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GENERAL OVERSIGHT ON ERISA

TUESDAY, JUNE 1, 1976

HOUSE OF Representatives,

SUBCOMMITTEE on Labor Standards of the

Committee on Education and Labor,
Washington, D.C.

The subcommittee met, pursuant to notice, at 10:15 a.m., in room 2261, Rayburn House Office Building, Hon. John Dent (chairman of the subcommittee) presiding.

Members present: Representatives Dent, Gaydos, Zeferetti, Erlenborn, and Goodling.

Staff present: S. Howard Kline, Pension Task Force legal law assistant; and Russell J. Mueller, actuary and minority counsel.

Mr. Dent. A quorum being present, the committee will come to order for the purposes of holding hearings on oversight on Public Law 93-406.

The first witness this morning is James D. Hutchinson, Administrator, pension and welfare benefit programs.

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Mr. Hutchinson, you may proceed in any fashion you wish. STATEMENT OF JAMES D. HUTCHINSON, ADMINISTRATOR, PENSION AND WELFARE PROGRAMS, U.S. DEPARTMENT OF LABOR, ACCOMPANIED BY STEVEN J. SACHER, ASSOCIATE SOLICITOR, PLAN BENEFITS SECURITY DIVISION, AND WILLIAM J. CHADWICK, SPECIAL CONSULTANT

Mr. HUTCHINSON. Thank you, Mr. Chairman. I appreciate this opportunity to present the Department of Labor's views on several current issues involving its implementation of the Employee Retirement Income Security Act of 1974, ERISA.

Before I begin, I would like to introduce the two individuals at the table with me. On my left is Steven Sacher, Associate Solicitor of Labor. On my right is William Chadwick, special consultant on my staff.

I shall first address the specific questions raised in the subcommittee's notification of these hearings. I also have brief comments on other matters I believe are important to this subcommittee's review of ERISA's implementation.

First, let me review the Department's actions in providing an alternative means for plans to meet certain reporting and disclosure obligations relating to the summary plan description. Such an alternative was made available to plans, provided they furnished an ERISA notice to participants and beneficiaries on or before May 30, 1976.

The deferral of the summary plan description requirements based on various provisions of ERISA. The postponement of requirements of sections 102(a)(1) and 104(b) of the act for welf plans is based on the authority of section 104(a)(3). This provis permits the Secretary of Labor to exempt by regulation "any welf benefit plan from all or part of the reporting and disclosure requi ments" of title I or to "provide for simplified reporting and disclos if he finds that such requirements are inappropriate as applied welfare benefit plans."

Final regulation section 2520.104-6, providing for the deferral certain summary plan description reporting and disclosure requi ments for pension plans, allows for an alternative method of co pliance under section 110 of the act for those pension plans wh elect to defer the summary plan description requirements by furnish an ERISA notice to participants and beneficiaries by May 30, 1976. Section 110 permits the Secretary of Labor to prescribe an alter tive method of compliance if he makes certain findings regard the use of the alternative, including determinations that the use the alternative method is consistent with the purposes of this ti and that it provides adequate disclosure to the participants a beneficiaries in the plan, and adequate reporting to the Secreta that the application of the statutory requirements would be adve to the interests of plan participants in the aggregate, and that appli tion of the reporting or disclosure requirements would increase costs to the plan, or impose unreasonable administrative burdens.

The May 30, 1976, deadline for summary plan description reporti and disclosure requirements was proposed in the Department's Ju 9, 1975 regulations (40 F.R. 24655). As was indicated in th proposal, an attempt was made to set the requirement at a ti by which plans would avoid the substantial burdens created by premature reporting and disclosure date, so that both participa and the Department would receive complete documents incorporati ERISA changes.

The comments received on the June 9 regulations overwhelmin urged deferral of the initial reporting and disclosure requiremen Particularly in the case of pension plans, the comments pointed that almost all plans could be expected to undergo extensive amer ments to comply with ERISA.

Because these amendments are not required to be adopted for p poses of title II of the act until a time, set by section 401(b) the Internal Revenue Code, which would generally be considera later than the close of the 1976 plan year, the comments stat that a May 30, 1976, summary plan description would not in m instances reflect plan amendments made to comply with ERISA.

The Secretary concluded that a summary plan description requir to be furnished on May 30, would in most instances describe nonco plying plan provisions that would soon be superseded, and that su disclosure would tend to confuse and mislead plan participants a beneficiaries.

If the May 30 date were adhered to, subsequent major plan amer ments predicated on the requirements of ERISA would be disclos via a summary of plan modifications and of changes in the informati required to be included in the summary plan description.

However, in accordance with section 104(b)(1), this information of may be furnished as late as 210 days after the close of the plan e year in which the changes were adopted. Such a summary of plan amendments made to comply with ERISA would not necessarily provide a complete description of new plan provisions, would not describe the_interrelationship between the new plan provision and other les unchanged provisions, and would more easily be lost, misplaced, or misinterpreted by plan participants and beneficiaries than a single document summarizing all the relevant facts about the plan.

al For these reasons, the Secretary found that the requirement that all pension plans furnish a summary plan description on or before May 30, 1976, would not provide adequate disclosure of essential plan provisions which would be modified or amended for the 1976 plan year, and would instead provide disclosure of plan provisions with a limited applicability. The further deferral of the summary plan description beyond May 30, 1976, is designed to meet this problem.

Mere deferral, however, is not a satisfactory solution. While it avoids e piecemeal disclosure that would, in our view, be adverse to the interests of plan participants in the aggregate, it also leaves participants to puzzle out their rights without any guidance or information from the plan administrator.

Communication with participants has shown the Department that there is a strong demand for such guidance, and something of a : consensus on the main causes of confusion and concern. Participants want to know what rights they have under ERISA, where they must call or write to get more information-such as plan documents-and when ERISA will cause changes in their plan, that is, when conforming amendments will be made.

They know that this type of information will help them in securing their rights and in making personal decisions that are often significantly affected by their status under the plan. Accordingly, the Department required that plans which do not provide a complete summary plan description on or before May 30, 1976, instead provide an ERISA notice that will generally alert participants to their rights and explain how to obtain further help and information.

The procedures outlined in the April 23, 1976, regulations are intended to give plan participants and beneficiaries the most effective disclosure under the circumstances. We have tried to avoid multiple descriptions that would not only raise costs, but also detract from the effectiveness of disclosure.

It should be noted that providing an alternative which permits plans to defer the distribution of summary plan descriptions until final plan amendments can be made was consistent with a recommendation of the 15-member public advisory council which was created by the act to advise the Secretary on his implementation of ERISA.

On balance, we believe that the Department's administration of the reporting and disclosure provision of ERISA will best enable participants to protect their interests during the transition period from prior law to ERISA.

Now I would like to turn to the issue of the Department's activities concerning minimum standards regulations defining "hours of service" and "year of service."

On September 8, 1975, the Department published in the Fe Register temporary and proposed regulations relating to mini standards for employee pension benefit plans. The temporary re tions were issued under sections 201-211 of ERISA, and designed to implement the minimum participation and vesting dards contained in sections 202 and 203 of ERISA and in sec 410 and 411(a) of the Internal Revenue Code of 1954–the codethe benefit accrual requirements contained in section 204 of El and section 411(b) of the code. More specifically, the temp regulations provided a definition for the term "hour of service were designed to implement the "year of service" and the of participation" concepts contained in the act and the code.

The Department invited interested persons to submit written views, or arguments concerning the temporary regulations and vided an extended comment period until January 9, 1976, du the recognized complexity and importance of the issues to be sidered and the interrelationship of these regulations issued d October and November 1975.

The extensive comments received from interested persons indic to the Department that a public hearing would be appropriat further clarify the issues and insure that we had the benefit of most complete record to resolve these difficult issues. Accordi the Department held such a hearing on March 2, 1976, with a p that included representatives of the Department of the Treasury the Internal Revenue Service. In addition to written submissions w were filed, we heard oral testimony from 21 witnesses.

Since that time, the Department has been engaged in an in-d analysis of the issues raised in the extensive comments and testimony. The comments received from interested persons car divided into two major categories. The first category includes ments relating to the definition of an "hour of service"-sed 2530.200b-2-and to the determination of "hours of service"-sed 2530.200b-3-particularly the alternative method of determination nonhourly employees-section 2530.200b-3(b).

Chairman Dent's letter of March 1. 1976, mentions important is in this category. Among other things, comments on these port of the temporary regulations urge their modification to the ex necessary to permit plans to credit service on the basis of elap time or continuous service, instead of requiring the crediting of ser on a unit basis.

The second category of comments includes arguments relating the interpretation contained in the temporary regulations of requirement that all service with the employer or employers maint ing the plan must be counted for participation and vesting poses-section 2530.210.

The Department has concluded that both the analysis of the c ments and testimony received and the publication of any modificati to be contained in the final regulations are matters of the hig priority. We recognize the importance of the issues involved in te of the rights of participants covered under employee pension ben plans, the administrative and cost implications to employers and o sponsors maintaining such plans, and the historical practices in m industries which are affected by these regulations.

In this regard, the Department has under consideration a modification of the definition of the term "hour of service" for purposes of ERISA. In addition, we are considering various alternative methods of determining hours of service.

More specifically, as a result of the comments received from interested persons, the Department is considering whether section 2530.2006-3 of the temporary regulations should be modified to provide alternative methods of determination for both hourly and nonhourly employees, without regard to whether hours are required to be counted and recorded under the Fair Labor Standards Act.

We are considering permitting employee pension benefit plans to credit employees on the basis of days, weeks, months, or shifts worked. The Department is also considering whether plans should be permitted to credit employees on the basis of regular time hours for which the employee is compensated for the performance of duties or on the basis of earnings.

Another issue we are considering is whether a plan should be permitted to credit service on an elapsed time or continuous service basis. Comments by interested persons, and testimony at the hearing held on March 2, 1976, indicate that the unit credit approach may cause recordkeeping burdens, increased administrative costs, and be confusing to participants and beneficiaries.

All of these results would, of course, be undesirable and contrary to the intent and purpose of ERISA. On the other hand, the Department is also concerned with the rights of participants and beneficiaries, the proper interpretation of statutory language, and the statutory safeguards included in ERISA, such as the 1-year break in service rule and the rule of parity for crediting service.

As I indicated previously, the Department considers modification of the temporary regulations relating to participation, vesting and benefit accrual to be a matter of the highest priority, and we are attempting to develop a regulatory framework which is totally consistent with the statutory scheme reflected by sections 202-204 of ERISA and sections 410 and 411 of the Code, and the legislative history.

Our awareness of the importance of the issues involved to sponsors attempting to amend and restate plans to conform with ERISA has led us to conclude that it would be appropriate for us to prepare ERISA technical releases to outline the results of our analysis so that plans may begin to plan accordingly in advance of the publication of final regulations.

As respects Chairman Dent's question relating to the Daniel v. International Brotherhood of Teamsters, et. al. case, in which it was held that certain employee benefit plans subject to ERISA are also subject to the antifraud provisions of the Securities acts, the Department has established contact with the counsel in the litigation and with the Office of the Clerk of the Court of Appeals for the Seventh Circuit so that we may continue to be informed of developments in the litigation.

Copies of pleadings filed in the district court and the court of appeals, including an amicus curiae brief submitted to the court of appeals in support of a petition for an interlocutory appeal under 28 U.S.C. 1292(b), and the district court's order of April 19, 1976,

74-924 0-76--2

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