Technical committee profile: Committee on Benefits Finance.

The ink was barely dry on the American Jobs Creation Act of 2004, signed by President Bush in late October, when FEI's Committee on Benefits Finance (CBF) recognized that the tax treatment of deferred income it lays out could be problematic for companies.

"Restrictions in the tax bill require immediate taxation of all deferrals under nonqualified deferred compensation plans unless the deferred amounts are subject to a substantial risk of forfeiture or meet certain new legislative requirements," says Thomas Leonard, Director of Government and Employee Benefits Finance for General Electric Company and chairman of CBF.

Bob Shepler, FEI's Director of Federal Affairs and FEI liaison to CBF, adds that the committee is concerned about transition issues from the old rules to the new rules--and that these changes are coming at the end of the year, when many employees are making decisions about what income to defer. It is also possible, he says, that employers may need to set up a new separate and distinct plan from their old plan or modify their existing plans to conform to the new rules--and that the grace period allowed by the Treasury Department may not be long enough.

Federal laws and rules coming out of the Treasury and other federal agencies affecting a host of benefits issues--pensions and other retirement income, healthcare, unemployment insurance and executive compensation--are core areas for CBF, which was founded in 1966. The committee membership has expanded as the area's complexity has mounted, with members drawn from the ranks of consultants, administrators, attorneys, actuaries and more. "We have an excellent core team and get great support from Bob Shepler," says Leonard.

According to the committee's mission statement, "The purpose of CBF is to educate consultants, administrators, attorneys, actuaries and other benefits finance professionals, preserve and strengthen the private employee benefits system through the development of sound retirement security and welfare benefits policy and to ensure that benefits professionals incorporate industry 'best practices' as finance professionals in their work."

"We are always looking for individuals with benefits expertise," Leonard adds. "The benefits arena is very active right now. Pensions, healthcare and deferred compensation continue to be hot topics." Membership is free--though there is a registration fee to cover meeting costs--and, like most other technical committees, CBF meets regularly four times a year, with meetings scheduled in February, May, September and December. The May meeting is promoted as a benefits forum and is open to all FEI members interested in benefits finance.

Another topic that CBF has spent considerable effort on is the ongoing debate over a new system of setting rates to be used for a variety of pension calculations, such as funding requirements for future liabilities, amounts for lump-sum distributions and premium payments to the Pension Benefit Guaranty Corp. Use of the 30-year Treasury bond (no longer issued), which had been used as the basis for calculations for many years, proved to be a problem when long-term rates plunged in recent years. A composite corporate bond rate was instituted, but now, Treasury is talking about creating a "yield curve" in which companies would be asked to determine the average "duration" of their plan liabilities and apply the appropriate interest rate from the curve to the plan.

[ILLUSTRATION OMITTED]

"CBF is concerned that a yield curve approach would be overly complex for employers," says Shepler. "We remain unconvinced that the composite corporate bond rate is inaccurate in appropriately matching liabilities with the interest rate."

Shepler adds that the committee is "interested in expanding the use of Health Savings Accounts (HSAs) in the marketplace, as a potential cost saver. Another area where we would like to see Congress act is on the issue of medical liability reform. Litigation against doctors, hospitals and health plans has increased the cost of malpractice insurance and therefore overall cost of healthcare, and tort reform would serve to decrease overall healthcare costs."

Adds Leonard: "We believe increasing healthcare costs remain a concern of all businesses. Healthcare is a topic that is discussed at all meetings via consulting presentations and best-practice sharing among CBF participants."

CBF is also monitoring the pension and cash-balance plan accounting frameworks being discussed by the International Accounting Standards Board (IASB). Committee vice chair Stewart Lawrence, Senior Vice President at the Segal Co. in New York and a pensions expert, notes that in July, the International Financial Reporting Interpretations Committee (IFRIC) issued a draft interpretation that takes the same approach as FASB did earlier this year. That is, if a fixed return is guaranteed, "the actuary can continue to compute the annual expense by projecting a benefit, then discounting it back to the present, usually producing a liability lower than the plan's cash balance because the expense 'anticipates' future investment returns above that to be credited to the individual accounts.

"However, if returns are indexed--irrespective of what they are indexed to--the liability must be at least as great as the current cash balance," Lawrence says. "If this change occurs, the current annual expense and liability will most likely be overstated--with future expense calculations being lower when actual positive investment experience emerges."

Much like FEI's Committee on Corporate Reporting and Committee on Taxation, profiled in earlier issues, "FEI and CBF are well respected in Washington," says Leonard. "FEI meets with lawmakers and communicates its positions via comment letters." Shepler says that CBF was instrumental last year in passing the temporary fix on the 30-year Treasury bond issue, since "the composite corporate bond rate we advocated was eventually passed by Congress and signed by the President. We believe that we will continue to be influential in this area as Congress revisits this issue and other defined benefit funding issues in 2005 and beyond."