AALU reports that S219 and H2830 Pension "reform" bills likely to become

[papau]

law this fall.

The Senate Finance Committee last week approved the National Employee Savings and Trust Equity Guaranty Act of 2005 (S. 219) (NESTEG)- National Employee Savings and Trust Equity Guaranty Act of 2005 (S. 219).

The movement of this bill out of committee follows closely upon the reporting out of the House Education and the Workforce Committee of the Pension Protection Act of 2005 (H.R. 2830). These two bills
are likely to form the backbone of any pension legislation that is enacted this Fall. Thomas, Chairman of the House Ways and Means Committee, has indicated that he will move this legislation through his Committee when Congress returns from its August recess.

Like H.R. 2830, NESTEG encompasses sections addressing the financial position of the PBGC. The bill, in common with H.R. 2830, would rewrite the rules for defined benefit plans generally to cash balance controversy and other pension issues. Defined Benefit Funding tighten the funding requirements. It adds new Code provisions dealing with minimum contribution requirements for single-employer defined benefit plans. It also establishes an interest rate for defined benefit plans; that rate will be based on a corporate bond rate to be published by the IRS and employing the yield
curve proposal being promoted by the Administration. NESTEG (unlike the House bill) creates certain special industry rules for defined benefit plan Also, like H.R. 2830, it establishes funding benchmarks under which certain restrictions apply. If plans fall below these funding requirements they will be unable to increase or pay benefits, other than in annuity form, until the plan becomes adequately funded. Most notably, it creates a special funding rule for the airline industry under which airlines can elect to be subject to a 14-year funding rule so long as benefits are not increased. This type of specific relief is an attempt to help the financially troubled airline industry without burdening the PBGC with an enormous new liability for airline pension plans.

Under the House bill, investment advice, even that provided by a party-in-interest to the plan, would be the subject of a new safe harbor exemption from the prohibited transaction rules of ERISA. Notably, NESTEG does not contain the same set of rules. It does
provide a safe harbor for investment advice from a “qualified investment advisor” and it requires that plans distribute certain investment guidelines to participants. It requires, however, that the investment advice be provided from a party who is not already a party-in-interest to the plan.

One of the new ideas in NESTEG is the creation of a new combined DB/K plan. A minimum level of contribution would be required to be provided under the defined benefit portion of the plan. The minimum
required benefit would be one percent of final average compensation (up to 20 years of service) with a three year vesting requirement. The 401(k) part of the plan would require automatic enrollment and a 50% matching contribution up to four percent of compensation. It is not entirely clear what would motivate employers to adopt this plan, other than the ability to combine the DB and 401(k) assets.