II

106TH CONGRESS

1ST SESSION S. 1640

To amend the Internal Revenue Code of 1986 and the Employee Retirement

Income Security Act of 1974 to protect pension benefits of employees

in defined benefit plans and to direct the Secretary of the Treasury

to enforce the age discrimination requirements of the Internal Revenue

Code of 1986 with respect to amendments resulting in defined benefit

plans becoming cash balance plans.

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 24, 1999

Mr. WELLSTONE introduced the following bill; which was read twice and

referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 to protect pension benefits of employees in defined benefit

plans and to direct the Secretary of the Treasury to

enforce the age discrimination requirements of the Internal Revenue Code of 1986 with respect to amendments

resulting in defined benefit plans becoming cash balance

plans.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. SHORT TITLE.

2 This Act may be cited as the ‘‘Pension Benefits Pro3 tection and Preservation Act of 1999’’.

4 SEC. 2. NOTICE REQUIREMENTS FOR PENSION PLANS OF

5 100 OR MORE PARTICIPANTS SIGNIFICANTLY

6 REDUCING FUTURE PENSION BENEFIT AC7 CRUALS.

8 (a) PLAN REQUIREMENT.—Section 401(a) of the In9 ternal Revenue Code of 1986 (relating to qualified pen10 sion, profit-sharing, and stock bonus plans) is amended

11 by inserting after paragraph (34) the following new para12 graph:

13 ‘‘(35) NOTICE REQUIREMENTS FOR DEFINED

14 BENEFIT PLANS OF 100 OR MORE PARTICIPANTS SIG15 NIFICANTLY REDUCING FUTURE BENEFIT ACCRU16 ALS.—

17 ‘‘(A) IN GENERAL.—If a large defined ben18 efit plan adopts an amendment which has the

19 effect of significantly reducing the rate of fu20 ture benefit accrual of 1 or more participants,

21 a trust which is part of such plan shall not con22 stitute a qualified trust under this section un23 less, after adoption of such amendment and not

24 less than 45 days before its effective date, the

25 plan administrator provides—
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1 ‘‘(i) a written statement of benefit

2 change described in subparagraph (B) to

3 each applicable individual, and

4 ‘‘(ii) a written notice setting forth the

5 plan amendment and its effective date to

6 each employee organization representing

7 participants in the plan.

8 Any such notice may be provided to a person

9 designated, in writing, by the person to which

10 it would otherwise be provided. The plan ad11 ministrator shall not be treated as failing to

12 meet the requirements of this subparagraph

13 merely because the statement or notice is pro14 vided before the adoption of the plan amend15 ment if no material modification of the amend16 ment occurs before the amendment is adopted.

17 ‘‘(B) STATEMENT OF BENEFIT CHANGE.—

18 A statement of benefit change described in this

19 subparagraph shall—

20 ‘‘(i) be written in a manner calculated

21 to be understood by the average plan par22 ticipant, and

23 ‘‘(ii) include the information described

24 in subparagraph (C).
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1 ‘‘(C) INFORMATION CONTAINED IN STATE2 MENT OF BENEFIT CHANGE.—The information

3 described in this subparagraph includes the fol4 lowing:

5 ‘‘(i) Notice setting forth the plan

6 amendment and its effective date.

7 ‘‘(ii) A comparison of the following

8 amounts under the plan with respect to an

9 applicable individual, determined both with

10 and without regard to the plan amend11 ment:

12 ‘‘(I) The accrued benefit and the

13 present value of the accrued benefit as

14 of the effective date.

15 ‘‘(II) The projected accrued ben16 efit and the projected present value of

17 the accrued benefit as of the date

18 which is 3 years, 5 years, and 10

19 years from the effective date and as of

20 the normal retirement age.

21 ‘‘(iii) A table of all annuity factors

22 used to calculate benefits under the plan,

23 presented in the form provided in section

24 72 and the regulations thereunder.
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1 Benefits described in clause (ii) shall be stated

2 separately and shall be calculated by using the

3 applicable mortality table and the applicable in4 terest rate under section 417(e)(3)(A).

5 ‘‘(D) LARGE DEFINED BENEFIT PLAN; AP6 PLICABLE INDIVIDUAL.—For purposes of this

7 paragraph—

8 ‘‘(i) LARGE DEFINED BENEFIT

9 PLAN.—The term ‘large defined benefit

10 plan’ means any defined benefit plan which

11 had 100 or more participants who had ac12 crued a benefit under the plan (whether or

13 not vested) as of the last day of the plan

14 year preceding the plan year in which the

15 plan amendment becomes effective.

16 ‘‘(ii) APPLICABLE INDIVIDUAL.—The

17 term ‘applicable individual’ means—

18 ‘‘(I) each participant in the plan,

19 and

20 ‘‘(II) each beneficiary who is an

21 alternate payee (within the meaning

22 of section 414(p)(8)) under an appli23 cable qualified domestic relations

24 order (within the meaning of section

25 414(p)(1)(A)).
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1 ‘‘(E) ACCRUED BENEFIT; PROJECTED RE2 TIREMENT BENEFIT.—For purposes of this

3 paragraph—

4 ‘‘(i) PRESENT VALUE OF ACCRUED

5 BENEFIT.—The present value of an ac6 crued benefit of any applicable individual

7 shall be calculated as if the accrued benefit

8 were in the form of a single life annuity

9 commencing at the participant’s normal re10 tirement age (and by taking into account

11 any early retirement subsidy).

12 ‘‘(ii) PROJECTED ACCRUED BEN13 EFIT.—

14 ‘‘(I) IN GENERAL.—The pro15 jected accrued benefit of any applica16 ble individual shall be calculated as if

17 the benefit were payable in the form

18 of a single life annuity commencing at

19 the participant’s normal retirement

20 age (and by taking into account any

21 early retirement subsidy).

22 ‘‘(II) COMPENSATION AND

23 OTHER ASSUMPTIONS.—Such benefit

24 shall be calculated by assuming that

25 compensation and all other benefit
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1 factors would increase for each plan

2 year beginning after the effective date

3 of the plan amendment at a rate equal

4 to the median average of the CPI in5 crease percentage (as defined in sec6 tion 215(i) of the Social Security Act)

7 for the 5 calendar years immediately

8 preceding the calendar year before the

9 calendar year in which such effective

10 date occurs.

11 ‘‘(III) BENEFIT FACTORS.—For

12 purposes of subclause (II), the term

13 ‘benefit factors’ means social security

14 benefits and all other relevant factors

15 under section 411(b)(1)(A) used to

16 compute benefits under the plan

17 which had increased from the 2d plan

18 year preceding the plan year in which

19 the effective date of the plan amend20 ment occurs to the 1st such preceding

21 plan year.

22 ‘‘(iii) NORMAL RETIREMENT AGE.—

23 The term ‘normal retirement age’ means

24 the later of—
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1 ‘‘(I) the date determined under

2 section 411(a)(8), or

3 ‘‘(II) the date a plan participant

4 attains age 62.’’.

5 (b) AMENDMENTS TO ERISA.—

6 (1) BENEFIT STATEMENT REQUIREMENT.—Sec7 tion 204(h) of the Employee Retirement Income Se8 curity Act of 1974 (29 U.S.C. 1054(h)) is amended

9 by adding at the end the following new paragraphs:

10 ‘‘(3)(A) If paragraph (1) applies to the adop11 tion of a plan amendment by a large defined benefit

12 plan, the plan administrator shall, after adoption of

13 such amendment and not less than 45 days before

14 its effective date, provide with the notice under para15 graph (1) a written statement of benefit change de16 scribed in subparagraph (B) to each applicable indi17 vidual.

18 ‘‘(B) A statement of benefit change described in

19 this subparagraph shall—

20 ‘‘(i) be written in a manner calculated to

21 be understood by the average plan participant,

22 and

23 ‘‘(ii) include the information described in

24 subparagraph (C).
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1 ‘‘(C) The information described in this subpara2 graph includes the following:

3 ‘‘(i) A comparison of the following amounts

4 under the plan with respect to an applicable in5 dividual, determined both with and without re6 gard to the plan amendment:

7 ‘‘(I) The accrued benefit and the

8 present value of the accrued benefit as of

9 the effective date.

10 ‘‘(II) The projected accrued benefit

11 and the projected present value of the ac12 crued benefit as of the date which is 3

13 years, 5 years, and 10 years from the ef14 fective date and as of the normal retire15 ment age.

16 ‘‘(ii) A table of all annuity factors used to

17 calculate benefits under the plan, presented in

18 the form provided in section 72 of the Internal

19 Revenue Code of 1986 and the regulations

20 thereunder.

21 Benefits described in clause (i) shall be stated sepa22 rately and shall be calculated by using the applicable

23 mortality table and the applicable interest rate

24 under section 417(e)(3)(A) of such Code.

25 ‘‘(D) For purposes of this paragraph—
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1 ‘‘(i) The term ‘large defined benefit plan’

2 means any defined benefit plan which had 100

3 or more participants who had accrued a benefit

4 under the plan (whether or not vested) as of the

5 last day of the plan year preceding the plan

6 year in which the plan amendment becomes ef7 fective.

8 ‘‘(ii) The term ‘applicable individual’

9 means an individual described in subparagraph

10 (A) or (B) of paragraph (1).

11 ‘‘(E) For purposes of this paragraph—

12 ‘‘(i) The present value of an accrued ben13 efit of any applicable individual shall be cal14 culated as if the accrued benefit were in the

15 form of a single life annuity commencing at the

16 participant’s normal retirement age (and by

17 taking into account any early retirement sub18 sidy).

19 ‘‘(ii)(I) The projected accrued benefit of

20 any applicable individual shall be calculated as

21 if the benefit were payable in the form of a sin22 gle life annuity commencing at the participant’s

23 normal retirement age (and by taking into ac24 count any early retirement subsidy).
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1 ‘‘(II) Such benefit shall be calculated by

2 assuming that compensation and all other ben3 efit factors would increase for each plan year

4 beginning after the effective date of the plan

5 amendment at a rate equal to the median aver6 age of the CPI increase percentage (as defined

7 in section 215(i) of the Social Security Act) for

8 the 5 calendar years immediately preceding the

9 calendar year before the calendar year in which

10 such effective date occurs.

11 ‘‘(III) For purposes of subclause (II), the

12 term ‘benefit factors’ means social security ben13 efits and all other relevant factors under section

14 204(b)(1)(A) used to compute benefits under

15 the plan which had increased from the 2d plan

16 year preceding the plan year in which the effec17 tive date of the plan amendment occurs to the

18 1st such preceding plan year.

19 ‘‘(iii) The term ‘normal retirement age’

20 means the later of—

21 ‘‘(I) the date determined under sec22 tion 3(24), or

23 ‘‘(II) the date a plan participant at24 tains age 62.
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1 ‘‘(4) A plan administrator shall not be treated

2 as failing to meet the requirements of this sub3 section merely because the notice or statement is

4 provided before the adoption of the plan amendment

5 if no material modification of the amendment occurs

6 before the amendment is adopted.’’.

7 (2) CONFORMING AMENDMENT.—Section

8 204(h)(1) of such Act (29 U.S.C. 1054(h)(1)) is

9 amended by inserting ‘‘(including any written state10 ment of benefit change if required by paragraph

11 (3))’’ after ‘‘written notice’’.

12 (c) EFFECTIVE DATES.—

13 (1) IN GENERAL.—The amendments made by

14 this section shall apply to plan amendments taking

15 effect in plan years beginning after December 31,

16 1998.

17 (2) SPECIAL RULE.—The period for providing

18 any notice required by the amendments made by this

19 section shall not end before the date which is 3

20 months after the date of the enactment of this Act.

21 SEC. 3. AGE-BASED REDUCTIONS IN THE RATE AT WHICH

22 BENEFITS ACCRUE UNDER A CASH BALANCE

23 PLAN VIOLATE AGE DISCRIMINATION RULE.

24 (a) DIRECTIVE.—The Secretary of the Treasury shall

25 apply section 411(b)(1)(H) of the Internal Revenue Code
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1 of 1986 without regard to the portion of the preamble to

2 Treasury Decision 8360 (56 Fed. Reg. 47524–47603,

3 September 19, 1991) which relates to the allocation of in4 terest adjustments through normal retirement age under

5 a cash balance plan, as such preamble is and has been

6 since its adoption without the force of law.

7 (b) SAFE HARBOR IF NOTICE AND ELECTION TO

8 CONTINUE BENEFIT ACCRUALS UNDER FORMER DE9 FINED BENEFIT PLAN INSTEAD OF UNDER CASH BAL10 ANCE PLAN.—

11 (1) AMENDMENT TO INTERNAL REVENUE

12 CODE.—Paragraph (1) of section 411(b) of the In13 ternal Revenue Code of 1986 (relating to defined

14 benefit plans) is amended by adding at the end the

15 following new subparagraph:

16 ‘‘(I) ELECTION TO CONTINUE BENEFIT AC17 CRUALS UNDER FORMER DEFINED BENEFIT

18 PLAN INSTEAD OF UNDER CASH BALANCE

19 PLAN.—

20 ‘‘(i) IN GENERAL.—A large defined

21 benefit plan that adopts an amendment

22 which results in such plan becoming a cash

23 balance plan shall be treated as not meet24 ing the requirements of this paragraph un-
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1 less such plan provides each participant

2 with—

3 ‘‘(I) notice and a written state4 ment of benefit change which meets

5 the requirements of section

6 401(a)(35), and

7 ‘‘(II) an election to continue to

8 accrue benefits under such plan, de9 termined under the terms of such plan

10 as in effect immediately before the ef11 fective date of such plan amendment.

12 ‘‘(ii) PROTECTED ACCRUED BEN13 EFIT.—For purposes of clause (i), an ac14 crued benefit shall include any early retire15 ment benefit or retirement-type subsidy

16 (within the meaning of subsection

17 (d)(6)(B)(i)), but only with respect to a

18 participant who satisfies (either before or

19 after the effective date of the amendment)

20 the conditions for the benefit or subsidy

21 under the terms of the plan as in effect

22 immediately before such date.

23 ‘‘(iii) TIMING OF ELECTION.—Except

24 as provided in regulations, the election re25 quired by clause (i)(II) shall be provided
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1 within a reasonable time before the effec2 tive date of the amendment resulting in

3 the plan becoming a cash balance plan.

4 ‘‘(iv) CASH BALANCE PLAN.—For pur5 poses of this paragraph, the term ‘cash

6 balance plan’ means a defined benefit plan

7 under which the rate of benefit accrual of

8 any 1 participant for a year of service is

9 reduced as the years of service of such par10 ticipant increase.’’.

11 (2) AMENDMENT TO ERISA.—Section 204(g) of

12 the Employee Retirement Income Security Act of

13 1974 (29 U.S.C. 1054(g)) is amended by adding at

14 the end the following new paragraph:

15 ‘‘(4)(A) For purposes of paragraph (1), in the case

16 of a plan amendment adopted by a large defined benefit

17 plan (as defined in subsection (h)(3)) which results in such

18 plan becoming a cash balance plan, such defined benefit

19 plan shall be treated as not satisfying the requirements

20 of this section unless such plan provides each participant

21 with—

22 ‘‘(i) notice and a written statement of benefit

23 change which meets the requirements of subsection

24 (h)(3), and
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1 ‘‘(ii) an election to continue to accrue benefits

2 under such plan, determined under the terms of

3 such plan as in effect immediately before the effec4 tive date of such plan amendment.

5 ‘‘(B) For purposes of subparagraph (A), an accrued

6 benefit shall include any early retirement benefit or retire7 ment-type subsidy (within the meaning of paragraph

8 (2)(A)), but only with respect to a participant who satis9 fies (either before or after the effective date of the amend10 ment) the conditions for the benefit or subsidy under the

11 terms of the plan as in effect immediately before such

12 date.

13 ‘‘(C) Except as provided in regulations, the election

14 required by subparagraph (A)(ii) shall be provided within

15 a reasonable time before the effective date of the amend16 ment resulting in the plan becoming a cash balance plan.

17 ‘‘(D) For purposes of this paragraph, the term ‘cash

18 balance plan’ means a defined benefit plan under which

19 the rate of benefit accrual of any 1 participant for a year

20 of service is reduced as the years of service of such partici21 pant increase.’’.

22 (c) EXCISE TAX ON FAILURE TO OFFER ELEC23 TION.—

24 (1) IN GENERAL.—Chapter 43 of subtitle D of

25 the Internal Revenue Code of 1986 (relating to
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1 qualified pension, etc., plans) is amended by adding

2 at the end the following new section:

3 ‘‘SEC. 4980F. FAILURE TO OFFER ELECTION TO CONTINUE

4 BENEFIT ACCRUALS UNDER FORMER DE5 FINED BENEFIT PLAN IN EVENT OF SIGNIFI6 CANT REDUCTIONS IN FUTURE BENEFIT AC7 CRUALS.

8 ‘‘(a) IMPOSITION OF TAX.—There is hereby imposed

9 a tax on the failure of any applicable pension plan to meet

10 the requirements of subsection (d).

11 ‘‘(b) AMOUNT OF TAX.—

12 ‘‘(1) IN GENERAL.—The amount of the tax im13 posed by subsection (a) shall be 50 percent of the

14 amount of the excess pension assets in such plan,

15 determined as of the effective date of the amend16 ment which has the effect of significantly reducing

17 the rate of future benefit accrual of 1 or more par18 ticipants.

19 ‘‘(2) EXCESS PENSION ASSETS.—For purposes

20 of paragraph (1), the term ‘excess pension assets’

21 has the meaning given to such term by section

22 420(e)(2).

23 ‘‘(c) LIABILITY FOR TAX.—The following shall be lia24 ble for the tax imposed by subsection (a):
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1 ‘‘(1) In the case of a plan other than a multi2 employer plan, the employer.

3 ‘‘(2) In the case of a multiemployer plan, the

4 plan.

5 For purposes of the preceding sentence, all multiemployer

6 plans of which the same trust forms a part shall be treated

7 as 1 plan. For purposes of this paragraph, if not all per8 sons who are treated as a single employer for purposes

9 of this section have the same taxable year, the taxable

10 years taken into account shall be determined under prin11 ciples similar to the principles of section 1561.

12 ‘‘(d) ELECTION TO CONTINUE BENEFIT ACCRUALS

13 UNDER FORMER DEFINED BENEFIT PLAN IN EVENT OF

14 SIGNIFICANT REDUCTIONS IN FUTURE BENEFIT ACCRU15 ALS.—In the case that an applicable pension plan adopts

16 an amendment which has the effect of significantly reduc17 ing the rate of future benefit accrual of 1 or more partici18 pants, the requirements of this subsection are met if the

19 plan administrator provides each participant who has a

20 nonforfeitable right to 100 percent of his accrued benefits

21 with—

22 ‘‘(1) notice and a written statement of benefit

23 change which meets the requirements of section

24 401(a)(35), and
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1 ‘‘(2) an election to continue to accrue benefits

2 under such plan, determined under the terms of

3 such plan as in effect immediately before the effec4 tive date of such plan amendment.

5 ‘‘(e) TIMING OF ELECTION.—Except as provided in

6 regulations, the election required by subsection (d) shall

7 be provided within a reasonable time before the effective

8 date of such amendment.

9 ‘‘(f) PROTECTED ACCRUED BENEFIT.—For purposes

10 of this section, an accrued benefit shall include any early

11 retirement benefit or retirement-type subsidy (within the

12 meaning of section 411(d)(6)(B)(i)), but only with respect

13 to a participant who satisfies (either before or after the

14 effective date of the amendment) the conditions for the

15 benefit or subsidy under the terms of the plan as in effect

16 immediately before such date.

17 ‘‘(g) APPLICABLE PENSION PLAN.—For purposes of

18 this section, the term ‘applicable pension plan’ means a

19 defined benefit plan that is subject to the notice require20 ments of section 401(a)(35).’’.

21 (2) CLERICAL AMENDMENT.—The table of sec22 tions for chapter 43 of subtitle D of such Code is

23 amended by adding at the end the following new

24 item:

‘‘Sec. 4980F. Failure to offer election to continue benefit accruals under former

defined benefit plan in event of significant reductions in future

benefit accruals.’’.
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1 (d) EFFECTIVE DATES.—

2 (1) IN GENERAL.—The amendments made by

3 this section shall apply to plans and plan amend4 ments taking effect after December 31, 1998.

5 (2) SPECIAL RULE.—The period for providing

6 any notice required by the amendments made by this

7 section shall not end before the date which is 3

8 months after the date of the enactment of this Act.

9 SEC. 4. PREVENTION OF WEARING AWAY OF EMPLOYEE’S

10 ACCRUED BENEFIT.

11 (a) AMENDMENT TO INTERNAL REVENUE CODE.—

12 Section 411(d)(6) of the Internal Revenue Code of 1986

13 (relating to accrued benefit may not be decreased by

14 amendment) is amended by adding at the end the fol15 lowing new subparagraph:

16 ‘‘(D) TREATMENT OF PLAN AMENDMENTS

17 WEARING AWAY ACCRUED BENEFIT.—

18 ‘‘(i) IN GENERAL.—For purposes of

19 subparagraph (A), a plan amendment

20 adopted by a large defined benefit plan

21 shall be treated as reducing accrued bene22 fits of a participant if, under the terms of

23 the plan after the adoption of the amend24 ment, the accrued benefit of the partici-
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1 pant may at any time be less than the sum

2 of—

3 ‘‘(I) the participant’s accrued

4 benefit for years of service before the

5 effective date of the amendment, de6 termined under the terms of the plan

7 as in effect immediately before the ef8 fective date, plus

9 ‘‘(II) the participant’s accrued

10 benefit determined under the formula

11 applicable to benefit accruals under

12 the current plan as applied to years of

13 service after such effective date.

14 ‘‘(ii) LARGE DEFINED BENEFIT

15 PLAN.—For purposes of this subpara16 graph, the term ‘large defined benefit plan’

17 means any defined benefit plan which had

18 100 or more participants who had accrued

19 a benefit under the plan (whether or not

20 vested) as of the last day of the plan year

21 preceding the plan year in which the plan

22 amendment becomes effective.

23 ‘‘(iii) PROTECTED ACCRUED BEN24 EFIT.—For purposes of this subparagraph,

25 an accrued benefit shall include any early
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1 retirement benefit or retirement-type sub2 sidy (within the meaning of subparagraph

3 (B)(i)), but only with respect to a partici4 pant who satisfies (either before or after

5 the effective date of the amendment) the

6 conditions for the benefit or subsidy under

7 the terms of the plan as in effect imme8 diately before such date.’’.

9 (b) AMENDMENT OF ERISA.—Section 204(g) of the

10 Employee Retirement Income Security Act of 1974 (29

11 U.S.C. 1054(g)) is amended by adding at the end the fol12 lowing new paragraph:

13 ‘‘(5)(A) For purposes of paragraph (1), a plan

14 amendment adopted by a large defined benefit plan shall

15 be treated as reducing accrued benefits of a participant

16 if, under the terms of the plan after the adoption of the

17 amendment, the accrued benefit of the participant may at

18 any time be less than the sum of—

19 ‘‘(i) the participant’s accrued benefit for years

20 of service before the effective date of the amend21 ment, determined under the terms of the plan as in

22 effect immediately before the effective date, plus

23 ‘‘(ii) the participant’s accrued benefit deter24 mined under the formula applicable to benefit accru-
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1 als under the current plan as applied to years of

2 service after such effective date.

3 ‘‘(B) For purposes of this paragraph, the term ‘large

4 defined benefit plan’ means any defined benefit plan which

5 had 100 or more participants who had accrued a benefit

6 under the plan (whether or not vested) as of the last day

7 of the plan year preceding the plan year in which the plan

8 amendment becomes effective.

9 ‘‘(C) For purposes of this paragraph, an accrued ben10 efit shall include any early retirement benefit or retire11 ment-type subsidy (within the meaning of paragraph

12 (2)(A)), but only with respect to a participant who satis13 fies (either before or after the effective date of the amend14 ment) the conditions for the benefit or subsidy under the

15 terms of the plan as in effect immediately before such

16 date.’’.

17 (c) EFFECTIVE DATE.—The amendments made by

18 this section shall apply to plan amendments taking effect

19 after December 31, 1998.

Æ