August 16, 1999
Benefits-Related Provisions of New Tax Bill
Congress passed H.R. 2488, the Taxpayer Refund and Relief Act of 1999, on August 5. It would cut taxes by more than $800 billion over the next decade, except that President Clinton will veto it. After that happens, we may see agreement on a smaller package that includes not only some tax cuts that Congressional leaders want but also some initiatives favored by the President, such as a minimum wage increase or Medicare prescription drug coverage.
Some of the benefits provisions included in H.R. 2488 could become law this year, as part of any ultimate compromise. Those provisions that do not become law in 1999 will have a running start at acceptance in future years, since Congress has already adopted them.
This Compliance Alert outlines the principal provisions most likely to be of interest to sponsors of pension plans, individual retirement accounts (IRAs) and health and welfare benefit plans.
I. Pension Plan Provisions (Title XII of H.R. 2488)
1. Higher Limits
- The Section 415(b) defined benefit dollar limit: $160,000/year at age 62, up from $130,000 at age 65, 66 or 67,
- The Section 415(b) 100%-of-pay defined benefit limit: eliminated for multiemployer plans,
- The Section 415(c) defined contribution dollar limit: $40,000, up from $30,000 (in the future this would be indexed in increments of $1,000, not $5,000),
- The Section 415(c) 25%-of-pay defined contribution limit: raised to 100%,
- The Section 403(b) exclusion allowance and Section 457 33.3%-of-pay limits: raised to 100%,
* The Section 401(a)(17) limit on compensation that may be counted for pension purposes: $200,000, up from $160,000 for corporate and multiemployer plans,
- The annual limit on salary-reduction deferrals under Sections 401(k) and 403(b): $15,000 by 2005, up from $10,000, and
- The annual limit on deferrals under Section 457 plans: $15,000 by 2005.
2. Catch-up Contributions to Defined Contribution Plans
Various limits and tests, including nondiscrimination tests, would be modified to allow people over the age of 50 to contribute up to 50% more, pre-tax or post-tax, to a 401(k), 403(b) or governmental 457 plan than is allowed for younger employees (phased in by 2005).
3. Faster Vesting for Matching Contributions to Corporate Plans
Employer matching contributions to Section 401(k) and similar plans would have to meet either a three-year cliff or six-year graduated vesting schedule.
4. Participant Communications
- If a corporate or multiemployer defined benefit or money purchase plan is amended to reduce future benefit accruals (ERISA Section 204(h)), participants would have to be given enough information (as defined in Internal Revenue Service regulations) to enable them to understand the effect of the change.
- Failure by a corporate or multiemployer plan with at least 100 participants to provide a Section 204(h) notice would trigger an excise tax similar to the tax penalty that applies for COBRA violations.
- All retirement plans, could provide retirement planning services to participants as a tax-free benefit. Note: The level and quality of disclosure required under ERISA Section 204(h) has become extremely controversial in the context of conversions to cash balance plans, and is likely to be revisited if and when pension legislation is again considered.
- Individuals in corporate and governmental plans could roll over distributions from and among Section 403(b), 457 and 401(k) plans, from IRAs into qualified plans, and payouts based on employee after-tax contributions into IRAs and qualified plans.
- The "same desk rule," which often prevents transfers from one corporate 401(k) plan to another after a corporate merger or acquisition would be repealed.
- Other assorted technical changes would make it easier for corporate plans to make and accept asset or liability transfers and rollovers.
- Section 403(b) and 457 plans could transfer assets to enable participants to purchase service credit in governmental defined benefit plans on the terms that now apply to other types of permissive purchases of service credit.
6. Section 401(k) Plans
- Public- and private-sector employers could offer "Roth 401(k) plans" (officially called "qualified plus contribution programs"), which would resemble Roth IRAs; for employees who choose to contribute on an after-tax basis, later distributions - including the earnings on those contributions - would be tax-free.
- The bill would repeal the complex "multiple-use" test that comes into play when a corporate Section 401(k) plan includes employer matching contributions.
- Section 401(k) pre-tax contributions made by employees of governments and tax-exempt organizations would not reduce the amounts they could defer under Section 457 plans.
- If a health care enterprise has some groups covered by Section 401(k) plans and others covered by Section 403(b) annuities, the Section 401(k) plans could be tested without taking into account those eligible for the Section 403(b) arrangement, under terms to be spelled out in Treasury regulations.
7. Employer Deductions
- The 150% full funding limit on deductible contributions to corporate and multiemployer defined benefit plans would be phased out by 2004.
- Contributions made in a single year to fully fund a corporate or multiemployer defined benefit plan ("fund-up contributions") would be deductible, up to the level of termination liability under Title IV of ERISA.
- Fund-up contributions to multiemployer plans and most small-employer plans (under 100 participants) would be deductible.
- Elective deferrals under corporate and multiemployer Section 401(k) plans would not be taken into account in applying deduction limits.
- Dividends paid on stock held in an Employee Stock Ownership Plan (ESOP) would be deductible if they are reinvested in employer stock (at present they are only deductible if paid out to the participants).
8. Three-Year Cycle for Corporate and Multiemployer Pension Valuations
If a pension plan's assets are equal to at least 125% of its liabilities, the plan sponsor would have the option of skipping the full valuation for the next two plan years, on terms to be prescribed in IRS regulations.
9. Pension Asset Transfers for Retiree Health (Corporate and Multiemployer Plans)
Internal Revenue Code (IRC) Section 420, authorizing the transfer of certain "surplus" single-employer pension assets to Section 401(h) accounts on an annual basis to pay current retiree health costs, would be extended to 2009.
10. Modification of Top-Heavy Rules for Corporate Plans
- The five-year "lookback" rules for identifying key employees and determining benefits would be largely repealed.
- The only "key employees" would be 5% owners and officers or 1% shareholders who make more than $150,000 per year.
- Neither safe-harbor Section 401(k) plans nor frozen plans could be top-heavy.
- Stock owned by other family members would not be counted when determining who is a 1% or 5% shareholder.
11. PBGC-Related Changes
- For new single-employer plans of small employers - 100 or fewer employees - the base Pension Benefit Guaranty Corporation (PBGC) premium would be $5 per participant (rather than $19) for the first five years.
- For new single-employer plans of larger employers, there would be no risk-related premium for the first year, and the portion of the premium that is based on unfunded liability would be phased in over the next five years.
- For especially small employers - 25 or fewer employees - whose plans have unfunded liabilities, the risk-related premium would be limited to five dollars per participant.
- PBGC would administer benefits for missing participants under terminated multiemployer pension plans on a mandatory basis, as it currently does for single-employer plans, and would be available to do so for certain other ERISA plans that are not covered by Title IV.
12. Simplification by Regulation
The IRS and Treasury would be directed to issue regulations:
- Simplifying the minimum distribution requirements for corporate and multiemployer plans under Section 401(a)(9) and
- Providing facts-and-circumstances opportunities, in addition to the objective tests, for corporate plans to meet the nondiscrimination and minimum coverage requirements of Sections 401(a)(4) and 410(b) and for employers to qualify Separate Lines of Business under Section 414(r).
13. Effective Date
- The provisions would generally take effect beginning in 2001, although several changes are phased in over periods that begin in that year.
- There would be a delayed effective date for collectively bargained plans only for the provision requiring faster vesting for matching contributions in 401(k) plans, and
- If corporate and multiemployer plans operate in compliance with the changes, conforming amendments would not be required before the end of the plan year beginning in 2003 (2005, for government plans).
II. IRA Provisions
- The maximum annual deductible contribution to an IRA would be increased in stages, to $5,000 by 2006, and indexed in $100 increments thereafter;
- The income limit for making deductible contributions and converting a conventional IRA to a Roth IRA would be raised to $100,000 for a single taxpayer, $200,000 for a couple filing a joint return;
- Employer plans would be allowed to offer IRA-like savings opportunities, with no impact on the various limits and standards that apply to 401(k) and other qualified plans; an
- For people over 50, the IRA deductible-contribution limit would be up to 50% higher than the otherwise-applicable limit, by 2005.
III. Health and Welfare Benefit Plan Provisions
- The exclusion for employer-provided educational assistance, now scheduled to expire on May 31, 2000, would be extended to December 31, 2003.
- Employers would be able to provide long-term care insurance on a salary-reduction basis, through cafeteria plans, or as a regular employer-paid tax exempt benefit.
- Partners and self-employed people could deduct 100% of the premiums for their own and their families' health insurance, starting in 2000.
Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.