14.

INTERIM BENEFITS IN CASES OF DELAYED FINAL DECISIONS

Present Law

Presently, there is an administrative appeals system for disability claimants and beneficiaries under review composed of four levels: 1) an initial decision by a State agency; 2) State agency reconsideration; 3) a hearing before an Administrative Law Judge (ALJ); and 4) Appeals Council review. If an individual receives a favorable decision from an ALJ, the Appeals Council may on its own motion review the ALJ determination, and act to affirm, revise, reverse, or remand the ALJ decision.

Explanation of Provision

The provision requires that in any case in which an ALJ has determined that an individual is eligible for disability benefits and the Secretary has not acted within 90 days to issue a final decision, interim benefits will be provided to the individual pending the issuance of a final decision. These benefits will commence with the month preceding the month in which the 90-day period expires and will not be considered overpayments if eligibility is finally denied, unless the benefits were fraudulently obtained. Claimants whose own action resulted in delays without good cause would not be permitted to toll more than 20 such days toward the 90-day limit.

Effective Date

The provision would apply with respect to ALJ determinations Occurring 180 days after the date of enactment.

1.

RECOMMENDATIONS OF THE SUBCOMMITTEE ON OVERSIGHT

SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLAN REFORM

a. Minimum funding standards

Present Law

Under present law, certain defined benefit pension plans are required to meet a minimum funding standard for each plan year. The minimum funding standard requires that an employer contribute an annual amount sufficient to fund a portion of participants' projected benefits determined in accordance with one of several prescribed funding methods, using actuarial assumptions that are reasonable in the aggregate.

The annual amount required to be contributed under the minimum funding rules generally consists of two components: normal cost (i.e., the cost of future benefits allocated to the current year), and a portion of the plan's unfunded accrued liabilities (i.e., all charges other than normal cost, such as past service liabilities and experience losses). The total annual contribution must be paid to the plan no later than 8-1/2 months after the end of the plan year.

Under certain circumstances, an employer may obtain from the Internal Revenue Service a waiver of all or a portion of the contributions required under the minimum funding standard for a plan year. Waived contributions are required to be amortized over 15 years.

Explanation of Provision

The present-law minimum funding rules have proved inadequate in many situations to protect the benefits of plan participants and reduce the financial risk to the Pension Benefit Guaranty Corporation (PBGC). Current minimum funding rules do not adequately assure that plans will have enough assets to pay participants' benefits when due. In addition, under present law, a plan may satisfy the minimum funding rules yet lack sufficient assets to pay accrued benefits when the plan terminates.

In order to reduce the financial risk to plan participants and the PBGC, the Subcommittee recommendation requires certain plans to be funded more rapidly, depending on the funded status of the plan.

Under the Subcommittee recommendation, the minimum amount required to be contributed to a defined benefit plan for a plan year would be the plan's normal cost for the year plus the greatest of the following 4 amounts:

(1) the amount determined under the present-law standards for liabilities other than normal cost;

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(2) an amount based on the funded status of the plan as a percentage of termination liability (the "termination liability rule");

(3) the amount determined under a rule requiring shorter funding for any decreases in the funded status of plans with assets less than termination liability (the "anti-deterioration rule"); or

(4) the sum of (i) the amount necessary to fund over 3 years the plan's unfunded expected liabilities, and (ii) nonannuity payments (e.g., lump sums) made to plan participants or beneficiaries during the year (the "anti-insolvency rule"). Expected liabilities are liabilities for benefits that are in pay status and for benefits expected to commence within 5 years.

Under the termination liability rule, unfunded termination liabilities would generally be funded over: (1) 3 years, in the case of a plan with assets less than 50 percent of termination liability, (2) 5 years, in the case of a plan with assets between 50 and 70 percent of termination liability, and (3) 15 years, in the case of a plan with assets greater than 70 percent of termination liability. Under a transition rule for existing unfunded termination liabilities, the termination liability rule would be phased in over 6 years with respect to such liabilities.

Experience gains and losses due to unreasonable interest assumptions would be required to be amortized over 3 years rather than over 15 years as under present law.

Under a transition rule for certain steel companies, the minimum required contribution for a plan year would be capped so that the plan's funded ratio would not be required to increase by more than a certain percentage.

In addition, in order to better ensure that required plan contributions are actually made, estimated contributions to plans would be required on a quarterly basis; the full contribution would be required to be made within 2-1/2 months after the end of the plan year; the liability for contributions would be extended to an employer's controlled group; and the availability of funding waivers would be restricted. Funding waivers would have to be requested sooner, a waiver would be available only if the entire controlled group is experiencing a substantial temporary business hardship, the frequency of permitted waivers would be reduced and the interest rate on waived contributions would be increased to a market rate. Also, the amortization period for waived contributions would depend on the funded status of the plan.

Effective Dates

The provisions would generally apply with respect to years beginning after December 31, 1987. For purposes of the transition rule for the termination liability rule, existing unfunded liabilities are unfunded termination liabilities on June 30, 1987, the date on which the Subcommittee recommendation was approved.

The requirement that plan contributions be made within 2-1/2 months after the plan year would be phased in over 2 years, for years beginning in 1988. The new rules relating to funding waivers would apply with respect to waivers granted after June 30,

1987.

Under present law, pension plan assets may not be used for purposes other than for the exclusive benefit of employees and their beneficiaries. However, upon termination of the plan and after satisfaction of all fixed and contingent liabilities of the participants and beneficiaries (termination liability), the employer may recover the excess assets. The assets that revert to the employer generally are includible in gross income and subject to a nondeductible 10 percent excise tax.

Explanation of Provision

Although an employer technically is not permitted to recover excess assets except upon termination of a plan under present law, certain transactions that have the effect of a withdrawal of assets from an ongoing plan are permitted. Thus, present law permits employers to reduce the ratio of plan assets to termination liability, thereby reducing participants' benefit security and potentially increasing the risk of liability of the PBGC. Present law also permits an employer to recover excess assets from an overfunded defined benefit pension plan and use the assets for nonretirement purposes while maintaining underfunded defined benefit pension plans.

Under the Subcommittee recommendation, as under present law, an employer would be permitted to recover all assets in excess of the plan's termination liability upon plan termination. However, to the extent the employer (or controlled group) continues to cover the same employees under another defined benefit plan, the employer would be required to make contributions to the other plan with respect to such employees so that plan assets would equal the lesser of the amount of the reversion or 125 percent of termination liability.

In addition, if the employer (or controlled group) maintains defined benefit plans with assets less than the cushion amount, the employer would be required to make contributions to the plan over 3 years equal to the lesser of (a) the amount of the reversion or (b) the amount necessary to bring the asset level up to the cushion. Contributions under this rule are accelerated if the plan is terminated before the end of 3 years. The cushion amount is 125 percent of termination liability.

In order to more fully recapture the tax benefits received by the employer when an overfunded defined benefit plan is terminated, the excise tax on plan reversions would generally be increased to 20 percent. However, if assets are transferred in order to meet the requirements stated above, the excise tax would be 10 percent and the amounts transferred are not includible in gross income. This special rule is designed to encourage employers to meet the cushion requirements by direct transfers of plan assets.

Effective Date

The provisions generally would apply to plan terminations

after June 30, 1987.

c. Termination of Underfunded plans

Present Law

A defined benefit pension plan may be terminated by the sponsoring employer only in a standard termination or in a distress termination. A plan may be terminated in a standard termination only if it has sufficient assets to pay all benefit commitments under the plan. Benefit commitments are greater than the benefits guaranteed by the PBGC, and include all guaranteed benefits and all benefits that would be guaranteed but for the dollar limit on the guarantee or the length of time the benefit has been in existence.

Benefit commitments are less than plan termination liability. Benefit commitments do not include benefits that vest solely due to plan termination or contingent benefits (such as early retirement benefits) for which the participant has not satisfied all conditions for entitlement prior to plan termination.

In order to terminate a plan in a distress termination, the plan administrator is required to demonstrate that the contributing sponsor and substantial members of the sponsor's controlled group meet certain criteria of financial distress.

In a distress termination, the liability of the employer to plan participants is limited to benefit commitments, and the liability to the PBGC is less than the amount of benefit commitments.

Explanation of Provision

Present law artificially limits the liability of the employer to plan participants and the PBGC. The Subcommittee recommendation would make employers fully liable for their pension promises.

Under the Subcommittee recommendation, an employer could terminate a plan in a standard termination only if the plan has assets sufficient to satisfy termination liability. In a distress termination, the employer would be fully liable to participants for the amount of termination liability, and to the PBGC for the full amount of guaranteed benefits.

In addition, in order to prevent an employer from transferring liability of one plan to the PBGC while obtaining a reversion from another plan, a distress termination would not be available if the employer (or controlled group member) maintains a defined benefit plan which has assets in excess of termination liability.

In order to prevent ongoing companies from transferring liabilities to the PBGC, the recommendation would provide that a Chapter 11 bankruptcy does not justify a distress termination. Appropriate provisions would ensure that the PBGC is adequately protected when an employer is involved in a Chapter 11 bankruptcy. Following a distress termination, except to the extent permitted by the PBGC, ar cmployer (or controlled group member) would be restricted from maintaining any retirement plan that provides similar benefits. Thus, an employer would be prevented from shifting pension liabilities to the PBGC while making additional retirement benefit promises.

Effective Date

The provisions would generally be effective with respect to terminations after June 30, 1987.