Grassley Leads Effort to Help Workers Save More for Retirement
WASHINGTON — Sens. Chuck Grassley and Max Baucus introduced a bill today to rewardfamilies who save and plan for retirement, enhance opportunities for small businesses to provideemployer-sponsored retirement packages, and make it easier for workers to transfer retirement plansavings from one employer to another.
"The need for better retirement income security among working Americans can not beignored if those currently in the workforce expect to maintain a comfortable standard of living inretirement," said Grassley, chairman of the Senate Committee on Finance.
The Retirement Security and Savings Act advances six goals to help jump start personalsavings rates and participation in retirement income plans: increased opportunities to save withindividual retirement accounts; expanded pension coverage for small business employees and theself-employed; enhanced fairness for women and families; increased pension portability;strengthened pension security and enforcement; and reduced regulatory burdens.
"Those of us at the policy tables can talk about the need for employees to prepare forretirement until we are blue in the face. Unless we give them the tools to build a better retirementnest egg, policy makers should be prepared for even greater challenges when retirees realize theirretirement income falls short when they need it the most," Grassley said.
The economic engines on Main Street USA, small businesses provide millions of familieswith their livelihood. The complexity and expenses associated with the nation's pension laws actas a deterrent to small businesses from offering employee retirement plans, and many are unable tomatch employee benefit packages offered by big corporations, including employer-sponsoredretirement plans. In 1995, only 50 percent of the work force was covered by a retirement plan, andcoverage was thinnest among small businesses where fewer than 20 percent were offered coverage.Grassley has been advocating pension reforms since 1997, when he introduced legislationto give pension participants and retirees tools to understand their plans and help ensure accuracy.
In 1999, he introduced another bill to increase the pension counseling to millions of Americanworkers. The Pension Coverage and Portability Act (S.741) introduced in 1999 by Grassley andSen. Bob Graham laid the groundwork for the measure put forward today.
"Congress needs to clear the thicket of rules governing private pension plans. The systemdoesn't address the changing structure of today's workforce and leaves too many workers uncovered.For example, making pensions portable will address a disadvantage many workers, particularlywomen, face due to breaks in employment related to child care or family obligations. And, cuttingcumbersome government red tape will help enable more smaller employers to offer a retirement planto their employees," Grassley said.
Fifteen senators were original cosponsors of the bill introduced today by Grassley andBaucus. Grassley said he hopes to see the Senate act this year on the proposal. Similar bipartisanlegislation has been introduced in the House of Representatives by Reps. Rob Portman and BenCardin (H.R.10).
SUMMARY OF THE RETIREMENT SECURITY AND SAVINGS ACT OF 2001
INDIVIDUAL RETIREMENT ARRANGEMENTS
1. Increase IRA Limits. Increase the maximum contribution limit to $3,000 in 2002, $4,000in 2003 and $5,000 in 2004 with indexing in subsequent years.
2. Increase AGI Deductibility Limits. Gradually increase the AGI limits for making deductibleIRA contributions to $60,000 for single taxpayers and $100,000 for married couples filingjoint returns.
3. Catch-Up Contributions to IRAs. Increase the maximum IRA contribution limit by 50% fortaxpayers age 50 and above.
4. Eliminate Marriage Penalty for Roth IRA Contributions. Increase the income limitapplicable to married couples making contributions to a Roth IRA to twice the limitapplicable to single taxpayers.
5. Deemed IRAs Under Employer Plans. Allow voluntary employee contributions made to aqualified retirement plan, section 403(b) annuity or eligible deferred compensation plan ofa state or local government to be treated as a traditional IRA or a Roth IRA for all purposesof the Code, as applicable.
6. Tax-Free Withdrawals for Charitable Purposes. Exclude from gross income distributionsfrom an IRA: (1) to a charitable organization; (2) to a charitable remainder annuity trust orcharitable remainder trust; (3) to a pooled income fund (as defined in Section 642(c)(5)); or(4) for the issuance of a charitable gift annuity.
7. Increase the Income Limit for Roth Conversions. Increase the income limit applicable tomarried couples making a conversion of a traditional IRA to a Roth IRA to $200,000.
1. Increase Benefit and Contribution Limits for Employer-Sponsored Retirement Plans. Thelimits on compensation that can be considered under section 401(a)(17) will be increasedfrom $170,000 to $200,000. Limits on contributions under section 402(g), which apply to401(k) and 403(b) plans, will be gradually increased from $10,500 to $15,000. Limits ondefined benefit plan benefits under section 415(b) will be increased from $140,000 to$160,000. The section 457 plan limit will be gradually increased from $8,500 to $15,000.The SIMPLE limit will gradually increase to $10,000. Indexing these limits will also bemodified to provide for increases in smaller increments.
2. Plan Loans for Self-Employed Individuals. Permit owners of partnerships and SCorporations to receive plan loans under the same rules applicable to employees and ownersof incorporated businesses.
3. Modify Top Heavy Rules. Encourage small businesses to start retirement plans for theiremployees by eliminating unnecessary administrative complexity in the top heavy rules,counting employer matching contributions toward satisfying the top-heavy minimumcontribution requirements, eliminating the accrual requirements for frozen top-heavy definedbenefit plans, and simplifying the definition of key employee.
4. Elective deferrals not taken into account for purposes of limits. Elective deferrals would notbe taken into account in applying the deduction limits to other contributions.
5. Repeal of Coordination Requirements for Section 457 Plans. The section 457 limit ondeferred compensation would not be reduced by elective deferrals under other types ofarrangements such as 401(k) plans or by section 403(b) contributions.
6. Definition of Compensation for Employer Deduction. The definition of compensation forpurposes of computing employer deductions includes salary reduction amounts treated ascompensation under Section 415.
7. Increase Profit-Sharing and Stock Bonus Contributions. Increase the annual limitation onthe amount of deductible contributions to a profit-sharing or stock bonus plan from 15percent to 25 percent of compensation.
8. Roth 401(k)/403(b) Contributions. Allow a section 401(k) or 403(b) plan to permitparticipants to elect to have all or a portion of the participant’s elective deferrals be treatedas "designated plus contributions." Designated plus contributions are not excludible fromthe participant’s gross income and distributions are not included in the participant’s grossincome just like Roth IRAs.
9. Credit for Low- and Middle-Income Savers. Provide a non-refundable income tax credit forcontributions made by eligible taxpayers to a qualified retirement plan. The maximum creditamount is 50% of up to $2,000 in contributions for a married couple with income up to$30,000 ($15,000 for a single individual) and is completely phased-out for couples withincome over $50,000 ($25,000 for singles). The credit sunsets after 5 years.
10. Small Business Pension Start Up Tax Credits. Provide a tax credit of up to 50% of thecontributions employers make on behalf of their non-highly compensated employees, up to3% of their pay. The credit for employer contributions is only available to employers withfewer than 50 employees for the first 3 years of a new retirement plan. In order to qualify,the plan must provide accelerated vesting and a 1% non-elective contribution. SmallBusiness Pension Administrative Cost Tax Credit: Help small businesses defray theadministrative costs of starting a retirement plan by offering a maximum $500 tax credit tobusinesses with fewer than 100 employees for up to 3 years.
11. Reduced PBGC Premiums for New Plans of Small Employers. The PBGC premium isnormally set at $19 per participant. This proposal would set the premium for a smallemployer plan at $5 per participant for the first five years of a plan.
12. Reduction of Additional PBGC Premium for New and Small Plans. Any applicable variablerate premium would be phased in over a six year period as follows: 0% for year one; 20%for year two; 40% for year three; 60% for year four; 80% for year five and 100% for year six.A cap would also be added on the variable rate premium of small plans.
13. Eliminate the "New Plan Fee". Employers who establish a pension plan must pay a fee,sometimes up to $1000, to receive a determination letter from the Internal Revenue Servicestating that the plan is qualified. In order to decrease the costs of establishing retirementplans, the legislation eliminates this fee.
ENHANCING FAIRNESS FOR WOMEN AND FAMILIES
1. Catch-Up Contributions to Qualified Plans. Gradually increases the limit on employeecontributions to qualified retirement plans for individuals age 50 and older by 50% of theotherwise applicable limit.
2. Allow More Contributions to DC Plans by Eliminating the ?25% of Salary? rule. Aparticipant is limited in a DC plan to contributing not more than 25% of salary, even thoughthe IRS limit is $10,500. The bill would eliminate the percentage of salary limitation.
3. Three-Year Vesting for Matching Contributions. Under current law, employers may requireup to five years of service before an employee is entitled to employer contributions to adefined contribution plan. The proposal would reduce that maximum to three years withrespect to employer matching contributions.
4. Division of Section 457 Plan Benefits upon Divorce. Clarify that, for purposes of taxationof distributions from section 457 plans, the recipient of the funds is liable for income taxes.Enactment of this proposal would prevent the case where a partiipant is taxed on retirementincome that, under a divorce decree, belongs to an ex-spouse.
5. Simplify Minimum Distribution Rules. Simplifies the minimum distribution rules applicableto qualified plans; reduces the excise tax applicable to failures to satisfy the minimumdistribution rules from 50% to 10%; directs Treasury to update, simplify and finalize itsminimum distribution regulations.
6. Modify the Suspension of Participation for Hardship Withdrawals. Participants who take ahardship withdrawal would be subject to a 6 month suspension rather than a 12 monthsuspension of participation in the employer’s retirement plans. Any hardship distributionmade pursuant to the terms of a plan is not an eligible rollover distribution.
7. Encourage Contributions on Behalf of Domestic Workers. The 10% excise tax applicableto employer nondeductible retirement plan contributions is eliminated for employercontributions to a SIMPLE plan if such contributions are nondeductible solely because theyare not a trade or business expense under Section 162 of the Internal Revenue Code.
INCREASING PORTABILITY FOR PARTICIPANTS
1. Rollovers. The bill would include several provisions to encourage workers who change jobsto roll over their pension and retirement plans into the plan of the new employer. Whereemployers elect to, the bill would allow workers changing jobs to roll over savings in a401(k) plan, a 403(b) plan, a governmental plan, or an IRA to a 401(k), 403(b) orgovernmental 457 plan of a subsequent employer.
2. After Tax Rollovers. Where new employers are willing to accept them, individuals changingemployers would be able to roll over after-tax contributions to the new employer’s plan orto an IRA.
3. Waiver of 60-Day Rule. Under current law, terminating employees have only 60 days inwhich they can roll over their distributions to an IRA without incurring tax. The proposalwould allow the Internal Revenue Service discretion to waive the limited sixty-day rolloverperiod.
4. Modify the Same Desk Rule. Conform the treatment of 401(k) plans to the treatment ofdefined benefit plans and money purchase plans in "same desk" situations. That is, wherean employee’s company is acquired by another business, the employee would meet the?separation from service? definition required to allow portability of the 401(k) benefits to thenew employer.
5. Treatment of Forms of Distributions. Employees would be allowed to waive section411(d)(6) (anti-cut-back rules) under certain circumstances when rolling one DC plan toanother. The transferee plan would not be required to preserve the optional forms of benefitsunder the transferor plan if requirements are met to ensure the protection of participants?interests.
6. Purchase of Service Credit in Governmental Defined Benefit Plans. Ease rules allowingpurchase of service credits from one DB plan to another. For example, many teacherspurchase ?service credits? when they move from one state to another. Under current law,individuals may not use DC assets, without penalty, to purchase these credits. The bill wouldallow individuals to purchase these credits with 403(b) or 457 retirement assets.
7. Disregarding Rollovers for Purposes of Cash-Out Amounts. This provision permits anemployer to disregard rollovers for purposes of making a cash-out. The provision willremove a disincentive for employers to accept rollovers.
8. Time and Inclusion of Benefits Under Section 457 Plans. Clarifies that amounts deferredunder a 457 plan of a state or local government are includible in income when paid. Theproposal also modifies a 1986 Act transition rule to apply to agreements providingcost-of-living adjustments.
STRENGTHENING PENSION SECURITY AND ENFORCEMENT
1. Repeal Full Funding Limit. The bill would repeal the current liability full funding limit onemployer contributions to defined benefit plans. This will allow employers to more evenlyand securely fund their plans. In 1997, Congress increased the limit from 150% to 170%.Repealing the limit would allow companies even more flexibility when funding their plans.
2. Penalty Tax Relief for Sound Pension Funding. The 10% excise tax on nondeductiblecontributions would generally not apply to any contributions to a defined benefit plan up tothe full funding limit (determined without regard to the current liability component of the fullfunding limit).
3. Notice of Significant Reductions in Future Plan Benefit Accruals. Increases the noticerequirements where there is an amendment to a defined benefit plan that significantly reducesfuture benefit accruals. In the case of a significant restructuring of the plan benefit formula,affected participants would have to be given a benefit estimation tool kit allowingparticipants to easily determine how their individual benefits will be changed.
4. Limited Relief for Multiemployer Plans. The legislation will include a proposal to exemptmultiemployer plans from the 100 percent of compensation limit in 415(b)(1)(A). Inaddition, a limited exemption from the aggregation rules will be applied to multiemployerplans.
5. Protection of Investment of Employee Contributions to 401(k) Plans. Clarify the definitionof assets covered by the limitation on 401(k) plan sponsors’ ability to invest employeecontributions in company real estate or stock.
6. Regular Benefit Statements. An annual benefit statement would be required to be sent everyyear to participants in defined contribution plans. Participants in a defined benefit planwould receive a statement every three years, unless the employer automatically provided anannual notice to employees of the right to receive a benefit statement and how to go aboutobtaining one.
7. Prohibited Allocations of Stock in an ESOP of an S Corporation. Establishes a 50% excisetax applicable to distributions from an S Corporation to an ESOP shareholder unless theESOP is broad-based and benefits rank-and-file employees.
8. Amendments to SAVER Act. Establishes dates for future National Summits on RetirementSavings and facilitates the administration of such summits. Adds six new statutory delegatesto future Summits.
9. Rollover of Automatic Distributions. A plan may provide for the automatic distribution ofparticipants’ vested accrued benefits that do not exceed $5,000. Plans that do this wouldhave to directly transfer such distributions to qualified retirement vehicle unless theparticipant affirmatively elects to receive the distribution directly. This proposal would notapply to distributions of $1,000 or less. A plan would be permitted to send the distributionto a designated financial institution.
REDUCING REGULATORY BURDENS
1. Use of Prior Year Valuations. To determine the employer contributions needed for definedbenefit plans, a prior year valuation can be used, as long as the plan has a history of beingfully funded. This will allow more certainty in business budget planning.
2. Encourage ESOP Dividend Reinvestment. In order for an employer to deduct dividends paidon stock held by an ESOP, the employer would be required to give employees a choice ofwhether to receive dividends in cash or allow them to be reinvested and grow tax-deferreduntil retirement.
3. Repeal of Unnecessary Transition Rule. The special 1986 Act grandfather would be repealedin light of the changes in the definition of highly compensated employee. General ruleswould apply.
4. Employees of Tax-exempt Entities. Directs the Treasury to maintain a rule that permitstax-exempt entities to exclude employees participating in a section 403(b) plan from 401(k)coverage rules provided certain participation levels are met.
5. Treatment of Employer-Provided Retirement Advice. Employer-provided retirementplanning would be deemed not to constitute a taxable fringe benefit.
6. Pension Plan Reporting Simplification. Directs the Secretary of Treasury to modify theannual return filing requirements for plans eligible to file Form 5500-EZ to eliminate thefiling requirement if plan assets do not exceed $250,000.
7. Improvement to EPCRS Program. The IRS would be directed to simplify and expand thevoluntary employee plans compliance resolution system.
8. Repeal Multiple Use Test. Employers would be able to use all of the tests for meeting theACP and ADP tests, rather than being restricted to use of a test on either the ACP or theADP.
9. Flexibility in nondiscrimination, coverage, and line of business rules. Plans would bepermitted to use a facts and circumstances test when the mechanical tests do not reflect thenondiscriminatory nature of a particular plan design. Appropriate additional safeguardswould ensure that this alternative is not used to avoid the purposes of the nondiscriminationrules.
10. Longer Periods for ?Notice and Consent? Regarding Distributions. Under current law, abenefit in excess of $5000 cannot be distributed prior to age 62, or normal retirement age,unless the participant consents no more than 90 days before the benefit commencement. Theconsent is not valid unless the participant receives an explanation of his/her distributionoptions. In some situations, an employer advises the participant of the options, but no actionoccurs within the 90 days. Thus, notice and consent must occur again. The bill extends theperiod from 90 days to 180 days. Further, participants would be given information to theextent there is any difference in value between different optional forms of benefits so theycan make an informed choice.
11. Expand PBGC Missing Participant Program. PBGC’s missing participant program wouldbe expanded to help companies find missing participants who are eligible for benefits frommultiemployer plans and defined contribution plans.
12. Authorization for PBGC to Pay Interest on Premium Overpayments. PBGC would be giventhe authority to pay interest on overpayments of PBGC insurance premiums.
13. Rules for Substantial But Not Majority Owners. Guarantee benefits to individuals owningmore than 10 percent but less than 50 percent of a business on the same schedule asindividuals owning less than 10 percent of the business.
14. Grant DOL Discretion in Cases of Fiduciary Breach. The Department of Labor would havethe sole discretion to waive certain penalties for fiduciary breaches where they deem itappropriate.
15. Benefit Suspension Notice. For individuals not reentering the workforce, and thus notsubject to a benefit suspension, the individual benefit suspension notice requirement wouldbe eliminated. Instead, the suspension of benefit rules would have to be outlined in thesummary plan description. Individuals reentering the workforce would still be required toreceive an individual notice.
16. Plan Amendments. Amendments would not be required to be made before the last day of thefirst plan year beginning on or after January 1, 2004. For governmental plans, the date foramendments is extended to the first plan year beginning on or after January 1, 2006.Operational compliance would be required with respect to all plans as of the applicableeffective date of any amendment made by this Act.
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