PENSION PROTECTION ACT ERISA AMENDMENTS SECTION-BY-SECTION
Summary of the Bill
PENSION PROTECTION ACT ERISA AMENDMENTS SECTION-BY-SECTION
Title I. Protection of Retiree Pension Assets and Distributions
Sec.101. Protects Workers from Additional Cuts into Their Already Reduced Retirement Fund. Under a new rule set out by PPA, when an employer-sponsored defined benefit plan terminates during a bankruptcy proceeding, the bankruptcy filing date is used to calculate employees’ guarantee from the Pension Benefit Guarantee Corporation (PBGC). Section 404, which establishes this new rule, became effective for bankruptcy petitions filed on and after September 16, 2006 (30 days after PPA’s enactment). Section 404 adversely affects participants in these plans – by stopping the clock sooner – further reducing the retirement money originally promised to them by their employer. Our modification eliminates Section 404, restoring the pre-PPA law so that when a plan terminates, the date of plan termination is used to determine the benefit owed to the worker.
Sec.102. Pension Benefit Guaranty Corporation Pilots Equitable Treatment Act. The PBGC typically pays pension benefits to retirees up to a maximum of about $49,500 per year. For those workers who retire before age 65, benefits are reduced even further by the PBGC. Unfortunately, airline pilots are forced to endure this deep cut into their retirement benefits due to the Federal Aviation Administration’s rule which requires them to retire at age 60. Due to this unfair rule, the maximum benefit pilots can receive from the PBGC at age 60 is about $32,175. To provide parity to airline workers, our modification lowers the retirement age to 60; enabling pilots to receive the maximum PBGC guaranteed benefit.
Sec.103. Protects an Injured Person’s Award to Pay for Medical and Other Expenses. An ERISA-regulated health plan has the ability to recoup an injured person’s entire settlement before he or she even holds it. Ironically, the Employee Retirement Income Security Act places injured workers, due to third-party negligence, at high risk of losing their entire settlement to their insurer and/or employer. In some instances, workers have lost their entire settlement to an insurer, forcing them to tap into their retirement savings to cover the cost of medical expenses. Understanding the need to protect an injured worker’s settlement from insurers and the partial claim insurers have to a portion of an award, most states, which regulate commercial insurance, allow insurers to be reimbursed, but prohibits them from collecting 100 percent of the worker’s settlement. Modeled after many state commercial insurance laws, our provision would require ERISA plans to pay a pro rata share of the litigation costs and recovery so that persons injured in an accident receive adequate compensation to pay for medical expenses. And the plan receives reimbursement for its services.
Sec.104. Guaranteeing Plan Participants of Collectively Bargain Arrangements Receive Timely Plan Statements. Due to the unprecedented method in which effective dates were written in several sections of PPA, a participant, in a collectively bargained plan, has an additional one-year delay to receive his or her benefit statement. For example, under PPA Section 508, the new benefit statement rules do not apply to the plan until January 1, 2008, one year later than they would if the rule was written as it is in PPA Sections 103, 904 and 1004. Therefore, new benefit statement rules and other worker protections would not apply until much later. Our provision corrects this potentially harmful provision to workers by removing the one-year delay.
Sec.105. Emergency Retiree Health Benefits Protection Act. Today, American workers are vulnerable to losing a considerable amount of their retirement due to the lack of an adequate mechanism in place to protect promised benefits. Whether it is a corporation that files bankruptcy or the malfeasance of a pension plan trustee, current law does not adequately help to replace a worker’s guaranteed retirement benefits. Our provision prohibits group health plans from reducing retiree health benefits after the retirement of a plan beneficiary and requires such plans to adopt provisions barring post-retirement reductions in retiree health benefits.
TITLE II. Multi-Employer Modifications
Sec.201. Multiemployer Incentive to Agree to Increases in Contributions in Collective Bargaining Agreements. PPA prohibits multi-employers, preparing to adopt rehabilitation plans, from increasing liabilities by increasing benefits. This prohibition is enforced by a surcharge, imposed on those employers who violate the rule. Unfortunately, there is no incentive for employers to agree to contribution increases for retiree benefits before their next collective bargaining agreement, which only hurts the workers. Our modification allows surcharges paid by an employer to be credited against the employer’s contribution requirements under the rehabilitation plan if the trustees later determine that the (1) applicable collective bargaining agreement in place at the time the plan is certified as being in critical status conforms to a schedule under the rehabilitation plan and (2) the surcharges are no longer required after the trustees make that determination. This provides an alternative to the earlier approach by requiring payment of the surcharge, but if the contributions are at least equivalent to those required in the rehab plan, employers would get credit against future contribution requirements for surcharges paid before the rehab plan is formally adopted in bargaining.
Section.202. Modifies Multi-Employer Plan Rules to Avoid Unfair Penalties.
Several technical errors in the multi-employer section of PPA impose unfair penalties on employers as well as weaken penalties for willful violations committed by employers. These provisions (1) modify the multi-employer funding rules so that the criterion for the shortfall funding method does not unfairly penalizes employers; (2) modifies the multiemployer funding rules by clarifying that the Secretary of the Treasury, in consultation with the Secretary of Labor, shall provide guidance with respect to the plan sponsor’s notice obligations; (3) clarifies that any failure to make a default schedule contribution is enforceable under ERISA; (4) conforms the multi-employer rule for payment of lump sum distributions to that of the single employer rule; ( 5) applies the multiemployer funding rules and excise tax rules that apply in the event of a failure to comply with the funding rules to the IRC; (6) revises the penalty applied to a multiemployer plan in the event of a failure to timely adopt a rehabilitation plan; (7) and clarifies that the excise tax provisions are effective with respect to taxable years beginning after 2007.
Section.203. Provides Multiemployer Plans with One Set of Rules When a Plan’s Funding Shifts from Seriously Endangered to Non-Seriously Endangered Status. Under the multiemployer rules, there is a possible shift back and forth from seriously endangered to non-seriously endangered benchmarks and the funding improvement period, creating a lot of unpredictability for the plan. Our modification makes it so that when a plan that is or becomes seriously endangered (whether when it first enters endangered status or at a later date) it is subjected to the 15-year/20% benchmark regardless of its funded ratio and remains in that status regardless of future funding fluctuations. In addition, we provide a new requirement that prohibits a seriously endangered plan from leaving endangered status until it is projected not to have a funding deficiency for the next 10 years — the same emergence rule that applies to critical status plans. All of the other requirements (e.g., funding improvement plan, schedules, and updates), benefit and other restrictions, and penalties, would continue to apply as long as the plan is in endangered status.
Title III. Single Employer Modifications
Sec.301. Provides Plan Sponsors with Greater Predictability of Their Plan Assets. Asset smoothing provides an employer with greater predictability with respect to the value of their employees’ pension assets, creating greater predictability with respect to its funding obligations. Unfortunately, PPA uses the term asset “averaging,” rather than asset “smoothing,” which has a very different meaning: Averaging can undervalue pension assets and raise liability, which could force some employers to drop their defined benefit plan altogether. The legislative history of PPA indicates that “smoothing,” not “averaging” is what Congress intended to be the law. Our provision clarifies Congressional intent, providing plan sponsors with greater predictability of their funding obligations.
Sec.302. Limits the Payment of Lump-Sums in Full to Certain Plans to Avoid a “Rush to Retire” Effect. PPA prohibits under-funded defined benefit plans from paying lump sum distributions in full. Plans that are at least 60 percent funded but less than 80 percent funded are only permitted to pay 50 percent of a participant’s lump sum. If a plan is less than 60 percent funded, no lump sum may be paid. Although the rule is rightly targeted at preventing further insolvency of under-funded plans it creates an unintentional consequence. Specifically, the rule requires employers to provide an after-the-fact notice to participants informing them of lump sum restrictions that have taken effect. Due to liability concerns, many companies will be very uncomfortable only providing after-the-fact notice and will most likely provide employees with an advance notice. Consequently, an advance notice will set off a “rush to retire,” putting the entire plan in jeopardy. Our provision modifies the lump sum distribution rule. If a plan is less than 80 percent funded then the maximum lump sum permitted would be equal to the product of (a) the lump sum otherwise payable to the participant, multiplied by (b) the plan’s funded percentage.
Sec.303. Provides Liability Protection to the Young Women’s Christian Association (YWCA) Pension Plan. The Young Women’s Christian Association’s Retirement Fund has been in existence since the 1920s; long before the enactment of the Employee Retirement Income Security Act (ERISA) and the America’s Disabilities in Employment Act (ADEA). Despite the fact that YWCA amended its plan to comply with ERISA and the ADEA, they still remain vulnerable to age discrimination litigation; leaving all of their retiree benefits at risk. To further protect the YWCA’s retiree assets, our provision clarifies that if a participant of the YWCA plan accrued benefits were equal to or greater than the accrued benefit of another plan participant who is younger but is identical in every other employment-related respect (e.g., period of service, compensation, position, date of hire, work history, and any other respect) except for age then they are not in violation of the age discrimination law prior to June 29, 2005.
Sec.304. Employer Protection for Diversifying Passive Participant Funds. In our post-Enron world, now, more than ever, it is vital that passive participants nearing retirement diversify their assets out of employer securities. Our modification would require employers to provide plan participants with a notice explaining an employee’s right under the plan to designate how contributions and earning will be invested. In exchange, the participant is treated as having elected to effect the transaction to diversify out of employer securities unless the participant specifically elects not to have the diversification transaction effected.
Sec.305. Provides Equitable Treatment of All Auto Buyouts. PPA requires special actuarial assumptions when determining benefits for participants in at-risk plans. In particular, Sec. 303(i)(4)(B) of ERISA requires plans sponsors of at-risk plans, to calculate benefits for eligible participants using assumptions that would result in the highest present value of benefits. To ensure that employees who worked for Chrysler, GM, Ford and Delphi and were offered and accepted early retirement buy-outs, our provision applies the abovementioned rule to those employees who opted for a buy-out between 2006-2007. Specifically, these changes extend by one year the period of time in which the early retirement offer may be made (from 2006 to 2006-2007), to extend by one year the period of time by which the offer must be accepted (from December 31 2006 to December 31, 2007), and to extend by one year the period of time by which the individual must have retired (from December 31, 2010 to December 31, 2011). This modification will ensure that these employees receive sufficient benefits and treat all of the auto buy-outs equally.
Sec.306 Grants a Transition Rule to Reach “Fully Funded Status” to Certain Plans. Under pre-PPA law, the funding target with respect to a defined benefit plan was, in a very general sense, 90% of a plan’s liability. The PPA increased the 90% figure to 100%, subject to the following phase-in: 92% in 2008, 94% in 2009, 96% in 2010, and 100% in 2011 and thereafter. However, the phase-in was limited to existing plans that (1) were not subject to the deficit reduction contribution (“DRC”) rules in 2007, and (2) were at the phased-in funding target in the current year and each year since 2008. Because of the second requirement, the transition rule has an unusual and very harsh effect. For a typical 90% funded plan, like the one above, the absence of a meaningful transition rule could cause funding costs to double or triple in 2008, as compared to 2007. For an 85% funded plan, for example, the increase will be even greater. There is no transition rule. So if you are at 85% in 2007 instead of 92%, you must make up the difference of 85% to 100% instead of 85% to 92%. Companies may have an extremely tough time absorb this type of increase, which places participants’ assets at risk. Our modification provides a meaningful transition rule so that plans are not subject to harsh penalties that may force some employers to drop plans.
TITLE IV: SMALL EMPLOYER MODIFICATION
Sec.401. Allows Small Employers to Band Together to Offer Affordable Retirement Plans to Their Employees. Currently, if unrelated employers (particularly small employers) join together to achieve efficiency in the administration of offering an affordable retirement plan to their employees they are viewed by federal and state regulators separately for plan sponsorship, regulatory filing, discrimination and eligibility testing; in effect, obviating the benefit for employers to band together. Our provision amends the Multiple Employer Welfare Arrangements (MEWA) provision within ERISA to permit certain cooperatives to roll up the employer function into a single Cooperative Employing Enterprise (CEE) to allow for small employers to band together to offer affordable retirement plans to their employees. Furthermore, CEEs will be subject to ERISA’s minimum participation, vesting and funding standards for private-sector pension benefit plans and reporting and disclosure, claims procedure, bonding and other requirements, as well as its standards of fiduciary conduct which all apply to private-sector pension plans.
TITLE V. IMPROVED TRANSACTION EFFICIENCY MODIFICATIONS
Sec. 501. Clarifies Definition of Investment Adviser to Allow Plans to Make Block Trades. The block trade provision under PPA is intended to provide more flexibility for ERISA assets to be part of block trades. Many trades are made as block trades to achieve best execution and to reduce costs. Specifically, the block trading provision provides a statutory exemption to allow ERISA plan assets in separately managed accounts to be included in a block trade when the interest of each plan involved in the block trade, together with the interests of any other plans maintained by the same employer or employee organization in the transaction, does not exceed 10 percent of the aggregate size of the block trade. However, the term used in Section 611(a) of PPA is a fiduciary described in section 3(21) (A) of ERISA. This definition over broadly includes all fiduciaries, which severely limits the utilization of the provision. Our modification broadens the definition of fiduciary to include investment advisers so long as they do not provide advice with respect to the transaction.
Sec. 502. Electronic Communication Networks (ECNs) and electronic trading venues. Prior to the passage of PPA, ERISA plans did not have access to the reduced costs and enhanced efficiency provided by ECNs, because use of ECNs constituted a prohibited transaction. PPA amended ERISA and the Code to make trades that take place through ECNs or similar trading venues an “allowable” transaction. Currently, a fiduciary is allowed to execute transactions on ECN networks and other trading venues, regardless of whether such fiduciary or its affiliates have an ownership interest in such facility. However, as written, it is not clear that it provides relief for inadvertent cross-trades that may be matched by the system or that the relief covers exchanges (e.g., New York Stock Exchange); i.e., the intention of the provision. In addition, the provision requires a 30-day advance notice even for the use of trading venues like the New York Stock Exchange and even where the fiduciary has no ownership in the entity. Finally, because the notice and consent provisions are implicated under the PPA provision when a “party-in-interest owns an interest in the trading venue, rather than when a fiduciary owns such an interest, the provision, as written, is unworkable. Our modification amends the section to provide relief for exchanges by including the term “automated quotation system,” and makes clearer that a fiduciary rather than a party-in-interest must provide notice and obtain consent to conduct a trade on an ECN
Sec. 503. Clarifies Fiduciary Liability with Respect to Fidelity Bonding. Section 412(a) of ERISA requires a plan fiduciary or an entity that is holding plan assets to have a fidelity bond. PPA amended Section 412(a) of ERISA to increase the bond amount to $1,000,000 for plans that hold employer securities. The original intent of this provision was to require doubling of the bond for individuals who handle plan assets which are in a portfolio or fund that is primarily invested in employer securities. Unfortunately, the language is written far too broadly and potentially would impact entities that are merely investing in an index or other portfolios that holds employer securities. Those entities who would be affected are anybody who touches plan assets or meets the definition of holding plan assets – an investment adviser, a broker, etc., even if they are not fiduciaries. The bad part is that these people would be liable for the increased bond amount, but they may not even know that the plan is invested in employer securities; some other investment manager may have made the investment on behalf of the plan. Our modification maintains the doubling of the bonding amount from $500k to $1 million but only for the fiduciary directing the investment into a portfolio that is primarily comprised of employer securities.