Pension Benefit Guaranty Corporation PBGC 1200 K Street, N.W., Washington, D.C. 20005-4026 US GOVERNMENT AGENCY ATTACHMENT 1 TO QUESTION AND ANSWER 12 DATE: TO: FROM: SUBJECT: March 23, 1999 Deborah Stover-Springer Office of the Inspector General Joseph H. Grant Deputy Executive Director and Chief Operating Officer Potential Changes to Title IV of ERISA that would speed the issuance of IDLs. I am writing in response to your inquiry of Thursday, March 11, asking for information about changes to Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) that would enable the PBGC to issue Initial Determination Letters (IDLs) more quickly. While the PBGC remains committed to improving the efficiency and effectiveness of our benefit determination process, we are, of course, bound by the statutory requirements of ERISA. Complying with some of these requirements can be quite time consuming. As we noted in our response to the Office of the Inspector General's Draft Audit Report: Improvements Are Needed to Achieve Better Efficiency and Effectiveness in PBGC's Benefit Determination Process, "The benefit calculation process is very time consuming because of... a complicated statute (e.g., calculations under Title IV of ERISA are often very complicated and can require data and documents that are very difficult to find). One specific proposal the PBGC has made would simplify the PBGC guarantee and asset allocation rules that apply to benefits of owner-employees. This proposal has been cleared with the Administration and is included in the Administration's FY 2000 budget proposals. Under current law, special guarantee and asset allocation rules apply to substantial owners (generally, an ownership interest exceeding 10%). The rules are inordinately complex and require plan documents going back as far as 30 years, which are difficult or impossible for the PBGC to obtain. The proposal would apply special guarantee limitations only to owners with a 50% or more ownership interest (owners with less than 50% ownership would be treated the same as regular participants), and it would simplify the special guarantee and asset allocation rules ANSWER 11: Yes, the Inspector General has attended the monthly meetings I have held to review our implementation of our corrective action plan. We have been reporting to your Committees on our computer security efforts and, as promised, we have completed all steps required in the corrective action plan as of September 30, 2000. I and others have asked the IG for his suggestions or observations. He has indicated in those meetings that what we were doing made sense and he would be reviewing our work after September 30, 2000 (as he told the Committees). In addition to the Inspector General, the Price WaterhouseCoopers computer consultants (under contract to the OIG) have also attended the last three meetings. They too have received copies of all procedure changes and have had separate meetings with our computer staff. QUESTION 12: Does the PBGC have any suggestions or recommendations for legislative changes that would provide the PBGC with a more efficient and faster benefit determination process? ANSWER 12: There are several legislative changes to the Employee Retirement Income Security Act (ERISA) that would provide the PBGC with a more efficient and faster benefit determination process. We supplied the PBGC's Office of Inspector General with these suggested changes in March of 1999. I am enclosing for the record the memorandum entitled "Potential Changes to Title IV of ERISA that would speed the issuance of IDLs," along with the attachment to that memorandum entitled "SUBSTANTIAL OWNER BENEFITS IN TERMINATED PLANS" that my deputy Joseph Grant sent to the Deputy Inspector General at that time. (See Attachments 1 and 2 to Question 12.) The proposal to simplify the "substantial owner" rules of Title IV is included in both the President's pension proposals and as section 602 in the bi-partisan S. 741, the Pension Coverage and Portability Act, of which you, Mr. Chairmen, are co-sponsors. In Mr. Grant's memorandum we also indicated that we were looking at amending how the Small Plan Average Recovery Ratio (the "SPARR") is determined under section 4022(c) of ERISA. Waiting for the information needed to calculate the SPARR significantly delays PBGC's processing of many plans. Pension Benefit Guaranty Corporation PBGC 1200 K Street, N.W., Washington, D.C. 20005-4026 ATTACHMENT 1 TO QUESTION AND ANSWER 12 DATE: TO: FROM: SUBJECT: March 23, 1999 Deborah Stover-Springer Office of the Inspector General Joseph H. Grant Deputy Executive Directo and Chief Operating Officer Potential Changes to Title IV of ERISA that would speed the issuance of IDLS. I am writing in response to your inquiry of Thursday, March 11, asking for information about changes to Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) that would enable the PBGC to issue Initial Determination Letters (IDLs) more quickly. While the PBGC remains committed to improving the efficiency and effectiveness of our benefit determination process, we are, of course, bound by the statutory requirements of ERISA. Complying with some of these requirements can be quite time consuming. As we noted in our response to the Office of the Inspector General's Draft Audit Report: Improvements Are Needed to Achieve Better Efficiency and Effectiveness in PBGC's Benefit Determination Process, "The benefit calculation process is very time consuming because of... a complicated statute (e.g., calculations under Title IV of ERISA are often very complicated and can require data and documents that are very difficult to find). One specific proposal the PBGC has made would simplify the PBGC guarantee and asset allocation rules that apply to benefits of owner-employees. This proposal has been cleared with the Administration and is included in the Administration's FY 2000 budget proposals. Under current law, special guarantee and asset allocation rules apply to substantial owners (generally, an ownership interest exceeding 10%). The rules are inordinately complex and require plan documents going back as far as 30 years, which are difficult or impossible for the PBGC to obtain. The proposal would apply special guarantee limitations only to owners with a 50% or more ownership interest (owners with less than 50% ownership would be treated the same as regular participants), and it would simplify the special guarantee and asset allocation rules Another example of the challenge the PBGC faces is the delay in case processing we encounter in valuing and allocating employer recoveries. ERISA requires the PBGC to determine the employer liability recovery for all plans and to share these recoveries with participants using the Small Plan Asset Recovery Ratio (SPARR). Determining the SPARR takes a minimum of 1-2 years. This makes it impossible to complete benefit processing for most plans in less than 3 years. Other areas of processing complexity include valuing participant liabilities and determining the appropriate priority category to which they should be assigned, and applying the benefit limits under ERISA's phase-in rules. We recognize that in most instances the statutory requirements of ERISA represent a balancing of competing considerations. With the exception of the above-mentioned substantial owner simplifications, the PBGC has not drafted or recommended changes at this time. As we noted in our response to the OIG report, while they would enable us to issue IDL's more quickly, they are more difficult to implement...". We recognize that careful consideration should be given before any action is taken. However, we believe it is important for all parties who are concerned about the delays our participants experience to understand that further substantial improvements in the PBGC's 3-5 year benefit determination processing time goal may require legislative changes. ATTACHMENT 2 TO QUESTION AND ANSWER 12 SUBSTANTIAL OWNER BENEFITS IN TERMINATED PLANS Current Law PBGC's guarantee of benefits of substantial owners (generally, ownership interest exceeding 10 percent) is phased in over 30 years as compared to five years for non-owners. A substantial owner's benefit under each amendment within the 30 years before termination is separately phased in. The combined guarantee of benefits under the terms of the original plan and all amendments to the plan cannot exceed two times the guarantee of benefits under the terms of the original plan. Priority Category 4 of the allocation of assets includes guaranteed benefits plus benefits that would be guaranteed but for the special substantial owner guarantee limitations. Assets are allocated pro rata in Priority Category 4 based on participants' benefit values. Thus assets may be allocated to a substantial owner's nonguaranteed benefits before all guaranteed benefits have been satisfied. Reason for Change The special substantial owner rules are inordinately complex and require plan documents going back as far as 30 years, which are difficult or impossible to obtain. The rules penalize owners in plans that started out with modest benefit levels and those with little control over plan decisions. Changes are needed in the guarantee and asset allocation rules to simplify determination of benefits and eliminate the unduly harsh treatment of owners under the current law. The proposed changes also will eliminate one of the reasons that small business owners give for not establishing defined bénefit plans (i.e., the inadequacy of PBGC guarantees for owners). Proposal The proposal would apply special guarantee limitations only to owners with a 50 percent or more ownership interest ("majority owners"); other owners (less than 50 percent ownership) would be treated the same as regular participants. The guarantee for majority owners would be phased in at the rate of 1/10 for each year that the plan has been in effect. Thus, after a plan has been in effect for ten-years, the same guarantee limits would apply to all participants. The proposal also would change the allocation of assets in priority category 4 to distinguish only between majority owners and regular participants and would allocate assets to nonguaranteed |