Order Code RS21717
Updated April 9, 2004
CRS Report for Congress
H.R. 3108: The Pension Funding Equity Act
Patrick Purcell and Paul Graney
Domestic Social Policy Division
Summary
The U.S. House of Representatives passed H.R. 3108, the Pension Funding Equity
Act by a vote of 336-69 on April 2, 2004. The legislation was approved by the Senate
on April 8 by a vote of 78-19. President Bush is expected to sign the bill into law later
in April. The bill will make several changes to the Internal Revenue Code (IRC) and the
Employee Retirement Income Security Act (ERISA) with respect to funding
requirements for defined benefit pension plans. Many of these plans experienced
declines in the value of their pension fund assets as a result of the stock market decline
from 2000 through 2002, and increases in the value of plan liabilities resulting from
historically low interest rates. The bill will change the interest rate used to calculate the
present value of pension plan liabilities, temporarily reduce the amount of additional
plan contributions required to be made by sponsors of underfunded plans (but only in
certain industries), and make changes to the schedule for amortizing investment losses
incurred by some multiemployer plans.
Temporary Replacement of Interest Rate on 30-Year Treasury
Securities with Interest Rate on Conservatively Invested Long-Term
Corporate Bonds. The Internal Revenue Code requires defined benefit pension plans
to use the interest rate on 30-year U.S. Treasury Bonds (1) to determine the funded status
of a defined benefit plan, (2) to calculate the amount of lump-sum distributions to plan
participants, and (3) to determine maximum benefit amounts. Under the terms of the Job
Creation and Worker Assistance Act of 2002 (P.L. 107-147), plan sponsors were
permitted to use an interest rate equal to 120% of the 4-year average interest rate on
long-term Treasury bonds for these purposes. The Treasury Department stopped issuing
30-year bonds in September 2001, and statutory authority to use an interest rate tied to the
Treasury bond rate expired on December 31, 2003.
The bill will replace the interest rate on 30-year Treasury bonds with an interest rate
based on the average rate of return on high-quality long-term corporate bonds for plan
years beginning in 2004 and 2005. For determining whether the plan meets minimum
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funding requirements, the maximum permissible interest rate will be the weighted average
of conservatively invested long-term corporate bond rates during the 4-year period ending
on the last day before the beginning of the plan year. The Secretary of the Treasury will
prescribe in regulations the method for determining the applicable interest rate, but the
rate must be based on two or more bond indices in the top two quality levels that reflect
average maturities of 20 years or more. The calculation of lump-sum distributions to plan
participants will not be affected by the change in interest rates during the two-year period
that the law will be in effect. Employers can elect to disregard the interest rate
replacement for purposes of calculating the maximum deductible contribution to the
pension plan.
The interest rate used to determine maximum permissible benefits under a defined
benefit plan will be 5.5% for plan years beginning in 2004 and 2005. A transition rule
provides that for 2004, the maximum will not be less than the maximum amount
determined using the interest rate in effect on the last day of the preceding plan year.
Election of Alternative Deficit Reduction Contribution (DRC). Pension
plans that are less than 90% funded, i.e., that have a funding deficit of more than 10%, are
required by law to make "deficit reduction contributions" to the pension plan. The
amount of the contribution is based on the plan's current liabilities, as determined using
a specific rate of interest and an approved mortality table. Under the bill, some employers
can elect temporary relief from required deficit reduction contributions for plan years
beginning after December 27, 2003 and before December 28, 2005. Only plans that were
not subject to the deficit reduction contribution in 2000 will qualify for this relief.
Commercial airlines, steel producers, and the Transportation and Communication
Workers' Union staff plan automatically qualify for the relief, unless they were subject to
the DRC in 2000. Under the bill, companies that qualify for DRC relief still will be
required to make the "regular contribution" that the company would have to make without
regard to the DRC provision, but the required DRC would be reduced by 80% in 2004 and
2005. Companies will be prohibited from increasing benefits during the lifetime of the
relief, unless:
!
the plan's actuary certifies that the amendment provides for an increase in
annual contributions that will exceed the increase in annual charges to the funding
standard account that are attributable to the amendment; or
!
the increase is required by an existing collective bargaining agreement.
Employers who elect relief from DRCs will have to notify participants, beneficiaries,
and the Pension Benefit Guaranty Corporation (PBGC). The notice to participants must
include the amount of relief and information about PBGC benefit guarantees. The notice
to the PBGC must include the amount of the relief, the expected number of years before
the plan will be fully funded, and a comparison of the amount of underfunding to the
company's capitalization.

Multiemployer Plan Funding Notices. Most companies that sponsor pension
plans for their employees do so as the sole sponsor of the plan. In some industries,
however, it is common for employers to jointly sponsor plans for their workers. These
are called "multiemployer plans." Many trucking companies, for example, participate in
multiemployer plans, and many members of the Teamsters' Union are covered under

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multiemployer pension plans. Under the bill, the administrator of a multiemployer
defined benefit plan will have to provide an annual notice to participants, beneficiaries,
labor organizations representing participants, and employers contributing to the plan that
includes:
! a statement that the plan's current liability funded percentage is at least
100% or, if less than 100%, the actual funded percentage;
! the value of assets and benefit payments, and the ratio of assets to benefit
payments;
! a summary of the rules that govern insolvent multiemployer plans,
including the limitations on benefit payments and any potential benefit
reductions or suspensions; and
! a description of PBGC guaranteed benefits.
Amortization Hiatus for Net Experience Losses in Multiemployer Plans.
In a typical defined benefit plan, 50% or more of the assets held by the plan are invested
in stocks. The 3-year decline in the stock market from 2000 to 2002 therefore resulted
in substantial losses in the value of the assets held by pension funds. Differences between
the expected return on assets in a pension plan and the actual return on assets are called
"experience losses" (or gains). Experience losses (and gains) are amortized beginning in
the year after they occur. Under the bill, some multiemployer plans may elect to delay the
start of the 15-year amortization period for "experience losses" for up to three years. The
election can apply to losses for any two plan years beginning after June 30, 2002 and
before July 1, 2006.
Plans that elect relief from amortizing experience losses would have to notify
participants, beneficiaries, labor organizations representing participants, and employers
contributing to the plan of the relief election. The notice would include the amount of
payment being deferred and the maximum PBGC guaranteed monthly benefit if the plan
were to terminate while underfunded. The bill establishes rules for multiemployer plans
seeking to delay the amortization of net experience losses. Under the rules, a
multi-employer plan:
C
must have had a net experience loss of 10% or more in 2002;
C
must be certified by the plan’s actuary as expected to have a funding deficiency in
2004, 2005, or 2006, based on the actuarial assumptions for plan year 2003;
C
must have paid on time any excise tax imposed by the Internal Revenue Service;
C
must not have had a plan year after June 30, 1993 when employers were required to
contribute an average of less than 10 cents per hour; and
•
must not have previously received a funding waiver from the Internal Revenue
Service.
During the delay in the start of the amortization period, a multiemployer plan could
not increase benefits unless the benefit increase had already been negotiated under an
existing collective bargaining agreement or unless contributions to the plan exceeded the
annual charges attributable to the benefit change. In additions, the plan's actuary must
certify that the contributions exceed the charges to the plan.

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Two-Year Extension of Transition Rule to Pension Funding
Requirements. Section 1508 of the Taxpayer Relief Act of 1997 (P.L. 105-34) allows
the pension plan of Greyhound bus lines to be treated as fully funded for plan years
beginning before 2005 if the funded current liability percentage is at least 85% (instead
of 90%, as applies to most plans.) Under the bill, the Greyhound/Amalgamated Transit
Union pension plan can use a specialized mortality table in calculating the funding
liability to its defined benefit plan in 2004 and 2005, and will be exempted from the
deficit reduction contribution and variable PBGC premiums in 2004 and 2005.
Procedures Applicable to Disputes Involving Pension Plan Withdrawal
Liability. In a multiemployer plan, plan liabilities are shared by the companies that
sponsor the plan. A company that withdraws from the plan must pay a proportion of the
plan's outstanding liability. If the withdrawing company is a subsidiary of a parent
company, the parent company may be responsible for paying part of the subsidiary's
withdrawal liability unless it can prove that the subsidiary was not created for the purpose
of evading withdrawal liability. Under the bill, the burden of proof that a subsidiary was
created to avoid termination liability is shifted from the employer to the multiemployer
plan if the transaction occurred before January 1, 1999, and the employer had not received
notice of a claim before October 31, 2003. The employer also will not be required to start
making payments of withdrawal liability before a final court or arbitration decision had
been issued.
Extension of Transfers of Excess Pension Assets to Retiree Health
Accounts. Under current law, an employer that sponsors a defined benefit pension
which is has excess assets is permitted to use some of those assets to fund retiree health
benefits. This authority expires on December 31, 2005. The bill extends the
authorization to use some excess pension assets to fund retiree health benefits through
December 31, 2013.
Repeal of Reduction of Deductions for Mutual Life Insurance
Companies. The conference agreement would repeal section 809 of the Internal
Revenue Code, relating to reductions in certain deductions for mutual life insurance
companies.
Clarification of Exemption from Tax for Small Property and Casualty
Insurance Companies. The conference agreement would treat certain small
insurance companies as tax-exempt organizations under section 501(c) of the Internal
Revenue Code.
Confirmation of Antitrust Status of Graduate Medical Resident
Matching Programs. The conference agreement would confirm that federal antitrust
laws do not prohibit medical schools from sponsoring, conducting, or participating in a
graduate medical education residency matching program, or agreeing to do so and ensure
that institutions that sponsor, conduct or participate in such matching programs will not
be subjected to the burden and expense of defending against litigation that challenges
such matching programs under the antitrust laws.

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