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CCH® PENSION AND BENEFITS — 7/30/06

House passes comprehensive pension reform bill

The House late on July 28, 2006, passed H.R. 4, the Pension Protection Bill of 2006, a comprehensive pension reform measure that has been the subject of negotiations between House and Senate conferees for five months. House Majority Leader John Boehner (R-OH) said the legislation “ represents the most sweeping overhaul to U.S. pension laws in more than 30 years.”

Even though the conferees had worked out such contentious issues as funding, investment advice, and airline relief, they failed to reach agreement on whether to strip the expiring tax provisions (the so-called trailer bill provisions) from the pension bill and include them in a separate tax measure. As a result, the House-passed measure reflects the agreement on pension-related provisions negotiated between House and Senate conferees to H.R. 2830, but is not a conference bill and will therefore be subject to amendment once it is taken up by the Senate. The nonpension-related tax provisions of H.R. 2830 were stripped out and put into a separate tax measure which included estate tax reforms, tax extenders and a minimum wage increase. This bill also passed the House.

Major provisions included in pension bill

The bill contains a variety of provisions designed to strengthen the funding rules for defined benefit pension plans. By tightening the funding rules, the bill seeks to ensure that employers make greater contributions to their pension funds, ensuring their solvency, and avoiding a potential multi-billion dollar taxpayer bailout of the PBGC. Accordingly, the bill establishes increased liabilities for plans that are defined as “at risk.” Plan liabilities would be determined using a three-segment yield curve developed from a 24-month average of the yield on the top three grades of corporate bonds. The new rules generally apply to plan years beginning after 2007.

Additional funding rules would apply to multiemployer plans in endangered or critical status. The bill would eliminate the full funding exception to the variable rate PBGC premium. Special PBGC premiums would be established for small plans.

The bill, as passed by the House, would include funding relief for the airlines in the form of a longer amortization period and a higher amortization interest rate. Somewhat different rules would apply for airlines that freeze their plans and those that do not. The termination premium paid to the PBGC would be increased.

The bill would create a prohibited transaction exemption for investment advice provided to employer-sponsored retirement plans through a computer model that is certified by an independent party. An exemption provided for advice provided by an adviser whose compensation does not vary with the investments selected would be available to both employer-sponsored plans and IRAs.

New rules would be established for testing defined benefit plans, including hybrid (cash balance) plans, for age discrimination under the Code, ERISA, and the Age Discrimination in Employment Act (ADEA).

In addition, among other things, the bill would:

• Make permanent the retirement savings incentives enacted under EGTRRA.
• Create a safe harbor to encourage employers to offer automatic enrollment in their defined contribution plans.
• Require plan administrators to comply with new strengthened disclosure rules.
• Allow small employers to establish a combined defined benefit/401(k) (DB/K) plan.
• Make the "saver's credit" permanent.
• • Allow direct rollovers from retirement plans to Roth IRAs.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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