LegislativeRegulatory Developments in Pension Plans

1
Legislative/Regulatory Developments in Pension
Plans

• IFEBP 49th Annual Conference
• November, 2003

James J. McKeogh, FSA, MAAA
2
Agenda

• Possible Legislation
• Regulations
• Court Cases
• Other Guidance

3
Possible Legislation - Examples

• Emergency Investment Loss Rule
• 30 (28?) Year Treasury Issue
• 25 of Pay Cap

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Emergency Investment Loss Rule

• Originally in Portman-Cardin Bill (HR 1776)
• Dropped
• Reintroduced as Bayh/Kerry
• Would allow 30-year amortization of loss on
  market value basis

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Emergency Loss Rule - Example

• Negative 10 return
• Assumption of 7.5 return
• Actuarial Value of Assets recognizes gains/losses
  over five years

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Emergency Loss Rule - Example
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Emergency Loss Rule - Example
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Emergency Loss Rule Local 123
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30-Year Treasury

• Last Issued in 2001
• Decrease in supply resulted in higher prices ?
  lower yields
• Used for many purposes including
• Lump sum calculations
• Minimum funding for single employer plans
• Maximum deductible calculations for all plans

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30-Year Treasury

• Several bills in Congress would provide some
  funding relief
• Generally, bills would allow switch to high-grade
  corporate rates for 2 or 3 years until permanent
  solution found
• Senate Finance Committee bill would switch to
  yield curve concept after 2 years relating
  interest rate to duration of plans liabilities
  --the older the population, the shorter term
  interest rate used and the higher (usually) the
  liabilities

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25 Pay Cap

• IRC 404(a)(7)
• Limit on deductibility of contributions if both
  DB DC Plans
• Combined Deductible Limit 25 Pay (or DB Plan
  minimum, if greater)

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25 Pay Cap

• Portman-Cardin addresses problem
• 1st 6 of contributions to DC Plan can be
  excluded in performing Section 404(a)(7)
  calculation
• For example, 10 pay to DC Plan and 20 pay to DB
  Plan would be fully deductible

13
Agenda

• Possible Legislation
• Regulations
• Court Cases
• Other Guidance

14
Regulations

• Relative Value Rules of Optional Forms
• Retroactive Annuity Starting Date

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Relative Value Rules

• Existing rules require disclosure of values of
  optional forms of payment from qualified plans
• Concern over whether current practices were
  sufficient, particularly when lump sum options
  present
• Proposes regs under IRC 417(a)(3) issued in late
  2002

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Relative Value Rules-- Example

• Option 1 1,000 per month payable on Qualified
  50 JS basis
• Option 2 900 payable on 10 CC basis
• Option 3 70,000 payable in single sum
• Options 2 and 3 have relative values that are 94
  and 70 of Option 1, respectively

17
Retroactive Annuity Starting Date

• Final regs under IRC 417(e) issued July 2003
• Retroactive Annuity Starting Dated permitted
  under certain conditions
• Terms and conditions must be in plan document
• Effective for Plan Years beginning in 2004

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Retroactive Annuity Starting Date

• RASD must be optional for participant and, if
  married, spouse will usually have to give consent
• Interest must be given on back payments at
  reasonable rate, even if only month or two back
  payments involved
• Retiree increases given during interim period
  must be reflected

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Agenda

• Possible Legislation
• Regulations
• Court Cases
• Other Guidance

20
Court Cases

• Cooper v. IBM Personal Pension Plan
• Berger v. Xerox Corporation Retirement Income
  Guarantee Plan
• Watts v. BellSouth Telecommunications, Inc.

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Cooper v. IBM Plan

• Plan was a Cash Balance Plan
• Even though major controversy was transition from
  DB Plan, U.S. District Court ruled cash balance
  plans are inherently age discriminatory under
  ERISA 204(b)(1)(G)
• Implications for all cash balance plans (i.e. DB
  plans where lump sum defined in plan with
  specified contribution credit and specified
  interest credit

22
Berger v. Xerox Plan

• Another adverse Cash Balance plan decision
• U.S. Court of Appeals for the Seventh District
  ruled that plan violated ERISA in determination
  of immediate lump sum the so-called whipsaw
  effect
• Plan should have projected balance to 65 using
  plan interest credit then discounted back to
  present using PBGC rates resulting in lump sum
  greater than amount in cash balance account

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Watts v. BellSouth

• Case involved health plan but implication for all
  plans
• Employee did not exhaust administrative remedies
  but sued nonetheless
• 11th Circuit reversed district court citing SPD
  language which stated, in standard ERISA rights
  section, that you have a right to sue
• Sponsors should review SPD language

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Agenda

• Possible Legislation
• Regulations
• Court Cases
• Other Guidance

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Other Guidance

• EEOC and Erie decision retiree medical
• American Academy of Actuaries multiemployer plan
  task force
• IRC 412(e) extension of amortization periods
• Cost-of-living adjustments to certain limits

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AAA Task Force

• Letter to IRS asking for regulatory relief in
  areas of using shortfall method, asset
  valuation method, funding relief
• Letter to PBGC requesting guidance when
  calculating withdrawal liability when
  contribution holiday or insufficient records
• Letter commenting on Bayh- Kerry bill
• Available on AAA web site- www.actuary.org

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Section 412(e)

• Extensions of amortization periods can be granted
  by IRS for up to 10 years but usually for 5 years
  or less
• Must show that extensions must carry out purpose
  of ERISA and that failure to grant extension
  would result in risk of plans continuation or
  substantial reductions in benefits
• Plan benefits from extension of periods and use
  of lower interest rate
• Restrictions on future benefit increases while
  extensions in effect

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Copies Available

• Copy of this Power Point presentation available
  on
• www.mckeogh.com

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COLA Adjustments
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COLA Adjustments