Segal’s Compliance Alert March 19, 2002

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March 19, 2002

Benefits Provisions in the New Economic Stimulus Law

On March 9, 2002, President Bush signed into law the Job Creation and Worker Assistance Act (P.L. 107-147), which is informally known as the economic stimulus law. Although the Act, which extends certain unemployment benefits, does not provide the assistance with health insurance coverage for displaced workers that had earlier been proposed, it does include some less dramatic benefits provisions. Key benefits provisions are summarized in this Compliance Alert.

Pension Provision

The fact that pension plans are legally obligated to use the 30-year Treasury bond rate to value their benefit liabilities and determine contributions had become a problem during 2001, which was made worse in October of last year when the Treasury Department decided to stop issuing 30-year bonds. As a result, interest rates for existing 30-year bonds were lower than economists believe was justified, a change that made some plans appear underfunded, potentially resulting in increased funding requirements and higher premium payments to the Pension Benefit Guaranty Corporation (PBGC).

The Job Creation and Worker Assistance Act includes the following temporary relief from this problem:

For funding purposes, the applicable rate can now be as high as 120 percent of the four-year weighted average of the 30-year bond rate (rather than 105 percent). This can be used to determine current liability for funding purposes for 2002 and 2003, and to measure the 2001 and 2002 current liability to determine whether the employer must make quarterly contributions in 2002 or 2003.
To determine PBGC variable-rate premiums for 2002 and 2003, the applicable rate is now 100 percent of the 30-year bond rate (rather than 85 percent).

This relief is for single employer defined benefit plans subject to ERISA.

Health Provisions

One-Year Extension of the Mental Health Parity Act (MHPA) The Act extends the existing provisions of MHPA for one year. MHPA now expires on December 31, 2003. (MHPA initially expired on September 30, 2001. Appropriations legislation signed in January extended the law through December 31, 2002. For information about MHPA, see The Segal Company's February 2002, Bulletin, "Mental Health Parity Act Extended; Congress May Seek to Expand Law this Year.") In addition, the Act states that no penalties will be imposed for violations of the parity rules during the gap period between expiration of MHPA in 2001 and enactment of the extension.
One-Year Extension for Medical Savings Accounts (MSAs) The Act extends the MSA demonstration project for one year, through December 31, 2003. The terms on which they are available, including the fact that MSAs may only be offered by employers with 50 or fewer employees, have not been changed.

Technical Corrections

The Act makes technical corrections to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and other recent tax laws, effective as of the effective date of those laws. Many of them confirm interpretations that the IRS and Treasury have already adopted. Here is a selection of the more substantive benefits-related technical changes to EGTRRA.

415 Limits — Plan Amendments If, when EGTRRA was signed, a pension plan incorporated the Code section 415 limits by reference, that plan can be amended by June 30, 2002 to keep the old section 415 limits in place even if the amendment would otherwise be viewed as a benefit reduction.
Catch-Up Contributions The Act confirms that individuals are allowed to make catch-up contributions if they will be age 50 by the end of the calendar year, that they cannot contribute more than the applicable dollar limit regardless of the number of plans in which they participate, and that public employees can make catch-up contributions up to the higher of the general limit or the special catch-up limit under Code section 457.
Section 457 Plans The Act makes clear that "compensation" under a section 457 plan includes the same salary-reduction amounts that are counted under Code section 415.
Benefit Reduction Notice Under the Act, only defined benefit plans are required to give advance notice of significant reductions in the rate of future benefit accruals.
Pension Valuation Data The Act modifies an EGTRRA rule on the timing of pension valuations, to allow use of data as of any time in the year before the valuation date if, as of that earlier date, the plan's current liability was 100 percent covered by assets, while providing that a plan can only shift to this type of retrospective valuation following a year in which its assets were at least 125 percent of its current liability.
Deductible ESOP Dividends For an employer to be able to deduct dividends paid on stock held by an ESOP, the employees must be fully and immediately vested in those dividends. Also, the Act confirms that the deduction is taken in the year the employee is offered a choice between receiving it in cash or having it reinvested or, if later, the year the dividend is reinvested.

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.