NNSA Response to Comments

Regarding the Total Compensation Design and Strategy Proposal to NNSA,
Revision 1, dated February 13, 2006, Submitted by Los Alamos National
Security, LLC

[Background and Definition of Substantial Equivalency
1](#background-and-definition-of-substantial-equivalency)

[Issue 1: Risks Associated With Moving From "Public Sector" Pension Plan
to "Private Sector" Pension Plan
2](#issue-1-risks-associated-with-moving-from-public-sector-pension-plan-to-private-sector-pension-plan)

[Issue 2: Lump Sum Distribution Option
3](#issue-2-lump-sum-distribution-option)

Issue 3: Treatment of Survivor Benefits for Domestic Partners in the
Defined Benefit Plan\...\.....4

[Issue 4: Treatment of Employees Not Currently Covered by Social
Security
4](#issue-4-treatment-of-employees-not-currently-covered-under-social-security)

[Issue 5: Treatment of Spousal Continuance Option
5](#issue-5-treatment-of-spousal-continuance-option)

Issue 6: Differences in Pre-tax Deferral
Limits...........................................................5

# Background and Definition of Substantial Equivalency

On December 21, 2005, NNSA awarded Contract No. DE-AC52-06NA25396 to Los
Alamos National Security (LANS), LLC, to manage and operate the Los
Alamos National Laboratory (LANL).  Pursuant to paragraph H.36
(d)(1)(i)(I) of this new contract, LANS is required to provide total
compensation packages for different groups of employees: (1) A total
compensation package for Transferring Employees (generally referred to
as "TCP1"), and a total compensation package for Inactive Vested
Transferring Employees, UCRP Retiring Employees, and New Employees
(generally referred to as "TCP2"). The contract requires the contractor
to provide a total compensation package to Transferring Employees at
LANL that is substantially equivalent to the total compensation package
provided them by the predecessor contractor, the University of
California, as of June 1, 2006. The contract requires that TCP2 be
market-driven.

LANS Total Compensation and Design Strategy Proposal to NNSA, Revision
1, dated February 13, 2006 (Proposal), was provided to NNSA by LANS to
fulfill NNSA's commitments to make this Proposal available for comment
prior to NNSA determination of substantial equivalency and to consider
written comments from interested parties on this Proposal before making
such a determination. NNSA received 1,309 comments on the Proposal from
February 16 through February 26, 2006.

After review of all the comments, NNSA determined that there are six key
issues raised by interested parties that concern NNSA's determination as
to whether the Proposal includes a total compensation package for
Transferring Employees that is substantially equivalent to the UC
Package. These six issues are:

1.  Risks associated with moving from "public sector" pension plan to
    "private sector" pension plans.

2.  Elimination of a lump sum distribution option under the defined
    benefit pension plan.

3.  Treatment of survivor benefits for domestic partners in the defined
    benefit pension plan.

4.  Treatment of employees not currently covered by Social Security.

5.  Treatment of spousal continuance option.

6\. Differences in pre-tax deferral limits.

NNSA also received comments on aspects of the proposed TCP2. NNSA will
address the three major common comments regarding TCP2 in a separate
paper.

**Definition of Substantial Equivalency**

The NNSA Contracting Officer used the following definition in
determining whether TCP1 as proposed is substantially equivalent to the
UC Package.

*Substantial equivalency is determined by comparing the aggregate value
of the total compensation package (consisting of salary, pension
benefits, and health and welfare benefits) offered by LANS with the
aggregate value of the total compensation package offered by the
University of California. Employees transferring to a substantially
equivalent total compensation package should receive neither
significantly more nor significantly less in aggregate value of salary
and benefits than they do under their current compensation package.
Substantial equivalency does not require that the packages have
identical aggregate values, contain identical features, or value shared
features identically. Because the statutory requirements that apply to
benefit plans sponsored by state government institutions are different
from those that apply to benefit plans sponsored by private
institutions, the benefit plan offered by LANS in TCP1 cannot be
identical to the benefit plan offered by the University of California,
particularly as to pensions. Despite these different statutory
requirements, TCP1 as proposed by LANS provides substantially equivalent
pension and other benefits.*

# Issue 1: Risks Associated with Moving From "Public Sector" Pension Plan to "Private Sector" Pension Plan

*[Key Comment:]{.underline}* A private company will be taking over a
historically well-managed public pension plan and will not manage it as
well as the current sponsor of the public pension plan. * *

*[Discussion]{.underline}:* As described above, LANS is required to
provide a total compensation package that is substantially equivalent to
that offered by the University of California (UC) as of June 1, 2006.
The defined benefit pension plan provided by UC is a governmental plan
and is not subject to some of the laws that govern benefit pension plans
for non-governmental employers. In particular, governmental pension
plans are not subject to many of the laws and regulations under the
Employee Retirement Income Security Act (ERISA). The new contractor,
LANS, is a Limited Liability Corporation subject to all of the laws and
regulations under ERISA and other laws that may not apply to the UC
pension benefit plans. These laws and regulations prevent LANS from
duplicating the defined benefit pension plan under TCP1 exactly as they
are provided under the UC pension benefit programs. In order to provide
pension benefits under TCP1 as part of a substantially equivalent total
compensation package and to comply with applicable laws and regulations,
certain changes needed to be made to the defined benefit pension plan
under TCP1.

LANS has a parent organization oversight body \-- the LANS Board of
Governors, which has authority to guide, control, direct, measure, and
incentivize the activities of its employees.  One of the early acts of
the LANS Board of Governors Executive Committee will be to appoint a
LANS Benefits and Investment Committee (BIC) consisting of members from
UC, Bechtel, BWX Technologies and Washington Group International and
require periodic reporting to the Board regarding BIC plan management
activity.

The LANS BIC will have the fiduciary responsibility to manage contractor
employee plan assets, through third party investment managers, in
accordance with the Employee Retirement Income Security Act of 1974
(ERISA), Internal Revenue Code (IRC), Department of Labor regulations,
and LANS/NNSA contract requirements   Members selected for the BIC will
have the expertise derived from participation in the oversight of the
University of California Retirement Plan, the BWX Technologies Pension
Plan and oversight of pension plans at other DOE/NNSA sites such as
Nevada Test Site, Idaho National Laboratory, Pantex Plant, Savannah
River Site, Bechtel Jacobs Company LLC and Y-12 National Security
Complex. In addition, the assets of the LANS pension plans are legally
required to be held in trust for the exclusive benefit of the
participants and beneficiaries of the plans by a fiduciary that is
legally responsible for the management and administration of the plans.
There is an annual independent auditor's report that must accompany the
LANS pension plan's annual compliance reports to the Department of Labor
and IRS. The LANS pension plan also will be insured by the Pension
Benefit Guaranty Corporation. 

NNSA is unaware of any instance in which DOE or NNSA contractor employee
benefit plans have required government intervention to assure that plan
participants received their vested plan benefits. Since the LANS Defined
Benefit pension plan will be a contributory plan, both LANS employees
and LANS will have an ongoing financial obligation to provide the
funding required by law that is needed to ensure that the plan is funded
at required levels should the return on plan asset investments not be
sufficient to cover plan liabilities. In addition, pursuant to the
NNSA/LANS contract, subject to applicable laws, NNSA is obligated to
reimburse LANS for the allowable costs of benefit plans sponsored by the
contractor.

*[Decision:]{.underline}* There is not a greater risk to employees in
having their pension plans managed by LANS. Therefore, this issue was
not a factor in the determination of substantial equivalency of the
total compensation package for TCP1.

# Issue 2: Lump Sum Distribution Option

*[Key Comment:]{.underline}* Elimination of the Lump Sum Distribution
Option under the proposed LANS TCP1 Defined Benefit plan does not make
the proposed plan "substantially equivalent."

*[Discussion:]{.underline}* As explained above, LANS is required to
provide a total compensation package that is substantially equivalent to
that offered by the University of California as of June 1, 2006. The
LANS TCP1 Defined Benefit pension plan will not continue or replicate
the lump sum distribution feature contained in the University of
California Retirement Plan (UCRP). After June 1, 2006, pursuant to ERISA
requirements, LANS will be required to use a discount rate to calculate
the lump sum value of the future stream of benefits that will result in
a significantly (21 percent to 41 percent) larger payment for a lump sum
distribution than would be used by UCRP. Inclusion of this feature would
provide a benefit significantly greater for "Transferring Employees"
under the new contract than that available to them under the UCRP simply
by virtue of the change to a private sector plan subject to ERISA.

Using an example from the table below, a Transferring Employee who would
be entitled to a lump sum payment of \$443,940 under the UCRP on May 31,
2006, would be entitled to a payment of \$624,913 if she were to retire
from LANL after the LANS TCP1 becomes effective on June 1, 2006.

Here are examples that reflect calculations based on age and service.

  ------------------- ------------------- ------------------- --------------------- ----------------------- --------------------- ------------------ --------------------- ------------------ --------------------- ---------------------
                                                                                                            UCRP Provisions                          417(e) Provisions                                              

  [Age]{.underline}   [Svc]{.underline}   [Pay]{.underline}   [Age                  [Benefit]{.underline}   [LS                   [Lump              [LS                   [Lump              [%                    [\$
                                                              factor]{.underline}                           factor]{.underline}   Sum]{.underline}   factor]{.underline}   Sum]{.underline}   Change]{.underline}   Change]{.underline}

  52                  22                  101,419             1.38%                 30,306                  14.6485               443,940            20.6199               624,913            41%                   180,973

  52                  27                  92,722              1.38%                 33,954                  14.6485               497,367            20.6199               700,120            41%                   202,753

  57                  22                  108,198             2.08%                 48,781                  13.5976               663,307            18.3878               896,976            35%                   233,668
  ------------------- ------------------- ------------------- --------------------- ----------------------- --------------------- ------------------ --------------------- ------------------ --------------------- ---------------------

*[Decision:]{.underline}* Providing the option for a lump sum
distribution under LANS TCP1 Defined Benefit pension plan would produce
a total compensation package for Transferring Employees that is not
substantially equivalent to that provided by the predecessor contractor
as of June 1, 2006, because such a package would provide substantially
greater compensation. The lump sum option will be eliminated under TCP1
to ensure benefit equivalency. Annuity payments are not affected by the
elimination of the lump sum distribution option.

**Issue 3: Treatment of Survivor Benefits for Domestic Partners in the
Defined Benefit Plan**

# 

*Key Comment:* Elimination of Survivor Benefits for Domestic Partners in
the Defined Benefit Plan is unfair.

*[Discussion:]{.underline}* The UCRP provides the same survivor benefits
to Domestic Partners (as defined in the UCRP in accordance with
California law) as it does to a spouse upon the death of an active plan
participant or retiree. This includes a requirement for spousal consent
to elect a beneficiary other than a domestic partner. However, as
discussed above, the defined benefit pension plan established by LANS
will be subject to ERISA. Under ERISA, the definition of a spouse does
not include a domestic partner so that the LANS plan cannot provide the
same survivor benefit to a domestic partner; i.e., a qualified joint and
survivor annuity. Further, under ERISA, spousal consent is necessary to
elect a beneficiary other than a spouse. However, other optional forms
of payment under TCP1 (e.g., different levels of joint and contingent
annuities) permit a plan participant to name a beneficiary of these
annuities that may include a domestic partner.

*[Decision:]{.underline}* Although TCP1 cannot provide the same level of
survivor benefits to domestic partners, it does provide optional forms
of payments such as joint and contingent annuities for any chosen
beneficiary, including a domestic partner. Therefore, this issue was not
a factor in the determination of substantial equivalency of the total
compensation package for TCP1.

# Issue 4: Treatment of Employees Not Currently Covered Under Social Security

*Key Comment*: LANL UC employees who are not currently covered by Social
Security will have to pay Social Security taxes under TCP1 but some may
never be able to claim Social Security benefits because they will not
have worked enough time to qualify for these benefits.

*[Discussion:]{.underline}* Certain LANL employees are not currently
covered by Social Security. They do not pay Social Security taxes and do
not receive service credit towards Social Security eligibility for their
service with LANL. The option to not participate in Social Security is
only available to certain employees of state and local governments.
Since LANS is a Limited Liability Corporation, LANS employees will be
required by federal law to participate in Social Security and hence pay
Social Security taxes effective June 1, 2006.

*[Decision:]{.underline}* The pension benefit will not be reduced for
employees who pay Social Security taxes after June 1, 2006, but are not
eligible for a Social Security benefit at retirement. In addition, LANS
will refund Social Security taxes over time to these employees without
any interest adjustment or tax gross up. If an individual becomes
eligible for Social Security benefits after retiring from LANS, the
Social Security benefit may be applied as an offset to the individual's
pension benefit.

# Issue 5: Treatment of Spousal Continuance Option

*[Key Comment:]{.underline}* The UCRP provides at no cost to employees a
death benefit equal to 25% of the retiree's Basic Retirement Income (as
defined in the UCRP). The TCP1 defined benefit pension plan has no
similar provision, therefore TCP1 and the UC total compensation packages
are not substantially equivalent.

*[Discussion:]{.underline}* As explained above, LANS is required to
provide a total compensation package that is substantially equivalent in
the aggregate to that offered by the University of California as of June
1, 2006. The UCRP provides a "Postretirement Survivor Continuance"
benefit to a retiree's Basic Retirement Income. This provision pays a
death benefit equal to 25% of the Basic Retirement Income to certain
eligible survivors. If one of those eligible survivors dies, the next
eligible survivor will receive the benefit until all eligible survivors
have died or cease to meet the eligibility criteria. This 25% survivor
continuance benefit is not permissible under a private sector defined
benefit pension plan subject to ERISA. Instead, ERISA requires that a
married participant receive a 50% Qualified Joint & Survivor Annuity
unless the spouse waives this right.

*[Decision:]{.underline}* For any employees who elect any of the Joint &
Contingent Annuities or the 50% Joint & Survivor Annuity, their monthly
annuities will be increased by 2.4% (4.8% for non-Social Security
eligible participants) to account for the value of the lost 25%
Postretirement Survivor Continuance provision.

**Issue 6: Differences in Pre-tax Deferral Limits**

[*Key Comment*:]{.underline} Pre-tax deferral limits under TCP1 are much
lower than under the UC benefit package so TCP1 is not substantially
equivalent to the UC package.

*[Discussion:]{.underline}* Pursuant to Internal Revenue Service (IRS)
regulations governing governmental plans for maximum allowable pre-tax
savings, the UC benefit package offers a 403(b) plan and a 457(b) plan
which allow maximum pre-tax deferrals in each plan of \$15,000 or
\$20,000 for employees age 50 and older, for a total of \$30,000 or
\$40,000 respectively. However, the IRS regulations for private sector
plans allow a maximum pre-tax savings in the TCP1 401(k) plan of
\$15,000 or \$20,000 for employees age 50 and older, which are half the
maximums allowed under the UC plans.

*[Decision:]{.underline}* Providing an employer contribution under TCP1
to make up for the reduction in differences in the pre-tax deferrals
would be a significant enhancement to TCP1 and would produce a total
compensation package that is not substantially equivalent to that
provided by the University because such a package would provide
substantially greater compensation.  In addition, providing an
additional contribution only to employees who contribute up to the IRS
maximum for 401(k) plans would likely violate IRS rules that prohibit
discrimination in favor of highly compensated employees. Therefore, this
issue was not a factor in the determination of substantial equivalency
of the total compensation package for TCP1.