October 27, 2015
- Bipartisan Budget Agreement Includes Numerous Benefits Provisions Including Defined Benefit Plan Changes, ACA Auto-Enrollment Repeal
Bipartisan Budget Agreement Includes Numerous Benefits Provisions Including Defined Benefit Plan Changes, ACA Auto-Enrollment Repeal
As part of a bipartisan agreement to raise federal spending caps and raise the debt ceiling, Congress is contemplating a number of employee benefit provisions designed to raise revenue.
A “discussion draft” of the Bipartisan Budget Act (H.R. 1314) was submitted to the U.S. House of Representatives Rules Committee on October 27 and could be considered within days. The estimates of amounts to be raised by individual provisions are not yet available, though the Congressional Budget Office reports that the whole package yields a $75.6 billion net decrease in budget from changes in direct spending and revenue over 10 years (including $11.6 billion from pension changes and $18.4 billion from health care changes). A section-by-section summary of the measure is available on the Council website.
PBGC Premium Increases and Acceleration
Most troubling among the provisions is a proposed increase in the premiums paid by single-employer defined benefit plans to the Pension Benefit Guaranty Corporation (PBGC).
PBGC recently announced that single-employer pension plans will pay a flat rate premium of $64 per person in 2016, with the amount adjusted for inflation annually. Pension plans subject to the variable rate premium will pay $30 per $1000 of underfunding in 2016, with that number also indexed for inflation.
Under the budget deal, the fixed-rate premium would rise to $68 for 2017, $73 for 2018, and $78 for 2019, and then re-indexed for inflation. The variable rate premium would continue to be indexed for inflation, but would be increased by an additional $2 in 2017, an additional $3 in 2018, and an additional $3 in 2019. (The budget deal would also accelerate the due date for PBGC premiums by one month in 2025 to capture the 2025 premium revenue within the budget scoring window.)
In recent years PBGC premium increases have been viewed by some in Congress as a convenient source of revenue to finance measures totally unrelated to pension policy, and this is no exception. In the wake of previous increases in 2012 and 2013, the Council has provided extensive written communications to all congressional offices, including distribution of an important independent research report we commissioned, Further PBGC Premium Increases Pose Greatest Threat to Pension System, which validated that “premium increases threaten the long-term viability of the defined benefit pension system and PBGC’s plan termination insurance program by driving away employers that present no risk to the system.”
The timing of this provision is somewhat unusual since the PBGC’s Fiscal Year 2014 Projections Report recently revealed that the financial condition of the single-employer pension insurance program has significantly improved, “continues to be likely to improve” and “is highly unlikely to run out of funds in the next 10 years.”
Extended Defined Benefit Plan Funding Relief
Under current law – as most recently modified by 2012 highway bill (MAP-21) and the 2014 highway bill (HAFTA), interest rates for valuing liabilities in 2012-2017 are not to vary more than ten percent from the average interest rates over the prior 25 years. That corridor increases by 5 percent per year through 2021, at which point it remains permanently at 30 percent.
Under the budget deal, as a revenue source rather than a deliberated pension policy decision, the corridor on interest rates would remain at ten percent through 2019. The corridor would increase by five percent per year through 2023, at which point the corridor would remain permanently at 30 percent. Election of this funding relief would be at the sole discretion of the plan sponsor.
Mortality Table Relief
The budget deal also provides increased flexibility for defined benefit plan sponsors to use mortality tables that are different than those prescribed by the U.S. Treasury Department. Mortality assumptions are a key component when calculating pension funding obligations, benefit restrictions and PBGC premiums.
Under current law, plans qualify to use a separate table only if (1) the proposed table reflects the “actual experience” of the pension plan maintained by the plan sponsor and projected trends in general mortality experience, and (2) there are a sufficient number of plan participants, and the plan was maintained for a sufficient period of time to have credible information necessary for that purpose.
Under the budget deal, plan may use tables that are adjusted from the Treasury tables if such adjustments are based on a plan’s experience. Also, the “credible information” determination shall be made in accordance with established actuarial credibility theory.
As we most recently reported in the October 8 Benefits Byte, the Council has been working closely with Treasury and the Internal Revenue Service to ensure that the official mortality tables reflect proper assumptions and experience.
Repeal of ACA Automatic Enrollment Provision
Like the budget reconciliation measure that passed the House on October 23, the new budget deal would repeal the automatic enrollment requirement under Section 18A of the Fair Labor Standards Act, as added by the Affordable Care Act (ACA).
The Council has also opposed the automatic enrollment provision of ACA and recommended its repeal in the Council’s 2020 Vision strategic plan adopted last year. We have argued that the requirement is unnecessary since virtually everyone is already legally required to have coverage under the ACA. We also note that automatic enrollment could potentially have adverse consequences on employees' eligibility for premium tax credits and cost-sharing reductions.
The timeline for consideration of the bill is uncertain, although lawmakers face a number of deadlines in the coming weeks. According to Treasury, Congress must act before Nov. 3 to raise the debt ceiling, thereby extending the government’s borrowing authority and avoiding a potential default on the country’s financial obligations. Lawmakers also have to pass a government funding bill before Dec. 11, when a temporary funding measure is set to expire. H.R. 1314 would suspend the debt limit until March 15, 2017 and raise the discretionary spending caps by $50 billion in fiscal 2016 and $30 billion in 2017.
For more information on the budget deal, contact Diann Howland, vice president, legislative affairs. For more information on defined benefit plan matters, contact Lynn Dudley, senior vice president, global retirement and compensation policy. For more information on ACA automatic enrollment and other health policy issues, contact Katy Spangler, senior vice president, health policy. All can be reached at (202) 289-6700.