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

If the employer contributes an amount equal to the full funding limit, the employer is not subject to the underfunding excise tax, even though the funding standard account is left with a deficit for the year. In addition, as explained below, the amount of the deduction an employer can claim for the year cannot exceed the full funding limitation.

Deductions for employer contributions

The Code also imposes a limit on the amount of deductible contributions that can be made annually to a defined benefit 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 deduction for any year can never exceed the full funding limitation for that year.

There is a 10-percent nondeductible excise tax imposed on contributions in excess of the deduction limit.

Security for plan amendments

Under the Code and ERISA, if a plan amendment increasing current liability is adopted, the contributing sponsor and members of the controlled group of the contributing sponsor must provide security in favor of the plan equal to the excess of (1) the lesser of (a) the amount by which the plan's assets are less than 60 percent of current liability, taking into account the benefit increase, or (b) the amount of the benefit increase and prior benefit increases after December 22, 1987, over (2) $10 million. The amendment is not effective until the security is provided.

The security must be in the form of a bond, cash, certain U.S. government obligations, or such other form as is satisfactory to the Secretary of the Treasury and the parties involved. The security is released after the funded liability of the plan reaches 60 percent.

IV. DESCRIPTION OF CERTAIN PROPOSALS

A. Pension Funding Improvement Act of 1993 (H.R. 298)

In general

H.R. 298, the Pension Funding Improvement Act of 1993,5 would increase the minimum funding requirements for underfunded plans, modify the security requirements with respect to plan amendments to underfunded plans, modify the PBGC's reporting obligations, and authorize the PBGC to obtain additional information from plan sponsors.

Modifications to minimum funding requirements

The bill would repeal the special present-law funding rule for underfunded single-employer plans and instead impose an underfunding reduction requirement and a solvency maintenance requirement on single-employer defined benefit pension plans that have a funded current liability percentage of less than 100 (determined as of the first day of the plan year). For such a plan, the amount of the accumulated funding deficiency (if any) for a plan year is the greatest of (1) the accumulated funding deficiency for the plan year under present law (determined without regard to the special rule for underfunded plans), (2) the excess of the underfunding reduction requirement for the plan year over the amount considered contributed by the employer for the year, and (3) the excess of the solvency maintenance requirement for the plan year over the amount considered contributed by the employer for the year.

The underfunding reduction requirement is the sum of (1) an amount equal to the product of the unfunded current liability of the plan multiplied by the applicable factor, (2) the expected increase in the current liability attributable to benefits accruing during the plan year, (3) the amount necessary to amortize any waived funding deficiency, and (4) the unpredictable contingent event amount (if any) for the plan year. Like present law, if the funded current liability percentage is less than 35 percent, then the applicable factor is 30 percent. The applicable factor decreases by .25 of one percentage point for each 1 percentage point by which the plan's funded current liability percentage exceeds 35 percent. The underfunding reduction requirement is not to exceed the amount necessary to increase the funded current liability percent of the plan (determined as of the first day of the plan year) to 100 percent plus the expected increase in current liability attributable to benefits accruing during the plan year.

The bill adopts a number of rules similar to or the same as present law. For purposes of determining the underfunding reduc

* H.R. 298 was introduced by Mr. Pickle on January 5, 1993.

tion requirement, the unpredictable contingent event amount is determined as under present law. Current liability is also determined as under present law, except that the interest rate must be 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. As under the present-law deficit reduction contribution rules, the underfunding reduction requirement and the solvency maintenance requirement do not apply to plans with 100 or fewer participants and are phased in with respect to plans with more than 100 but no more than 150 participants.

The solvency maintenance requirement for a plan year is the sum of (1) all disbursements from the plan for the plan year plus interest on the unfunded current liability of the plan (determined as of the first day of the plan year), (2) the expected increase in current liability attributable to benefits accruing during the plan year, and (3) the amount necessary to amortize any waived funding deficiency. The solvency maintenance requirement is not to exceed the amount necessary to increase the funded liability percent of the plan to 100 percent plus the expected increase in current liability attributable to benefits accruing during the plan year.

For purposes of this rule, "disbursements from the plan" means benefits payments, including purchases of annuities or payment of lump sums in satisfaction of liabilities, administrative expenditures, or any other disbursements from the plan. In determining the applicable amounts attributable to purchases of annuities or the payment of lump sums, the actual purchase price or lump sum amount paid by the plan is multiplied by the excess of one over the funding ratio of the plan. Thus, for example, if the funding ratio of the plan at the beginning of the plan year is 80 percent, then the amount of annuity purchases and lump-sum payments taken into account is 20 percent of such actual amounts.

The solvency maintenance requirement is phased in over 5 years after the effective date at a rate of 20 percent per year.

At the election of the employer, the amounts required to be contributed under either the underfunding reduction requirement or the solvency maintenance requirement may be reduced by the net of (1) credits to the funding standard account for plan years beginning on or before December 31, 1993, arising due to experience gains or changes in actuarial assumptions and amounts considered contributed by the employer to the extent necessary to avoid an accumulated funding deficiency and (2) charges to the funding standard account for such plan years arising due to experience losses and changes in actuarial assumptions.

The funding provisions would be effective for plan years beginning after December 31, 1993.

Required security

The bill would amend the Code and ERISA to require that the plan sponsor of any defined benefit pension plan is required to security to the plan if a plan amendment increases current liability of the plan and the plan is less than 90 percent funded (taking into account the increase in current liability under the amendment). The amount of required security is the excess of (1) the additional

plan assets necessary to increase the funding ratio of the plan to 90 percent over (2) $1 million.

The bill would extend the ERISA criminal penalty to failures to satisfy the security requirement. Thus, a person who willfully violates the requirement may be fined up to $5,000 or imprisoned for up to one year. In the case of a violation by a person not an individual, the fine may be up to $10,000.

The security provisions would apply to plan amendments adopted after December 31, 1993.

Miscellaneous provisions

Reports by the PBGC and CBO

The bill directs the PBGC and the Congressional Budget Office (CBO) to submit separate reports to the Congress setting forth alternative increases in premiums that would be required for the assets of the single-employer termination insurance program to equal or exceed the program's current and expected liabilities by the year 2002. The report is to be submitted no later than March 1, 1993.

The bill provides that the annual report of the PBGC is to include an actuarial evaluation of the expected operations and status of the PBGC for the next 5, 10, 20, and 30 years. Under present law, only the 5-year evaluation is required. The evaluation is to include alternative premium schedules designed to assure that the assets of the PBGC equal or exceed its liabilities during such periods.

The provision would be effective upon the date of enactment.

Information required to be provided to the PBGC

The PBGC is authorized to require the plan sponsor of a plan that is underfunded by more than $10 million, has more than 2,000 participants, or has minimum funding waivers in excess of $1 million to provide to the PBGC such records, documents or other information the PBGC deems necessary to determine the liabilities and assets of plans covered by the termination insurance program or the financial condition of sponsors of such plans.

The provision would be effective upon the date of enactment.

B. 1992 PBGC Proposals

During the 102nd Congress, the PBGC proposed a number of reforms relating to the PBGC termination insurance system, including increasing the minimum funding rules for certain plans, modifying the PBGC guarantee with respect to plan amendments, and bankruptcy reforms.6

Minimum funding requirements

In general, the PBGC's minimum funding proposal would build on the changes made by the Pension Protection Act of 1987 by requiring sponsors of underfunded plans to pay off pension liabilities more rapidly than under present-law rules. Alternatively, under

• These proposals were included in the President's fiscal year 1993 budget, and in H.R. 4545, introduced by Mr. Michel (by request) on March 24, 1992.

funded plans with high levels of payments would be required each year to make contributions to the plan equal to disbursements plus interest on the plan's unfunded liability. The proposed rules would require underfunded plans to increase their funding levels over a period of time.

To accomplish these goals, the proposal would replace the current deficit reduction contribution with two new rules: (1) the "underfunding reduction requirement," and (2) the "solvency maintenance requirement". The required minimum funding contribution would be the greatest of (a) the amount of any funding deficiency according to the regular funding standard account, (b) the amount required by the underfunding reduction rule, or (c) the amount required by the solvency maintenance rule. The two new rules would only apply to underfunded pension plans with more than 100 participants, and would only have a limited effect on plans with more than 100, but no more than 150 participants.

The underfunding reduction requirement would apply the formula for the unfunded new liability amount from the deficit reduction contribution to the entire underfunding, thereby eliminating the grandfathering of pre-1987 liabilities over an 18-year period. As under present law, the rule would require higher contributions from the worst funded plans. To this amount would be added normal cost, the repayment of waived contributions, and charges for experience losses and losses from changes in actuarial assumptions. Credit for experience gains, gains from changes in actuarial assumptions and greater than required minimum contributions would be allowed as offsets, but only to the extent of the charges for experience losses and the losses from changes in actuarial assumptions.

The solvency maintenance requirement has two main components: (1) disbursements from the plan (i.e., benefit payments, including annuity purchases, administrative expenses and other disbursements), and (2) the plan's initial unfunded liability multiplied by the interest rate used for purposes of the funding standard account under section 412(b). Normal cost and other charges are added to this amount, and credits are allowed, in the same manner as under the underfunding reduction requirement.

To protect firms against possibly large increases in their required contributions on account of this rule, the solvency maintenance requirement would be phased in over a 5-year transition period. In addition, with respect to both requirements, any positive credit balances that antedate 1992 would be allowed as full offsets under both the new requirements.

Discipline in actuarial assumptions would be maintained by use of the funding standard account concepts of experience losses and losses from changes in actuarial assumptions. Limiting credit for experience gains, gains from changes in actuarial assumptions, and for greater-than-required minimum contributions in past years buttresses that discipline and assures that underfunded pension plans always make a contribution in each year that they are underfunded.

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