ACOPA Advanced Actuarial ConferenceJune 2-3, 2014

Washington Update

Judy Miller, MSPA

Executive Director, ACOPA

Director of Retirement Policy, ASPPA

1

Agenda

• New laws– Budget Act

– CSEC

• Passed by Senate – (“Raisers”)– MAP 21 extension

– PBGC advance premium payment

• Legislative proposals– Camp

– Hatch

– Harkin

– NCCMP

– Other

• In case you had not heard– 412(d)(2) bubbling up

– Late retirement

– PBGC Agenda

– ACOPA has taken the position that….

2

Balanced Budget Act of 2013

• Enacted in December 2013

– Senator Murray (D-WA) and Rep. Ryan (R-WI)

primary authors

• Provisions of interest:

– PBGC premium increases

• Opposition to this provision from key Senators, but …

– Restricted access to Social Security Death Master

File

• Must be certified to access records within three years

of death

• Secretary of Commerce in charge of the process

3

Premium Increases

• Map-21 had increased premiums– Single employer plans:

• PYB in 2013, increased the $35 basic flat-rate premium to $42 per participant per year in 2013, increasing to $49 per participant in 2014, with indexing thereafter.

• Variable rate charge of $9 per $1,000 of unfunded vested benefits increased to $13 per $1,000 in 2014, and $18 in 2015, subject to a cap of $400 per participant.

– Multiple employer plans:• Increased per participant premium from $9 to

$12 in 2013, with indexing thereafter

4

Premium Increases

• 2013 Budget Act increased only single employer

premiums:

– Flat rate $57 in 2015 and $64 in 2016, indexed to

average wages thereafter

– Variable set at $24 per $1000 in 2015 and $29 in 2016,

indexed thereafter

• Cap increased to $500 per participant in 2016,

indexed thereafter

– Scored to raised revenues by $7.9 b over 10 years

• President’s 2015 budget proposed $20 billion but

acknowledged:

“Any further premium increases need to be

carefully crafted to avoid worsening PBGC’s

financial condition and harming workers’ retirement

security by driving healthy plans that pose little risk

of presenting a claim to PBGC out of the system.”

5

CSEC Pension Flexibility Act

• CSEC= Cooperatives and Small Employer Charities– Multiple employer in existence 1/1/2013

• Treated as employed by single employer for funding purposes

• Pre-PPA rules minus DRC – “Funding restoration” status for <80% funded

using valuation interest rates

• Allows charities to revert to PPA

• Signed into law 4/27/14

6

UI Extension - HR 3979 EAS

• Passed by Senate 4/7/2014– Passed House without any unemployment

provisions or pension revenue raisers 3/11/2014

• MAP 21 extension– Retain 10% corridor through 2017, then resume

gradual increase• Another version has it extended through 2016

– Less of a raiser than it used to be

– Other related modifications• AFN funding stabilization reporting extended through

2018

• Stabilized rates cannot be used for 436 purposes if in bankruptcy

• For small plans – 1st day of segment rate period is “valuation date” instead of “first day of plan year”.

7

UI Extension

8

• Elective advance payment of flat PBGC premiums– Up to 5 years could be pre-paid

– Advance payment equals current year flat dollar amount

– If participant count increases in a future year

• Must pay for those additional participants at the rate in effect for that (future) year

– If participant count decreases?

• You lose. No refund or credit.

– Appears a new election could not be made while another is in effect

• Refers to an election for “subsequent plan years

CAMP TAX REFORM PROPOSAL

9

49%

37%

6%

3%1% 1% 1% 1% 1%

5%7%

5%

8%

5%4%

14%

11%

41%

0%

10%

20%

30%

40%

50%

60%

DC Plan Tax Expenditures

Cap Gains Tax Savings

Estimated Defined Contribution Federal Tax Expenditure1

and Tax Savings for Net Capital Gains2 (2011)

Distributed by Adjusted Gross Income

1 Estimated - participants with access and retirees with account balances. See ASPPA, "Distributional Analysis and

Pension Tax Provisions", (2014)2 Tax differential between ordinary Income and capital gains rates. Estimates based on IRS SOI, Individual Income Tax

Returns

10

JCT January 2013 estimates(https://www.jct.gov/publications.html?func=startdown&id=4503)

Billions

Tax Expenditure 2013 2014 2015 2016

Employer-provided health exclusion $131.7 $143.0 $153.0 $161.5

Capital Gains and Dividends 160.8 91.3 114.9 120.6

Home mortgage deduction 69.7 71.7 75.0 79.2

Defined contribution plans 57.0 61.4 65.9 72.5

Defined benefit plans 32.9 35.1 41.2 48.9

Self-employed pension plans 11.3 12.0 12.7 13.6

Total ER-Provided retirement plans 101.2 108.5 119.8 135.0

Traditional IRAs 11.1 13.3 14.5 15.9

Roth IRAs 3.8 4.3 4.9 5.5

Tax Expenditures

11

Camp Tax Reform Proposal

• Self-imposed constraints

– Revenue neutrality

– Distributional neutrality

12

• Preserves cap gains break (40% exclusion)

• Revenue Raisers in Camp Proposal:

– Pre-tax elective deferral contributions limited to 50% of

the IRC § 402(g) limit (including catch-up), remainder must

be contributed on a Roth, after-tax basis. (Raises $143.7

billion)

– 10 year freeze on cost of living increases to qualified plan contribution and benefit limits. (Raises $60.1b on § 402(g)

and $1.8 §415 freeze)

– Eliminates SIMPLE plans (Raises $1.1b)

– “Stretch IRA” eliminated (Raises $3.5 b)

Camp Tax Reform Proposal

13

• Revenue Raisers (cont’d):

– Pre-tax IRA contributions eliminated, only Roth

IRAs would be permitted Including a 10-year freeze

on cost of living increases. (Raises $16.7b)

– Income limits on Roth IRA’s eliminated.

– And no re-characterization of Roth into a traditional

IRA. (Raises $.4b)

– No exclusion for unrealized appreciation on

employer securities. (Raises $.9b)

Camp Tax Reform Proposal

14

• Revenue Raisers (cont’d):

– Double Taxation on DC Plan Contributions

• Marginal tax rates reduced to 10% and 25%, but adds a new

10% additional income tax for earnings in excess of $400 k

($450k joint) of modified adjusted gross income (AGI).

• AGI for this purpose is modified by INCLUDING various items

of compensation that would not otherwise be subject to

income tax including all pre-tax contributions to qualified

defined contribution plans (both employer and employee)

but not defined benefit plans.

• Net effect is a double tax on plan contributions, i.e. at 10%

when they go in and again at normal income tax rates when

they are distributed. (Revenue not broken out)

Camp Tax Reform Proposal

15

Other Camp Provisions

• “Simplification”

– No new SEP’s and SIMPLE 401(k)’s. (Raises $.6b)

– Defined Benefit, 457(b) and money purchase pension

plans would be permitted to make in-service

distributions at 59 ½. (Raises $.2b)

– Eliminates the special contribution rules for 403(b)

and 457(b) plans (Raises $.9b)

– 10% early distribution tax for 457(b) (Raises $.6b)

16

Other Camp Provisions

• “Leakage” provisions:

– 1st time home purchase and post-secondary

education would no longer qualify for an exception

to the 10% penalty on early distributions. (Raises

$.3b)

– From the SEAL Act:

• The 6-month contribution suspension after a

401(k) hardship distribution would be eliminated.

• Rollover period for loan offset distribution would

be extended until the due date of the tax return

for the year of the distribution.

17

Tax Reform Prospects

• Won’t happen in 2014

– Leadership not eager to take a tough vote in an election year

– New Senate Finance Chairman Wyden • Marked up “extenders”, acknowledgement that

reform is dead for now

• Some tax reform hearings to set the stage for next year

– House W&M Chairman Camp retiring• Extenders now on W&M agenda

• If Ryan chairs next year, he will be eager

– 2015 effort, but 2017 most likely – post-presidential election

18

SECURE ANNUITIES FOR

EMPLOYEE (SAFE) RETIREMENT

ACT OF 2013

19

20

Hatch SAFE Retirement Act

• S 1270

• Title I – Public plan reforms

– Structure for purchase of individual annuity contracts to replace traditional DB plans

• Title II – Private plan reforms

• Title III – Fiduciary rule jurisdiction

– Give IRS jurisdiction over investment advice related to IRAs

21

Hatch SAFE Retirement Act

• Included in private plan reforms

– No more top heavy

– Plan adoption until due date of tax filings

– Interim amendment/spd deadline synchronization

– QPSA simplification

– 401(a)(26) revisions

• frozen and cross-tested plans

– 401(a)(4) for plans frozen to new entrants

– Update MRD mortality table

– Much, much, much, more

22

Hatch SAFE Retirement Act

• 401(a)(26) provisions (Sec. 218)– Ongoing plans:

• 401(a)(26) would not apply to a DB plan aggregated with a DC plan for 401(a)(4) and 410(b) IF the number of NHCE’s receiving 7.5% DC contributions is at least equal to the totalnumber of participants otherwise required to benefit under 401(a)(26)

– Frozen plans (defined as frozen to new entrants)• If the employer does not maintain another DB plan during

the current year and the following 5 years :

– The DB plan may be aggregated with another plan to pass 401(a)(26) provided the aggregated plans pass 401(a)(4) and 410(b).

– Only NHCE’s benefitting under the other plans count toward meeting the 401(a)(26) requirement

• If another DB plan is established during the prohibited period, NHCE’s that would have been required to benefit must receive retroactive accruals.

23

Universal Secure & Adaptable

(USA) Retirement Funds Act of

2014

March 28,

2014

24

USA Retirement Funds Act

• S 1979 - Harkin (D-Iowa) and Brown (D-OH)

• Proposes a “new” structure that limits employer responsibility and which would:

– be universal and automatic so that all workers are

covered;

– provide certainty that retired workers will receive a

check every month for the rest of their lives;

– be financed by contributions from employees,

employers, and government, because it is unfair to

make families shoulder the burden alone; and

– be pooled and professionally managed.

25

USA Retirement Funds Act

• Solution: “USA Retirement Funds”– Structure

• Multiple employer.

• Privately run, DOL approved.

• Administered by Trustees (also approved by DOL).

• Assets pooled and professionally managed.

• Employers have no fiduciary responsibility.

– Employers could have another DC or DB plan.

– Some details unclear pending a companion bill with more IRC provisions.

26

USA Retirement Funds

• Employers with 10 or more employees, in business for 2 or more years, required to offer a qualifying retirement program or else enroll employees in “USA Retirement Funds”

– Qualifying retirement program does not include:

• Frozen DB plan

• DC plan without a lifetime income option

• 401(k) plan without auto-enrollment at rates at least equal to the USA Retirement Fund rates

• Plan with only non-elective contributions if annual employer contribution rate not at least equal to the USA Retirement funds rates

27

USA Retirement Funds

• Contributions:– Employees auto-enrolled, can modify any

time.

3% in 2015, increasing 1% per year to 6%

in 2017 and later.

– $10,000 cap on employee contributions.

– Employers can contribute uniform $ or % of pay up to $5,000 per employee

– Refundable Saver’s Credit at least equal to the USA Retirement funds rates

• Rollovers permitted into USA fund;

– out only up to $5500

28

USA Retirement Funds Act

• Distributions:

– Lifetime income based on account balance at

retirement.

– Long-term better or worse-than-expected

returns could result in up or down adjustments

to benefits.

– One-time lump sum of $10,000 or 50% of acct if

greater to individual over age 60 for substantial

hardship OR sufficient income outside of fund

(before annuity payments begin).

29

Harkin – Title II – DC Plans

• “Pooled” Employer Plans

– Open MEP concept, but no grandfather for

existing plans.

– Designated provider responsible for

administration and key disclosures.

– Pooled and multiple would file list of adopters

with 5500.

– Treated as a “small plan” for independent audit

requirement if less than 1000 participants and

no single er exceeds 100

30

Harkin – Title II – DC Plans

• Small plan fiduciary safe harbor for employers with 50 of fewer employees

• Sense of Senate that rollover advice could be

investment advice under 3(21) – Response to Hatch provision handing IRAs to Treasury?

• Lifetime Income proposals

– Required disclosure of lifetime income estimate with protection for

disclosing fiduciary

– Safe harbor for annuity selection relying on state regulators

– Clarifies QDIAs can include insurance contact features

– Allows appointment of a plan ”Annuity Administrator” to assume

fiduciary responsibility with respect to QJSA/QPSA and related

annuity payments

31

Harkin – Title III –DB

• Hybrid plan interest rate issues

• NRA of 30 years of service ok for existing plan

provisions

• Prohibition on PBGC imposition of shutdown

liability under 4062(e)

• Funding/Notice simplification

– No reduction for credit balances for IRC 436 of quarterly

contribution determination

– All elections timely if made by filing of Schedule SB

– Timing of annual notices aligned for plans of all sizes

• Multiemployer disclosure improvements

• PBGC provisions

32

NCCMP – “Solutions not Bailouts”

• Why now?

• Current rules expire at the end of 2014

– Extended one year in SFC extenders bill

• Chairman Kline (House E&W) spoke favorably of the proposal at

a May 1 event:

“With each passing day there are fewer choices and

tougher decisions to make. We have to get this done. We

have to get this done for employers struggling to run

successful businesses. We have to get this done for

taxpayers already drowning in red ink. More importantly,

we have to get this done for those men and women

clinging to the promise they can enjoy a retirement that is

financially secure. I look forward to working together on

this important effort.”

33

Multiemployer Proposal (NCCMP)

• Not all unions are on board

• Various proposals to “strengthen” the

current system

– Encourage mergers and alliances

– Make funding relief permanent

– Technical fixes

– Allow plans to change NRA for accrued

benefits to SSNRA

34

Multiemployer Proposal

• Deeply troubled plans could suspend a portion of the accrued benefits iff:

- A plan has taken all reasonable measures to improve funding

- Insolvency is still inevitable and

- It is possible to avoid insolvency and preserve benefits above (at least 110%) PBGC maximum guarantee level

• Distribution of suspensions must protect vulnerable populations to extent possible

• PBGC would make the determination

• Suspensions must be restored before any future benefit improvements can be made

35

Multiemployer Proposal

• New Flexible Benefit Plan

– Operate like current defined benefit plan

– No withdrawal liability

– Higher funding targets

– Adjust accrued benefits in event of funding distress

– Funding standards vary with projection of funded ratio (120% FT for full funding)

• Prospective accruals only

– Current funding rules remain for legacy costs

36

IN CASE YOU HAVE

NOT HEARD….

IRC §412(d)(2)

[A]ny amendment applying to a plan year which—

(A) is adopted after the close of such plan year but no later than 2 ½ months after the close of the plan year (or, in the case of a multiemployer plan, no later than 2 years after the close of such plan year),

(B) does not reduce the accrued benefit of any participant determined as of the beginning of the first plan year to which the amendment applies, and

(C) does not reduce the accrued benefit of any participant determined as of the time of adoption except to the extent required by the circumstances,

shall, at the election of the plan administrator, be deemed to have been made on the first day of such plan year.

38

IRC §412(d)(2)

• 2011 Gray Book Q.4 answer indicated a retroactive discretionary

amendment could not be made after year end and taken into

account for the prior year.

• ASPPA/ACOPA sent a letter to Treasury, and had a meeting, in

July, 2011 expressing concern about this interpretation.

• Recently in the DL process IRS has objected to past 412(d)(2)

amendments (and pre-PPA 412(c)(8) amendments), saying they

violate the qualification requirements.

– Some agents cite the Gray Book, some Rev. Proc. 2007-44, and

some insist the position has always been that these amendments

were not appropriate (although previous DLs were issued where such

amendments were present)

– Appears most DL’s have been issued after responding to concerns,

but some are requiring a closing agreement.

• Next steps

39

Late Retirement & PBGC

• In post-distribution audits of standard terminations, PBGC has required pre-retirement mortality adjustment for late retirement benefits unless the plan has no pre-retirement mortality assumption, or specifically states that it does not apply to the late retirement benefit calculation.

– Example 1: Plan provide PVAB upon death. Also designates a pre-retirement mortality assumption. The plan administrator has never applied the pre-retirement mortality assumption for early or late retirement on the grounds that there is no forfeiture upon death so it is not relevant to the actuarial equivalent benefit calculation. PBGC’s position is that since the plan defines a pre-retirement mortality assumption, and the description of the late retirement benefit simply says it is the actuarial equivalent of the normal retirement benefit, the late retirement benefit must be adjusted for mortality.

– Example 2: Same as 1 except the plan states that the assumptions used to determine actuarial equivalence are 417(e) applicable interest and mortality. PBGC reads the plan as requiring the late retirement benefit to be adjusted for mortality unless the document specifically states otherwise.

• Most plans with PVAB death benefit provide no pre-retirement mortality assumption so no problem.

40

Upcoming PBGC Guidance

• Regulatory agenda released May 23rd

provided target dates for 2014:– In July, re-proposed 4062(e) rule on withdrawal

liability for cessation of operations resulting in 20% reduction in plan participants

– In September:

• Final Reportable Events rule

– Proposed rule exempted small plans from most reporting requirements

• Final rule on benefit determinations and plan valuations for hybrid plans

– In December, notice of proposed rule making on expanding the missing participant program

41

ACOPA Comment Letters

IRS/Treasury:• 8/19/2013 requesting 404(o) guidance including

– Different plan and fiscal years

– Cushion amount determination

– Coordination of minimum required and maximum deductible

contributions

• 10/21/2013 responding to request for comments on whether

static mortality tables should continue to be published (“Yes”)

• 2/28/2014 responding to the request for comments on DB/DC

combo testing including

– Permit average of NHCE matching contributions to satisfy up to

50% of gateway

– Lower gateway if interest rates below 8.5% used for testing

– Develop safe harbor alternatives for HCE outliers

– Phase in gateway for closed plans that no longer meet the

“primarily DB” rule42

Soon to be a comment letter

Volume submitter cash balance document should provide:

• Flexibility in

– Defining classes to which different formulas apply

• Option for different pay credits and interest credits for

each class

– Defining pay credits

• Percentage of compensation or flat dollar credit per

year of service and the lesser of these or net self-

employment income.

• Pay credits based on PV of an annual accrual times

the APR of the annuity deferred to Normal Retirement

Age.

– Defining interest credits

• Range of fixed and variable with ability to apply cap or floor

• Also will address opening balance options, top heavy

accruals, actuarial equivalence…

43

Other ACOPA Comment Letters

• 7/31/2013 to the Academy’s Committee on Qualifications in response to their RFC

– QS should be expanded to all actuaries performing Actuarial Services as defined in the Code of Professional Conduct

– Remove the EA continuing education exemption

• 9/30/2013 to ASB regarding the proposed standard on Modeling

– clarify the scope

• 1/31/2014 to ASB re Exposure Draft of the Proposed Revision of ASOP 35 – Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations

– Clarify a single retirement age might be appropriate for small plans

– Allow reference to a non-public document in disclosing rationale for choosing assumptions

44

What’s Next?

• Hybrid regs?

• MRC regs?

• Update to Rev. Proc. 2000-40?

45