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DONALD F. SMITH & ASSOCIATES,
Princeton, N.J., May 6, 1975.

Re Employee Retirement Income Security Act of 1974.

Hon. JOHN H. DENT,

Chairman, Task Force on Welfare and Pension Plans, 112 Cannon House Office Building, Washington, D.Č.

DEAR SIR: I have been "very strongly" urged by Representative Frank Thompson, Jr. to contact you in regard to our views on the proposed reporting requirements of the new Pension Reform Act. It is our understanding that the Task Force on Welfare and Pension Plans chaired by you is presently holding hearings on this very subject. A most distressing development has recently occurred concerning plan reporting that we feel should be of major concern and interest to your committee. It is to us, since we are the employee benefit and pension consultants for several major employer associations in New Jersey. Our clients include the New Jersey Bankers Association, the New Jersey Hospital Association, the Medical Society of New Jersey, the Associated General Contractors of New Jersey, and several others.

We, on behalf of our association clients, have, therefore, enclosed herewith an original and two copies of our statement in this matter which we submit for inclusion on the record of your Task Force.

Our fundamental anxiety rests on the requirement placed upon multiple employer associations to file separate (and similar) reports for each employermember of the benefit plan. In the past under the Welfare and Benefit Plans Disclosure Act, employer associations could file one report for each of the employee benefit plans that it sponsored. The financial and administrative savings of this approach were appreciated by both the employers and the governmental agencies reviewing the documents.

Suddenly, without any prior notification, the U.S. Labor Department published the final draft of Form EBS-1 (Plan Description) which altered the prior consolidated reporting approach.

The impact of this development is quite substantial as expressed in our attached statement. Hopefully, the governmental agencies administering the new law will recognize this impact and make the necessary changes to improve its application. Please advise me if there is any further information you may need to appreciate our position on this subject.

Sincerely,

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STATEMENT OF DONALD F. SMITH, PRESIDENT, DONALD F. SMITH AND ASSOCIATES

Mr. Chairman and Members of the Subcommittee:

I appreciate this opportunity to submit this statement for inclusion in the record of the Labor Standards Subcommittee. We are employee benefit and pension consultants for several major employer-associations in New Jersey. Our clients include the New Jersey Hospital Association, the New Jersey Bankers Association, The Medical Society of New Jersey, the Associated General Contractors of New Jersey, and several others. It is on their behalf and upon their request that we offer our views on a specific aspect of ERISA. Please see Exhibit I attached to and made a part hereof.

We and our association clients have spent a great deal of time in recent months reviewing the requirements of the Pension Reform Act. Although regulations have not been released as yet, a most distressing development, in our opinion, has recently occurred concerning plan reporting.

Like most new statutes, the interpretation and application of the legislative intent of ERISA has raised numerous controversies. Perhaps the most sensitive issue to employer-associations sponsoring employee benefit plans is the requirement placed upon them to file separate and similar plan descriptions for each employer member. We are also quite apprehensive about the possibility that the same separate reporting standard will be applied to the annual financial reports. In the past under the Welfare and Benefit Plans Disclosure Act, employerassociations could file one report for each of the employee benefit plans that it sponsors. This consolidated approach still provided all the necessary information on each participating employer, but it eliminated the need for each one to file a separate and similar report. Obviously, the financial and administrative savings

were appreciated by both the employers and the governmental agencies reviewing the documents.

The "proposed" plan description (Form EBS-1 and instructions) was released for public comment in late 1974. No objection was raised by us at that time since it continued existing procedures by approving the continuation of an arrangement whereby "only one form is to be filed by a multi-employer plan or by a trade or professional association,' as stated on page 4 of the first draft of Form EBS-1 defining Filing Entity.

We further noted that the Act did not amend the definition of the term "employer", as it appeared in the former Welfare and Benefit Plans Disclosure Act. This definition defines "employer" to include a group or association of employers. We, therefore, concluded that our association clients, as in the past, could continue to report as such even though they are not deemed to be "multi-employer plans" or a "controlled group of corporations" as described by the Act. This assumption was confirmed verbally by both the U.S. Labor Department and the Solicitor General's Office on February 20, 1975. On February 26, 1975, we wrote to Mr. J. Vernon Ballard, Acting Director of the new Office of Employee Benefit Security, to secure written confirmation. No answer has been forthcoming, due, no doubt, to the monumental backlog of correspondence on ERISA.

It was not until a release of the Final Draft of Form EBS-1 (Pension World, March, 1975) that a complete reversal of reporting requirements for associations was identified. Discussions with officials at the U.S. Labor Department corroborated our worst fears. Suddenly and without prior notification, a "separate form is also to be filed for each employer who participates in a trade or association plan", as stated on page 3 of the final draft of Form EBS-1 defining Filing Entity. The impact of this development is quite substantial. By way of example, an association (hospitals, banks, etc.) may sponsor eight employee benefit plans (including both pension and welfare plans). In this situation, the association would normally be considered as the "plan administrator." And, since the plan administrator is generally obligated to file on behalf of its' plan members, it would have to prepare and file eight separate forms for each participating association member. One of our association clients, for instance, with 237 participating members could potentially have to prepare and file almost 2,000 Plan Descriptions, all of which would be essentially the same. This seems to be a needless waste of paper, not to mention the cost to taxpayers of having government personnel reviewing this "duplicate" material. We think you will agree that this arrangement serves no useful purpose, nor does it add anything to the effectiveness of the Act and its intent.

In testimony before this honorable Subcommittee, Mr. Paul J. Fasser, Jr., Assistant Secretary of Labor for Labor-Management Relations, stated that Congress itself was most appreciative of the added administrative responsibilities created by ERISA and directed that the paperwork requirements for plan administrators be reduced as much as possible. Surely, this requisite does not serve to achieve that instruction.

He further stated that "in virtually every one of our regulations, interpretations and announcements, we had to carefully consider the impact on the dual statutory goal of ERISA: to protect the interest of participants and beneficiaries in their plans and in the integrity of their plan's funds, and to maintain an environment in which private employee benefit plans continue to grow and flourish." Further, "we must remain mindful of the other major statutory objective, to maintain a climate in which employee benefit plans may thrive. If the costs of compliance with the law are so high, and the restrictions of the law so tight, that institutions which maintain plans decide to drop them, we will have furthered neither statutory purpose."

There is little question that association plans can comply with a decision that requires each association member to file a separate plan description for those benefit plans in which it participates. The cost and administrative burden would be substantial, but it is within their power to achieve.

Can the same be said for the requirement to file the annual reports, which includes a complete financial statement? If the same individual filing was required for the annual reports, the situation would be extremely acute. The very nature of an association sponsored plan necessitates that financial figures be comingled for ease of administration and, further, to keep expenses down. All of our coverages are provided through insurance policies, and we, as well as the insurance companies involved, would be unable to break-out separate claims experience on an employerby-employer basis. Apparently, the Congress and the U.S. Labor Department

recognized these problems, but seemingly only for "multiemployer plans" and a "controlled group of corporations." The Act allows them to file only one form for each plan, provided that a list of participating employers and their Employer Identification Numbers are attached. We feel that this discriminates against our association clients, and this could very well be an oversight.

To maintain separate, isolated experience for each employer-member for their welfare and pension coverages could potentially jeopardize the association theory of benefit programs and the resultant economies that participating employers enjoy from it. Quite often these savings are passed off to employees in the form of improved benefits.

Perhaps, the governmental agencies administering the new law did not recognize this impact. We have contacted the various insurance companies providing the benefit coverages for our clients and asked if they would be able to detail, among other items, the premiums and administration expenses charged, the benefits paid, and the amount held to pay future benefits for each employer unit within the plan on an annual basis. On each occasion, we have received a negative response. They have stated that to provide this information each plan would require a sub-division into its component parts, and they would need to increase the administrative charges to provide this service to us. Is this added administrative expense to the participants in any way beneficial? We feel quite sure that the answer to this question is no!

ERISA provides the flexibility to weigh these legitimate considerations and grant exemptions and variances in furtherance of the dual statutory goal. Here is an opportunity to continue well established and smooth running administrative procedures and, at the same time, to maintain substantial cost savings to plans, employers and insurance carriers, as well as governmental agencies.

Thank you, Mr. Chairman, and other members of this Subcommittee for your consideration.

NEW JERSEY HOSPITAL ASSOCIATION,
Princeton, N.J., April 25, 1975.

EXHIBIT I

Re Employee Retirement Income Security Act of 1974.

(Reporting Requirements.)

MR. DONALD F. SMITH,

Donald F. Smith & Associates,

Princeton, N.J.

DEAR MR. SMITH: As you know, we have spent a considerable amount of time reviewing the impact of the reporting requirements of ERISA. Our initial understanding was that we would be able to file a single Plan Description and Annual Report for each of our employee benefit programs on behalf of our Association members. Now, as we understand it, independent reporting by each of our participating hospitals will be necessary due to a rather sudden and unexpected change in the procedures that are soon to be announced by the U.S. Labor Department.

First, we do not feel that all of our member hospitals are prepared, administratively, to accomplish this enormous task. Secondly, the ability to furnish separate financial figures for each hospital seems to be beyond our capabilities since we must "pool" membership data for our insurance coverages. Obviously, these pooling procedures have helped us keep our administrative costs down on these programs, and, as a result we were able to pass off the savings to our participating member hospitals.

We would of course lose many of the cost economies that typically are available through association sponsored plans if an "individual reporting by hospital" requirement mentioned above is implemented. This could jeopardize the entire association_concept of providing low cost employee benefit programs to their members. Consequently, taking this a step further, it could also result in lower benefits being provided for employees-which, most certainly, was not the spirit or intent of ERISA.

I would recommend that an extensive review of this situation be made and the resultant effects measured. Further, I understand that a subcommittee in the Congress has recently been formed to hear issues of this nature. We would appreciate it if you would express our apprehension to the subcommittee.

Hopefully, something can be done to alter the situation, and avoid the deteriorating results that could otherwise come about.

Please advise me immediately of any further information pertaining to this subject that you secure.

Sincerely,

JACK G. OWEN, President.

Hon. JOHN H. DENT,

SANDERS, MILLER, DOWNING & KEAN,
Baton Rouge, La., April 18, 1975.

Chairman, House Subcommittee on Labor Standards, House of Representatives,
Washington, D.C.

DEAR MR. CHAIRMAN: These written comments are submitted for consideration in connection with the oversight hearing on the Employee Retirement Income Security Act of 1974 to be held April 29, 30 and May 1, 1975. I am a practicing attorney who has been rather deeply involved in advising clients with respect to amendment of employee benefit plans in order to comply with the Employee Retirement Income Security Act of 1974 (ERISA). Our clients are relatively small businessmen who employ anywhere from one to several hundred common law employees. In addition to employees benefit plans qualified under the Internal Revenue Code, we are, of course, concerned with other fringe benefits which may be classified as "employee welfare plans" under ERISA Section 3(1).

It is practically impossible to over-emphasize the administrative burden and cost which will be involved in meeting various record-keeping, reporting, and other duties imposed by this statute. By its terms, the statute imposes rather significant reporting and disclosure requirements upon programs which are generally thought of as normal incidents of employment. I have in mind, particularly, vacation benefits, medical benefits, sickness benefits, etc. The most sensible approach I have seen, to date, is that which is put forward in proposed Labor Department regulations issued December 3, 1974. In a proposed amendment to the Code of Federal Regulations to create Part 2521, the Secretary stated, in introductory remarks, as follows:

"The Secretary also anticipates issuance of regulations that will make it clear that other programs under which employees are paid as a part of their regular compensation directly by the employer an under which no separate fund is established will not subject the employer to any filing or disclosure duties under Title I of the Act. Examples of the employer practices that may receive this treatment are payment of overtime pay, vacation pay, shift premiums, Sunday premiums, holiday premiums, jury duty or military duty, make-up pay, and pay while absent on account of illness or excused absences."

Such unregulated activity and exemptions should have clearly spelled out in the statute; at the very least, wholesale exemptions of plans (not "qualified plans" under the Internal Revenue Code) with fewer than one hundred employees should be made, whether or not the plan would meet the "unfunded" aspects stated in the proposed regulations to be issued by the Secretary. To allow such exemptions to be made by administrators and bureaucrats rather than by the elected repesentatives of the people is an unconscionable delegation of responsibility.

Moreover, I would emphasize that the reporting requirements and the burdensome, complicated fiduciary responsibility requirements imposed upon all persons associated with the plan (who are covered by a rather amorphous, sweeping definition of "plan fiduciary") has caused virtually every prudent employer contemplating institution of an employee benefit plan to have second thoughts. I would rather emphatically suggest that the end result is not better benefits for employees, but rather the adoption of fewer employee benefit plans and geometric escalation of the cost of plans which have already been adopted. These increased costs will contribute to a reduction in the productivity of American business; even though the intent behind the statute was to raise the standard of employment conditions, the increased cost, and consequent reduced procutivity, actually lead to a reduction in the overall standard of living rather than in its intended increase. My purpose, in this letter, is to recommend, most emphatically, that small employers not be burdened with same administrative and reporting requirements which can be borne by huge businesses with very large administrative staffs. I commend to your careful consideration the fact that a small entrepreneur cannot afford the espertise required to advise him of minute reporting requirements and to kcep up with the events which trigger such reports. There appears to be an inkling of such recognition in the Department of Labor comments, which precede

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their proposed rule-making; I strongly endorse this direction, and recommend it to you as a very real need to be put in legislation rather than left to administrative rule making.

Thank you, and the Subcommittee for your attention.

Sincerely,

WESLEY W. STEEN.

STATEMENT OF R. F. STEPHENS, JR., PRESIDENT, TOWER LIFE AND ACCIDENT INSURANCE CO.

Tower Life and Accident Insurance Company ("Tower"), a wholly-owned subsidiary of the Tribune Company, was formed in 1967 with the initial purpose of providing accident insurance to subscribers of newspapers published by subsidiaries of the Tribune Company. Tower is an Illinois domestic insurance company licensed to write life, health and accident insurance in the States of Alaska, Colorado, Florida, Idaho, Indiana, Illinois, Iowa, Louisiana, Michigan, Minnesota, Montana, New Mexico, North Dakota, Oregon, South Carolina, South Dakota, Texas, Utah, and Wisconsin.

In addition to providing accident insurance to newspaper subscribers, Tower also actively markets, through its agency force, life, health and accident insurance and annuities on a competitive basis in the 19 states referred to above.

In 1971 Tower commenced insuring accident, life, and health and disability plans on a group basis for Tribune Company and its 45 subsidiary companies, covering approximately 8,900 employees. The cost of the insurance provided by Tower is at competitive rates, and premiums are determined generally on an experience-rated basis. Tower believes that its relationship with Tribune Company puts it in a position to offer service both to Tribune Company and its subsidiaries and their covered employees on a basis superior to that which could be obtained from an outside carrier.

In 1974, the total premium volume of Tower, determined on a statutory basis, was $9,382,000 of which $6,389,000 (or 68%) was attributable to premiums paid by Tribune and its subsidiaries to provide the programs described above.

The purpose of this statement is to call your attention to a provision in the Employee Income Security Act of 1974 ("ERISA") which works a hardstip in certain situations without serving any useful purpose.

Section 406 of ERISA prohibits certain transactions between a fiduciary and a party in interest. Section 406(a) (1) (C) prohibits the furnishing of goods, services or facilities between a fiduciary and a party in interest; accordingly, in the absence of any other provision, it would appear that an employer is prohibited from insuring its welfare programs through an insurance subsidiary. However, Section 408(b) (5) (B) would permit such transaction provided the premiums paid by the employer to its subsidiary insurance company do not exceed 5% of the total premiums and annuity considerations received by the insurance subsidiary for all lines of insurance in that year.

In view of the fact that 68% of its gross premiums in 1974 were in payment of group insurance for Tribune Company welfare programs, Tower could be adversely affected by the prohibitions of Sections 406 and 408 which, taken together, would seem to prevent the Tribune Company from purchasing group life, health and accident insurance from Tower because the premiums paid for such coverage exceed 5% of Tower's total premium volume.

It is Tower's position that the 5% limitation in Section 408(b) (5) (B) serves no useful purpose and that such limitation (i.e., the 5% standard) should be eliminated for the following reasons:

(1) The limitation is probably unconstitutional because it unfairly discriminates between wholly-owned insurance subsidiaries and publicly-owned stock companies and mutual insurance companies which are not subject to the 5% limitation; (2) The limitation serves no useful purpose because an employer could provide the same coverage on a self-insured basis through a trust qualifying under Section 501 (c) (9) of the Internal Revenue Code. Moreover, in those cases where an employer adopts the 501 (c) (9) approach, it would have the adverse effect on plan participants of removing the funding for such benefits from the scope of insurance regulations;

(3) The limitation is redundant to the basic mandate of Section 408(b) (5) that no more than an adequate consideration be paid for the insurance;

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