Harkin's ERISA bill could bank employers millions

A new Senate bill calling for an amendment to a controversial section of the Employee Retirement Income Security Act is expected to save employers and plan sponsors $15 million over the next decade, according to new estimates.

Sen. Tom Harkin’s (D-Iowa) S. 2511, first introduced in June, proposes a modification to Section 4062(e) of ERISA. The bill mandates that employers and plan sponsors will no longer face stiff payment plans from the Pension Benefit Guaranty Corporation should there be a cessation of their single-employer pension plan.

According to the current rule, employers are required to put together financial assurances, whether it is in the form of credit or additional contributions, to employees should a cessation of operations result in a 20% reduction in the number of employees participating in the plan.

In Harkin’s bill, the substantial cessation of operations equates to a total workforce reduction – not just a reduction within the plan’s participant level – to more than 15% of the number of all eligible employees of the employer.

Meanwhile, the Congressional Budget Office noted this week that the changes could decrease direct spending by $15 million over the 2015-2024 period. Even more, when linking estimates from the staff of the Joint Committee on Taxation, the collective reductions extend to $29 million over the same time frame. At the same time, the CBO predicts that because terminated plans will have fewer assets for the PBGC to take over, it will cause a reduction in reimbursements and raise the agency’s costs.

Within the payment requirement, plan sponsors will also be allowed to satisfy liability requirements through alternative means, which includes a plan for additional contributions through a designed formula. The payment period could last up to seven years. The payment formula is also expected to consider only vested benefits and cap any additional payments.

Because prior provisions of Section 4062(e) hurt overall business operations, Matthew Whitehorn, a partner and chair of Dilworth Paxson’s employee benefits group, notes that employers are elated over the proposed rules.

“Employers will be very happy because it would only impose liability if there was actually a significant companywide reduction in force,” explains Whitehorn. “It would also make payment terms a little bit more flexible. The payment of the liability would be spread out much longer.”

He notes that “there is a united front to take care of this issue.” In July, the PBGC issued a moratorium on enforcement of 4062(e) that would last until the end of 2014. At the time of its initial announcement, the pension protection agency said that this break will allow it to ensure that it is targeted “cases were pensions are genuinely at risk.” It added that will continue to work with the business community, labor, and other stakeholders.

Over the past seven years, the PBGC says it used 4062(e) to protect pensions covering 180,000 people in 35 states. In 2013, the CBO estimates that PBGC’s enforcement has resulted in 13 plan sponsors providing $156 million in extra contributions to pension plans.

For Kathryn L. Ricard, senior vice president of retirement policy at the ERISA Industry Committee, an industry group that advocates for America’s large employers, the bill helps to alleviate some of “uncertainty” associated with 4062(e)’s interpretation and specifics on financial obligations. 

“It can really tie up an employer in terms of taking out a credit line, or throwing more money in the plan,” Ricard says. “It can certainly stop employers in their tracks, if you will, from their kind of ongoing concerns as an employer. It can be a big issue if you are caught unaware.”

But over the last 15 years, employers in the Fortune 500 have shifted further and further away from the defined benefit space, indicating a shift in company priorities in favor of the more stable funding scheme offered by defined contribution and hybrid DB plans. A Towers Watson tally finds that only 24% of this large employer grouping currently offer DB plans to new hires, which is down from the 60% figure reported in 1998. As of 2013, only 34 private companies in Fortune 500 offer traditional DB plans.

Ricard explains that new proposal looks to “modernize” the provision in favor of the state of the current economy. She says due to the declining number of plans, the bill looks to prevent unnecessarily triggering a 4062(e) event.

“There is a shrinking number of DB plans, and then there is, therefore, a corresponding shrinking number of people in a DB plan,” Ricard notes.

PBGC did not respond to requests for comment. 

Source: Employee Benefit News