House Bill - Increases plan full funding requirement to 100 percent over five years beginning in Shortfalls must be amortized over 7 years.

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1 Attachment th Congress: Key Defined Benefit Plan Solvency and Retirement Savings Provisions in House and Senate-Passed Pension Reform Proposals March 2006 The pages that follow include summary descriptions of key provisions in Current Law, the President s Plan, the House-passed Pension Protection Act (HR 2830) and the Senate passed Pension Security and Transparency Act (S 1783) affecting tax-favored defined benefit plans, cash balance plans, defined contribution plans and individuals retirement savings arrangements of special interest to IEEE s U.S. members. I. Defined Benefit Plan Funding Rules Plan Funding Requirements Current Law Employers are permitted to fund healthy plans on an actuarily reasonable basis. Plans with assets less than 90% of current liabilities are under-funded and must make additional deficit reduction contributions and amortize deficits over 7 to 30 years. President s Plan - Replaces the deficit reduction contribution approach with a funding target approach that compares the present value of plan liabilities with the market value of plan assets. Shortfalls must be amortized over 7 years. House Bill - Increases plan full funding requirement to 100 percent over five years beginning in Shortfalls must be amortized over 7 years. Senate Bill Increases plan full funding requirement to 100 percent over three years beginning in 2007 with a five year phase-in for small plans.. Calculating Plan Liabilities (Interest Rates) Current Law The present value of a pension plan s liabilities is determined by discounting future benefit obligations at a specific rate of interest. For plan years before 2004 and after 2005, the applicable rate is based on a weighted average of interest rates on 30 Year Treasury securities. The Pension Funding Equity Act changed the rules in 2004 and 2005 to permit use of a long term, investment grade corporate bond rate. President s Plan Replaces the current fixed rate method with a schedule of rates drawn from a spot yield curve of high grade corporate bonds. House Bill Requires use of a modified interest rate yield curve based on a 3 year weighted average of investment grade corporate bonds of varying maturities.

2 Senate Bill Same as House bill, except that the underlying yield curve reflects yields on high grade corporate bonds averaged over 12 months. Identification of At Risk Plans Current Law Not applicable (The financial health of plan sponsors is not considered and there is no increase in plan liability due to a sponsor s health or plan funding levels) President s Plan Plans sponsored by employers with below investment grade credit ratings would be considered at risk and have to be funded on a termination basis. House Bill Uses plan s funding status rather than a sponsor s credit rating to identify at risk plans. Plans that are less than 60% funded will be considered to be at risk. Senate Bill Plans maintained by financially weak employers that are less than 93% funded will be considered to be at risk. Provides exceptions for sponsors whose credit ratings are stable or improving. Funding-Related Restrictions on Plan Benefits Current Law Restricts lump sum distributions and allowable benefit increases by underfunded plans in certain limited cases. No restrictions on benefit accruals. President s Plan -Would prohibit benefit increases and lump sum distributions by plans that are less than 80% funded. Plans that are less than 60% funded will be frozen. House Bill Same as President s Plan Senate Bill Essentially the same as the President s Plan. PBGC Premiums Current Law Fully-funded plans pay an annual flat rate premium of $19 per participant to the Pension Benefit Guaranty Corporation. Plans that are less than 90% funded pay an additional variable rate premium of $9 for every $1,000 of under-funding. President s Plan Flat rate premiums will increase from $19 to $30 per participant. PBGC will be permitted to increase (or decrease) variable rate premiums. House Bill Increases the PBGC flat rate premium from $19 to $30 per participant over 5 years (over 3 years for plans that are less than 80% funded). Premiums will be indexed annually to reflect wage growth.

3 Senate Bill Increases the PBGC flat rate premium from $19 per participant to $30 effective immediately with indexing to reflect wage growth. Plan Disclosure Rules (PBGC) Current Law Plans with more than $50 million in under-funding must provide the PBGC with confidential corporate information about plan funding status on Form President s Plan Same as current law. House Bill Disclosures will be required for plans that are less than 60% funded or less than 75% funded and sponsored by employers in troubled industries. Senate Bill Disclosures will be required for plans with under-funding in excess of $50 million or that are less than 90% funded and sponsored by employers with less than investment grade bond ratings. Plan Disclosure Rules (Participants) Current Law Plan participants are entitled to a Summary Annual Report (SAR) and, on request, the Annual Return for an Employee Benefit Plans (Form 5500) that plans file with the Department of Labor and the IRS. Sponsors are not required to notify participants of Form 4010 filings. President s Plan All Form 4010 information (except proprietary commercial or financial information) must be disclosed to plan participants. House Bill Plan sponsors must notify participants of Form 4010 filings Senate Bill Same as House Bill. Special Rules for Commercial Airlines Current Law In 2004 and 2005, commercial airline companies were permitted to make reduced deficit reduction contributions, subject to certain restrictions on their ability to increase benefit promises to plan participants. President s Plan No special provisions House Bill No special provisions

4 Senate Bill Allows commercial airlines an additional 20 years in which to amortize deficit reduction payments to under-funded pension plans. II. Cash Balance Plan Reforms Legal Status of Cash Balance Plan Designs Current Law Cash balance plans are classified as defined benefit plans because they express earned benefits as hypothetical account balances based on pay, service and interest credits and because benefits are determined using a benefit formula. In 2003 (in Cooper v. IBM Personnel Pension Plan), a Federal district court held that cash balance plan designs are inherently age discriminatory. President s Plan Would clarify that cash balance plans are not age discriminatory as long as pay credits for older workers are not less than pay credits for younger workers. House Bill Would clarify that cash balance plans are not age discriminatory if older workers earn benefits at the same rate as similarly situated, younger workers. Senate Bill Essentially the same as the President s Plan. Treatment of Existing Plans Current Law Not applicable President s Plan Effective after enactment on a prospective basis. Provides that no inference is intended regarding the legal status of existing plans. House Bill Effective on a prospective basis only. Senate Bill Essentially the same as the President s Plan Cash Balance Plan Conversions Current Law Does not regulate conversions, except by requiring advance notice and prohibiting the reduction of any participant s earned benefits. President s Plan For the first 5 years following a conversion, benefits earned by all participants must be at least as valuable as the benefits such participants would have earned under the traditional defined benefit plan. House Bill No special provisions other than current law participant protections.

5 Senate Bill Eliminates wear-away and provides transition rules to protect some future benefits of current workers. III. Defined Contribution Plan Improvements Automatic Enrollment Current Law No special provisions President s Plan No provision House Bill Includes a non-discrimination safe harbor for plans with an automatic enrollment feature that meet certain requirements. Only applies to new hires. Senate Bill Includes a non-discrimination safe harbor for current employees and new hires as well as a fiduciary safe harbor for default investments Retirement Savings Incentives Current Law 2001 Economic Growth and Tax Relief Reconciliation Act provisions that increased contribution limits, reduced vesting standards and improved portability in employer-sponsored pension plans and individual retirement arrangements will expire in 2010 unless amended or extended. President s Plan Would make most 2001 tax relief act provisions, including workplace pension and other retirement savings incentives, permanent. House Bill Same as the President s Plan. Senate Bill No provision Saver s Credit Current Law A nonrefundable tax credit is available for up to $2,000 in qualified retirement savings contributions by certain taxpayers: joint filers earning up to $50,000, heads of households earning up to $37,500 and single filers earning up to $25,000. President s Plan Would make the Saver s Credit permanent. House Bill Same as President s Plan Senate Bill No provision Employer Stock Diversification Rules

6 Current Law The statutory requirement that no more than 10% of the assets in defined benefit plans can be invested in company stock does not generally apply to participantdirected defined contribution plans. President s Plan Will allow defined contribution plan participants to diversify out of company stock after 3 years. House Bill - No provision. Senate Bill Same as President s Plan Investment Advice Current Law Fiduciary responsibility requirements and prohibited transaction rules in the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) limit the ability of interested financial institutions (including plan service providers) to offer investment advice to plan participants. President s Plan Recommends that steps be taken to increase participant access to investment education. House Bill Clarifies the fiduciary responsibilities of plan sponsors and prohibited transaction rules in order to facilitate the provision of investment advice by financial advisors that meet certain requirements. Senate Bill Includes a limited safe harbor from fiduciary responsibility rules that will enable plan sponsors to use unaffiliated financial services firms to offer investment advice to plan participants. No relief from prohibited transaction rules is provided. IV. Legislative History and Cost Estimates Pension Protection Act (HR 2830) Pension Security & Transparency(S 1783) Introduced in the House on Jun Introduced in Senate on Sep Passed House on Dec ( ) Passed Senate on Nov (97-2) Cost Estimate - $69.8 billion over10 years Cost Estimate - $12.1 billion over10 years Major differences in the costs of the House and Senate bills are attributable to: the House proposal to make 2001 pension and IRA tax relief provisions permanent ($20.3 billion); a House proposal to allow unused health and dependent care carry-overs ($17.0 billion); and a House proposal to alter the treatment of annuity and life insurance contracts with a long term care insurance feature ($8.6 billion). Source: Joint Committee on Taxation, Comparison of the Provisions of the Pension Security Act (HR 2830) as Passed by the House of Representatives on December 15,

7 2005 and the Pension Security and Transparency Act (HR 2830) as Passed by the Senate on March 03, 2006, March 08, 2006 [JCX-13-06] Q:cpc/2005legis/Pension Reform PBGC Solvency