House Passes Pension Bill; Legislation Entangled in Tax and Wage Policy

Late Friday night, the House passed a bill that would require companies to fund 100 percent of their pension promises within seven years beginning in 2008. But the Senate may fail to take similar action this week, which could halt the first major overhaul of pension rules since the mid-1970s.

House and Senate negotiators late last week reached an agreement on the legislation, but its fate may be bound to an unrelated measure extending a number of tax cuts, reducing the estate tax and increasing the minimum wage.

The House-Senate conference committee did not produce a final report because a bipartisan group of senators wanted to include the tax-cut extenders. Instead, House Republicans split off the tax cuts off from the pension agreement and put them in the separate tax bill.

They took advantage of the opportunity to force Democrats to vote on an estate tax cut by linking it to raising the minimum wage. For the most part, Democrats decry the estate tax measure as a break for the rich, but see minimum wage as a winning issue in this fall’s elections.

The House approved the pension bill 279-131 and the tax bill 230-180. In the Senate, a motion to end debate on the tax package was set to be filed Wednesday, August 2, according to an aide to Senate Majority Leader Bill Frist, R-Tennessee. That would set up a Senate vote on Friday–first on the tax package, then on the pension bill.

“The pensions bill is must-pass,” Frist said in an Aug. 1 speech on the Senate floor. “If we fail to act, billions of dollars of new debt will be thrown on the federal treasury. That’s just irresponsible. The Senate must clear the pensions bill, clean, so the president can sign it this month. We will act, and pensions will get done, without amendment.”

But Senate Democrats, who have already stopped estate tax reform this year, are gearing up to defeat the tax bill. If they do, the Senate might then re-attach tax extenders to the pension measure, which represents perhaps the last vehicle for tax reform this year.

Such a move would require the pension bill to return to conference negotiations for reconciliation with the bill the House passed on Friday.

“I can’t imagine the Senate taking up the pension bill as a stand-alone bill,” says Robert Davis, senior manager of Deloitte Consulting in Washington. “Even if it were to come out of the Senate, it would be lit up like a Christmas tree (with tax provisions).”

Among the highlights of the House-passed pension bill:

Requires companies to fund 100 percent of their pension promises within seven years.

Prohibits the use of credit balances in pension plans that are less than 80 percent funded and, for the most part, subtracts them from assets when calculating “at-risk” status.”.

Requires increased pension payments that are deemed “at risk.” They fall into that category if their plans are less than 80 percent funded and fall to less than 70 percent after subtracting credit balances and assuming that workers eligible to retire within the next 10 years retire as early as possible.

Reduces the smoothing of interest rates to a 24-month average of the yield on the top three grades of corporate bonds.

Prohibits increasing benefits if a plan is less than 80 percent funded.

Gives airlines 17 years to meet 100 percent funding of their pensions.

Protects companies from age discrimination suits if they establish cash-balance pension plans, but does not provide safe harbor for existing plans.

Permits financial advisors for company-sponsored 401(k) plans to provide advice to employees based on a computer model certified by an independent party.

Provides incentives for automatic enrollment of employees in 401(k) plans.

Makes permanent the federal income tax credit for the first $2,000 of annual contributions to an IRA or qualified pension plan.

Allows companies to use excess pension funds to finance retiree health benefits.

The business lobby, which has warned Congress not to make pension funding more volatile and onerous, is lukewarm toward the bill emerging on Capitol Hill. The Pension Coalition, a group of about 200 companies, remains neutral on the bill.

“The success or failure of the legislation will be judged over time,” says Martin Reiser, manager of government policy for Xerox and spokesman for the coalition. “There are individual companies within the coalition that have endorsed it, including Xerox. But there are others who have concerns.”