WASHINGTON -- A citizens' group advising the Labor Department on pension policy matters is recommending expanding current law to let companies dip into their pension fund surpluses to pay for anticipated retiree health care liabilities.
Although companies are usually slapped with hefty excise taxes when they tap their pension funds, Section 420 of the tax code permits them to do so without paying the tax so long as they use the money to pay for the current year's retiree medical expenses. The law does not permit companies to siphon surplus pension assets to pay for future retiree medical expenses.
But the proposal by a working group of the ERISA Advisory Council would require companies to maintain bigger safety nets for pension plan participants than required under current law.
The law now permits companies to use surplus pension assets to pay for retiree health care expenses so long as they have assets to cover the greater of the full funding limit or at least 125% of their current pension liabilities.
The group's proposal would require companies to maintain the greater of the full funding limit or 135% of their current pension liabilities in order to tap their pension funds to pay pensioners' future medical expenses.
The group's recommendation comes as even some lawmakers have expressed concerns that companies with overfunded pension plans are already using a back-door version of this technique -- while cutting pension benefits -- to siphon out pension assets yet escape paying the high penalties on such transactions.
At a recent hearing of the Senate Finance Committee, Sen. Tom Harkin, D-Iowa, noted that some companies that have converted their traditional pension plans to cash balance plans might have in the process reduced pension benefits for older workers and then used the surplus pension assets to pay for retiree health care costs.
Slightly more than half of the working group also approved a recommendation to let companies use surplus pension assets to pay for anticipated health care expenses of workers approaching retirement, although some members of the group protested the recommendation was too broad.
The belief underlying the recommendation to expand current law is that companies might be reluctant to contribute as much to their pension funds as they are allowed to because the law restricts their ability to later retrieve the money to pay for other employee benefits.
"There has been a consistent decline in pension assets since 1990, which has resulted in the decline of ... funding ratios across all industries," said Michael Gulotta, chief executive officer of ASA Inc., a Somerset, N.J.-based pension consulting firm, and head of the working group, voicing a finding of the group.
The working group also recommended permanently extending the current law and allowing companies to continue using surplus pension assets to pay for medical expenses of their retired workers, so long as the assets exceed 125% of current pension liabilities. The current law, enacted in 1990, is scheduled to expire at the end of 2000.
A proposal to extend the current law was part of the tax package vetoed by President Clinton in September. But a coalition of companies that has been using surplus pension assets to pay for their retired workers' health care expenses is lobbying furiously for an extension of the law.
Other items the group is expected to include in its final report are:
* A requirement that companies using surplus pension assets to pay for retiree health care expenses provide for at least five years of health care benefits for pensioners. Under the current law, companies must maintain the same level of health care benefits they provide retirees for five years. Some members of the group, however, worried that if this standard were adopted, high inflation of health care costs could eat into the benefits companies provide their retired workers. The recommendation, however, passed after other group members contended that covering the cost of health care benefits is the minimum, not the maximum benefit companies must provide.
* A recommendation that a qualified actuary certify the present value of benefits was determined by using sound actuarial analysis.
* A recommendation that income from surplus pension assets put into separate trusts known as voluntary employee benefit associations to pay for retiree health care costs would not be subject to taxes. Under current law, income on assets put into VEBAs is subject to unrelated business income taxes if VEBA covers non-union employees.
* A recommendation that health care inflation be taken into account in determining the present value of benefits for current retirees.
* A recommendation that employer-provided long-term medical care be counted as part of retiree medical expenses.
The working group on defined benefit pension plans, along with two other working groups of the ERISA Advisory Council, will present its final recommendations this month to Labor Secretary Alexis Herman; the reports are then presented to lawmakers for consideration. But because members of the ERISA Advisory Council are not Labor Department officials, their recommendations do not carry the weight of proposals by the pension regulatory agency, and regulators are free to ignore them.
