less than 70% of its liabilities in a worst-case scenario in which every employee retires early at maximum benefits would flunk the first test. A plan funded at less than 80% of liabilities using standard retirement calculations would fail the second test.

Companies that fail both tests would have a year to accelerate payments to pass them. The 80% test would be phased in over three years, starting at 65% in 2008.

Additionally, only companies that are above 80% funded will be able to count credit balances, or money paid into pension plans early, toward quarterly pension payments.

Additional provisions in the compromise measure include:

  • Clarification of the law so that companies can offer hybrid (cash balance) plans in the future without fear of lawsuits. The agreement does not include a retroactive liability shield for companies that have already been sued for switching to hybrid plans.
  • Special pension aid to four airlines: American Airlines, Delta Air Lines Inc., Continental Airlines Inc., and Northwest Airlines Corp.

A provision that would have allowed employers and health insurers to claim money from employees who received compensation from a third party for an illness or accident was removed from the measure.

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