News Briefings - Pension & Benefits

The following article was taken from the 3/15/10 issue of Pension & Benefits Week.

3/16/10 -- Senate passes pension funding relief and COBRA premium subsidy extension

On March 10, 2010, the Senate, by a vote of 62 to 36, passed H.R. 4213, the "American Workers, State, and Business Relief Act" (AWSBRA). Though the Senate bill primarily features the retroactive reinstatement and extension through 2010 of a number of provisions that expired at the end of 2009, the bill also provides special funding relief for pension plans that suffered losses due to recent stock market reversals, and extends COBRA subsidy benefits. The bill will have to be reconciled with the version of H.R. 4213 that the House of Representatives passed on December 9, 2009 as the "Tax Extenders Act of 2009." (Isakson News Release, 3/9/2010; Summary of Amendment (S. Amdt. 3430))

The Senate-passed version of H.R. 4213 carried new tax provisions that have no parallel in the version passed by the House. These provisions include:

... temporary, targeted funding relief for single employer and multiemployer pension plans that suffered significant losses in asset value due to the steep market slide in 2008; and

... an extension of the 65% COBRA premium subsidy, and unemployment insurance benefits through the end of 2010.

An amendment (S. Amdt. 3430), which was designed to encourage companies to continue their defined benefit pension programs by providing temporary relief from statutory pension funding obligations, was introduced by Sen. Johnny Isakson (R-GA) and Sen. Ben Cardin (D-MD), and approved by unanimous consent.

Without funding relief, it will be difficult to create jobs in the struggling economy and many companies will be forced to cut expenses and eliminate jobs in order to make the required pension contributions, or may decide to terminate their defined benefit pension programs altogether and turn them over to PBGC, said Isakson.

According to the summary of S. Amdt. 3430, the amendment's main provision would allow employers to choose from two options to spread out their pension obligations:

(1) Employers would be able to repay their shortfall over seven years, but the seven-year amortization would start two years late. During the two-year delay period, the employer would only owe interest on the shortfall; or

(2) Employers would be able to pay back their shortfall over 15 years.

Employers would be entitled to apply either rule for any two of plan years 2009, 2010, and 2011.

In addition, any employer taking relief under either of the above rules would need to satisfy both requirements of the "cash flow rule." Specifically,

(1) if any employee's taxable compensation for a year exceeds $1 million (indexed), the employer must make a matching contribution to the plan for that year of an amount equivalent to the excess. This rule is not limited to the top five employees or any other subset of employees, but applies to all employees; and

(2) employers must make a matching contribution to the plan equal to the aggregate amount of "extraordinary dividends" plus the aggregate fair market value of the "stock redeemed" in excess of a company's net income for accounting purposes.

If the employer elects the "2 and 7 relief," the cash flow rule applies for three years, and if the employer elects the 15-year amortization rule, the rule applies for five years.

The amendment would also:

... exempt redemptions under an employee benefit plan, and redemptions on account of death, disability, or termination of employment of an employee or shareholder; and clarify that the value of redeemed stock is determined when the redemption starts and that investment expenses are not part of normal cost;

... exempt dividends that have been paid in the same way for at least five years;

... exempt, with respect to the dividend and redemption rule, preferred stock that functions like debt, with mandatory dividends and interest on unpaid dividends;

... provide that IRS is to prescribe rules for the application of the cash flow rule where there is a merger or acquisition;

... replace "net income" with "EBITDA," (i.e., earnings before reductions by reason of interest, taxes, depreciation, and amortization) in the bill's provision that the cash flow rule is triggered if the sum of dividends and redemptions exceed the company's "net income;" and

... provide that if a charity's plan was above 80% funded before the market downturn, the plan can use its credit balances in the next two years.

Revenue offsets. The Senate-passed bill carries several revenue raising offsets, which are completely different from the offsets in the House-passed bill. Among the Senate offsets is a provision that would allow retirement plans that include a qualified Roth contribution program to allow for taxable rollovers from the non-Roth portion of the account to the designated Roth portion. (Code Sec. 402A(c))

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