[90] cluded that it is appropriate to authorize the insurance Corporation to establish separate premium rates for multiemployer plans. Since there is insufficient experience at present on which to base a determination as to the extent to which the premiums for multiemployer plans should differ from the premiums for other plans the bill establishes no difference in rates for the first 3 years (1975 through 1977), but authorizes differences for the future. Although separate risk accounts are to be maintained, on the basis of which future rates are to be determined, the funds derived from all the premiums are to be available to pay benefits for any plan losses, without regard to whether any particular funds were derived from multiemployer plans or from other plans.

A multiemployer plan is a plan to which more than one employer is required to contribute; is established or maintained pursuant to a collective bargaining agreement between employee representatives and employers; and is a plan where the benefits are payable with respect to each participant without regard to whether that participant's employer is still making contributions to the fund. All employers who are members of the same affiliated group (sec. 1504(a)) are to be treated as one employer for purposes of this definition. A plan is not a multiemployer plan for any year with respect to which the liability of any one employer for contributions to the plan is as much as 50 percent of the aggregate liabilities of all employers for contributions to the plan for that year.

A plan administrator of a multiemployer plan must notify the Corporation whenever a "substantial employer" 13 withdraws from that plan. The Corporation, upon notification of the withdrawal, will notify the substantial employer of a contingent liability that is the substantial employer's pro-rata share of the total amount of payment that would be made by the Corporation for the entire plan if the plan were terminated on the date of the withdrawal of the substantial employer. The total potential loss of the Corporation is to be apportioned in accordance with the relative amounts of liabilities for plan contributions during the 5 years ending with the withdrawal. As an alternative to payment of this contingent liability into an escrow account, the substantial employer could be required to furnish the Corporation a bond insuring payment of the substantial emplover's contingent liability. The limitation to liability of 50 percent of the emplover's net worth would be separately applied to each employer. If the multiemployer plan is not terminated in the 5 years following the withdrawal of the substantial employer, the contingent liability payment would be returned to the substantial employer, or the bond would be cancelled, as the case might be. If the plan does terminate within that time, the Corporation would be entitled to the contingent liability payment, plus any additional amount required to meet the substantial employer's portion of the liability as finally determined. The liability of an employer (other than a substantial employer) in a multiemplover plan for losses of the insurance fund because of terminations of the plan is generally to follow the rules for determin

13 If an emplover's liability for plan contributions for each of two consecutive years is at least 10 percent of all employer liabilities for plan contributions for each of those years, then that employer is a "substantial employer" for each of the next 2 consecutive years.

[91] ing the liability limitations for plans of individual employers. The 50-percent-of-net-worth limitation is to be applied separately to each

employer.

Within 6 months after the close of each plan year, the plan administrator must notify each substantial employer of its status as a substantial employer. Furthermore, any employer in a multiemployer group who contributes 10 percent or more of the total contributions to the plan during a plan year is to be notified of that fact even if it is not yet a substantial employer (because it has not been in this status for two consecutive years).

Termination by plan administrator. Before terminating a plan, the plan administrator must notify the insurance Corporation of the planned termination (sec. 441). This is to give the Corporation an opportunity to determine whether the plan can meet all of its liabilities before the termination occurs. No benefits are to be paid under the termination procedure of the plan until 90 days after the notice (or, if sooner, until the Corporation supplies the plan administrator with the notice of the Corporation's determination that plan assets are sufficient to discharge plan liabilities). Benefits already being paid as of date of the notice are to continue to be paid unless the plan administrator is informed by the Corporation that plan assets are insufficient to pay all benefits, if that should be the case.

If, after receiving a notice of sufficiency and proceeding with the termination, the plan administrator determines that the assets are insufficient, he is to so inform the Corporation. If the Corporation agrees, it is to terminate the plan.

If, upon notification by a plan administrator, the Corporation determines that the plan has insufficient assets to meet all guaranteed liabilities, the plan is to be treated as terminated on the date the Corporation so notifies the plan administrator.

The 90-day period during which the plan administrator may not proceed to terminate a plan without the Corporation's notice of sufficiency of assets may be extended by agreement for succeeding 90-day periods.

Termination by Pension Benefit Guaranty Corporation. The insurance Corporation may take steps to terminate a plan whenever the Corporation determines that (1) the plan has failed to meet the minimum funding standards (discussed above, under D. Funding), (2) the plan is unable to pay benefits when due (to the extent guaranteed under the insurance system), (3) if the plan is not terminated, the liability of the insurance Corporation is likely to increase, or (4) there is a lump-sum distribution in excess of $10,000 to a proprietary employee or an owner-employee and afterwards there are unfunded vested liabilities in the plan.

If the Corporation determines to institute procedures to terminate a plan, it is to notify the plan administrator of this determination and set forth the reasons. The notice is to specify what activities, if any, the administrator may engage in prior to the termination (or a notice from the Corporation directing the administrator to continue to operate the plan). If the administrator violates the conditions of the notice, the Corporation may apply to a Federal district court for equitable relief (injunction, mandamus, replacement of trustee, etc.). In

[92] addition, violation of the provisions of the notice is to be a violation of the administrator's fiduciary obligations.

The plan administrator has 15 days after the notice has been issued to demonstrate that termination is improper or no longer necessary. If the Corporation concludes that it is necessary to terminate the plan, it may apply to the appropriate district court (1) for appointment of a trustee and (2) for a court decree to terminate the plan. This action may be brought in the judicial district where the plan administrator resides or is doing business or where any property of the trust forming a part of the plan is situated. The court to which this action is brought may issue summonses regarding this action in any other judicial district. This power is provided so that the court may act promptly and effectively regardless of where the assets or the administrator of the plan may be located at any particular moment. In general, a trustee appointed under these provisions is to be subject to the same duties as a trustee appointed under section 47 of the Bankruptcy Act.

In order to simplify the administration of the Insurance Fund and to avoid abuses, the plan administrator is to be required to report promptly to the Corporation the occurrence of certain events: (1) a loss of qualified status by the plan or its trust. (2) plan amendments that would decrease a benefit of any participant, (3) a decrease in participants to less than 80 percent of those participating at the beginning of that plan year or less than 75 percent of those participating as of the beginning of the previous plan year, (4) a termination or partial termination of the plan under the Internal Revenue Code, (5) a failure to meet current funding requirements or to pay current benefits, (6) a charge by the Secretary of Labor that a fiduciary standard has been violated, or (7) a lump-sum distribution in excess of $10,000 (made other than on account of death or disability) to a proprietary employee or an owner-employee if, after the distribution, there are unfunded vested liabilities. In addition, the Internal Revenue Service is required to independently notify the Corporation of the first and fourth of the above-noted events since these would be normally brought quickly to its attention in the course of its duties. For the purposes of the seventh category of reportable events described above, a distribution of an annuity contract is to be treated as a lump-sum distribution. Any lump-sum distribution which is a reportable event may be recaptured at any time within 3 years after the insurance Corporation is notified of the distribution.

If an insurable plan is changed in nature, to one not covered by the insurance provisions (e.g., is converted into a money-purchase plan), the change will be treated as a plan termination.

The trustee to administer a termination under the Corporation is to be appointed by a court order. This may be obtained regardless of the pendency of any bankruptcy, lien, foreclosure, liquidation, etc., proceeding.

Termination-powers and duties of trustees.—A trustee appointed pursuant to a decree to administer a plan is to have the power to do anything the plan administrator or any plan trustee might do under the terms of the plan or under the provisions of this bill. He could require the transfer to himself as trustee of all or any part of the assets, records, or other information pertaining to the plan; invest

[93] and reinvest the assets in accordance with the plan provisions and the applicable rules of law; and limit benefits to the amounts guaranteed under the insurance provisions. If the final determination is that a plan termination is improper, the trustee is to transfer back to the plan administrator all the assets, without liability for losses except for willful misconduct.

After a final decree that a plan should be terminated, the trustee is to collect amounts due the plan, pay benefits in accordance with the allocation rules already discussed, and receive payments from the insurance Corporation for funding of guaranteed benefits. In addition, he could perform the expectable functions of a fiduciary in such a situation, including arranging the liquidation of plan assets. After his appointment, the trustee must give notice of that fact to the plan administrator and to all plan participants, beneficiaries, and employers who might be liable for insurance losses or who made contributions to the plan during the current or any of the previous three years.

The Corporation is to furnish the trustee and the court with a report showing benefits payable with respect to each participant, the amount of those benefits that are guaranteed, the value of the aggregate guaranteed benefits as of the termination, the fair market value of the plan assets as of the termination, and such other information as may be necessary to effectuate the insurance provisions. Effective date

The insurance provisions generally are to take effect after the date of enactment. Premium taxes are to be collected after December 31, 1974. Insurable benefits are to be guaranteed beginning January 1, 1978.

Cost

The cost of plan termination insurance coverage to individual employers would be 50 cents per year per participant or, if the employer should choose to avoid limited employer liability, 70 cents per year per participant. It is estimated that this would produce about $18 million per year for the insurance fund. The Treasury-Labor Department study on planned terminations which has just been completed indicates a loss of vested benefits of $34 million in 1972. However, for several reasons, it is believed that this substantially overstates the revenue cost of providing term insurance. First, the term insurance payments with respect to any losses need not be paid immediately, but instead can be spread out over the lifetime of the annuitants. Second, the increased funding provided by this bill will significantly lessen the insurance losses. Third, the requirement that employers provide up to 10 percent of the liabilities arising from their own plan failures (except where the additional premium insurance cost is incurred) will further lessen the insurance cost to be paid from the corporation. Fourth, the requirement that improvements in the plan not be taken into account for 3 to 5 years before termination will still further reduce the insurance costs. Fifth, no amounts are paid out in the first 3 years with the result that the revenues raised in these years will be available to help meet future costs. Sixth, limits are provided on the size of the insurance payments which can be made with respect to

[94] individuals. For these reasons, it is believed that an annual $18 million premium commencing January 1, 1975, and collected 3 years in advance of the first years of insurance claims should be an adequate fund to cover insurance losses.

It is estimated that a revenue loss of $9 million per year will be realized on account of the plan termination insurance provisions, because of the tax deductions taken by employers for their premium payments to the Insurance Fund.

G. FIDUCIARY RESPONSIBILITY

(Secs. 501 and 551 of the bill and secs. 503 and 4973 of the Code) Present law

A retirement plan trust may be qualified under the Internal Revenue Code only if it is impossible under the governing instrument for trust funds to be used for any purpose other than the exclusive benefit of the employees or their beneficiaries (sec. 401(a) (2)). In addition, a retirement plan trust will not be exempt from taxation if it engages in any of the specifically defined "prohibited transactions" (sec. 503). Under administrative rulings, an investment generally meets the "exclusive benefit" requirement if it meets the following standards: the cost of the investment does not exceed fair market value, a fair return commensurate with the prevailing rate is provided, sufficient liquidity is maintained to permit distributions, and the safeguards and diversity that a prudent investor would adhere to are present. (IRS Publication 778 (February 1972)).

"Prohibited transactions" include the lending of funds to certain interested persons without receipt of adequate security and a reasonable rate of interest. Other prohibited transactions with disqualified persons include payment of excessive salaries, providing the trust's services on a preferential basis, substantial purchases or sales of property for other than adequate consideration, and engaging in any other transaction which results in a substantial diversion of trust assets.1 If the trust engages in any prohibited transaction, it will lose its taxexempt status for at least one year.

General reasons for change

Under present law, a trust forming part of a qualified retirement plan loses its exemption from taxation if it engages in a prohibited transaction. With loss of exemption, special tax benefits relating to qualified plans also may be denied, including deferral of taxation by employees and loss of deductions by employers contributing to the trust. In practice these sanctions have not been satisfactory in discouraging prohibited transactions. An employer, needing working capital or in bad financial condition, may forego a deduction in order to divert trust assets to his own use, and the trust fiduciary may acquiesce in his demand.

In addition, the present law's sanctions for engaging in prohibited transactions tend to fall upon innocent employees. For example, if a trust is disqualified because of an act of the trustee and the employer,

1 More stringent rules govern trusts benefiting owner-employees who control the business (sec. 503 (g) of the Code).