Blogging Employee Benefits

July 28, 2006

Not Far To Go for Pension Farrago

Filed under: Legislation, Pensions — Fuguerre @ 7:00 am

We may still see a House vote on pension legislation today, or even tomorrow if House leaders think it worth keeping reps around an extra day to get the bill through this year. By all reports, key congressional conferees have settled on a compromise on the pension funding, hybrid plan, and defined contribution plan bulk of the package, and staffers have pulled all-nighters to draft legislative language. The final sticking point seems to be whether this long-awaited pension initiative will pick up tax extender hitchhikers, with House Republicans boycotting last night’s meeting scheduled to resolve that final issue. If the House does pass the bill before leaving town this week for a pre-election summer break, the Senate remains around next week to send the package to the President.

Meanwhile, the Administration persists in measuring the expected effects of the pension funding heart of the bill against a benchmark that all sides had originally broadly agreed as over-valued, based on the 30-year Treasury bond rates that are currently in effect for valuation of pension current liabilities, as evidenced in a report recently released by Rep. Miller. Lately we haven’t been hearing the veto threats that such reports were frequently associated with much of the past year; but with the compromise bill including breaks for airlines – one of the largest sources of risk for the PBGC – and numerous other provisions that don’t produce better figures than that over-valued benchmark, the veto status of the bill remains an open question, I would imagine.


July 27, 2006

Measurement Date Change Pushed Back

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 7:29 am

Plan assets and benefit obligations for pension plans and other postemployment benefits (OPEBs) are to be measured as of the close of the employer’s fiscal year, beginning the first fiscal year ending after December 15, 2008, according to a decision reached at yesterday’s meeting of the Financial Accounting Standards Board. [Board Meeting Handout, pp. 3-6] For an employer with a calendar fiscal year, the new rule will require a 12/31/2008 measurement for balance sheet numbers reported as of 12/31/2008 and for costs for the 2009 fiscal year.

Under current U.S. GAAP, as governed by FAS 87 and 106 for pensions and OPEBs, an employer is permitted to select a measurement date up to 3 months before the end of the employer’s fiscal year. The FASB’s exposure draft of phase 1 of its two-phase project to revise pension/OPEB accounting proposed eliminating the 3-month period. However, the exposure draft would have required that change more quickly: for a calendar year fiscal period, a 12/31/2007 measurement would have been required for the 2007 year-end balance sheet, but an earlier 12/31/2006 measurement would have been required for 2007 costs.

Yesterday’s decision not only defers the measurement date change, but eliminates the need for an extra measurement date for measurement of cost. The issue of the cost measurement has been the source of some confusion, even among the FASB itself. Yesterday’s discussion clarified that use of an early measurement date for cost merely shifts the cost measurement, rather than the cost itself. That is, for a calendar year employer that uses a 9/30 measurement, the 9/30/2007 measurement will be determining the cost to be reported for the period 1/1/2008-12/31/2008: although that cost may technically be based on accruals and demographics specifically for the year beginning 9/30, that cost is treated as the cost for the fiscal year 2008. Thus, there is not an additional quarter of cost during the transition to the 12/31/2008 measurement; rather, each year’s cost includes one year’s worth of costs, merely measured as of different dates for the 2008 cost versus the 2009 cost. FASB slightly complicated that explanation a bit further by characterizing the 2008 cost as the “last 80%” portion of the 15-month period measured as of 9/30/2007, but that simply returns us to the same position of requiring us to use the annual amount measured on 9/30/2007 as the periodic cost reported in 2008: even my simple math tells me that unless your actuary gets far more detailed with a 15-month valuation than FASB’s principle-based rules expect, prorating an annual valuation up to 15 months in order to recognize an extended period through to the next measurement, then taking 80% of that number, gets you back to 100% of the original number. The point being that we won’t see a bump-up of approximately an extra quarter’s cost for the transition to the new measurement date: all we get is one year’s costs in each year, measured as of one date under the existing rule and as of a different date under the new rule.

FASB struggled over the measurement date issue more than any other issue raised by its exposure draft, actually coming close to pushing the change off until phase 2 of its project, which is expected to take 2-3 years beyond this year’s conclusion of phase 1. The 2008 compromise keeping the measurement date change in phase 1 seemed a nod to the very strong opinions of one FASB contingent that sees no difference between valuation of pension/OPEB arrangements versus other complicated financial arrangements required to be valued as of the fiscal year end.  FASB staff noted that only about one-third of S&P 500 companies currently report using a measurement date different than the fiscal year end, but only hinted at vague awareness that those disclosures give an incomplete snapshot: accelerated measurement dates are far more common among smaller firms and almost universal among firms with non-calendar fiscal years, and even many of the larger calendar-year employers that report using a fiscal year-end measurement date for domestic pension plans use a different measurement date for OPEBs and foreign plans.  Perhaps the strongest advocates for the measurement date change implicitly made the case for giving a longer period for making the change: since “advance planning” is required in order to perform a year-end valuation in time to have a year-end measurement date, the anticipated September 2006 publication of the formal new accounting standard for phase 1 of the pension/OPEB project was starting to squeeze the time being given for getting that advance planning completed.

July 21, 2006

PBGC Waives Pension Liability Claim in GMAC Sale

Filed under: PBGC, Pensions — Fuguerre @ 5:49 am

The PBGC has assured General Motors that as a result of its sale of a majority interest in General Motors Acceptance Corporation, the agency will not take action to terminate the GM pension plan nor impose liability on the GMAC purchaser.  Resolution of the threat that the agency would view the GMAC sale as a stretegy designed to evade pension obligations had been a major condition of the sale.  [GM 8-K]

July 20, 2006

ERISA Exempts Maryland Wal-Mart Law

Filed under: Healthcare, Litigation — Fuguerre @ 6:47 am

If employers are faced with the choice of paying a sum of money to the State or offering an equal sum of money to their employees in the form of health care, no rational employer would choose to pay the State.

Arguing that Maryland’s Fair Share Health Care Fund Act presents an employer with a Hobson’s choice aimed directly at imposing a substantive mandate of health care, the Maryland district court has ruled that law exempted by ERISA. [Retail Industry Leaders Association v. Fielder, JFM-06-316; Order] Effectively aimed exclusively at Wal-Mart, the law would by 1/1/2007 have required non-governmental non-profit employers of 10,000 or more employees within the state to spend at least 8% of wages toward health insurance costs, else pay into a general state fund for low-income residents’ health care.

But expect this decision to be appealed, watch for decisions in similar cases to the north, and keep tabs on many other states with comparable legislation under consideration.  This is but an early battle in a very very long war ahead.

July 3, 2006

Excise Tax on Late Deferrals

Filed under: 401(k), Prohibited Transactions — Fuguerre @ 6:58 am

If an employer does not deposit participant deferrals into a 401(k) plan in a timely manner, then the prohibited transaction excise tax under §4975 is based on interest on those elective deferrals. [Rev. Rul. 2006-38]

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