By Staff Report
Jun. 28, 2010
President Barack Obama has signed into law pension funding relief legislation.
Obama’s action came Friday, June 25, after the House approved the bill, H.R. 3962, on a 417-1 vote. Only Rep. George Miller, D-California, who chairs the House Education and Labor Committee, voted against the measure. Miller objected to the omission of provisions that would beef up disclosure of 401(k) plan fees.
The measure would give employers temporary alternatives to the basic requirement—embedded in a 2006 law—that requires employers to amortize pension funding shortfalls over seven years.
Under one alternative, employers could amortize funding shortfalls over 15 years for any two plan years from 2008 to 2011.
Under the other option, employers would have to pay interest on a funding shortfall for only the two plan years they choose. After that, the seven-year amortization period would begin. For example, if an employer chose this approach for the 2010 plan year, it would only pay interest—roughly 6 percent based on current rates—on the shortfall in 2010 and 2011, while the shortfall would be amortized over seven years starting in 2012.
Either approach would significantly reduce the cash pension plan contributions employers would have to make compared with current requirements.
“While this bill is not perfect, it is an important step in providing urgent relief to plan sponsors—many of whom continue to be strapped for cash and must choose between funding their plans or delay hiring and capital investments or even further cut back on jobs,” Mark Ugoretz, president of the ERISA Industry Committee in Washington, said in a statement.
Some of the relief provided to employers, though, would be eroded by a provision known as the cash-flow rule. That provision would require employers that use either of the temporary funding schedules to contribute extra cash to their plans to equal “excess” employee compensation or “extraordinary” dividends.
For example, an amount equal to compensation in excess of $1 million paid to any employee would have to be contributed to the plan.
Employers adopting the interest-only funding approach would be bound by the cash-flow rule for three years, while the rule would apply for five years for employers adopting the 15-year amortization schedule. The pension funding relief provisions are part of a broader measure that temporarily reverses a cut in fees the government pays doctors treating patients covered by Medicare.
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