Op-Ed ¦ March 4, 1991
Unmasking ERISA's "protections

By David Langer

The 1990 budget reconciliation act purports to improve employee benefits by further restricting reversions and by permitting the transfer of defined benefit assets into a 401(h) retiree medical benefit account.

But employee benefit provisions in the new law raise troubling questions about its real intent as well as the legislative system.

Do we in this day once again have taxation without representation? It seems we do when one looks at the way pension measures have come into being in recent years, frequently without adequate public hearings. Having little role to play, the benefits community has become little more than an ineffective complainer.

Consider the two most important provisions in the act dealing with reversions and retiree medical benefits.

The new, higher excise tax on revisions discourages, as probably intended, any termination of defined benefit plans having large surpluses. That may not be good public policy. Sponsors now may prefer to find as minimally as possible, even though such a policy may impair plan solvency. Those sponsors with surpluses may want to reduce investment risk and, as a result, accept lower returns by placing more assets in Treasury securities. Sponsors with surpluses who foresee the need to terminate their plans will consider alternatives for cutting back on the surplus as much as possible before such terminations by raising benefits and by reducing any contributions.

The new excise tax, coupled with regular federal, state and local income taxes, is tantamount to confiscation of any surplus. The budget reconciliation act raised the excise tax, which was 15%, to either 20% or 50%, depending on circumstances. The total tax on reversions, including regular federal, state and local taxes, probably will range between 60% and 96%, leaving 40% to 4% for the employer.

The Employee Retirement Income Security Act of 1974 intended that any surplus revert to the sponsor. ERISA's Section 4044 (d)(1) states any surplus may be distributed to the employer upon the satisfaction of all liabilities to participants and their beneficiaries. But now the government has decided to claim the surplus. So ends the debate about who owns the surplus, neither sponsor nor employee.

The idea of transferring surplus pension assets to pay retiree medical expenses is worthy. The authors of the law, however, burden this useful and simple transfer concept with requirements of fully vesting accrued pension benefits and tricky maintenance of effort, both of which will limit interest by employers. This is puzzling because transfers raise additional current tax payments to the government.

Clearly, the success of qualified plans in improving retirement benefits of a large segment of our work force has, unfortunately, caught the eye of the prodigal government. It now appears the government, whenever it can manufacture a reason, will appropriate retirement plan assets for itself.

The marvelous apparatus that private enterprise has assembled to accumulate and disburse funds for retirement is thus being progressively undermined. The executive and legislative branches clearly have assumed a royal status for themselves by not subscribing to the same standards of conduct established by ERISA for the ordinary citizens who are plan fiduciaries. The benefits community, which has greater practical experience operating plans, should be given legal status in the legislative and regulatory process so it can enjoy real influence. That would make for more constructive collaboration among the benefits community, Congress and its staff, the Internal Revenue Service and the departments of Labor and Treasury.

- David Langer, a consulting actuary and president of David Langer Co., Inc.
New York

Copyright 1991 Crain Communications, Inc., Pensions & Investments, March 4, 1991
Reproduced with permission.