DoL proposed new overtime pay threshold for white collar exemptions

The Department of Labor released a new proposed rule that would raise the minimum salary requirements for exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act’s (FLSA) overtime pay requirements. Under the proposed rule, the minimum salary threshold would increase to $35,308/year ($679/week), up from the current $23,660/year ($455/week).

In 2016, the DoL issued a final rule that raised the current threshold— which had not increased since 2004—to $47,476/year ($913/week) (see Client Action Bulletin 16-2). In 2017, a federal district court invalidated the rule, but the DoL, under a new Administration, appealed to the Fifth Circuit. The DoL also asked the court to hold the appeal while the agency reconsidered proposing an appropriate salary level.

The new proposed rule also would:

• Increase the total annual compensation requirement for “highly compensated employees” from the current $100,000 to $146,414
• Commit the DoL to periodically review the salary threshold via the proposed rulemaking process every four years
• Allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary level threshold

The proposed rule makes no changes to the FLSA’s “duties tests.”

Following publication in the Federal Register, the proposed rule will be open for public comment for 60 days. (As of March 19, the proposed rule has not been published.) The DoL hopes to finalize the rule in time to apply it beginning in January 2020.

Employers should begin to evaluate how the rule will affect their pay and job classification practices with an eye toward changes that may be necessary if a final rule applies in 2020. In addition, employers should consider the effects any final rule might have on their benefit programs (e.g., overtime compensation under a retirement plan’s contribution formula and differing contribution requirements for healthcare coverage based on FLSA exempt/nonexempt status) and plan accordingly.

Please contact your Milliman consultant for additional information about the DoL’s proposed rule.

Calculating withdrawal liability under proposed rule

In February, the Pension Benefit Guaranty Corporation issued a proposed rule to amend and simplify the calculation of withdrawal liability for multiemployer plans with rehabilitation plans or funding improvement plans that have made certain benefit or contribution changes. This paper by Biljana Guchereau and Josh Goodwin provides a detailed review of these proposed rules.

Pension reform reversals in Central and Eastern Europe

Central and Eastern Europe’s (CEE) experience with pension reform can illuminate some of the pitfalls of embracing systemic reforms too eagerly. Subsequent reversal of these reforms occurred some years later as governments found themselves increasingly under financial strain.

As the largest economy in CEE, the case of Poland provides a good example. In 1999, Poland enacted “public-to-private” systemic pension reforms of the then-existing pay-as-you-go (PAYG) state system. The reforms introduced private pensions and diverted a significant share of workers’ contributions away from public pensions towards these private plans.

In a dramatic move in 2014, however, the Polish government then reversed these changes, with “private-to-public” reforms that saw the government transfer the equivalent of US$40 billion at present exchange rates of bond assets that had been accumulated within the nascent private pension system to the public system. In 2016, the government announced a further reversal of the previous system.

To learn more about pension reforms in Central and Eastern Europe, read Dominic Clark’s article here.

February’s investment gains propel corporate pension funding ratio to 92.6%

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In February, these pensions experienced a $20 billion increase in funded status thanks to healthy investment gains and an increase in the benchmark corporate bond interest rates used to value pension liabilities. The market value of assets rose by $15 billion as a result of February’s robust investment gain of 1.24%. Pension liabilities also fell to $1.648 trillion at the end of the month, the result of a two basis point increase in the monthly discount rate. The PFI deficit has dropped by $45 billion in the first two months of 2019. The funding ratio of the Milliman 100 PFI rose from 91.4% at the end of January to 92.6% as of February 28.

“February’s investment gains continue to propel corporate pension funding in the right direction, adding to an already positive start to the year,” said Zorast Wadia, co-author of the Milliman 100 PFI. “While the gains of the past two months are good news for these pensions, we’ve still not fully recovered from the $70 billion hole created last December.”

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.58% by the end of 2019 and 5.18% by the end of 2020) and asset gains (10.8% annual returns), the funded ratio would climb to 105% by the end of 2019 and 121% by the end of 2020. Under a pessimistic forecast (3.58% discount rate at the end of 2019 and 2.98% by the end of 2020 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2019 and 81% by the end of 2020.

To view the complete Pension Funding Index, click here. To see the 2018 Milliman Pension Funding Study, click here.
To receive regular updates of Milliman’s pension funding analysis, contact us here.

IRS permits lump-sum window option for pension annuitants pending further study

The IRS has suspended its four-year regulatory project that was expected to limit a defined benefit (DB) retirement plan’s ability to offer retirees and beneficiaries a short-term opportunity for a lump sum in lieu of their annuity. Notice 2019-18, released on March 6, states the agency no longer intends to amend the required minimum distribution rules to prohibit lump-sum windows to current annuitants in a DB plan. The IRS, however, notes it will continue to study the issue of retiree lump-sum windows.

The IRS notice supersedes Notice 2015-49 (see Client Action Bulletin 15-8).

Until the IRS issues further guidance, the agency will not assert that a plan amendment providing for a retiree lump-sum window program results in a violation of the minimum distribution rules, but will continue to evaluate whether the plan, as amended, satisfies the other requirements (e.g., nondiscrimination, vesting, maximum benefit limits) of the tax code.

The IRS also will not issue private letter rulings on this matter. However, if a taxpayer is eligible to apply for and receive a determination letter, the IRS will no longer include a caveat expressing “no opinion” regarding the tax consequences of a pension plan document that includes such a window.

Although certain plan sponsors—such as those pursuing means to curtail their DB plan liabilities and obligations through “de-risking” strategies or those considering terminating a frozen plan—might find the notice of particular interest, they also should review non-tax considerations for possible implications. In particular, fiduciary responsibilities under ERISA should be contemplated, as well as potential exposure to ERISA-based litigation.

For additional information about the impact of IRS Notice 2019-18 on your DB plan or to discuss lump-sum window options and plan amendments to adopt such changes, please contact your Milliman consultant.

Milliman FRM Insight: February 2019 Market Commentary

After its best January in more than 30 years, the S&P 500 rose again in February, completing a full recovery from its 16% December drawdown. Bolstered by dovish Federal Reserve comments and rising prospects for a U.S./China deal, S&P volatility edged sharply lower for the second month in a row. Stocks were supported by a continuation of January’s solid earnings reports, with 70% of companies reporting in February beating estimates by an average of 10%. Managed risk benchmarks increased their equity exposure again in February.

Milliman’s Joe Becker offers more perspective in this month’s market commentary. Download the full commentary at MRIC.com.