Order Code RS22179
Updated July 18, 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 30, 2005, the House Committee on Education and the Workforce
favorably reported H.R. 2830 (Boehner), The Pension Protection Act of 2005. As
amended by the Committee, the bill would:
! Reform the funding rules for both single-employer and multiemployer
defined benefit pensions,
! Require sponsors to disclose more information about pension finances,
! Restrict benefit payments and benefit accruals in underfunded plans,
! Increase the premiums that plan sponsors pay to the Pension Benefit
Guaranty Corporation (PBGC), which insures defined benefit plans, and
! Clarify, prospectively, that cash balance pension plans do not ordinarily
violate the legal prohibition on age discrimination in employee benefits.
This report will be updated as further 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
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
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. Employers must pre-fund these benefits.
Congressional Research Service ˜ The Library of Congress

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unfunded liability, less any permissible credit balance for prior contributions. The 100%
percent funding target would be phased in over five years, as follows:
Funding target
Year
(Percent of liabilities)
2006
92%
2007
94%
2008
96%
2009
98%
2010
100%
Plans with assets equal to less than 60% of the plan’s liabilities (less than “60%
funded”) would be considered “at-risk” of default, and would be required to use more
conservative actuarial assumptions in determining plan liability. 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. In addition, a “loading factor” of 4% of the plan’s liabilities
plus $700 per participant would be added to their required contribution. A plan’s
“at-risk” status would be based on the plan’s ratio of assets to liabilities. In determining
the ratio of assets to liabilities and calculating the loading factor, 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 for
at-risk plans would be phased in at 20% per year after 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 with plan years ending after 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. (Bond prices
and interest rates are inversely related. As bond prices rise, their yields fall.)
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, participants
of different ages would have their lump sum distributions calculated using 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.

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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 2007, 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. As introduced, these restrictions would have applied to plans that were
under-funded after credit balances had been deducted from plan assets. As amended by
the Committee, the benefit restrictions would not apply if the plan’s assets were at least
100% of plan liabilities before subtracting credit balances. In pension plans considered
to be at risk of default, 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

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are not pre-funded because the probability of future plant shutdowns is unpredictable.
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 2007.4
Disclosure Requirements. The bill would plan administrators 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 must
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. 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.
Section 4010 of ERISA provides that plans underfunded by $50 million or more
must file a report with the PBGC, but it 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. The 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. The disclosure requirements would be triggered if the plan
were underfunded by $50 million or more; if the plan were less than 60% funded; or if the
plan were less than 75% funded and sponsored by an employer in a financially troubled
industry. Congress would also have to be given the same information sent to the PBGC.
Rules for Multiemployer Plans.5 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 - generally 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 within 10 years. Alternative schedules for improving solvency would
apply to endangered plans that are less than 70% funded and to plans more than 70%
funded but less than 80% funded. Employers currently contributing to severely
4 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 March 2005, the U.S.
Supreme Court declined to hear the case, leaving the Circuit Court’s decision in place.
5 Multiemployer plans are common among workers covered by collective bargaining agreements.

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underfundfed plans would be required to make 5% to 10% surcharge contributions until
the next collective bargaining agreement is adopted.
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 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. Eligible
plans 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.
Cash Balance Plans and other Hybrid Pensions. The Committee adopted
an amendment that 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. It 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, and clarifies 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
amendment also provides 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 of interest. The amendment would apply prospectively, i.e., after enactment.

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