Order Code RS22179
June 28, 2005
CRS Report for Congress
Received through the CRS Web
H.R. 2830: The Pension Protection Act of 2005
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Summary
On June 9, 2005, Representative John Boehner (OH) and several co-sponsors
introduced H.R. 2830, The Pension Protection Act of 2005. The bill would:
! Reform the funding rules for both single-employer and multiemployer
defined benefit pensions,
! Require plan sponsors to disclose more information about pension plan
finances,
! Restrict benefit payments and accruals of new benefits in underfunded
plans, and
! Increase the premiums that plan sponsors must pay to the Pension
Benefit Guaranty Corporation (PBGC), which insures benefits in
defined benefit pension plans.
A companion bill, H.R. 2831, would clarify that cash balance pension plans do not
ordinarily violate the legal prohibition on age discrimination in employee benefits.
This report will be updated as legislative developments warrant.
Funding Requirements for Single-Employer Pension Plans. The Pension
Protection Act would increase funding requirements for defined benefit pension plans and
shorten the period over which funding shortfalls must be eliminated.1 In general, plans
would be required to fund 100% of their “funding target” which under current law is
referred to as the plan’s “current liability.” The funding target would be the present value
of all benefits – including early retirement benefits – that plan participants have earned
1 Defined benefit pension plans usually pay benefits based on an employee’s salary and years of
service. With each year of service a worker earns a benefit equal to either a fixed dollar amount
or a percentage of his or her final pay or average pay. Defined contribution plans — such as
§401(k) plans — are like savings accounts maintained by the employer on behalf of participating
employees. The employee — and sometimes the employer — contributes part of his or her pay
into the account, which is usually invested in stocks and bonds. When the worker retires, the
benefit is the sum of contributions plus interest, dividends, and capital gains (or losses).
Congressional Research Service ˜ The Library of Congress

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as of the beginning of the plan year. The plan would have to amortize (pay off with
interest) any funding shortfalls over seven years. Under current law, a plan’s unfunded
liability can be amortized over periods of up to 30 years in some circumstances. Under
the bill, a plan’s funding requirement in any year would be the present value of the
benefits expected to be earned during the year by all active participants (called the
“normal cost” of the plan) plus payments to amortize over seven years any pre-existing
unfunded liability, less any permissible credit balance for prior contributions.
Plans with assets equal to less than 60% of the plan’s liabilities (less than “60%
funded”) would be considered “at-risk” of default. These plans would be required to use
more conservative actuarial assumptions in determining plan liability, and a “loading
factor” would be added to their required contribution. Under the required actuarial
assumptions, the plan sponsor would have to calculate the plan’s current liability as if all
participants would choose the retirement date and form of distribution that would be most
costly to the plan. The loading factor would be 4% of the plan’s liabilities plus $700 per
participant. A plan’s “at-risk” status would be based solely on the plan’s ratio of assets
to liabilities, rather than on the plan sponsor’s credit rating, as it would be under the
Administration’s pension reform proposal. In determining the ratio of assets to liabilities
and calculating the loading factor of 4% of liabilities, plans would use “regular” liabilities
(calculated without assuming that everyone would take the most expensive benefit and
without the load charges). The additional funding requirements applicable to at-risk plans
would be phased in at a rate of 20% per year when a plan enters at-risk status.
Valuation of Assets and Liabilities. Under current law, a plan sponsor can
determine the value of a plan’s assets using “actuarial valuations.” Actuarial valuations
of plan assets can differ from the current market value of those assets. For example, in
an actuarial valuation, the plan’s investment returns may be averaged — or “smoothed”
— over a five-year period, and the average asset value may range from 80% to 120% of
the assets’ fair market value. This “smoothing” is permitted because pension plans are
considered long-term commitments, and smoothing reduces volatility in the measurement
of plan liabilities and assets that can be caused by year-to-year fluctuations in interest
rates and the rate of return on investments. Smoothing of interest rates and asset values
therefore reduces the year-to-year volatility in the plan sponsor’s required minimum
contributions to a defined benefit pension plan. H.R. 2830 would narrow the range for
actuarial valuations to 90% to 110% of the fair market value of assets and reduce the
maximum smoothing period from five years to three years.
Pension plan liabilities — the pensions owed to participants and survivors — extend
many years into the future. Determining whether the plan is adequately funded requires
converting this long-term stream of pension payments into an equivalent lump sum, which
is essentially the amount that would be needed today to pay off those liabilities all at once.
This lump sum — representing the “present value” of the plan’s liabilities — is then
compared to the value of the plan’s assets. An underfunded plan is one in which the value
of the plan’s assets falls short of the present value of its liabilities by more than the
percentage allowed under law. Converting a future stream of payments (or income) into
a present value requires the future payments (or income) to be “discounted” using an
appropriate interest rate. Other things being equal, the higher the interest rate, the smaller
the present value of the future payments (or income), and vice versa.

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Under the bill, plan sponsors would determine the funding target (the present value
of the plan’s liabilities) using three interest rates, which would be based on when the
benefits are projected to be paid: in less than five years, in 5 to 20 years, or in more than
20 years. The Secretary of the Treasury would determine the three rates, which would be
derived from a “yield curve” of investment-grade corporate bonds.2 Interest rates would
be averaged over a three-year period under a weighting formula using 50% of the rate
from the most recent plan year, 35% of the rate from the previous plan year and 15% from
the plan year before that. The yield curve would be phased in during the 2006 and 2007
plan years, and become fully effective for the 2008 plan year. This methodology would
permanently replace the four-year average of corporate bond rates established under P.L.
108-218, which expires on December 31, 2005.
Contribution Limits and Credit Balances. H.R. 2830 would allow plan
sponsors to contribute more to their pension plans than they can under current law. It
would set the maximum tax-deductible contribution at 150% of the plan’s funding target
(150% of the plan’s current liability).3 Within certain limits, sponsors would be able to
offset required current contributions with previous contributions. However, using these
so-called “credit balances” to offset required contributions would be permitted only in
plans that are at least 80% funded and only after subtracting pre-enactment credit balances
from plan assets. Credit balances also would have to be adjusted for investment gains and
losses since the date of the original contribution that created the credit balance.
Lump-Sum Distributions. By law, defined benefit pensions must offer
participants the option to receive their accrued benefits in the form of an annuity — a
series of monthly payments guaranteed for life. Increasingly, however, defined benefit
plans also have offered participants the option to take their accrued benefits as a single
lump sum at the time they separate from the employer. The amount of a lump-sum
distribution from a defined benefit pension is inversely related to the interest used to
calculate the present value of the benefit that has been accrued under the plan: the higher
the interest rate, the smaller the lump-sum and vice versa. Under current law, lump-sum
distributions are calculated using the average interest rate on 30-year Treasury bonds. The
interest rate on long-term Treasury securities has historically been lower than the average
interest rate on long-term investment-grade corporate bonds because bond markets
generally consider U.S. Treasury securities to be free of the risk of default. The Treasury
Department stopped issuing the 30-year bond in 2001, and the interest rate on bonds that
have not yet been redeemed has fallen as the supply of bonds has shrunk.4
H.R. 2830 would require plan sponsors to calculate lump-sum distributions using
three interest rates based on investment-grade corporate bonds. As a result of using this
three-segment yield curve to determine lump sum distributions, participants of different
2 A yield curve is a graph that shows interest rates on fixed income securities (bonds) plotted
against the maturity date of the security. Normally, long-term bonds have higher yields than
short-term bonds because both credit risk and inflation risk rise as the maturity dates extend
further into the future. Consequently, the yield curve usually slopes upward from left to right.
3 The bill would allow a plan sponsor to deduct for tax purposes a contribution equal to the
greater of (1) 150% of current liability or (2) if the plan is not “at-risk,” 100% of liability
determined as if the plan were at-risk, plus the plan’s normal cost, minus the value of plan assets.
4 Bond prices and interest rates are inversely related. As bond prices rise, their yields fall.

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ages would have their lump sum distributions calculated using different interest rates.
Other things being equal, lump-sum distributions paid to workers nearer to retirement
would be calculated using a lower interest rate than would be used for younger workers.
As a result, all else being equal, an older worker would receive a larger lump-sum than
a similarly situated younger worker. The interest rates used to calculate lump sums would
be based on current bond rates rather than the three-year weighted average rate used to
calculate the plan’s funding target (current liability). The new rules for calculating lump
sums would be phased-in over five years.
PBGC Premiums for Single-Employer Plans. The Pension Benefit Guaranty
Corporation (PBGC) was established by the Employee Retirement Income Security Act
of 1974 (ERISA) to insure pension benefits under defined benefit pension plans. The
PBGC is funded by premiums paid by plan sponsors and investment returns on the assets
held in its trust fund. It receives no appropriations from Congress. The PBGC does not
have the legal authority to set its own premiums, which are set in law by Congress. The
PBGC has had to take over a number of large underfunded plans in recent years, and it
reported a deficit of $23.3 billion at the end of 2004, raising concerns that the agency may
require a taxpayer-financed “bailout” at some point in the future. The PBGC receives two
types of premiums from plans sponsored by individual employers: a per-capita premium
of $19 per year that is charged to all single-employer defined benefit plans, and a variable
premium equal to $9 per $1,000 of underfunding (0.9%) charged to underfunded plans.
H.R. 2830 would raise the base annual PBGC premium from $19 to $30 per
participant. The $30 premium would be phased in beginning in 2008, on a schedule based
on the plan’s funded status. For plans that are at least 80% funded, the higher premium
would be phased in over five years. In plans that are less than 80% funded, the higher
premium would be phased in over three years. The premium then would be indexed to
average national wage growth. The act would also increase the variable-rate premium (to
be renamed the “risk-based premium”) of $9 per $1,000 of underfunding by indexing it
to the rate of growth of average wages beginning in 2008. Unlike current law, a plan
would not be exempted from the risk-based premium if it was not underfunded in any two
consecutive years out of the previous three years. The risk-based premium would be
assessed on all underfunded plans, regardless of the plan’s funding status in earlier years.
Limits on Benefits in Underfunded Plans. H.R. 2830 would limit certain
forms of benefit payments and the accrual of new benefits in underfunded plans. Plans
funded at less than 80% could not pay lump-sum distributions and could not increase
benefits without first fully funding the new benefits. In plans less than 60% funded,
benefits would be “frozen” and no new benefits could be earned under the plan.
Participants would have to be notified of these restrictions on benefits. An actuary would
have to certify that the plan had re-attained funded status before new benefit accruals
could begin. In addition, if a pension plan were considered to be “at-risk” of default, the
bill would restrict benefits in nonqualified deferred compensation arrangements for
highly-compensated employees. Assets set aside in trust funds to pre-fund deferred
compensation for highly compensated employees would be taxable as employee income.
Prohibition on “Shut-Down” Benefits. “Shutdown benefits” are pension
payments made to long-service employees when a plant is shut down. These benefits
typically are negotiated between employers and labor unions. Shutdown benefits usually
are not pre-funded because the probability of future plant shutdowns is unpredictable.

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Because they are unfunded, shutdown benefits weaken the financial status of the PBGC
when it takes over an under-funded pension plan of a company that has promised its
workers these benefits. H.R. 2830 would prohibit shut-down benefits and similar
“contingent-event” benefits. This change generally would be effective in 2007.5
Disclosure Requirements. The bill would require single-employer and
multiemployer plans to provide participants with more information about the financial
condition of the plan than under current law. The plan administrator would have to
provide an annual “funding notice” within 90 days of the close of the plan year to each
participant and beneficiary and to any labor organization representing participants. The
notice would have to include (1) identifying information; (2) the ratio of active to inactive
participants; (3) the plan’s assets and liabilities and the ratio of assets to liabilities; and
(4) the plan’s funding and asset allocation policies. Plan sponsors also would have to
include more information on the Form 5500 that they file annually with the Internal
Revenue Service, including an explanation of the actuarial assumptions used to project
future retirements and asset allocations. All plans would have to provide participants a
copy of the summary annual report (SAR) within 15 days of the deadline for filing the
Form 5500, rather than within the 60-day limit under current law.
Section 4010 of ERISA provides that plans underfunded by $50 million or more
must file a report with the PBGC. Section 4010 prohibits the PBGC from releasing this
information to the plan participants or the public. H.R. 2830 would require the plan
sponsor to provide participants with a notice of their filing with the PBGC. The notice
would include (1) the number of the sponsor’s at-risk plans in which the ratio of assets
to liabilities in the preceding plan year was less than 60%; (2) the value of the assets, the
funding target, and the asset/liability ratio for each plan; and (3) the aggregate value of
plan assets, plan funding targets (taking into account only vested benefits) and
asset/liability ratios for all plans. This notice would have to be sent to participants no
later than 90 days after the related notice is sent to PBGC. The PBGC notice is due 105
days after the close of the year. This disclosure requirement would be effective in 2007.
Rules for Multiemployer Plans.6 H.R. 2830 would establish new funding
standards for multiemployer plans, with special rules for plans that are less than 80%
funded. Multiemployer plan sponsors would have to amortize unfunded prior service
liability over 15 years, rather than over 30 years as under current law. “Endangered”
plans — those that are less than 80% funded — would be required to develop a plan to
increase contributions, reduce or cease new benefit accruals, and adopt other plan
amendments that can reasonably be expected to meet prescribed improvements in the
plan’s funded status over a 10-year period. Plans less than 65% funded would be deemed
“critical” and would have to develop a program aimed at moving out of the critical range
within 10 years. Multiemployer plans would be required to furnish actuarial and financial
reports within 30 days of a request from a contributing employer or labor organization,
and they would have to report the amount of an employer’s withdrawal liability within
5 In 2004, the 6th U.S. Circuit Court of Appeals ruled that in order to protect its insurance program
from the financial burden of unfunded benefits, the PBGC could set a plan termination date that
would prevent the agency from being liable for shutdown benefits. In Mar. 2005, the U.S.
Supreme Court declined to hear the case, leaving the Circuit Court’s decision in place.
6 Multiemployer plans are common among workers covered by collective bargaining agreements.

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180 days of receiving a written request from a contributing employer. They also would
have to identify the number of contributing employers and the number of workers for
whom there is no contributing employer. The bill would increase the maximum
tax-deductible contribution for multiemployer plans to 140% of current liability.
Investment Advice. H.R. 2830 would allow advisors or affiliates of investment
funds offered in a §401(k) plan to offer investment advice to plan participants. For this
purpose, the plan would be exempted from certain rules governing prohibited transactions
under ERISA and the Internal Revenue Code. To qualify for this exemption, the adviser
would have to meet disclosure and qualification requirements. The adviser would have
to provide notice of fees, material affiliations, any limitation on the scope of advice, and
services provided with respect to the advice. The notice would have to state that the
adviser is acting as a fiduciary and that the participant or beneficiary could arrange for
outside “third-party”advice. By providing investment advice, the adviser would be acting
as a fiduciary subject to the terms of ERISA that apply to plan fiduciaries. In addition,
the advisor would have to be either a registered investment adviser under the Investment
Advisers Act; a bank or similar financial institution; an insurance company; a registered
broker or dealer; or an affiliate, agent, or employee of one of these institutions. Fees paid
to the adviser would have to be reasonable and at least as favorable as an arm’s length
transaction, and the participant would have to make the actual investment and asset
allocation decisions. The bill defines the scope of a plan sponsor’s fiduciary obligations
as limited to “the prudent selection and periodic review” of the adviser, and provides that
the sponsor has no duty to monitor specific investment advice given by the adviser, and
therefore would not be liable for the specific advice given.
The Pension Preservation and Portability Act. H.R. 2831, The Pension
Preservation and Portability Act (Boehner) would establish principles for testing defined
benefit plans for age discrimination and would clarify that “cash balance plans” do not
ordinarily discriminate against older employees under federal law.7 The bill describes
how cash balance plans and other “hybrid” pensions that have characteristics of both
defined benefit and defined contribution plans would be tested for age discrimination.
H.R. 2831 would clarify that a defined benefit plan does not discriminate on the basis of
age if a participant’s entire accrued benefit, as defined under the plan’s benefit formula,
is no less than the accrued benefit of any worker similarly situated in every respect except
for age. Pre-retirement indexing (for example, periodic adjustments that protect the
economic value of the benefit against inflation prior to distribution) could be disregarded
in making this determination. The bill also would clarify that in the case of cash balance
plans, paying a lump sum equal to the participant’s account balance would be sufficient
to prevent a prohibited forfeiture of an accrued benefit, provided that the plan credits
interest at a rate no greater than a market rate, which is to be defined in regulations issued
by the Secretary of the Treasury. H.R. 2831 would be applied to existing plans as well
as plans established after enactment. This would have the effect of clarifying the legality
under federal law of previously-existing plans that meet the requirements that would be
established by the bill.
7 See CRS Report RL30196, Pension Issues: Cash Balance Plans, by Patrick Purcell.