Order Code RS22179
Updated November 15, 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. The
Committee on Ways and Means approved an amended version of H.R. 2830 on
November 9. Both versions of the bill would reform the funding rules for single- and
multiemployer-defined benefit pensions; require sponsors to disclose more information
about pension funding; restrict benefit payments and benefit accruals in underfunded
plans; increase the premiums that plan sponsors pay to the Pension Benefit Guaranty
Corporation; and clarify, prospectively, that cash balance pension plans do not violate
the prohibition on age discrimination in employee benefits. Amendments passed by the
Committee on Ways and Means would delay the effective date of the new funding
requirements for defined benefit plans by one year, until 2007, and would impose a fee
of $1,250 per plan participant on employers that terminate their pension plans in
bankruptcy. The fee would apply for three years after a firm emerges from bankruptcy.
This report will be updated as 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 any funding
shortfalls over seven years. Under current law, a plan’s unfunded liability can be
amortized over periods of 5 to 30 years. Under the bill, a plan’s funding requirement
would be the present value of the benefits expected to be earned during the year by active
participants (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. The 100% percent funding target would be phased in over five years.
1 A defined benefit pension plan pays benefits based on an employee’s salary and years of service.
Congressional Research Service ˜ The Library of Congress

---

CRS-2
Funding target
(Percentage of liabilities)
Education and
Ways and Means
Year
Workforce Committee
Committee
2006
92%
90%
2007
94%
92%
2008
96%
94%
2009
98%
96%
2010
100%
98%
2011
100%
100%
Plans with assets equal to less than 60% of liabilities would be considered “at-risk”
of default, and would be required to use specific actuarial assumptions in determining
plan liability. Under the required assumptions, the plan sponsor would 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 the required
contribution. A plan’s “at-risk” status would be based on the 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 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, which can differ from
the current market value of those assets. For example, in an actuarial valuation, the plan’s
investment returns may be averaged (“smoothed”) over a five-year period, and the average
asset value may range from 80% to 120% of the 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 extend many years into the future. Determining whether the
plan is adequately funded requires converting a long-term stream of pension payments
into the amount that would be needed today to pay off those liabilities all at once. This
amount — the “present value” of the plan’s liabilities — is then compared with 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.
Under the bill, plan sponsors would determine the funding target using three interest
rates, which would be based on when the benefits are projected to be paid: in less than

---

CRS-3
five years, in 5 to 20 years, or in more than 20 years. The Secretary of the Treasury would
determine these 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
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, becoming fully effective in 2008. This
methodology would permanently replace the four-year average of corporate bond rates
established under P.L. 108-218, which expires 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.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. Some defined benefit plans also offer
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.
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
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
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.

---

CRS-4
average rate used to calculate the plan’s funding target. 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 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. Congress last raised the annual PBGC premiums in 1991.
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. Unlike current law, a plan would not be exempted from
the variable-rate premium (to be renamed the “risk-based premium”) of $9 per $1,000 of
underfunding 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 Education and Workforce Committee, the benefit restrictions would not apply if the
plan’s assets were at least 100% of plan liabilities before subtracting credit balances. In
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
are not prefunded. H.R. 2830 would prohibit shut-down benefits, effective in 2007.4
4 In 2004, the 6th U.S. Circuit Court of Appeals ruled that 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.

---

CRS-5
Disclosure Requirements. The bill would require 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 Under H.R. 2830, multiemployer plans 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 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
5 Multiemployer plans are common among workers covered by collective bargaining agreements.

---

CRS-6
ERISA and the Internal Revenue Code. The adviser would have to meet disclosure and
qualification requirements and 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 participant or beneficiary could arrange third-party
advice. The adviser would be acting as a fiduciary, subject to the terms of ERISA that
apply to plan fiduciaries. The advisor would have to be either a registered investment
adviser, a registered broker or dealer, or an affiliate, agent, or employee of a bank or
insurance company. Fees 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 plan sponsor’s fiduciary obligations would be limited
to selecting and reviewing the adviser. The sponsor would have no duty to monitor
investment advice given by the adviser and would not be liable for the advice given.
Cash Balance Plans and other Hybrid Pensions. The bill 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 bill 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. These provisions would
apply to cash balance plans only prospectively.
Other Defined Contribution Plan Provisions. Several amendments to H.R.
2830 passed by the Committee on Ways and Means would affect defined contribution
plans and Individual Retirement Accounts (IRAs). The higher annual contribution limits
for IRAs and qualified retirement plans enacted in 2001 under P.L. 107-16 would be made
permanent. A safe harbor for nondiscrimination testing would be established for
employers who offer automatic enrollment in defined contribution retirement plans.
Taxpayers could direct the Internal Revenue Service deposit part of a tax refund directly
into an IRA. Workers who participate in tax-preferred flexible spending accounts (FSAs)
could carry over as much as $500 annually in unused balances or transfer them to a health
savings account. The Savers’ Credit, a nonrefundable tax credit for low- and middle-
income families, which is scheduled to expire after 2006, would be made permanent. The
10% early-distribution penalty would be waived for public safety employees who
participate in pension plans with a “Deferred Retirement Option Plan” feature and for
military reservists and national guardsmen who are called to active duty for at least 180
days. For members of the military, combat pay would be treated as earned income for
purposes of IRA contributions. Tax-free rollovers would be permitted from the IRA or
pension of a deceased individual to an IRA or pension of a designated beneficiary other
than a spouse. Disabled persons could contribute to an IRA even if they had no earned
income. Public safety officers who retire or become disabled could make tax-free
distributions of up to $5,000 annually from governmental pension plans to purchase
health or long-term care insurance.

---