Senate Finance Committee Unanimously Approves Retirement Security and Savings Act of 2000

This Compliance Alert first summarizes the key provisions in H.R. 1102 for employee benefit plan sponsors and then notes the main points on which the Senate Finance Committee bill differs from the House bill. (The provisions are marked to indicate the types of plan sponsors for which they are most likely to be of interest: C for corporate, PS for public sector and M for multiemployer.)

If these changes are adopted, plan sponsors should look to their attorneys for authoritative advice on their interpretation and application.

Following is a list of provisions in the version of the Portman-Cardin Bill passed by the House that are most likely to be of interest to sponsors of employer-funded plans. They would generally be effective starting with the first year or plan year beginning after December 31, 2000, with a delayed effective date for collectively bargained plans in many cases. While good faith compliance would be required starting on the effective date, plan amendments would not be required before the end of the 2003 plan year (2005, for public sector plans).

• Section 415 defined-benefit dollar limit increased to $160,000 at age 62, with late-retirement adjustments for benefits starting after age 65 – C, PS, M

• Section 415 defined-contribution dollar limit increased to $40,000/year, then indexed in $1,000 increments – C

• Section 415 defined-contribution pay-based limit increased to 100 percent of pay – C, PS, M

• Section 457 plan pay-based limit increased to 100 percent of pay – C, PS

• Section 401(a)(17) limit on pay that can be counted for pension purposes increased to $200,000/year, then indexed in $5,000 increments – C, PS, M

• Section 401(k) annual limit on elective deferrals increased, over 5 years, to $15,000 in 2005 – C, PS, M

• Section 457 annual limit on elective deferrals increased, over 5 years, to $15,000 in 2005 – C, PS

2. Multiemployer Section 415 Limits

• 100 percent-of-pay limit repealed, for multiemployer defined benefit plans – M

• Multiemployer plan benefits would no longer need to be aggregated with single-employer benefits funded by the same employer, when applying the 100 percent-of-pay limit to single employer defined benefit plans – M

3. Deduction Limits

• Employees’ pre-tax contributions to section 401(k) plans would not be counted in applying the deduction limits to other employer contributions – C, M

• Deduction limit for profit-sharing plan contributions raised to 20 percent of covered participants’ compensation, and "compensation" for this purpose would include salary-reduction amounts – C, M

• Full-funding limit based on 150 percent of current liability phased-out by 2004 – C, M

• Notwithstanding other deduction limits, defined benefit plan contributions up to the full amount of termination liability would be fully deductible, in the case of multiemployer as well as single employer plans, including – with some restrictions – single employer plans with 100 or fewer participants (For small plans, recent benefit increases for highly compensated employees are disregarded when determining termination liability, and this liberalized deduction rule does not apply to plans of professional service organizations, such as law firms and accounting firms) that have not had more than 25 active participants since enactment of ERISA) -- C, M

• The excise tax on non-deductible contributions would not apply to defined-contribution plan contributions up to 6 percent of participants’ pay or, if greater, the sum of participants’ pre-tax contributions plus employer matching contributions – C

• The excise tax on non-deductible contributions could be determined without regard to contributions to defined benefit plans – C, M

• ESOP dividends would be deductible even if automatically reinvested in employer stock – C

• Tax-free rollovers would be allowed among governmental section 457 plans, section 403(b) plans and qualified plans under section 401(a) – C, PS

• Distributions from IRAs could be rolled over to employer-sponsored plans – C
• Employees’ after-tax contributions could be rolled over to other plans or to IRAs – C, PS

• Defined contribution plans could eliminate all payment options other than lump sums, and IRS would be directed to issue regulations authorizing elimination of defined benefit payment options where that "does not adversely affect the rights of participants in a material manner" – C, M

• The "same desk rule" would be repealed, to the extent it applies to section 401(k) plans affected by corporate transactions – C

• Trustee-to-trustee transfers from section 403(b) or 457 plans, could be used for the purchase of service credit under governmental defined benefit plans – PS

• The constructive-receipt concept would not apply, in the case of distributions available under governmental section 457 plans - PS

• Top-heavy rules would be streamlined and simplified – C

• In the case of a controlled group that is partly tax exempt and partly taxable, the minimum coverage rules would be modified to allow the taxable enterprise to offer a section 401(k) plan while the tax exempt operations maintain their section 403(b) program - C

• The "multiple use" test for section 401(k) plans that include matching employer contributions would be repealed – C

• Pursuant to IRS regulations, plans would be considered nondiscriminatory if they pass a facts-and-circumstances test, including a facts-and-circumstances test for separate lines of business – C

• All governmental plans, including those maintained by international organizations, would be exempt from the nondiscrimination requirements – PS

• Section 204(h) is amended to require notice and an explanation of the expected impact of an amendment to a defined benefit or money purchase plan that is expected to reduce the rate of future benefit accruals significantly, and an excise tax penalty, based on the COBRA excise taxes, is added – C, M

• Employer-provided retirement planning services could be provided tax-free to employees – C, PS, M

• The maximum period for notice and consent to plan distributions would be extended from 90 to 180 days – C, M

7. New Deferred Savings Opportunities

• Employers could offer "qualified plus contribution programs" comparable to Roth IRAs, through which employees could make after-tax contributions and withdraw the earnings tax-free under specified circumstances – C, PS

• Employees over age 50 could make catch-up contributions of up to $5,000 a year to 401(k), 403(b) and 457 plans, which would be over and above any other limits but would still be subject to any applicable nondiscrimination requirements – C, PS, M

8. Other

• Self-employed people and partners would be allowed to take participant loans from their firms’ qualified plans – C

• Employer matching contributions to section 401(k) plans would have to vest on either a 3-year cliff or 2 – 6 year graduated schedule – C

• Minimum distribution rules would be simplified and updated, pursuant to Treasury regulations, and the excise tax for violations would be cut from 50 percent to 10 percent – C, PS, M

• Distributions to alternate payees from section 457 plans would be taxed like distributions from qualified plans under QDROs – PS

• Special rules would be added for stock allocations under ESOPs sponsored by Subchapter S corporations – C

• A pension valuation could be performed as of a date within the prior plan year if, as of that date, the plan’s assets were at least 125 percent of its current liability – C, M

• IRS is instructed to continue improving the Employee Plans Compliance Resolution System and making it more user-friendly, especially for small employers – C, PS, M

• The safe harbor for hardship distributions from 401(k) plans would be modified to enable employees to resume pretax contributions after 6 months – C, PS, M

• User fees for IRS determination letters would be waived for new retirement plans adopted by employers with 100 or fewer employees - C

• A tax credit for low- and moderate-income people who make salary-reduction contributions to 401(k), 403(b) plans or IRAs – C, PS, M

• Tax credits for small businesses that adopt new plans, or that contribute to plans for non-highly compensated employees – C, M

• Authority for extra catch-up contributions to 401(k) and 403(b) plans by employees aged 50 and over, as in the House bill, but without requiring that those contributions meet nondiscrimination tests – C

• Substantially broader disclosure requirements when a pension plan is converted to a cash balance plan ("a defined benefit plan under which the accrued benefit is expressed in terms of an accumulation account"), including a requirement that plan sponsors provide illustrative examples and so-called "benefit estimation tool kits" so that employees can get a clear picture of how the change is likely to affect them individually – C

• A ban on the wear-away of benefits payable at normal retirement age when a defined benefit plan is converted to a cash balance plan – C
  

• Clarification that the hypothetical account balance is the accrued benefit, in a cash balance plan – this would eliminate the so-called "whipsaw" problem (and thus clear the way for higher interest crediting rates) – C

• A requirement that the plan sponsor inform retiring employees if there is a difference in the value of an optional lump sum as compared with any of the available annuities (e.g., if there is an early retirement subsidy that is not included in the lump sum) – C, M

• A requirement that single employer defined benefit plans provide annual individual benefit statements, and that multiemployer plans provide an individual benefit statement upon request – C, M

• A provision that benefits under Section 457 plans, like benefits under qualified plans, would be taxable only when paid (i.e., eliminating the problem of constructive receipt) – C, PS

• No increase in the $30,000 annual Section 415 limit for defined contribution plans (although, like the House bill, the Senate bill would raise the pay-based Section 415 limit for defined contribution plans from 25 percent of pay to 100 percent of pay) – C

• A change in the name of the new plan design under which employees could make after-tax contributions to 401(k) plans and later withdraw the earnings tax-free: instead of calling these "401(k) Plus" plans, they would be labeled "Roth 401(k) plans."

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