T t. L II /-S -ll*. 7
96th Congress 1st Session
COMMITTEE PRINT
S. 209
THE ERISA IMPROVEMENTS ACT OF 1979
SUMMARY AND ANALYSIS OF
CONSIDERATION
PREPARED BY THE
COMMITTEE ON LABOR AND HUMAN
RESOURCES
UNITED STATES SENATE
NOVEMBER 1979
Printed for the use of the Committee on Labor and Human Resources
53-018 0
U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1979
COMMITTEE ON LABOR AND HUMAN RESOURCES
HARRISON A. WILLIAMS, Jr., New Jersey, Chairman
JENNINGS RANDOLPH, West Virginia RICHARD S. SCHWEIKER, Pennsylvania
CLAIBORNE PELL, Rhode Island JACOB K. JAVITS, New York
EDWARD M. KENNEDY, Massachusetts ROBERT T. STAFFORD, Vermont
GAYLORD NELSON, Wisconsin ORRIN G. HATCH, Utah
THOMAS F. EAGLETON, Missouri WILLIAM L. ARMSTRONG. Colorado
ALAN CRANSTON, California GORDON J. HUMPHREY, New Hampshire DONALD W. RIEGLE, Jr., Michigan HOWARD M. METZENBAUM, Ohio
Stephen J. Paradise, General Counsel and Staff Director
Marjorie M. Whittaker, Chief Clerk
Steven J. Sacher, Special Counsel
David A. Winston, Minority Staff Director
Peter H. Turza. Special Counsel to Senator Javits
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FOREWORD
The "ERISA Improvements Act of 1979" contains amendments to the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1954 which, in the view of the Committee on Labor and Human Resources, are necessary and desirable in light of five years' experience since ERISA was enacted.
S. 209 represents a balanced legislative approach in furtherance of national policy respecting retirement income — it is designed to en- courage and stimulate private sector retirement and welfare plans while continuing ERISA's thrust towards improving plans from the standpoint of the workers and retirees for whom the plans have been established. It is also forward-looking legislation that takes into account the likely results of present demographic, economic, and social trends.
Under the Senate rules, legislation which is jointly referred to two or more committees may be reported only by such committees jointly, accompanied by only one report. S. 209 is such a bill, and this sum- mary and analysis of consideration is being made available as a Com- mittee Print in the belief that it will be helpful to the Committee on Finance and others in their consideration of the "ERISA Improve- ments Act of 1979." I am pleased to include in this print the views of the Committee as well as additional views, background and legisla- tive history, the complete text of the bill as amended and approved by the Committee, and other pertinent material.
Harrison A. Williams, Jr.,
Chairman, Committee on Labor and Human Resources.
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Digitized by the Internet Archive in 2013
http://archive.org/details/s209erisaimprove00unit
CONTENTS
Page
I. S. 209: Summary 1
II. History of legislation 5
III. Committee views and analysis 10
IV. Additional views of (1) Senator Javits and (2) Senator Hatch 61
V. Tabulation of votes cast in committee 66
VI. Congressional Budget Office — cost estimate 67
VII. Changes in title I of ERISA 68
VIII. S. 209. as amended and approved by the Committee on Labor and
Human Resources 90
IX. Pertinent correspondence 184
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I. Summary of the Bill
The bill is divided into four titles, as follows :
I. General Amendments to ERISA.
II. Amendments to the Internal Revenue Code of 1954.
III. Special Master and Prototype Plans.
IV. Employee Benefits Commission.
The bill is intended to achieve the following major objectives :
A. Strengthen and increase coverage of private sector retire- ment income and welfare benefit arrangements ;
B. Provide greater assurance that employees and their families will receive benefits from such arrangements;
C. Clarify and simplify the Federal laws under which employee benefit plans operate and are regulated, and reduce paperwork burdens of plan sponsors, administrators and service providers;
D. Adjust the applicability of certain Federal and state laws as they relate to plans which are subject to ERISA ; and
E. Streamline the administration and enforcement of ERISA and the Internal Revenue Code, insofar as it relates to employee benefit plans which are subject to ERISA.
TITLE I GENERAL ERISA AMENDMENTS
The amendments in title I of S. 209 change many provisions of title I of ERISA.
The ERISA declaration of policy is amended to state explicitly Congress' policy that private sector employee benefit plans are to be encouraged and fostered. Also, the definition of "pension plan" is changed to give the Secretary of Labor explicit authority to treat legitimate severance pay or supplemental retirement income arrange- ments as welfare plans rather than pension plans.
The reporting and disclosure rules are changed to provide an alter- native method of document distribution for multiemployer plans, to eliminate the requirement that plans must annually furnish partici- pants with summary annual reports, to provide greater flexibility for the Secretary of Labor to grant variances and exceptions from the statutory rules, to consolidate and simplify in one section the presently scattered rules relating to participants' status reports, and to clarify the roles of accountants and actuaries who perform services for plans.
The minimum standards provisions of title I are revised to make clear that certain types of reciprocity arrangements between collec- tively bargained plans are permissible. Other changes are made in the participation, vesting, accrual, and funding rules, primarily in recog- nition of the unique circumstances under which multiemplover plans operate. The permissibilitv of reducing welfare plan disability pay- ments due to Social Security disability payment increases and reduc- ing of pension plan retirement payments due to workers' compensa- tion payments is clarified. Protection is provided for surviving spouses
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of deceased participants who completed substantial service under a plan before death. ERISA's rule prohibiting assignments or aliena- tions of benefit rights is clarified to ensure that it will not be interpreted to preclude a plan's honoring certain property settlements, alimony or child support orders of state courts. The elapsed time method of meas- uring service for purposes of ERISA's minimum standards, already approved by Labor Department proposed regulations, is codified.
Regarding ERISA's fiduciary responsibility provisions, the rule governing the extent to which an insurance company's general account shall be deemed to hold assets of a plan which is signatory to a contract or policy issued by the insurer is clarified, as is the general cofiduciary responsibility rule as it relates to fiduciaries which conduct business in corporate, partnership or association form. The rule governing re- funds of contributions made to collectively bargained plans is relaxed slightly. The prohibited transaction and related rules are changed in three respects : the ERISA definition of "party in interest" is narrowed to exclude persons who, as a practical matter, do not occupy positions in which they can exert influence over a plan ; a new statutory exemp- tion is provided for transfers of assets between plans which have en- tered into reciprocity arrangements; and the Secretary of Labor will be required to report to the Congress and to the President respecting those applications for administrative exemptions as to which final agency determinations have not been made expeditiously.
In the areas of administration and enforcement, the bill requires that one member of the Secretary of Labor's ERISA Advisory Council must be representative of small employers and directs the Secretary to study and report to the Congress on the feasibility and ramifications of mandatory cost of living increases for pension plans. Also, rules are established prohibiting misrepresentations to employees about plans subject to ERISA and requiring employers to make periodic contribu- tions to collectively bargained plans.
ERISA's preemption rules are changed in several respects. Applica- tion of the antifraud provisions of the federal securities law to the rela- tionship between an employee and an ERISA plan (or officials of the plan or plan sponsor) is nullified, and application of State securities laws to an ERISA plan is preempted. Preemption will not apply to certain State laws dealing with health care plans (although States will be preempted from specifying in insurance laws or regulations the types of benefits, other than conversion rights, which must be made available in policies or contracts issued by insurers to plans). Also, a conforming change is made to foreclose arguments that ERISA pre- empts state court orders dealing with property settlement, alimony, or child support payments described in the new explicit exception to the rule prohibiting assignments and alienations.
Numerous changes are made in ERISA's enforcement and federal court jurisdiction provisions to conform to substantive changes made elsewhere in ERISA by the bill.
TITLE I! INTERNAL REVENUE CODE AMENDMENTS
Changes are made in provisions of the Internal Revenue Code of 1954 which are analogous to the ERISA title r provisions amended by S. -jo!) and described above.
In addition, four other amendments to the Cock' are made. The first two (sections 201 and 202) deal with rollover or other favorable tax treatment for lump sum distributions made by tax-qualified plans. The bill amends the aggregation of plan rules to provide that, as respects multiemployer plans and plans for employees of organizations de- scribed in Code section 501(c) (3) or (5) (charitable, religious, etc, and labor, agricultural or horticultural associations) all defined bene- fit plans of an employer are to be treated as a single plan and all defined contribution plans are to be treated as a single plan. Also, an employee receiving a lump sum distribution from a multiemployer plan after not working in service covered under the plan for a period of six months would be eligible for rollover or other favorable tax treatment.
Section 203 of S. 209 amends the code to permit employees who are active participants in most tax-qualified plans to claim a deduction for certain contributions made to the plan in which they are participating or to an Individual Retirement Account. The deduction is limited to the lesser of $1,000 per year or 10 percent of annual compensation, and rules are included to prohibit discrimination in favor of the highly compensated.
To stimulate the creation of more private sector plans, section 204 of the bill includes a limited tax credit for small employers who estab- lish or commence contributions to tax qualified plans. The credit is designed to offset the initial costs of plan design and implementation. Accordingly, the credit is a phased-down incentive of five years' dura- tion, based on a percentage of allowable deductions for contributions made by the employer to the plan. In the year of the plan's establish- ment, the credit is five percent of allowable deductions. For each of the second and third years after establishment, it is three percent. For each of the next two years, it is one percent. The credit is not available for the sixth and subsequent years after the plan's establishment.
The staff of the Joint Committee on Taxation has estimated the revenue costs of sections 201-204 of S. 209, as follows :
It is estimated that section 201 of the bill would reduce budget receipts by less than $5 million annually.
It is estimated that section 202 of the bill would reduce budget receipts by less than $5 million annually.
It is estimated that section 203 of the bill would reduce budget receipts by $480 million in fiscal year 1980, by $1,025 million in fiscal vear 1981, by $1,145 million in fiscal year 1982, and by $1,330 million in fiscal year 1984.
It is estimated that section 204 of the bill would reduce budget receipts by $5 million in fiscal year 1980, by $25 mil- lion in fiscal vear 1981, by $50 million in fiscal year 1982, and by $90 million in fiscal year 1984.1
TITLE III SPECIAL MASTER AXD PROTOTYPE PLANS
Under title III of the bill, a "master sponsor,'' such as a bank, in- surer, mutual fund, or savings and loan association, would develop one or more special master pension plans and would seek approval, at
1 Staff of the Joint Committee on Taxation, "Description of S. 75 S. 94, S. 20!) and S. 557" (Comm. Print 1979) (Hereinafter "Joint Committee Print5').
the national office level, from the Secretary of Labor. The terms of approval may be conditioned by the Secretary, and the Secretary of the Treasury has an opportunity to add conditions related to ap- plicable Internal Revenue Code provisions.
Once approval is obtained, the master sponsor makes the special master plan available to employers, subject to any conditions stipu- lated by the government. An adopting employer may establish and implement the plan without further determinations by the govern- ment. The master sponsor is the administrator and fiduciary of each adopting employer's plan, and the responsibilities of each adopting employer under ERISA and complementary provisions of the tax code are limited to complying with the terms of the plan, paying the costs of funding the plan (as to which the present tax code deducti- bility rules would apply) , paying a servicing fee to the master sponsor, and furnishing the master sponsor with timely and accurate work- force data. Numerous safeguards are included to prevent abuse by either adopting employers or master sponsors.
TITLE IV EMPLOYEE BENEFITS COMMISSION
Title IV of S. 209 consolidates in a single agency, the new "Em- ployee Benefits Commission," the functions related to administration and enforcement of ERISA and complementary tax code provisions that are now scattered in three separate agencies: the Labor Depart- ment, the Treasury's Internal Revenue Service, and the Pension Benefit Guaranty Corporation.
The Employee Benefits Commission is composed of five members, including a chairman who is a special liaison for the Secretary of Labor and a vice-chairman who is a special liaison for the Secretary of the Treasury. All five members are Presidential appointments, sub- ject to Senate confirmation, and serve six year, staggered terms. The chairman and vice chairman are nominated by the President from lists of candidates submitted, respectively, by the Secretary of Labor and the Secretary of the Treasury. The other three members are nominated by the President from a list of candidates submitted jointly by the two secretaries.
In addition to administering and enforcing ERISA and comple- mentary tax code provisions, the Commission is to formulate policy respecting federal laws which relate to employee benefit plans.
The Commission is an on-budget agency; however, the portion of the Commission's activities attributable to title IV of ERISA (plan termination insurance) would continue to be financed by plan-paid premiums.
The Commission will commence its work, and the transfers of func- tion and stall' identified by title IV of S. 209 shall be completed by, the date which is two years after the enactment of S. '209. At that time, subtitle A of title III of ERISA (jurisdiction, administration, and enforcement) is repealed.
II. History of Legislation
During- October of 1977, the Labor Subcommittee of the Committee on Human Resources held ERISA oversight healings, during which many issues addressed in S. 209 were discussed.1 On May 1. 1978, S. 3017, the direct predecessor to S. 209, was introduced and referred to the Committee on Human Resource's and the Committee on Finance jointly, by unanimous consent. Hearings on S. 3017 and other bills to amend ERISA and the Internal Revenue Code were conducted jointly by the Labor Subcommittee and the Finance Committee's Subcom- mittee on Private Pension Plans and Employee Fringe Benefits during August of that year.2
S. 209 was introduced on January 24, 1979 and was referred to the Committee on Labor and Human Resources and the Committee on Finance jointly, by unanimous consent. Hearings were conducted in February by the Committee on Labor and Human Resources.3 On May 16, 1979 the Committee amended the bill in certain respects and approved it unanimously, with three abstensions.4
In the course of these hearings, testimony was heard and written comments received from a wide range of persons, including representa- tives of the Labor Department, the Treasury, the Pension Benefit Guaranty Corporation, and the Securities and Exchange Commission. Witnesses included the following :
Members of Congress Senators Dewey F. Bartlett, Oklahoma. Lloyd Bentsen, Texas. Daniel K. Inouye, Hawaii. Spark M. Matsunaga, Hawaii.
Executive branch officials
Department of Labor, Secretary of Labor Ray Marshall, et al.
Department of the Treasury, Assistant Secretary for Tax Policy, Donald C. Lubick, et al.
Pension Benefit Guaranty Corporation, Director Matthew Lind, et al.
Securities and Exchange Commission, Chairman Harold Williams, et al.
1 "Oversight of ERISA. 1977 : Hearings before the Subcommittee on Labor of the Senate Committee on Human Resources." 95th Congress, 1st session (1977).
2 ERISA Improvements Act of 1978: Joint hearings on S. 3017. S. 901. S. 2992. S. 3193. S. 1745, S. 1383 and S. 250 before the Subcommittee on Labor. Committee on Human Resources and Subcommittee on Private Pension Plans and Employee Fringe Benefits, Committee on Finance, 95th Congress, 2d session (1978).
s ERISA Improvements Act of 1979: Hearings on S. 209 before tbe Committee on Labor and Human Resources, 96th Congress, 1st session (1979). [Hereinafter cited as 1979 Hearings.]
4 See V, Tabualtion of Votes Cast in Committee, p. 66. Pursuant to Rule XXVI of the Standing Rules of the Senate, legislation which is referred to two or more committees jointly may be reported by those committees only with a joint renort. Accordingly, thp Committee action taken on May 16 constitutes an approval of the bill, as amended, in tbe nature of a favorable report and indicates the Committee's readiness to report the bill favorably as soon as possible.
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Other persons
Donald C. Alexander — Former Commissioner, Internal Revenue Service, Olwine, Connelly, Chase, O'Donnell and TVeyher.
American Academy of Actuaries — Stephen G. Kellison, et al.
American Bankers Association — Charles A. Moran, et al.
American Bar Association — Frank Cummings, et al.
American Council of Life Insurance — William Gibb, et al.
American Federation of Labor/Congress of Industrial Organiza- tions— Bert Seidman, et al.
American Institute of Certified Public Accountants — Andrew J. Capelli,et al.
American Society for Personnel Administration — James H. Ferguson.
American Society of Pension Actuaries — J. William Cloer, et al.
Association of Private Pension and Welfare Plans — William Bret, et al.
William Chadwick, Former Administrator, Office of Pension and Welfare Benefit Programs, U.S. Department of Labor — Paul, Has- tings, Janofsky & Walker.
Chamber of Commerce — Ernest Griffes, et al.
Church Alliance for the Clarification of ERISA — Charles Cowsert, et al.
Council of Construction Employers, Inc. — Harry P. Taylor, et al.
ERISA Industry Committee/Business Roundtable — Boris Auer- bach,et al.
John Finnell — retiree.
Hawaii State Federation of Labor. AFI^CIO — A. Van Horn Diamond.
Roderick Hills — Former chairman, Securities and Exchange Com- mission, Latham, Watkins & Hills.
Investment Company Institute — David Silver, et al.
National Association of Pension Consultants and Administrators. Inc. — Harry Lamon, Jr.. et al.
National Coordinating Committee for Multiemployer Plans — Robert Georgine, et al.
National Employee Benefits Institute — Steven Schanes.
National Federation of Independent Business — James '"Mike" McKeyitt.
National Women's Political Caucus — Anita Xelam.
Pension Rights Center — Karen Ferguson, et al.
Prudential Insurance Company of America. Equitable Life Assur- ance Society of the U.S., John Hancock Mutual Life Insurance Com- pany. Aetna Life and Casualty Company and Mutual Life Insurance Company of New York Theodore Groom, Groom & Nordberg.
Roy Schotland- ( reorgetown I Fniversity Law Center.
State of I la waii I )r. Joshua C. Agasalud, et al.
United Automobile, Aerospace and Agricultural Implement Workers of America, International Union- -Claude Poulin, et al.
La wrence Walner counsel to Mr. John Daniel. Western Conference of Teamsters Pension Trust Fund- -- T. Neal MrNaniara. Pillsbury, Madison & Sutro; Theodore Groom, Groom & NTordberg. In addition, statements for the record were submitted bv :
Members of Congress and state legislator* Senators Frank Church, Idaho. Robert Packwood, Oregon. Ted Stevens, Alaska. Orrin Hatch, Utah. Dennis DeConcini, Arizona.
Representatives Carl Perkins, Kentucky. Al Ullman, Oregon. John Seiberling, Ohio. Patricia Schroeder, Colorado.
State legislators
Donald Ching, Majority Leader, Hawaii State Senate. Other persons
Alder, Jonathan; Boothroyd, Herbert; Fleming, Donald — New England Life.
Anderson, Herbert; Hudson, H. P.; Kinder, Wesley — National Association of Insurance Commissioners.
Armand, John — Red Crown Federal Credit LTnion.
Asling, John.
Barnes, Willie — Commissioner of Corporations, State of California.
Bateman, Ben Carlyle — Vice President, Thompson & Green Ma- chinery Company, Inc.
Berin, Barnet — Director, Professional Standards, William M. Mercer, Inc.
Bradley, Howard — Wholesale, Inc.
Budek-Kielski, Ewa — Chairman, Committee for ERISA Working Action.
Clarke, Weston — Vice President, American Telephone and Tele- graph Company, Human Resources Division.
Conte, Michael.
Damaso, Carl — President, International Longshoremen's and Ware- housemen's Union, Local 142.
Davis, Hilton — U.S. Chamber of Commerce, Vice President for Legislative Action.
Diamond, J. C. — National Association of Small Retirement Plans.
Drake-Johnson, Craig — Deferred Compensation Administrators, Inc.
Driesen, George — Van Arkel, Kaiser, Gressman, Rosenberg and Driesen.
Dudovits, Neal; Miller, Bruce — National Senior Citizens Law Center.
Ellingsen, Rudolph.
Faber, Peter — Harter, Secrest and Emery.
Fox, Douolas, Esq.
George, Ralph — President, IPCO, Inc.
Gordon, Michael — Mittleman & Gordon.
Gray, William — Financial Analysts Federation.
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Grier, W. E. — Standard Oil Company of California.
Grohne, Jack — Corporate Fiduciaries Association.
Guarrera, John; Weinschel, Bruno — Institute of Electrical and Electronics Engineers, Inc.
Hassen, Joel; Singer, Thomas — Kaiser Aluminum and Chemical Corp.
Henrickson, Warner — Standard Oil Company of Indiana.
Hornbostel, Charles — President, Financial Executives Institute.
Jackson, Paul — The Wyatt Company.
Kirk, Donald — Financial Accounting Standards Board.
Kluwin, John — American Bar Retirement Association.
Kneen, H. P. — International Business Machines.
Lewis, Stuart; Sherman, Gerald — Association of Advanced Life Underwriters.
Lidsay, Dennis — Master Contracting Stevedore Association of the Pacific Coast, Inc.
Marinich, M. George — Director, Pension and Insurance Depart- ment, United Rubber, Cork, Linoleum and Plastic Workers of America.
McDonald, J. Douglas — Treasurer, Planning Counselors, Inc.
Middleton, II. Woodward — Middleton, McMillan, Architects, Inc.
Moore and Associates, Charles P.
Mutschler and Associates, John G.
Navarre, R. W. — President, Simpson Industries Association.
O'Brien, Edward — Securities Industries Association.
Pavlo, Andrew — President, Oil, Chemical and Atomic Workers International Union.
Perkins, Richard — Society of Professional Benefit Administrators.
Quillen, William — Senior Vice President, Wilmington Trust ( Company.
Sachs, Theodore — Marston, Sachs, Nunn, Kates, Kadushin & O'Hare.
Shockley, W. Ray — Executive Vice President, American Textile Manufacturers Institute, Inc.
Siegel, Mayer — Attorney.
Skillnian, Richard — Caplin and Drysdale.
Sprague, Fred — Orrin A. Sprague Agency.
Staats, Elmer — Comptroller General of the United States.
Svetanics, Milton — General American Life Insurance Company.
Tannenbaum, Arnold.
Tarver, Norman.
Tassios, Dimitrios — Department of Chemical Engineering, New Jersey Institute of Technology.
Tennant, Otto Chairman, National Society of Professional En- gineers, and the American Society of Mechanical Engineers.
Thompson, .James General Vice President, Association of Western Puh) and Paper Workers.
Tnornberry, Gary Columbian Peanut Company.
Thorsen, Edward Madigan and Thorsen.
Tully, Richard Dugan Production Corporation.
Tuttle, William Tuttle, Morris, Kairick & Ingram.
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American Paper Institute.
Arthur Young and Company.
Associated General Contractors of America, Inc.
Health Insurance Association of America.
Merrill Lynch, Pierce, Fenner, and Smith, Inc.
National Association of Manufacturers.
National Automobile and Associates Retirement Trust.
Price Waterhouse and Company.
Printing Industries of America, Inc.
U.S. League of Savings Associations.
III. Committee Views and Analysis
It is the view of the Committee on Labor and Human Kesources that the Employee Retirement Income Security Act of 1974 is extremely important legislation which, in the main, has already proven its value for the retirement income and welfare benefit security of the roughly 55 million American workers and their families who are covered by private sector plans. Further, it is the view of the Committee that, especially as regards retirement income, ERISA's value and impor- tance in the future will be even greater, as present demographic trends indicate that the proportion of retirees in our society is likely to grow significantly larger during the coming years.
Hence, the changes in ERISA and the tax code which are contained in S. 209, while comprehensive in the sense that all five parts of title I, subtitle B of ERISA (and complementary provisions of the Internal Revenue Code) are in some way affected, do not disturb any of its fundamental, underlying, substantive concepts.1 Based on almost 5 years' experience since enactment, the Committee strongly approves and endorses these basic tenets, which are presently reflected in ERISA's provisions :
Voluntary private sector arrangements can and should play a vital role in assuring retirement income and welfare (health care, disability, accident, supplemental unemployment, etc.) benefits for American workers and their families.
The national interest in these arrangements is significant and is appropriately reflected in Federal law, both in terms of incentives which are made available for persons who maintain or contribute to the arrangements, and in terms of rules under which such arrangements are regulated, including reporting and disclosure requirements to assist in the regulation.
Covered employees must be fairly informed as to their plans' terms and financial condition and as to their rights and obligations under the plans.
Standards respecting the terms of retirement income and other deferred compensation arrangements (e.g., participation, vesting, accrual, and related matters) are necessary and appropriate.
The economic and social ramifications of private plan assets are great, and standards respecting the funding of certain retirement income arrangements and the conduct of fiduciaries and parties in interest of all <\\e\\ plans are necessary and appropriate.
The Federal courts and, in certain cases, the state courts and the U.S. Tax Court, are appropriate forums for the redress of complaints alleging violations of federal law relating to private sector retirement income and welfare benefit programs, and access to the courts should be readily available to complainants.
1 Due to the pendency <>f separate legislation (S. 1076) concerning problems <>r plan termination Insurance under title IV of ERISA, s. 209 does not address title iv issues and Hi'' committee expresses no view al this time regarding the problems addressed by s. 1076.
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Accordingly, S. 209 docs not change any of the fundamental substan- tive concepts involved in the treatment of private sector plans under ERISA and the tax code. Rather, the ERISA Improvements Act of 1979 is properly viewed as remedial legislation ; the changes it makes do have long-term significance in terms of the underlying goals de- scribed in the summary section of this analysis, but the changes also address many specific problems which have arisen or been highlighted in the years since ERISA's enactment.
Policy of Encouraging Private Plans — Section 101
Section 101 of the bill amends ERISA's declaration of policy to make explicit Congress' policy that the establishment and maintenance of private sector plans should be encouraged and fostered. In the Com- mittee's view, this policy has been implicit and reflected in a variety of federal laws, including the tax code, the Taft-Hartley Act, ERISA, and most recently, in the 1978 amendments to the Age Discrimination in Employment Act. But given the ever-increasing social and economic importance of private retirement income arrangements and the in- evitable tension between the equally important goals of fostering vol- untary employee benefit plans and at the same time regulating such plans to assure equity and fairness, the Committee believes that an explicit statement of the former is desirable and necessary.
Definitions — Section 102
Section 102 of the bill amends several of the key ERISA definitions. The changes in the definitions of "party in interest" and "relative" (ERISA sections 3(14) and (15)) are discussed below in connection with changes in ERISA's fiduciary responsibility provisions.
The definition of "multiemployer plan" (ERISA section 3(37)) is simplified under bill section 102(4) by eliminating the 50/75 percent aggregate amount of contributions tests. It is the view of the Commit- tee that these tests are difficult to administer and enforce, and are based on a premise which has proven faulty. At the time of ERISA's enactment, there was concern that the special treatment accorded to multiemployer plans in certain instances (e.g., the 40-year amortiza- tion rule for unfunded past service liabilities rather than the 30-year rule applicable to single employer plans) would serve as an incentive for plans which were not true multiemployer plans to characterize themselves as multiemployer plans for the purpose of taking advan- tage of these special rules. In fact, experience has shown that the dis- incentives to being characterized as a multiemployer plan are more than strong enough to counterbalance the incentives. Indeed, while the Committee is aware of numerous instances in which multiemployer plans have sought to be characterized as single employer plans, the Committee is unaware of any case in which a single employer plan has sought to be characterized as a multiemployer plan.
In lieu of the 50/75 percent tests, the amended definition provides that a collectively bargained plan to which ten or more employers con- tribute and which meets the "benefits payable without regard to the cessation of contributions" test of the present definition will be a multi- emplover plan for all ERISA purposes. Also, the Secretary of Labor may afford multiemployer plan treatment to a collectively bargained plan in which more than one and less than 10 employers contribute and which meets the "benefits payable" test if he finds that doing so
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would be consistent with ERISA's purposes. The Committee expects that such a finding will normally be made respecting such plans, but that extra scrutiny will be applied in cases involving an unusually high proportion of total contributions by a single contributing employ- er. Since the amended definition retains the Secretary's existing power to prescribe other requirements for any multiemployer plan, ample authority exists to prevent any unforeseen abuse.
Severance Pay and Supplemental Retirement Income Arrangements — Section 102 {5)
The amendment to the definition of "pension plan" (section 102(5) ) is designed to provide statutory flexibility to foster the creation and continued operation of severance pay arrangements and supplemental retirement income arrangements which are not subterfuges to evade the purposes of ERISA.
Although the Committee is not dissatisfied with the Secretary's past efforts to delineate the types of severance pay arrangements which are not pension plans, the Committee believes that the rigidity of the present definition of "pension plan" has unneecssarily circumscribed the permissible ambit of the Secretary's regulatory authority. Under the amendment, for example, the Committee would expect the Secre- tary to provide greater flexibility for severance pay arrangements covering true reduction-in-force situations so as to permit severance payments in excess of two year's compensation in such situations.
The onset of persistent high rates of inflation has made supple- mental retirement income arrangements all the more valuable to re- tirees. Ileiv, even more than in the case of severance pay arrangements, the establishment and maintenance of such supplemental retirement income arrangements has been hampered by the rigidity of the "pen- sion plan" definition and by the fact that there is some doubt under present law as to whether a supplemental retirement income arrange- ment which is not a "pension plan" is a "welfare plan." The amend- ment will permit the Secretary to adopt regulations which will foster legitimate supplemental arrangements.
In establishing the categories of plans referred to in the amendment, the Committee expects the Secretary to include rules which will pre- vent abuse of ERISA's funding and other rules which are applicable to pension plans but inapplicable to welfare plans.
In addition, the "subterfuge" sentence at the end of new section 3(2) (B) provides another safeguard under which the Secretary may remove any arrangement or type of arrangement previously in- cluded in one of the exempted categories if he finds it to be a pension plan masquerading as a severance pay or supplemental retirement income arrangement.
AMENDMENTS TO PART 1 OF TITLE I OF ERISA
Sections 111-118 of the bill make changes in ERISA's reporting and disclosure rules. All of the changes are designed to simplify these rules mid reduce paperwork for plan administrators, plan sponsors and vice providers.
Disclosure of Status Under Pension Plans— Section 111
Section 111 consolidates existing ERISA sections 105 and 209 and makes several clarifying changes. As regards penalties imposed under
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amended ERISA section 105(c) (3), it is the view of the Committee that any such penalties are to be paid to the plan, and this view is reflected in subsection (c)(3). Further, as stated in that subsection, the payment of any such penalty to the plan may not be used as an off- set against required contributions.
Exemptions and Modifications From Part 1 Requirements— Sections 112 and 1H Under present law the Secretary of Labor has plenary authority to exempt any welfare plan from any ERISA title I reporting or dis- closure requirement. However, as regards pension plans, the Secretary's flexibility is limited to providing an ''alternative method," under rather strict limitations.
As amended by section 112 of S. 209, ERISA section 110 consolidates in one place the Secretary's authority to exempt any plan or class of plans from any Part 1 (reporting and disclosure) requirement or to modify any such requirement if he finds that the exemption or modifi- cation is appropriate and necessary in the public interest and is con- sistent with the purposes of title I of ERISA.
Concern has been expressed that the Secretary, pressured by pension plans seeking special treatment under this new, more liberal standard, will proceed to grant exemptions and modifications on a wholesale basis, severely diluting ERISA's disclosure provisions. The Commit- tee neither expects nor will tolerate this result. In the reporting and disclosure area, as elsewhere under ERISA, uniform principles and rules are set forth which must be applied, in a common sense fashion, to an almost infinite variety of types of plans, plan sponsors, and serv- ice providers. The intent of the change made by section 112 of the bill is to provide the Secretary with sufficient flexibility to tailor these principles and rules by type of plan ; to enable the Secretary to utilize the regulatory process in the public interest to recognize that a particu- lar reporting or disclosure rule which makes perfectly good sense in the context of one type of plan makes less sense or no sense at all in the context of another plan or type of plan.
Section 114 of the bill mandates that this recognition be fully ex- plored by both the Secretary of Labor and the Secretary of the Treasury.
More generally, the Committee expects that the Secretaries will find numerous ways in which ERISA's (and the tax code's) report- ing or disclosure rules can be adjusted for various types of plans to ease reporting and disclosure paperwork and cost burdens without depriving participants, beneficiaries or the government of information needed to understand plan terms and conditions, rights and obliga- tions, and plan finances, and without any measurable adverse impact on enforcement activities or on the government's need to catalogue and understand the identity and types of plans in the regulated universe.
In this regard, the Committee recognizes that both Secretaries have already gone to considerable lengths to reduce unnecessary paperwork and plan administration costs, and the Committee encourages the Secretaries to continue those efforts, mindful of the cardinal principle that such endeavors must not result in a material lowering of ERISA's essential levels of protection. The changes made by sections 112 and 114 of the bill are intended to effectuate this important goal.
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Elimination of Summary Annual Report — Section US
Section 113 of S. 209 abolishes the requirement that plans must annually furnish each participant with a summary of the plan's an- nual report. The Committee is of the view that the summary -annual re- port presently required by ERISA seciton 10-±(b) (3) , as interpreted by Labor Department regulations,2 is of questionable value to the vast majority of participants and is a relatively costly item for plans to prepare and distribute. Relatively few employees can utilize the in- formation shown on these records, and the Committee believes that there is a measure of validity to the comment that some participants are unnecessarily confused and alarmed due to misunderstandings of material contained in the summary annual report.
On the other hand, the Committee strongly believes that informa- tion respecting a plan's financial condition should be fully available to those participants or beneficiaries who seek it, and notes that, under other provisions of ERISA, each participant or beneficiary has a right to request from the plan administrator a complete copy of the plan's most recent annual financial report. A reasonable copying charge, based on the number of pages copied, may be made for the document, but section 113 of the bill provides that the total charge may in no event exceed $10. Also, of course, participants or beneficiaries may exercise their right as members of the public to request copies of current and former annual reports from the Labor Department files.
Opinions of Actuaries and Accountants; Scope of Accountant'* Opinion — Sections 115 and 116
Sections 115 and 116 of the bill clarify the respective responsibilities of accountants and actuaries who perform services for plans. To ensure that plan annual financial reports adhere to professional accounting standards. ERISA requires that each such report be accompanied by an opinion of an independent public accountant. For certain types of plans (e.g., defined benefit pension plans), the report must also include an actuarial statement prepared and certified to by an actuary enrolled by the Joint Board for the Enrollment of Actuaries.
Under present law, each of these professionals may rely on the correctness of any matter certified to by the other, but they are not required to do so. The Committee recognizes that the permissive re- liance language was deliberate on the part of ERISA's draftsman, and was premised on the assumption that the tension therein' created be- tween the plan's actuary and the plan's accountant would result in a form of private sector self-policing. It is the view of the Committee, however, that in fact this statutorily created tension is on balance counterproductive; that whatever value has resulted from the tension is substantially outweighed by the confusion, delay, and cost to plans that have arisen due to what is perceived as "second guessing" of one professional's work by another.
The Committee is aware that there is at least a potential overlap, in some respects, between the two areas of professional expertise and, further, that both professions have been working together with the government to more clearly define their respective areas of ERISA expertise. However, whatever the eventual outcome of those efforts, the
Committee believes that the statutory scope of each profession's
• CPB Bee. 2520.1041V 10, 44 F.H. 19400, Apr. U, 1070.
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ERISA-related responsibility must be clarified now to put a stop to the confusion and cost resulting from disagreements between actuaries and accountants in preparation of plan annual financial reports. The change made by section 115 — requiring reliance by the accountant on matters certified to by actuary, and vice versa — accomplishes this result.
If, during the course of further Congressional consideration of this legislation, the two professions reach an agreement respecting their roles in connection with ERISA plans that differs from the rule em- bodied in section 115, and if the agreement reached is consistent with the goals of the amendment made by section 115, the Committee stands ready to consider such a substitution.
Section 116 addresses a similar problem involving the plan account- ant's auditing of plan assets held by Federally or state regulated banks and insurers. ERISA presently states that the plan's accountant may rely on the correctness of statements which have been prepared and certified as to accuracy by the bank or insurer, but need not do so. Hence, some plan accountants have insisted on auditing all of the assets held in a pooled trust or account.
Again, the Committee believes that whatever marginal degree of protection for the plan and its participants and beneficiaries may be theoretically achieved by these audits is far outweighed by the costs involved. Accordingly, section 11(> requires the plan accountant to rely on certified statements furnished by the bank or insurer.
Alternative Document Distribution Method for Multiemployer Plans — Sections 117 and 153(7) Section 117 of S. 209 provides an alternative method of distribution for documents and notices, which, under the provisions of ERISA, the Internal Revenue Code, or other applicable law, must be furnished directly to plan participants. In the case of a multiemployer plan. direct furnishing by the plan requires that the plan compile and main- tain an up-to-date list of the home addresses of participants. For many multiemployer plans this task has proven to be expensive and, in some cases, simply impossible. During hearings on S. 209, a witness 3 repre- senting a very large multiemployer plan stated :
When it first became apparent that the Labor Department would require delivery through the mails, the administrative offices of the WCT Plan began efforts to accumulate home address records for its approximately 600,000 participants. These efforts were undertaken at an estimated initial cost of $2.5 million. A number of approaches to gathering this infor- mation have been taken. For example, an address information card, which participants have been asked to complete and return, has been inserted in the summary plan description and summary annual report which have been distributed to partic- ipants. We have asked that notices soliciting home address information be placed in union periodicals. To date, these and other efforts have generated only a 50 percent rate of response. We believe it is likely that a very substantial portion of par- ticipants will never respond at all.
3 Theodore R. Groom, co-counsel for the Western Conference of Teamsters Pension Trust Fund, 1979 Hearings, supra.
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The problems of establishing initial home address records have been substantial and quite discouraging. However, the difficulty and expense of maintaining current address infor- mation is even more staggering. Some of the reasons are as follows :
If only one of every five plan participants moves each year, more than 100,000 home addresses will need to be updated annually.
Scores of thousands of persons join or leave the plan each year so that, as a practical matter, the number of persons for whom home address records must be main- tained is far in excess of 600,000 and will continually increase.
A substantial segment of the WCT Plan population is employed in the food processing industry where multiple address changes in a year are common, and many persons may not actually have a "home address". In fact, we be- lieve that the Plan has correct addresses for less than 40 percent of this large group of participants. In view of these and other problems, the annual mainte- nance cost of the "home address" file is estimated at $1 million. The ability of the WCT Plan to comply with the current distribution-by-mail requirements is really only one aspect of the problem. Assuming that the Plan could maintain current home address records for all participants, the cost of postage alone for mailing summary plan descriptions could easily ap- proach several hundred thousand dollars. The annual cost of mailing summary annual reports could involve another $100,000 yearly expenditure, excluding the costs of envelopes and handling. The imposition of such substantial costs (which, no doubt, will steadily increase) seems inconsistent with the purpose of ERISA — more and more of each $1 in contribu- tions must be used to pay costs of administration instead of paying benefits to participants and beneficiaries.
Admittedly, the magnitude of the figures presented by the Western Conference Plan, the largest of all multiemployer plans, is not repre- sentative in an absolute sense for all such plans. Tn proportionate terms, however, the figures may serve as a reliable benchmark.
Accordingly, new section 112 of ERISA provides that, if certain strict procedures are followed and safeguards are observed, a multi- employer plan may provide for the distribution of documents by the employers who contribute to the plan. If the alternative is adopted, and if the plan furnishes the documents to each employer in timely fashion and with proper instructions, each employer would become legally responsible for furnishing the documents, by hand delivery or mail, to his employees who are participants in the plan. To assure that contributing employers are not forced against their will to under- take this responsibility, the alternative can be used only where the plan's board of t rustees (which, under section 302(c) (5) of the Labor- Management Relatione Act, HUT. must he equally representative of labor and management) authorizes adoption of the alternative by a unanimous vote.
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Moreover, the alternative may not be effectuated unless the admin- istrator of the plan makes an initial finding that use of the alternat ive will be less costly to the plan than direct distribution and will result in distribution which is at least as comprehensive as would result through direct distribution. Further, the plan administrator must periodically assess the efficacy of the alternative, and use of the alternative may not be continued unless, after each such assessment, the administrator makes the same findings regarding cost and comprehensiveness of dis- tribution. If, for example, an administrator were to become aware of facts indicating that some participants were not receiving the docu- ments under the alternative method, these facts would have to be taken into account in the administrator's next periodic assessment. Similarly, the alternative may not be continued unless it is periodically reauthor- ized by unanimous vote of the trustees.
As regards cost, the Committee contemplates that many employers will agree to furnish the documents at no charge to the plan. How- ever, the plan is not to be precluded from reimbursing employers for actual costs incurred in furnishing documents, if such costs are reason- able and if. despite such reimbursement, the administrator nevertheless can make the cost-savings finding described above.
As regards the application of EKISA's fiduciary responsibility pro- visions to the parties involved in a plan's adoption and implementation of the alternative method of document distribution, the trustees and plan administrator are of course fiduciaries and their conduct in con- nection with the authorizations and determinations described above would have to satisfy the standards of section 404 and other provisions of part 4 of title I. So, for example, the trustees' actions under the requirements of new section 117(e) would be tested against the stand- ards of part 4, as would the action of the plan administrator and trustees under subsections (a) and (b) of that new section.
As is indicated by the language of subsection (d) of new section 112, the Committee is of the view that an employer required to distribute documents under the alternative shall be deemed to be a plan adminis- trator solely for purposes of those provisions of law which relate specifically to the obligation to furnish plan documents under ERISA or other applicable law and for enforcement purposes related to that obligation, and shall not be deemed a fiduciary merely because the furnishing obligation has been imposed pursuant to the plant's adop- tion of the alternative method.
Thus, for example, if the plan administrator were to furnish a con- tributing employer with copies of the summary plan description for distribution to that employers employees who were plan participants and the documents were subsequently found to be inaccurate or other- wise substantively insufficient, the employer would not be liable.
Moreover, if the employer were named as a defendant in a suit by a participant or the Secretary alleging only the substantive insufficiency of the summary plan description, the employer's motion to dismiss himself as a party-defendant would be appropriately granted by the court. This is because the complaint in such a case would not relate to the obligation to furnish the documents, but rather to their content.
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The Committee contemplates that the ''necessary services" statutory exemption (section 408 (b) (2) of ERISA and section 4975(d) (2) of the Internal Revenue Code) from the party in interest prohibited transactions (section 406(a) (1) (A)-(D) of ERISA and section 4975 (c) (1) (A)-(4) of the Code) would be applicable to reasonable ar- rangements by which plans reimburse employers for actual and rea- sonable costs of document distribution and further, that the Secretary of Labor will expeditiously grant an appropriately structured admin- istrative class exemption, with such conditions as the Secretary deems necessary under section 408(a), for reimbursement situations involv- ing employers who are plan fiduciaries.
Xew ERISA section 502 (m), added by bill section 153(7), amends ERISA's enforcement provisions to conform to new ERISA section 112. Xew subsection (m) assumes that there will be situations in which a plan has used the alternative method but that a plaintiff participant who has not received a plan document nevertheless sues the plan officials because, e.g., the participant does not know that the alternative has been used and assumes that the plan officials are responsible. The first sentence contemplates that where the alternative method has been properly authorized and implemented as far as the plan is concerned, and the only allegations made by the plaintiff involve a failure of timely receipt, the plan officials should not be liable. However, the Committee is of the view that in such situations, the court, before dismissing the action as to the plan and its officials, shall satisfy itself that the requirements of section 112 (a), (b), and (e) have been satis- fied by those parties.
The second sentence assumes that in the situation described above. the plan officials, or perhaps the plaintiff, would move to join the responsible employer as the person responsible for the distribution failure, and contemplates that such a motion would be granted expedi- tiously under applicable rules of Federal civil procedure.
AMENDMENTS TO PARTS 2 AND .'i OF TITLE I OF ERISA
Sections 121-129 and 131 of S. 209 contain amendments to provisions of parts 2 and 3 of ERISA's title I. With the exception of sections 12(>-129, these provisions of the bill deal largely with ERISA problems which are unique to, or exacerbated under, collectively bargained mul- tiemployer plans. It is the view of the Committeee that some of the difficult ies which multiemployer plans have encountered in attempting to comply with ERISA can and should be overcome by statutory ad- justments. Just as the provisions of S. 209's sections 111-118, which are generally applicable to all plans, are expected to be most helpful re- specting plans of small employers, so the Committee expects that most of the ERISA part 2 and 3 amendments will be of greatest value respecting multiemployer plans.
Ri ciprocity . 1 rmngements — St ction i.ii
Bill section L21 entirely amends ERISA section 209 (the present substance of which has been incorporated in section 105 of the Act by section HI of the bill) to encourage collectively bargained plans, par-
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ticularly multiemployer plans, to establish and maintain reciprocity arrangements which protect an employee's vesting and benefit accrual despite shifts from the employment covered by one plan to employment covered by another.
Every multiemployer plan offers built-in, intraplan portability, a feature which is of great value to employees. But this intraplan porta- bility applies only as regards work that is performed for an employer who, under applicable collective bargaining agreements, is required to contribute to the plan. Reciprocity arrangements provide, in effect, a further measure of portability to plan participants, protecting workers from the loss of pension credits when a shortage of jobs in one geo- graphic area forces them to seek work in a different area.
One particular type of reciprocal arrangement, commonly referred to as umoney-follows-the-manv, involves a transfer of contributions on the employee's work when he or she is employed outside the juris- diction of the "home plan." On receipt of the transferred contributions, the home plan credits the employee with that service, even though it was outside its own covered employment. Plan trustees and counsel have in some cases been reluctant to establish new reciprocity arrange- ments of this type or expand existing ones because of uncertainties about certain ERISA provisions.
It is the view of the Committee that voluntary reciprocity arrange- ments should be facilitated because of their obvious value to employees. In some industries and in some geographic areas, there is little as- surance that a particular employee will always be able to find work in a location that is within the geographic area covered by the plan and there is a corresponding likelihood that work under a different plan will be available in a location which is outside that geographic area. In such situations, reciprocity arrangements make a great deal of sense from the standpoint of employees, employers and unions alike and. in terms of 8. 209's goal of enhancing the retirement income potentials of the private sector, are extremely important from the standpoint of national interest and policy.
Concern has been expressed by the Treasury Department that, in extreme situations, section 121 of the bill could undermine the princi- ples which underlie the ERISA and tax code rules relating to the funding of plans and mergers and consolidations of plans. However. no case involving this potential cause, either pre- or post-ERISA, has been brought to the attention of the Committee, and new ERISA section 209 gives the Secretary full power, by regulation, to impose additional conditions to protect pension and welfare benefits of em- ployees working under these arrangements.
Section 144 of the bill complements section 121 by adding a new. statutory exemption from the prohibited transaction rules for transfers of contributions between plans. The exemption permits the payment of reasonable charges by the transferee plan for administrative ex- penses reasonably incurred by the transferor plan.
Certain plans, such as plans which are maintained by universities in connection with the Teachers Insurance and Annuity Association- College Retirement Equities Fund and which are funded by fully portable annuity contracts without cash surrender values, although collectivelv bargained in some cases, are not included under new sec- tion 209. The TIAA-CREF arrangement, for example, offers full
20
portability on a national basis, and application of section -209 would involve redundancy and confusion.
Although section 121 is limited by its terms to collectively bar- gained plans in which contributions are made on behalf of employees pursuant to applicable bargaining agreements, the Committee has become aware that proposed regulations 4 promulgated by the Internal Revenue Service under sections 401(a) (12) and 414 (1) of the Internal Revenue Code face affiliated companies which have long-established beneficial reciprocity and portability arrangements for their employees with a Hobson's Choice. Under these proposed regulations, such companies, if they wish to continue a decades-long practice of trans- ferring assets and liabilities attributable to pension rights of employees moving from company to company, will have to comply with expensive and burdensome rules requiring actuarial calculations, recordkeeping, disclosure and reporting. Or, these requirements can be avoided, but only by ending the practice of transferring assets and liabilities, ''freezing-' an employee's accrued benefit at the time of his or her move from one company to another, and paying multiple, separate pensions upon retirement. This course of action would mean confusion for em- ployees, receipt of multiple benefit status reports, multiple modifica- tions in summary plan descriptions, multiple notifications from the Social Security Administration at retirement time, multiple tax filing requirements, etc.
The Committee understands that despite the fact that there has been no known instance of abuse in over 40 years during which a reciprocity and portability arrangement has been in effect respecting one group of affiliated companies, the Internal Revenue Service has indicated a reluctance to provide a modification of its proposed regu- lations for this or similar arrangements which will permit the con- tinued transfer of assets and liabilities without imposition of all of the burdensome requirements previously noted.
Because the Committee's focus on reciprocity in connection with S. 209 has been confined to situations that arise, most typically, in multiemployer plans and because the Internal Revenue Service's reg- ulations have not been finalized as of the date the Committee met to mark up the bill, no amendment to ameliorate the disruptive effect of Code sections 401(a) (12) and 414(1) (analogous to ERISA section 208) has been considered by the Committee. If, however, the final regulations of the IRS regarding these Code sections do not satis- factorily resolve the dilemma created by the proposal, the Committee stands ready to consider such an amendment at the earliest appropriate t iinc.
Maritime Industry Plans Technical Correction — Section
The technical correction made1 by bill section 122 clarities the appli- cation of ERISA's accrual rules in maritime industry plans, and codi- fies existing Labor Department regulations. The amendment makes it clear that if a maritime industry plan provides the maximum accrual for, e.g. 200 days of service in a year, the participant who completes 1 25 days of service would be en< it led to receive five-eights of the maxi- mum accrual. This change merely conforms the statutory treatment
' 42 !K. ::::7o. July 1, 1<»77.
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of accrual for maritime industry plans to the treatment specified for plans in general and corrects a drafting error in ERISA.5
Measuring Participation on a. Plan-Year Basis — Section 123
Under present law, a plan may use its bookkeeping year ("plan year") for measuring employees' service for all purposes (e.g. vesting, accrual) except for the purpose of measuring whether an employee has completed a sufficient length of covered service to be eligible to partici- pate in the plan. For participation purposes, the plan in most cases must measure from the date on which the employee commenced service under the plan. The use of the employment commencement date is supported by the rationale that, since under ERISA eligibility to par- ticipate must generally precede entitlement to all other rights under the Act, measurement of service for that purpose should commence at the earliest possible time, a rationale with which the Committee does not find fault.
However, the statutory mandate that the date employment com- menced must be used for participation purposes creates complication (and consequent costs) in plan recordkeeping because records for all other purposes may be — and usually are — kept on a plan year basis.
To deal in an equitable fashion with this disparity, section 123 of S. 209 permits a plan to measure service for participation purposes on a plan-year basis, commencing with the first plan year during which the employee is engaged in covered employment. However, in order to insure that use of the plan year for this purpose does not delay the commencement of benefit accrual, section 123 permits such use only if the plan does not impose a waiting period for vesting or benefit accrual purposes. Thus, a plan which chooses to use the plan- vear basis for calculating eligibility to participate must, under the bill's amendment to ERISA section 202(a) (3) (A), provide that an employee receives credit for vesting and accrual purposes based on all covered service beginning with service during the plan year in which the employee first entered covered service following the em- ployer's participation in the plan.
For example, a 25-year old employee whose service began on April 1,
1979 must, under present law, be permitted to begin participation (and benefit accrual) in a plan which uses a calendar year as its plan year sometime during 1980 if he or she had completed 1000 hours of service by April 1980. If 1000 hours of service are not completed during the period April 1, 1979 to April 1, 1980, but are completed during the
1980 plan year, participation and benefit accrual must commence not later than January 1, 1981. Thus, in order to determine the required date for participation, a calendar-year plan must compute hours of service during the 12-month period April 1, 1979 to April 1, 1980 in addition to computing hours of service during the 1979 plan year and the 1980 plan-calendar year.
Under the change made by section 123 of S. 209f participation for the same employee under the same plan would not have to begin until January 1, 1981 (assuming the employee did not complete 1000 hours
* Conference Renort to Acrompani/ H.R. 2. H.R. Rep. No. 93-1280. 93d Congress. 2d session, pp. 263. 269 (1974). reprinted in Subcommittee on Labor. Senate Committee on Labor and Public Welfare. 94th Congress. 2d session. Legislative History of the Emplovee Retirement Income Security Act of 1974. at 4530, 4536 (1976) [Hereinafter ERISA Legislative History].
22
of service prior to December 31, 1979, but did complete at least 1000 hours of service during the 1980 plan year) and irrespective of whether the employee completed 1000 hours of service during the period April 1, 1979 to April 1, 1980 (of course, if the employee completed 1000 hours of service during the period April 1, 1979 to December 31, 1979, participation would have to commence on January 1, 1980). In any event, as of the date participation commences, the participant would be entitled to vesting and benefit accrual credit measured on the basis of hours of service completed by the employee in each plan year during which the employee worked in covered service (i.e., 1979 and all subsequent plan years). Thus, if the employee did not complete 1000 hours of service during the 1980 plan year, participation would not be required until the employee did complete 1000 hours of service in a. plan year, but vesting and benefit accrual credit would still be granted retroactively on the basis of all service completed during 1979 and all subsequent plan years.
Summation of Different Benefit Accrual Rates — Section 12 %
Bill section 124 amends ERISA section 210 to clarify the manner in which the generally applicable accrual rules (ERISA section 204(b) (1) ) are applied to multiemployer plans. Two distinct types of prob- lems are addressed.
The first relates to a "multilevel" multiemployer plan. Many of the largest multiemployer plans are multilevel plans, in which employees in each of two or more different collective bargaining units participate in the plan under a benefit accrual formula based on the level of employer contributions negotiated in the bargaining agreement for each particu- lar bargaining unit. For example, the agreement negotiated for one unit of employees (Unit A) may call for employer contributions of SO. ^5 per hour worked and provide that a participant in Unit A will be entitled to a pension commencing at normal retirement age of $10 per month for each year of service. Another bargaining unit (Unit B) participating in the same plan may negotiate an employer contribu- tion rate of $0.50 per hour and the benefit for covered employees of that unit at normal retirement age will be $20 per month per year of service. Under present law, it is unclear how the benefit accrual require- ments of section 204 (b) apply to a multilevel plan of the type described above, particularly in cases where an employee transfers between units. It is the Committee's view that the correct approach to be taken in cases of this type is to separately compute the benefit accrual for the emplovee's period of service in Unit A and for his period of service in Unit B. The sum of these different rates of benefit accrual as defined by employment in different bargaining units should then be combined to compute the minimum benefit required under section 204(b) for a vested participant In cases where section 204(b) (1) requires a projec- tion of the normal retirement benefit to which an employee would be entitled at his normal retirement age (subparagraphs (A) and (C)), the projection should be made on the basis of the average of the rates applicable to the employee in each of the units in which he has worked, weighted to reflect the number of years in each unit during which he was covered.
The above method as applied to a multilevel plan under bill section \-i\ is illustrated by the following examplee: In a multilevel, multi-
23
employer plan, the normal retirement benefit for Unit A members is a pension for life beginning at normal retirement age of $10 per month for each year of service. The normal retirement benefit for Unit B employees is a pension for a life of $20 per month for each vein- of serv- ice. After accumulating five years of benefit accrual credit in Unit A, an employee transfers to Unit B and thereafter accrues an additional five years of credit. At this point, his five years of service in Unit A gives rise to a normal retirement benefit of $50 per month and his five years of service in Unit B gives rise to a normal retirement benefit of $100 per month. His total accrual toward the normal retirement benefit is $150 and the weighted average of the benefit accrual rates attribu- table to his ten years of service is $15 per month for each year of serivce. A benefit accrual rate of $15 per month should therefore be used in projecting the normal retirement benefit of this employee for purposes of the three percent formula of section 204(b) (1) (A) and the fractional formula of section 204(b) (1) (C). If the employee re- turns to employment in group A for an additional five years of serv- ice, the employee's total accrual toward a normal retirement benefit after the additional five years would be $200 and the weighted average of the different benefit accrual rates applicable to his 15 years of serv- ice would be $13.33 per month per year of service. Accordingly, at this point, an accrual rate of $13.33 per month per year would oe used to make the projection required under the subparagraph (A) and (C) formulas.
The second problem to which bill section 124 is addressed arises in cases where, generally as a result of a collectively bargained increase in the rate of employer contributions to a multiemployer plan, the benefit accrual rate is increased for all service after a future fixed calendar date. For example, suppose the employers which contribute to a multiemployer plan agree to increase the contribution rate from $0.25 per hour to $0.50 per hour as of January 1, 1980. The credit earned toward a normal retirement benefit for service under the plan is correspondingly increased from $10 per year of service to a $20 per year of service for service after January 1, 1980. Under the amend- ment to section 210(a), cases of this type would be treated in the same manner as though all of the workers covered under the plan trans- ferred on January 1, 1980 from a bargaining unit with a $10 per month per year of service formula to a bargaining unit with a $20 per month per year of service formula.
Suspension of Benefits Due to Reemployment — Section 125
Section 203(a) (3) (B) of ERISA permits pension plans to tempo- rarily suspend benefit payments, in certain cases, for periods during which a retiree is reemployed. As respects multiemployer plans, the exception presently in the law applies only when three distinct criteria are satisfied. The reemployment must be (1) in the same industry, (2) in the same trade or craft, and (3) in the same geographic area covered by the plan when benefit payments commenced.
The purpose of the suspension rules is to remove incentives that would encourage and permit a form of "double dipping." Annuitants who, while continuing to draw benefits, return to work of a type which competes with employees of preretirement age who are participants in the same plan defeat the purposes of the pension plan and create
24
labor relations instabilities. However, where the work engaged in bears no relationship to the employment nexus which is covered by the plan, these side effects are non-existent or greatly minimized.
For multiemployer plans, the present three-pronged test does not conform to the intended policy because a former employee drawing pension benefits may return to work without triggering suspension if e.g., he is reemployed in the same industry and geographic area as that covered by the plan but in a different trade than the one he had prac- ticed before retirement. Yet where the reemployed annuitant is en- gaged in work covered by the plan, both deleterious effects described above are present. The plan is paying retirement benefits to an indi- vidual who is not retired, and plan participants of pre-retirement age are denied work opportunities they would otherwise have.
Section 125 of the bill remedies this problem by permitting a multi- employer plan to suspend benefits if a retiree goes back to work which is in the same industry or trade (or craft) and the same geographic area as when benefits commenced. This change will permit multiemployer plans to protect themselves against destructive ''double dipping/' while not penalizing annuitants who are reemployed in work which has no relationship to work covered by the plan.
The Committee's amendment also codifies a portion of proposed Labor Department regulations stating that, in the context of a multi- employer plan, the term "employed" includes self -employment. In some industries, self-employed persons and employees compete for work in the same industry, trade or craft, and geographic area. A retiree who returns to work as a self-employed person should have no greater claim to receive pension benefits than a retiree who returns to work as an employee. In the case of a multiemployer plan, suspension of benefits properly is based upon the type of post-retirement work engaged in, not on whether a participant's post-retirement earnings are derived from employment or self-employment.
A third change in the suspension rules under section 125 relates to the period of suspension. The change is intended to avoid the con- version of pensions into a form of supplementary unemployment com- pensation. Some plans cover employment that is sporadic or irregular. In such situations an employee who has attained normal retirement age may draw pension benefits for the months when he is not work- ing (either because work is not available or because he chooses not to work), but he may be employed during the rest of the year, either at the same job, or another job covered by the plan, or in the same craft or industry, and area covered by the plan. In such instances, the employee may not, in any real sense, be retired.
If the pension may be suspended only for the months of employ- ment, multiemployer plans will be obligated to pay benefits for par- ticular months to an employee who has attained normal retirement Bge and is eligible for a pension, notwithstanding his work during other months in employment of a type and in an area covered by the plan. Where employment is characteristically irregular, this may re- quire a. plan to divert resources to non-retired participants who are temporarily unemployed at the expense of fuller benefits for those who have substantially retired from the type of employment covered hv the plan. The Committee is of the view that a plan should be per- mitted to deal with this problem by a suspension period which is
25
longer than the months of employment, pursuant to regulations of the Secretary of Labor, as provided by bill section 1'25 (3) .
A fourth change in the suspension of benefit rules applicable to multiemployer plans is necessary because such plans find it difficult to enforce their rules concerning suspension of benefits. A multiemployer plan is a distinct entity from the employers maintaining the plan and does not necessarily have access to the employment records of par- ticipating employees sufficient to detect forbidden reemployment. Moreover, the reemployment may be with an employer who does not contribute to the plan and with whom the, plan has no connection. In order to provide a basis for securing compliance with their sus- pension rules, multiemployer plans generally provide that a retired worker must notify the plan if he returns to work after retirement in the same industry, trade or craft, and geographic area. The purpose of this rule is to protect the job opportunities of active workers and preserve the assets of the pension fund for the benefit of persons who are truly retired and therefore have the greatest need for retirement income.
Although the Committee believes most retirees are conscientious in complying with plan rules of this type, a few may attempt to obtain a personal financial advantage at the expense of the plan by deliberately not reporting their reemployment. In order to insure that these few do not obtain a financial benefit at the expense of the majority who abide by the rules, plans should be permitted to impose reasonable sanctions on those who flout plan reporting rules.
In connection with the enforcement of these plan reporting rules, the Committee expects that the Secretary's regulations will provide that plans may impose a penalty in an amount not exceeding one year's benefit where a plan obtains evidence that a "retiree" engaged in employment in the same industry or trade or craft, and geographical area covered under the plan and failed to report it to the plan within a reasonable time. It should not be necessary for the plan to establish the exact number of hours of proscribed employment, but the penalty must bear a reasonable relationship to the gravity of the violation of the plan's rules.
More generally, the Secretary's regulations must assure fairness for both plans and their participants and retirees. Plan rules on suspen- sion under these regulations must embody basic elements of due proc- ess. At the same time, the regulations must provide sufficient flexibility and latitude so that plans can protect their integrity and the retire- ment income interests of their participants and retirees.
Reductions in Retirement or Disability Benefits — Section 126
Section 126 of the bill deals with two distinct matters. The first of these is the relat'onship between disability payments under ERISA plans and disability payments under Social Security. Under present law it is clear that retirement or disability benefits (or vested rights in such benefits) under a pension plan may not be decreased by reason of an increase in retirement or disability benefit levels or in the wage base under title II of the Social Security Act or by reason of an in- crease in benefit levels under the Railroad Retirement .vet. This rule embodies the Congressional policy that beneficiaries should not be deprived of, e.g., cost of living increases under Social Security, by a
26
consequent reduction in benefits to which the individual is entitled under a private plan. The present statutory prohibition against reduc- tions (section 206(b)), however, is limited to pension plans. Yet in some cases, private sector disability protection is furnished not as a component of a pension plan but through a separate arrangement which falls within the title I definition of "welfare plan."
The Committee is of the view that there is no rational basis for a distinction in treatment based upon the happenstance of plan design, and section 126 clarifies the applicability of the prohibition against decreases whether the disability benefits are provided as a component of a pension plan or separately as a welfare plan or part of such a plan.
The other portion of section 126 involves the relationship between benefits under an ERISA plan and worker's compensation. As is evi- denced by recent decisions in the Federal courts,6 there is some uncer- tainty as to whether it is permissible for an ERISA pension plan to reduce or suspend benefits respecting persons who are receiving work- er's compensation payments.
The Committee is of the view that a retirement pension is different than a worker's compensation award. The former represents a com- ponent of a worker's earnings which has been deferred. It has been earned by a period of service for an employer which is at least long- enough to satisfy the plan's vesting standards. Generally speaking, whether or not a pension will be paid to an individual is a matter that, if not wholly within the individual's control, can at least be the sub- ject of planning and influence of the individual.
Workers' compensation, by contrast, is paid when an employee is injured or becomes ill in the course of or as a result of his or her em- ployment and is disabled. Workers' compensation payments are not "earned" in the sense pensions are earned, but rather are paid in ac- cordance with state law as compensation for a disability sustained in the course of employment.
Without expressing a general view on the desirability of offsetting the cost of one form of benefit by reducing payments under another form of the same type of benefit, the Committee believes that offset- ting the cost of workers' compensation payments by reducing a dif- ferent type of benefit — retirement pensions — is unsound as a matter of public policy and counterproductive as a matter of labor relations. It is also an aberration from ERISA's vesting policy which is not supported by any countervailing public policy.
Section 126(a) (3) of the bill, accordingly, would make explicit in ERISA a principle that some courts have already found to be implied in ERISA's vesting rules by clearly stating that the reduction of vested retirement pension benefits due to workers' compensation pay- ments is prohibited.
'Tins provision is nol intended to prohibit an ERISA welfare disa- bility plan from reducing the benefits otherwise payable to a disabled participant by an amount not in excess of workers' compensation pay- ments made to the participant by the employe!" maintaining the wel- fare plan. Nor is it intended to prohibit an ERISA pension plan which
" Bee, e.g., Buozynski v. General Motors, 456 F. Supp. 8(57 (D.N. J. 1978) ; Utility Workers i nion \. consumers Power Co., 459 B\ Supp. 447 (B.D. Mich. 1978) ; contra Pavlovic v Chryalen Corp., (B.D. Mich., Jan. 10, 1078) : Bor&ine v. Evans Products Co., 453 v Supp 19 (E.D. Mi<h. 1078) ; Carlson v. Bundy, (B.D. Mich.. Aug. 18, 11)77).
27
provides disability benefits from providing for a reduction in plan benefits otherwise payable to a disabled retiree by an amount not ex- ceeding the workers' compensation payments made by the employer maintaining the plan (or made by an insurer on behalf of the em- ployer), but only to the extent that the value of plan disability pay- ments exceeds the value of the participant's accrued, vested retirement pension.
The extent to which pension plan disability payments exceed the value of a participant's accrued, vested retirement pension will be dependent on the terms of the plan. For example, a pension plan pro- vides for the commencement of disability benefit payments six months after the date on which a participant is permanently disabled, and provides that a non-vested participant is deemed vested at that time. The plan also provides that, commencing at the time when the disabled participant reaches the plan's normal retirement age, the disability pension converts to a retirement pension based upon actual accrued loenefits. At the normal retirement age, the disabled employee is also receiving workers' compensation. Under the clarification made by sec- tion 126(a) (3) of the bill, the plan could not reduce its payments to the disabled retiree because such payments do not exceed his vested accrued benefits.
However, if in the above example the plan provides that the disa- bility pension continues to be paid even after the disabled participant reaches the plan's normal retirement age, or provides that the disa- bility pension converts to a retirement pension based on accruals that would have been credited if the participant had not been disabled, the plan's payments to the disabled retiree who is receiving workers' com- pensation after normal retirement age may be reduced to the extent that they exceed the amount to which the retiree would be entitled based on accual accruals.
Of course, there may be no reduction in pension plan payments based on workers' compensation received before the disabled partici- pant reaches the plan's normal retirement age. Also, the amendment is not intended to disturb existing rules regarding integration between private plans and Social Security benefits. Finally, the amendment applies to all cases in which workers' compensation (including, e.g., benefits paid under the Black Lung Benefits Act of 1972) is paid, including cases where liability is conceded or undisputed.
Survivor Protection — Section 127
Section 127 of the bill makes two major changes in ERISA's "joint and survivor" rules. First, section 127 provides clearly that a pension plan (as defined in section 3(2) of ERISA) may provide for one or more annuity forms of benefit as options. One such option would have to be the qualified joint and survivor annuity described in section 127. However, under the amendment, plans would not be faced with the choice, presently imposed by Internal Revenue Service rules, of either providing the joint and survivor annuity as the normal form of bene- fit or having no annuity form of benefit whatsoever.
Second, all pension plans would have to provide a benefit for the surviving spouse of a participant who dies at any time after achieving 10 years of vesting service. Under the amendment, the amount of the survivor's benefit and the terms of its payment will depend on the terms of the plan.
53-018 0-79-3
28
In a plan which provides an annuity as the normal form of bene- fit, the surviving spouse of a participant who dies after attaining 10 years of vesting service will receive a benefit unless an election to the contrary has been made and not subsequently revoked by the par- ticipant prior to death. The benefit will be in the form of an annuity. The value of the annuity will be based upon accruals to the date of the participant's death, adjusted to take account of the joint characteristic of the annuity. Payments of the annuity to the spouse will begin on the annuity starting date, which is determined as of the date of the participant's death if death occurs after the date on which the par- ticipant attains the earliest retirement age under the plan, or as of the date that the participant would have attained the earliest retirement age under the plan if death occurs before that date.
Where the actuarial equivalent of the surviving spouse's annuity does not exceed $'2,000 on the date of the participant's death, the plan may distribute the benefit in the form of a lump sum or in install- ments, with payout taking place (or in the case of installments, be- ginning) not later than the annuity starting date described above.
In a plan which provides a normal form of benefit other than an annuity, the surviving spouse of a participant who dies after achiev- ing 10 years of vesting service and before receiving nonforfeitable benefits will also receive a benefit from the plan. The benefit will be in lump sum or installment payment form, in an amount equal to the value of the participant's benefit at the time of death, with payment taking place (or beginning) not later than 60 days after the end of the plan year during which the participant died. A different payment (or payment commencement) time and a different method of distribution, agreed to in writing by the plan and the surviving spouse, will also be acceptable under the amendment.
The provisions described above reflect several policy judgments of the Committee. First, the Committee is of the view that death of a married participant after a substantial term of covered service should not defeat the right to vested benefits. As noted above, the Committee views pension benefits as a form of deferred compensation, and the amendment made by section 1:27, without disturbing the 1974 Con- gressional judgment that the right to receipt of deferred income may be conditioned upon completion of a period of relatively continuous service, more fully perfects the concept of nonforfeitability that is so central to ERISA's underlying purposes.
Second, the amendment reflects the Committee's view that plans which are designed to provide retirement income, e.g., plans offering an annuity as the normal form of benefit — most typically, defined benefit plans, and which are described to employees as retirement in- come vehicles, ought to provide retirement income to surviving spouses except in cases where the value of the spouse's benefit is de minimis. Accordingly, the amendment provides that in such plans the surviving spouse's benefit shall be an annuity commencing at the time when the annuity would have begun' if the participant had lived until attaining the earliest retirement age under the plan (or, if death occurs after the attainment of such age, at the time of actual death). This type of plan covers the majority of employees covered under private sector pension plans. Under such plans, employees' ex- pectations for retirement income are greatest, most readily ascertain- able, and most consonant with sound retirement planning.
29
On the other hand, for those plans which provide for a normal form of benefit other than an annuity — most typically, defined contribution plans providing a lump sum as the normal form, the Committee is of the view that the enhanced survivor's righi is approximately ful- filled by a full payout (or payout commencing) at the actual time of the participant's death, even if that event occurs well before the plan's earliest retirement age. Further, without expressing a normative judg- ment about the relative merits of one form of benefits as compared to another, the Committee is of the view that plan sponsors who wish to provide, e.g., a lump sum as the normal form of benefit but who also wish to offer an annuity as an optional form ought to be allowed to do so. Accordingly, the amendment expressly reverses Internal Revenue Service rules to the contrary.
Under the amendment, for plans providing an annuity as the normal form of benefit, the joint and survivor form of annuity is the form in which benefits will be paid unless an election to the contrary is made by the participant. In the absence of affirmative action by the participant, vested benefits will be paid to a surviving spouse where the partici- pant's death occurs after completion of 10 years of vesting service and before the plan's earliest retirement age and, in those cases in which a participant survives until actual retirement, a joint and survivor an- nuity will be paid.
Because there wall 'be situations in which a joint and survivor annuity is not the most advantageous form of benefit from the participant's standpoint, the amendment requires that participants in such plans be given the right to elect another available form of benefit. But no such election should be irrevocable prior to death or retirement because the participant's situation may change over the span of years between the point of achieving 10 years of vesting service and the point of death or retirement. Important choices such as these must be made with full knowledge of their consequences. Therefore, subsection (e) of the amendment requires that such plans must provide an appropriate and timely notice fully explaining the terms and conditions of the joint and survivor annuity and the rights, effects and procedures pertaining to elections, revocations and reelections. If the summary plan description of the plan is sufficiently comprehensive on the subject of the joint and survivor annuity and if the notice itself highlights its own importance, the notice need be furnished only once.
To minimize the costs of plan amendments conforming to the changes mandated by section 127, the Secretary of the Treasury is directed to develop versions of model language which tax-qualified plans can adopt. The amendment made by section 127 will be effective as to active participants and terminated service, vested participants during plan years beginning on or after one year from the date the bill is enacted.
Alimony and Support Payments — Section 128
Section 206(d) of ERISA generally prohibits the alienation or as- signment of pension plan benefits. The prohibition embodies the policy judgment that benefits intended to be used as retirement income ought to be preserved for that purpose and, more particularly, that in the absence of the prohibition benefits intended for retirement income could easily be diverted for other purposes.7
7 See Internal Revenue Code section 401(a) (13) and regulations thereunder, 20 C.P.R. Sec. 1.401(a)-13 (1978).
30
Kecent litigation 8 has raised the issue of whether this prohibition was intended to permit a plan to refuse to honor a State court order directing the payment of all or part of a participant's benefit to a divorced spouse for alimony (or, in community property states, as a portion of the divorced spouse's marital property share) or child sup- port. It is the view of the Committee that, generally, the prohibition was not intended and should not be interpreted to permit a plan to refuse to honor such an order, and sections 128 and 155(3) of the bill are designed to clarify the law in this respect, both as to the scope of the prohibition and as to ERISA's preemption of state domestic rela- tions law.
This amendment, in effect, replaces the implied exception to the prohibition which has been judicially approved in some cases with an explicit and carefully delineated statutory exception. Accordingly, section 128 requires that state court orders be specific enough so that the plan will know who and how much to pay but does not require a plan to distribute a benefit prior to the time stated in the plan or to pay in a different form or for a different duration than is called for by the terms of the plan. For example, if a plan were served with an order -fating that part or all of a participant's benefit must be distributed to a divorced spouse prior to the time when a distribution to the partici- pant would be permitted under the terms of the plan, the plan would not violate section 206 of ERISA, as amended by bill section 128, if it refused to make the distribution. In such a case, the order would not be in compliance with new section 206(d) (3) and would be expressly preempted pursuant to ERISA section 514(b) (6), added by bill sec- tion 155(3) . However, the mere fact that an order which complies with new section 206(d) (3) is served on a plan prior to the time specified in the plan for distribution of benefits does not mean the order is pre- empted. In this case, the plan would have to retain the order and would have to make the distribution in accordance with the order at the time stated in the plan.
Elapsed Time — Section 129
Prior to ERISA's enactment many plans measured service by the elapsed time method, which has the virtue of great simplicity from the standpoint of both plan recordkeeping and employee comprehen- sion. ERISA's present rules explicitly authorize the counting-of- hours method of measuring service for purposes of the participation, vesting, and accrual rules. Generally, these ERISA minimum stand- ard- require that an employee be credited with a year of service for participation and vesting purposes upon completion of 1000 hours of service during a measuring period of 12 continuous months with the employer who maintains the plan (or, in the case of a multiemployer plan, with an employer who is required to contribute to the plan under applicable collective bargaining agreements).
During its development of the extensive regulations necessary to implement these rules, the Labor Department recognized the desir- abllity of the elapsed time method of measuring service, under which it is not necessary to count hours. Instead, the entire period of time
. Stone v. Stone, »•"><> F. Supp. 018 (N.D. Cal. 1978), appeal docketed, No. 78-2313 (9th <'ir. June 21, 1978) : Francis v. United Tech. cu>/>., 458 F. Supp. 84 (N.D. Cal.
mis >
31
which elapses while the employee is employed with the employer main- taining the plan (or with employers required to contribute to the plan) is taken into account, without regard to the actual number of hours completed during the period.
In the introduction to its temporary regulation, the Labor Depart- ment stated :
(t)he alternative [elapsed time] method set forth in this section is designed to enable a plan to lessen the administra- tive burdens associated with the maintenance of records of an employee's hours of service by permitting each employee to be credited with his or her total period of service with the employer or employers maintaining the plan, irrespective of the actual hours of service completed in any 12-consecutive- month period.9
Section 129 is intended to provide a more secure statutory base for the elapsed time concept. The only concern that has been expressed about use of elapsed time systems is the theoretical possibility that a particular participant could have a pattern of service that would be treated less favorably under an elapsed time method than under the counting-of -hours method. The Committee recognizes this possibility ; and recognizes also that the obverse is even more likely — that, on the whole, employees and participants are more likely to benefit from the type of elapsed time method authorized in the Labor Department's temporary regulations than to be disadvantaged by it, as compared to the counting-of -hours method. And, of course, the lower administrative costs associated with the elapsed time method will also inure to the benefit of the participants.
To be sure that any such system authorized by the Secretary of Labor pursuant to this amendment is in fact not disadvantageous to participants in the aggregate, the second sentence of section 129 has been included. It is the Committee's expectation that the Secretary will continuously review operations of plans which use an elapsed time method authorized by the regulations, and will make any adjustments found to be necessary to assure compliance with this directive.
Funding to Take Account of Future Amendments — Section 131
Section 131 clarifies the maner in which the funding rules should be applied in the case of a collectively bargained plan which adopts an increase or decrease in benefit accrual to take place in some subsequent year. In general, the amendment provides that once the change in benefit accrual rates has been adopted and is no longer contingent upon some future event, it must be taken into account for purposes of applying the funding rules to the plan in the case of any plan year begining after December 31, 1980. Use of this same method would be permitted for plan years beginning before December 31, 1980.
In some cases the change described above will be helpful to plans in dealing with an actual or prospective funding deficiency. For ex- ample, a plan faced with a funding deficiency must generally either obtain increased contributions from employers or decrease future bene- fit accruals. If a multiemployer plan were faced with an anticipated funding deficiency at a time when renegotiation of contribution rates
9 29 CFR Sec. 2530.200b9.
32
was not permitted under the collective bargaining agreement, it might be forced to decrease the benefit accrual rates applicable to active employees.
The Committee considers it preferable that a drastic change of this kind, if necessary, should not be implemented without notice to em- ployees. The need for adequate notification may require that the change only become effective in a subsequent plan year. Moreover, a postponed effective date may allow sufficient time for contract expiration, nego- tiation of greater contributions, and cancellation of the planned reduc- tion in benefits.
Under the amendment approved by the Committee, it will not be necessary for plans to accelerate unduly the effectiveness of a benefit decrease in order to have an impact on the application of the funding standard for the year the decrease is adopted. Under bill section 131, once the decrease in benefit accrual rates has been formally adopted, the plan would be entitled to adjust its funding account to reflect the change, even if the decrease does not become effective until a subsequent plan year.
Similarly, under the amendment, an increase in benefits would have to be reflected in the funding of the plan, even if the benefits are not actually increased until a year later.
It is not the Committee's intention to weaken funding standards by affording the device of repeatedly postponed reductions. In order to avoid that possibility, this section provides that if a reduction is not implemented, regulations are to provide for an appropriate adjustment to the plan's funding standard account.
AMENDMENTS TO PART 4 OF TITLE I OF ERISA
Insurance Company General Account Assets — Section HI
ERISA presently provides that to the extent a plan is funded through insurance, the assets of the plan shall be deemed to include the policy but not, solely by reason of the policy's issuance, the under- lying assets of the insurer. This rule, similar to a rule that applies where a plan holds shares of a mutual fund, constitutes statutory recognition of the difficulties and complications that would arise if the plan's assets, merely by virtue of the issuance of a policy to the plan by the insurer, were deemed to include all of the insurer's assets. The present ERISA rule, however, is not applicable unless two con- dit ions are met. First, the policy must be a "guaranteed benefit policy," defined in ERISA section 401(b)(2)(B) as "an insurance policy or contract to the extent that [it] provides for benefits the amount of which is guaranteed by the insurer." Second, by definition, a "guaran- teed benefit policy" does not include any portion of an insurer's separate account other than surplus in that account. Taken together, these two conditions mean, generally, that ERISA's special rule on plan assets applies only to those types of policies or contracts which fit within the "guaranteed benefit policy" definition, and only where they are written on the insurer's general account.
Early on, the Labor Department recognized that a literal interpre- tation of ERISA section 101(b)(2) would place both insurers and insured plans in untenable positions. The basic problem is that the definition of "guaranteed benefit policy" is unduly restrictive. The
33
Department addressed this problem in Interpretive Bulletin 75-2 10 in which a general interpretation was applied specifically to insurance companies.
As a general proposition, the Department said that investment by a plan in securities of a corporation or partnership would not, for that reason alone, convert the underlying assets of the corporation or part- nership into plan assets, thereby making a subsequent transaction between the corporation or partnership and a person who is a party in interest to the plan a prohibited transaction.
Applying this general interpretation to insurance companies, the Department said :
* * * if an insurance company issues a contract or policy of insurance to a plan and places the consideration for such contract or policy in its general asset account, the assets in such account shall not be considered to be plan assets. There- fore, a subsequent transaction involving the general asset account between a party in interest and the insurance com- pany will not, solely because the plan has been issued such a contract or policy of insurance, be a prohibited transaction.
The Committee basically agrees with the position in the Interpre- tive Bulletin, and is of the view that as far as insurance companies are concerned, the decision as to whether or not insurer assets should be treated as plan assets should turn primarily on the nature of the insurer's account in which the plan's premiums are held. An insurer's general account contains commingled assets of, typically, thousands or millions of policy holders. The manner in which these assets may be invested under state law is heavily regulated and generally re- stricted to relatively safe and conservative debt instrument invest- ments emphasizing low-risk, long-term appreciation, and security of principal. Insurance company separate accounts, by contrast, are permitted under state law to invest heavily in equity securities.
To meet the needs of their plan sponsor customers, insurers, like other financial institutions offering investment management and ad- ministrative services to employee benefit plans, are constantly develop- ing new products. A competitive and innovative environment for these institutions can be most beneficial for the plans and their participants. Accordingly, it is the view of the Committee that expansion of the present ERISA section 401(b) (2) rule from the "guaranteed benefit policy" terminology to any "policy or contract of insurance" is war- ranted and desirable.
Conceptually, the Committee approves of the approach taken b}7 the Labor Department in Interpretive Bulletin 75-2. The language of section 141 of the bill codifies the Interpretive Bulletin, to the extent that document relates to insurers. Under section 141, the Committee expects that the Department will monitor the development of new insurance company products. Whether or not such a product falls within the language of ERISA section 401(b)(2), as amended by bill section 141, is to be determined not by the application of any mechanistic test but rather on the basis of its value to plans and their participants under prevailing and projected economic conditions.
™29 CFR Sec. 2509.
34
Re rund of Mistaken Contributions — Section 1J$
Soon after ERISA's enactment, it was recognized that ERISA section 403 (c) (2) (A), an exception to the general rule that plan assets may never inure to the benefit of any employer, was unworkable for many collectively bargained multiple employer plans (including multiemployer plans). As a general proposition, the Committee strongly approves the general rule (ERISA section 403(c) (1)) and endorses the intent of the several necessary exceptions (sections 403 (c)(2) and (3)). Section 402 (c)(2)(A), however, which permits the return of contributions made by an employer by a mistake of fact, but only if the contribution is returned within one year after it has been made, is too narrow for collectively bargained multiple employer plans.
First, a grace period of one year from the time a contribution is made is sometimes not a long enough time for the plan to learn that the contribution has been made, to determine that it has been made by a mistake of fact rather than for some other reason, and to complete the careful verification and paperwork involved in reaching the determi- nation and in returning the contribution.
Second, the "mistake of fact" limitation is too narrow, especially given the existence of section 302 of the Labor-Management Rela- tions Act, 1947 (LMRA) . Under section 302, it is a criminal offense for an employer to make a contribution to a plan on behalf of, e.g., a per- son who is an independent contractor or supervisor within the mean- ing of the LMRA. It is also a criminal offense for a plan to accept such a contribution. Yet such contributions may be made not only due to a mistake of fact but also due to a mistake of law (e.g., because of an incorrect interpretation of the LMRA meaning of "independent contractor'' or "supervisor"). And there have been situations in which contributions have been deliberately made on behalf of the "wrong" persons.
Collectively bargained plans must have greater flexibility in deal- ing with these types of contributions, and section 142 of the bill, there- fore, measures the time period during which contributions must be returned from the time when the plan administrator determines (1) that the contribution was made by a mistake of fact or (2) that hold- ing a contribution would contravene section 302 of the LMRA. After the determination is made, the plan has six months in which to return the contril)ution.
Further, to deal equitably with existing situations in which a plan administrator discovered a mistakenly made contribution too late to return it within one year, or discovered a contribution made in con- travention of section 302 of the LMRA. amended KRIS A section 403 (c) (2) (A) provides a period of six months from the date of enact- ment during which such a contribution may be returned.
Because the return period begins to run at the time of the plan ad- ministrator's determination, the Committee believes that six months' time for return is sufficient. Also, the Committee expects that plan administrators, if they have not already done so, will establish pro- cedures consistent with their fiduciary duty under which mistaken contributions and contributions made in contravention of section 30*2. L.MR A. will be found and returned in a timelv and efficient manner.
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(Jo-fiduciary Responsibility — Section US
The amendment made to ERISA section 405 (cofiduciary respon- sibility) by bill section 14:* is, in the Committee's view, necessary to conform the law to the realities of business organization. While the Committee agrees with and endorses the underlying intent of ERISA section 405(a)(3) the existing language of that provision assumes that knowledge on the part of one individual or one division of, e.g., a corporation, is imputed to all the individuals or divisions in the corporation and to the corporation itself. If interpreted literally, sec- tion 405(a)(3) faces many business organizations with the equally untenable choices of either establishing costly and complex internal reporting systems or risking the imposition of liability as a cofiduciary without any means of guarding against the liability.
The language of new ERISA section 405(e)(2) — "in the normal course of such fiduciary's business'' — is intended to provide a flexible standard under which various organizational forms of doing business can be recognized. However, the Committee does not intend this language to insulate a particular organization from cofiduciary re- sponsibility and liability merely because it follows sloppy internal management practices.
Prohibited Transaction Exemption Reporting; Definition of "Party In Interest" and "Relative"— Sections' 1^5 and 102(1) , (£). and (6)
Since the effective date of ERISA's fiduciary provisions, plan spon- sors, service providers, and investment advisors and managers have encountered difficulty securing guidance from the Labor Department and the Internal Revenue Service regarding application of the pro- hibited transaction rules, the scope of the statutory exemptions, and in securing decisions on applications for administrative exemptions. Long delays have been a regular occurrence, and applicants for single and class exemptions respecting business transactions have been forced to hold them in abeyance (or sometimes cancel them altogether) due to lengthy agency deliberation and processing times.
Since Reorganization Plan Xo. 4 was implemented in late December of 1978, the Labor Department, with minor exceptions, has been solely resonsible for administrative exemption processing and for interpreta- tion of the prohibited transaction rules and statutory exemptions.11 An improvement appears to have resulted, although it is not clear whether the recent reduction in processing time is due to localization of function in the Labor Department, shifts of personnel from IRS to Labor, or growing understanding of the law and heightened sophis- tication on the part of staff. Without question, though, the improve- ment is a welcome one.
However, the Committee is of the view that a more formal over- sight role by the Congress regarding prohibited transaction exemp- tions is both necessary and appropriate. While applauding the Labor Department for the recent improvements in processing, the Committee is also aware that no single ERISA subject has received more atten- tion and criticism by plan trustees, sponsors, service providers, etc.,
11 Under the Reorganization Plan. IRS retains responsibility for interpretations re- garding the prohibited transaction excise taxes, individual retirement accounts, loans to ESOPs. ear-marked account plans, and ancillary matters. Reorganization Plan Xo. 4, Sees. 102 (a) and (b).
36
than prohibited transaction exemptions, and of what has been per- ceived, rightly or wrongly, as the inability of the government to con- sider and decide upon exemption applications rapidly and equitably. Therefore, section 145 of the bill establishes a formal reporting mechanism to assist Congress in its oversight responsibilities. Begin- ning on January 1, 1980, the Labor Department will have to report to this Committee, to the Committee on Education and Labor of the House of Representatives, and to the President respecting each pro- hibited transaction exemption application on which a final administra- tive determination has not been reached after the passage of 180 calen- dar days in the case of individual exemptions and one year in the case of class exemptions. Each such report must identify the applicant (s) and the transaction (s) involved in the application and the terms and conditions of the exemption that is sought. In addition, if the Depart- ment has proposed to grant one or more exemptions relating to the application (s), the report must include an identification of the persons who will be involved or affected and must describe the terms and con- ditions of the proposed exemption. The report must also identify the Labor Department official (s) responsible for the application's processing.
Regarding the subject of prohibited transactions more generally, the Committee believes that the case has not been made to warrant a basic change in the approach Congress adopted in 1974. It was the view of the Congress then, as evidenced by its adoption of the Senate version over the House version, that ERISA's goal of protecting the integrity of plan assets could best be served by absolute, positive pro- hibitions against a range of transactions between plans and persons occupying positions in which they can influence plan decision-making about investment (and other uses) of plan assets (parties in interest). At the same time, however, the Committee believes that experience has warranted some relaxation of the rules describing parties in inter- est. Accordingly, section 102(1) of the bill contains a carefully meas- ured narrowing of the party in interest definition (section 3(14) of the Act ) , as well as some clarifying changes.
This amendment eliminates the parenthetical clause in section 3(14) (A). The Committee is of the view that whether or not a person is a fiduciary under ERISA should be determined on the basis of the definition of that term in section 3(21) of the Act. Removal of the parenthetical clause eliminates the possibility of confusion in this regard.
The changes made by bill section 102(1) to subparagraphs (B), (C), (I)), (II), and (I) of EKISA section 3(14) all have the effect of nar- rowing the category of persons who are parties in interest under ERISA, and should be of considerable help in reducing the ambit of the prohibited transaction rules. The basis for all of these changes is the Committee's judgment that the persons who will be excluded from the definition by these changers are extremely unlikely to be in a posi- tion through which they can influence the actions of plan fiduciaries regarding plan assets.
With respect to service providers, it is the Committee's view that professionals, e.g., actuaries, accountants, lawyers, uncompensated in- vestment advisors and others who hold themselves out as having special expert ise relal ing to plan assets, invest ment, and finances, can by virtue
37
of only a single involvement with the plan exercise a measure of de- facto control, so that subsequent transactions (or subsequent pari- of a continuous transaction) between such persons and the plan should be subject to the prohibited transaction rules. On the other hand, there is no reason to assume that a single service (or a series ol* sporadic serv- ices not performed pursuant to a single agreement) by a nonprofes- sional will vest any measure of control in such a person.
The Committee believes that the Labor Department has now had sufficient experience with the prohibited transaction rules and the party in interest delinition to enable it to prescribe sensible regulations further defining the terms ''professional" and ''nonprofessional" in amended subparagraph (13), and the Committee expects the Depart- ment to do so expeditiously.
Under subparagraphs (C) and (D) of section 3(14) every employer of employees covered by a plan and every union which has members covered by a plan is a party in interest. These definitions make sense in the case of a single employer plan and, as regards the union, make sense in most multiemployer plan situations. But in a typical multi- employer plan, with scores, hundreds, or even thousands of contrib- uting employers, it is plain "overkill" to classify each one as a party in interest. In these plans, the rule of reason dictates that only those employers who may be in a position to exert control over the plan should be classified by the statute as parties in interest. In the Commit- tee's view, this objective can be met by including within subparagraph (C) only those employers (1) who employ one or more of the trustees or (2) whose employees constitute five percent or more of the total employees covered by the plan.
For purposes of certainty, the five percent test is to be made as of the first day of a plan year. In cases where the plan, exercising due dili- gence, cannot be certain that a particular employer is not a five percent or more employer at the beginning of a plan year, the percentage fig- ures as of the beginning of the previous plan year are to be used unless the plan officials have reason to know that the figures are inaccurate as regards a particular employer. In such a case, the particular employer is to be deemed a party in interest until plan records demonstrate otherwise.
For example, a construction industry plan which maintains its rec- ords on a calendar year basis has 60 contributing employers on Janu- ary 1, 1980, no one of which employs more than three percent of the plan's participants on that date. The figures are roughly the same for the succeeding two years. During calendar year 1983, a large con- tractor begins work in the area. On January 1, 1984, the plan admin- istrator has reason to believe, based on his best judgment, that the large contractor accounts for at least five percent of the plan's participants. but will not know for sure until contributions are received from the contractor. The contractor is to be deemed to be a party in interest from January 1, 1984 until the beginning of the plan year following the year in which the plan's records based on contributions or other data demonstrate that the contractor employs less than five percent of the plan's participants.
The five percent test is also to be applied to the unions whose mem- bers are covered by multiunion plans. There are relatively few of these plans, and the Committee expects that the Department will, by
38
regulation, interpret subparagraph (D) in the spirit of these amend- ments regarding application of the five percent test in situations in- volving separate locals within, e.g., a district, joint regional council, or international.
There may be unusual situations in which persons excluded from the definition of party in interest by the amendments to section 3(14) (C) and (D) should in fact be deemed to be parties in interest because they are owned (within the meaning of section 3(14) (E) (i)-(iii) ) by a plan fiduciary. Bill section 102(6) gives the Department of Labor authority to classify such persons as parties in interest on a class basis if the Secretary finds that such action is in the public interest and nec- essary in order to achieve the purposes of title I of ERISA.
The amendment to section 3(14) (II) removes from the party in interest definition employees of employers maintaining or contributing to a plan. Under present law, every employee covered by a plan is a party in interest and a literal interpretation of section 406(a) (1) (D) would turn most welfare plan benefit payments into prohibited trans- actions. Under the amendment, only those employees who occupy posi- tions of control are included within the definition by reason of sub- paragraph (H).
The change in subparagraph (I) (substituting the word "in" for the word "with") codifies a long-standing Labor Department inter- pretation 12 and has the effect of slightly narrowing the definition.
Section 102(2) corrects an error in ERISA's drafting. The failure to include brothers and sisters in the definition of "relative" (ERISA sect ion 3 (15) ) is corrected by this change.
AMENDMENTS TO PART 5 OF TITLE I OF ERISA
ERISA Advisory Council — Section 151
Section 151 specifies that one of the three members of the Advisory Council who are representative of employers shall be representative of employers maintaining small plans.
Impact of Inflation — Sect Jon 152
Persistent high increases in the costs of goods and services have a particularly cruel impact on those whose income is fixed. While Social Security retirement payments are indexed, all but a handful of private pension plans are not. Many private defined benefit plan sponsors, while sympathetic and willing to assist their retirees through what are essentially voluntary and gratuitous supplemental pension payments, maintain that any form of mandatory cost-of-living increases would be ruinously expensive and would, at the very least, require a substantial lowering of benefit levels. ( )t hers have argued t hat i f given t he choice, participants would accept initially lower benefits in return for assur- ance that some form of inflation adjustment would be automatically provided.
A-ide from these generalities, little else has been presented to the Committee m terms of feasible suggestions, and it is the Committee's view t hat more analysis is needed before a judgment can be made about t he feasibility and ramiflcal ions of requiring plans to provide cost-of-
1 Metropolitan Life Insurance Company, Opinion letter 7.r>-147 ; Groat Western Snv Ingl and Loan Association, Opinion letter 77 83.
39
living adjustments. Section 152 of the bill mandates a study, to be conducted by the Secretary of Labor, which the Committee expects
will provide a sound basis for further deliberations. The study is to be completed and submitted to the Congress not later than 2 1 months after enactment of S. '20V.
As noted above in the discussion of S. 20i)'s amendment to the ERISA definition of "pension plan/' supplemental retirement income arrangements are used by plan sponsors to help offset the effect of inflation on fixed pension benefits. The use of these arrangements will be encouraged by the amendment in bill section 102(5) .
Remedies — Section 153
The change made by bill section 153(1) is a conforming change ne- cessitated by section 111 of the bill. Section 153(6) reserves to the Sec- retary of Labor exclusively the authority to intervene in actions under part 5 of ERISA. These actions will involve claims procedures, inter- ference with rights protected under title I, coercive interference, mis- representation, employers' obligations to contribute to collectively bargained plans, and preemption.
The other amendments to section 502 of ERISA which are made by bill section 153 are designed to complement substantive changes made elsewhere in the bill and are discussed elsewhere in this section.
Misrepresentation ; ERISA and the Securities Laics — Sections 153 and 154-
Section 154(b) of the bill adds to title I of ERISA new section 515, which prohibits certain forms of misrepresentation in connection with employee benefit plans. Section 153(2) amends section 502 of ERISA to provide an express damages remedy in cases of reliance on a pro- scribed misrepresentation. Section 153(5) makes additional changes in ERISA civil remedy and court jurisdiction rules to conform them to the new misrepresentation remedy. Section 154(a) amends ERISA section 514 to clarify that the antifraud provisions of the Federal secu- rities laws and all provisions of state securities laws shall not apply prospectively to the relationship between a plan or plan sponsor and an employee. Section 153(7) renders nugatory any litigation based on an act or omission occurring on or after the date of enactment of the bill insofar as it alleges that the relationship between a plan or plan sponsor and an employee may serve as the basis for a claim under the Federal securities laws' antifraud provisions or under any provision of state securities laws, and holds harmless plans, plan sponsors and others from any and all civil or criminal liability, penalty or punish- ment arising from any such existing claim.
It is the firm view of the Committee that the role of the Federal and state securities laws regarding the relationship between plans or plan sponsors and employees should be. at most, extremely limited. That relationship is already heavily regulated under ERISA, analo- gous and complementary provisions of the Internal Revenue Code, the Taft-Hartley Act, the Landrum-Grimn Act, a panoply of labor stand- ards laws, title YII of the Civil Rights Act. other law's which prohibit age or sex discrimination in employment, and certain Federal criminal laws. More to the point, perhaps, no less than six Federal agencies (the Department of Labor, the Internal Revenue Service, the Pension
40
Benefit Guaranty Corporation, the National Labor Relations Board, the Justice Department, and the Equal Employment Opportunity Commission) administer and enforce these laws.
The Securities Act of 1933 and the Securities Exchange Act of 1934 regulate, among other things, the issuance, sale and purchase of securities. The amendments made by the ERISA Improvements Act do not disturb in any way the application of the 1933 and 1934 Act to transactions involving the issuance, sale or purchase of securities be- tween plans and plan sponsors or third parties such as investment managers, nor do they affect in any way the definition of the term "security" in connection with such transactions. However, the amend- ments provide that the interests of an employee in a plan is not to be considered to be a security for purposes of the antifraud rules of the 1933 and 1934 Acts and within the meaning of any provision of a state securities law.
The application of the 1933 and 1934 Acts' antifraud rules to the relationship of an employee to a multiemployer plan and one of its sponsors, a local union, was the subject of recent Supreme Court litiga- tion. In I.B.T. v. Daniel,1* the Court ruled unanimously that the anti- fraud rules did not apply. The decision is largely consistent with the Committee's views as regards defined benefit plans in which participa- tion is mandatory, but the amendments in S. 209 extend the Daniel case result to all employee benefit plans which are subject to title I of ERISA.
The application of the registration rules of the 1933 Act and the periodic reporting rules of the 1934 Act to an employee benefit plan also rests on an interpretation of the term "security" which includes the interest of an employee in such a plan. Given ERISA's reporting and disclosure rules, the Committee considered extending its treatment of the antifraud rules to the 1933 Act's registration rules. Consistency alone would mandate such an extension and, as noted above, the Com- mittee is not enthusiastic about any involvement by the SEC in the day-to-day affairs of ERISA plans where the involvement is based upon the relationship between the plan or its sponsor and employees covered by the plan. Moreover, the Supreme Court's decision in the Daniel case casts considerable doubt on a portion of the rationale that has been used by the SEC to justify application of the registration rules to certain plans. Finally, due to lack of guidance from the SEC, there continues to exist great uncertainty as to the types of plans which must register under the 1933 Act.
The Committee expressed its concern in this regard to the SEC and has been assured that the Commission will soon clarify its views.14 As a result of this assurance, and because the potential for day-to-day involvement by the SEC in plan operations is somewhat less respect- ing the registration rules than it is in connection with the antifraud niH>s^ -s- 209 does not atl'cct application of the registration rules to
* International Brotherhood of Teamsters, etc. v. John Daniel, U.S. , 99 S.Ct. 790
♦ the I, Mr ;iii(l the public should receive as much guidance as possible from the Commission to resolve any uncertainties as to the application of the registration pro- visions Of the Federal securities laws . . . The Division of Corporation Finaace will he In a position to prepare a .1. -tailed release on registration of interests in employee bene-
\ ,,' o"S,."m ! V, ( "(mmissl1,,M's appeal before tin- end of this year." Extracts from a
•1' • ,-..;. , ,'' T'V" llu' A880ciate Director. Division of Corporation Finance, SEC. 1 •■•• '"'i te*1 <>i the letter is reprinted on pp. 7o«> 710 of the 1079 Hearings
41
ERISA plans. The subject of registration, however, remains one of great interest to the Committee. The Committee expect- the SEC to issue clear rules as expeditiously as possible and contemplates thai the rules will take full cognizance of the detailed reporting and dis- closure requirements of ERISA and of the Supreme Court'- view- in the Daniel decision regarding the 1970 amendment to section 3 of the 1933 Act.15
The Committee's antipathy towards application of the securities Jaws' antifraud provisions and concepts to ERISA plans and the in- volvement of the SEC in the day-to-day operations of plans is not to be confused with the Committee's views regarding misrepresentations made to employees about their plans. Positive protection against such misrepresentations is necessary and desirable, and new ERISA Mo- tions 515 (added by bill section 154(b)) and 502(a)(7) (added by bill section 153(2) ) reflect the Committee's view in this regard.
ERISA's fiduciary rules provide some protection against conduct by fiduciaries that misleads or deceives plan participants. Thus, a fiduciary who by written or oral statement deliberately misleads one or more participants concerning, e.g., the plan's financial condition, has violated his duty to act solely in the interest of the participants.
However, the duty of a fiduciary under ERISA does not run to an employee wTho is not a plan participant and. even as regards partici- pants, ERISA's civil enforcement provisions focus on equitable relief and on integrity of plan assets. Thus, assuming a participant in the case described above could show damages resulting from his or her reliance on the fiduciary's misleading statement, there is uncertainty as to whether the participant could recover an appropriate measure of damages under existing law.
Of course, a person who is not a fiduciary has no duty under ERISA respecting statements made to employees.
Regarding new section 515, the Committee emphasizes the following :
(1) A knowing misrepresentation is required. This would include a statement which is inaccurate or false on its face and known to be so ;by the utterer as well as a statement which is deceptive (and known by the utterer to be so) by virtue of omission. It would also include an inaccurate, false, or deceptive statement which is not known to be so but which is made with willful or reckless disregard for its veracity. It would not include, however, an unintentional oral omis- sion or error of description made by a person who does not hold himself out as an expert about the plan (and who does not occupy a position under the plan or with a plan sponsor or collective bargain- ing party to the plan which a reasonable person would assume i> occupied by a plan expert), if it is clear under the facts and circum- stances that the omission or error was wholly unintentional. Thus, for example, if a union official (who is not an official of a plan covering the union's members) describes the plan in general terms to a group of employees and also tells the employees that the description is gen- eral and that more detailed information is available if they want it,
15 "The amendment recognized only that a pension plan had 'an interest or partici- pation' in the fund in which its assets were held, not that prospective beneficiaries of a plan had any interest in either the plan's bank-maintained assets or the plan itself." I.H.T. v. Daniel, U.S. — , 99 S.Ct. 790 (1979).
42
his failure to detail fully, e.g., the forfeiture or suspension of benefit rules of the plan, is not to be considered a knowing misrepresentation in violation of section 515.
Similarly, if a general description of a corporation's plan were made orally to a prospective employee by an individual in the com- pany's personnel department whose duties include screening job ap- plicants but no functions under the plan and were accompanied by a copy or offer of a copy of the summary plan description, failure to accurately describe, e.g., the break in service rules of the plan, is not to be considered a knowing misrepresentation in violation of section 515.
(2) The three subjects covered by section 515(a) are intended to be interpreted in a relatively broad fashion, subject of course to the exception contained in subsection (b). "Terms and conditions of the plan'' would thus include the plan rules in their entirety and provi- sions of applicable law. "Financial condition of the plan'' would in- clude plan assets, liabilities, or transactions, and expectations or predictions regarding future assets, liabilities, or transactions. ''Status under the plan" would include the facts, plan rules, and law relating to an individual's satisfaction of the participation, vesting, accrual, break in service, and other terms of the plan upon which benefit re- ceipt is based.
(3) Rules already included in ERISA require a standard of accu- racy in disclosures plans must make to participants and beneficiaries. The statutory rules have been considerably augmented and refined by Labor Department, IRS, and PBGC regulations, and these existing rules establish levels of responsibility respecting disclosure documents which take into account the "layman's language" and "summary" concepts of ERISA, and which are not intended to be disturbed by S. 209. Accordingly, section 515(b) provides that if such a document satisfies these already existing standards, no person shall be liable under subsection (a) respecting the document. However, if the mate- rial in such a document fails to meet existing standards, subsection (b) would not be applicable and, under the proviso to that subsection, the person or persons responsible for the failure could not rely on that subsection as a defense to a claim of misrepresentation under subsection (a).
The Committee recognizes that, in many cases, plans have included in, e.g., the summary plan description or benefit status report, mate- rial that goes beyond what is required by the law. This is done in an effort to apprise participants as to matters in addition to those as to which disclosure is required or in a level of detail greater than that which is required by the law. The Committee views this practice as highly beneficial to participants and emphasizes that the proviso to subsection (b) does not relate in any way to the range of subjects in- cluded in any ERISA or Code disclosure document but rather to the manner in which matters required to be covered by the document are t reated.
For example the Committee notes that under section 102(a)(1) of ERISA, the summary plan description must be "sufficiently accurate and comprehensive to reasonably apprise * * * participants and bene- ficiariee of their rights and obligations under the plan." Section 102(b) of ERISA describes the range of material that must be covered by
43
theSPD. Labor Department regulations lfl provide additional guidance
regarding both sets of requirements. A summary plan description which meets the test of section 102(a) (1) and applicable regulations and covers the material described in section 102(1)) and applicable
regulations cannot give rise to liability under section 515(a), even if it contains additional statements, as long as those additional state- ments, by themselves and when taken together with the material re- quired by section 102(b) and applicable regulations, meet the standard of section 102(a) (1) and applicable regulations.
Section 515(b) also makes clear that plans need not, by virtue of section 515(a), add additional material to ERISA and Code-required disclosure documents. Congress determined the required scope of these documents regarding subject matter, subject only to adjustments that may be made by the Secretaries of Labor and the Treasury. Without the subsection (b) exception, it might be argued that a summary plan description or benefit status report which fails to include the statistical probability of actual receipt of a pension is misleading and constitutes a misrepresentation. The subsection (1)) exception is intended, among other things, to preclude such an interpretation.
In summary, the applicability of the new misrepresentation rule to documents required to be furnished to plan participants and bene- ficiaries will be as follows :
(1) If such a document completely fails to address a subject which is required by law or regulation, section 515 has no applicability. The remedies for such a failure are those already in ERISA and the In- ternal Revenue Code, e.g., ERISA sections 501 and 502 (c) ; Code sec- tion 6690.
(2) Subjects addressed in such a document (whether required to be included by law or regulation or voluntarily included) are to be judged by the standard presently in the law and applicable regulations (e.g., a summary plan description must be "sufficiently accurate and com- prehensive to reasonably apprise * * * participants and beneficiaries of their rights and obligations under the plan,"17) and not by the standard of section 515(a). If the manner of addressing subjects in such a document satisfies the presently existing applicable standard, section 515 is not applicable. If such existing standard is not satisfied, section 515(a) applies pursuant to the proviso of section 515(b), and applicable remedial provisions would include new section 502(a)(7) as well as, e.g., section 502 (a) (3) .
Subsection 515(c), which provides that a plan itself shall not be liable for damages resulting from a misrepresentation, reflects the Committee's view that plan assets ought not be drawn upon in recom- pense for misrepresentations of individuals involved with the plan, plan sponsor, or other persons associated with the plan. Of course, the presence of a misrepresentation allegation combined with a claim un- der, e.g., section 502(a)(1)(B) (to recover benefits due under the terms of a plan) should not, in itself, preclude a recovery of benefits from plan assets in connection with such claim.
Subsection (d) provides that the misrepresentation rule is not retro- active. Under new ERISA section 502(1) (3) (added by bill section 153(7)) and new section 515(d), a claim involving the relationship
16 29 CFR Section 2520.102-2, et seq. "ERISA. Section 102(a)(1).
53-018 0
44
between a plan or plan sponsor and an employee under the Federal securities laws' antifraud rules (or under state securities laws) re- mains cognizable and may be adjudicated to final decision in the Fed- eral courts only if such claim arises from an act or omission which occurred prior to the date of enactment of S. 209. A similar claim arising from an act or omission occurring on or after the date of enact- ment will be cognizable in the Federal courts only if it can be made under new ERISA section 515.
New ERISA section 502(a)(7), added by bill section 153(2), is the remedy provision that complements section 515. It specifies the availability of damages as a form of relief in a meritorius case under section 515. It also clarifies that there can be no recovery of damages absent a showing that the claimant relied on a misrepresentation. It is the Committee's view that the burden of proving reliance rests with the claimant. A mere allegation of reliance is not intended to be suffi- cient to shift the burden of proof to the defendant.
Also, it is the Committee's view that the claimant in an action under section 502(a) (7) must prove damages and that the cause of the dam- ages was reliance on a misrepresentation.
Numerous witnesses testified in opposition to section 515 on the grounds that it is an invitation to spurious and vexatious litigation. After careful consideration, the Committee rejected these arguments as a basis for striking section 515 from the bill. As noted above, the Committee believes that a prohibition against misrepresentation and an effective remedy where a misrepresentation occurs are necessary to protect employees, participants, and beneficiaries against know- ingly inaccurate, false, or misleading information which can defeat ERISA's most basic purposes. Moreover, the logic of these arguments applies with equal force to many other statutes and rules of law which protect individuals by permitting the recovery of damages for viola- tions of important rights and interests. The mere threat of abuse is not, in the Committee's view, sufficient reason to ignore the gap in ERISA's protective mechanisms that exists in the absence of a prohibi- tion against misrepresentation.
The threat of abuse, however, is not taken lightly by the Committee. The elements of proof for the recovery of damages in an action under now ERISA section 502(a)(7) and the careful tailoring of section 515 itself evidence the Committee's intent to include in ERISA effec- tive protection against misrepresentation without encouraging vexa- tious litigation or "strike ' suits. In this regard, the Committee notes that ERISA section 502(g) (1) (as amended by bill section 153(4)), which provides that a court may allow reasonable attorney's fees and costs to cither party, will apply to misrepresentation suits and provides a potent disincentive to frivolous and abusive suits.
Further, the Committee intends and expects that the Secretary of Labor, by regulation pursuant to ERISA section 505 and through liti- gation policy and practice, will take special care to adhere faithfully to the policy views expressed herein, and that the federal courts shall do likewise. The Secretary, of course, may not initiate suits under sen ion 502(a) (7), hut he may intervene in such suits and may initiate -nits for equitable relief, e.g., injunctions, against conduct which vio- late- Section 515.
45
In this regard, the Committee emphasizes that section 515, unlike the securities laws' antifraud rules, has been designed specifically for use
in connection with employee benefit plans. The special nature of, e.g., collectively bargained plans, is not to be ignored in interpretations of
and decisions under section 515. The realities of the workplace environ- ment and the union hiring hall, the essentially political nature of union and employer conduct in connection with organizing campaigns, and the frequent necessity for rapid decision-making in connection with contract ratification votes are factors that must be considered as part of the overall picture encompassed by section 515.
Concerning the adjustment in application of the securities laws and the new misrepresentation provision, new ERISA section 514(e) (added bv bill section 155(4)) provides that both changes are to be applied to all plans which are subject to title I of ERISA, including plans which have no "common law" employees.
Delinquent Contributions — Sections 154(b) and 153(3) and (4)
Xew ERISA sections 516 and 502(b)(2) and (g)(2), added by bill sections 154(b) and 153(3) and (4), relate to a problem encoun- tered at one time or another by virtually every multiple employer plan — delinquencies in making required contributions by contributing employers. Section 516 applies only in those situations where, pur- suant to the terms of a plan which is collectively bargained (or under the terms of a collective bargaining agreement related to such a plan) one or more employers are obligated to make specified periodic con- tributions to the plan.
The problems caused by delinquencies in such plans, brought to the Committee's attention previously, have been reemphasized in connec- tion with the Committee's consideration of legislation to amend title IV of ERISA. The importance of timely receipt of previously agreed upon periodic contributions to a collectively bargained multiple em- ployer plan is great. Section 516 reflects the Committee's views that the collectively bargained obligation of an employer to contribute to such a plan merits special treatment under ERISA, and that sole re- liance on widely varying state laws governing suits to collect delin- quent contributions is both insufficient and unnecessarily costly.
As is noted above in the discussion of bill section 142 (refunds of contributions), section 302 of the Labor-Management Relations Act prohibits contributions on behalf of certain persons. Legitimate dis- putes occasionally arise over whether certain contributions are per- missible under section 302. Xew ERISA section 516 clarifies that only contributions the payment of which is not inconsistent with, e.g., sec- tion 302, LMRA, are subject to the new rule.
Because of the costs of litigation and pre-litigation legal work which are frequently involved in efforts to collect delinquent contri- butions and because of the importance of timely contributions in con- nection with the funding requirements for multiple employer plans, the Committee believes that an additional incentive for timely pay- ment is necessary. This is accomplished by new ERISA section 502(g) (2) (added by bill section 153(4) ), under which reasonable attorneys' fees and costs of the action must be awarded to the plan in section 516 suits in which a judgment in favor of the plan is awarded.
46
New ERISA section 502(b) (2), prohibiting the Secretary of Labor from initiating suits under section 516, reflects the Committee's view that the Labor Department should not be subjected to pressures which might cause it to routinely institute collection litigation on behalf of plans against delinquent employers. This prohibition, however, does not disturb the authority of the Secretary of Labor to intervene in actions, including section 516 actions, under title I of ERISA, and the Committee contemplates that the Secretary will exercise his inter- vention power under section 516, in accordance with his general litiga- tion policy.
Preemption of State Laws — Sections Ion (1) and {2)
In addition to subjects previously discussed (application of State securities laws to the plan/employee relationship, obligation of ERISA plans to honor state court decrees involving marital property, alimony and child support), S. 209 makes two additional changes in ERISA's preemption of State law rules.
The two sentences added to ERISA section 514(b) (2) (B) by bill section 155(1) clarify the extent to which state laws regulating insur- ance, which are generally not preempted respecting ERISA plans, may affect plans which are subject to title I of ERISA.
The first sentence overturns the decision of the U.S. First Circuit Court of Appeals in Wadsworth, et ah v. ^Yhaland™ which held that a New Hampshire insurance law 1!l regulating the content of group insurance policies sold to ERISA covered welfare plans was not pre- empted under section 514 of ERISA.
The Committee is of the view that while states should not be pre- cluded from requiring ERISA plan sponsors to provide health care benefits or services to employees and their dependents (as explained more fully below), states should not be permitted to impose such requirements only on those plan sponsors which choose to provide benefits through the medium of insurance. Just as the existing language of ERISA section 514(b) (2) (B) was intended to prevent state insur- ance laws (and actions of state insurance commissioners) from inter- fering with a plan sponsor's choice to "self insure," so the first new sentence added to subparagraph (B) of section 514(b) (2) by bill sec- tion 155(1) is intended to prevent state action which would have the opposite effect, i.e., interfering with a plan sponsor's choice to provide benefits through insurance.
The second sentence added to subparagraph (B) by bill section 155 ( 1 ) makes dear that a provision of a state insurance law (or a duly promulgated rule or regulation under such a law) which requires inclusion of conversion lights in policies issued to plans is not pre- empted In section 511 of ERISA. The Committee believes that such rights are valuable to employees and their dependents, and that state policies designed to effectuate the exercise of rights of continued pro- tection tor employees after group coverage ceases should and can be
162 r 2d 7<i (lsl Clr. r.i77», cert, denied. 435 r.s. 980 t litis).
\ II. Rev. Stat. Ann. Sec. 415: 18 a(I) (1976) : "Bach insurer that issues or re- views ;m\ polici ni group or blanket accident or health Insurance providing benefits for in. .Heal nr hospital expenses, -hall provide to each group, or to the portion of each group comprised <>i certificate holders of such Insurance who are residents of this state and whose principal place ol employment is in this State, coverage tor expenses arising fiom the treatmenl ot mental Illnesses and emotional disorders • * •",
47
permitted without undue disruption of ERISA's general policy re- garding preemption of State laws.
Bill section 155(2), adding new paragraphs (5) (A) and (5) (B) to ERISA section 514(b), makes a major change in ERISA's preempt ion rules.
As a general proposition, the Committee approves and reaffirms the present sweeping preemption of state laws which relate to ERISA covered employee benefit plans. In the Committee's view, eases such as Azzaro v. Harnett 20 and National Car-Tiers' Conference Committer v. Heffeman21 were correctly decided. The national interest in uniform federal regulation of ERISA-covered employee benefits plans is still generally paramount.
However, preemption under ERISA can on occasion result in the supercession of a type of state law or an aspect of state court jurisdic- tion which many believe are highly desirable. In such situations, the Congress is justified in reviewing the competing policies highlighted by such actual or arguable supercession and in deciding whether an additional explicit exception should be added to the ERISA pre- emption rule. One such situation has involved the relationship between ERISA and state domestic relations laws. As previously discussed, the Committee has decided that a new explicit statutory exception to ERISA preemption (as well as to the anti-assignment and anti-aliena- tion rule) is warranted to replace the implied exception to ERISA's anti-assignment and anti-alienation rule as found by certain courts.
Another such situation has involved ERISA's preemption of certain state health care statutes. In two federal court decisions, progressive health care statutes of two states — have been held preempted by ERISA.23 Stated in the most elementary terms, employees and their dependents in these states are deprived of benefits and protections which the states, in the exercise of their power to regulate for the health and safety of their citizens, have deemed appropriate, while at the same time Congress has not regulated the substantive aspects of these matters at all.
In order to accommodate the bona fide state interest in protecting its citizens by assuring better health care services — an interest which is consistent with the Eederal interest expressed through ERISA of assuring improved protections under pension and welfare plans — the Committee has decided to except from ERISA's general preemption rules those state laws (or portions thereof) (1) requiring an employer to directly or indirectly provide health care benefits or services to employees and their dependents, or (2) regulating arrangements under which such benefits or services are provided.
During hearings on S. 209, a number of witnesses pointed out that some ERISA welfare plans with multistate coverage provide health
20 414 F. Supp. 47.->» (S.D.N.Y. 11)76), aff'd without written opinion, 553 F. 2d 93 (2d Cir.). cert, denied, 432 U.S. 824 (1977). In Azzaro, the District Court held that ERISA prohibited a State insurance department from directly supervising an employee pension benefit plan.
-1454 F. Supp. 914 (D. Conn. 1978). The District Court in Heffernan held that ERISA preempted a State statute insofar as it imposed a tax on benefits paid to State residents under a dental plan covered by ERISA.
--Hawaii Prepaid Health Care Act, Haw. Rev. Stat. 393-1 to 393-51 (1976) ; California Knox-Keene Health Care Service Flan Act of 1!)7 5. Cal. Health and Safety Code, sees. 1340 to 1345 (West Cum. Supp. 1971-1977).
33 Hewlett-Packard Co. v. Barnes, 425 F. Supp. 1294 (X.D. Cal. 1977) aff'd, 571 F. 2d 502 COtli Cir. 197S). cert, denied, 99 S. Ct. 108 (1978) (the California law) ; Standard Oil of California v. Agsaliul, 442 F. Supp. 965 (N.D. Cal. 1977), appeal docketed, No. 7S- 1095 (9th Cir. Jan. 16, 1978).
48
care benefits that meet or exceed the requirements and standards of existing state laws, and it has been suggested that if ERISA plans must comply with various state health care laws, the result will be an increase in plan administrative costs, accompanied in at least some cases by a lowering of overall benefit packages, at least regarding certain' plans. The Committee recognizes that application of state health care laws of the type described in new ERISA section 514(b) (5) (A) will impact on the operations of multistate ERISA welfare plans and that some increase in administrative costs is possible for such plans to the extent that they cover employees in states which have enacted such laws. However, the Committee is of the view that in the huge majority of cases the impact of bill section 155(2) for employees and their dependents will be favorable.
Moreover, the Committee has taken pains to limit the possibility of undue impact on plan administration. Paragraph (5) (B) provides that the provisions of parts 1, 4 and 5 of title I of ERISA shall con- tinue to supersede state health care benefit or service laws. This means that while states may effectuate the substance of their health care laws as regards employees (and their dependents) covered by ERISA plans, provisions of such state laws which relate to ERISA's report- ing and disclosure (part 1) , fiduciary responsibility (part 4) , or claims procedure, interference with protected rights, misrepresentation, and delinquent contributions in collectively bargained multiple employer plans (sections 503, 510, 511, 515 and 516) shall continue to be superseded under section 514(a). Also, the Committee contemplates that any litigation involving both issues arising under ERISA parts 1, 4, or 5 and issues arising under substantive provisions of state health care laws described in paragraph (5) (A), may be fully litigated in the Federal courts under ERISA's civil enforcement provisions and pend- ant jurisdiction rules.
Paragraph (5) (B) authorizes the Secretary to enter into coopera- tive arrangements with officials of states which have enacted health care laws described in paragraph (5) (A) to assist those states in effec- tuating the policies of any portions of such laws that are superseded by the provisions of parts 1, 4 and 5 of ERISA's title I. In this regard, the Committee expects the Secretary to include in his annual report to the Congress (ERISA section 513(b)) a discussion of the inter- play between state health care laws and ERISA, and an assessment of the extent to which the policies referred to in paragraph (5) (B) are being effectuated under ERISA.
The laws to which paragraph (5) (A) applies are State laws (or por- tions thereof) ( 1 ) requiring an employer to directly or indirectly pro- vide health care benefits or services to employees or employees and their dependents, or (2) regulating arrangements under which such benefits or services are provided. Use of the word "indirectly" is not intended to override or conflict with the first sentence that is added to ERISA section 514(b)(2)(B) by bill section L55(l) (specifying that State insurance laws requiring that particular benefits be pro- vided or made available under insured plans are superseded); Rather, the term "directly or indirect ly" is included in new paragraph 5 to make it deal- that a State health care law which otherwise meets the terms' of paragraph (5) (A) will not be superseded merely because it permits employers to provide required benefits through insurance or
49
because it regulates insured health care arrangements, as long as it also regulates uninsured health care arrangements.
Also, a state law which is not described in new ERISA section 51 1 (b) (5) (A) is of course not subject to the rules described above. Whether such a law is preempted will depend on how section 514 otherwise applies to it. For example, a state law prohibiting employers from maintaining pension or welfare plans (including- health care arrangements) would be a law described in section 514(a) and not described in any of the exemptive provisions of section 514. Accord- ingly, such a law would be preempted.
When the Committee met to mark up S. 209, there was some dis- cussion as to the advisability of amending ERISA to include a mini- mum standard for participation in welfare plans, especially health care arrangements. The Committee decided that such a change was un- necessary, in view of its understanding that welfare plans commonly provide for immediate participation or participation within a very short time after the commencement of employment. In connection with its oversight activity, the Committee will be monitoring welfare plan participation rules and stands ready to reconsider this decision if a trend away from the practice of rapid welfare plan participation appears to be developing.
With respect to the meaning of existing ERISA section 514(d), the Committee is of the view that this provision was not intended to be a basis for determining whether a state law is preempted by ERISA. Section 514(d) addresses the relationship between ERISA and other Federal lawTs.24 The proper and only general standard for determining whether ERISA preempts a state law is contained in ERISA section 514(a) which states that ERISA preempts any and all state laws inso- far as they relate to an employee benefit plan described in ERISA section 4(a), and are not exempt under ERISA section 4(b). This, for example, in Bucyrus-Erie Compa?iy v. Department of Industry, Labor and Human Relations of Wisconsin,25 the Seventh Circuit Court of Appeals' reliance on ERISA section 514(d) as the basis for decision was, in the view of the Committee, incorrect.
The Committee's interpretation of ERISA section 514(d) is entirely consistent with the floor statements of Senators Williams and Javits on March 23, 1978 with respect to the relationship between ERISA and state age discrimination statutes.26
Effective Dates for Amendments to Title I of ERISA
As specified in section 118 of the bill, the amendments made by bill sections 111 (disclosure of status under pension plans), 112 (exemp- tions and modifications), and 117 (alternative document distribution method for multiemployer plans) are effective on the date of enact- ment of S. 209. The amendments made by sections 113 (elimination of summary annual report), 115 (opinions of actuaries and accountants) and 116 (scope of accountant's opinion) are effective respecting all plan years beginning on and after the date of enactment.
24 This is generally true under the amendment to section 514(d) made by bill section 154(a)(3). However, new section 514(d)(2), the sole exception to this general rule, clarifies the relationship between plans subject to ERISA and State securities laws.
« 599 F. 2d 205, 7th Cir.. 1979.
26 124 Cong. Rec. S. 4451 (daily ed. Mar. 23, 1978), as corrected, 124 Cong. Rec. S. 4767 (daily ed. Apr. 4, 1978).
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As provided by bill section 126(c), the amendments made to ERISA section 206(b) by section 126(a) and the conforming amend- ment to Internal Revenue Code section 401(a) (15) made by bill sec- tion 205(h) are effective respecting- plan years beginning on and after the date which is 60 days after the date of enactment of S. 209.
The change in ERISA's joint and survivor rules made by bill section 127 (and the conforming amendment to Code section 401(a) (11) made by bill section 205 (i) ) is effective, as specified in bill section 127 (c), with respect to active participants in, and terminated, vested participants under, a plan during plan years beginning on or after the date which is 12 months after S. 209's enactment date.
Pursuant to section 156 of the bill, all other amendments made by the bill to ERISA's title I and all other conforming amendments to the Internal Revenue Code (bill section 205) are effective on the date of the bill's enactment.
TITLE II AMENDMENTS TO THE INTERNAL REVENUE CODE
Tax Treatment Of Lump Sum Distributions From Multiemployer Plans And Plans Of Certain Tax Exempt Organizations — Ten Year Arc, ■aging And Capital (rains Treatment — Section 201
Although for most purposes under ERISA and the Internal Reve- nue Code, retirement plans are classified either as defined benefit plans or defined contribution plans, a different system of classification is used for purposes of section 402(e) of the Code. Under Code section 402(e) (4) (C), for purposes of determining qualification for the favor- able tax treatment available for lump sum distributions from qualified plans, retirement plans are classified either as pension plans, profit sharing plans, or stock bonus plans.
This pre-ERISA system of classification under section 402(e) has worked to the disadvantage of multiemployer plans and has deprived covered workers of tax benefits which are widely available to workers under single employer plans. If a worker is covered under both a -ingle employer pension plan and a profit sharing plan, a lump sum distribution from the profit sharing plan may qualify for favored tax treatment (e.g.. ten year averaging and capital gains treatment) under Code section 402(e). However, if a worker is covered under a multi- employer pension plan (defined benefit plan) and a money purchase plan (defined contribution plan), a distribution from the money pur- chase plan cannot qualify for favored tax treatment under section 102(e) because benefits from both plans must be aggregated under a rule which requires that the balance to, the credit of an employee must be paid within one taxable year and pension plan benefits are normally paid over a term of years. This discrepancy in tax treatment occurs even though a single employer profit sharing plan and multiemployer money purchase plan are both defined contribution plans which are very similar in all major respects. The use of a profit sharing plan would not be feasible in a multiemployer context, however, because of problems involved in computing the profits of the many employers contributing to the plan find the possible disparate effects on workers covered under the plan.
The ( Jommittee is of t he view t hat the favored tax t reatment allowed under section 402(e) for participants in single employer plans ought
51
to be available to workers covered under multiemployer plan- and knows of no tax policy that would be adversely affected by such a change. Accordingly, under the amendment approved by the Com
mittee, a multiemployer retirement plan would bo classified as either a defined benefit plan or a defined contribution plan for purposes of
the aggregation rules under section 402(e).
The disparity in treatment under present tax law also adversely affects workers covered under retirement plans maintained by tax exempt organizations described in Code sections 501(c)(3) (charit- able, religious, educational, etc.) and (5) (labor, agricultural and horticultural). Here, too. the Committee sees no reason for not extend- ing the availability of favorable tax treatment to these employee- and knows of no adverse affect on tax policy that would result from such an extension.
The staff of the Joint Committee on Taxation has estimated thai section 201 of the bill would reduce budget receipts by less than $5 million annually.27
Tax treatment of Jump sum distributions from multiemployer plans — separation from the serr/ce — section 202
Because multiemployer plans provide portability of pension credits between the various employers maintaining the plans, and because such plans exist in industries where changes of employment are frequent, difficulty has arisen in some cases in determining when a "separation from the service'' occurs in the context of a multiemployer plan for purposes of determining qualification for favored tax treatment of certain lump sum distributions under section 402(e). In order to re- solve this issue, the amendment to section 402(e) (4) made by bill sec- tion 202 specifies that a separation from service shall be deemed to have occurred in the case of a multiemployer plan if any employee has not worked in service covered up by the plan for a period of 6 consecu- tive months.
The staff of the Joint Committee on Taxation has estimated that section 202 would reduce budget receipts by less than $5 million annually.28
Deduction for certain employee retirement savings and contributions — section 203
Bill section 203 amends the Internal Revenue Code to allow a deduc- tion to certain individuals who participate in most types of qualified pension plans for contributions to their plan, or to an IRA. or in part to their plan and in part to the IRA.
Under current law, an individual who is not participating in a quali- fied pension plan may contribute and deduct up to the lesser of $1,500 ($1,750 in the case of certain husband and wife IRAs) or 15 percent of the individual's compensation. On the other hand, an individual who is an active participant in a qualified pension plan may not make a de- ductible contribution to an IRA or the qualified plan in which he is participating. This exclusion from favorable tax treatment for em- ployee contributions applies even where the employer's contribution made on behalf of the individual is small, or where the individual may never vest in a private plan retirement benefit because of frequent
27 Joint Committee Print.
28 Id.
52
changes in employment. The Committee believes that the deduction available under the proposed amendment to the Code will correct the inequity described above and, at the same time, will give additional encouragement to the establishment of new, tax-qualified pension plans.
Under new Internal Revenue Code section 221, added by section 203 of the bill, the deductible limit for an employee's contribution is the lesser of $1,000 or 10 percent of annual compensation. In deter- mining the limit on deductible contributions to an individual retire- ment account, the amount of the limit will be reduced first by any amount contributed to the qualified plan. Thus, a deduction for a contribution to an IRA will be allowed only to the extent that the amount contributed to the plan is less than the deduction limitation. Also, the same deduction limitation applies if the employee makes contributions to two or more plans.
Employee contributions made either to an IRA or to the plan would be generally treated as contributions made by the employer, except for purposes of determining the amount of the employer's deduction for its own contribution and for certain other purposes, such as application of the vesting and previously existing antidiscrimi- nation rules under the Code.
The Committee also believes that the tax benefit derived from this new deduction should be spread among all participants of a plan on a nondiscriminatory basis and in a responsible fashion. For purposes of testing for discrimination in favor of the highly compensated, the bill uses the concept of an "actual deferral percentage," similar to the one used with respect to cash or deferred compensation arrangements.
The antidiscrimination rules applicable to employee contributions under new Code section 221 work in the following manner :
If the annual compensation of an employee covered by a qualified plan equals or exceeds $23,087 (equivalent to the present compensa- tion of a GS-12, step one, U.S. Government employee), and if his or her compensation is within the top one-third of the total compensation paid to all other plan participants, the employee would be considered to be "highly compensated" under new Code section 221(c)(7), and would be allowed a deduction only if the employer certifies that the actual deferral percentage limitations have been met. Generally, these rules will be met and highly compensated employees will be eligible to make deductible contributions to the plan or to an IRA, if the aggre- gate percentage for all highly compensated employees derived by dividing each such individual's deductible contributions by his com- pensation is not more than one and one-half times the percentage derived in the same fashion for all participants who are not highly compensated.
A deduction for contributions to a plan or to an IRA would be available for an employee with compensation of less than $23,087 without regard to whether his or her compensation is within the top one-third of compensation paid to all other plan participants. Because I he hill describes the compensation dividing line in terms of a GS level, the line will be adjusted whenever Congress adjusts pay levels of Federal employees, or when pay levels are adjusted by the President (o keep pace with inflation.
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Deductions for employee contributions to plans or IK As would generally be available under the bill to active participants in qualified pension, profit-sharing or stock bonus plans. Deductions would not be available to participants in governmental plans, tax-sheltered annuities, or to self-employed individuals. However, contribution- made by employees to certain pre-KKISA group retirement trusts maintained by labor organizations would be deductible.
As a safeguard against the possibility that employers would shift a portion of their pension cost to employees because of the available deduction, the Committee decided to permit the deduction in the case of plans requiring mandatory contributions to only those plans which required such contributions on January 1, 1978. It is obvious with respect to these existing plans that the cost-sharing by the employer and its employees was not encouraged by the availability of a deduc- tion for employee contributions.
Section 203 has been included in S. 209 because of the Committee's view that a way must be found to eliminate the gross inequity created by the unavailability of IRAs for certain active participants in tax- qualified plans. Recognizing that perfect equity cannot be achieved regarding either one employee vis-a-vis another or the policies that underlie favorable tax and labor lawT treatment to encourage sound private sector retirement income arrangements, the Committee be- lieves that section 203 is a responsible approach to a difficult problem.
The staff of the Joint Committee on Taxation has estimated that the revenue loss from section 203 would be $480 million in fiscal year 1980, $1,025 million in fiscal year 1981, $1,145 million in fiscal year 1982, and $1,330 million in fiscal year 1984.29
Tax Credits for Qualified Plans Sponsored by Small Employers — Section 204
It is the view of the Committee that the national interest in adequate present and future retirement income for Americans who have ceased active participation in the workforce demands an expansion in cover- age under private sector plans which supply retirement income.
Tax incentives have historically played a prominent role in encour- aging employers to establish and maintain such plans. Along with other incentives such as emphasis on benefit plans by employees' orga- nizations in collective bargaining, increased productivity flowing from employees' peace of mind regarding income during their retirement years, and competitive pressures leading to establishment and improve- ment of plans, favorable tax treatment has resulted in very substantial coverage among employees of medium to large employers.
How- ever, this extent of coverage has not been mirrored as respects smaller employers, where employees more frequently are not repre- sented by labor organizations, economics and efficiencies of scale are less often realized, profit margins are generally thinner, and the value of the favorable tax treatment presently available to sponsors of tax- qualified plans is less.
Bearing these factors in mind, the Committee has concluded that sub- stantial growth in employer-sponsored retirement income plan cover- age is unlikely in the absence of additional incentives, especially for
29 Joint Committee Print.
54
smaller firms.30 The tax credit in section 204 of the bill is one of several major stimulants in S. 209 to the establishment of more plans covering- more employees.
The credit provided by section 204 is designed to offset the costs asso- ciated with pian design and the early years of plan implementation. Thus, the credit is of a phase-down type and is available only during the five consecutive years beginning with the plan's establishment, or, in the case of a multiple employer plan, beginning with the com- mencement of an employer's contributions to the plan. It is keyed to deductions for employer contributions 31 and is equal to 5 percent of such deductions in the first year, 3 percent in the second and third years, and 1 percent in the fourth and fifth years.
The credit is available to any "small business employers" who estab- lishes a tax-qualified plan meeting the requirements of Code section 401(a), 403(a) (annuity plans) or 405(a) (bond purchase plans). Section 204's definition of "small business employer' reflects the Com- mittee's intent to limit the credit's availability to firms which are both small in size and in profits. Thus, the definition includes only employ- ers with less than 100 employees and earnings and profits (if a corpo- ration) or net profits (if an unincorporated trade or business or a partnership) of no more than $50,000.
The credit is not allowable in any year in which an employer (or successor) has terminated a tax-qualified plan of the type for which the credit is normally available.
The staff of the Joint Committee on Taxation, without expressing a view on the extent to which section 204 will increase coverage, has esti- mated that it would reduce budget receipts bv $5 million in 1980, $25 million in 1981, $50 million in 1982 and $90 million in 1984.32
Amendments Conforming The Internal Revenue Code To S. 209 Changes In Title I Of ERISA— Section 20:> Bill sections 205(a)-(m) contain amendments to the Internal Rev- enue Code to conform its provisions to the provisions of title I of ERISA, as amended by title I of S. 209. The Committee views stated above apply equally to these Code amendments.
TITLE III SPECIAL MASTER AM) PROTOTYPE PLANS
A second major stimulant to encourage retirement plan establish- ment and maintenance is embodied in new ERISA section 601, added by section 301 of the bill. New section 601 authorizes and describes a new type of master or prototype retirement income plan, known as a "special master plan/'
A special master plan is a pension plan (within the meaning of sec- tion 3(2) of ERISA) which has been designed by a "master sponsor," i.e.. a registered investment advisor, bank, savings and loan association. or insurance company, and adopted by an employer (or association of employers). ( renerally, special master plans must meet all requirements
his \i<w appears to lie shared by the Treasury Department. Assistant Secretary Lubick. testifying OH section 204, stated: "It is probably true that a major improvement in coverage by private plans will not he accomplished within the present framework of In- centives." /.''7.1/ Hearing a, p. 217.
Deductions attributable to the transfer to or under the plan of employer securities (as defined in section 107(d) (1 ) of ERISA) are to be disregarded in calculating deductions on which the credit is based.
in Committee Print.
00
of ERISA and the tax code but, under the terms of new section 601, virtually all of the administrative burdens and fiduciary responsibili- ties normally assumed by an employer who sponsors a pension plan arc shifted from the adopting employer to the master sponsor. Thus, the special master plan should be particularly attractive to small and other employers who are struggling with the paperwork, recordkeeping, and fiduciary duties associated with their present plans, or who have been reluctant to establish a retirement income plan because of apprehen- sions respecting these duties.
A second major improvement from the employer's perspective is that once a special master plan has been submitted to the Secretary of Labor- by the master sponsor and has been approved, the plan need not be resubmitted to the Internal Revenue Service for approval by each adopting employer.
Once an employer adopts a special master plan, his only responsibili- ties under title I of ERISA will be to make the contributions that are required under the terms of the plan, to pay the servicing costs charged by the master sponsor, and to provide to the master sponsor the in- formation needed to assure compliance with the applicable ERISA and tax code rules.33
Under new7 section 601(d), the Secretary of Labor may approve a special master plan for adoption by employers only if he finds that the plan, in design and in operation, will satisfy applicable rules of ERISA and the tax code. Before approval, the Secretary of Labor must submit the plan to the Secretary of the Treasury, who shall review the plan for compliance with applicable Internal Revenue Code requirements. If the Treasury Secretary finds that the design of the plan does not satisfy the Code's requirements, he must specify what changes must be made to bring the plan into compliance and obtain his concurrence in the approval.
The Committee contemplates that any particular master sponsor may design numerous special master plans (or variations of such plans), each intended for adoption by one or more categories of em- ployers, depending upon such factors' as size, workforce composition, industry characteristics, benefit features, and so on. In the process of approval, either or both Secretaries may find that a particular plan, intended to be adopted by, for example, employers with fewer than 100 employees in service industries, will in operation not comply with applicable ERISA or tax code rules. Or. it might be determined that the plan will not comply with such rules respecting certain service industries, even though the design of the plan is unobjectionable and it would, with respect to other service industries, operate in compliance with the rules. In either such case, the Committee expects that the terms of the approval would specify that the plan may be adopted only by service industry employers falling in certain categories designated by either Secretary.
'Subsection (d)(7) provides that approval by the Secretaries of a special master plan does not in any way limit the power of the Secre- tary of the Treasury to find that the plan of any adopting employer, in operation, has in fact failed to meet applicable tax code rules. However, it is also made clear the consequences of the failure (e.g. disqualifiea-
33 If the plan so provides, an adopting employer may also have the responsibility of furnishing summarv plan descriptions and other documents which must, by law, be distri- buted to participants and beneficiaries of his plan.
56
tion) shall not be applied retroactively unless the Secretary also finds that the failure was intentional or the result of willful neglect by the adopting employer.
A number of adjustments have been made in the applicability of ERISA's title I requirements to master sponsors and adopting employ- ers to facilitate the design and adoption of special master plans. Thus, special treatment is provided under ERISA rules relating to summary plan descriptions, annual reports, and the service provider and an- cillarv services exemptions from the prohibited transaction rules (new sections 601(c) (2), (3), and (4)).
Also, section 601(c)(5) provides that a master sponsor will not have a responsibility to verify the accuracy of information that is furnished to it by adopting employers, nor any responsibility for the failure of an adopting employer to properly fund the plan.
However, the master sponsor will be a fiduciary and the adminis- trator of each adopting employer's plan. As such, the master sponsor will be subject to all applicable requirements of ERISA and the Code, except as otherwise provided in section 601. In this regard, section 601(c) (5) (C) provides that the master sponsor will not have respon- sibility under ERISA or the Code respecting the decision of an em- ployer to adopt the master plan, except insofar as ERISA's fiduciary provisions apply to the advertising or publicizing of the administra- tive services provided, and the investment practices and procedures followed, by the master sponsor relating to the plan which is adopted and to the extent those provisions apply to disclosures regarding such services, practices and procedures.
When approval is given to a special master plan so that it may be made available to employers for adoption, the Secretary of Labor shall issue a certificate evidencing compliance of the terms and conditions of the plan with applicable requirements of ERISA and the Code. The certificate will be good for five years, and the Committee expects that the Secretary will by regulation establish procedures for the renewal of certificates after such review as the Secretary deems necessary.
The conditions for mandatory revocation of the certificate respect- ing the plan of any adopting employer or the entire special master plan are described 'in section 601(d) (5) (A) and (B). The Commit- tee contemplates that the Secretary, in consultation with the Secre- tary of the Treasury, may promulgate regulations delineating other circumstances under which a certificate will be revoked (e.g., where the plan, in operation, is abusive of the tax or labor law policies em- bodied in ERISA and applicable provisions of the Internal Revenue Code).
Section 601(e)(1) specifies the conditions under which the duties (and attendant liabilities) assumed by a master sponsor under sec- t ion 601 shall he t ransferred to an adopting employer. The Committee contemplates that these conditions shall be stated in the terms of the plan and shall include the time at which the transfer shall occur. For example, a master plan might provide that an adopting employer will \)v deemed to he plan administrator (and, as such, a fiduciary) as of the time that such employer furnishes inaccurate workforce data to t he master sponsor and t hat as of that time, the master sponsor ceases lo 1)/ administrator and fiduciary respecting that employer's plan. In tliis way, master sponsors can protect themselves from liability for matters bevond t heir conl rol.
57
The special master plan provisions in new ERISA section 601 are designed to make the establishment and maintenance of sound re- tirement plans as simple and inexpensive as possible for employers, especially smaller employers who lack the "in-house" resource- to design and administer their own plans. At the same time, special master plans, like all other plans, must meet or exceed the standards of applicable law. Thus, two concepts of section 001 are exceedingly important.
The first is the assumption by the master sponsor of virtually all of the administrative and fiduciary burden normally borne by an em- ployer who sponsors a plan. The second is a procedure under which no master plan may be made available for adoption until it has been thoroughly reviewed by the Secretaries of Labor and the Treasury to be certain not only that the design of the plan meets all applicable legal standards, but also that the plan in operation will comply with the law.
To meet this second objective — compliance in operation — the Com- mittee emphasizes that the Secretaries are to have sufficient latitude in designating the types of employers (by size, industry, workforce characteristics, etc.) to which a master plan may be made available for adoption to provide reasonable assurance that approved special master plans will, in operation, satisfy applicable rules. To a large extent, this "tailoring'' can be accomplishel by permitting numerous variations of a particular master plan. For example, the Secretary of the Treasury, as part of the approval process under section 601(d) (2) (B), might approve the marketing of a master plan containing a ten year cliff vesting standard to one or more categories of employers with high workforce turnover characteristics only if, for those employers, the plan embodies the 4/40 vesting rules. As explained in section 601 (d) (1), the Committee contemplates that regulations and other rules under new part 6 will be designed to facilitate the development of special master plans and their wide-spread adoption by employers.
Once approval is obtained under conditions imposed by the Secre- taries relating to the terms and conditions of the plan and the class of employers to which it may be made available, section 601 contemplates an absolute minimum of government involvement respecting any adopting employer. Accordingly, adopting employers will have no need to secure advance determination letters from the Internal Rev- enue Service, will not have to file annual financial (Form 5500) and other reports, will not have to furnish summary plan descriptions and other documents to plan participants (except as provided by sec- tion 601(e) (2) ), and will not be responsible for processing claims for benefits. All of the duties described above will be performed by the master sponsor, who will be legally responsible for carrying them out in the manner prescribed by law.
Similarly, the adopting employer will not be a fiduciary respecting the administration of the plan or the investment of plan assets. The master sponsor will be a fiduciary and, depending ^n the administra- tive and investment procedures followed, others may also be fiduciaries.
Bill section 301(c) provides that the special master plan provisions shall be. effective one vear after the bill's enactment. As is specified in new ERISA section 601(d) (1), the Committee expects the two Secre- taries to issue initial regulations and forms, sufficient to enable pro-
58
spective master sponsors to submit special master plans for approval, a soon as possible after enactment and not later than the effective date of section 601.
TITLE IV EMPLOYEE BENEFITS COMMISSION
Title IV of S. 209 establishes a new agency — the Employee Benefits Commission — to take over the functions now performed by the Labor Department and Pension Benefit Guaranty Corporation under titles I and IV of ERISA, and by the Internal Revenue Service under provi- sions of the tax code relating to private sector pension plans.
It is the view of the Committee that the national interest in private sector employee benefit plans and the interests of plan sponsors, par- ticipants, and beneficiaries are not well served by the present frag- mented method of administration and enforcement of ERISA and complementary provisions of Federal tax law. Further, the Committee believes that all of these interests will be better served under the uni- tary administrative arrangement provided by title IV of the bill.
There are several components of the Committee's reasoning and con- clusions in this regard.
First, experience has demonstrated that where two or more agencies administer a law (or separate laws designed to achieve the same ob- jective respecting the same sector of society), the inevitable result is confusion, duplication of effort, delay in decision making, undue cost for the regulated public, and reduced government effectiveness in at- taining the objectives the law seeks to achieve.
All of these attributes are displayed under ERISA's tripartite ad- ministrative and enforcement arrangement, despite what the Com- mittee believes to be generally good faith efforts by officials of all three agencies during two separate Administrations to minimize the inherent difficulties of the existing structure.
The attributes of fragmented administration are destructive of the purposes of ERISA. They make it vastly more difficult for the agen- cies and the Congress to assess the efficacy of the law itself or of par- ticular provisions of the law. They exacerbate the burdens and costs of those who are regulated and needlessly breed frustration on their part respecting the law and for the entire process of government. And they delay or otherwise interfere with achievement of the law's ob- jectives, thus short-changing employees and retirees.
Most importantly, fragmented jurisdiction has prevented the devel- opment and implementation, within the Executive Branch, of coherent short- and long-term planning respecting ERISA and, more generally, respecting the critically important subject of this nation's policies regarding retirement income for the remaining years of this century and beyond.
Two recent developments bear on this matter. In late December of L978, Reorganization Plan No. 4 was implemented, assigning more nearly exclusive responsibility for interpretation of some ERISA pro- vision- to either the Labor Department or the Internal Revenue Serv- ice. The effects of the Reorganization Plan appear to be constructive, within its limited framework, and the Committee looks forward to the Presidential evaluation and recommendations for long-term ad- ministrative structure that arc called for by section 107 of the Plan.
59
The Committee notes, however, that the Plan docs not deal at all with certain areas of shared jurisdiction, such as reporting and disclosure and enforcement, does not include within its scope any of t be overlaps between the Pension Benefit Guaranty Corporation and the other two
agencies, and, of greatest importance, does not contain any mecha- nism for the development and implementation of rat ional and coherent policy.
Earlier this year, the President's Commission on Pension Policy got underway in earnest. It is the Committee's understanding that the Commission will not address the issue of ERISA's administrative and enforcement structure, but will focus on broader, long-term retire- ment income issues and will make such recommendations as it deems necessary and appropriate. This too, is a welcome development, and the very fact that the President saw a need for the Commission em- phasizes both the importance of retirement income policy-making and the present lack of it within the Executive branch agencies.
Unitary administration under the Employee Benefits Commission, as provided in title IV of the bill, will eliminate the attributes of tripartite jurisdiction under ERISA and, as is specified in bill section 401(e) (1), the Commission wall formulate policy respecting Federal laws relating to employee benefit plans. The Committee contemplates that some of the policies formulated by the Commission may be im- plemented under the authority of existing law. In other cases, policies developed may not be implemented unless appropriate action is taken by Congress. In either case, though, there will be an ongoing Execu- tive Branch policy making function.
The Commission will be independent of the Labor Department and the Treasury, but will have close, high-level links to both. The Com- mission's chairman will be a special liaison for the Secretary of Labor. The vice chairman wil be a special liaison for the Secretary of the Treasury. The Chairman and vice chairman will report regularly to the respective Secretaries. These statutory links will assure that labor, collective bargaining, and tax policy concerns will be appropriately considered in all Commission and staff decisions and actions.
The Commission will have three additional members, and all five Commission members will be Presidential appointments, subject to Senate confirmation, with staggered six year terms of office, as provided in bill section 401 (c) .
Regarding functions relating to employee benefit plans now per- formed by the Internal Revenue Service, bill section 401(e) (3) identi- fies certain Internal Revenue Code sections under which functions w^ill be transferred to the Commission. In addition, section 401(f) requires the President, within nine months after the bill's enactment, to identify such other Code sections under which functions should be transferred to the Commission in order to effectuate the maximum feasible con- solidation in the Commission of all statutory functions presently car- ried out by the Labor Department and the Internal Revenue Service respecting employee benefit plans. This discretion is accorded to the President in accordance with the Committee's view that the creation and operation of the Commission shall not disturb the integrity of either tax policy or tax collection.
Bill section 402 states the Commission's powers, which include all of the powers and authoritv now vested in the Secretarv of Labor and
53-018 0-79-5
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the PBGC under ERISA, as well as the power to obtain compliance with the Internal Revenue Code provisions described in bill section 401 (e) (3) (including the provisions designated by the President under section 401(f)).
In addition, the Commission is to have the power to certify to the Secretary of the Treasury whether or not a particular plan satisfies the requirements of the Code provisions described in bill section 401(e) (3) (and those designated under section 401(f)). Section 403 specifies that such certifications must be treated by the Secretary of the Treasury as if he had made them himself.
These provisions effectuate the Committee's intent that the Commis- sion is to be fully responsible for administering and enforcing ERISA and the complementary tax code provisions. The Committee believes that this can be done without disturbing the integrity of tax policy or tax collection, and notes that tax policy respecting ^employee benefit plans is designed largely to help effectuate Federal social and economic policies rather than to generate revenues for the operation of govern- ment and the provision of government services.
IV. INDIVIDUAL VIEWS OF SENATOR JAVITS AND ADDITIONAL VIEWS OF SENATOR HATCH
Individual Views of Jacob K. Javits
I am very pleased that the Senate Labor and Human Resources Committee has unanimously approved S. 209, the ERISA Improve- ments Act of 1979. As a cosponsor of this measure with Senator Williams, I believe that S. 209 is a major step toward the clarification and strengthening of the Employee Retirement Income Security Act of 1974 (ERISA). The bill will improve the benefits, coverage, and viability of the private pension system.
S. 209, to be sure, does not deal with every employee benefits issue. For example, Senator Williams and I have cosponsored, by request, S. 1076 which would redesign the plan termination insurance program for multiemployer plans. S. 209, however, and its predecessor bill S. 3017, contain the first comprehensive set of ERISA amendments since 1974 and represent over two years of work of the Senate Labor Com- mittee.1
I perceive a growing awareness in our country of the need now for comprehensive planning regarding the equitable provision of retire- ment income for an increasingly aging population. For this reason the President has appointed the President's Commission on Pension Policy which is presently studying the adequacy of private and public pen- sion plans to contribute to our society's ability to cope with the pyra- miding problem of providing retirement income. By the year 2030, the over sixty-five age group, which in 1970 comprised about 10 percent of the population, is expected to grow to approximately 17 percent of the anticipated U.S. population. This "greying of the population" is in part due to such demographic factors as declining fertility and mor- tality rates as well as the maturation of the post-war baby boom.
The approach which Senator Williams and I have adopted in S. 209 for dealing with the the increasing demand for retirement income is to encourage the maintenance and growth of private pension plans. This approach stands in sharp contrast to the proposals of some to scrap the private retirement system and establish one all-encompassing Social Security system. I believe that the Social Security system should be placed on a sound long term financial footing but that advanced- funded private and public pension plans which contribute to capital formation should continue to be maintained and expanded as a key source of additional retirement income.
S. 209 contains provisions which are intended to facilitate compliance with ERISA and thereby to remove impediments to plan maintenance
1 My earlier statements on the need for ERISA amendments include the following : 123 Cong. Rec. S.13528 (daily ed. Aug. 4. 1977) ; 123 Cong. Rec. S.16057 (daily ed. Sept. 30. 1977) ; 124 Cong. Rec. S.6584, S.6586 (daily ed May 1, 1978) ; 125 Cong. Rec. S.570 (daily ed. Jan. 24, 1979).
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and formation. S. 209 also contains proposals which would expand coverage and benefits under private pension plans. For a fuller discus- sion of the bill's provisions, I refer to the preceding portions of this Committee Summary and Analysis of Consideration which I approve. I support particularly the statements on ERISA preemption, a subject which my staff and I have studied extensively.
Every day of delay on enacting S. 209 is a day lost in strengthening private employee benefit plans. I urge my colleagues in both the Senate and the House to give S. 209 prompt consideration.
Additional Views of Senator Orrin G. Hatch on S. 209, "The ERISA Improvements Act of 1979"
It is my judgment that S. 209 as presently constituted in certain provisions, perpetuates the apparent negative impact which ERISA has had on some some areas of the private pension system. Amend- ments which have a chilling effect on the growth and continued sta- bility of employee benefit plans must be avoided.
Accordingly, I believe we should enact amendments which will al- leviate the current burdens or at least reduce the legal complexities em- ployers must face, encourage the growth of plans to cover the 50 per- cent of presently uncovered workers, and maintain proper protection of the rights of existing participants and beneficiaries.
In short, a bill, to be worthy of full Senate consideration, should be balanced and designed to encourage rather than discourage the growth of the private pension system.
Allow me to indicate at this point some of the areas of S. 209 which require further refinement to achieve the basic goals I have outlined above.
1. The bill establishes a new agency, the Employee Benefits Commis- sion, to administer ERISA. The agency is intended to end the dual and overlapping jurisdictions under existing law currently exercised by the Internal Revenue Service and the Department of Labor.
While the amendment is well-intended, I do have serious reservations concerning the inclusion in this bill of a new agency to absorb the current functions of the Treasury and Labor Departments and the Pension Benefit Guaranty Corporation. Last session we approved the Administration's ERISA Reorganization Plan No. 4 which attempts to deal with the dual jurisdiction problem; however, the administra- tion has not yet submitted its long-term proposal. It is due by January 31, 1980, on whether or not one new agency should be created. My feel- ing is that the proposed new single agency should be deferred until there has been a reasonable opportunity to assess the operation of the Aministration's Reorganization Plan, and until the issue is addressed, and the recommendations by the President's Commission on Pension Policy have been received.
Moreover, creation of a new agency may well be counterproductive and result in triple jurisdiction instead of dual jurisdiction. Although consolidation of all pension regulation in one agency sounds good in theory, in reality it may result in three agencies principally adminis- tering ERISA — Treasury, Labor and the new agency — instead of the two principal existing agencies. This will simply aggravate the prob- lem instead of resolve it. For example, nobody has suggested that the IRS be denied its traditional role of auditing tax deductions for pen- sion contributions to insure that they are not used merely as a business tax shelter device. Likewise, the Labor Department should always be empowered to prevent certain union abuses whether or not such abuses are pension related.
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64
In addition, the principal multiple jurisdiction problems arose im- mediately after passage of EKISA and, in large part, were associated with the creation of new offices within the Labor and Treasury Depart- ments and the implementation of entirely new legislation. The creation of a new agency at this time could have the effect of resurrecting many of the start-up and transfer of responsibility problems which were the source of many of the complaints which generated this proposal but which have now been largely resolved.
Furthermore, it is my opinion, that the American people want to cut big government down to size not expand it. With respect to pensions, there is no compelling need for the establishment of a new Federal agency which would require hiring additional Federal employees and opening held offices all over the Nation at what must be substantial costs. This is an added cost which can be avoided by clarifying and consolidating jurisdictional lines rather than creating more bureauc- racy and I believe, by avoiding a premature action here, this situation, which is of concern to all of us. will be satisfactorily resolved.
In summary, I believe the creation of a new agency is at best pre- mature. Until such time as the Congress and the public can reach a consensus on a coherent and responsive national pension policy, which is the challenge of the Pension Commission, there seems to be no reason to determine whether one, two or three agencies should implement ERISA. I believe the overwhelming majority of our expert witnesses testifying on this subject agree with the efficacy of a deferral of this issue under the circumstances. It makes eminently good sense and I hope that the Senate will agree with me when floor consideration is commenced.
2. The bill would require that all qualified plans provide joint and survivor benefits for each participant with 1 ) years of vested service without regard to the participant's age at death.
This provision, in essence, mandates pension plans to provide a death benefit to a surviving spouse unless the participant otherwise elects. However, pension plans are designed to provide retirement income, not death benefits. A requirement that accrued benefits be paid to surviving spouses would increase the funding and administra- tive burdens on plans, while providing relatively little protection to surviving spouses since the benefit payable under the provision would not commence until the employee would have attained retirement age, which might be as much as thirty years after death. Moreover, most employees currently elect out of pre-retirement survivor's annuities. Because the benefit payable to a surviving spouse under the proposal would be relatively small, even if the employee had ten or twenty years of vesting service, most employees would elect not to take sur- vivors' protection. Under the proposal, as I understand it, employees may change their election regarding the survivor's annuity at will. The recordkeeping burden on the employer would be immense, par- ticularly when the incidence of divorce and remarriage1 is considered. In addition, every defined benefit plan would have to be amended, ;iikI many defined contribution plans would need amendment; sum- mary plan descriptions would have to be amended; plans would prob- ably seek requalincation.
In light of the relatively small benefit advantages of this provision we should evaluate it in this light : will it constitute another impedi-
65
ment on the growth and stability of employee benefit plans? I think the answer is "yes", and accordingly it should be eliminated.
3. The bill, as reported, contains a provision which prohibits any reduction or suspension of pension benefits as a result of an award or settlement made under a workers' compensation law.
I feel it is an unwise proposal and should be eliminated.
a. The proposal would sanction costly and inappropriate double- dipping.
b. The Internal Revenue Service has long allowed plans to offset workers' compensation awards against pension benefits, thus permit- ting the elimination of very costly duplication of benefits.
c. Many plans provide benefits commencing at normal retirement age or upon earlier total and permanent disability. To preclude the offset of workers' compensation benefits from pension benefits might encourage employers to eliminate disability benefit provisions or to resist increasing normal retirement pension benefit levels.
d. Those plans (and their summary plan descriptions) which nowT offset workers' compensation would have to be amended.
e. The proposal is inconsistent with other Federal lawrs relating to workers' compensation offsets. For example, 42 U.S.C. section 424a provides that Social Security disability benefits must be offset by workers' compensation benefits to the extent that the combined Social Security and workers' compensation benefits exceed 80 percent of the employee's previous average monthly earnings. Further evidence of the policy against double benefits appears in other Social Security provisions (see 42 U.S.C.A. sections 402(d)(2)(B), (k)(3), and 414(a)) and was recently reaffirmed by Congress by requiring reduc- tion of Social Security survivors' benefits for persons receiving Civil Service annuities (see section 334(b) (2) of the Social Security Amend- ments of 1977, Public Law 95-216).
f. The provision might be inflationary because it has the potential to cause a considerable increase in employers' workers' compensation costs at a time when that system is in need of more urgent reform of the administrative practices that increase unnecessary costs.
g. It would unnecessarily interfere with the right of free collective bargaining iby interjecting the federal government into that process and eliminating a currently negotiated item among labor and management.
For all of these reasons, this proposal does not meet the test of strengthening and expanding private pension plan coverage under ERISA and as such, it should be rejected.
In conclusion, it is my hope and expectation that the amendatory process will cure some of these defects and that the product which will ultimately surface from the Finance Committee, where S. 209 has been referred, and through the Senate will facilitate and enhance the positive aspects of ERISA, for the benefit of all working Americans.
V. TABULATION OF VOTES CAST IN COMMITTEE
Pursuant to section 133(b) of the Legislative Reorganization Act of 1949, as amended, the following is a tabulation of votes in committee:
Motion by Senator Javits that the Committee Print be treated as the basic text for purposes of amendment — agreed to without objection.
Motion by Senator Pell to include plans of organizations described in Internal Revenue Code sections 501(c) (3) or 501(c) (5) in bill sec- tion 201, amending Code section 402(e) (4) (C) (relating to aggrega- tion of certain trusts and plans) — agreed to without objection.
Motion by Senator Kennedy to adopt the Kennedy -Cranston amend- ment, as clarified by Senator Metzenbaum, providing that substantive requirements of state health care laws shall not be preempted by ERISA (bill section 155(2) ) — agreed to without objection.
Motion by Senator Javits to require that the Secretary of Labor re- port to the Committee on Labor and Human Resources of the Senate and the Committee on Education and Labor of the House of Repre- sentatives and to the President respecting certain pending applications for exemptions from ERISA's prohibited transaction rules (bill sec- tion 145) — agreed to without objection.
Motion by Chairman Williams to report the bill favorably to the Senate as amended, subject to Rule XXVI of the Standing Rules of the Senate, carried as follows :
Yeas Nays Xot Voting
Williams Xelson
Randolph Stafford
Pel] Hatch
Kennedy
Eagleton
( Jranston
Riegle
Metzenbaum
Schweiker
Javits
Armstrong
I [umphrey
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VI. CBO COST ESTIMATE
Congressional Budget Office,
U.S. Congress, Washington J >.C, October 23, l(.n(.>. Hon. Harrison A. Williams, Jr.,
Chairman, Committee on Labor and Human Resources, U.S. Senate, Washington, D.C. Dear Mr. Chairman : In accordance with the Budget Act of 1974. the Congressional Budget Office has examined S. 209. which would make changes related to the Employee Retirement Income Security Act of 1974 (ERISA). Title II of the bill makes several changes in the Internal Revenue Code of 1954 pertaining to contributions to re- tirement plans. The Congressional Budget Office agrees with the methods used and the resulting revenue estimates made by the Joint Committee on Taxation for Sections 201, 202, and 204 of Title II of the bill. The revenue loss for those sections is estimated to be less than $15 million in fiscal year 1980 and $120 million by fiscal year 1985.
Title IV of S. 209 would establish the Employee Benefits Commis- sion as an independent agency of the Executive Branch. This ( Commis- sion would assume those functions and duties of the Secretary of Labor and the Pension Benefit Guaranty Corporation which fall under the Employee Retirement Income Security Act of 1974, and of the Secretary of Treasury insofar as they relate to employee benefit plans. Since the personnel of the new Commission would be transferred from the Departments of Labor and Treasury and the Pension Benefit Guaranty Corporation, with the possible exception of the Commis- sioners and Liaison Officers ; the net cost in federal budget outlays of this title should not be significant.
The bill would provide a new tax expenditure with Section 204, which would allow a credit to small business employers for their con- tributions to employer retirement plans. This provision is estimated to cost $5 million in fiscal year 1980 and approximately $110 million by fiscal year 1985. Sincerely,
Alice M. Rivlin,
Director. (67)
VII. AMENDMENTS MADE BY S. 209 TO TITLE I OF EKISA 1 Subtitle A — General Provisions
FINDINGS AND DECLARATION OF POLICY
Sec. 2. (a)-(c) * * *
(d) It is hereby further declared to be the policy of this Act to foster the establishment and maintenance of employee benefit plans sponsored by employers, employee organizations, or both.
DEFINITIONS
Sec. 3. For purposes of this title : /-j \ * * *
(2) (A ) [The] Except as provided in subparagraph (B), the terms "employee pension benefit plan'- and "pension plan'' mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization or by both, to the extent that by its express terms or as a result of surround- ing circumstances such plan, fund, or program —
[A] (i) provides retirement income to employees, or
[B] (ii) results in a deferral of income by employees for pe- riods extending to the termination of covered employment or beyond,
regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.
(B) Notwithstanding subparagraph (A), the /Secretary may by regulation prescribe rules for one or more exempted categories under ivhich (i) severance pay arrangements and (ii) supplemental retire- ment income arrangements will be deemed not to be pension plans for the purposes of this title but will be deemed to be welfare plans de- scribed in paragraph (1). Any such regulations shall include rides under which the Secretary may remove any such arrangement from any exempted category if he finds it to be a subterfuge to evade the purposes of this title.
(3)-(13) ***
(14) The term "party in interest" means, as to an employee benefit plan —
(A) any fiduciary [including, but not limited to, any admin- istrator, officer, trustee, or custodian], counsel, or employee of suchTemployee benefit] plan;
(B) a person providing professional services to such plan, or a person pro-riding nonprofessional services on a continuous basis to such plan;
Sections not shown are unchanged by S. -01). Subsections, paragraphs, etc. followed by asteriski are aol changed by s. 209.
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(C) an employer any of whose employees is a trust < < of a t, described in section 302{c) of the Labor-Management Relations Act, 1947, if such trust is maintained in connection with such plan, and an employer any of whose employees [are] is covered by such plan if the employees of such em ploy < r constituti 5 perci nt or more of all employees covered by the plan on the first day of the plan year;
(D) an employer organization any of whose m< mh< rs or em- ployees is a trustee of a trust described in section 302(c) of tht Lab or- Management Relations Act, 1947. if such trust is main- tained in connection with such plan, and an employee organiza- tion any of whose members [are] is covered by such plan if the members of such employee organization constituti 5 percent or more of all employees covered by the plan on the first day of tit, plan year;
(E)-(G) * * *
(H) an [employee,] officer, director (or an individual having powers or responsibilities similar to those of officers or directors), [or] a 10 percent or more shareholder, directly or indirectly. [of a person described in subparagraph (B), (C), (D), (E), or (G), or of the employee benefit plan] or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subpa ra r/raph (/>). (O), (D). (E),or{G))ov
(I) a 10 percent or more ([directly or indirectly] in capital or profits) partner or joint venturer, directly or indirectly, [of] in a person described in subparagraph (B), (('). (I)). (E). or
The Secretary, after consultation and coordination with the Secretary of the Treasury, may by regulation prescribe a percentage lower than 50 percent for subparagraph (E) and (G) and lower than 10 percent for subparagraph (H) or (I). The Secretary may prescribe regula- tions for determining the ownership (direct or indirect) of profits and beneficial interests, and the manner in which indirect stockhold- ings are taken into account. // the Secretary determines that it is necessary in order to achieve the purposes of this titlt and in the public interest to do so. he may by regulation dt signate as parties ',,, interest within the meaning of this paragraph any class of employers any of whose employees are covered by a plan and any class of t mployee orga- nizations any of whose membt rs are coven <l by a plam ( other titan an employer or an employee organization described in subparagraph (C) or (D)) if each employer or employee organization comprising sunk class is owned (within the meaning of subparagraphs < E) (i) through (Hi) ) by a fiduciary respecting such a plan.
(15) The term "relative" means a brother, sister, spouse, ancestor. lineal descendant, or spouse of a lineal descendant.
(16)-(19) * * *
(20) [The] Except as otherwise provided in sections 502(1) and 514(d) (2) and (S). the term "security" has the same meaning as such term has under section 2(1) of the Securities Act of 1933 (15 U.S.C. 77b(l)).
(21)-(36) * * *
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(37) (A) The term "multiemployer plan" means a plan —
[(i) to which more than one employer is required to contribute.]
L(ii)3 (<0 which is maintained pursuant to one or more collec- tive bargaining agreements between an employee organization and more than one employer,
(ii) to which ten or more employers contribute, or to which more than one and fewer than ten employers contribute if the Sicretary finds thai treating such a plan as a multiemployer plan mould be coiixist< ,if with purposes of this Act, and
£(iii) under which the amount of contributions made under the plan for a plan year by each employer making such contri- butions is less than 50 percent of the aggregate amount of contributions made under the plan for that plan year by all employers making such contributions,]
[(iv)] (Hi) under which benefits are payable with respect to each participant without regard to the cessation of contributions by the employer who had employed that participant except to the extent that such benefits accrued as a result of service with the employer before such employer was required to contribute to such plan, and
E(V)J ({r) which satisfies such other requirements as the Secretary may by regulations prescribe. (B) For purposes of this paragraph
[(i) if a plan is a multiemployer plan within the meaning of subparagraph (A) for any plan year, clause (iii) of subpara- graph (A) shall be applied by substituting "75 percent" for u50 percent'" for each subsequent plan year until the first plan year following a plan year in which the plan had one employer who made contributions of 75 percent or more of the aggregate amount of contributions made under the plan for that plan year by all employers making such contributions, and
[(ii)] , all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a) of the Internal Revenue Code of 1954, determined without regard to section 1563(e)(3)(C) of such Code) shall be deemed to be one employer. (38)-(39) * * *
Subtitle B— Regulatory Provisions
PART [—REPORTING AM) DISCLOSURE
Duty of Reporting and Disclosure
. L01. ia) The administrator of each employee benefit plan shall cause to be furnished in accordance with section 104(b) to each par- ticipant covered under the plan and to each beneficiary who is receiv- ing benefits under the plan —
( 1 ) a summary plan descripl ion described in section 102(a) (1) ; and
(2) the information described in section KM(l>) (3) and 105 (a) and [>)](/,). (b) (d) * * *
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Annual Reports Sec. 103. (a)(1) * * *
(2) * * *
(3) (A) Except as provided in subparagraph (C), the adminisl rat or
of an employee benefit plan shall engage, on behalf of all plan par- ticipants, an independent qualified public accountant, who shall con- duct such an examination of any financial statements of the plan, and of other books and records of the plan, as the accountant may deem necessary to enable the accountant to form an opinion as to whether the financial statements and schedules required to be included in the annual report by subsection (b) of this section are presented fairly in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Such examination shall be conducted in accordance with generally accepted auditing standards, exept to the extent required by subparagraph (B). and shall involve such tests of the books and records of the plan as are con- sidered necessary by the independent qualified public accountant. The independent qualified public accountant shall also offer his opinion as to whether the separate schedules specified in subsection (b) (3) of this section [and the summary material required under section 104(b) (3)] present fairly, and in all material respects the information contained therein when considered in conjunction with the financial statements taken as a whole. The opinion by the independent qualified public accountant shall be made a part of the annual report. In a case where a plan is not required to file an annual report, the requirements of this paragraph shall not apply. In a case wdiera by reason of section [104(a) (2)] 110 a plan is required only to file a simplified annual re- port, the Secretary may waive the requirements of this paragraph.
(B) In offering his opinion under this section the accountant [may] shall rely on the correctness of any actuarial matter certified to by an enrolled actuary [, if he so states his reliance].
(C) The opinion required by subparagraph (A) [need] shall not be expressed as to any statements required by subsection (b) (3) (G) prepared by a bank or similar institution or insurance carrier regu- lated and supervised and subject to periodic examination by a State or Federal agency if such statements are certified by the bank, similar institution, or insurance carrier as accurate and are made a part of the annual report.
(Y)\ * * *
(4) (A) The administrator of an employee pension benefit plan sub- ject to the reporting requirement of subsection (d) of this section shall engage, on behalf of all plan participants, an enrolled actuary who shall be responsible for the preparation of the materials com- prising the actuarial statement required under subsection (d) of this section. In a case where a plan is not required to file an annual report. the requirement of this paragraph shall not apply, and. in a case where by reason of section [104(a) (2) J 110, a plan is required only to file a simplified report, the Secretary may waive the requirement of this paragraph.
(B)-(C) * * *
(D) In making a certification under this section the enrolled actu- ary [may] shall rely on the correctness of any accounting matter under
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section 103(b) as to winch any qualified public accountant has ex- pressed an opinion [, if he so states his reliance].
(b)-(e) * * *
Filing With Secretary and Furnishing Information to Participants
Sec. 104. (a)(1) * * *
[(2) (A) With respect to annual reports required to be filed with the Secretary under this part, he may by regulation prescribe simpli- fied annual reports for any pension plan which covers less than 100 participants. In addition, and without limiting the foregoing sentence, the Secretary may waive or modify the requirements of section 103 (d) (6) in such cases or categories of cases as to which he finds that (i) the interests of the plan participants are not harmed thereby and (ii) the expense of compliance with the specific requirements of sec- tion 103(d)(6) is not justified by the needs of the participants, the Pension Benefit Guaranty Corporation, and the Department of Labor for some portion or all of the information otherwise required under section 103(d) (6).
[(B) Nothing contained in this paragraph shall preclude the Sec- retary from requiring any information or data from any such plan to which this part applies where he finds such data or information is necessary to carry out the purposes of this title nor shall the Sec- retary be precluded from revoking provisions for simplified reports for any such plan if he finds it necessary to do so in order to carry out the objectives of this title.
[(3) The Secretary may by regulation exempt any welfare benefit plan from all or part of the reporting and disclosure requirements of this title, or may provide for simplified reporting and disclosure if he finds that such requirements are inappropriate as applied to welfare benefit plans.]
EW J (#) The Secretary may reject any filing under this section —
(A) if he determines that such filing is incomplete for purposes of this part ; or
(B) if he determines that there is any material qualification by an accountant or actuary contained in an opinion submitted pur- suant to section 103(a)(3)(A) or section 103(a)(4)(B).
CO"*) J (-J>) If the Secretary rejects a filing of a report under para- graph [(4)] {u2) and if a revised filing satisfactory to the Secretary is not submitted within 45 days after the Secretary makes his deter- mination under paragraph [(4)](#) to reject the filing, and if the Secretary deems it in the best interest of the participants, he may take any one or more of the following actions —
(A) retain an independent qualified public accountant (as de- lined in section 103(a)(3)(D)) on behalf of the participants to perform an audit,
(B) retain an enrolled actuary (as defined in section 103(a) (4) (C) of this Act ) on behalf of the plan participants, to prepare an actuarial statement.
(( 1 ) bring a civil act ion for such legal or equitable relief as may be appropriate to en force t he provisions of this part, or
(I)) take any other action authorized by this title. The adminis- trator -hall permit such accountant or actuary to inspect whatever
73
lx>oks and records of the plan are necessary for such audit. The plan shall be liable to the Secretary for the expenses for such audit or report, and the Secretary may bring an action against the plan in any court of competent jurisdiction to recover such expenses.
(b) Publication of the summary plan descriptions and annual re- ports shall be made to participants and beneficiaries of the particular
plan as follows :
(l)-(2) * * *
[(3) Within 210 days after the close of the fiscal year of the plan, the administrator shall furnish to each participant, and to each benefi- ciary receiving benefits under the plan, a copy of the statements and schedules, for such fiscal year, described in subparagraphs (A) and (B) of section 103(b)(3) and such other material as is necessary to fairly summarize the latest annual report.]
E(4)] (3) The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated sum- mary plan description, plan