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Nevertheless, a plan will be permitted to provide for voluntary and revocable assignments (not to exceed 10 percent of any benefit payment).

This provision is not intended to interfere with the current practice in many plans of using vested benefits as collateral for reasonable loans from the plans, where the "prohibited transactions" provisions of present law (sec. 503 of the Code) and other fiduciary requirements are not violated.

Benefits of terminated participants.-Protection is given to retired individuals and individuals who are separated from the service of the employer against reductions in private plan benefits when social security benefit levels increase. In general, under present integration procedures, social security benefits attributable to employer contributions are treated as though they were part of the private plan. As a result when the level of social security benefits increases, some integrated plans have reduced the amount of the retirement benefits that they provide for covered employees.

Present law under administrative practice provides that qualified plans may not use increases in social security benefit levels to reduce the benefits that they pay where the employees concerned are retired and already receiving integrated plan benefits. The bill codifies this treatment for retired persons. It also extends the prohibition against reducing plan benefits where social security benefit levels are increased to cases where the individuals concerned are separated from service prior to retirement and have deferred nonforfeitable rights to plan benefits. This provision is effective for increases in social security benefits which take place after the date of enactment or on the date of the first receipt of plan benefits or the date of separation from service (whichever is applicable) if that date is later.

These changes do not affect the ability of plans to use the integration procedures to reduce the benefits that they pay to individuals who are currently covered when social security benefits are liberalized. Your committee, however, believes that such practices raise important issues. On the one hand, the objective of the Congress in increasing social security benefits might be considered to be frustrated to the extent that individuals with low and moderate incomes have their private retirement benefits reduced as a result of the integration procedures. On the other hand, your committee is very much aware that many present plans are fully or partly integrated and that elimination of the integration procedures could substantially increase the cost of financing private plans. Employees, as a whole, might be injured rather than aided if such cost increases resulted in slowing down the growth or perhaps even eliminated private retirement plans.

In view of the serious issues involved in the integration of private plans with the social security system, your committee believes that it is desirable to postpone action on this issue pending further study of this problem. More specifically, your committee plans to consider this overall problem again at the earliest opportunity, possibly in connection with future tax reform or social security legislation. However, your committee believes that no further integration of social security and pension benefits should be allowed under any further regulations issued by the Secretary or his delegate at least until June 30, 1975.

[70]

Payment of benefits.-To ensure that a participant can reasonably expect to receive his benefits during his retirement years, the committee bill requires a qualified plan (to which the basic vesting provisions apply) to commence payment of benefits to the participant (unless he elects otherwise in writing and this election is permitted by the incidental death benefits rule) not later than the 60th day after the close of the plan year in which the latest of these events occurs: (1) the participant attains age 65; (2) the 10th anniversary of the time the participant commenced participation in the plan; or (3) the participant terminates his service with the employer. This requirement is set in terms of the end of a plan year, rather than the date on which the event occurs, in order not to disrupt unduly the administrative practice of plans that begin retirement benefits for all new retirees on the same date. The second of the above alternatives (the 10th anniversary of commencement of service) is designed to permit a defined benefit plan to have an adequate period of time in which to fund the benefit for a person who first enters the plan at a relatively late age. The third of the above alternatives (termination of service) has been added in recognition of the fact that these benefits are designed primarily to provide for the participant's retirement.

Effect of withdrawal of employee contributions.-At the present time, many employee plans require employees to make contributions in order to receive employer contributions (or benefits to be funded by the employer). Some such plans permit employees to withdraw their contributions (or the benefits derived from their contributions) but impose as a "penalty" for such withdrawal the forfeiture of some or all of the benefits derived from employer contributions. Where this occurs, the effect is to reduce the retirement protection afforded to the employee. Your committee is not at this point expressing a view as to whether employee contributions or the right to withdraw those contributions are desirable features of retirement plans. However, it does not appear appropriate to provide for forfeitures derived from employer contributions merely because of a withdrawal by the employee. Accordingly, the committee bill specifically requires all qualified plans to forbid forfeitures of non forfeitable benefits derived from employer contributions solely because of withdrawals by employees of any parts of the benefits derived from the employees' contributions.

This limitation is to apply only to plans to which the new vesting provisions of the bill apply.

Comparability of plans having different vesting provisions under the antidiscrimination rules.-There are certain classes of employees, such as engineers, whose rate of job mobility is so high, that many of them would not receive protection even under the vesting provisions provided under the bill. To be effectively covered under a pension plan, these employees would have to receive a very substantial amount of vesting during their first 5 years of employment. At the same time, if all employees were to be provided with vesting on this rapid a basis under the plan, the cost might be so high that the employer would terminate the plan, or drastically reduce the benefits under the plan. To meet this situation, the committee bill contains a provision which would allow the engineers and other employees with a similar problem, in effect, to trade off some of their benefits in exchange for earlier vesting.

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Under present law a single plan may satisfy the antidiscrimination requirements (sec. 401(a) (4)), if either the contributions or the benefits do not discriminate in favor of certain enumerated employees. Generally, profit-sharing plans, stock bonus plans, and money purchase plans can satisfy this requirement if the contributions are nondiscriminatory even though the benefits may discriminate. Defined benefit plans can satisfy this requirement if benefits are nondiscriminatory even though the contributions are discriminatory. A target benefit plan, a type of money purchase plan, may satisfy the requirement if the anticipated benefits do not discriminate even though the contributions do. (For this purpose actual investment experience is not considered.) Also under existing law, two plans can be considered as one for purposes of satisfying the antidiscrimination requirements, either as to contributions or benefits.

Under the committee bill an employer might set up two retirement plans, one with very rapid vesting, the other with slower vesting, but with higher benefits. The bill provides that for the purposes of applying the antidiscrimination rules, the two plans could be considered as a unit (as under present law) and the plan with more rapid vesting would not be considered discriminatory merely because of this feature (even if highly compensated employees were covered under the plan), if contributions were comparable or (in the case of defined benefit plans) if benefits under this plan were scaled down appropriately in relation to benefits provided under the plan with less rapid vesting. (Of course, each plan would have to at least meet the minimum vesting schedule provided in the committee bill and would also have to be nondiscriminatory as to the employees covered by it.)

Thus, in the case of a defined contribution plan, the tax deductible contributions to both plans would be required to be the same in proportion to covered compensation. This would mean, in effect, that employees in the plan with less rapid vesting would receive increased benefits as the result of forfeitures,15 whereas there would be relatively few forfeitures under the plan with earlier vesting.

In the case of a defined benefit plan, the same principle of comparability would apply, but here the level of benefits under the plan with carlier vesting would have to be lower, in relation to the benefits provided under the other plan. Generally, these comparisons would be made on an actuarial basis, in accordance with regulations.

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.

Protection of pension rights under government contracts.-Many employees, such as engineers, who are employed in industries engaged to à substantial extent in the performance of Federal contracts, have an unusually high rate of mobility which results to a considerable extent from terminations or modifications of Federal contracts, grants, or procurement policies. As a result of this unusual mobility, these employees are particularly susceptible to the loss of their pension rights due to changes in their employment status before they can become

vested.

16 If the employer reduced his tax deductible contributions under the plan because of forfeitures, the tax deductible contributions to the plan with early vesting would also have to be reduced; comparatively, the employees in the plan with less rapid vesting would always have to accumulate larger benefits in proportion to empensation.

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To meet this situation, the bill directs the Secretary of Labor to undertake a study, in consultation with professional societies, business and labor organizations, and other Federal agencies, of steps to be taken to ensure that professional, scientific, technical, and other personnel employed under Federal contracts are protected against loss of their pensions resulting from job transfers or loss of employment. The Secretary of Labor is to report to Congress on this subject within 2 years after the date of enactment and shall, if feasible, develop recommendations for Federal procurement regulations to safeguard pension rights in this situation within one year after filing his report. These regulations are to become effective unless either House of Congress adopts a resolution of disapproval within 90 days after the proposed regulations are submitted to the Congress by the Secretary of Labor. Of course, individual government agencies would be free to take action to protect the rights of workers employed under agency contracts, even if no comprehensive regulations, applicable on a government-wide basis, could be developed.

Church and government plans, and union-sponsored plans.-Church and government plans (described above under participation and coverage) are exempt from the vesting provisions of the bill but must comply with the requirements of present law in this area (as in effect on the day before enactment) in order to be qualified. Church plans may elect to come under the provisions of the bill and, once made, such an election will be irrevocable.

The committee bill also exempts from the vesting requirements plans which do not, at any time after enactment, provide for employer contributions-in other words, union-sponsored plans. Since these plans are, in effect, controlled by the employees for whose benefit they are established, there is no need to impose the vesting requirements of the bill. However, if the plan provides for employer contributions, the mere fact that no such contributions are made (either because the plan is fully funded, or because the employer fails to comply with the funding requirements of the bill, or for some other reason), will not result in an exemption for the plan from the vesting requirement. Effective dates

These provisions apply generally to plan years beginning after the date of enactment of the bill. Later effective dates (which may vary from 1976 to 1981, depending on the circumstances of the plan) are provided in the case of plans in existence on January 1, 1974, in order to afford such plans adequate opportunity to adopt any amendments needed in order to conform to the new requirements resulting from this bill. The effective date provisions are described more fully above, in the discussion of participation and coverage requirements.

Revenue effect

Estimates of the revenue effect of the minimum vesting provisions vary with the assumption made about the relationship between additional employer contributions to pension plans and cash wages. If it is assumed that the additional employer contributions will be a substitute for cash wages, the estimated revenue loss is $130 million. On the other hand, if it is assumed that the additional employer contributions will be an addition to cash wages, the estimated revenue loss

[73] $265 million. The estimates under both cases assume that benefits under pension plans are not decreased and that no benefit increases are foregone as a result of the bill. The estimates are based on 1973 levels of income and employment.

C. FUNDING

(Secs. 1013, 1033 of the bill and secs. 404, 412, 4971, 6059, 6692, 7517 of the Code)

Present law

Under present tax law, contributions to a qualified pension plan gencrally must be sufficient to pay the liabilities created currently (ie., the normal pension costs) plus the interest due on unfunded accrued pension liabilities (past service costs) (regs. § 1.401-6 (c) (2) (ii)).1 This tends to keep the amount of unfunded pension liabilities from growing larger, but does not require any contributions to be made to amortize the principal amount of the unfunded liabilities.

2

Pension plan liabilities generally are estimates and are based on actuarial calculations. Consequently, all actuarial methods, factors, and assumptions used must, taken together, be reasonable and appropriate in the individual employer's situation (Regs. § 1.404(a)−3(b)). When applying for a determination letter from the Internal Revenue Service that a plan is qualified, the actuarial methods, factors, and assumptions used generally must be reported to the Service, along with other information to permit verification of the reasonableness of the actuarial methods used. Changes in actuarial assumptions and methods must be reported annually to the Service.

Actual experience may turn out to be different from anticipated experience, changing the estimated pension liabilities (and needed contributions) and resulting in experience loss or experience gain. Depending on the circumstances, the contributions needed to make up experience losses may be deducted currently or may be added to past service costs and deducted only on an amortized basis. Similarly, depending on the circumstances, experience gains may reduce the plan cost currently or reduce costs under one of the spreading methods used to determine the amounts deductible.*

The value of plan assets also affects the amount of contributions. Under administrative rulings, assets may be valued by using any valuation basis if it is consistently followed and results in costs that are reasonable.

If an employer does not make the minimum required contributions to a qualified plan, under administrative practice the deficiency may be added to unfunded past service costs. However, the plan also may be considered terminated, and immediate vesting of the employees' rights, to the extent funded, may be required.

1 This requirement applies only to pension and not to profit-sharing or stock bonus plans. 2 In determining liabilities, an employer must take into account factors such as the basis on which benefits are computed, expected mortality, interest, employee turnover, and changes in compensation levels.

Under the "10-percent" deduction limit (sec. 404 (a) (1) (C) of the Code), if the experience loss occurs using the same assumptions as previously, the additional contributions, subject to certain restrictions, may be deducted currently. If the deficit results from a loss in asset values or revaluation of liabilities using more conservative assumptions the deficit may be added to past service cost. Rev. Rul. 57-550, 1957-2 C.B. 266.