June 09,2005

Grassley Calls for Aggressive Pension Reform, Describes Legislation to Come


To: Reporters and Editors
Re: Pension legislation substance
Da: Thursday, June 9, 2005

Sen. Chuck Grassley, chairman of the Committee on Finance, today made the following comment on the substance of the pension legislation he is drafting. Grassley is refining the pension bill he introduced in January in light of recent developments.

“As the Finance Committee’s investigation of United Airlines’ pension default and theGAO’s recent report on the pension crisis have made painfully clear, we need completely new rules requiring accurate measurement of pension liabilities and full funding of all pension plans. The legislation I’m drafting will do just that. It’ll adopt the Administration’s yield curve proposal and eliminate the so-called ‘smoothing’ techniques that let companies hide massive pension losses from their employees and the public at large.”

Following is information on his bill introduced in January.

For Immediate Release
Monday, Jan. 31, 2005

Grassley, Baucus Re-introduce NESTEG Pension Bill, Announce Plans to Look at More Reforms

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen.Max Baucus, ranking member, today re-introduced their pension protection legislation -- theNational Employee Savings and Trust Equity Guarantee (NESTEG) Act – which received unanimousFinance Committee support last year but never won final approval.

The NESTEG bill would expand protections for retirement plan participants and requirecompanies to allow their employees to diversify out of company stock, adopt a permanent yieldcurve replacement for the 30-year Treasury rate used for pension funding purposes, expand the portability of retirement plan assets, and simplify pension laws and regulation.

“I’ve worked in the Finance Committee on several pieces of legislation signed into law inresponse to the scandals at Enron and other corporations,” Grassley said. “The important pensionprotections in the NESTEG bill are one remaining area for reform. This is ‘must-pass’ legislationthis year. The headlines have died down, but workers’ pensions are still too vulnerable to executivegreed. It’s also critically important to remove the uncertainty in our pension system by enacting apermanent replacement to the 30-year Treasury rate for pension funding. Workers need reliablepension funding, and employers need a reliable basis on which to calculate pension payments.”Baucus said, “I join Senator Grassley in urging rapid passage of this legislation. We must actbefore another corporate scandal devastates more workers’ retirement security. We must makepensions more secure for workers while simplifying administration for employers. The bill we areintroducing today is a big step in that direction.”

Last year, Congress approved a temporary replacement of the 30-year Treasury rate with along-term corporate bond rate for pension funding purposes. The NESTEG bill includes a permanentreplacement of the 30-year Treasury rate with a yield curve based on corporate bond rates.In addition, Grassley and Baucus said they expect the committee to consider additionalpension funding reforms in light of concerns regarding pension under-funding and the financialhealth of the nation’s pension insurer, the Pension Benefit Guaranty Corporation (PBGC). ThePBGC’s deficit has increased from $11 billion to $23 billion in the course of a year, and was insurplus as recently as 2001.

“We need to be sure our nation’s pension plans are fully funded,” Grassley said. “Whencompanies fall short in their pension payments, workers end up on the short end of the stick inretirement. We also need to do all we can to get the PBGC back on a strong financial footing.”Baucus said, “We must strengthen the funding of defined benefit plans so workers can counton their pension benefits. Retirement is not the time to find out you have planned your financial lifearound a hollow promise.”

Grassley and Baucus also expect the committee to look at new, innovative ways to increase savings.

“We all know Americans should be saving more,” Grassley said. “There are a lot of creativeideas out there for boosting savings, and I look forward to working with members of the FinanceCommittee on ways to do that.”

Baucus said, “We all agree on the need for a real increase in retirement savings. I amcommitted to developing ways to create new savings, and help Americans look forward to a moresecure retirement.”

A section-by-section summary of NESTEG follows.

National Employee Savings and Trust Equity Guarantee Act of 2005 (NESTEG)


Subtitle A -- Diversification Of Pension Plan Assets

Sec. 101. Defined contribution plans required to provide employees with freedom to invest their planassets.

The bill generally provides that publicly held companies must allow workers to divest themselvesof company stock attributable to employer contributions once they have completed 3 years of service.

Accounts attributable to employee contributions could be diversified immediately. There is a 3-yearphase-in for stock contributed to employer accounts in previous years, except participants who are55 years old with 3 years of service can diversify immediately. Only free-standing Employee StockOwnership Plans and single-participant plans are exempt from the requirement.

Sec. 102. Notice of freedom to divest employer securities or real property.

Participants must be notified of the right to divest at least 30 days before the date the participant isfirst eligible to do so. The notice will describe the importance of diversification. A model notice willbe prescribed by the Secretary of Labor. Penalties apply to failure to give notice.

Subtitle B -- Information To Assist Pension Plan


Sec. 111. Periodic pension benefit statements.

The bill requires quarterly benefit statements for defined contribution plans that allow workers todirect their own investments, annual statements for plans that do not allow worker investmentdirection, and once every 3 years to workers in defined benefit plans. In addition to the market valueof investments, individually directed plan participant statements would include a description of anyrestrictions on the right to direct investments, and a notice that investments may not be adequatelydiversified if over 20% of the account is in one investment.

Sec. 112. Defined contribution plans required to provide adequate investment education toparticipants.

All workers must receive annual investment guidelines and retirement planning information. TheSecretary of Labor will develop a model form, worksheet and internet calculators.

Sec. 113. Material information relating to investment in employer securities.

The bill requires sponsors of defined contribution plans to make sure that all material informationthe employer is required to disclose to investors under the securities laws also be provided to workersconcerning investments in company stock in the worker=s account.

Sec. 114. Fiduciary rules for plan sponsors designating independent investment advisors.

If certain rules are followed, plan sponsors would not be liable for investment advice provided bya qualified investment adviser to participants in a self-directed individual account plan.

Sec. 115. Treatment of qualified retirement planning services.

Employers would be permitted to offer qualified retirement planning services to employees on asalary reduction basis, with a limit of $1,000 per year.

Subtitle C -- Protection Of Pension Plan Participants

Sec. 121. Notice to participants or beneficiaries of blackout periods.

An excise tax is added to the Code for failure to provide a blackout notice. Minor corrections to theERISA provision added in Sarbanes Oxley are also included.

Sec. 122. Allowance of catch-up payments.

An eligible individual would be permitted to make additional contributions to an IRA up to $1,500per year in tax year 2005 and $3,000 in tax years 2006 through 2009. Eligible individuals wereparticipants in a 401(k) or similar plan, with a matching contribution from a currently bankruptemployer, and the employer is currently under indictment or subject to conviction.


Subtitle A – Replacement of Interest Rate on 30-Year Treasury Securities

Sec. 201. Replacement of interest rates on 30-year Treasury securities used for purposes of fundingand PBGC premium rates.

The interest rate used for funding requirements and PBGC premiums is changed for plan yearsbeginning after December 31, 2005. For years beginning before December 31, 2006, the proposalreplaces the 30-year Treasury rate with the rate of interest on amounts conservatively invested inlong-term corporate bonds. For funding purposes, the maximum permissible rate will be 100% ofthe 4 year weighted average of this rate. A similar provision, effective for only 2004 and 2005, wasenacted into law in H.R. 3108.

For plan years beginning after December 31, 2006, the interest rate used for purposes of fundingrequirements, PBGC premiums and determining lump sum distributions is based on a yield curvereflecting interest rates on corporate bonds of various durations. Under the proposal the yield curveis phased in at a rate of 20 percent each year over five years. During the phase in period, the rate usedis based on a combination of the yield curve and the previously applicable rate. For determiningfunding requirement and PBGC premiums, the previously applicable rate is the rate of interest onamounts conservatively invested in long-term corporate bonds. For purposes of determining lumpsum distributions, the previously applicable rate is the 30-year Treasury rate. The yield curve iscompletely phased in for years beginning after December 31, 2010.

The Secretary of the Treasury is directed to prescribe by regulations a method for determining therates of interest. The Treasury Department is also directed to issue recommendations for changes infunding rules to strengthen funding, and disclosure of funded status.

Sec. 202. Replacement of 30-Year Treasury rate for calculating lump distributions.See section 201 above.

Sec. 203. Section 415 limitation on defined benefit plans.

The interest rate used to determine maximum benefit payment will be fixed at 5.5%.

Subtitle B – Provisions Relating to Pension Plan Funding and Deductions

Sec. 211. Deduction limits for plan contributions.

To allow employers to contribute more in good times, the maximum deductible contribution to adefined benefit plan would be increased to allow employer to fund up to 130% of current liabilityinstead of the current 100%.

Sec. 212. Benefit limitations for certain financially distressed plans.

Plans of employers with junk bond ratings will have to freeze accruals if vested benefits are less than50% funded. These plans will also be prohibited from making lump sum payments in excess of$5,000. The freeze applies to negotiated plans on the first day of the next collective bargainingagreement. For other plans, it applies on the first day of the next plan year.

Sec. 213. Updating deduction rules for combination of plans.

Employer contributions to defined contribution plans of up to 6% of compensation would bedeductible, regardless of the amount of defined benefit contributions. Matching contributions thatare not deductible solely because of the combined plan limitation would not be subject to the 10%excise tax on non-deductible contributions.

Subtitle B – Provisions Relating to Pension Benefit Guaranty Corporation

Sec. 221. PBGC premium for new plans of small employers.

Reduces the basic PBGC premium for new small employer (100 or fewer employees)plans from $19 per person to $5 per person for the first 5 years of the plan’s life.

Sec. 222. Additional PBGC premium for new and small plans.

Five-year phase in of PBGC premium for new plans and special rule for new plans of very smallemployers.

Sec. 223. Authorization for PBGC to pay interest on premium overpayment refunds.Allows PBGC to pay interest on premium refunds at the rate charged for underpayments.

Sec. 224. Substantial owner benefits in terminated plans.

Guaranteed benefits for majority owners (50% or more ownership) would phase in over 10 years.Existing law provides a phase in over 30 years for “substantial owners “(more than 10% owners.)

Sec. 225. Acceleration of computation of benefits attributable to recoveries of employer liability.In order to expedite payments, PBGC would be permitted to estimate the amount of benefits payableto participants in PBGC-trusteed plans. Adjustments would be made when final calculations areavailable.

Subtitle D – Studies

Sec. 231. Joint study on revitalizing defined benefit plans.

Sect. 232. Study on floor-offset ESOP’s.


Sec. 301. Clarifications regarding purchase of permissive credit.

This provision clarifies rules regarding purchase of service credit from a sec. 403(b) annuity or a sec.457 plan to a governmental defined benefit plan. Purchase of service is permitted by participants inthese plans. In the case where service is performed as an employee of an educational organizationproviding elementary or secondary education, service can be determined under the law of any Stateor nation.

Sec. 302. Allow rollover of after-tax amounts in annuity contracts.

Sec. 303. Clarification of minimum distribution rules.

The proposal directs the Secretary of the Treasury to issue regulations under which a governmentalplan is treated as complying with minimum distribution rules, for all years to which suchrequirements apply, if the plan complies with good faith interpretation of the statutory requirements.

Sec. 304. Waiver of 10 percent withdrawal penalty tax on certain distributions of pension plans forpublic safety employees.

Reduces from 55 to 50 the age at which public safety employees can take penalty-free lump sumwithdrawals of lump sum benefits from governmental defined benefit plans.

Sec. 305. Allow rollovers by non-spouse beneficiaries of certain retirement plan distributions.Benefits payable from a qualified retirement plan, governmental 457(b) plan or tax sheltered annuitycould be transferred to an inherited IRA for a non-spouse beneficiary.

Sec. 306. Faster vesting of employer nonelective contributions.

Nonelective employer contributions would be subject to the same minimum vesting rules as matchingcontributions (6 year graded or 3 year cliff).

Sec. 307. Allow direct rollovers from retirement plans to Roth IRAs.

Eligible rollover distributions could be deposited directly to a Roth IRA instead of having to be firstdeposited to a traditional IRA, then transferred to a Roth.

Sec. 308. Elimination of higher penalty on certain simple plan distributions.

The 20% early distribution penalty applicable to SIMPLE plans for an initial 2 year period wouldbe reduced to10%.

Sec. 309. Simple plan portability.

The bill would permit rollovers between SIMPLE plans and other tax-favored retirementarrangements within the first two years of participation.

Sec. 310. Eligibility for participation in retirement plans.

Distributions under former Sec. 457(e)(9) (pre-SBJPA 96) would not preclude participation in aneligible non-governmental 457 plan.

Sec. 311. Transfers to the PBGC.

Automatic rollovers of involuntary distributions could be transferred to PBGC instead of to an IRA.

Sec. 312. Missing participants

PBGC has maintained a “Missing Participant Program” that holds and pays benefits to missingparticipants of terminated single-employer defined benefit plans covered by PBGC, but other planshave had no help available. The bill would extend this program to terminated plans of privateemployers not covered by PBGC, including defined contribution plans. PBGC would also be directedto set up a similar program for multiemployer plans.


Sec. 401. Employee Plans Compliance Resolution System.

The Employee Plans Compliance Resolution System (EPCRS) allows plan sponsors to correctoperational violations with regard to qualified retirement plans without risking plan disqualification.Treasury is directed to update and improve the program with regard to small business plan sponsors.

Sec. 402. Extension to all governmental plans of moratorium on application of certainnondiscrimination rules applicable to State and local plans.

All government plans would be treated like state and local government plans for purposes of nothaving to comply with certain non-discrimination rules.

Sec. 403. Notice and consent period regarding distributions.

The bill extends the benefit election period from 90 days to180 days. In addition, participants mustbe notified of the right to defer payment, if deferral is available and of the impact of failing to deferpayment.

Sec. 404. Reporting simplification.

Raises the asset limit for the 5500-EZ to $250,000, and requires Treasury and DOL to develop asimplified 5500 form for plans with 25 or fewer participants.

Sec. 405. Voluntary early retirement incentive and employment retention plans maintained by localeducational agencies and other entities.

This provision addresses two issues that affect teachers: retirement plans for that provide retentionbonuses, and plans that provide early retirement incentives. Retention bonuses would be treated asseverance pay instead of deferred compensation, and early retirement incentives could be age-related.

Sec 406. No reduction in unemployment compensation as a result of pension rollovers.States would be prohibited from treating rollovers as income in determining unemploymentcompensation.

Sec. 407. Withholding on distributions from governmental section 457 plans.

Grandfather’s certain distributions, exempting them from withholding requirements imposed byEGTRRA.

Sec. 408. Provisions relating to plan amendments.


Subtitle A -- Study of Spousal Consent for Distributions From Defined Contribution PlansSec. 501. Joint study of application of spousal consent rules to defined contribution plans.Joint study of application of spousal consent rules to defined contribution plans.

Subtitle B -- Division of Pension Benefits Upon Divorce

Sec. 511. Regulations on time and order of issuance of domestic relations orders.Directs DOL to issue regulations to clarify that a domestic relations order issued subsequent to adivorce can be a Qualified Domestic Relations Order (QDRO).

Subtitle C -- Railroad Retirement

Sec. 521. Entitlement of divorced spouses to railroad retirement annuities independent of actualentitlement of employee.

Extension of tier II railroad retirement benefits to surviving former spouses pursuant to divorceagreements.

Sec. 522. Extension of tier II railroad retirement benefits to surviving former spouses pursuant todivorce agreements.

Subtitle D -- Modifications of Joint and Survivor Annuity Requirements

Sec. 531. Requirement for additional survivor annuity option.Mandates an alternative joint and survivor annuity option under pension plans that do not fullysubsidize the qualified joint and survivor annuity.


Conforms retirement and benefit programs of the Tax Court to those of Article III Courts.


Sec. 701. Transfer of excess pension assets to multiemployer health plan.Extends the ability to make Sec. 420 excess asset transfers to certain multiemployer plans.Sec. 702. Transfer of excess funds from black lung disability trusts to United Mine Workers ofAmerica Combined Benefit Fund.

Eliminates the aggregate limit on the amount of excess black lung benefit trust assets available topay premiums, and transfers the additional amounts available to the UMWA Combined BenefitFund.

Sec. 703. Treatment of death benefits from corporate-owned life insurance.Limits the availability of tax-free proceeds on company-owned life insurance, and providesdisclosure and reporting requirements.