February 4, 2014
- Pension Funding Stabilization Included in Unemployment Insurance Extension
- Council Files Amicus Brief in Supreme Court Stock Drop Case
- House Committee Approves Bill Defining 'Full Time' as 40 Hours under PPACA
Pension Funding Stabilization Included in Unemployment Insurance Extension
A newly proposed measure to temporarily extend long-term unemployment insurance (UI), the Emergency Unemployment Compensation Extension Act (1845), includes a four-year delay in the phase-out of the pension funding stabilization provision originally enacted in the 2012 transportation bill.
As we have previously reported, the Moving Ahead for Progress in the 21st Century (MAP-21) Act enacted in July 2012 included a provision, originally advanced by the Council, to ease the cost burden of pension plan sponsorship by stabilizing the interest rates associated with plan funding calculations. Essentially, the provision “smoothed out” the effect of historically and artificially low interest rates in recent years by constricting the segment rates used to determine funding status to be within 10 percent of a 25-year average of prior segment rates. The subsequent phase-out of the stabilization provision – under which the 10 percent corridor is gradually increased to 30% - has reduced the effectiveness of the measure to the point where many defined benefit plans face new funding challenges, leading the Council to advocate for an extension of the program.
The UI measure essentially follows the Council’s recommendation, delaying the phase-out for four years, to start in 2017. Because 2017 is the earliest year that pension interest rates could return to normal based on the Federal Reserve Board’s monetary approach, this provision matches congressional intent with the Fed’s announced policy.
The funding stabilization provision, which raises federal revenue, will be used as an offset for the three-month UI extension. The Senate is expected to bring the bill to the floor quickly, but consideration in the House is less certain. The Council will continue to advocate for the inclusion of funding stabilization in a final measure.
Council Files Amicus Brief in Supreme Court Stock Drop Case
The Council and four other trade groups filed an amicus (“friend of the court”) brief with the U.S. Supreme Court on February 3 in the case of Fifth Third Bancorp v. Dudenhoeffer, urging the justices to uphold the so-called “Moench presumption” of prudence with regard to breach of fiduciary duty.
The case centers on allegations that the defined contribution plan sponsor violated their fiduciary duty under ERISA by providing an investment option composed primarily of company stock when it was "imprudent" to do so (plaintiffs also claimed SEC filings were misleading). When the employer’s stock price declined, retirement plan investment returns were negatively affected (commonly known as a "stock drop" case).
The district court initially granted the defendant’s motion to dismiss the case, invoking the "Moench presumption" of prudence to which fiduciaries are entitled when offering an employer stock as an investment. (The Moench presumption is named after the first court case in which it was applied. The presumption is based on the theory that Congress favors employee investment in employer stock based on a number of statutory benefits for employer stock funds in benefit plans.)
The Sixth Circuit Court of Appeals reversed the district court’s ruling, arguing that the Moench presumption did not apply at the “motion to dismiss” stage of the case, and the presumption could be overcome whenever a plaintiff proves that “a prudent fiduciary acting under similar circumstances would have made a different investment decision. Nearly every other circuit to address the question has held that the presumption applies at the “motion to dismiss” stage and can only be rebutted if the plaintiff shows that the plan sponsor was in a dire financial condition. The U.S. Supreme Court agreed to hear the case in order to resolve differences among the circuit courts of appeals, and in doing so will examine whether the allegations against the plan sponsor were sufficient enough to overcome the presumption of prudence.
The amicus brief – on which the Council joined with the U.S. Chamber of Commerce, the ERISA Industry Committee, the Plan Sponsor Council of America and the National Association of Manufacturers – urges the court to reverse the Sixth Circuit’s ruling and uphold the presumption of prudence, noting that:
- Congressional policy strongly favors the offering of employee stock funds,
- the unique nature of employer stock funds warrant a presumption that fiduciaries act prudently by offering them, and
- if such presumption is not provided, sponsors will be discouraged from offering employer stock.
The U.S. Department of Labor filed a brief with the Supreme Court in 2013 at the petition stage, recommending that the question be re-phrased to consider whether a presumption of prudence should ever apply in employer stock cases. However, it does not appear that the Supreme Court will take such a broad view.
The Council has consistently defended plan sponsors against claims of fiduciary duty breach in "stock drop" cases, supporting the application of the presumption of prudence. For more information on this issue or the Council’s amicus brief program, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice present, retirement and international benefits policy. Both can be reached at (202) 289-6700.
House Committee Approves Bill Defining 'Full Time' as 40 Hours under PPACA
The U.S. House of Representatives Ways and Means Committee reported out the Save American Workers Act (H.R. 2575) which changes the Patient Protection and Affordable Care Act (PPACA) definition of a “full-time employee” from 30 to 40 hours, in a February 4 “mark-up” meeting. The committee approved the measure on a party-line vote of 23-14 (with two Democrats absent).
The PPACA "shared responsibility" employer mandate, which has been delayed until 2015, requires employers with 50 or more full-time (or equivalent) employees to offer health coverage that satisfies affordability and minimum value requirements to their full-time employees or pay a penalty if even one full-time employee receives a premium tax credit for health coverage obtained through an insurance exchange. Under PPACA and Internal Revenue Service Notice 2012-58, "full-time employee" is defined generally as a person who works, on average, at least 30 hours per week.
H.R. 2575, introduced by Representative Todd C. Young (R-IN), would replace the number 30 (hours per week) with the number 40 (hours per week) for purposes of identifying full-time employees, and modify the calculation of full-time equivalent workers by requiring employers to divide the aggregate number of hours of service of employees who are not full-time employees by 174 rather than 120. Asimilar bipartisan measure has been introduced in the Senate as the Forty Hours is Full Time Act (S. 1188).
The substitute amendment offered by Ways and Means Committee Chairman Dave Camp (R-MI) and approved by the committee makes the amendment effective for months beginning after December 31, 2013. In his opening statement, Camp emphasized that the current 30-hour limit for a full-time workweek puts workers at risk of having their hours reduced. “‘Obamacare’ is putting full-time work and the potential to earn more wages out of the reach of millions of Americans already struggling in these tough economic times,” Camp said.
Young also provided anecdotes of workers having their hours cut to below 30 hours so as to avoid fitting the definition of a full-time employee.
During debate, Democrats warned that an increase to 40 hours could put as many as five times more workers at risk to have their hours cut, and maintained that the 30-hour limit is necessary to achieve broader coverage. Republicans argued that the law negatively impacts businesses by restricting economic growth and hurts already marginalized groups and populations who are most likely to have their hours cut. Thomas Barthold, chief of staff of the Joint Committee on Taxation, answered questions from the panel regarding the economic implications of the proposed legislation but said that the majority of data still needs to be processed and analyzed and promised more information in the coming weeks.
A number of lawmakers cited the February 4 Congressional Budget Office (CBO) report on the effects of PPACA on the labor market, which found that full implementation of the law could result in the loss of 2.3 million full-time jobs by 2021, which “includes some people choosing not to work at all and other people choosing to work fewer hours than they would have in the absence of the law.” This conclusion may stem from the possibility that some people, particularly those at the margins of eligibility for premium tax credits, might conclude that it is more advantageous to accept somewhat lower compensation in return for government subsidies that would enable them to purchase coverage through an exchange.
The bill is now clear for consideration by the full House of Representatives, where strong majority support is expected. The Senate bill has been referred to the Senate Finance Committee, which has not taken action on the measure. The Council will continue to monitor the legislation as it advances in Congress. For more information, contact Kathryn Wilber, senior counsel, health policy or Diann Howland, vice president, legislative affairs, at (202) 289-6700.