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CRS86106EPWpage24
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CRS86106EPWpage24
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on the availability of the benefit or subsidy and (2) plan amendments and plan terminations that occur after July 30, 1984. ERISA does not prevent freezing accrued benefits or eliminating future benefit accruals, provided the plan provides 15 days prior notice to partici-i pants and beneficiaries. The following are generally not to be considered "retirement-type" subsi- _ dies: (1) qualified disability
CRS86106EPWpage29
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CRS86106EPWpage29
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funded. Generally, initial past service liabilities and past service liabilities arising under plan amendments are to be amortized over no more than 30 years (40 years in the case of plans in existence on January l, l974), and gains and losses resulting from plan experience are to be amortized over no more than 15 years. Changes in plan liabilities resulting from changes in actuarial assump- tions
CRS86106EPWpage27
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CRS86106EPWpage27
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CRS-l9 notify their employees of this option. fhe notice must be.a written explanation to each participant which states: 0 the terms and conditions of the qualified joint and survivor annuity; i o the right of the participant and spouse to decline the survivor annuity and the effect of the decision; ‘ o the rights of the participant's spouse; and o the right to reverse the decision
CRS86106EPWpage30
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CRS86106EPWpage30
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CR8-22 substantial business hardship, the IRS may waive the funding requirement. The amount waived (plus interest) is to be amortized over no more than 15 years. These funding rules do not cover profit sharing and stock bonus plans. For instance, an employer would not have to contribute in a year in which there were no profits. «Moreover, pension plans funded exclusively by the purchase of cer
CRS86106EPWpage28
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CRS86106EPWpage28
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. 1.!!!
CRS86106EPWpage38
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CRS86106EPWpage38
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-employer pension plans have been insured by PBGC since July 1, l974. Q As long as the plan is ongoing, the plan administrator pays premiums to PBGC for l termination insurance coverage. The single-employer program was substantially revised in 1986 to place it on a more sound financial footing. The Consolidated Omnibus Budget Reconciliation Act of 1986 (P.L. 99-272) increased the annual in- surance premium
CRS86106EPWpage45
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CRS86106EPWpage45
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in contributions for a plan year. In addition, if a plan is con- sidered "overburdened" because it has a high proportion of re- tirees, the minimum contribution requirement is reduced by an overburden credit, giving the employer relief. 0 The PBGC will guarantee 100 percent of the first $5 of monthly ben- efits earned per year of service plus 75 percent of the next $15 of monthly benefits per year
CRS86106EPWpage46
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CRS86106EPWpage46
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cRs—4oi o Increases in annual insurance premiums charged for each plan partic- ~ ipant in a multiemployer plan are phased as follows: Plan year beginning on ‘ Premium per 0 or after September 26 participant 1981-1984 ............................... $1.40 1985-1986 ............................... 1.80 1987-1988 ............................... 2.20 1989 and after .......................... 2.60 o
CRS86106EPWpage39
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CRS86106EPWpage39
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CRS-33 age, certain early retirement and disability benefits, and benefits for survi- vors of deceased plan participants. Only vested benefits are insured. ERISA sets a maximum limit for PBGC guaranteed benefits. This maiimum amount is based on a formula contained in ERISA, and is adjusted periodically. For pension plans ended in 1986, the maximwn pension guarantee is $1,790 a month. The maximum
CRS86106EPWpage40
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CRS86106EPWpage40
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received their benefit com- mitments. b. Distress termination. An employer may terminate an underfunded plan under a distress termination only if one of the following conditions applies: 0 Bankruptcy or insolvency proceedings seeking liquidation have been filed by or against the company; o The company is under bankruptcy reorganization and the bankruptcy court has approved a plan termination; o
CRS86106EPWpage43
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CRS86106EPWpage43
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CRS-37 6. Attempt to Evade Liability If a company sells or transfers a business with an underfunded pension plan for the purpose of evading pension liabilities, it can be held liable if the plan is ended within 5 years of the transfer. However, the employer is not liable for any increases or improvements in plan benefits adopted after the transfer. 7. Administering Insufficiently Funded Terminated Plans When PBGC funds are required to provide guaranteed benefits, PBGC becomes trustee of the pension plan. Retirees receive monthly benefit checks directly from PBGC_by mail, or from a bank or financial institution authorized to make benefit payments on PBGC's behalf. Individuals receive benefits upon reaching a the retirement age specified for their benefit under their plan. The amount received depends on the provisions of the pension plan, PBGC's maximum guaran- tee limit, and whether or not benefit increases have been phased in. In any event, the amount received cannot exceed what would have been received if the plan had continued. 8. Lump-Sum Settlement If a person receives a lump-sum settlement from his pension plan when it terminates, he can put the money into another retirement plan without paying taxes on it immediately. The law provides that an individual can make a "tax- free rollover" into an individual retirement arrangement (IRA) within 60 days after receiving a lump~sum distribution. By choosing this rollover, the indi- vidual can defer taxes on the distribution until the funds are withdrawn from the IRA.
CRS86106EPWpage44
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CRS86106EPWpage44
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CRS-38 C. Multiemployer Pension Plans Multiemployer pension plans were covered by the pension plan insurance pro- gram with the passage of the Multiemployer Pension Plan Amendments Act of 1980 (P.L. 96-34). 1. Withdrawal Liability Employers who leave a multiemployer plan for any reason continue to be lia- ble for any underfunding. The purpose of the withdrawal liability is to protect
CRS86106EPWpage42
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CRS86106EPWpage42
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CRS-36 4. Employer Liability to Plan Participants An employer who ends a plan faces a liability to plan participants to cover unfunded benefits not guaranteed by the PBGC. Under the formula, the employer is liable for the lesser of: (1) 75 percent of the total amount of outstanding benefit commit- ments, or (2) 15 percent of the total amount of benefit commitments., The term foutstanding amount
CRS86106EPWpage41
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CRS86106EPWpage41
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percent of the controlled group's net worth, and (2) the excess (if any) of the amount by which 75 percent of the un- funded guaranteed benefits exceeds 30 percent of the controlled group's net worth, together with interest from the date of termination. The liability amount de- scribed in (1) above is payable to PBGC as of the date of termination in cash or acceptable securities; PBGC may
CRS86106EPWpage53
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CRS86106EPWpage53
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. Small pension plans would be most likely to fall into the top-heavy category. Key employees are defined as those who are (l) officers, (2) the 10 employ- ees who own the largest interest in the company, (3) owners of 5 percent or more of the company, (4) owners of at least 1 percent of the company who are receiv- ing over $150,000 in annual compensation, or (5) employees owning the 10 largest
CRS86106EPWpage54
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CRS86106EPWpage54
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CRS-48’ A. Limitations on Compensation Pension benefit formulas are usually based on employee's earnings. For top-heavy plans, only the first $200,000 of any employee's annual compensation can be used in computing pension benefits. B. Accelerated Vesting Schedule Plans that have been top-heavy must implement an accelerated vesting sched- ule. The benefits vested under the accelerated
CRS86106EPWpage51
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CRS86106EPWpage51
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of compensation or $90,000. The Deficit Reduction Act of 1984 freezes these limits until 1988, when automatic adjustments for price inflation are to resume. A special rule applies in a case where an indi- vidual is covered by both a defined benefit and a defined contribution plan. Under a "12$-percent rule,’ when an employee receives the maximum benefit pay- able under one plan, he can receive up to 25
CRS86106EPWpage55
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CRS86106EPWpage55
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CRS-49 For each year that a defined benefit plan is top-heavy, a minimum benefit is required equal to 2 percent of the employee's average compensation earned for the 5 highest consecutive years of compensation. The highest minimum ben- efit would not have to exceed 20 percent of average compensation within the firm. For each year that a defined contribution plan is top-heavy, the employer
CRS86106EPWpage49
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CRS86106EPWpage49
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CRS-43 XII. GENERAL RULES ON PENSION PLAN LOANS Generally, loans from a tax-qualified or governmental pension plan are treated for Federal income tax purposes as a taxable plan distribution to the extent the loan exceeds prescribed limits. All loans up to $10,000, plus those loans up to $50,000 that do not exceed half of the present value of an employ- ee's vested benefits, are not treated
CRS86106EPWpage47
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CRS86106EPWpage47
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XI. INTERNAL REVENUE CODE PROVISIONS_ ERISA also made changes to the Internal Revenue Code of 1954 concerning employee benefit plans. Subsequent tax laws made futher changes in the rules affecting tax-qualified pension plans. These laws include the Economic Recov- ery Tan Act of 1981 (ERTA), the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA); and the Deficit Reduction Act of l984 (DEFRA

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