Introduction A majority of the population of the United States has private health insurance coverage (i.e., coverage not available through a public program, such as Medicare or Medicaid). In 2017, about 55% of the U.S. population had private group coverage (e.g., a health plan offered by an employer) and 13.5% had private individual coverage (e.g., a health plan offered through a health insurance exchange). In general, health plans sold in the private health insurance market must comply with state and federal health insurance requirements. The federal requirements relate to how coverage is offered and issued, the benefits it must cover, and how it is priced, among other issues. An example of a federal health insurance requirement is the prohibition of preexisting condition exclusions. Although federal health insurance requirements generally apply to health plans sold in the private health insurance market, not all private health coverage arrangements comply with such requirements. This includes exempted health coverage arrangements and nonco mpliant health coverage arrangements , as termed for purposes of this report. This report identifies and describes arrangements within these two categories. The report is intended to help congressional policymakers better understand the scope of these health coverage arrangements that are available to individuals in the United States private health insurance markets and to provide information about the limitations of the application of federal health insurance requirements. Background The private health insurance market has different segments. Understanding these different segments is relevant to the application of state and federal health insurance requirements. The individual health insurance market segment is where individuals and families buying insurance on their own (i.e., not through a plan sponsor) may purchase health plans. In the group health insurance market, a plan sponsor, typically an employer, offers coverage to a group (e.g., the employer's employees). The group market is divided into small- and large-group market segments. It is also categorized according to how the plan is insured. Group plans that are purchased by employers and other plan sponsors from state-licensed health insurance issuers and are offered to employees or other groups are referred to as fully insured plans. Employers or other plan sponsors that offer self - insur e d plans set aside funds to pay for health benefits directly, and they bear the risk of covering medical expenses generated by the individuals covered under the self-insured plan. States are the primary regulators of the business of health insurance, as codified by the 1945 McCarran-Ferguson Act, and each state requires health insurance issuers to be licensed to sell plans in the state. Each state has a unique set of requirements that apply to state-licensed issuers and the plans they offer; these requirements are broad in scope and address a variety of issues, and often the requirements apply differently to the various market segments. In general, state oversight of health plans applies only to plans offered by state-licensed issuers. Because self-insured plans are financed directly by a plan sponsor, as opposed to a state-licensed insurer, such plans generally are not subject to state law. The federal government also regulates state-licensed issuers and the plans they offer, as well as self-insured plans and their sponsors . Federal requirements can, but do not necessarily, apply uniformly to health plans offered in the aforementioned market segmentsâindividual, small-group, and large-group marketsâand to self-insured plans. For example, the requirement that plans cover preexisting health conditions applies uniformly; health plans offered in the individual, small-group, and large-group markets and self-insured plans must comply with the prohibition on excluding benefits based on health conditions for any individual. The requirement to cover a core package of 10 "essential health benefits" does not apply uniformly; it applies only to health plans offered in the individual and small-group markets. Federal health insurance requirements are codified in three statutesâTitle XXVII of the Public Health Service Act (PHSA), Part 7 of the Employee Retirement Income Security Act of 1974 (ERISA), and Chapter 100 of the Internal Revenue Code (IRC). In general, federal standards establish a minimum level of requirements ( federal floor ) and states may impose additional requirements on issuers and the health plans they offer, provided the state requirements neither conflict with federal law nor prevent the implementation of federal health insurance requirements. Enforcement of the federal health insurance requirements generally involves both the federal and the state governments. States are the primary enforcers of private health insurance requirements, but the federal government assumes this responsibility if it is determined that a state has failed to "substantially enforce" the federal provisions, including if a state indicates that it lacks authority to enforce or is otherwise not taking enforcement actions. Applicability of Federal Health Insurance Requirements to Selected Health Coverage Arrangements Some health coverage arrangements that consumers may purchase to help them pay for health care services do not comply with some or all of the federal health insurance requirements codified in Title XXVII of the PHSA, Part 7 of ERISA, and Chapter 100 of the IRC. This report focuses on such arrangements ( Table 1 ). The health coverage arrangements listed in Table 1 can be divided into two categories: 1. Exempted Health Coverage A rrangements : Those that meet a federal definition of health insurance but that are exempt from compliance with some or all applicable federal health insurance requirements. 2. Noncompliant Health Coverage A rrangements : Those that the federal government has not explicitly exempted from compliance with federal health insurance requirements and that do not necessarily comply with those requirements. The arrangements listed in Table 1 are summarized in the remainder of this report. Each summary includes a brief description of the arrangement, its status with respect to complying with federal health insurance requirements, and the history of its status. The summaries also include information about whether and how the arrangements are subject to state regulatory authority. Where available, estimates of enrollment in an arrangement are provided. Exempted Health Coverage Arrangements The arrangements discussed in this section have the following in common: they meet a federal definition of health insurance (i.e., they meet the federal definition of health insurance coverage or group health plan), but they are exempt from compliance with some or all applicable federal health insurance requirements. For most of the arrangements discussed in this section, the exemption is explicit in federal statute, regulations, or guidance (see Table 1 ). Group Health Plans Covering Fewer Than Two Current Employees Both fully insured and self-insured group health plans covering fewer than two current employees are exempt from all federal health insurance requirements. This includes retiree-only plans , provided they cover fewer than two current employees. If retiree benefits are offered through the same plan offered to current employees (and there are two or more current employees enrolled in such plan), then the retiree benefits are not exempt from federal health insurance requirements. The exemption was established in the Health Insurance Portability and Accountability Act (HIPAA; P.L. 104-191 ). HIPAA set forth parallel exemptions from federal health insurance requirements for group plans covering fewer than two current employees in Title XXVII of the PHSA, Part 7 of ERISA, and Chapter 100 of the IRC. After the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended) amended, reorganized, and renumbered Title XXVII of the PHSA, the exemption that had been in the PHSA ceased to exist. However, in the preamble to an interim final rule implementing ACA provisions related to grandfathered plans (see " Grandfathered Plans " in this report), the Department of Health and Human Services (HHS) stated that it would not enforce HIPAA or ACA requirements with respect to group health plans covering fewer than two current employees, including retiree-only plans. HHS encouraged states not to enforce the requirements, either, and said the federal government would not cite states for failing to enforce in this situation. Given an Administration's authority to promulgate regulations and issue administrative guidance relating to federal health insurance standards, it is possible that an Administration may reconsider its position on enforcement, but no Administration has done so to date. States may impose their own requirements on group health plans covering fewer than two current employees (including retiree-only plans), provided the plans are fully insured. States do not have the authority to regulate self-insured plans. CRS did not find estimates of enrollment in group health plans covering fewer than two current employees. Excepted Benefits In general, health plans in their provision of excepted benefits are exempt from all federal health insurance requirements. A diverse collection of insurance benefits can be considered excepted benefits, including auto liability insurance, limited-scope dental and vision benefits, benefits for long-term care, specific disease coverage, and supplemental Medicare plans (i.e., Medigap plans). Per federal statute, there are four categories of excepted benefits. One category is exempt from complying with all federal health insurance requirements in all circumstances; the other three categories are exempt from complying with all of the requirements only when specified conditions are met. (See Table 2 for details.) The exemption for excepted benefits and the conditions for exemption were established under HIPAA. HIPAA set forth parallel exemptions and conditions in Title XXVII of the PHSA, Part 7 of ERISA, and Chapter 100 of the IRC. Enactment of the ACA modified the PHSA exemption in such a way that some federal requirements would apply to excepted benefits under the PHSA. However, given that the ERISA and IRC exemptions for excepted benefits remained unchanged, HHS stated it would not enforce HIPAA or ACA requirements on excepted benefits and encouraged states not to enforce the requirements, either. States may impose requirements on excepted benefits, provided the benefits are not self-insured. CRS did not find estimates of enrollment in the various types of excepted benefit plans. Short-Term, Limited-Duration Insurance Short-term, limited-duration insurance (STLDI) is defined as health insurance coverage provided pursuant to a contract with a health insurance issuer that meets the following standards: the contract for the coverage must have a specified expiration date that is less than 12 months after the original effective date of the contract and cannot last longer than 36 months, taking into account renewals or extensions, and the contract and application materials must display a notice as specified in federal regulations indicating that the coverage does not have to comply with federal requirements. Additionally, the 36-month maximum duration is severable from the rest of the definition, meaning the definition would be operative even if the 36-month maximum duration were challenged in court and found invalid or unenforceable. The federal definition of STLDI has changed twice since it was established. STLDI was first defined in regulations issued in 1997. The term was redefined in regulations issued in 2016, and again in regulations issued in 2018. (See Table 3 for details.) Although the definition of STLDI has changed, the applicability of federal health insurance requirements to STLDI has remained the same. STLDI historically has not and currently does not have to comply with federal health insurance requirements. Although STLDI is health insurance coverage generally sold in the individual market, it is excluded from the federal definition of individual health insurance coverage. Per the preamble to the final rule on STLDI, this exclusion from the definition of individual health insurance coverage provides the basis of STLDI's exemption from federal health insurance requirements. State regulation of STLDI varies. Some states impose restrictions on STLDI that are more prohibitive than what is allowed under the federal definition. For example, 22 states (including the District of Columbia [DC]) impose expiration dates shorter than the 12 months allowed under federal law. States may opt to place additional restrictions on STLDI that are not addressed under federal law. For example, 34 states (including DC) require that individuals enrolled in STLDI have access to external appeals processes and 3 states restrict how issuers can vary rates for STLDI (e.g., Minnesota prohibits gender rating for STLDI policies). States also may ban the sale of STLDI in the state, as four states have done. The most recent change to the definition of STLDI has been in effect for less than a year, and enrollment data for the new policies are not yet available. For a discussion of projected estimates of enrollment in STLDI under the latest definition, see the final rule on STLDI. Student Health Insurance Coverage Student health insurance coverage is a type of individual health insurance coverage that may be provided only to students enrolled in an institution of higher education and their dependents. The coverage has to meet the following conditions: it cannot be available to anyone other than a student in an institution of higher education and a student's dependent(s), it cannot condition eligibility for the coverage on any health status-related factor of a student or a student's dependent(s), and it must meet requirements imposed under state law. As a type of individual health insurance coverage, fully insured student health insurance coverage would be required to comply with federal health insurance requirements that apply to individual coverage. However, regulations provide that it is exempt from complying with specified requirements that otherwise apply to individual health insurance coverage. (See Table 4 for details.) Student health insurance coverage was defined and its exemption status was established through the rulemaking process in response to ACA Section 1560(c), which states, "Nothing in this title (or an amendment made by this title) shall be construed to prohibit an institution of higher education (as such term is defined for purposes of the Higher Education Act of 1965) from offering a student health insurance plan, to the extent that such requirement is otherwise permitted under applicable Federal, State, or local law." In the preamble to the proposed rule on student health insurance coverage, HHS noted that it proposed to exempt student health insurance coverage from guaranteed issue and renewal, minimum actuarial value requirements, and the single risk pool requirement because it believed that having to comply with the requirements "would effectively prohibit institutions of higher education from being able to offer these [student health insurance coverage] plans" and doing so would not be in keeping with ACA Section 1560(c). These regulatory exemptions went into effect for student health insurance coverage beginning on or after July 1, 2012. The exemption from rate review requirements was established later and went into effect for student health insurance plans beginning on or after July 1, 2018. HHS acknowledges that it does not have the authority to regulate self-insured student health plans, which means the federal health insurance requirements and the exemptions listed in Table 4 apply only to fully insured student plans. States, however, can regulate fully insured and self-insured student health plans. According to data from the National Association of Insurance Commissioners, in 2017, there were about 1.1 million student health insurance policies written and nearly 1.3 million covered lives. Self-Insured, Nonfederal Governmental Plans A nonfederal governmental plan is a governmental group health plan that is not sponsored by the federal government. Examples of entities that may sponsor nonfederal governmental plans are states, counties, school districts, and municipalities. Like private employers, sponsors of nonfederal governmental plans can choose to offer self-insured or fully insured plans. If a sponsor of a nonfederal governmental plan offers a self-insured plan, the sponsor may elect to exempt the plan from the specified federal requirements listed in Table 5 . The sponsor may choose to exempt the plan from some or all of the listed requirements. For example, a sponsor may elect to exempt its plan only from complying with the mental health parity requirement. The exemption for self-insured, nonfederal governmental plans was established in the PHSA under HIPAA as an exemption from seven federal requirements. Because of how the ACA amended and reorganized the PHSA, the exemption was modified and, as of September 2010, self-insured, nonfederal governmental plans may opt out of only the four requirements listed in Table 5 . Because these plans are self-insured group health plans, states do not have the authority to regulate these plans. According to an analysis of data published by the Center for Consumer Information & Insurance Oversight, as of June 21, 2019, at least 174 nonfederal governmental entities across 35 states have elected to exempt at least one self-insured plan they offer from one or more of the four requirements. Nearly all of the 174 entities offer at least one plan that is exempt from the mental health parity requirement; significantly fewer entities offer plans that are exempt from each of the other three requirements. About 11% of the 174 entities offer at least one plan that is exempt from all four requirements. CRS did not find estimates of enrollment in self-insured, nonfederal governmental plans. Grandfathered Plans The ACA provided that group health plans and health insurance coverage in which at least one individual was enrolled as of enactment of the ACA (March 23, 2010) could be grandfathered . For as long as a plan maintains its grandfathered status, the plan is exempt from specified federal health insurance requirements established under the ACA. Since grandfathered plans existed as of March 23, 2010, they must comply with applicable federal health insurance requirements that were established prior to enactment of the ACA, as long as the prior requirements do not conflict with the ACA's grandfathered rules. For example, both grandfathered and non-grandfathered plans offered in the individual market must comply with federal health insurance requirements that applied to the individual market prior to enactment of the ACA. However, a grandfathered plan is required to comply with only some ACA requirements that apply to the individual market, whereas a non-grandfathered plan must comply with all such requirements. Table A-1 in the Appendix identifies which federal health insurance requirements apply to grandfathered plans. A plan can lose its grandfathered status. To maintain grandfathered status, a plan must continue to meet specified conditions and avoid making specified changes regarding employer contributions (where applicable), access to coverage, benefits, and cost sharing (e.g., changes in coinsurance requirements). A health plan offered in any market segmentâindividual, small group, large group, or self-insuredâcould be grandfathered. There is no time limitation on grandfathered status; as long as a plan avoids making the specified changes, it can remain a grandfathered plan. Once a plan has lost its grandfathered status, it cannot regain that status. Grandfathered plans generally are not available to new enrollees. Only individuals who have been continually covered and any new dependents can be covered under grandfathered plans in the individual market, and only individuals who have been continually covered, new dependents, and new employees can be covered under self-insured grandfathered plans and grandfathered plans offered in the group market. As of the date of this report, no repository for enrollment data for grandfathered plans was found, but the federal government has commented on enrollment. In October 2018, the Departments of HHS, Labor, and the Treasury commented that "only a small number of individuals are currently enrolled in grandfathered individual health insurance coverage" and "the number of individuals with grandfathered individual health insurance coverage has declined each year since ... [the ACA] was enacted, and the already small number of individuals who have retained grandfathered coverage will continue to decline each year." In February 2019, the Departments issued a request for information on grandfathered group health plans and grandfathered group health insurance coverage. In the request, they noted the following: "It is the Departments' understanding that the number of group health plans and group health insurance policies that are considered to be grandfathered has declined each year since the enactment of ... [the ACA], but many employers continue to maintain group health plans and coverage that have retained grandfathered status." Data from the Kaiser Family Foundation's annual surveys on employer-sponsored health benefits underscore the decline among grandfathered group plans. According to the surveys, the percentage of employers that offer at least one grandfathered plan declined from 72% in 2011 to 22% in 2019. The percentage of covered workers covered under a grandfathered plan declined from 56% in 2011 to 13% in 2019. States may regulate grandfathered plans in the same way they regulate non-grandfathered plansâthey may impose requirements on issuers of grandfathered plans and the plans themselves, provided the state requirements neither conflict with federal law nor prevent the implementation of federal health insurance requirements. States do not have the authority to regulate self-insured grandfathered plans. Transitional Plans The ACA included many new federal requirements that applied to health insurance coverage and the entities that offer such coverage. Some of the requirements were effective shortly after the ACA was enacted, but most became effective for plan years beginning on or after January 1, 2014. Many of the 2014 requirements applied to plans offered in the individual and small-group markets. In the fall of 2013, issuers offering non-grandfathered individual and small-group plans began notifying their enrollees that their coverage would soon be canceled because the plans did not comply with the 2014 ACA requirements. If the individuals and employers enrolled wanted to continue to be covered in the individual or small-group market, they would have to find plans (offered by their current issuer or a different issuer) that complied with the 2014 ACA requirements. In response to the announced plan terminations, CMS issued guidance in November 2013 that established what are often referred to as transitional plans (or grandmothered plans). In the guidance, CMS stated it would not find individual and small-group market plans out of compliance with specified 2014 ACA requirements if the plans did not satisfy such requirements, provided the plans were renewed for plan years starting between January 1, 2014, and October 1, 2014. Pursuant to the guidance, state insurance commissioners could choose whether to enforce compliance with the specified 2014 ACA requirements in their individual and small-group markets. If state insurance commissioners chose not to enforce compliance in one or both of the markets, then issuers selling plans in the market(s) could choose to (but would not be required to) renew coverage for enrollees who otherwise would receive cancellation notices. Table A-1 in the Appendix identifies the ACA requirements with which transitional plans do and do not have to comply. Transitional plans must comply with federal health insurance requirements that went into effect prior to enactment of the ACA and all ACA requirements that went into effect prior to 2014. Initially, the transitional plan guidance applied to plans that were renewed for plan years starting between January 1, 2014, and October 1, 2014. The transitional plan guidance has been extended multiple times (most recently on March 25, 2019); currently, states may allow issuers that have continually renewed transitional plans since 2014 to continue to cover individuals under transitional plans through 2020. In states that allow transitional plans, issuers can choose to continue their transitional plans or not. Discontinued transitional plans cannot be revived. Transitional plans generally are not available to new enrollees. Only individuals who have been continually covered and any new dependents can be covered under transitional plans in the individual market, and only individuals who have been continually covered, new dependents, and new employees can be covered under transitional plans in the small-group market. Most states opted to allow transitional plans in both their individual and small-group markets when the policy was first established. Some states have changed their policies since then. In 2019, transitional plans are available in both the individual and small-group markets in 32 states; most of these states have indicated they will allow transitional plans to continue in their markets through 2020 under the recent federal extension. In four states, transitional plans are allowed in both markets, but issuers have stopped offering transitional plans in each state's individual market. Fifteen states (including DC) either never allowed or no longer allow transitional plans in the state. As of the date of this report, no repository of enrollment data for transitional plans could be found. Given that transitional plans, for the most part, may only be renewed by those currently involved and may not be sold to new consumers, enrollment in transitional plans likely has declined since the plans were established. Noncompliant Health Coverage Arrangements The two health coverage arrangements discussed in this section have the following in common: the federal government has not explicitly exempted them from compliance with federal health insurance requirements, and they do not necessarily comply with those requirements. The arrangements summarized in this section are just two examples that share the aforementioned characteristics. There may be other health coverage arrangements that share the same characteristics, but it is difficult to make a comprehensive list of such arrangements, given that one of their defining characteristics is that the federal government does not appear to have discussed their status with respect to the application of the federal health insurance requirements. Health Care Sharing Ministries A health care sharing ministry (HCSM) is a faith-based organization that shares resources for medical needs among its members. The idea of pooling financial resources for medical needs among a religious community has a long history in the United States. The idea originated with the Amish and Mennonites over a century ago, and other religious groups began offering HCSMs in the 1990s. In general, members of an HCSM are expected to follow a set of religious or ethical beliefs and regularly contribute a payment (e.g., monthly) to cover the medical expenses of other members. The contributions are distributed, either through the HCSM or via a member-to-member match, to members who need funds for health care costs. Members are often responsible for a portion of their health care costs prior to receiving funds from the HCSM, and most HCSMs exclude coverage of specified illnesses, care, or treatments. HCSMs maintain that they are not providing insurance and do not guarantee payment for members' health care costs. However, the federal government does not appear to have defined HCSMs for regulatory or exemption purposes. HCSMs do not necessarily currently comply, and have not historically complied, with federal health insurance requirements. States may choose whether and how to regulate HCSMs operating in their state. As of August 2018, 30 states had opted to explicitly exempt HCSMs from state insurance law (i.e., the HCSM does not have to comply with the state's body of insurance laws), provided the HCSM meets specified requirements. State HCSM requirements vary; examples of requirements include providing to consumers written disclaimers stating the HCSM is not an insurance company and having an annual audit. In the remaining 21 states (including DC), HCSMs have not been explicitly exempted from state insurance law; however, the lack of an explicit exemption does not necessarily mean that such states regulate HCSMs. Regardless of whether a state has exempted an HCSM from its body of insurance laws, a state's role in regulating HCSMs is complex and varied. In states that exempt HCSMs from their insurance laws, state regulators are responsible for ensuring that HCSMs meet the requirements necessary to maintain their exemption and for taking action if they do not. In states that do not exempt HCSMs from their insurance laws, state regulators "can investigate and, if sufficient evidence exists, regulate these plans as unauthorized insurers." In all states, regulators may have roles to play in "investigating fraud, referring cases to the Attorney General's office, and assisting consumers who may have been harmed [by an HCSM]." The Alliance of Health Care Sharing Ministries reports that there are 104 HCSMs in 29 states, and 7 of the 104 are open to new members. As of the date of this report, the alliance estimates enrollment in HCSMs at just under 970,000. Farm Bureau Coverage The American Farm Bureau Federation is a national organization established in 1919 to advocate for the financial and political interests of farmers, ranchers, and others associated with agriculture. There are local farm bureau offices in all 50 states and in Puerto Rico (but not in DC). Membership in a local farm bureau is open to anyone who pays the membership fee, but typically membership is tiered, with members associated with agriculture having a status different from other members (e.g., agriculture-associated members may have voting rights in the organization, whereas other members may not). Each state farm bureau provides member benefits. The benefits include discounts on a variety of products and services, such as hotel stays, farm equipment, and membership in air ambulance networks. Additionally, many state farm bureaus assist their members with obtaining insurance, including health insurance. The assistance with health insurance takes different forms. Many state farm bureaus have agents available to assist their members with finding and enrolling in a health plan; some state farm bureaus sponsor coverage that is available to their members; and at least one state farm bureau is divided in two parts, with one part being an insurance company that serves the farm bureau's members. As of the date of this report, three statesâIowa, Kansas, and Tennesseeâhave enacted laws that allow the farm bureaus in each state to offer a different type of health coverage arrangement. Each state allows the state's farm bureau to sponsor health benefits coverage that is not defined by the state as insurance and is not subject to the state's insurance laws, provided the coverage and the farm bureau comply with specified requirements. (See Table 6 for details.) Iowa and Kansas passed their laws recentlyâin 2018 and 2019, respectivelyâand Tennessee passed its law in 1993. The farm bureaus in Iowa and Tennessee currently offer such coverage; the Kansas Farm Bureau's coverage became available for purchase beginning October 1, 2019, with coverage starting as early as January 1, 2020. As explained above, the arrangements sponsored by farm bureaus in Iowa, Kansas, and Tennessee are not considered insurance in their respective states and do not have to comply with state requirements that apply to insurance. Additionally, farm bureau coverage in these three states does not necessarily comply with any federal health insurance requirements. However, the federal government does not appear to have defined such coverage for regulatory or exemption purposes. In 2017, about 23,000 individuals had Tennessee Farm Bureau coverage. Estimates for the Iowa Farm Bureau were not found. Kansas Farm Bureau estimates that 11,000-42,000 residents of Kansas will be covered by its health benefits coverage. Appendix. Applicability of Selected Federal Health Insurance Requirements to Grandfathered and Transitional Plans Table A-1 shows the applicability of selected federal health insurance requirements to grandfathered and transitional plans. Both types of plans are described in detail in this report; as a reminder, any type of plan could be grandfathered, but only fully insured small-group plans and individual-market plans could become transitional plans. The check marks in the table indicate that the grandfathered or transitional plan must comply with the requirement. The term N.A. indicates that the requirement does not apply to the specified market segment, regardless of whether the plan is a grandfathered or transitional plan. The use of Exempt in the table indicates that the grandfathered or transitional plan is exempt from complying with the requirement. For example, the ACA's rate review requirement applies only to fully insured small-group plans and individual market plans. Grandfathered plans do not have to comply with the requirement, which is why the table indicates that grandfathered fully insured small-group plans and grandfathered individual plans are "Exempt" from the requirement. Transitional plans do have to comply with the requirement, which is why the table has check marks for these plans. The rate review requirement does not apply to fully insured large-group plans or self-insured plans; as such, the table indicates that the requirement is not applicable (N.A.) to grandfathered versions of these plans.


Introduction A pension is a voluntary benefit offered by employers to assist employees in preparing for retirement. Pension plans may be classified according to whether they are (1) defined benefit (DB) or defined contribution (DC) plans and (2) sponsored by one or more than one employer. In DB plans, participants typically receive regular monthly benefit payments in retirement (which some refer to as a "traditional" pension). In DC plans, of which the 401(k) plan is the most common, participants have individual accounts that can provide a source of income in retirement. This report focuses on DB plans. Pension plans are also classified by whether they are sponsored by one employer (single-employer plans) or by more than one employer (multiemployer and multiple-employer plans). Multiemployer pension plans are sponsored by more than one employer (often, though not required to be, in the same industry) and maintained as part of a collective bargaining agreement. Multiple-employer plans are sponsored by more than one employer but are not maintained as part of collective bargaining agreements. Multiple-employer plans follow the same funding rules as single-employer plans and are generally not reported separately. This report focuses on single-employer plans. Except where noted, references to single-employer plans in this report include multiple-employer plans. To protect the interests of pension plan participants and beneficiaries, Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406 ). The law is codified in the Internal Revenue Code (26 U.S.C.) and Labor Code (29 U.S.C.). ERISA sets standards that private-sector pension plans must follow with regard to plan participation (who must be covered); minimum vesting requirements (how long a person must work for an employer to be covered); fiduciary duties (how individuals who oversee the plan must behave); and plan funding (how much employers must set aside to pay for future benefits). In addition, ERISA established the Pension Benefit Guaranty Corporation (PBGC), which is a government corporation that insures DB pension plans covered by ERISA in the case of plan termination. ERISA covers only private-sector pension plans and plans established by nonprofit organizations. It exempts pension plans established by the federal, state, and local governments and by churches. The funding relief provisions discussed in this report generally apply only to plans covered by ERISA. Basics of Single-Employer Defined Benefit Pension Plan Funding Pension funding consists of several elements. These include the value of plan benefits that participants will receive in the current and in future years; the amount a plan has set aside to pay for these benefits; and the employer contributions required each year to ensure the plan has sufficient funds to pay benefits when participants retire. The amount of a participant's benefit in a single-employer DB plan is based on a formula that typically uses a combination of length of service, accrual rate, and average of final years' salary. For example, a plan might specify that retirees receive an amount equal to 1.5% of their pay for each year of service, where the pay is the average of a worker's salary during his or her highest-paid five years. In general, ERISA requires DB plans to have enough assets set aside to pay the benefits owed to participants. For various reasons, plans may have less or more than this amount. Employers that sponsor DB plans are required to make annual contributions to their plans to ensure they ultimately reach that 100% funding goal. Typical Defined Benefit Plan Balance Sheet Figure 1 depicts a typical DB pension plan's balance sheet. It consists of (1) plan assets, which are the value of the investments made with accrued employer (and employee, if any) contributions to the plan, and (2) plan liabilities, which are the value of participants' benefits earned under the terms of the plan. Plan assets are invested in equities (such as publicly-traded stock), debt (such as the U.S. Treasury and corporate bonds), private equity, hedge funds, and real estate. Plan Assets Pension plans are required to report the value of plan assets using two methods: (1) market values (the value at which assets can be sold on a particular date) and (2) smoothed, or actuarial , values (the average of the past, and sometimes expected future, market values of each asset). Actuarial values are used to determine the 100% funding goal and any additional employer contributions necessary to achieve that goal. The smoothing of asset values prevents large swings in asset values and creates a more predictable funding environment for plan sponsors. Some advocates of reporting market values note that smoothed values are often higher than market values (particularly during periods of market declines), which could overstate the financial health of some pension plans. Some advocates of smoothing argue that market values are useful only if a plan needs to know its liquidated value (e.g., if the plan had to pay all of its benefit obligations at one point in time), which is unlikely to be the case as most employers sponsoring pension plans are unlikely to enter bankruptcy. Plan Liabilities A pension plan's benefits are a plan liability spread out over many years in the future. These future benefits are calculated and reported as present values (also called current values). Using a formula, benefits that are expected to be paid in a particular year in the future are calculated so they can be expressed as a present value. This process is called discounting , and it is the reverse of the process of compounding , which projects how much a current dollar amount will be worth at a point in the future. The formula by which future values are calculated as present values is shown in Figure 2 . Figure 3 shows a simplified example of a DB pension benefit calculation. In this example, it is assumed that at the beginning of year 1, the worker has already earned a benefit of $100 per year in retirement, which is expected to begin in year 5. Retirement is expected to last four years. Each of the payments is made at the beginning of the year and is discounted using the present value formula in Figure 2 and assuming an interest rate of 10%. In this example, the first benefit is received at the beginning of year 5, so that benefit payment is discounted over four years. The benefits for the following three years are also discounted to beginning of year 1 dollar amounts and are then summed, resulting in a benefit value of $238.16 at the beginning of year 1. The calculated present value of the benefit payments depends on the year in which the benefit is calculated. For example, as a worker moves closer to the expected date of retirement and recalculates the present value of the benefit, the calculated value of the obligation increases. For example, when calculated at the beginning of year 2, the simplified pension benefit has a present value of $261.97 in year 2 dollars . When calculated at the beginning of year 3, the benefit has a present value of $288.17 in year 3 dollars . Defined Benefit Plan Funding Ratio The DB plan funding ratio compares the value of a plan's assets with the present value of a plan's liabilities and is often used as an indicator of the financial health of a plan. The DB plan funding ratio is calculated as A funding ratio of 100% indicates that the DB plan has set aside enough funds to pay the present value of the plan's future benefit obligations. Funding ratios that are less than 100% indicate that the DB plan has not set aside enough to meet the calculated value of its future benefit obligations. Because benefit obligations are typically paid out over a period of 20 to 30 years, participants in even an underfunded plan will likely receive their promised benefits in the near term. However, if the underfunding persists without additional contributions or higher investment returns, plan participants in an underfunded plan might not receive 100% of their promised benefits in the future. Returning to the example above, setting aside $238.16 at the beginning of year 1 would fund the year 1 value of the benefit. At the beginning of year 2, the benefit has a recalculated value of $261.97 in year 2 dollars. Because $238.16 was set aside at the beginning of year 1â and assuming no investment gains or losses and no additional pension benefits âan additional contribution of $23.81 ($261.97 - $238.16) is needed to fund the value of the benefit as calculated at the beginning of year 2. Likewise, at the beginning of year 3, the benefit has a recalculated value of $288.17 in year 3 dollars. Because $238.16 was set aside at the beginning of year 1, and $23.81 more was contributed at the beginning of year 2â and assuming no investment gains or losses and no additional pension benefits âan additional contribution of $26.20 ($288.17 - $261.97) is needed to fund the value of the benefit as calculated at the beginning of year 3. This discussion of the example in Figure 3 has reviewed the funding ratio and required payments for only the first three years displayed. In practice, the DB plan funding ratio would continue to be recalculated and payments necessary to satisfy any DB plan funding ratio shortfalls would continue to be required each year to ensure the DB plan funding obligation is fully satisfied. The present value of a dollar amount is inversely related to the assumed interest rate. As the interest rate increases, present value decreases; as the interest rate decreases, present value increases. In the above example, if the interest rate is 15%, then the pension benefit has a value of $187.72 calculated at the beginning of year 1, $215.88 calculated at the beginning of year 2, and $248.26 calculated at the beginning of year 3. In this modification of the simplified example, with the only difference being a 15% interest rate, the pension benefit would be fundedâ and assuming no investment gains or losses and no additional pension benefits âwith contributions of $187.72 at the beginning of year 1; $215.88 - $187.72 = $28.16 at the beginning of year 2; and $248.26 - $215.88 = $32.38 at the beginning of year 3. This example shows payments for the first three years; in practice, contributions would continue until the obligation is fully satisfied. Note that the amounts of the yearly payments differ depending on the interest rate used. Compared with the payments in the 10% interest rate example, the initial payment in the 15% example is lower ($187.72 versus $238.16) but subsequent payments are higher (e.g., year 2 payments are $28.16 using the 15% interest rate and $23.81 using the 10% interest rate). Over time, the required payments in both casesâ assuming no investment gains or losses and no additional pension benefits âsum to the total benefits received in retirement. The interest rate used by single-employer DB plans is discussed later in this report. Annual Employer Contributions to Defined Benefit Plans ERISA sets out requirements for the minimum required contribution , which is amount of money that must be contributed each year to a DB pension plan. In general, the minimum required contribution is the sum of (1) the value of benefits earned by participants in the plan year (the target normal cost ), (2) installment payments resulting from plan underfunding in previous years (the shortfall amortization charge ), and (3) installment payments resulting from Internal Revenue Service- (IRS-) approved waived required contributions in previous years (the waiver amortization charge ). Target Normal Cost The target normal cost represents the value of pension benefits that are earned or accrued by employees in a plan year and the cost to administer these benefits (minus any mandatory employee contributions). Amortization Charges A DB plan's funding can change in a given year as a result of changes to participants' benefits, employer contributions, and circumstances or events outside the plan's control. Plan underfunding could increase from events such as a decrease in plan assets due to declines in the stock market or an increase in plan liabilities due to decreases in interest rates. In order for a plan to remain fully funded, employers must increase their plan contributions to make up for losses that are outside the plan's control. Employers are not required to make up for the losses all at once. Rather, they may make installment payments to make up for plan losses over a number of years. Plan underfunding is paid off in installment payments via amortization . The amortization period is the length of time over which a plan can spread the installment payments. Shortfall Amortization Charge A plan's funding target is the present value of all benefits earned by participants as of the beginning of the year. A plan's funding shortfall is the amount by which the funding target is greater than the value of plan assets. Various factors can cause funding shortfalls, such as investment losses and decrease in interest rates. In general, PPA required plan underfunding resulting from funding shortfalls to be amortized over a period of seven years. Waiver Amortization Charge Employers that face a temporary substantial business hardship can apply to the IRS for a funding waiver. Missed minimum required contributions as a result of receiving an IRS funding waiver must be amortized over five years. The waiver amortization charge is the amount of a plan's installment payment that amortizes the missed contributions. Single-Employer Defined Benefit Pension Plan Data Table 1 provides data on single-employer DB pension plans. In 2018, there were over 23,000 of such plans with 26.2 million participants. According to PBGC, 81.4% of plans (containing 95.2% of plan participants) were underfunded in 2016. The total amount of underfunding in these plans was $625.4 billion. In addition, 18.6% of plans (containing 4.8% of participants) were overfunded in 2016. The total amount of overfunding in these plans was $15.3 billion. Figure 4 shows the funding percentage of the 100 largest corporate DB pension plans from 2015 to 2020. The most recent data show that in February 2020, these plans had $1.6 trillion in assets and $1.9 trillion in projected benefit obligations. The funding percentage (assets as a percentage of benefit obligations) was 82.2%, and total underfunding was $0.3 trillion. The Pension Protection Act of 2006 The Pension Protection Act of 2006 (PPA; P.L. 109-280 ) was the most recent major legislation to affect pension plan funding. Among other provisions, PPA established new funding rules for single- and multiple-employer plans and required that plans become 100% funded over a certain time period. PPA specified interest rates and other actuarial assumptions that plans must use to calculate their funding targets and target normal costs. PPA gave plans three years to transition to the new funding requirements. PPA also created special rules for certain types of plans, including those sponsored by certain government contractors, commercial airlines, and rural cooperatives. Pension Protection Act Interest Rates PPA specified that pension plans discount their future benefit obligations using three different interest rates. The rates, called segment rates, used in the calculation depend on the date on which benefit obligations are expected to be paid and the corresponding rates on the corporate bond yield curve. The segment rates are calculated as the average of the corporate bond yields within the segment for the preceding 24 months. The IRS publishes the segment rates on a monthly basis. The first segment is for benefits payable within five years. The first segment rate is calculated as the average of short-term bond yields (with a maturity less than five years) for the preceding 24 months. Likewise, the second and third segments are for benefits payable after 5 years to 20 years and after 20 years, respectively. The second and third segment rates are calculated similarly to the first segment rates, using bonds of appropriate maturities. Pension Protection Act Amortization Periods PPA required that shortfall amortization charges (funding shortfalls as a result of, for example, investment losses) be amortized over seven years and waiver amortization charges (from missed required minimum contributions) be amortized over five years. Amortization payments include interest. Pension Protection Act Special Rules for Certain Plans PPA outlined special rules for certain pension plans. Some of the rules have expired; others have been extended or expanded by subsequent legislation. Special Rules for Certain Commercial Airline Industry Plans PPA provided special funding rules for certain eligible plans maintained by (1) a commercial passenger airline or (2) an employer whose principal business is providing catering services to a commercial passenger airline. Eligible plans that met certain benefit accrual and benefit increase restrictions could (1) use a 17-year amortization period, instead of the seven years required by PPA, beginning in 2006 or 2007 and (2) use an 8.85% interest rate, instead of the required segment rates, for the purposes of valuing benefit obligations. Eligible plans that did not meet certain benefit accrual and benefit increase restrictions could choose to use a 10-year amortization period for the first taxable year, beginning in 2008. Special Rules for Certain Government Contractor Plans PPA delayed the date for certain government contractor plans to adopt the new funding rules to the 2011 plan year. Eligible plans were defense industry contractors whose primary source of revenue was derived from business performed under government contracts that exceeded $5 billion in the prior fiscal year. Special Rules for Certain Pension Benefit Guaranty Corporation Settlement Plans PPA delayed the date for certain PBGC settlement plans to adopt the new funding rules to the 2014 plan year. Eligible plans were those in existence as of July 26, 2005, and (1) sponsored by an employer in bankruptcy proceedings giving rise to a claim of $150 million or less, and the sponsorship of which was assumed by another employer, or (2) that, by agreement with PBGC, were spun off from plans that were subsequently terminated by PBGC in involuntary terminations. Funding Relief and Other Modifications for Single-Employer Plans Since PPA's enactment in 2006, Congress has modified funding rules for pension plans several times. Funding relief provisions have delayed the implementation dates of some PPA provisions, extended amortization periods, or changed interest rates. Some funding relief has been directed toward all single-employer DB plans; other modifications of funding rules have been targeted to specific types of pension plans, such as plans for certain cooperative and charitable organizations and for community newspapers. An extension of amortization periods allows plans a greater amount of time to pay off unfunded liabilities, meaning that plans can contribute less money per year over a greater number of years. Changes in interest rates modify the timing of required employer contributions. As previously mentioned, a higher interest rate decreases the present value of plan liabilities, which means employers can contribute less today to fund a future benefit. The dollar amount of the benefit that a participant will receive in the future remains unchanged. Relative to a lower interest rate, a higher interest rate allows plans to contribute relatively smaller amounts in the near term but will have to be made up with higher contributions in the longer term. A lower interest rate does the oppositeâit increases the present value of plan liabilities, requiring more employer contributions in the near term (and fewer in the long term). Funding Relief and Other Modifications Since the Pension Protection Act The following sections describe funding relief provisions and other funding rule modifications in chronological order, where feasible, since PPA. Special Rules for Certain Plans in the Commercial Airline Industry The U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 ( P.L. 110-28 ) provided funding relief for plans operated by certain commercial airlines and airline catering companies. As described above, PPA had extended the amortization period to either 10 or 17 years for these plans. P.L. 110-28 specified that eligible plans that had chosen the 10-year amortization period could use an interest rate of 8.25% for purposes of calculating the funding target for each of those 10 years. Delay of Certain Pension Protection Act Rules The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA; P.L. 110-458 ) delayed the implementation of the PPA transition rules, giving plans additional time to become fully funded (given the decline in asset values due to the 2007-2009 economic downturn). Extended Amortization Periods The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 ( P.L. 111-192 ) allowed plans to amortize underfunding resulting from the 2007-2009 market downturn using one of two alternative amortization schedules. Pension plan sponsors could amortize their funding shortfalls over either (1) 9 years, with the first 2 years of payments consisting of interest only on the amortization charge and the next 7 years consisting of interest and principal, or (2) 15 years. Plan sponsors that chose one of these amortization schedules were required to make additional contributions to the plan if the plan sponsors paid excess compensation or declared extraordinary dividends, as defined in P.L. 111-192 . Interest Rate Corridors The Moving Ahead for Progress in the 21 st Century Act (MAP-21; P.L. 112-141 ) established a funding corridor to provide minimum and maximum interest rates used in calculating plan liabilities. The minimum and maximum rates were initially calculated as 90% and 110%, respectively, of the average of corporate bond yields for the segment over the prior 25-year period. If the 24-month segment interest rate as calculated under PPA is below the minimum percentage of the funding corridor, the interest rate is adjusted upward to the minimum. If the 24-month segment interest rate is higher than the maximum, it is adjusted downward to the maximum. MAP-21 adjusted the minimum and maximum percentages surrounding the baseline rate over time to become 70% and 130%, respectively, by 2016 (essentially widening the corridor). When interest rates increase (which occurs when the 24-month rate is adjusted upward to the minimum rate), the present value of future benefit obligations decreases, and required plan contributions decrease. When companies contribute less to their pension plan, lower plan contributions increase companies' taxable income, which results in increased Treasury revenue. Since MAP-21, provisions in enacted legislation twice delayed the beginning of the widening of the funding corridor. First, the Highway and Transportation Funding Act of 2014 (HTF; P.L. 113-159 ) delayed the beginning of widening of the funding corridor until 2018. Later, the Bipartisan Budget Act of 2015 (BBA; P.L. 114-74 ) delayed it until 2021. Table 2 shows the applicable minimum and maximum percentages under MAP-21, HTF, and BBA. Figure 5 shows a hypothetical example of how segment rates are determined using the funding corridors. The red line shows the average of a segment's interest rates for the prior 25 years. The yellow and gold lines indicate the minimum and maximum rates around the 25-year average under the MAP-21 provisions. The light green and dark green lines indicate the widening of the corridors around the 25-year average under the HTF provisions (starting in 2018). The light blue and dark blue lines are the minimum and maximum rates around the 25-year averages in current law, as passed in the BBA (starting in 2021). Because of the HTF and BBA extensions, the minimum and maximum corridors have remained at 90% and 110%, respectively, since 2012. The following example demonstrates how segment rates are adjusted. If Treasury determines that the segment rate is above the maximum segment rateâpoint (1) in Figure 5 âthen Treasury adjusts the segment rate downward until it equals the proposed maximum segment rate. If Treasury determines that the segment rate is at or below the maximum segment rate and at or above the minimum segment rateâpoint (2) in Figure 5 âTreasury does not adjust the segment rates. If Treasury determines that the segment rate is below the minimum segment rateâpoint (3) in Figure 5 âthen Treasury adjusts the interest rate upward until it equals the proposed minimum segment rate. For example, in April 2020, the first segment rate before adjustment was 2.68%. Adjusted for the 25-year average bond yields, the first segment rate was 3.64%. Special Rules for Certain Cooperative and Charity Pension Plans Congress has authorized special funding rules for plans sponsored by specific types of employers, such as rural cooperatives and certain charities. PPA delayed the implementation of funding rules for certain cooperatives. Subsequent legislation expanded this delayed effective date to certain charities. Later legislation modified funding rules for these plans, referred to as Cooperative and Small Employer Charity (CSEC) pension plans. With two exceptions, CSEC plans are multiple-employer pension plans established by eligible cooperatives and certain charitable organizations to provide retirement benefits for their employees. Delay of PPA Funding Rules PPA provided a delayed effective date of January 1, 2017, for certain multiple-employer cooperative plansâsuch as pension plans for agriculture, electric, and telephone cooperativesâto adopt the new funding rules. The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 ( P.L. 111-192 ) extended PPA's delayed effective date to apply to certain charitable organizations' pension plansâmultiple-employer plans whose employers are charitable organizations described in 26 USC Â§501(c)(3). Establishment of CSEC Funding Rules The Cooperative and Small Employer Charity Pension Flexibility Act of 2013 ( P.L. 113-97 ) established funding rules for and provided a definition of CSEC pension plans. Among other provisions, this act permanently exempted these plans from PPA's funding rules and outlined minimum funding standards for CSEC plans. Plans must indicate if they use the CSEC-specific funding rules in their required annual reporting to the Department of Labor (DOL). Table A-1 provides a list of CSEC plans and funded status in the 2017 plan year. Expanded Definition of CSEC Plans in 2015 Section 3 of Division P of the Consolidated and Further Continuing Appropriations Act, 2015 ( P.L. 113-235 ) expanded the definition of CSEC plans to include plans maintained by an employer that meet several criteria. It appears that the Boy Scouts of America Master Pension Trust is the only plan that meets these expanded criteria. Expanded Definition of CSEC Plans in 2020 Section 3609 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136 ) applies CSEC funding rules to plans sponsored by certain charitable employers "whose primary exempt purpose is providing services with respect to mothers and children," among other criteria. It appears that the pension plan sponsored by March of Dimes is the only plan that meets these expanded criteria. Special Rules for Community Newspaper Plans Section 115 of the Setting Every Community up for Retirement Enhancement Act of 2019 (SECURE Act, enacted as Division O of the Further Consolidated Appropriations Act of 2020; P.L. 116-94 ) provided special funding rules for pension plans operated by certain community newspapers that had no benefit increases for participants after December 31, 2017. Community newspaper plans are those maintained by certain private community newspaper organizations that are family-controlled and have been in existence for 30 or more years. For these plans, the SECURE Act increased the interest rate to 8%, and extended the amortization period from 7 to 30 years. Delayed Due Date for 2020 Plan Contributions Section 3608 of the CARES Act ( P.L. 116-136 ) allows contributions that are due in calendar year 2020 to be made, with interest, on January 1, 2021. Section 3608 also allows plans to use the funding percentage for the 2019 plan year, rather than the 2020 plan year (which would likely be lower), in determining whether plans must impose benefit restrictions. Policy Considerations Policymakers and stakeholders might consider some of the policy implications of single-employer DB pension plan funding relief. The considerations include the rationale for providing relief, the effects of lower levels of plan assets on participant benefits and PBGC, and the effect on the federal budget. Funding relief results in lower employer contributions to DB plans in the near term. Among the rationales for funding relief is that it allows employers the flexibility to use funds for other priorities (such as retaining or hiring employees). For example, 74 trade associations said in a 2009 letter to policymakers that, "[P]roviding defined benefit funding relief is directly related to improving the economy and employment." On the other hand, some policymakers oppose funding relief to specific industries or companies because they provide "a special-interest bailout" and set both "bad policy and bad precedent." Some stakeholders have expressed concern that employers adopting funding relief measures might use the funds saved via reduced contributions for non-core business activities. For example, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 ( P.L. 111-192 ) limited the ability of employers that adopted funding relief measures to provide excess employee compensation or extraordinary dividends. Although employer contributions and plan assets are lower following funding relief, participants' benefits are not necessarily at riskâalthough they may be under certain circumstances. Participants in DB plans that receive funding relief remain entitled to their benefits; funding relief does not reduce these benefits. For employers that do not become bankrupt, modifying the timing of contributions generally would not be problematicâover time, the employer would need to make all required contributions for participants to receive their full benefits. However, in the case of employer bankruptcy, the timing of contributions may negatively affect both participants' benefits and PBGC. Participants with benefits greater than the PBGC maximum guarantee or with non-guaranteed benefits might see reduced benefits when PBGC becomes trustee of their plan. Following funding relief, there are fewer plan assets available from which to pay non-guaranteed benefits because funding relief lowers employer contributions to DB plans in the short term. In addition, PBGC receives fewer assets from the plans that it trustees, which harms its financial position. ERISA requires PBGC to be self-supporting and receives no appropriations from general revenue. ERISA states that the "United States is not liable for any obligation or liability incurred by the corporation." Increasingly large amounts of unfunded liabilities in terminated plans may burden PBGC's single-employer insurance program. Although PBGC ended FY2019 with a surplus of $8.6 billion, the effects of (1) the Coronavirus Disease 2019 (COVID-19) pandemic on the financial health of employers and (2) the market downturn in early 2020 on the value of DB plan assets will likely worsen the funding position of single-employer pension plans and PBGC's financial position. Funding relief can result in short-term revenue for Treasury and PBGC. Because employer contributions to pension plans are generally tax deductible, decreasing a plan's required contributions for a year (either through increasing the interest rate or extending the amortization period) increases the plan's taxable income. Some stakeholders point out that because funding relief provides revenue to Treasury, it has been used for budgetary offsets without regard to the policy justifications. Funding relief can positively affect PBGC finances because greater DB plan underfunding results in higher variable-rate premiums (premiums based on the amount of plan underfunding) paid by employers to PBGC. Appendix. Data on CSEC Plans in 2017 Table A-1 provides data on Cooperative and Small Employer Charity (CSEC) plans in the 2017 plan year (the most recent year for which complete data are available). In total, CSEC plans had about 239,000 participants, $19.6 billion in assets, and a total funding target of $20.7 billion in 2017. The largest plan by number of participants in 2017 was the Retirement Security Plan, which had assets of $8.6 billion and a total funding target of $9.2 billion in that year. To determine which plans use CSEC funding rules, the Congressional Research Service (CRS) analyzed public-use Form 5500 data from the Department of Labor (DOL) for the 2014 to 2017 plan years. 2014 is the first year that Form 5500 includes an option to indicate the use of CSEC funding rules (following P.L. 113-97 ), and 2017 is the most recent year for which complete data are available. Most private-sector pension plans are required to submit annual forms to the Internal Revenue Service (IRS), DOL, and the Pension Benefit Guaranty Corporation (PBGC). These forms generally include information about the plan, such as the number of participants, financial information, and the companies that provide services to the plan. In addition to Form 5500, pension plans are generally required to file information in specific schedules. For example, most single-employer and multiple-employer plans are required to file Schedule SB, which contains information specific to these plans. Each pension plan's Form 5500 and required schedules are available by search on DOL's website. Because data are self-reported, Table A-1 may not capture all plans that used CSEC funding rules or may include non-CSEC plans that erroneously identified as CSEC plans. Table A-1 provides data on private-sector defined benefit (DB) pension plans that indicated using CSEC funding rules on their 2014, 2015, 2016, or 2017 Schedule SB filings. Twenty-eight plans indicated using CSEC funding rules in multiple years. One plan, the Johns Hopkins Health System Corporation Plan, appeared to start using CSEC funding rules in 2017. Table A-1 provides the total number of participants, actuarial value of assets, total funding target, and funding target attainment percentage for the 29 plans (including the Johns Hopkins plan). In addition to the Johns Hopkins plan, 10 plans indicated using CSEC funding rules in a single year but not in other years. An examination of individual plan filings from the Employee Benefits Security Administration (EBSA) showed that these plans did not use CSEC funding rules in the year they indicated having done so and are not included in this analysis. The Employee Benefit Plan of Jewish Community of Louisville, Inc., indicated using CSEC funding rules in 2014, 2015, and 2016, but a Form 5500 for the 2017 plan year is not available and is not included in Table A-1 . In 2016, this plan had 110 participants.


Introduction According to a 2014 study conducted by the National Center for Education Statistics (NCES) within the U.S. Department of Education (ED), 53% of public elementary and secondary schools need to spend money on repairs, renovations, and modernizations to put their onsite buildings in good overall condition. The study estimated that the nationwide spending necessary to reach this standard would be approximately $197 billion, or about $4.5 million per school that needs improvements. The 2014 study was the first by NCES to estimate such costs since a 2000 report and is the most recent available. As there is no ongoing federal data collection on the physical condition of schools, it is difficult to assess the current state of the nation's school facilities and the need for infrastructure investment. While the construction, renovation, repair, and maintenance of public school facilities have primarily and typically been the responsibility of state and local governments, the federal government has provided some funding for construction and renovation for specific purposes. This report provides a description of and background for selected provisions of the Rebuild America's Schools Act of 2019 ( H.R. 865 / S. 266 ), which was ordered to be reported by the House Committee on Education and Labor on February 26, 2019. H.R. 865 proposes to authorize $70 billion in grants and facilitate $30 billion in school infrastructure tax credit bonds to be used toward the construction and repair of public elementary and secondary school facilities. Grant funds and school infrastructure bond limits would be allocated to states proportionally based on their prior-year local educational agency (LEA) grant allocations under Title I-A of the Elementary and Secondary Education Act (ESEA). Additional funds would also be authorized for Impact Aid construction payments authorized under Section 7007 of the ESEA for FY2020 through FY2023. Background Funding public schools has traditionally been primarily the responsibility of state and local governments. In school year 2015-2016, for instance, public elementary and secondary schools in the United States collectively received about 47% of their revenue from state governments and about 45% from local governments. Of the local revenue, the majorityâapproximately 81%âwas derived from property taxes. While different states and LEAs have access to various other funding streams and mechanisms to finance school construction, a common practice to raise funds for this purpose is to issue a general obligation bond (backed by the credit of the state or local government) and repay the debt over time with revenue from sources such as property taxes. Nationwide, public schools spent approximately $48 billion on facilities acquisition and construction in the 2015-2016 school year. While state and local governments typically provide the majority of support for facilities-related expenditures in public K-12 schools, the federal government also provides some direct and indirect support for school infrastructure. Federal direct support is provided through loans and grants to K-12 schools with specific needs or serving certain populations of students. For example, there are school infrastructure grant programs respectively for schools with high populations of students with disabilities or students who are Alaska Natives, Native Hawaiians, American Indians, or children of military parents. Funding is also available to schools affected by natural disasters or located in rural areas. Additionally, there are facilities financing assistance programs to encourage the development of charter schools. Although ED administers several of the grant programs funding facilities at elementary and secondary schools, other agencies, such as the Department of the Interior and the Department of Defense, also administer programs. Aside from the targeted efforts, a one-time appropriation of $1.2 billion was made under the Consolidated Appropriations Act for FY2001 ( P.L. 106-554 ) for emergency school renovation and repair activities, as well as activities under Part B of the Individuals with Disabilities Education Act and technology activities. Most recently, Congress provided a one-time appropriation in 2009, as part of the response to the Great Recession, that could be used for renovation and construction, among other purposes. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ) authorized a $54 billion State Fiscal Stabilization Fund (SFSF). States were required to use at least 81.8% of their share of the SFSF to restore support of public elementary, secondary, and postsecondary schools, and, as applicable, early childhood education programs and services. Among the allowable uses of restoration funds were modernization, renovation, or repair of public school facilities. States were required to use the remaining 18.2% of their share of the SFSF for education, public safety, and other government services, which included modernization, renovation, or repair of public school and public or private college facilities, depending on the criteria that the state's governor used to allocate the funds. ED issued guidance specifically allowing a portion of the SFSF to be used for the construction of K-12 schools but not institutions of higher education. Another large source of federal contributions to school facilitiesâthe forgone revenue attributable to the exemption of interest on state and local governmental bonds used for school construction, modernization, renovation, and repairâis indirect. The Internal Revenue Code (IRC, or Chapter 26 of the U.S. Code) provides for the federal government to exempt interest income earned on bonds issued by state, local, and tribal governments for a "public" purpose from federal income tax (26 U.S.C. Â§103). Â Examples of public projects include elementary, secondary, and postsecondary schools; public buildings; and roads. The tax exemption lowers the cost of capital for state and local governments because investors are generally willing to accept a lower rate of return when it is not subject to federal taxation. There is no bond volume cap on tax exempt state and local government bonds. Major Provisions of H.R. 865 H.R. 865 would support public elementary and secondary school construction through several approaches. ED would administer federal grants, the Department of the Treasury would administer tax credit bonds, and regular reports on the condition and need for school facilities would fill a knowledge gap in order to inform future federal support. The following sections summarize the major provisions of the four titles included in H.R. 865 . Title I would authorize grants for the long-term improvement of public school facilities, Title II would authorize school infrastructure bonds, Title III would cover general provisions, and Title IV would authorize a temporary increase in funding for Impact Aid construction. Title I: Grants H.R. 865 would authorize $7 billion in grants per fiscal year from FY2020 to FY2029 to support long-term improvements to public school facilities. Of the amounts appropriated, 0.5% would be reserved for the outlying areas, and 0.5% would be reserved for schools funded by the Bureau of Indian Education. The remainder would be allocated to the states in proportion to their share of all ESEA Title I-A state grants allocated during the prior fiscal year with no hold harmless provision applied. The states would then award competitive grants to qualified LEAs. To be eligible for an allocation, a state would have to submit a plan to ED that describes how it would use the funds to make long-term improvements to public school facilities and how it would maintain fiscal effort for the funded activities after it no longer receives the allocation. The plan would also need to explain how the state would determine the eligibility and priority of grant recipients and carry out its state-level responsibilities. States would be required to match 10% of the allocated amount from nonfederal sources to support the activities funded by the allocation. A maintenance of effort provision would also require that the fiscal effort per student or aggregate expenditure by the states on public school facilities could not be less than 90% of the level in the prior fiscal year. Further, states would be required to use their allocations to supplement not supplant federal, state, and local public funds that would otherwise be available for supported activities. The bill would allow states to reserve no more than 1% of their allocation for their state-level responsibilities, including providing technical assistance to LEAs and developing an online database that contains an inventory of the infrastructure of all public school facilities in the state. Such funds could also be used for issuing and reviewing health and safety regulations and creating a plan to reduce exposure to toxins and chemicals. To be eligible to receive a competitive grant from the state, an LEA would have to have received an ESEA Title I-A grant in the previous year. Further, an LEA would have to be among those with the highest number or percentage of children "counted" in the formulas used to allocate ESEA Title I-A state grants. LEAs meeting these criteria would also be required to prioritize improvement of facilities of public schools that serve the highest percentages of students who qualify for free or reduced price lunches. Additional consideration in the awarding of grants to LEAs may be given to those with school facilities that pose a severe health or safety threat. States would have to ensure that LEA grantees represent the geographic diversity of the state. In addition, states would have the option of including the need to improve facilities or having the most limited capacity to raise funds for that purpose in the LEA eligibility criteria. States would be required to prioritize applications from LEAs by comparing these eligibility criteria. Additionally, states would be able to prioritize applications for grants to improve access to broadband or grants for schools without access to broadband. To be considered for a competitive grant, qualifying LEAs would have to submit an application to the state. Application requirements could be determined by the individual states, but H.R. 865 would require all applications to include certain information: information necessary for the state to determine eligibility and priority; a description of the projects that the LEA plans to carry out with the grant; an explanation of how such projects will reduce risks to the health and safety of staff and students at schools served by the LEA; and for charter schools, whether the operator has control or ownership of the facility, and the extent to which the charter schools lack access to funding through financing methods available to public schools or LEAs in the state. After grants are awarded, the bill would require certain actions by LEAs, states, and ED. Within 180 days of receiving a grant, an LEA would be required to submit to the state a 10-year facilities master plan. Each LEA that receives a grant would also be required to annually compile, publish, and submit to the state certain information about the LEA, its student population, and projects funded by the grant. States would then be required to compile, publish, and distribute such information to the LEAs, the public, and tribal governments in the state. In addition, states would be required to submit the information to the Secretary of Education. By the end of each fiscal year, the Secretary of Education would be required to submit a report to the House Committee on Education and Labor and the Senate Committee on Health, Education, Labor, and Pensions (hereinafter, the "appropriate congressional committees") containing the information collected from the states. Title II: Bonds H.R. 865 would reauthorize certain repealed tax credit bonds (TCBs) and authorize a new TCB, School Infrastructure Bonds. TCBs are an alternative to tax-exempt bonds that offer investors a federal tax credit or the issuer a direct payment proportional to the bond's value in lieu of a federal tax exemption. Before the 2017 tax revision ( P.L. 115-97 ) repealed the authority to issue new TCBs after December 31, 2017, Qualified School Construction Bonds (QSCBs) and Qualified Zone Academy Bonds (QZABs) were TCBs used to fund school construction and renovation, among other purposes. The bill would also apply certain wage rate requirements to any school infrastructure bond, as have been required for QZABs issued since the date of the enactment of the ARRA. The remainder of this section provides more-detailed information about the various bond provisions included in H.R. 865 . QSCBs and QZABs H.R. 865 would amend the Internal Revenue Code to authorize QSCBs and QZABs for the first time since 2017. QSCBs made bond proceeds available for the construction, rehabilitation, or repair of, or the acquisition of land for, a public school facility, including charter schools but excluding postsecondary facilities. They were generally allocated to states based on a state's share of ESEA Title I-A grants. The bonds had a national limit of $11 billion in each of 2009 and 2010. The authority to issue QSCBs expired at the end of calendar year 2010. H.R. 865 would not authorize a new bond limitation for QSCBs, but it would restore a subparagraph in statute (formerly 26 U.S.C. 54A(d)(1)(E)) listing QSCBs as a qualified tax credit bond. H.R. 865 would also reauthorize QZABs, remove the former private business contribution requirement associated with them, and set the bond limitation at $1.4 billion for each calendar year into perpetuity. In addition to school renovation, the bill would authorize QZABs to be used to fund school construction as well. To be eligible to receive the proceeds from QZABs, a school must be public; be providing education or training below the postsecondary level in an empowerment zone or enterprise community, or have 35% or more of its students qualified for free or reduced price lunches; and cooperate with businesses to enhance the school's curriculum, increase graduation and employment rates, and prepare students for college and the workforce. School Infrastructure Bonds Under H.R. 865 , School Infrastructure Bonds would function as a new type of tax credit bond to support long-term improvements to public school facilities. The bill would authorize a national volume cap of $10 billion in School Infrastructure Bonds per calendar year from 2020 to 2022. As with the grant appropriation, 0.5% of the annual bond limitation of $10 billion would be allocated to possessions of the United States, and 0.5% would be allocated to the Secretary of the Interior for schools funded by the Bureau of Indian Education. The remainder would be allocated to the states in proportion to their share of all prior-year Title I-A state grants, as authorized under the ESEA, with no hold harmless provision applied. State educational agencies and the U.S. possessions would then allocate their share of the bond limitation to issuers within their jurisdictions using the same required eligibility and priority criteria established for the competitive grant program in Title I of H.R. 865 . The new School Infrastructure Bond program would provide bond holders with a tax credit equal to 100% of the amount of interest payable by the issuer, and any unused credit could be carried over to the succeeding taxable year. The bill would require bond issuers to spend 100% of the available project proceeds within six years of the date of issuance. By the end of each fiscal year, the Secretary of the Treasury would be required to submit an annual report on the bond program to the appropriate congressional committees. Title III: General Provisions Uses of Funds H.R. 865 would place certain restrictions on how funds from grants or bonds may be used. Allowable uses would generally include new construction, renovation, major repairs, site acquisition, the reduction or elimination of toxins and pests, the expansion of access to broadband, and compliance with the Americans with Disabilities Act, among other uses for public school facilities. Funds could also be used to develop the facilities master plans required by the bill. LEAs would be prohibited from using funds for routine and predictable maintenance, minor repairs, facilities used primarily for athletic contests or other events that charge admission, vehicles, or facilities that are not primarily used to educate students. The bill also specifies, for each year, a certain percentage of funds used for new construction or renovation that would have to be used for such activities that are certified, verified, or consistent with "green" standards. The applicable percentage would be 60% in FY2020, 70% in FY2021, 80% in FY2022, 90% in FY2023, and 100% in FY2024 through FY2029. For FY2030 and thereafter, there would be no such requirement for QZABs. LEAs that receive covered funds from grants or bonds authorized by H.R. 865 would be required to ensure that any iron, steel, and manufactured products used in projects are produced in the United States. However, the Secretary of Education would have authority to waive this requirement if applying it would be inconsistent with the national interest, if materials produced in the United States are not sufficiently available or of satisfactory quality, or if using materials produced in the United States would increase the cost of the overall project by more than 25%. Reporting and Information Within two years of enactment, H.R. 865 would require the Government Accountability Office (GAO) to submit a report on projects carried out by covered funds to the appropriate congressional committees. The report would include the types of projects carried out, their geographic distribution, and an assessment of their impacts on the health and safety of staff and students. The report would also address how the Secretary of Education or the states could make covered funds more accessible to schools with the highest numbers and percentages of students counted in ESEA Title I-A allocation formulas and schools with fiscal challenges in raising capital for school infrastructure projects. GAO would be required to prepare an updated version of the report between 5 and 6 years after enactment and again between 10 and 11 years after enactment. The bill would also require ED's Institute of Education Sciences to carry out and submit to the appropriate congressional committees a comprehensive study of the physical condition of all public schools in the United States at least once every five years. The report would include an assessment of the effect of school facilities on health, safety, and academic outcomes; the condition of facilities, categorized by geographic region, racial and ethnic groups, and economic status of students; the accessibility of school facilities for students and staff with disabilities; and any differences in these areas of disaggregation between LEAs that received covered funds and those that did not. H.R. 865 does not include an authorization of appropriations for this purpose. Additionally, H.R. 865 would require the Secretary of Education to establish a clearinghouse to disseminate information on federal programs and financing mechanisms that may be used to assist schools in initiating, developing, and financing energy efficient, energy retrofitting, and distributed generation projects. The bill does not include an authorization of appropriations for this purpose. Title IV: Impact Aid The Impact Aid program, administered by ED and authorized by Title VII of the ESEA, compensates LEAs for a "substantial and continuing financial burden" resulting from federal activities, such as federal ownership of certain lands, as well as the enrollments in LEAs of children whose parents work or live on federal property and of children living on tribal lands. The Impact Aid program authorizes several types of payments, including a construction payment (ESEA, Section 7007). The construction payment provides funds for construction and facilities upgrades to certain LEAs, such as those serving high percentages of children living on tribal lands or children with parents on active duty in the uniformed services. These funds are used to make formula and competitive grants. For FY2019, Section 7007 was appropriated $17.4 million. Authorizations of appropriations for Section 7007 are provided through FY2020. H.R. 865 would extend the authorization of appropriations for Section 7007 through FY2023 at levels substantially higher than current authorization of appropriations levels. For FY2020, Section 7007 has an existing authorization of appropriations level of $18,756,765. H.R. 865 would increase that level to $50,406,000 for FY2021 and FY2022 and $52,756,765 for FY2023. Cost Estimate The Congressional Budget Office (CBO) estimates that enactment of H.R. 865 would result in an increase of approximately $8.4 billion in direct spending, a decrease of approximately $1.2 billion in revenues, and an increase of approximately $55.6 billion in outlays subject to appropriation in the period from FY2019 to FY2029. In producing this estimate, CBO assumes that H.R. 865 would be enacted near the end of FY2019 and that authorized and estimated funds would be appropriated every year.