U.S. Chamber Statement on Reduction of Accurals and Allocations Because of Age
Statement of the U.S. Chamber of Commerce at a Public Hearing on the U.S. Department of the Treasury Proposed Regulations, Reduction of Accurals and Allocations Because of Age
April 9, 2003
I am Lawrence Lorber, a partner in the Law Firm of Proskauer Rose LLP and Chair of the EEO Subcommittee of the Labor Relations Committee of the U.S. Chamber of Commerce. I have held various positions in government involving labor and equal employment law. Most recently I was honored to be appointed by the Congressional Joint leadership to be a member of the first Board of Directors of the Office of Compliance. The Office of Compliance was established pursuant to the Congressional Accountability Act to apply and enforce eleven labor and employment laws, including the Age Discrimination in Employment Act to Congressional employees and employees of Congressional entities.
I am appearing today on behalf of the U.S. Chamber of Commerce ("the Chamber") to discuss proposed regulations issued by the Department of Treasury addressing "Reductions of Accruals and Allocations Because of the Attainment of Any Age and Related Issues." The United States Chamber of Commerce is the world's largest business federation representing more than three million businesses and organizations of every size, sector and region, with substantial membership in all 50 states.
The U.S. Chamber of Commerce, along with many other interested parties submitted written comments to the Department of Treasury on March 12, 2003. The purpose of this statement is to supplement the previously filed comments by the Chamber and to address critical policy issues which we believe must be taken into account by the Department of the Treasury and the other agencies with which it has consulted as it decides whether and how to adopt final regulations.
The Chamber believes that the proposed regulations should be revised because: (1) the proposed regulations are not compelled by OBRA; (2) the proposed regulations are neither authorized nor permitted by OBRA; and (3) the proposed regulations not only do not represent sound retirement policy, but that the consequences of adoption of the proposed regulations would have many harmful consequences, and in particular hurt older workers.
As with any set of proposed regulations, it is critical to review the underlying statutory provisions which the regulations presume to address. It is a standard principle of our governmental structure that regulators are not legislators. Although regulations issued by agencies charged with enforcing any statute are normally given deference by the courts, that deference is not a blank check. As set forth by the Supreme Court in its recent decision in Ragsdale v Wolverine World Wide, Inc, 122 S.Ct. 1155, 1160 (2002) in reviewing the Secretary of Labor's implementing regulations for the Family and Medical Leave Act:
The Secretary's judgment that a particular regulation fits within this statutory constraint must be given considerable weight. See United States v O'Hagan 521 U.S. 642 (1997) [other citations omitted]. Our deference to the Secretary, however, has important limits: A regulation cannot stand if it is "arbitrary, capricious, or manifestly contrary to the statute." (quoting Chevron U.S.A. v Natural Resources Defense Council 467 U.S. 887 (1984). To determine whether [the regulation at issue] is a valid exercise of the Secretary's authority, we must consult the Act, viewing it as a "symmetrical and coherent regulatory scheme."
Following the direction of the Supreme Court, it is necessary to refer back to the 1986 Act which is the underpinning of the proposed regulation. In 1986, as part of the Omnibus Budget Reconciliation Act (OBRA 1986) Congress enacted Subtitle C- Older Americans Pension Benefits. This subtitle in turn amended the Age Discrimination in Employment Act (ADEA), the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (the Code) to apply basic principles found under ADEA, that (1) accruals to a defined benefit plan not be reduced because of age; and (2) that a benefit accrual not be ceased because of age. ADEA, ERISA and the Code all had to be amended in order to deal with the multi-faceted regulation of pension plans. The thirty words used to incorporate these requirements in the relevant statutes were certainly not complex. Nor is there any indication that the Congress intended by this simple Act to authorize the establishment of extraordinarily complex rules to determine formulas for rates of accrual or that the Congress engaged in anticipatory selection of favored or disfavored forms of defined benefit plans. Rather, at the same time as the Congress was removing the cap on coverage under ADEA, see e.g., P.L. 99-592 (October 31, 1986), ten days after the passage of OBRA, and attempting to stop a drain on the Social Security System by requiring continued participation in employer sponsored pension plans for employees who worked past the age of 65, the Congress acted to ensure that accrual rates would not be reduced because of the age of an employee and that accruals continue for employees who worked beyond the normal retirement age (65). Unfortunately, these simple Congressional mandates were not converted into regulation as directed by the statute until these proceedings, seventeen years later.
However, whether contemporaneous with the passage of the statute or almost a generation later, these regulations must be reviewed to determine if they are consistent with the Congressional mandate. In simple terms, the answer must be no. However, to preserve those aspects of the regulations which do accurately reflect Congress' intention, the Treasury Department should analyze these proposed regulations under three criteria. First, are the proposed regulations as drafted compelled by the statute? Second, are the proposed regulations as drafted authorized or permitted by the statute? And third, do the proposed regulations as drafted represent sound retirement policy?
Are the proposed regulations compelled by the statute?
The simple answer to this question is no. As noted, there is nothing in the statute which suggests that the simple thirty words be somehow converted into 30 pages of complex regulation. This statute was designed to prohibit the basic form of age discrimination. Recognizing as a matter of sound employment policy that employees would work to or beyond "normal pension retirement age," i.e. 65 years, the Congress acted to ensure that benefit plans not be designed to penalize employees as they advanced in age, particularly as the law was amended to remove any statutory age cap with respect to continued employment. However, in all of its regulation of benefit plans, the Congress recognized certain fundamental principles. Our retirement system is a voluntary system. Nothing compels an employer to sponsor a plan. Nor is an employer compelled to maintain a plan. Rather, the law (ERISA) requires that benefits already accrued cannot be forfeited, and that employers generally cannot now withdraw assets from a qualified plan. However, within those general principles, employers are free to sponsor retirement plans created in different forms and designed to deal with the rapidly changing workforce. Whereas the workforce used to be relatively static, with employees remaining with one employer from commencement of employment to retirement, today's workforce is a dynamic one, wherein employees can be expected to change employers several times during their working life. Sound retirement policy therefore almost compels employers who sponsor plans to revise those plan designs to make the retirement vehicle fit the needs of the current workforce, without regard to the age of the workforce while at the same time controlling the cost and expense of these plans, so that employers are not forced to discontinue the plans because they have become financially impossible to maintain. And based on the voluntary design of retirement plans, the 1986 law simply required that whatever the rate of accrual in the plan, it could not be reduced as employee participants grew older. In response to these requirements, the proposed regulations create a complex mathematical General Test to determine whether a rate of accrual is reduced because of age. This regulatory creation finds no foundation whatsoever in the statute. Instead, it creates a regulatory encumbrance and cost which will be devastating to the remaining defined benefit system.
Too, the proposed regulation is not compelled by any accepted interpretation of the ADEA. As passed in 1967 and interpreted by the courts since then, the ADEA is a relatively straightforward anti-discrimination law. It prohibits discrimination in employment, including employment benefits, "because of age." The courts, recognizing that various employment practices may have some relationship to or be deemed to be a corollary to the age (or seniority) of an employee have uniformly held that practices which may be viewed as corollaries to age are nevertheless not included within the practices or considerations prohibited by the ADEA. Within the list of practices not prohibited by ADEA is the basic premise that the value of a benefit, or component of compensation which is affected by the passage of time and the application of interest rate factors, the time-value of money, is not deemed illegal. Thus, the longer an asset sits before it is drawn upon, the greater its value when finally drawn upon. These proposed regulations reject this fundamental principle. Instead, relying in some fashion upon the 1986 amendments but without support from the statute, these proposed regulations hold that such reliance violates ADEA, ERISA and the Code.
Alternatively, to sustain these regulations under ADEA, the only possible legal justification is to apply a concept known as "disparate impact" to the application of ADEA. Disparate impact is a concept of discrimination developed to deal first with race discrimination, and then applied in general terms to gender discrimination. Because of our social history, the Supreme Court in 1971 in Griggs v Duke Power Co., 401 U.S. 424 (1971) and the Congress in 1991, when it amended the Civil Rights Act, established a principle of discrimination known as disparate impact. Simply stated, disparate impact holds that a practice which is neutral on its face nevertheless may violate the prohibitions found in Title VII of the Civil Rights Act if the practice or policy results in a numerically determined adverse treatment for a protected group. As pointed out in the many written comments filed in response to these proposed and in the vast majority of court decisions, disparate impact is not applicable to an analysis of employment practices under ADEA. Absent the application of disparate impact to ADEA or the 1986 amendments, there is absolutely no basis to compel the Treasury Department to issue or adopt the proposed regulations in their current form.
Are the proposed regulations authorized or permitted by the statute?
For many of the reasons set forth above, as the proposed regulations are not compelled by the statute, they are neither authorized nor permitted by the statute. There have been several alternative theories expressed by the agency during this comment and consultation period to justify the design of the proposed regulations. One oft-stated justification is that the IRS is comfortable in dealing with mathematical tests. Thus, for the convenience of the agency and agents who must review plans to determine if they can be granted favorable determination letters, complex mathematical calculations are the most common means of reviewing plan designs. So too, the application of a complex mathematical test to the IRS determination letter process establishes a rigid, irrebuttable determination process for various forms of defined benefit plans. Whatever the administrative convenience of such a system, it is precisely those rationales which were rejected by the Supreme Court in the Ragsdale decision. In that case, the Secretary of Labor attempted to defend the FMLA regulations by noting "that a categorical penalty requiring the employer to grant more leave is easier to administer than one involving a fact-specific inquiry into what steps the employee would have taken had the employer given the required notice." Ragsdale at 1162 (emphasis added). The Supreme Court summarily rejected the administrative convenience rationale for regulations with no foundation in the underlying statute:
Furthermore, even if the Secretary were authorized to reconfigure the FMLA's cause of action for her administrative convenience, this particular rule would be an unreasonable choice. As we have noted in other contexts, categorical rules - such as the rule of per se antitrust illegality-reflect broad generalizations holding true in so many cases that inquiry into whether they apply to case at hand would be needless and wasteful.
Id. at 1163. Thus, rules based upon administrative convenience or which attempt to substitute some form of mathematical certainty to otherwise subjective analysis cannot be sustained. They are certainly neither authorized not permitted by the statute here.
Of perhaps equal concern is the fact that these regulations have the effect of picking and choosing between various forms of defined benefit plans as they have been developed. The structure of these regulations is based upon a conundrum. The Treasury Department has determined that under certain circumstances, Cash Balance plans and conversions to Cash Balance plans are permitted. The Chamber addressed this in its written comments and applauds the recognition by the Treasury Department that such plans do not violate ADEA or the Code. Indeed, were the Treasury to have stopped there, as indeed its focus in proposing these regulations was to address the Cash Balance Plan issue and conversions, the controversy underlying these proposed regulations would be significantly muted. However, the proposed regulations deal with Cash Balance Plans and conversions via a "Safe Harbor," but then establish an extraordinarily onerous and expensive test for every other form of hybrid defined benefit plan. The result of this awkward regulatory scheme is to bring into question Cash Balance plans since they seem to require special regulatory treatment and to create almost insurmountable barriers to every other form of defined benefit plan such as Pension Equity Plans (PEP plans), fractional accrual plans, floor offset plans or the other myriad form of hybrid defined benefit plans designed to address specific employee and employer needs. Whatever the policy goal of the agency, there is certainly no statutory justification for such a regulatory design.
Do the proposed regulations represent sound retirement policy?
The purpose of any regulation is to faithfully reflect the intent of Congress in the least obtrusive way as possible. Creativity in regulatory design helps neither the regulated community nor the underlying public policy represented by the statute. In the area of retirement policy, the basic policy goal is to encourage the creation and maintenance of our private voluntary pension system while ensuring that basic rights, such as the prohibition of age discrimination in employment, be ensured. This is really not a difficult task. In 1967, when the Congress was first passing the ADEA, Senator Javits, a sponsor of the ADEA, was deeply concerned that nothing in that law result in increased costs, particularly pension costs so as to provide disincentives for employers to hire older workers. See United Airlines v McMann, 434 U.S. 192, 200 (1977). Too, Senator Javits, later the prime sponsor of ERISA was concerned that nothing in ADEA or ERISA impedes the necessary flexibility in the design and administration of pension plans. What Senator Javits recognized in 1967 has been forgotten in 2003. Whatever else may be said about the proposed regulations, they are neither flexible nor cost efficient. Too, they add yet another burden to the defined benefit pension system at the precise time and in the current economic climate when there is greater recognition that there is a great public benefit to a relevant and affordable guaranteed private pension system. Compare this obvious policy need with a regulatory scheme based neither upon statutory authority or accepted legal concepts.
The United States Chamber of Commerce filed its detailed comments on March 12. It greatly appreciates the opportunity to supplement those comments in this public session. As noted in those comments, the Chamber applauds the recognition by the Treasury Department that Cash Balance plans do not violate ADEA or the Code. The Chamber further applauds the effort of the Treasury Department to finally adopt regulations seventeen years after OBRA was enacted provide a regulatory underpinning to the basic and simple Congressional mandate. However, the Chamber would urge the Treasury Department to look to the legal and administrative impediments to a sound defined benefit system created by its proposed regulations and to the holding of the Supreme Court regarding appropriate administrative regulatory policy. The Treasury should be able to take these comments and fashion a simple regulatory scheme faithful to the clear intent of Congress, limited in its scope to the specific issues addressed by the statute, and consistent with well established law and precedent under the ADEA and related statutes. What is not needed are the complexity, cost, and continued uncertainty of the current proposal. If however the Treasury believes that amending these proposed regulations to conform them to the statute requires a new comment period, the Chamber urges that any new comment period be conducted with utmost speed. Waiting for over seventeen years for these regulations has been far too long. And the moratorium on the issuing of determination letters for any form of hybrid plan since 1999 has created a needless logjam in the pension system. Finally, the Chamber also applauds the recent decision by the Treasury to drop the proposed discrimination testing requirements from the proposed regulations. We had noted this problem in our comments and hope that the Treasury's action in that matter suggests that necessary regulatory clarification and simplicity will be forthcoming as a result of its consideration of the proposed regulations in response to this extensive comment period.