[40] frustrate the effective functioning of the private pension system. In view of these considerations, the committee has concluded that it is appropriate to specifically limit age and service eligibility requirements which an employer may incorporate in a qualified pension plan. Explanation of provisions pro In view of the considerations outlined above, the committee bill vides that a plan which is qualified under the Code is not to require, as a condition of participation, more than one year of service, or an age greater than 30 (whichever occurs later).3 The committee believes that this rule will significantly increase coverage under private pension plans, without imposing an undue cost on employers. From an administrative point of view, however, the rule will allow the exclusion of employees who, because of youth or inexperience with the job in question, have not made a career decision in favor of a particular employer or a particular industry. For the purposes of these rules, an employee is to be considered to have performed a year of service if he was employed for more than 5 months during the year. It is intended that employment for 80 hours or more during a month will be considered as employment for a month. The "year" of service may be a calendar, plan, or fiscal year, whichever is applied on a consistent basis under the plan. The committee intends, by adopting this provision, to facilitate the coverage of seasonal employees under qualified pension plans. For example, if a fisherman is employed by a company having a qualified pension plan for 5 months and one day during 1975, and is reemployed by the same company in a later year, he is not to be ineligible for participation in the plan upon his reemployment by reason of a minimum service. requirement. The committee intends that Treasury regulations specify the extent to which service with a predecessor of the employer is to be counted for purposes of the eligibility requirements. In the case of a multiemployer plan, service with any employer who was a member of the plan is to be counted toward an individual's participation requirement (see sec. 705 of the bill). The bill does not provide any authority to exclude from the plan those employees hired within any specified number of years of normal retirement age. The provisions of present law with respect to coverage under an owner-employee (H.R. 10) plan are not changed by the committee's bill. Present law already requires relatively early participation (after 3 years of service) and 100-percent immediate vesting in the case of owner-employee plans. The committee concluded that the retention. of these provisions of present law was needed to protect the rights of employees in such cases. The Treasury Department may provide by regulations for those cases where a plan shifts in or out of owneremployee status, for example, because of fluctuating partnership interests. 3 This rule applies whether or not the plan is a trusteed plan. That is, a plan funded through purchase of annuities from an insurance company is subject to these rules, as is a plan with investments managed by a trustee. This test of service is to be applied with regard to the actual employment of that employee. In this respect, it differs from similar definitions under present law (secs. 401(a) (3) (A) and 401(d)(3)), which determine employment service on the basis of the employee's "customary employment". [41] Proprietary employee plans (see I. Limitation on Contributions, below) and H.R. 10 plans where there are no owner-employees (i.e., where no partner has a greater than 10-percent interest) are not now subject to the 3-year-participation and immediate-full-vesting rules. Under the bill, they are to be subject to the new one-year-service and age-30 participation requirements (and the new vesting requirements, see C. Vesting, below) in the same manner as regular corporate plans. Effective date These provisions generally apply to plan years beginning after the date of enactment. However, to allow time for amendment, in the case of a plan already in existence on the date of enactment of the bill, the provisions apply to plan years beginning after December 31, 1975 (or December 31, 1980, in the case of a government plan). Where the plan is subject to the provisions of a collective bargaining agreement in effect on the date of enactment of the bill, the effective date is further postponed until the expiration of the collective bargaining agreement, but, in any event, all plans are to be subject to these provisions in plan years beginning after December 31, 1980. Revenue effect The revenue effect of these provisions is expected to be minimal. 2. PLANS WHERE A COLLECTIVE BARGAINING UNIT IS INVOLVED; OTHER ANTIDISCRIMINATION PROVISIONS Present law 5 Under present law (sec. 401(a) (3)), a qualified retirement plan must cover either (1) a specified percentage of all employees (generally, 70 percent of all employees, or 80 percent of those eligible to benefit under the plan if at least 70 percent of all employees are eligible) or (2) such employees as qualify under a classification which is found by the Internal Revenue Service not to discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated employees. (A plan is not per se discriminatory for purposes of these rules merely because it is limited to salaried or clerical employees.) Also, under present law, either the contributions or the benefits provided under a qualified plan must not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated employees. General reasons for change Where employees covered under a collective bargaining unit prefer current compensation or some other form of benefits to coverage under a pension plan, employers sometimes are unable to establish a plan for other employees because the percentage requirement cannot be satisfied if the bargaining unit employees are not covered. It is then necessary for the plan to qualify as one which has coverage requirements that do not discriminate. The Service's approach (see Rev. Rul. 70-200, 1970-1 CB 101), which has generally been upheld by the courts, has 5 In applying these numerical tests under present law, there are excluded employees who have been employed not more than a minimum period prescribed by the plan (up to 5 years), part-time employees (customary employment for not more than 20 hours in any one week), and seasonal employees (those whose customary employment is for not more than 5 months in any calendar year). [42] been to look at the composition of the group which is covered under the plan, and to allow the plan to qualify if the compensation of most of the participants is substantially the same as that of the excluded employees, the plan covers employees in all compensation ranges, and employees in the middle and lower ranges are covered in more than nominal numbers. Where most of the lower-paid nonsupervisory personnel are members of a collective bargaining unit which elects not to be covered by a pension plan, the remainder of the employees may include relatively large percentages of supervisors or highly compensated employees. As a result, under present law it may be impossiblebecause of the antidiscrimination requirements-to establish a qualified plan for the remaining employees. The committee believes that this situation can result in a hardship, where all employees of an employer are forced to forego the benefits of a pension plan merely because those employees who are covered under a collective bargaining argreement choose nonpension benefits, or nonpension benefits plus pension benefits at a lower level than those provided nonunion employees. At the same time, the committee is concerned that any change in the law should not result in a situation where an employer might be able to exclude these employees from the pension plan without compensation for this in the form of other types of benefits. To deal with this situation, the committee bill provides that collective bargaining employees may be excluded for purposes of applying the coverage test, but only where there is evidence that retirement benefits have been the subject of good faith bargaining between the union employees and the employer. Explanation of provisions Collective bargaining unit.-The committee bill eases the application of the provisions of existing law by providing that employees covered under a collective bargaining agreement can be excluded for purposes of the coverage requirement, and for purposes of the antidiscrimination provisions (of sec. 401 (a) (4)), but only if there is evidence that the retirement benefits have been the subject of good faith bargaining between the union employees and the employer. If pension plan coverage had been discussed with the representatives of the union employees and no pension coverage was provided, either because the union employees were covered under a union plan (which might or might not offer comparable benefits to those provided under the employer plan), or because the employee representatives opted for higher salaries, or other benefits, in lieu of pension plan coverage, or for some other valid reason, then it would be permissible to exclude those union employees from the calculations. In effect, the collective bargaining agreement employees could then be excluded from the plan, or could be provided with a lesser or different level of benefits. The committee anticipates that in any case where collective bargaining unit employees were excluded from a plan under this provision, the Internal Revenue Service will receive information as to the justification for the exclusion before ruling that the plan is qualified. There is no requirement that the collective bargaining agreement specifi Additional protection for the employees would be provided under the part of the bill (sec. 601) which establishes a right on the part of an employee to participate in IRS proceedings to determine if a plan is qualified and to petition the Tax Court if he disagrees. [43] cally state that the employees have elected to be out of the plan or to take a lower level of benefits. However, there must be evidence that the retirement benefits have been the subject of good faith bargaining between the union employees and the employer. Nonresident alien employees.-The bill provides for the exclusion, for purposes of applying the coverage requirements and the antidiscrimination requirements, of those employees who are nonresident aliens with no United States income from the employment in question. It was believed that the United States tax laws should not impede appropriate pension plan benefits for United States citizens or persons with United States earned income, merely because comparable benefits were not afforded to nonresident aliens with no United States income from the employment in question. Also, the mere processing of such cases would take an inordinate amount of time because of the complexity of applying rules to integrate the appropriate foreign equivalent of Social Security with the benefits or contributions provided by the employers under such plans. Affiliated employers.-The committee bill also provides that in applying the coverage test, as well as the antidiscrimination rules and the vesting requirements, employees of all corporations who are members of a "controlled group of corporations" (within the meaning of sec. 1563 (a)) are to be treated as if they were employees of the same corporation. Thus, if two or more corporations were members of a parent-subsidiary, brother-sister, or combined controlled group, all of the employees of all of these corporations would have to be taken into account in applying these tests. The committee, by this provision, intends to make it clear that the coverage and antidiscrimination provisions cannot be avoided by operating through separate corporations instead of separate branches of one corporation. For example, if managerial functions were performed through one corporation employing highly compensated personnel, which has a generous pension plan, and assembly-line functions were performed through one or more other corporations employing lower-paid employees, which have less generous plans or no plans at all, this would generally constitute an impermissable discrimination. By this provision the committee is clarifying this matter for the future. It intends that prior law on this point be determined as if this provision had not been enacted. At the same time, however, the committee provision is not intended to mean that all pension plans of a controlled group of corporations must be exactly alike, or that a controlled group could not have pension plans for some corporations but not others. Thus, where the corporation in question contains a fair cross-section of high and lowpaid employees (compared to the employees of the controlled group as a whole), and where the plan is nondiscriminatory with respect to the employees of the corporation in question, it is anticipated that the Internal Revenue Service would find that the plan met the antidiscrimination tests, even though other corporations in the controlled group had a less favorable retirement plan, or no plan at all. On the other hand, if, looking at the controlled group as a whole, it were found that a disproportionate number of highly compensated employees were covered under the plan of the corporation in question, or that the average compensation of covered employees was substantially higher in that plan than the average compensation of noncovered employees, [44] it would be anticipated that the plan would not be found to be qualified, because the corporation does not contain a fair cross section of the controlled group employees. Supervisory employees.-Under the committee bill, the category of "supervisors" is to be dropped from the list of personnel which a plan may not discriminatorily favor. The committee understands that all persons who are supervisors within the intent of present law also are officers, shareholders, or highly compensated employees, and that as a result this deletion can be made without any substantive change in the antidiscrimination provisions of present law. Temporary and seasonal employees. In applying the coverage rules, the bill makes several small changes from present law. In applying the 70 percent and 80 percent coverage tests, employees who fail to meet the minimum age and service requirements prescribed by the plan may be excluded. These requirements may not be more than the top limit of one-year-service and 30-year-age requirements described above with respect to participation. Of course, the plan may provide lower age and service requirements. Present law defines excludable part-time employees as those whose customary employment is for not more than 20 hours in any one week. To conform the definitions closely to those used for participation (described above), the bill defines excludable part-time employees as those whose customary employment is for not more than 80 hours in any one month. Present law permits exclusion from these calculations of employees whose customary employment is for not more than 5 months in any calendar year; the bill retains the 5-month period but permits computations to be made on the basis of calendar, plan, or fiscal years, depending upon the period specified in the plan itself. Effective date These provisions apply generally to plan years beginning after the date of enactment of the bill. However, to allow time for amendment in the case of plans in existence on the date of enactment, the provisions are to take effect for plan years beginning after December 31, 1975 (or December 31, 1980, in the case of a government plan). Where the plan is subject to the provisions of a collective bargaining agreement in effect on the date of enactment of the bill, the effective date is further postponed until the expiration of the collective bargaining agreement (but without regard to any extension made after the date of enactment), but, in any event, all plans are to be subject to these provisions in plan years beginning after December 31, 1980. Revenue effect The revenue effect of these provisions is expected to be minimal. C. Vesting (Secs. 221, 261, and 705 of the bill and secs. 401, 411, 413, 6688, and 6690 of the Code.) Present law Plans which qualify under the Internal Revenue Code are now required to provide vested (i.e., nonforfeitable) rights to participating employees when they attain the normal or stated retirement age. |