(RIVERWOODS, ILL., April 9, 2004) – With the April 15 deadline looming for the next round of defined benefit plan contributions, the Senate on April 8 cleared for the President the Pension Fund Equity Act of 2004, which will allow employers to lower the amount of their required contributions immediately. A slow economy, along with unusually low interest rates and generous pension benefits agreed to in better times, combined to make the required plan funding too burdensome for many businesses, notes CCH INCORPORATED (CCH), a leading provider of tax and pension law information (cch.com). The President is expected to sign the bill.
“Many companies are now faced with having to make substantial contributions to pension plans at a time when they can least afford them. These high costs could drive some companies out of business,” noted CCH senior pension law analyst Nicholas Kaster, J.D. “The measure provides two-year, temporary relief to get businesses through this immediate crisis, but it’s only a short-term solution to a longer-term problem.”
An estimated 45 million employees are covered by single- or multi- employer pension plans, with a total of one in five workers participating in a defined benefit plan. Under the legislation, pension plan benefits promised to employees remain the same, with the defined benefit plan expected to have the cash on hand when those obligations arise.
Overview of the Pension Fund Equity Act of 2004
The legislation replaces for 2004 and 2005, the 30-year Treasury bond rate used to calculate employers’ contributions to pension plans with a long-term corporate bond rate. Companies currently use from 90 percent to 120 percent of the average interest rate for 30-year Treasury bonds maturing in 2031.
“An interest rate based on long-term corporate bonds would provide a more accurate benchmark for measuring pension plan liabilities,” noted Kaster.
The measure also provides partial, temporary two-year relief from the deficit reduction contributions (DRCs) required of underfunded plans. It gives special relief to airlines, steel companies, and the Transportation Communications Union pension plan, allowing them to reduce contributions by 80 percent, for two years only.
Multiemployer plans “most in need” also receive targeted relief under the new measure. These are plans that have had significant losses as a result of low interest rates, sizable market investment losses and a growing number of retirees. To qualify for relief, plans would have to meet specific thresholds and make a special election.
“As a condition of relief, employers maintaining multiemployer plans would generally not be allowed, during the deferral period, to adopt amendments that would increase plan liabilities by increasing benefits or changing the rate at which benefits accrue or become nonforfeitable,” cautioned Glenn Sulzer, J.D., CCH senior pension law analyst. “However, exceptions are provided for previously negotiated benefit increases or where the plan’s actuary certifies that contributions to the plan will exceed charges to the plan for benefit increases.”
The legislation also requires multiemployer plans to give an annual plan funding notice to each participant and beneficiary, labor organization representing participants and beneficiaries, employer that has an obligation to contribute under the plan, and the Pension Benefit Guaranty Corporation. This applies to plan years beginning after December 31, 2004.
A special CCH news briefing on the Pension Fund Equity Act of 2004, with additional information and analysis on the legislation, can be accessed at: CCH Tax Briefing.
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of tax and business professionals and their clients. CCH is a Wolters Kluwer company. The CCH web site can be accessed at cch.com.