EBSA Congressional Testimony

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Statement by
Ann L. Combs
Assistant Secretary Employee Benefits Security Administration
On
Fiscal Year 2006 Request for
Employee Benefits Security Administration

I appreciate the opportunity to present the Department of Labor's Fiscal Year (FY) 2006 budget request for the Employee Benefits Security Administration (EBSA).

EBSA is responsible for the administration and enforcement of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA governs approximately 730,000 private pension plans and six million private health and welfare plans that hold approximately $4.4 trillion in assets and cover 150 million Americans. Our current authorized staffing is 887 FTE and the FY 2005 appropriation is $131 million. The President's budget request for FY 2006 is 887 FTE and $137 million, an increase of 4.4 percent above the 2005 enacted level.

EBSA and its employees around the country work diligently to protect the interests of American workers, retirees and their families, and to support the growth of our private employee benefits system. EBSA's top priority is to ensure that pension and health plans are operated in accordance with the law. We employ a comprehensive, integrated approach encompassing programs for enforcement, participant and compliance assistance, outreach, interpretive guidance, legislation, and research to protect and advance the health and retirement security of our nation's workers and retirees.

EBSA's primary mission is to protect worker benefits, a key component of the Department's goal to promote the economic security of workers and their families. We continue to focus on ensuring that our efforts to assist workers, to maintain an effective and responsive regulatory environment, and to provide strong enforcement are consistent with the changing nature of work in the 21st Century. Accomplishing these strategic goals will enable us to succeed in meeting the challenges and realizing the opportunities afforded by the President's Management Agenda.

To protect employees' benefits, EBSA employs an effective combination of vigorous enforcement, voluntary compliance, and education and outreach. Our enforcement efforts have produced a new record high in each of the last four years. In FY 2004 alone, we achieved a record $3.1 billion in monetary results (e.g. funds restored to plans or participants, etc.) and 121 criminal indictments for crimes connected to employee benefit plans.

In addition to enforcement efforts, we continue to expand our voluntary compliance initiatives. The Voluntary Fiduciary Correction Program (VFCP) and the Voluntary Delinquent Filer Correction Program (VDFCP) provide a means for plans to self-report certain fiduciary breaches and to self-report late or missing required filings. These initiatives provide a faster and more efficient means of restoring assets to plans and assessing appropriate fines and penalties, allowing the agency to target more of its investigative resources on serious violations. The VFCP alone experienced a 98 percent increase in usage in FY 2004 compared to FY 2003, resulting in the voluntary restoration of $246 million to employee benefit plans. In recognition of the success of this program, this year EBSA is expanding the number of transactions eligible for the VFCP program and simplifying the application process. In addition, EBSA is developing for its website an online calculator that allows applicants to calculate the lost earnings and profits to be restored to the plan, making it easier to determine the amount of the violation and to correct it.

EBSA conducts numerous educational and outreach activities to ensure fiduciaries understand and comply with their responsibilities under the law. Our Fiduciary Education Campaign, “Getting It Right - Know Your Fiduciary Responsibilities," includes nationwide educational seminars to help plan sponsors understand the law. The program teaches plan sponsors steps for avoiding the most common problems EBSA encounters in its enforcement activities, emphasizing the obligation of fiduciaries to:

• Understand the terms of their plans;
• Select and monitor service providers carefully;
• Make timely contributions to fund benefits;
• Avoid prohibited transactions; and
• Make timely disclosures to workers and reports to the government.

Eight seminars have been held to date and four more are scheduled. We have also conducted 31 Health Insurance Portability Accountability Act (HIPPA) compliance assistance seminars in partnership with state commissioners.

Through our Office of Participant Assistance, we also provide direct assistance to workers with their employee benefit questions responding to more than 160,000 calls to our toll free number. They recovered over $76 million in benefits for participants that had been improperly denied through an informal resolution process with the employer. As in FY 2004, our Benefits Advisors participated in 674 Rapid Response Sessions sponsored by the states to assist 24,977 dislocated workers, educating them about ways to protect their health coverage and retirement benefits after separation from their employer. These participant assistance and education efforts protect workers and their families by preventing problems before they start.

FY 2006 Budget Request

The President's FY 2006 budget request of $137 million and 887 FTE for EBSA includes an increase of $5.7 million. The President's request includes a $2.1 million program increase to continue current ERISA Filing and Acceptance System (EFAST) operations with the level of service and functionality that currently exists. EFAST is the system that receives and processes reporting Forms 5500 and 5500EZ. These forms are filed each year by more than one million pension and other employee benefit plans to satisfy annual reporting requirements under ERISA and the Internal Revenue Code.

The data collected by EFAST is used to target enforcement efforts by the DOL, IRS, and the PBGC. It is a primary source of disclosure for plan participants and beneficiaries and is the only source of comprehensive information about the $4.4 trillion in assets held by ERISA-covered plans. The data is used extensively by the government and private users for research and analysis of policy issues and trends in employee benefits. The President's request for an additional $2.1 million for EFAST will ensure that this data continues to be available for enforcement, research, and policy analysis.

DOL will use its requested FY 2006 funds to continue to safeguard workers' retirement savings, health coverage, and other employee benefits. EBSA also will increase efforts to combat health plan fraud, such as fraudulent Multiple Employer Welfare Arrangements (MEWA's), as well as expand the compliance assistance programs designed to improve plan sponsors' and service providers' understanding of the complex provisions of ERISA. Increasing the EBSA budget by 5 percent – at a time when other national priorities such as the war on terrorism and homeland security are so compelling – demonstrates the Administration's strong commitment to protecting the employment-based benefits of American workers and their families.

Policy Initiatives

The FY 2006 Budget includes a discussion of several major policy initiatives that the Bush Administration believes are necessary to improve workers' retirement and health security.

• Retirement Security

The retirement security of America's workers is a top priority of this Administration. From securing Social Security for future generations to making sure companies keep their pension promises, we are making every effort to ensure that workers can rely on the benefits they have earned.

In January, Secretary Chao announced the Administration's proposal to reform the single-employer, private sector defined benefit pension system described in detail in the FY 2006 Budget. These pension plans cover 16 percent of the nation's private workforce, or about 34 million Americans, but current law does not ensure that defined-pension plans are adequately funded.

Broken pension promises can have serious repercussions for workers, and we must take action now to ensure that these promises are kept. If significantly underfunded pension plans continue to terminate, not only will some workers lose benefits, but other plan sponsors, including those that are healthy and have funded their plans in a responsible manner, may be forced out of the system, reducing the availability of a very important source of retirement income.

The Administration's reform package improves pension security for workers and retirees, stabilizes the defined benefit system, and avoids a taxpayer bailout of the Pension Benefit Guaranty Corporation (PBGC). The reforms are focused on the three key deficiencies of the current system: ineffective funding rules, lack of transparency, and an unsustainable pension insurance safety net.

First, the funding rules must be strengthened to ensure that plan sponsors adequately fund their plans and keep their pension promises. This is particularly important for those plans at the greatest risk of terminating. The Administration's plan will bring simplicity, accuracy, stability, and flexibility to the funding rules, encouraging employers to fully fund their plans and ensuring that benefit promises are kept.

Under the President's proposal, the multiple sets of funding rules applicable to single-employer defined benefit plans would be replaced with a single set of rules. The rules would provide for each plan a single funding target that is based on meaningful, accurate measures of its liabilities that reflect the financial health of the employer and use fair market values of assets.

The applicable funding target is calculated by discounting benefit liabilities based on a yield curve of long-term corporate bonds. Funding shortfalls would be amortized and paid over 7 years. Underfunded pension plans sponsored by financially weak or bankrupt sponsors would face limits in making new unfunded benefit promises, ensuring that workers can rely on the promises already made. Plan sponsors would have the opportunity to make additional, tax-deductible contributions in good years, even when the plan's assets are substantially above its funding target.

Second, disclosure to workers, investors and regulators about pension plan status must be improved. Under the Administration's proposal, workers would receive an annual statement that shows the plan's funding status for the current year and the two preceding years. It would also ensure that information filed by certain underfunded plans with the Pension Benefit Guaranty Corporation is made public, and shorten the deadlines for filing other required funding information. Workers need to have timely and accurate information about the funding status of their pension plans to make informed decisions about their retirement needs and financial futures.

Third, the premium rates for the pension insurance system must be revised to more accurately reflect the risk of a plan defaulting on its promises and to help restore the PBGC to financial health. The current premium structure encourages irresponsible behavior by not reflecting a plan's true level of risk. The Administration's proposal would immediately adjust the flat per-participant premium to $30 initially to reflect the growth in worker wages since 1991, when the current $19 figure was set in law. This recognizes the fact that the benefit guarantee continued to grow with wages during this period, even as the premium was frozen. Going forward, the flat rate premium would be indexed for wage growth.

In addition to the flat-rate premium, a risk-based premium will be charged based on the gap between a plan's funding target and its assets. Because the funding target takes account of the sponsor's financial condition, tying the risk based premium to the funding shortfall effectively adjusts the premium for both the degree of underfunding and the risk of termination. All underfunded plans would pay the risk based premium. The PBGC Board – which consists of the Secretaries of Labor, Treasury and Commerce – would be given the ability to adjust the risk-based premium rate periodically so that premium revenue is sufficient to cover expected losses and improve PBGC's financial condition. Charging underfunded plans more gives employers an additional incentive to fully fund their pension promises.

The Administration's proposal will strengthen the funding rules and defined benefit system, so that the nation's workers and retirees can be confident of the secure retirement they have worked for all their lives. The Administration developed and proposed these reforms to ensure the health of America's single-employer defined benefit pension plans. We believe it is critically important that Congress enact legislation to protect the retirement security of workers in these plans. At the same time, however, we must remember that there are millions of Americans who are covered by multi-employer pension plans, and that their retirement security is equally important. We look forward to working together in a bipartisan fashion to ensure that multi-employer plans are strengthened too.

• Health Security

The President is deeply committed to expanding access to quality, affordable health benefits for all Americans. A key element of his plan to reduce the number of uninsured Americans is the enactment of Association Health Plan (AHP) legislation.

Forty-five million Americans lack health insurance, and fully 87 percent of the uninsured are in working families – with most working at firms with fewer than 100 employees. Small businesses are only half as likely as large employers to offer health benefits and pay more than 20-30percent higher premiums than large employers or labor unions for similar health coverage. AHPs are aimed squarely at closing this gap by providing a level playing field for small businesses.

AHP legislation would allow small employers and others to join together through their bona fide trade and professional associations to purchase health benefits, allowing them to take advantage of the same economies of scale and uniform regulation enjoyed by large employer and union health plans. AHPs will give small businesses the same kind of purchasing power and negotiating clout that large firms and unions can provide. According to the Congressional Budget Office, AHPs could reduce health insurance premiums by as much as 25% and provide health benefits to as many as 2 million Americans currently uninsured. The President has proposed expanding AHPs to include members of civic, religious and similar groups as well, furthering increasing access to health coverage.

The AHP legislation introduced in the House and Senate, S. 406/H.R. 525, the Small Business Health Fairness Act, would expand access to health benefits while safeguarding workers and their families. Only bona fide trade or professional associations that have existed for at least three years, and for purposes other than providing health coverage, could form an Association Health Plan under the legislation. The legislation also requires coverage options to be offered to all members of the trade or professional association, and the Association Health Plan must follow the requirements of the Health Insurance Portability and Accountability Act. The legislation prohibits setting prices based on the health status of workers, and no eligible individual worker may be denied participation in the Association Health Plan selected by the employer. All Association Health Plans must also operate under applicable State solvency laws or new, stringent Federal solvency standards.

The effect of these provisions is to allow small businesses greater opportunities and more choices of quality, affordable health coverage for their employees. The Department of Labor will play a significant role in protecting health benefits offered through AHPS--before an AHP could offer benefits to a single worker, the Department of Labor must certify that it meets the strong consumer protection and solvency provisions of the legislation. Our experience in administering health plans under current law, protecting 131 million workers in approximately 2.5 million health plans, including 67 million workers in self-insured health plans governed solely by ERISA, well prepares EBSA to provide the necessary oversight for Association Health Plans.

AHP legislation enjoys wide bipartisan support in the House and Senate, and we stand ready to work with members of Congress to pass this much-needed legislation into law, expanding access to affordable quality health insurance coverage for working Americans and their families.

Conclusion

Mr. Chairman and members of the Committee, this budget reflects the strong commitment of the Bush Administration and this Congress to improving the lives of America's working families by protecting their employee benefits and retirement security. This Committee's support for our program has been and will continue to be essential in that effort.