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Multiemployer plans

Under the conference substitute, service with any employer, for any year in which the employer is a member of the plan, is to be counted for purposes of vesting as if all employers who are parties to the plan were a single employer.

Permitted forfeitures of vested rights

Under the conference substitute, except as outlined below, an employee's rights, once vested, are not to be forfeitable for any reason. An employee's rights to benefits attributable to his own contributions may never be forfeited.

(1) The plan may provide that an employee's vested rights to benefits attributable to employer contributions may be forfeited on account of the employee's death (unless a "joint and survivor" annuity is to be provided).

(2) Also, the plan may provide that payment of benefits attributable to employer contributions may be suspended for any period in which the employee is reemployed by the same employer under whose plan the benefits are being paid (in the case of a single employer plan). In the case of a multiemployer plan, however, a suspension of benefit payments is permitted when the employee is employed in the same industry, in the same trade or craft and also in the same geographical area covered under the contract, as was the case immediately before he retired. Regulations with respect to the suspension of benefits are to be prescribed by the Department of Labor.

(3) A plan amendment may reduce an employee's vested or nonvested accrued benefit attributable to employer contributions, but only for the current year, and only if the amendment is adopted within 212 months from the close of the plan year in question (without regard to any extensions). In the case of a multiemployer plan, the retroactive amendment may effect the current year, and the two immediately preceding years (thus, a multiemployer plan amendment adopted by December 31, 1978, could effect plan benefits for 1976, if the plan was on a calendar year). However, no plan amendment which reduces accrued benefits is permitted unless the Secretary of Labor has 90 days prior notice of the proposed amendment, and approves it (or fails to disapprove it). No such approval is to be granted, except to prevent substantial economic hardship, including a serious danger that the plan will be terminated unless the amendment is allowed. In addition, it must be found that the economic hardship cannot be overcome by means of a funding variance. Subject to these rules, no plan amendment may retroactively reduce the accrued benefit of any participant (whether or not that benefit is vested).

(4) A plan may provide that an employee's rights to benefits from employer contributions may be forfeited where the employee is less than 50 percent vested in these benefits and withdraws all or any part of his own mandatory contributions to the plan. However, the plan must also provide a "buy back" rule, i.e., that the employee's forfeited benefits will be fully restored if the employee repays the withdrawn contributions (with interest of 5-percent per annum, compounded annually) to the plan.

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In the case of a plan which does not provide for mandatory contributions after the date of enactment, the plan may provide, in this case, that the employee will forfeit a proportionate part of his pre-dateof-enactment accrued benefits derived from employer contributions even if he is 50 percent or more vested in these benefits. Also, the plan is not required to have a "buy back" clause with respect to the withdrawal of pre-enactment contributions. Additional regulations in this area are to be prescribed by the Secretary of the Treasury, or his delegate.

(5) A plan may provide for the "cash out" of an employee's accrued benefit. In other words, the plan may pay out, in a lump sum, the entire value of an employee's vested accrued benefit. (However, portability is available to the employee because other provisions of the bill permit the employee to reinvest in an individual retirement account on a tax-sheltered basis.) If the plan does make such a cash-out, then the plan would not be required to vest the employee in his accrued benefits which are not vested at the time he separates from the service, if the employee is later reemployed. (However, the employee's prebreak service would have to be taken into account for all other purposes, subject to the break-in-service rules, e.g., for purposes of his place on the vesting schedule.)

A cash-out could be made from the plan without the employee's consent only if the payment (a) was made due to the termination of the employee's participation in the plan, (b) constituted the value of the employee's entire interest in the plan, and (c) did not exceed an amount (to be prescribed in regulations by the Secretary of the Treasury or his delegate), based on the reasonable administrative needs of the plan, and, in any event, not in excess of $1,750 (with respect to the value of the benefit attributable to the employer's contributions). Despite the foregoing provision, generally, the conferees prefer that all amounts contributed for retirement purposes be retained and used for those purposes. Thus, a plan could provide for no cash-out, or the employee's collective bargaining unit might wish to bargain for such a provision.

A higher cash-out could be made with the employee's consent. However, even these voluntary cash-outs could only be made if the employee terminated his participation in the plan, or under other circumstances to be prescribed in regulations.

Moreover, the plan must provide, in all cases (except where a distribution equal to the value of the full accrued benefit is made), that all accrued benefits must be fully restored (except to the extent provided under the break-in-service rules) if the employee repays the amount of the cash-out, with interest. Repayment of an involuntary cash-out would have to be allowed under the plan at any time after the employee reentered employment under the plan, and repayment of voluntary cash-outs would have to be allowed under circumstances to be prescribed in regulations. However, an individual account plan

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would not be required to permit repayment after the employee had a one year break in service.

Accrued benefit

Under the conference substitute, the term "accrued benefit" refers to pension or retirement benefits. The term does not apply to ancillary benefits, such as payment of medical expenses (or insurance premiums for such expenses), or disability benefits which do not exceed the normal retirement benefit payable at age 65 to an employee with comparable service under the plan, or to life insurance benefits payable as a lump sum.

Also, the accrued benefit does not include the value of the right to receive early retirement benefits, or the value of social security supplements or other benefits under the plan which are not continued for any employee after he has attained normal retirement age. However, an accrued benefit may not be reduced on account of increasing age or service (except to the extent of social security supplements or their equivalents).

In the case of a plan other than a defined benefit plan, the accrued benefit is to be the balance in the employee's individual account.

In the case of a defined benefit plan, the accrued benefit is to be determined under the plan, subject to certain requirements. In general, the accrued benefit is to be defined in terms of the benefit payable at normal retirement age. Normal retirement age generally is to be the age specified under the plan. However, it may not be later than age 65 or the tenth anniversary of the time the participant commenced participation, whichever last occurs. No actuarial adjustment of the accrued benefit would be required, however, if an employee voluntarily postponed his own retirement. For example, if the plan provided a benefit of $400 a month payable at age 65, this same $400 a month benefit (with no upward adjustment) could also be paid by the plan to an individual who voluntarily retired at age 68.

Each defined benefit plan is to be required to satisfy one of three accrued benefit tests (which limit the extent of "back-loading" permitted under the plan).

The three percent test.-Under this alternative each participant must accrue, for each year of participation, at least 3 percent of the benefit which is payable under the plan to a participant who begins participation at the earliest possible entry age and serves continuously until age 65, or normal retirement age under the plan, whichever is earlier. This test is to be applied on a cumulative basis (i.e., any amount of "front loading" is permitted). Also, in the case of a plan amendment, the test would be cumulative. For example, assume that a plan provided a flat benefit of $200 a month payable at age 65 during the first 10 years of an individual's participation, then amended to provide a flat benefit of $400 a month; the participant's accrued benefit at the end of his 11th year of participation would equal $132 (3 percent of $400, times 11 years of service.)

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In addition, if a plan elects this alternative, and if the plan provides a given benefit to a person who is employed when he attains retirement age, who has a given amount of service, then any employee who has that amount of service, even though he leaves before retirement age, would be entitled to this same benefit when he reaches retirement age. For example, if the plan is based on compensation and provides a 40 percent of salary benefit for an employee who served at least 20 years and is still employed at age 65, then the plan must provide that an employee who served 20 years from age 35 to age 55 would be entitled to that same 40 percent of compensation benefit (beginning at normal retirement age or age 65).

1333 percent test.-Under this alternative, the plan is to qualify if the accrual rate for any participant for any later year is not more than 1333 percent of his accrual rate for the current year. Thus, (unlike the House bill) the conference substitute permits an unlimited amount of "front loading” under this test. The accrual rate can be based on either a dollar or percentage rate. In applying these rules, a plan amendment in effect for the current year is to be treated as though it were in effect for all plan years. (For example, if a plan provides a one percent rate of accrual for all participants in 1976, and is amended to provide a 2 percent rate of accrual for all participants in 1977, the plan will meet this test, even though 2 is more than 113 times 1). Also, if the plan has a scheduled increase in the rate of accruals, which will not be in effect for any participant until future years, this scheduled increase will not be taken into account for purposes of the backloading rules until it actually takes effect. Also, in applying the 1333 percent test, social security benefits and all other factors used to compute benefits under the plan will be treated as remaining constant, at current year levels, for all future years.

Pro rata rule.-As a third alternative, the conference substitute contains a modified version of the rule contained in the Senate amendment. Under this test, for purposes of determining the accrued benefit, the retirement benefit is to be computed as though the employee continued to earn the same rate of compensation annually that he had earned during the years which would have been taken into account under the plan (but not in excess of 10), had the employee retired on the date in question. This amount is then to be multiplied by a fraction, the numerator of which is the employee's total years of active participation in the plan up to the date when the computation is being made, and the denominator of which is the total number of years of active participation he would have had if he continued his employment until normal retirement age. This test is cumulative in the sense that unlimited front loading is permitted. For purposes of this test, social security benefits and all other relevant factors used to compute benefits shall be treated as remaining constant at current year levels for all future years. Also for purposes of this rule the term "normal retirement age" would be defined as set forth above, and the test would apply only to the benefit payable at, or after, normal retirement age

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(i.e., it would not take account of subsidized early retirement (to the extent such a benefit does not exceed the benefit payable at normal retirement age) and social security supplements.) 3

A plan is not to be treated as failing to meet the tests solely because the accrual of benefits under the plan does not become effective until the employee has two continuous years of service, measured from the anniversary date of employment.

In the case of a plan funded exclusively through the purchase of insurance contracts, the accrued benefit is to be the cash surrender value of the contract (determined as though the funding requirements with respect to the plan had been fully satisfied).

In the case of a variable annuity plan, the accrued benefit is to be determined in accordance with regulations to be prescribed by the Secretary of the Treasury or his delegate.

Benefits accrued in the past

Generally, the vesting rules of the conference substitute are to apply to all accrued benefits, including those which accrued before the effective date of the provisions (subject, however, to the break-inservice rules discussed above). However, many plans now in existence have no accrued benefit formula for the past, thus making it impossible in these cases to determine what the employee is vested in. To deal with this situation, the conference substitute provides that the accrued benefit under a plan for years prior to the effective date of the vesting provisions for any participant is to be not less than the greater of (1) the accrued benefit under the provisions of the plan (as in effect from time to time), or (2) an accrued benefit which is not less than one-half of the benefit which would have accrued under one of the three back-loading tests described above.

The plan may choose which of the 3 standards it wishes to apply for the past (subject to the antidiscrimination rules); however, the same standard must be applied to all the plan's participants on a consistent basis. The plan is not required to choose, for the past, the same test which it applies in the future.

For example, assume a social security offset plan providing a benefit equal to 2 percent of high-3 years compensation per year of service with the employer, minus 30 percent of the primary social security benefit, with a normal retirement age of 65. Assume also an employee who began employment at age 25, and terminated employment at age 45, 100 percent vested, with high-3 years pay of $19,000, $20,000, and $21.000. At the time the employee separates from service the primary social security benefit payable to him at age 65 (under the social security law as an effect when he terminates) would be $6.000 if he continued to work with the employer at his same annual rate of compensation until normal retirement age. His accrued benefit under the plan would equal $7,100. (If the employee had remained in service until age 65, he would have 40 years service, times 2 percent per year (80 percent), times $20,000 average high-3 years compensation ($16,000), minus 30 percent of the $6,000 primary social security benefit payable to the em ployee at age 65 under then current law ($16.000 minus $1.800 equals $14,200) times 20/40ths (20 years of service over 40 total years from age 25 to age 65) equals $7,100.) In the case of a plan amendment, the rule would work as follows. Assume an individual begins participation at age 25 in a plan which provides 1 percent of high-threeyears pay during his first 10 years of service. In the 11th year the plan amends to provide 2 percent of pay for all future years of service. The employee separates from service at the end of the 11th year (and is 100 percent vested). His accrued benefit would_equal 19.25 percent of average high-three-years pay (10 (years of participation) times 1 per cent per year. 30 (years of projected participation) times 2 percent per year, times 11/40ths (11 years of participation over 40 total years between age 25 and age 65)).