2. Alternative to involuntary termination (sec. 202 of the
bill and new sec. 4050 of ERISA)

Present Law

The PBGC is authorized to terminate a plan when the plan
has not met the minimum funding requirements, the plan will
be unable to pay benefits when due, certain distributions are
made to substantial owners, or the possible long-run loss of
the PBGC with respect to the plan may reasonably be expected
to increase unreasonably if the plan is not terminated.

Des of P

Under the bill, if the PBGC determines that the
occurrence of one of the new reportable events (or any other
event that the PBGC determines may warrant plan termination)
would unreasonably increase the PBGC's possible long-run loss
if the plan is not terminated, the PBGC would be authorized
to apply to district court for relief other than involuntary
termination. In the case of events involving the break up of
a controlled group (or other events that the PBGC determines
May warrant plan termination), the PBGC’s new authority to
seek. court-ordered relief under the bill would be limited to
situations in which total revenues, operating income, or
assets of the controlled group (as it exists after the event)
are less than 90 percent of the total revenues, operating
income, or assets of the controlled group (as it existed
before the event) .

Effective Date

The provision would be effective for events occurring on
or after 60 days after the date of enactment.

3. Certain information required to be furnished to the PBGC
{sec. 203 of the bill and new sec. 4010 of ERISA)

Present Law

The PBGC receives certain financial information from
plans pursuant to required filings with the Department of
Labor and other governmental agencies.

Description of Provision

The bill would authorize the PBGC to require certain
contributing sponsors and controlled group members to submit
to the PBGC such information as the PBGC may specify by
regulation. The required information may include information
that the PBGC determines is necessary to determine plan
assets and liabilities and copies of audited financial

16



liability limit for full funding limit purposes without
regard to the interest rate and mortality assumptions set
forth in the bill. Thus, any interest rate within the
present-law corridor could be used.

Pl solven: xr r

In general, the bill would require underfunded single
employer defined benefit pension plans to make quarterly
contributions sufficient to maintain liquid plan assets,
i.e., cash and marketable securities, at an amount
approximately equal to three years worth of trust
disbursements (based on disbursements made in the prior
year).

Under the bill, the plan solvency requirement would
apply to underfunded single employer defined benefit pension
plans that (1) are required to make quarterly installments of
their estimated minimum funding contribution for the plan
year and (2) have liquid assets as of the last day of the
last month preceding the quarterly installment due date that
are less than the base amount for the quarter. Liquid assets
would mean cash, marketable securities and such other assets
as specified by the Secretary of the Treasury. The base
amount for the quarter would be an amount equal to the
product of three times the adjusted disbursements from the
plan for the 12 months ending on the last day of the last
month preceding the quarterly installment due date.

Under the bill, the amount of the required quarterly
installment for defined benefit pensions plans that do not
have sufficient liquid assets for any quarter would be the
greater of the quarterly installment as determined under
present law or the quarterly solvency payment. The quarterly
solvency payment would equal the difference between the
plan’s liquid assets and the base amount as of the last day
of a quarter.

If a quarterly solvency payment is not made, then the
plan sponsor would be subject to a nondeductible excise tax
equal to 10 percent of the amount of the outstanding
quarterly solvency payment. If the quarterly solvency payment
remains outstanding after four quarters, the excise tax would
increase to 100 percent.

The bill would amend ERISA to prohibit fiduciaries from
making certain payments from defined benefit pension plans
during the period in which the plan has outstanding quarterly
solvency payments. The bill would also amend ERISA to provide
that, if a fiduciary makes a prohibited distribution from the
plan, he or she would be subject to a civil penalty for each

10



8. Substantial owner benefits (sec. 208 of the bill and sec.
4022 (b) (5) of ERISA)

Present Law

Under present law, the PBGC guarantee is generally
phased in over 5 years from the date of plan adoption or plan
amendment. However, in the case of substantial owners, the
guarantee is generally phased in over 30 years. Plan
amendments are separately phased in over 30 years. The
combined guarantee of benefits under the terms of the
original plan and all amendments to the plan cannot exceed
two times the guarantee of benefits under the terms of the
original plan. In general, a substantial owner is a person
who owns more than 10 percent of a business.

Description of Provision

Under the bill, the same 5-year phase in and asset
allocation rules that apply to persons other than substantial
owners would apply to substantial owners with less than a 50
percent ownership interest. For 50 percent or more
substantial owners ("majority owners"), the bill would amend
the phase-in rule so that the guarantee would depend on the
number of years the plan has been in effect, not the number
of years the owner has been a participant.

Effective Date

The provision would be effective for terminations for
which a notice of intent to terminate is filed or for which
the PBGC institutes termination proceedings on or after the
date of enactment.

9. Phase out of variable rate premium cap (sec. 209 of the
bill and sec. 4006(a) (3) of ERISA)

Present Law

Plans covered by the termination insurance program are
required to pay a flat per-participant premium of $19. In
addition, underfunded plans are required to pay an additional
premium based on the amount of underfunding. The additional
premium is $9 per $1,000 of underfunding, and is capped at
$53 per participant. Thus, the maximum per-participant
premium for an underfunded plan is $72.

Description of Vv:
The bill would phase out the cap on the additional
premium for underfunded plans over three years, beginning
with plan years beginning on or after July 1, 1994. For plan

20



I. SUMMARY OF H.R. 3396 ("RETIREMENT PROTECTION ACT")

in_general

Under present law, underfunded defined benefit pension
plans are subject to stricter funding requirements than other
defined benfit plans. H.R. 3396 would make changes in four
Major areas: the special funding rules for underfunded
single-employer defined benefit pension plans, Pension
Benefit Guaranty Corporation (PBGC) premiums for underfunded
plans, PBGC enforcement capabilities and the obligations of
plan sponsors to the PBGC, and protections for plan
participants and beneficiaries. The bill would also make a
number of miscellaneous changes to the Internal Revenue Code
(the Code) and the Employee Retirement Income Security Act of
1974 (ERISA).

FS} i und. es

H.R. 3396 would change the special funding rules that
apply to underfunded single-employer defined benefit pension
plans. In general, the bill would require sponsors of
underfunded plans to fund pension liabilities more rapidly
than under the present-law rules. Specifically, the bill
would (1) modify the calculation of the minimum required
funding contribution applicable to underfunded plans, (2)
change the permissible range of interest rates and require
uniform mortality assumptions for the purpose of determining
an underfunded plan’s current liability for deficit reduction
contribution purposes, and treat any increase in current
liability due to the new interest and mortality assumptions
as "unfunded old liability", (3) accelerate the funding of a
plan’s "unfunded new liability", (4) change the calculation
of the additional funding contribution required on account of
an unpredictable contingent event, (5) provide an elective
transition rule for sponsors of underfunded plans to protect
against possibly large increases in their minimum required
contributions on account of the proposed changes in the
special funding rules, and (6) change the manner in which the
full funding limit is determined.

The bill would also require underfunded single employer
defined benefit pension plans to satisfy a plan solvency
requirement. In addition, the bill would waive the excise
tax on nondeductible contributions in certain cases. This
change would permit companies to fund fully an underfunded
defined benefit pension plan while making other qualified
plan contributions without incurring the excise tax.

PBI ba
Under present law, plans insured by the PBGC are

1


9. Funding of restored plans (sec. 409 of the bill)
Present Law

Under certain circumstances, the PBGC may restore the
operation of a plan that has terminated to the sponsor of the
plan. Treasury regulations set forth rules regarding the
funding of plans that have been terminated and then restored
by the PBGC. :

Deseription of Provision ~
The bill would provide that any changes made by the bill
to the funding rules of the Code or ERISA would not apply to
a plan which, on the date of enactment, is subject to a

restoration payment schedule order issued by the PBGC and
that meets the requirements of Treasury regulations.

Effective Date

The provision would be effective on the date of
enactment .

31



statements. A contributing sponsor or controlled group member
would be subject to these information requirements if: (1)
the total unfunded vested benefits of all underfunded plans
sponsored by the controlled group exceed $50 million; (2)
missed funding contributions exceed $1 million and the
conditions for imposing a lien for missed contributions have
been met; or (3) there are outstanding minimum funding
waivers in an amount exceeding $1 million, any portion of
which remains unpaid. Any information required to be provided
to the PBGC under the provision would be exempt from public
disclosure.

Eff vi te

The provision would be effective on the date of
enactment.

4. Liability upon liquidation of contributing sponsor or
controlled group member where plan remains ongoing (sec. 204
of the bill and sec. 4062 of ERISA)

es! Law

Under present law, liability to the PBGC arises only
when an underfunded plan is terminated. A plan is not
considered terminated merely because the contributing sponsor
or a member of the contributing sponsor’s controlled group is
liquidated. In such a case, the remaining controlled group
members remain responsible for funding the plan.

Description of Provision

The bill would provide that, if one or more contributing
sponsors or controlled group members liquidates all or
substantially all of its assets in a Federal or state
insolvency proceeding, they would be liable for plan
underfunding as if the plan had terminated in a distress
termination on the date on which the liquidation was
initiated. The liability would be joint and several among the
liquidating firms, would be owed to the plan, and could be
collected either by the PBGC or the plan. The PBGC would be
authorized to issue such regulations as May be necessary to
implement the provision, including rules governing procedures
pursuant.to which a plan could assign its claim to other
controlled group members as a means of collecting such
payments.

Effective Date

The provision would be effective for liquidations
initiated on or after the date of enactment.

17



Description of Provision

Disability benefits would be exempted from the age
reduction in the maximum PBGC insurance amount, if the
participant meets the standards for social security benefits
on account of permanent and total disability.

Eff ate

The provision would be effective for terminations for
which a notice of intent to terminate is filed or for which
the PBGC institutes termination proceedings on or after the
date of enactment.

D. Title IV--Miscellaneous Amendments

1. ERISA citation for certain deduction rules (sec. 401 of
the bill and sec. 404(g) (4) of the Code)

esen

Under present law, contributions to tax-qualified
pension plans are deductible within limits. The Code provides
that amounts paid by an employer or a member of its
controlled group under the following provisions of ERISA are
treated as plan contributions subject to the deduction rules
of the Code (Code sec. 404(g)(1)): (1) section 4041(b) of
ERISA (relating to standard terminations); (2) section 4062
of ERISA (relating to liability to the PBGC in the case of a
distress termination); (3) section 4063 of ERISA (relating to
liability of a substantial employer for withdrawal from
single-employer plans under multiple controlled groups); (4)
section 4064 of ERISA (relating to liability on termination
of single-employer plans under multiple controlled groups;
and (5) part I of subtitle E of title IV of ERISA (relating
to liability upon withdrawal from a multiemployer plan). The
Code provides that the references to these sections of ERISA
are to these sections as in effect on the date of enactment
of the Single Employer Pension Plan Amendments Act of 1986
(SEPPAA). The amounts referred to in such sections have
generally been increased since the enactment of SEPPAA.

Description of Provision
The bill would provide that the references to ERISA in

Code section 404(g) are to ERISA as in effect on the date of
enactment of the bill.

23



Description of ‘Ov on

The bill would provide that the PBGC is not required to
issue a notice of noncompliance (and nullify a termination)
in the case of failure to meet procedural requirements with
respect to the termination if it determines that it would be
inconsistent with the interests of participants and
beneficiaries to issue the notice.

Effective Date

The provision would apply with respect to standard
terminations for which the PBGC has not, as of the date of
enactment, issued a notice of noncompliance that has become
final, or otherwise issued a final determination that the
plan termination is nullified.

7. Prohibition on benefit increases where plan sponsor is in
bankruptcy (sec. 207 of the bill, sec. 401(a) of the Code,
and sec. 204 of ERISA)

Present Law

Under present law, there is no restriction on the
adoption of plan amendments that increase benefits when a
plan is underfunded.

Description of Provision

The bill would amend the Code and ERISA to prohibit an
employer in bankruptcy from adopting an amendment to an
underfunded plan that increases benefits unless the benefit
increase does not become effective until after the effective
date of the employer’s plan of reorganization. The
prohibition would not apply to amendments that (1) provide
reasonable, de minimis increases in liabilities for employees
of the debtor, (2) repeal an amendment made within the first
2-1/2 months of a plan year that would reduce accruals for
that plan year, as permitted under section 302(c) (8) of
ERISA, or (3) are needed to meet the qualification
requirements contained in the Code.

Effective Date

The provision would be effective with respect to plan
amendments adopted on or after the date of enactment.

19



III. POSSIBLE CHAIRMAN’S AMENDMENT TO H.R. 3396

A. Modifications to the Calculation of the
Deficit Reduction Contribution for Certain Plans
(secs. 101(a) (4) and 121(a) (4) of the bill)

The provision in the bill that requires faster
amortization of a plan’s unfunded new liability would be
modified for plans with a current funded liability percentage
greater than 60 percent. Such plans would be permitted to
amortize their unfunded new liability over approximately a 5
to 14-year period rather than the 5 to 10-year period that
results under the bill.

In addition, plans that for any plan year have a current
funded liability percentage of between 90 and 100 percent
after application of the new interest and mortality
assumptions contained in the bill would not-be required to
make a deficit reduction contribution for such plan year.

B. Modification to Disclosure Requirements
(sec. 301 of the bill)

The provision in the bill that requires pension plan
administrators of all underfunded plans to notify plan
participants of the plan’s funded status and the limits on
the PBGC’s guarantee should the plan terminate while
underfunded would not apply to plans that are at least 90
percent funded.

Cc. Miscellaneous Technical Modifications

The Administration has proposed various technical
modifications to the language in H.R. 3396. In addition to
certain clerical and technical changes to the bill language,
section 403 of the bill relating to the repeal of the small
plan recovery ratio under section 4022(c} of ERISA would be
deleted.

D. Deletion of Cross Testing in Defined Contribution Plans
(sec. 408 of the bill)

The provision in the bill relating to cross testing in
defined contribution plans would be deleted. The Committee
Report would state that the Committee is concerned with
reports of significant abuses in the use of the final
nondiscrimination regulations promulgated under section
401 (a) (4) of the Code that permit cross testing in defined
contribution plans. The Committee believes that the
Secretary of the Treasury should review its current
nondiscrimination regulations in light of these abuses.

32



the plan's unfunded current liability as determined under the
minimum funding rules.

There is a 10-percent nondeductible excise tax imposed
on contributions in excess of the applicable deduction limit
(Code sec. 4972).

Description of Provision

Under the bill, nondeductible contributions to a
terminating single-employer defined benefit pension plan with
less than 101 participants for the year would not be subject
to the excise tax on nondeductible contributions to the
extent such nondeductible contributions do not exceed the
plan’s unfunded current liability as determined under the
minimum funding rules.

In addition, employer contributions to a cash or
deferred arrangement or employer matching contributions to a
defined contribution plan that are nondeductible because they
exceed the combined plan deduction limits would not be
subject to the 10-percent nondeductible excise tax to the
extent such contributions do not exceed 6 percent of
compensation. For purposes of this rule, the combined plan
deduction limits would first be applied to contributions to
the defined benefit pension plan. In addition, this provision
would apply only if the defined benefit pension plan is a
single-employer defined benefit pension plan that has more
than 100 participants.

Effective Date

The provision eliminating the excise tax for
nondeductible contributions to a terminating single-employer
defined benefit pension plan would be effective for taxable
years ending on or after the date of enactment. The provision
eliminating the excise tax for nondeductible contributions to
certain defined contribution plans would be effective for
taxable years ending on or after December 31, 1992.

B. Title II--Amendments Relating to Title IV of ERISA

1. Reportable events (sec. 201 of the bill and sec. 4043 of
ERISA)

Present Law

Under present law, the plan administrator is required to
notify the PBGC of the occurrence of certain events, called
reportable events, that may indicate possible risk to the
financial status of the plan or the PBGC insurance program.
The plan administrator is to notify the PBGC within 30 days

14



method. As a result, the new full funding limit can be lower
than the old full funding limit.

Time for making contributions

Under present law, the required minimum funding
contribution for a plan year must be made within 8-1/2 months
after the end of the plan year. If the contribution is made
by such due date, the contribution is treated as if it were
made on the last day of the plan year. In the case of
single-employer defined benefit pension plans, 4 installments
of estimated contributions are required for the plan year
with the total contribution due within 8-1/2 months after the
end of the plan year. The amount of each required installment
is 25 percent of the lesser of (1) 90 percent of the amount
required to be contributed for the current plan year or (2)
100 percent of the amount required to be contributed for the
preceding plan year. If a plan sponsor fails to make a
required installment, additional interest is charged to the
funding standard account.

Description of Provision

Special funding rules for underfunded plans
In Sal

The bill would change the special funding rules that
apply to underfunded single-employer defined benefit plans
(other than plans with no more than 100 participants on any
day in the preceding plan year) that were adopted in the
Pension Protection Act of 1987. In general, the bill would
amend ERISA and the Code to require sponsors of underfunded
plans to pay off pension liabilities more rapidly than under
present-law rules. Specifically, the bill would (1) modify
the calculation of the minimum required contribution
applicable to underfunded plans, (2) change the permissible
range of interest rates and require uniform mortality
assumptions for the purpose of determining an underfunded
plan’s current liability for purposes of the deficit
reduction contribution, and treat any increase in current
liability due to the new interest and mortality assumptions
as "unfunded old liability", (3) accelerate the funding of a
plan’s "unfunded new liability", (4) change the calculation
of the additional funding contribution required on account of
an unpredictable contingent event, (5) provide an elective
transition rule for sponsors of underfunded plans to protect
against possibly large increases in their minimum required
contributions on account of the proposed changes in the
special funding rules, and (6) change the manner in which
sponsors of defined benefit pension plans determine the full
funding limit of their plans.



Effective Da

The provision would be effective for required
contributions that become due on or after the date of
enactment.

7. Rounding rules for cost-of-living adjustments (sec. 407 of
the bill and secs. 401(a) (17), 415, 402(g) and 408(k) of the
Code)

Present Law

Under present law, the dollar limit on benefits under a
defined benefit pension plan ($118,800 for 1994), the limit
on elective deferrals under a qualified cash or deferred
arrangement ($9,240 for 1994), the compensation limit for
qualified retirement plan purposes ($150,000 for 1994), and
the minimum compensation limit for determining eligibility
for participation in a simplified employee pension (SEP)
($396 for 1994) are adjusted annually for inflation. The
dollar limit on annual additions to a defined contribution
plan is the greater of $30,000 or 1/4 of the dollar limit for
benefits under defined benefit pension plans. Thus, the
dollar limit will be $30,000 until the defined benefit
pension plan dollar limit exceeds $120,000.

Description of Provision

The bill woutd provide that (1) the dollar limit on
benefits under a defined benefit pension plan is indexed in
$5,000 increments, (2) the dollar limit on annual additions
under a defined contribution plan is indexed in $5,000
increments, (3) the limit on elective deferrals is indexed in
$500 increments, (4) the compensation limit is indexed in
$10,000 increments, and (5) the minimum compensation limit
for SEP participation is indexed in $50 increments. In
addition, the bill would provide that the cost-of-living
adjustment with respect to any calendar year is based on the
increase in the applicable index as of the close of the
calendar quarter ending September 30 of the preceding
calendar year so that the adjusted dollar limits would be
available before the beginning of the calendar year to which

they apply.
Eff ve Di

The provision would be effective for years beginning
after December 31, 1994.

29



Effective D.

The provision would be effective as if included in the
SEPPAA. Thus, it would be effective with respect to notices
of intent to terminate filed with the PBGC on or after
January 1, 1986.

5. Single sum distributions (sec. 405 of the bill, secs.
411(a) (11), 417(e), and 415(b) of the Code, and secs. 203 (e)
and 205(g) of ERISA)

a. Determination of present value

Present Law

Under the Code and ERISA, if the present value of a
participant’s vested accrued benefit exceeds $3,500, the
benefit cannot be immediately distributed (i.e., cashed out)
without the consent of the participant. In addition, if the
present value of a joint and survivor annuity exceeds $3,500
it cannot be distributed without the consent of the
participant and the participant’s spouse. For purposes of
these rules, present value is calculated by using an interest
rate no greater than (1) the rate that would be used (as of
the date of the distribution) by the PBGC for purposes of
determining the present value of a lump-sum distribution on
plan termination if the vested accrued benefit (using such
rate) is not in excess of $25,000, or (2) 120 percent of such
PBGC rate if the vested accrued benefit exceeds $25,000.

Description of Provision

Under the bill, present value for purposes of the
cash-out rules must be no less than the present value
determined by using the mortality table used by the IRS to
determine reserves for group annuity contracts issued on the
date as of which present value is being determined and the
rate of interest on a 30-year Treasury security (as of the
date of distribution).

A plan would not violate the prohibition on reduction of
accrued benefits (Code sec. 411(d)(6)) merely because it
calculates benefits in accordance with the proposal.

ffe e Dd.
The provision would generally be effective for plan
years beginning after December 31, 1994, except that an

employer could elect to treat the provision as being
effective on or after the date of enactment.

26



II. DESCRIPTION OF PRESENT LAW AND H.R: 3396
A. Title I--Pension Plan Funding

1. Minimum funding requirements (secs. 101 and 121 of the
bill, secs. 412(c), (1), and (m) of the Code, and secs. 204,
302(d), and (e) of ERISA)

Present Law

in nm

ERISA and the Code impose both minimum and maximum
defined benefit pension plan funding requirements. The
minimum funding requirements are designed to provide at least
a certain level of benefit security by requiring the employer
to make certain minimum contributions to the plan. The
requirements recognize that, in an on-going plan, pension
liabilities are generally a long-term liability. Thus,
benefits are not required to be immediately funded, but can
be funded over a long period of time.

Minimum funding standard

Under the Code and ERISA, certain defined benefit
pension plans are required to meet a minimum funding standard
for each plan year. As an administrative aid in the
application of the funding standard, each defined benefit
pension plan is required to maintain a special account called
a "funding standard account" to which specified charges and
credits (including credits for contributions to the plan) are
to be made for each plan year. If, as of the close of a plan
year, the account reflects credits equal to or in excess of
charges, the plan is treated as meeting the minimum funding
standard for the year. Thus, as a general rule, the minimum
contribution for a plan year is determined as the amount by
which the charges to the account would exceed credits to the
account if no contribution were made to the plan.

If, as of the close of any plan year, charges to the
funding standard account exceed credits to the account, then
the excess is referred to as an "accumulated funding
deficiency." Unless a minimum funding waiver is obtained, an
employer who is responsible for contributing to a plan with
an accumulated funding deficiency is subject to a 10-percent
nondeductible excise tax on the amount of the deficiency
(Code sec. 4971). If the deficiency is not corrected within
the "taxable period", then an employer who is responsible for
contributing to the plan is also subject to a nondeductible
excise tax equal to 100 percent of the deficiency.


required to pay a per-participant premium of $19.

Underfunded plans are required to pay an additional premium
of $9 per $1,000 of underfunding, up to a maximum per-
participant additional premium of $53. The bill would
increase PBGC premiums for certain underfunded plans by
phasing out the $53 cap on the additional PBGC premium for
underfunded plans over three years, beginning with plan years
beginning on or after July 1, 1994.

PBGC enforcement and sponsor compliance

The bill would add to the list of events that must be
reported to the PBGC by employers, authorize the PBGC to
apply to district court for relief other than involuntary
pian termination in certain circumstances, impose additional
PBGC reporting obligations on plan sponsors, authorize the
PBGC to bring suit to enforce the minimum funding standards
if the amount of missed contributions exceeds $1 million, and
generally prohibit an employer’ in bankruptcy from adopting a
plan amendment increasing benefits.

Participant protections

The bill would require plan administrators of
underfunded defined benefit pension plans to disclose to
their participants the plan’s funded status and the limits on
the PBGC’s guarantee should the plan terminate while
underfunded, The bill also would impose additional
requirements on plan sponsors of terminating plans that would
protect the pension benefits of participants who cannot be
located.

Mi ous

The bill would also make a number of additional changes
to the Code and BRISA. These changes would include
modifications to the actuarial assumptions used to calculate
lump-sum distributions, adjustments to the lien for missed
contributions, adjustments to the rounding rules for
cost-of-living adjustments, and a prohibition on cross
testing of defined contribution plans under the Code’s
nondiscrimination rules.


after the plan administrator knows or has reason to know that
a reportable event has occurred. If an employer making
contributions under a plan knows or has reason to know that a
reportable event has occurred, the employer is to notify the
plan administrator of the reportable event.

sori on of Prov: on

The bill would provide that a contributing sponsor that
knows or has reason to know that a reportable event has
occurred (as well as the plan administrator) is responsible
for reporting the event to the PBGC, and would repeal the
requirement that an employer notify the Plan administrator of
reportable events.

The bill would add a number of new events to the list of
reportable events. Under the bill, a reportable event would
occur: (1) when a person ceases to be a member of the
controlled group; (2) when a contributing sponsor or a member
of a contributing sponsor’s controlled group liquidates in a
case under title XI, United States Code, or under any similar
Federal law or law of a State or political subdivision of a
State; (3) when a contributing sponsor or a member of a
contributing sponsor’s controlled group declares an
extraordinary dividend or redeems, in any 12-month period, an
aggregate of 10 percent or more of the total combined voting
power of all classes of stock entitled to vote, or an
aggregate of 10 percent or more of the total value of shares
of all classes of -stock, of a contributing sponsor and all
members of its controlled group; (4) when, in any 12-month
period, an aggregate of 3 percent or more of the benefit
liabilities of a plan covered by the PBGC insurance program
are transferred to a person that is not a member of the
contributing sponsor’s controlled group or to a plan
maintained by a person that is not a member of the
contributing sponsor’s controlled group.

Controlled groups with underfunded plans with more than
$50 million in unfunded vested benefits would be required to
notify the PBGC of the new reportable events at least 30 days
in advance of the effective date of the event.

Any information provided to the PBGC with respect to a

reportable event generally would be exempt from public
disclosure.

Effective Date

The provision would be effective for events occurring 60
days or more after the date of enactment.

15



Unpredictable contingent event benefits include benefits
that depend on contingencies that, like facility shutdowns or
reductions or contractions in workforce, are not reliably and
reasonably predictable. The event on which an unpredictable
contingent event benefit is contingent is generally not
considered to have occurred until all events on which the
benefit is contingent have occurred.

The amount of the additional contribution is generally
equal to the greater of (1) the unfunded portion of the
benefits paid during the plan year (regardless of the form in
which paid), including (except as provided by the Secretary)
any payment for the purchase of an annuity contract with
respect to a participant with respect to unpredictable
contingent event benefits, and (2) the amount that would be
determined for the year if the unpredictable contingent event
benefit liabilities were amortized in equal annual
installments over 7 years, beginning with the plan year in
which the event occurs. :

The rule relating to unpredictable contingent event
benefits is phased in for plan years beginning in 1989
through 2001.

The special rules for underfunded plans do not apply to
plans with 100 or fewer employees. In the case of a plan with
more than 100 but no more than 150 Participants during the
preceding year, the amount of the additional deficit
reduction and unpredictable contingent amount benefit
contribution is determined by multiplying the otherwise
required additional contribution by 2 percent for each
participant in excess of 100.

Full funding limit

ERISA and the Code limit the amount of annual
contributions that can be made to a defined benefit plan.
One such limitation is the full funding limit, under which no
contribution is required under the minimum funding rules to
the extent the plan is at the full funding limit. Before
1988, the full funding limit was 100 percent of an employer's
accrued liability, as determined under the plan’s funding
method. However, because of concerns that employers could
manipulate the limit by changing actuarial assumptions, the
Pension Protection Act of 1987 amended ERISA and the Code to
create a new full funding limit. The new full funding limit
is equal to the lesser of the old funding limit (accrued
liability) or 150 percent of the employer’s current
liability. Current liability is all liabilities to
participants and beneficiaries under the plan determined as
if the plan terminated. It represents only benefits accrued
to date, and is not dependent on the actuarial funding

5


years beginning on or after July 1, 1994, but before July 1,
1995, the maximum additional premium would be $53 per
participant, plus 20 percent of the amount of the total
premium (determined without regard to the cap) in excess of
$53. For plan years beginning on or after July 1, 1995, but
before July 1, 1996, the maximum additional premium would be
$53 per participant, plus 60 percent of the amount of the
total premium (determined without regard to the cap) in
excess of $53.

Effective Date

The provision would be effective on the date of
enactment.

Cc. Title III--Participant Services

1. Disclosure to participants (sec. 301 of the bill and new
sec. 4011 of ERISA) .

Present Law

ERISA requires that plan participants be provided with
certain information. One of these requirements is that, if
the plan is less than 70 percent funded, the annual report
regarding the plan must include the funded percentage of the
plan. Plan administrators must also provide participants with
a summary plan description (SPD) that advises participants of
their rights, obligations, and eligibility for benefits under
the plan. If the benefits are guaranteed by the PBGC, the SPD
must include a summary of ERISA’s guarantee provisions and a
statement that more information may be obtained from the PBGC
or the plan administrator. Department of Labor regulations
include a safe harbor statement that can be included in the
SPD to satisfy the requirements regarding the PBGC guarantee.

e: td £ Provisi

The bill would amend title IV of ERISA to require that
the plan administrator of a plan that must pay the additional
premium applicable to underfunded plans must notify plan
participants of the plan’s funded status and the limits on
the PBGC’s guarantee should the plan terminate while
underfunded. The notice would have to be provided in the time
and manner prescribed by the PBGC.

Ef ive Dat

The provision would be effective for plan years
beginning after the date of enactment.

21



DESCRIPTION OF H.R. 3396
("RETIREMENT PROTECTION ACT")

AND POSSIBLE CHAIRMAN’S AMENDMENT

Scheduled for a Markup

by the

HOUSE COMMITTEE ON WAYS AND MEANS

On July 22, 1994

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
July 21, 1994
JCX-8-94


(2) require all underfunded plans to use the same mortality
table to determine current liability.

The bill would limit the interest rate to no more than
100 percent of and no more than 10 percent below the weighted
average of the rates of interest on 30-year Treasury
securities during the 4-year period ending on the last day
before the beginning of the plan year. Under the bill, the
mortality table used to determine current liability would be
the "prevailing commissioners’ standard table" used to
determine reserves for group annuity contracts issued on the
date as of which current liability is determined.

Under the bill, increases in current liability
attributable to changes in interest rates and mortality
assumptions would be treated as an "additional unfunded old
liability amount" and would be amortized in equal annual
installments over 12 years beginning with the 1995 plan year.

A lerati nded_ new liabili

Under present law, if a plan’s funded current liability
percentage is 35 percent or less, 30 percent of the plan’s
unfunded new liability for the plan year must be included in
the calculation of the deficit reduction contribution for the
plan year. Generally, this results in an amortization period
of approximately five years. The bill would increase the 35
percent threshold under present law to 60 percent. Thus,
under the bill, if a plan’s funded current liability
percentage is 60 percent or less, 30 percent of the plan’s
unfunded new liability for the plan year would be included in
the calculation of the deficit reduction contribution for the
plan year. Like present law, the 30 percent amount would
decrease by .25 of one percentage point for each percentage
point by which the plan’s funded current liability percentage
exceeds 60 percent, to a minimum of 20 percent (approximately
an 8 to 10-year amortization period for better funded plans).

uv dictabl t fi

The bill would add a third component to the calculation
of the additional funding contribution required on account of
an unpredictable contingent event. Under the bill, the amount
of the additional funding contribution would equal the
greater of the amounts determined under present law or the
additional contribution that would be required if the
unpredictable contingent event benefit liabilities were
included in the calculation of the plan’s unfunded new
liability for the plan year. Under present law, for purposes
of calculating the unfunded new liability for a plan year,
all unpredictable contingent event benefits are disregarded.



Calculation of minimum required contribution

The bill would change the manner in which underfunded
plans calculate their minimum required contribution for a
plan year. Under the bill, amounts necessary to amortize
experience gains and losses and gains and losses resulting
from changes of actuarial assumptions would no longer be
considered in the calculation of the minimum required
contribution for underfunded plans. According to the PBGC,
one reason that the minimum required contribution for
underfunded plans adopted in the Pension Protection Act of
1987 has not been effective in increasing contributions to
underfunded plans is because experience gains or gains from
changes in actuarial assumptions are counted twice under
present law, i.e., to reduce the minimum required
contribution for underfunded plans and as a credit to the
funding standard account under the normal funding rules.
Thus, under the bill, the minimum required contribution for
underfunded plans would be, in general, the greater of (1)
the amount determined under the normal funding rules, or (2)
the deficit reduction contribution plus the amount required
with respect to benefits that are contingent on unpredictable
events.

Further, the bill would add a third component to the
calculation of the deficit reduction contribution under
present law. Under the bill, the deficit reduction
contribution would be the sum of (1): the unfunded old
liability amount, -(2) the unfunded new liability amount, and
(3) the expected increase in current liability due to
benefits accruing during the plan year. The third component
replaces the normal cost component of the calculation under
present law.

In addition, the bill would provide that the amount of
the minimum required contribution for underfunded plans could
not exceed the amount necessary to increase the funded
current liability percentage of the plan to 100 percent
taking into account all charges and credits to the funding
standard account and the expected increase in current
liability attributable to benefits accruing during the plan
year.

sin i es and _m

tion:

Under present law, the calculation of the deficit
reduction contribution for underfunded plans is based on the
plan's current liabilities. Under the bill, a plan’s current
liability would be determined as under present law, except
that the bill would (1) limit the permissible range of
interest rates used to determine the current liability, and


411(d) (6)) merely because it calculates benefits in
accordance with the provision.

Effective Date

The provision would be effective for limitation years
beginning after December 31, 1994, except that an employer
could elect to treat the provision as being effective on or
after the date of enactment. Benefits accrued as of the last
day of the last plan year beginning before January 1, 1995,
would not have to be reduced merely because of the provision.
A plan would not have to be amended to comply with the
provision until a date to be specified by the Secretary of
the Treasury, provided the plan complies with the proposal in
operation.

6. Adjustments to lien for missed minimum funding
contributions (sec. 406 of the bill, sec. 412(n) of the Code,
and sec. 302(f) of ERISA) .

Present Law

Under present law, in the case of a single-employer
defined benefit pension plan with a funded current liability
percentage of less than 100 percent, a lien arises on all
controlled group property in favor of the plan 60 days after
the due date of an unpaid required contribution if the
cumulative missed contributions exceed $1 million. The
amount of the lien is the amount of the cumulative missed
contributions in excess of $1 million.

Description of Provision

The bill would (1) eliminate the 60-day waiting period
before the lien arises, (2) eliminate the $1 million
exclusion on amounts subject to the lien, and (3) provide
that the lien applies only to plans covered by the PBGC
termination insurance program. Thus, among other types of
plans, the lien provision would not apply to plans maintained
by a professional services employer that do not have more
than 25 active participants or to plans maintained
exclusively for substantial owners.’

? "Substantial owner" is defined generally as an individual
who (1) owns the entire interest in an unincorporated trade or
business, (2) in the case of a partnership, is a partner who owns
more than 10 percent of the capital or profits interests in the
partnership, or (3) in the case of a corporation, owns more than
10 percent in value of the voting stock of the corporation or all
the stock of the corporation.

28



Under a transition rule, until the earlier of (1) the
first plan year beginning after 1999 or (2) the later of when
a plan amendment applying the provision is (a) adopted or (b)
made effective, the bill would require present value to be
calculated as under present law, using the interest rate
valuation methodology for lump-sum distributions under PBGC
regulations in effect on September 1, 1993, the present-law
Code and ERISA rules, and the current plan provisions
(provided they are consistent with present law) .

b. Limitation on maximum benefits
Pri Law

The Code provides limits on contributions and benefits
under tax-qualified pension plans. In the case of a defined
benefit pension plan, the maximum annual benefit payable is
generally the lesser of (1) 100 percent of average
compensation or (2) $118,800 for 1994. The dollar limit is
adjusted annually for cost-of-living increases.

If the benefit under the plan is payable in a form other
than a single life annuity, then the benefit must generally
be converted to the actuarial equivalent of a single life
annuity for purposes of applying the limit on benefits. If
the benefit is payable before social security retirement age,
the dollar limit on annual benefits is reduced so that the
limit is actuarially equivalent to a benefit beginning at the
social security rétirement age. These adjustments are made
using an assumed interest rate that is not less than the
greater of 5 percent or the rate specified in the plan.
Similarly, if the benefit is payable after social security
retirement age, then the limit is actuarially increased. This
adjustment is made using an assumed interest rate that is not
greater than the lesser of 5 percent or the rate specified in
the plan.

Description Prov: on

The bill would provide that the mortality table required
to be used for purposes of adjusting any benefit or
limitation in applying the limit on maximum benefits would be
the prevailing standard mortality table used by the IRS to
determine reserves for group annuity contracts. In addition,
in adjusting benefits that are payable in a form other than a
single life annuity, if the benefit is subject to the joint
and survivor annuity rules, the interest rate would be the
same used to calculate benefits under those rules (as
described above).

A plan would not be considered to violate the
prohibition on reduction in accrued benefits (Code sec.

27



A defined benefit pension plan is required to use an
acceptable actuarial cost method to determine the elements
included in its funding standard account for a year.
Generally, an actuarial cost method breaks up the cost of
benefits under the plan into annual charges consisting of two
elements for each plan year. These elements are referred to
as (1) normal cost, and (2) supplemental cost.

Under the minimum funding standard, the portion of the
cost of a plan that is required to be paid for a particular
year depends upon the nature of the cost. For example, the
normal cost for a year is generally required to be funded
currently. On the other hand, costs with respect to past
service (for example, the cost of retroactive benefit
increases), experience losses, and changes in actuarial
assumptions, are spread over a period of years.

A special funding rule applies to underfunded
single-employer defined benefit pension plans (other than
plans with no more than 100 participants on any day in the
preceding plan year). This special funding rule was adopted
in the Pension Protection Act of 1987 due to concerns about
the solvency of the defined benefit pension plan system and
concerns that the generally applicable funding rules were not
in all cases sufficient to ensure that plans would be
adequately funded.

With respect to plans subject to the special rule, the
minimum required contribution is, in general, the greater of
{1) the amount determined under the normal funding rules, or
{2) the sum of (a) normal cost, (b) the amount necessary to
amortize experience gains and losses over 5 years and gains
and losses resulting from changes in actuarial assumptions
over 10 years, and (c) the deficit reduction contribution,
plus (d) the amount required with respect to benefits that
are contingent on unpredictable events. In no event is the
amount of the contribution to exceed the amount necessary to
increase the funded ratio of the plan to 100 percent.

The deficit reduction contribution is the sum of (1) the
unfunded old liability amount, and (2) the unfunded new
liability amount. Calculation of these amounts is based on
the plan’s current liability.

The value of any unpredictable contingent event benefit
is not considered until the event has occurred. If the event
on which an unpredictable contingent event benefit is
contingent occurs during the plan year and the assets of the
plan are less than current liability (calculated after the
event has occurred), then an additional funding contribution
(over and above the minimum funding contribution otherwise
due) is required.


5. Enforcement of minimum funding requirements (sec. 205 of
the bill and sec. 4003(e) of ERISA)

Present Law

Under present law, the Secretary of the Treasury
generally interprets and administers the minimum funding
requirements. An excise tax applies with respect to the
failure to satisfy the minimum funding requirements. In
addition, plan participants and fiduciaries may bring suit
under ERISA to enforce the minimum funding requirements. The
Secretary of Labor may also bring suit to enforce the minimum
funding requirements if requested to do so by a plan
participant, fiduciary, or the Secretary of the Treasury. The
PBGC enforces a lien that arises in favor of the plan if
missed required contributions exceed $1 million.

Description of Provision

The bill would give the PBGC the authority to bring suit
to enforce the minimum funding standards if the amount of
missed required contributions exceeds $1 million. The bill
would not change existing authority of the Department of the
Treasury or the Department of Labor.

ectiv te

The provision would be effective for minimum funding
contributions that become due on or after the date of
enactment.

6. Remedies for noncompliance with requirements for standard
termination (sec. 206 of the bill and sec. 4041(b) of ERISA)

Present Law

Under present law, a single-employer defined benefit
pension plan can terminate in a standard termination only
after the plan administrator notifies participants of the
termination, issues individual benefit notices to
participants, and files a notice with the PBGC that includes
an enrolled actuary’s certification of sufficiency. The PBGC
has 60 days to review the proposed termination. If the PBGC
does not issue a notice of noncompliance nullifying the
proposed termination, the plan administrator may distribute
plan assets.

If the plan administrator fails to give all participants
advance notice of how their benefits were computed or fails
to fully comply with other procedural requirements designed
to protect participants, the PBGC generally is required to
issue a notice of noncompliance and nullify the termination.

18



Effective Date

The provision would be effective on the date of
enactment.

2. Definition of contributing sponsor under title IV of ERISA
{sec. 402 of the bill and sec. 4001(a) (13) of the Code)

Present Law

Under present law, for purposes of the PBGC termination
insurance program, the contributing sponsor of a plan is
defined as a person (1) who is responsible, in connection
with such plan, for meeting the funding requirements under
section 302 of ERISA or under section 412 of the Code, or (2)
who is a member of the controlled group of a person described
in (1), has been responsible for meeting such funding
requirements, and has employed a significant number (as may
be defined by the PBGC) of participants under such plan while
such person was so responsible. Under the Pension Protection
Act of 1987, all members of a contributing sponsor's
controlled group are responsible for the minimum funding
requirements.

Description of Provision

The bill would define contributing sponsor for purposes
of title IV of ERISA to mean the person responsible for
making minimum funding contributions to the plan under
section 302 of ERISA or section 412 of the Code, without
regard to the controlled group rules. All members of a
contributing sponsor’s controlled group would remain liable
for making the minimum funding contribution.

Effective Date

The provision would be effective as if included in the
Pension Protection Act of 1987.

3. Recovery ratio under ERISA (sec. 403 of the bill and sec.
4022(c) of ERISA)

Pr. nm we

Under present law, the extent to which the PBGC pays
benefits (in addition to guaranteed benefits) under a plan
terminated in a distress termination depends on the
applicable recovery ratio. If the unfunded nonguaranteed
benefits exceed $20 million, the applicable recovery ratio is
based on the actual recovery by the PBGC from the employer
(the “large plan" rule). In the case of other terminations,
the applicable recovery ratio is based on the average

24



INTRODUCTION

This document!, prepared by the staff of the Joint
Committee on Taxation, provides a description of, and
possible Chairman’s amendment to, the provisions contained in
H.R. 3396 ("Retirement Protection Act"), which is scheduled
for markup in the House Committee on Ways and Means on July
22, 1994. H.R. 3396 was introduced on October 28, 1993, by
Representatives William Ford and Rostenkowski (by request) as
the Administration’s proposal. The bill was referred jointly
to the Committee on Education and Labor and the Committee on
Ways and Means. H.R. 3396 contains the Administration’s
recommendations to modify the funding and plan termination
rules applicable to single-employer defined benefit pension
plans and to make other changes in the rules applicable to
tax-qualified pension plans.

Part I of the pamphlet is a summary of the provisions of
H.R. 3396. Part II describes present law and the provisions
of H.R. 3396. Part III contains a possible Chairman’s
amendment to the provisions of H.R. 3396.

1 This document may be cited as follows: Joint Committee on
Taxation, Description of H.R. 3396 ("Retirement Protection Act")

and Possible Chairman’s Amendment (JCX-8-94), July 21, 1994.
(i)



prohibited distribution equal to the lesser of the amount of
the distribution or $10,000.

Effective Date

The provision would apply to plan years beginning after
December 31, 1994.

2. Limitation on changes in current liability assumptions
(secs. 102 and 122 of the bill, sec. 412(c) of the Code, and
sec. 302(c) of ERISA)

Present Law

Under present law, in determining plan funding under an
actuarial cost method, a plan's actuary makes certain
assumptions regarding the future experience of a plan. These
assumptions typically involve rates of interest, mortality,
disability, salary increases, and other factors affecting the
value of assets and liabilities. A Plan’s actuary may revise
these assumptions to reflect the actual experience of the
plan. Actuarial assumptions must be reasonable, both
individually and in the aggregate and reflect the actuary’s
best estimate of experience under the plan.

Description of Provision

The bill would prohibit certain underfunded plans from
changing the actuarial assumptions used to determine current
liability for a plan year (other than interest rate and
mortality assumptions) unless the new assumptions are
approved by the Secretary of the Treasury prior to the
beginning of such plan year. Under the bill, pre-approval of
changes in actuarial assumptions would apply to (1) an
underfunded plan if the aggregated unfunded vested benefits
of all underfunded plans maintained by the employer and
members of the employer’s controlled group excéed $50
million, and (2) if the change in assumptions would decrease
the plan’s unfunded current liability for the current plan
year by (a) at least $50 million or (b) at least $5 million
and at least 5 percent of the current liability.

e vi t:

The provision would be effective with respect to changes
in actuarial assumptions for plan years beginning after
October 28, 1993. In addition, any changes in actuarial
assumptions for plan years beginning after December 31, 1992,
and before October 29, 1993, that would have been subject to
the pre-approval requirements set forth in the bill would not
be effective for the 1995 plan year unless approved by the
Secretary of the Treasury.

11



required to be contributed for the current plan year or (2)
100 percent of the amount required to be contributed for the
preceding plan year. If a plan sponsor fails to make a
required installment, additional interest is charged to the
funding standard account.

De on of Provisi

Under the bill, single-employer defined benefit plans
with a 100 percent funded current liability percentage in the
prior plan year would not be required to make quarterly
estimated contributions during the current plan year.

Eff ve D

The provision would be effective for plan years
beginning after the date of enactment.

5. Exceptions to excise tax on nondeductible contributions
(sec. 105 of the bill and new sec. 4972(c) (6) of the Code)

Present Law

The Code imposes a limit on the amount of deductible
contributions that can be made annually to a defined benefit
pension plan. Contributions necessary to pay normal costs (as
defined under the funding rules) generally are fully
deductible. Contributions necessary to fund supplemental
costs generally are deductible only to the extent necessary
to cover such costs amortized over 10 years.. However, the
amount of the deduction an employer can claim for the year
cannot exceed the full funding limitation for that year,
except that a special deduction rule applies to underfunded
defined benefit pension plans. In the case of a
single-employer defined benefit pension plan that has more
than 100 participants during the plan year, the maximum
amount deductible is not less than the plan’s unfunded
current liability as determined under the minimum funding
rules.

The Code also imposes limits on the amount of deductible
contributions that can be made annually if an employer
sponsors both a defined benefit pension plan and a defined
contribution plan that covers some of the same employees.
Under the combined plan deduction limits, the total deduction
for all plans for a plan year is generally limited to the
greater of (1) 25 percent of compensation or (2) the
contribution necessary to meet the minimum funding
requirements of the defined benefit pension plan for the
year. For underfunded single-employer defined benefit pension
plans with more than 100 participants for the plan year, the
maximum deductible contribution for the year is not less than

13



II.l.

6. Remedies for noncompliance with
requirements for standard termination

7. Prohibition on benefit increases where
plan sponsor is in bankruptcy .....

8. Substantial owner benefits ......

9. Phaseout of variable rate premium cap ..
C. Title III--Participant Services ........

1. Disclosure to participants ........,

2. Missing participants ........0...

3. Modification of maximum guarantee for
disability benefits ..........

D. Title IV--Miscellaneous Amendments .... .

1. ERISA citation for certain deduction
rules 2... . ee
2. Definition of contributing sponsor under
title Iv of ERISA ........... .
3. Recovery ratio under ERISA. .......
4. Distress termination criteria for banking
institutions... .........2.22
5. Single sum distributions .......2..
6. Adjustments to lien for missed minimum
funding contributions ........4..
7. Rounding rules for cost-of-living 29
adjustments .............
8. Limitation on cross testing in defined
contribution plans ...........2.
9. Funding of restored plans .......

POSSIBLE CHAIRMAN’S AMENDMENT TO H.R. 3396...

18

19
20
20
21
21

22

22
23

23

24
24

25
26

28

29

30
31
32


2. Missing participants (sec. 302 of the bill and new sec.
4031 of ERISA)

Present Law

Under present law, one of the requirements of a standard
termination is that the plan administrator distribute plan
assets by purchasing irrevocable commitments from an insurer
in satisfaction of all benefit liabilities that must be in
annuity form and by otherwise providing all benefit
liabilities that need not be provided in annuity form. Under
PBGC rules, if the plan administrator has been unable to
locate participants after having made a reasonable effort to
do so, the administrator must either purchase irrevocable
commitments to provide benefits for each participant who has
not been located or, in certain circumstances, deposit the
amounts in a bank.

Description of Provision

The bill would provide special rules for payment of
benefits in the case of participants under a plan terminating
in a standard termination whom the plan administrator cannot
locate after a diligent search ("missing participants"). The
plan administrator would be required to (1) transfer a
participant’s designated benefit to the PBGC or purchase an
annuity from an insurer to satisfy the benefit liability to
the participant, and (2) provide the PBGC with such
information and certifications with respect to such benefits
or annuity as the PBGC may specify. Any amounts transferred
to the PBGC under the provision would be treated as assets
under a plan trusteed by the PBGC.

Effective Date

The provision would be effective with respect to
distributions that occur in plan years beginning after final
regulations implementing the provision are adopted by the
PBGC.

3. Modification of maximum guarantee for disability benefits
(sec. 303 of the bill and sec. 4022(b) of ERISA)

Present Law

The PBGC guarantee generally applies to a disability
benefit if the benefit is in the form of an annuity payable
because of permanent and total disability and the participant
became disabled before the plan termination date. As is the
case with other benefits, the PBGC guarantee is reduced if
the benefit begins before age 65.

22



ie)

Tr:

Ss

Page
INTRODUCTION . see ee oe we eee eee Ci
I. SUMMARY OF H.R. 3396 ("RETIREMENT PROTECTION
ACT") es ee ew ee . 1
II. DESCRIPTION OF PRESENT LAW AND H.R. 3396 . -.3
A. Title I--Pension Plan Funding . woe - 3
1. Minimum funding requirements . . . oe 3
2. Limitation on changes in current liability
assumptions .. wee . eee ee 1D
3. Recognition of already bargained benefit
increases .... ee ee ee ee - 12
4. Modification of quarterly contribution
requirement ........ woe ee » 12
5. Exceptions to excise tax on nondeductible
contributions ... ee ee we ee 13
B. Title II--Amendments Relating to Title IV of
ERISA... .... a . 14
1. Reportable events ....... . 14
2. Alternative to involuntary termination 16
3. Certain information required to be 16
furnished to the PBGC . wee oe 16
4. Liability upon liquidation of contributing
sponsor or controlled group member where
plan remains ongoing. . ee ee . 17
5. Enforcement of minimum funding
requirements .........2.. - . 18



8. Limitation on cross testing in defined contribution plans
(sec. 408 of the bill and secs. 401{a) (4) and (5) of the
Code)

Present Law

The Code provides that the contributions or benefits
provided under a plan may not discriminate in favor of highly
compensated employees. Treasury regulations provide that, in
testing to determine whether a plan is discriminatory, a
defined benefit pension plan may be tested on the basis of
equivalent contributions and that a defined contribution plan
may be tested on the basis of equivalent benefits. This is
generally referred to as "cross-testing". In addition, two or
more plans may be combined and treated as a single plan for
purposes of determining whether the plans as a whole satisfy
the nondiscrimination requirement. The same determination of
benefits or contributions that is used for general
nondiscrimination testing also applies for purposes of the
average benefit percentage test under the coverage rules.

escr. ion rovision

The bill would provide that a defined contribution plan
(other than a target benefit plan that satisfies regulations
prescribed by the Secretary) would have to be tested for
nondiscrimination on the basis of contributions. In addition,
two or more plans of an employer, at least one of which is a
defined contribution plan, would be considered as satisfying
the nondiscrimination test as a single plan only if the
contributions provided under the aggregated plans are
nondiscriminatory.

The bill would also provide that in applying the average
benefit percentage test, employee benefit percentages are to
be determined on a basis consistent with regulations
prescribed by the Secretary. Thus, the Secretary could limit
the circumstances under which defined contribution plans are
tested on a benefits basis under the average benefit
percentage test.

Effective Date

The provision would be effective for plan years
beginning after September 30, 1993, except that for defined
contribution plans in existence on September 30, 1993, the
provision would be effective for plan years beginning on or
after January 1, 1995.

30



recovery from employers from prior terminations with respect
to which the notice of intent to terminate is provided after
December 17, 1987, and within the 5 fiscal years of the
Federal Government ending before the year in which the date
the notice of intent to terminate the plan for which the
recovery ratio is being determined was provided (the "small
plan" rule).

This rule was initially enacted as part of the Pension
Protection Act of 1987, and applies to distress terminations
for which notices of intent to terminate are provided after
December 17, 1987, and terminations instituted by the PBGC
after such date.

D. ris of Provi

The bill would retroactively repeal the small plan rule
for determining the applicable recovery ratio. Thus, under
the bill, the recovery ratio for all plans would be based on
the actual recovery by the PBGC from the employer.

Effective Date

The provision would be effective as if included in the
Pension Protection Act of 1987. Thus, it would apply with
respect to distress terminations for which notices of intent
to terminate are provided after December 17, 1987, and
terminations instituted by the PBGC after such date.

4. Distress termination criteria for banking institutions
(sec. 404 of the bill and sec. 4041(c) of ERISA)

Pre: we

Under present law, a plan may terminate in a distress
termination only if the contributing sponsor and each member
of the controlled group of the contributing sponsor meet one
of three financial distress standards. One of the standards
of financial distress is that the entity is liquidating in
bankruptcy or insolvency proceedings under title 11 of the
United States Code or under any similar law of a State or
political subdivision of a State.

Description of Provision

The bill would provide that a proceeding under title 11
of the United States Code or any similar Federal law would
qualify as a standard for distress criteria. This standard
would apply, for example, to bank insolvency receivership
actions.

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In addition, the bill would limit the present value of
the additional funding contribution with respect to one event
to the unpredictable contingent event benefit liabilities
attributable to that event.

Transition rul

The bill would provide an elective transition rule for
sponsors of underfunded plans to protect against possibly
large increases in their minimum required contributions on
account of the proposed changes in the special funding rules.
Under the transition rule, the minimum required contribution
for a plan year could not be less than the minimum required
contribution determined under present law. In addition,
relief under the transition rule would depend on the plan’s
funded current liability percentage.

If the plan’s funded current liability percentage as of
the first day of the 1995 plan year is equal to or less than
75 percent, the plan's minimum required contribution would be
limited to an amount that would increase the plan’s funded
liability percentage by 3 percentage points for the 1995
through 1999 plan years, 4 percentage points for the 2000
plan year, and 5 percentage points for the 2001 plan year. If
the plan’s funded current liability percentage as of the
first day of the 1995 plan year is equal to or greater than
85 percent, the plan’s minimum required contribution would be
limited to an amount which would increase the plan’s funded
liability percentage by 2 percentage points for the 1995
through 1999 plan years, 3 percentage points for the 2000
plan year, and 2 percentage points for the 2001 plan year.
Further, if the plan’s funded current liability percentage as
of the first day of the 1995 or a later plan year is between
75 and 85 percent, a special formula would be used to
determine the limitation, if any, on the plan’s minimum
required contribution.

ni in full ail limit

The bill would change the manner in which sponsors of
defined benefit pension plans determine the full funding
limit to conform to IRS practice. The bill would retain the
present-law rules relating to the determination of a defined
benefit pension plan’s full funding limit but would also
provide that the expected increase in current liability due
to benefits accruing during the plan year be included when
determining 150 percent of the employer's current liability.
In addition, the bill would provide that the full funding
limit for underfunded defined benefit pension plans could not
be less than the plan’s unfunded current liability as
determined under the minimum funding rules. Further, the bill
would allow plans to determine their 150 percent of current

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3. Recognition of already bargained benefit increases (secs.
103 and 123 of the bill, sec. 412(c) of the Code, and sec.
302 of ERISA)

Present Law

Under final Treasury Regulations, a defined benefit
plan‘s funding method is not considered reasonable if it
anticipates changes in plan benefits that become effective,
whether or not retroactively, in a future plan year or that
become effective after the first day of, but during, a
current plan year. However, the regulations contain an
elective exception to this general rule for collectively
bargained plans. Under the regulations, a collectively
bargained plan’s funding method is considered reasonable if
the plan elects on a consistent basis to anticipate benefit
increases scheduled to take effect during the term of the
collective bargaining agreement applicable to the plan
(Treas. Reg. 1.412(c) (3)-1(d)).

Description of Provision

The bill would require sponsors of collectively
bargained plans to recognize any negotiated benefit increases
scheduled to take effect in a future plan year in the plan
year in which the collective bargaining agreement is entered
into for purposes of the normal funding rules but not the
special rules for -underfunded plans.

Effective Date

The provision would apply to plan years beginning after
December 31, 1994, with respect to collective bargaining
agreements in effect on or after January 1, 1995.

4. Modification of quarterly contribution requirement (secs.
104 and 124 of the bill, sec. 412(m) of the Code, and sec.
302(e) of ERISA)

Present Law

Under present law, the required minimum funding
contribution for a plan year must be made within 8-1/2 months
after the end of the plan year. If the contribution is made
by such due date, the contribution is treated as if it were
made on the last day of the plan year. In the case of
single-employer defined benefit pension plans, 4 installments
of estimated contributions are required for the plan year
with the total contribution due within 8-1/2 months after the
end of the plan year. The amount of each required installment
is 25 percent of the lesser of (1) 90 percent of the amount

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