The new Pension Funding Equity Act of 2004 provides relief both for pension plan sponsors and for mutual life insurers.
One section of the bill, H.R. 3108, lowers funding costs for sponsors of defined benefit pension plans by temporarily replacing the very low 30-year Treasury bond rate with a much higher corporate bond rate index.
The House and Senate approved the conference report version of the bill earlier this month, and President Bush signed it April 11, so that employers could use the rate change when calculating the first-quarter plan contributions that were due April 15.
The new pension rate law is set to expire in 2 years. Congress could make the act permanent or come up with another approach for calculating employers pension obligations.
Employer groups have been asking for a change in the official pension rate index in part because overall rates have fallen in the past few years. Because 30-year bonds are popular and the federal government stopped issuing them 2 years ago, yields on 30-year bonds have been even lower than rates on other types of notes and bonds.
When the official pension contribution benchmark rate falls, projected earnings on plan assets fall, and employers must contribute more to plans to meet federal plan funding requirements.
Another, less-publicized section of H.R. 3108 repeals the Section 809 tax on mutual life insurers.
Congress enacted Section 809 of the Internal Revenue Code in 1984 to ensure that life insurers with stock company charters could compete with the mutual life insurers who then dominated the market, according to Massachusetts Mutual Life Insurance Company, Springfield, Mass., which lobbied hard for Section 809 repeal.
Since 1984, mutual insurers share of the U.S. life market has fallen to less than 10%, from 55%.
The Section 809 tax has forced mutual life insurers to do the equivalent of prepaying tax on income later distributed to policyholders in the form of dividends, MassMutual says.
“The permanent repeal of Section 809 eliminates an obsolete, harmful tax imposed only on mutual life insurance companies,” Kenneth Cole, a MassMutual senior vice president, says in a statement about the change.
Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.