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March 25, 2002

Legislative Response to Enron Includes Federal Disclosure Rules and Excise Penalty for Governmental 457s, 403(b)s, and Certain Private Plans

By Cynthia L. Moore, NCTR Washington Counsel

Many congressional committees are acting in response to the Enron situation, including the House Ways and Means Committee, which has jurisdiction over state and local government pension plans. The Committee approved, on March 14, 2002, a bill that will require governmental 457 and 403(b) plans, as well as certain private plans, to follow new disclosure requirements. It will assess an excise tax for failure to do so. Known as the "Employee Retirement Savings Bill of Rights (H.R. 3669)," the measure, which includes a variety of other provisions, passed with bipartisan support. Reps. Rob Portman (R-OH) and Ben Cardin (D-MD), sponsors of previous pension bills, introduced the measure.

Under the disclosure provisions, plan administrators will be required to provide to employees: 1) a quarterly statement describing generally accepted investment principles, including risk management and diversification; and 2) notification of at least 30 days whenever a "blackout" takes place in order to allow employees an opportunity to change investment options before any restrictions are imposed. A blackout (known as a "transaction restriction period" in the bill) is a temporary or indefinite period of at least three consecutive business days during which rights of one or more plan participants or beneficiaries to direct investments in the plan, obtain loans from such plan, or obtain distributions from such plan are substantially reduced. The statements could be provided electronically.

Failure to comply with the notice requirements results in an excise tax penalty. The tax is $100 per applicable participant or beneficiary up to a maximum of $500,000. The employer would be responsible for paying the tax. In effect, the federal government would be assessing a tax on state or local governments if administrators of their 457 and 403(b) plans did not comply with the disclosures.

Rep. Sam Johnson (R-TX) introduced an amendment to strike the application of the disclosure and tax to state and local government plans. Opponents of Mr. Johnson's amendments asked why state and local government employees should not have the same disclosure provisions available to them as private sector employees. In addition, Rep. Rob Portman (R-OH), the sponsor of H.R. 3669, stated that the excise tax was preferable to plan disqualification, which imposes harsh tax consequences on plan participants. The amendment failed on a voice vote.

The federal disclosures in H.R. 3669 are similar to those of the past. In the early 1980's, sponsors of legislation to expand federal regulation of state and local government plans succeeded in moving their bills in Congress. They never achieved enactment, however. The legislation was called the "Public Employee Pension Plan Reporting and Accountability Act" ("PEPPRA") or the "Public Employee Retirement Income Security Act" ("PERISA"). Since that time, legislation has been introduced, but has not received action. The Ways and Means Committee approval marks the first action on such legislation in more than 15 years.

H.R. 3669 includes a variety of other items of interest. First, in order to improve employees' access to retirement planning services, employees would be allowed to purchase retirement planning services (including professional investment advice) using pre-tax dollars that are automatically deducted from their paychecks. Qualified advisors would have to be regulated under applicable laws. Second, Congress granted state and local government plans an exemption from the nondiscrimination rules in 1997. The relief did not extend to certain federal plans and other governmental plans. H.R. 3669 does so.

The House Education and the Workforce Committee is moving a similar bill that applies to private plans only (H.R. 3762). It will eventually be merged with H.R. 3669 and possibly other bills. There have been discussions, in the context of the merger, about modifying the excise penalty tax of H.R. 3669 as it affects state and local government plans. On the Senate side, the Health, Labor, Education, and Pensions Committee is working on S. 1992, which covers private plans only. It is quite different from H.R. 3762. The Finance Committee is expected to consider a similar bill. Whether it will contain federal disclosure requirements and excise penalty taxes applicable to state and local government plans is not known at this time.