[49] 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, where the agreement does not provide that the union employees are to be included in the plan and 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 if the employees are excluded from the plan and 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. Since this provision is intended to relax the coverage requirements of present law, in circumstances where the union employees elect not to participate in the plan, it follows, of course, that any plan which meets the coverage rules of present law, even though it excludes certain union employees, would not be adversely affected as to its tax-qualified status by this provision..

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 specifically 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."

The committee bill also provides that a plan is not to be considered discriminatory because it covers air pilots represented in accordance with the Railway Labor Act while not covering other employees working for the same employer if it covers a sufficient number or a nondiscriminatory cross-section of such pilots.

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

Once this issue had been negotiated, the union and the employer would not be required under this provision to renegotiate the issue at each bargaining session. However, the committee has been informed that it would constitute an unfair labor practice, within the meaning of the Federal labor laws, for an employer to refuse to negotiate in good faith with a labor union concerning retirement benefits. An example of good faith bargaining would include agreements or memoranda of understanding between railway companies and their emplovee representatives designed to effect changes in the Railroad Retirement Act of 1937 or Chapter 22 of the Internal Revenue Code, or both.

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[50] 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, the vesting requirements, and the limitations on and benefits, 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. A comparable rule is provided in the case of partnerships and proprietorships which are under common control (as determined under regulations), and all employees of such organizations are to be treated for purposes of these rules as though they were employed by a single person. 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 lowerpaid employees, which have less generous plans or no plans at all, this would generally constitute an impermissible 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 or partnerships 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 highand low-paid employees (compared to the employees of the controlled group as a whole), and where the plan coverage 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, it would be anticipated that the plan would not be

[51] 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 has been informed by the Treasury Department 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 will result in no substantive change in the antidiscrimination provisions of present law. Coverage of temporary and seasonal employees.-In applying the coverage rules, the bill makes several 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 (assuming these employees are actually excluded from the plan). These requirements may not be more than the top limit of one-year-service and 25-year-age requirements (or 3-yearservice, immediate-full-vesting, and 25-year-age alternative) described above with respect to participation. Of course, the plan may provide lesser age and service requirements.

Present law permits exclusion, in applying the coverage 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 any 12-month period (not merely the calendar year) depending upon the period specified in the plan itself. Part time employees (as defined in regulations) may also be excluded from the plan.

Work product contributions.-In some industries, contributions may be made under a plan based on the work product of an individual who is not a participant (for example, contributions based on tonnage of minerals mined or processed). Obviously, such an individual may be excluded under the plan, notwithstanding the fact that contributions are made based on his work, if the individual fails to meet the minimum age or service requirements, or other lawful conditions that the plan imposes for participation. On the other hand, a person could be a participant in a plan even though neither he nor his employer make contributions on his behalf.

Effective dates

These provisions apply generally to plan years beginning after the date of enactment of the bill. However, to allow time for amendment for plans in existence on January 1, 1974, the provisions are to take effect in these cases for plan years beginning after December 31, 1975, unless the plan administrator makes an irrevocable election. to have the provisions apply sooner (under regulations prescribed by the Secretary or his delegate), in which case the provisions will take effect at the beginning of the first plan year which occurs after the election.

Where the plan is subject to the provisions of a collective bargaining agreement in effect on January 1, 1974, the effective date is further postponed until plan years beginning after December 31, 1976, or, if later, plan years beginning after the expiration of the collective bargaining agreement (or the expiration of the last relevant agreement in the case of a multiemployer plan or a single plan subject to more than one collective bargaining agreement), but without regard to any ex

[52] tension made after the date of enactment. For this purpose, a collective bargaining agreement will not be considered as terminated if it can be (or is) reopened with respect to relatively narrow issues only. For example, a collective bargaining agreement would not be considered as being terminated for this purpose if it can be reopened with respect to the benefit payable to a surviving spouse, if it can be reopened because of a change in payments with respect to voluntary coverage under Part B of the Medicare benefits under the Social Security Act, or if it can be reopened to increase benefits with respect to a quite limited group of employees.

A question has arisen as to how the effective date rules are to be applied to a plan which includes employees subject to one or more collective bargaining agreements and also employees not under any such agreement. The intent is that the presence of an insignificant number of union members as participants in a plan is not to be sufficient to delay the effective dates for an additional 5 years. On the other hand, the presence of a small number of nonunion participants should not force the untimely renegotiation of labor-management contracts. As a result, your committee intends that a plan is to be regarded as maintained pursuant to a collective bargaining agreement if (1) either the contribution levels or the benefit levels under the plan are to be determined under the agreement and (2) at least 25 percent of the participants are members of the unit of employees covered by the agreement. In addition, where an employer has one plan for collective bargaining unit employees and another plan for other employees, but those plans are essentially the same with regard to benefits and contributions, then the two will be considered as one for purposes of applying the rule described above as to when a plan with both union and nonunion participants is to be entitled to delayed effective date provisions. Finally, where an employer has a plan for collective bargaining unit employees and another plan for other employees, and the second plan consists of two parts, one part of which is essentially the same as that for the collective bargaining employees, the part which is essentially the same will be considered as a part of the collective bargaining plan for purposes of this effective date provision.

In the case of a plan maintained by a tax-exempt (under sec. 501 (c) (5)) labor organization for its own employees, the effective date is postponed to plan years beginning after December 31, 1976, or, if later, the first plan year following the date on which the second convention of the organization is held after the date of enactment. But. in any event, all plans (including those subject to existing collective bargaining agreements) are to be subject to these provisions in plan years beginning after December 31, 1980.

An existing plan which would be entitled to a delayed effective date for the new participation, vesting, funding, etc. provisions is to be permitted to elect to have all those provisions apply sooner. Any such election must be made under Treasury regulations, must not be piecemeal (i.e., it is not permitted to be made for, say, vesting, without also applying to participation, funding, etc.), and is irrevocable.

Revenue effect

The revenue effect of these. provisions is expected to be minimal.

[53]

B. VESTING

(Sees. 1012. 1014, 1015, 1017, 1021, 1023, and 1024 of the bill and secs. 401. 411, 414, 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. Employees must also be granted vested rights if the plan terminates or the employer discontinues his contributions.

However, qualified corporate plans are generally not required to provide vested rights to participating employees before normal retirement age unless this is considered to be necessary-in view of the likely pattern of employee turnover-to prevent discrimination against the rank and file employees in favor of officers, shareholders, supervisors, or highly paid employees. In other words, preretirement vesting is required only where its absence would cause discrimination in favor of officers, etc., who could be expected to remain with the firm long enough to retire and qualify for benefits, while the rank and file employees would continually be separated from the firm and lose their benefits.

Under an owner-employee plan,' the rights of all employees must vest in full as soon as they become participants (sec. 401(d) (2) (A)). General reasons for change

Unless an employee's rights to his accrued pension benefits are nonforfeitable, he has no assurance that he will ultimately receive a pension. Thus, pension rights which have slowly been stockpiled over many years may suddenly be lost if the employee leaves or loses his job prior to retirement. Quite apart from the resulting hardship, your committee believes that such losses of pension rights are inequitable, since the pension contributions previously made on behalf of the employee may have been made in lieu of additional compensation or some other benefits which he would have received.

Today, slightly over two-thirds of the private pension plans provide some vested rights to pension benefits before retirement. However, as a general rule, employees do not acquire vested rights until they have been employed for a fairly long period with a firm or are relatively mature. Since there is no general applicable legal requirement for preretirement vesting, some plans do not offer this type of vesting at all, and among those plans which do, there is no uniformity in the vesting rules as provided. At present, only one out of every three employees participating in employer-financed plans has a 50percent or greater vested right to his accrued pension benefits. Even for older employees, a substantial portion do not have vested rights. For example, 58 percent of covered employees between the ages of 50 and 60, and 54 percent of covered employees 60 years of age and over, still do not have vested rights to even 50 percent of their accrued pension benefits. As a result, even employees with substantial periods of service may lose pension benefits on separation from employment. Extreme cases have been noted in which employees have

1 An owner-employee is a sole proprietor or a partner with a greater than 10-percent interest in capital or profits (sec. 401 (c) (3)).

2 U.S. Treasury Department-Fact Sheet, Pension Reform Program, as reprinted in Material Relating to Administration Proposal Entitled the "Retirement Benefit Tax Act," Committee on Ways and Means, 93d Cong., 1st sess., p. 37, Table B.