January 22, 2004
BB 04—6

In this issue:

  • Senate Debate on Interest Rate Begins, Vote Expected on Monday
  • Senate Approves Omnibus Spending Bill Including Cash Balance Language

Senate Debate on Interest Rate Begins, Vote Expected on Monday

Debate on the interest replacement legislation, H.R. 3108, the Pension Funding Equity Act, began in the Senate on January 22. Senate Finance Committee Chairman Charles Grassley (R-IA), Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Judd Gregg (R-NH) and the ranking minority members of those committees Max Baucus (D-MT) and Edward Kennedy (D-MA) have offered a bipartisan amendment that would provide technical corrections to H.R. 3108 and add two provisions to the bill: relief from the deficit reduction contribution (DRC) for underfunded single employer plans and relief for underfunded multiemployer plans.

H.R. 3108, as passed by the House on October 8, 2003, would replace the 30-year Treasury bond rate used for calculating a defined benefit plans' funding liability with a rate based on conservatively invested long-term corporate bonds for 2004 and 2005. As modified by the amendment offered by Grassley, Gregg, Baucus and Kennedy, the bill would still provide for an interest rate range of 90-100% of the 4-year weighted average of the long-term corporate bond rate for the minimum contribution requirements and Pension Benefit Guaranty Corporation premiums. However, it would make certain technical clarifications, including a provision that employers can elect to disregard the interest rate replacement for purposes of calculating the maximum deductible contribution. It is also the Council's understanding that statutory language will address technical problems with the "look back" rules for calculating quarterly contributions by allowing use of the prior temporary rate. As in prior bills, the ability to use long-term corporate bond rates for determining whether quarterly contributions are required and whether the deficit reduction contribution (DRC) rules apply is optional; alternatively, a plan may use the rate actually used for 2003.

It is intended that the Secretary of Treasury will prescribe the method for determining the long-term corporate bond rate. The determination of the rate is to be based on two or more indices that are in the top two quality levels available and that reflect average maturities of 20 years or more. Report language published by the HELP Committee on January 9 (relating to S. 2005) indicates that the indices used to calculate the rate are to be publicly available, published by established financial services firms and based on publicly disclosed methodologies, as was suggested by the Council and other business organizations. The single interest rate is also intended to be based on the arithmetic average of such indices. (The Council believes that S. 2005 accurately reflects the compromise proposal included in the bipartisan amendment.) The Council continues to work closely with the appropriate congressional members' staffs to ensure that these specific guidelines are included in the final legislation and to address timing and other issues related to determining the substitute interest rate.

The DRC provisions to be added to H.R. 3108 by the bipartisan amendment described above would provide relief automatically to airline, steel and one other plan. All other companies seeking relief from the deficit reduction contribution would have to apply to Treasury for such relief. This provision has been highly controversial and will likely result in significant debate on the Senate floor. The Administration continues to maintain publicly that it is opposed to any DRC relief. If an employer avails itself of relief, benefits cannot be increased under the plan during the relief period unless the plan's funded percentage would be at least 75% after the increase, the increase is required by existing collective bargaining agreements, or the increase is for a flat dollar benefit and does not exceed the amount required to keep up with inflation. Employers using DRC relief will have to comply with increased notice provisions.

Under the multiemployer proposal, a multiemployer defined benefit plan could elect to defer payments required to amortize experience losses for up to two years. This proposal is also highly controversial and opposed by the Administration and will likely be the subject of one or more additional amendments offered. If relief is elected, benefits under the plan cannot be increased during the relief period unless the plan's funded percentage would be at least 75% after the increase or the plan's actuary certifies that the plan will be sufficiently funded over a shortened period of time (to be specified in the statute).

Also available on the Council Web site are the Republican Policy Committee report on H.R. 3108 and a bill summary of H.R. 3108 for Senate staff.

Senate votes are not expected until Monday. If passed by the Senate, the bill will need to be reconciled with the House-passed version of the bill through a conference or by consideration of the Senate bill by the House. The Council is continuing to work closely with the appropriate congressional staffs to achieve passage of this legislation. For more information, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.

Senate Approves Omnibus Spending Bill Including Cash Balance Language

On January 22, by a vote of 65-28, the Senate approved the conference report of the omnibus spending bill providing funding for government operations through the remainder of the fiscal year. Included in the measure is cash balance plan legislation and related legislative history. The legislation directs the Treasury Department to produce a legislative proposal within 180 days that would provide transition relief for older and longer service workers affected by a conversion from a traditional defined benefit plan to a cash balance plan or other hybrid plan. The bill also effectively precludes the Treasury Department from issuing related hybrid plan guidance during the 2004 fiscal year. The legislative history to the bill makes clear that the intent of the legislation is to address conversion issues and not to call into question the validity of the hybrid plan design. The House considered the conference report prior to the end of 2003 and it will now go to the President for his signature.

Though the Treasury Department has indicated that it has largely finished internal approval of its forthcoming legislative proposal, representatives have stated that Treasury will not make the proposal public until after the fiscal 2005 budget is issued in early February. It is expected that the legislative proposal will include proposals relating to the application of age discrimination rules generally in addition to addressing conversion issues, and will likely also include a proposal addressing issues relating to the proper crediting of interest rates for distributions prior to retirement (so called "whipsaw" problem).

On a separate note, the Council reported in December that it had filed an amicus brief jointly with the ERISA Industry Committee in the remedies portion of the hybrid plan case, IBM v. Cooper. The Council was notified on January 22 that the District Court for the Southern District of Illinois has rejected that brief and will not consider it in its decision on the retroactivity and amount of damages. The Council will continue to monitor the case which has significant implications for all hybrid and other defined benefit plan sponsors.

For more information on cash balance issues, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.