Three Senators (Tillis, Marshall, Cassidy) have proposed legislation that would allow employers to tap into surplus pension (“defined benefit/cash balance”) assets without terminating the plan.

Background:
This harkens back to 1985, when employers would terminate an overfunded DB plan, pay out accrued benefits, and then re-establish the same plan the next day. (They called this “termination/re-establishment”—quite creative.) Legislators really disliked this idea, hence the 50% excise tax we have today on surplus assets that companies absorb upon plan termination.

 

But here are some new ideas:
The American Benefits Council (an employer group) suggested this new idea earlier this year, and it has now been introduced as proposed legislation. It offers some different concepts than the old method described above. For example:

• The excess assets can be grabbed without terminating the DB plan.

• At least 110% of assets must remain after the grab, so hopefully it won’t cause these overfunded plans to become “underfunded,” but with a 10% cushion, you never know.

• Any employees who left in the prior year would need to be made fully vested. This mimics the current rule for terminating plans, where everyone must be made fully vested.

• The funds could only be used to make a 401(k) contribution or fund retiree medical plans.

So, like, wow.

 

Do we like?
Some people really like this. Congress will find it attractive, because it appears as a revenue raiser! Why is that? It’s because these other benefits (401(k) contribution, retiree medical) would normally have been funded via an additional employer contribution, which would be tax deductible. By avoiding these further deductions, it raises revenue.

Further, plan sponsors would not be allowed to reduce the level of 401(k) employer contribution for the next four years.

What do I think? I have not yet heard people discussing the potential impact upon the funding of the DB plan from which these assets are taken. Yes, a 110% cushion is nice. While it feels disharmonious with the issues of the mid-1980s which I described above (“Nasty corporate raiders invading protected pension assets.”), most of the provisions do address these concerns. But it is inevitable that some plans will become underfunded (even with the 110% cushion), perhaps as a result of an investment downturn. So that will be the bad optics if this does go through.

 

Most importantly…
What do you think? Do let me know at
[email protected]

David M. Lipkin, FSA
Consulting Actuary
Editor

 

 

Note: The views herein do not necessarily reflect the opinion of Metro benefits, Inc.