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CRS Reports on Major Provisions of Comprehensive Retirement Security and Pension Reform Act

SEP. 22, 2000

RS20629

DATED SEP. 22, 2000
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Citations: RS20629

 

=============== SUMMARY ===============

 

The Congressional Research Service (CRS) has issued an updated report detailing the major provisions included in H.R. 1102, the Comprehensive Retirement Security and Pension Reform Act, which was later incorporated into H.R. 5203 and approved by the House on September 19 by a vote of 401 to 20. (For related coverage, see Doc Doc 2000-24300 (3 original pages), 2000 TNT 183-1 Database 'Tax Notes Today 2000', View '(Number', H&D, Sept. 20, 2000, p. 2901, or Tax Notes, Sept. 25, 2000, p. 1559; also see Doc 2000-19549 (4 original pages), 2000 TNT 140-2 Database 'Tax Notes Today 2000', View '(Number', H&D, July 20, 2000, p. 609, or Tax Notes, July 24, 2000, p. 442.)

Written by Patrick Purcell, the report, "Pensions: Major Provisions of the Comprehensive Retirement Security and Pension Reform Act," details the amended sections of the bill that deal with individual retirement accounts and employer-sponsored pension and retirement savings plans.

The report focuses on the fact that the bill would (1) increase the maximum annual contribution to an IRA from $2,000 per individual to $5,000 and (2) include measures to encourage employers to offer pensions, increase participation by eligible employees, raise limits on benefits and contributions, and improve asset portability.

 

=============== FULL TEXT ===============

 

CRS REPORT FOR CONGRESS

 

 

Order Code RS20629

 

Updated September 22, 2000

 

 

Patrick Purcell

 

Specialist in Social Legislation

 

Domestic Social Policy Division

 

 

SUMMARY

[1] On July 19, 2000, the House of Representatives passed H.R. 1102, "The Comprehensive Retirement Security and Pension Reform Act," by a vote of 401-25. The bill was later incorporated into H.R. 5203, which was passed on September 19 by a vote of 401-20. The bill amends sections of the Internal Revenue Code that deal with Individual Retirement Accounts (IRAs) and employer-sponsored pension and retirement savings plans. It would increase the maximum annual contribution to an IRA from $2,000 per individual to $5,000. The pension measures are intended to encourage employers to offer pensions, increase participation by eligible employees, raise limits on benefits and contributions, improve asset portability, strengthen legal protections for plan participants, and reduce regulatory burdens on plan sponsors. The Joint Committee on Taxation has estimated that H.R. 1102 would reduce federal tax revenues by $16.1 billion over the 5 years from 2001 through 2005.

[2] On September 7, 2000, the Senate Finance Committee ordered reported the "Retirement Security and Savings Act of 2000." The Senate bill contains many provisions similar to those in H.R. 1102. In addition, it would (1) allow individuals age 50 and older to contribute up to $7,500 annually to an IRA, (2) provide a nonrefundable tax credit to low- and middle-income persons 18 to 60 years old who contribute to a qualified retirement plan or IRA, and (3) provide a tax credit to small employers to defray some of the start-up costs of establishing an employee pension or retirement savings plan. The bill also would increase the limit on conversions of traditional IRAs to Roth IRAs from $100,000 to $200,000 for married couples filing jointly and adjust the range of income over which the allowable contribution to a Roth IRA is phased out for joint filers such that it is twice the income limit applicable to single filers. The Joint Committee on Taxation has estimated that the "Retirement Security and Savings Act" would reduce federal tax revenues by $26.7 billion from 2001 through 2005.

[3] For a description of the Senate Bill see CRS Report RS20675 by Paul J. Graney. Both reports will be updated as further legislative action occurs.

[4] INDIVIDUAL RETIREMENT ACCOUNTS. The $2,000 annual contribution limit for individual retirement accounts (IRAs) is not indexed to the rate of inflation. Had the original 1975 limit of $1,500 been adjusted yearly to account for increases in the Consumer Price Index, it would have reached $5,353 in 2000. If the $2,000 limit set by Congress in 1981 had been adjusted annually, it would have reached $4,158 in 2000. Proponents of raising the limit on IRA contributions argue that it will encourage people to save more for retirement. Opponents say that it will result in little new saving because additional IRA contributions will consist of funds that would have been saved anyway.

[5] The bill would increase the annual limit on IRA contributions from $2,000 to $3,000 in 2001, $4,000 in 2002, and $5,000 in 2003. In years after 2003, the limit would be indexed to inflation in $500 increments. For individuals age 50 and older, the limit on annual contributions would increase to $5,000 in 2001, with indexing to begin after 2003. The Joint Committee on Taxation has estimated that the increase in IRA contribution limits and the accelerated increase in contribution limits for individuals 50 and older would result in revenue losses totaling $10.3 billion over 5 years.

[6] EMPLOYER-SPONSORED PENSIONS AND RETIREMENT SAVINGS PLANS. The bill contains provisions that are intended to expand pension coverage, promote pension fairness for women, increase portability of pension benefits for workers who change jobs, strengthen legal protections for pension participants, and reduce regulatory burdens on plan sponsors.

[7] EXPANDING COVERAGE. Beginning in 2001, the annual benefit limit for defined benefit plans would increase from $135,000 to $160,000. Thereafter, it would be indexed in $5,000 increments. The bill would lower the early retirement age to 62 and the normal retirement age to 65 for purposes of applying the limit on benefits. The annual contribution limit for defined contribution plans would be raised from $30,000 to $40,000 and indexed in $1,000 increments. The limit on compensation that may be taken into account under a plan would be raised to $200,000 and indexed in $5,000 increments.

[8] Currently, annual elective deferrals under Section 401(k) plans, Section 403(b) annuities, and salary-reduction simplified employee pensions (SEPs) are limited to $10,500, which is indexed to inflation in $500 increments. Beginning in 2001, the limit would be increased annually until reaching $15,000 in 2005. The maximum annual elective deferral to a savings incentive match plan for employees of small employers (SIMPLE) is currently $6,000. The bill would increase this limit in annual increments until reaching $10,000 in 2004. The $15,000 and $10,000 dollar limits would be indexed in $500 increments, as under present law. The maximum deferral under a Section 457 plan would increase to $11,000 in 2001, $12,000 in 2002, $13,000 in 2003, $14,000 in 2004 and $15,000 in 2005, and would be indexed in $500 increments thereafter. For the 3 years immediately preceding retirement, the limit on deferrals would be twice the otherwise applicable dollar limit.

[9] A Section 401(k) plan or a Section 403(b) annuity could allow a participant to elect to have all or a portion of the participant's elective deferrals under the plan treated as after-tax contributions (called "designated plus contributions"). These contributions would be included in income. A qualified distribution from a participant's "designated plus contributions" account would not be included in the participant's gross income. Such contributions would generally otherwise be treated the same as elective deferrals for purposes of the qualified plan rules.

[10] The bill would repeal the rules coordinating the dollar limit on Section 457 plans with contributions under other types of plans. In addition, the limit on deductible contributions under a profit-sharing or stock bonus plan would be raised from 15% to 20% of the compensation of the employees covered by the plan.

[11] The bill also would:

o eliminate some rules that apply to plan loans made to an

 

owner-employee;

 

 

o provide that a safe-harbor Section 401(k) plan is not a "top-

 

heavy plan" (i.e., does not discriminate in favor of highly

 

compensated employees);

 

 

o allow matching contributions to be taken into account in

 

satisfying the minimum contribution requirements;

 

 

o simplify the definition of a "key employee" and the

 

determination of "top-heavy" status;

 

 

o repeal the family attribution rule used to determine whether

 

an individual is a key employee by reason of owning at least

 

5% of the employing firm; and

 

 

o exempt employers with 100 or fewer employees from IRS user

 

fees for determination letters requested during the first 5

 

plan years with respect to the qualified status of a

 

retirement plan that the employer maintains.

 

 

[12] The Joint Committee on Taxation has estimated that the provisions of the bill that are intended to expand pension coverage would result in a loss of tax revenue totaling $4.6 billion over 5 years. Of this amount, $3.0 billion is attributable to the increase in the limits on annual elective deferrals under Section 401(k) plans, Section 403(b) annuities, and salary reduction SEPs.

[13] ENHANCING FAIRNESS FOR WOMEN. 1 Distributions from a Section 457 plan made pursuant to a qualified domestic relations order (QDRO) would be made under the same tax rules that now apply to distributions from tax-qualified plans as the result of a QDRO. In addition, a Section 457 plan would not be treated as violating the restrictions on distributions from such plans due to payments to an alternate payee under a QDRO.

[14] Vesting of employer matching contributions to a retirement plan would be accelerated. In addition, the bill would apply to all post-death distributions the rules that apply under current law if the participant dies before distribution of minimum benefits has begun. The bill also would reduce the excise tax on failures to satisfy the minimum distribution rules from 50% to 10% of the amount that was required to be distributed but was not distributed. In addition, the Department of the Treasury would be directed to update, simplify, and finalize the regulations relating to the minimum distribution rules. The bill also would repeal the special minimum distribution rules that now apply to Section 457 plans.

[15] The bill would permit individuals who are age 50 or older to make additional contributions to a Section 4O1(k) plan or similar plan. The maximum permitted additional contribution would be $5,000, indexed in 2006 and thereafter. Catch-up contributions to a Section 401(k) plan or similar plan would not be subject to any other contribution limits and would not be taken into account in applying other contribution limits; however, they would be subject to nondiscrimination rules.

[16] The bill would increase the limitation on annual additions under a defined contribution plan from 25% of compensation to 100%, and would conform the limits on contributions to a tax-sheltered annuity to the limits applicable to tax-qualified plans. It also would increase the limitation on deferrals under a Section 457 plan from 33.3 % of compensation to 100% of compensation.

[17] Currently, an employee is prohibited from making elective contributions and employee contributions for 12 months after a pre- retirement distribution deemed necessary to satisfy an immediate financial need. The Secretary of the Treasury would be directed to issue regulations reducing from [sic] this period to 6 months.

[18] The Joint Committee on Taxation has estimated that the provisions of the bill that are intended to enhance pension fairness for women would result in a loss of tax revenue totaling $1.8 billion over 5 years.

[19] INCREASING PORTABILITY FOR PARTICIPANTS. The bill would allow eligible distributions from qualified retirement plans, Section 403(b) annuities, IRAs, and Section 457 plans to be rolled over to any other such plan or arrangement. The rules for tax withholding applicable to rollovers from qualified plans would be extended to distributions from Section 457 plans. Employee after-tax contributions could be rolled over into another qualified plan or a traditional IRA. In the case of a rollover from a qualified plan to another qualified plan, the rollover would be permitted only through a direct rollover. Surviving spouses would be allowed to roll over distributions to a qualified plan, Section 403(b) annuity, or Section 457 plan in which the spouse participates. The bill would allow the Secretary to waive the 60-day rollover period if the failure to waive such requirement would be against equity or good conscience.

[20] Provided that certain requirements are satisfied, a defined contribution plan to which benefits are transferred would not be treated as reducing a participant's accrued benefit, even if it does not provide all of the forms of distribution that previously were available to the participant. In addition, the Secretary would be directed to specify the circumstances under which early retirement benefits, subsidies, or optional forms of benefit may be reduced or eliminated without the rights of participants being materially affected.

[21] The bill would modify the distribution restrictions applicable to Section 401(k) plans, Section 403(b) annuities, and Section 457 plans to provide that distribution may occur upon severance from EMPLOYMENT with the plan sponsor rather than separation from SERVICE under a particular plan. (This is the so- called "same desk rule," which primarily affects plan participants in firms that have been merged with or acquired by another firm).

[22] A participant in a state or local governmental plan would not be required to include in gross income a direct trustee-to- trustee transfer to a governmental defined benefit plan from a Section 403(b) annuity or a Section 457 plan if the transferred amount is used to purchase permissive service credits under the plan or to repay certain contributions. A plan would be permitted to disregard benefits attributable to rollover contributions for purposes of the cash-out rules.

[23] The Joint Committee on Taxation has estimated that the provisions of the bill that are intended to improve portability of pension benefits would result in a loss of tax revenue totaling $0.006 billion, ($6 million) over 5 years.

[24] STRENGTHENING PENSION SECURITY AND ENFORCEMENT. The "full funding limit" for tax-qualified plans would be 160% of current liability for plan years beginning in 2001, 165% beginning in 2002, and 170% beginning in 2003. The current liability full funding limit would be repealed for plan years beginning in 2004 and thereafter. The special rule allowing a deduction for unfunded current liability generally would be extended to all defined benefit pension plans covered by the Pension Benefit Guaranty Corporation (PBGC). If an employer so elected, contributions in excess of the current liability full funding limit would not be subject to the excise tax on nondeductible contributions. The bill also would modify the Section 415 limits for multi-employer plans.

[25] In the case of defined benefit plans -- other than governmental plans and certain church plans -- with more than 100 participants, the plan administrator would be required to notify plan participants in advance of any amendment that would significantly reduce the rate of future benefit accruals. (Such reductions in accrual rates sometimes occur, for example, when a traditional pension is converted to a cash balance plan). The notice would be required to include sufficient information to allow participants to understand how the amendment would affect different classes of employees. In some cases, additional information would be required to be provided after the amendment takes effect. An excise tax would be levied against the plan sponsor if the required notice is not provided. The Secretary would be required to report to Congress on the effect of cash balance conversions on participants' pension benefits, with special reference to periods during which no new benefits are accrued (so-called "wear-away" periods).

[26] Under the bill, an excise tax would be levied on an employee stock ownership plan (ESOP) that engages in prohibited transactions with "disqualified individuals," who are deemed to be substantial shareholders of the corporation sponsoring the plan.

[27] The Joint Committee on Taxation has estimated that the provisions of the bill that are intended to strengthen pension security and enforcement would result in a loss of tax revenue totaling $0.114 billion, ($114 million) over 5 years.

[28] REDUCING REGULATORY BURDENS. A defined benefit plan with assets equal to at least 125% of current liability would be permitted to use a valuation date within the prior plan year. An employer would be entitled to deduct dividends that, at the election of plan participants or their beneficiaries, are paid to the plan and reinvested in employer securities. The special definition of a "highly compensated employee" under the Tax Reform Act of 1986 would be repealed.

[29] The bill would direct the Treasury Department to revise its regulations under Section 410(b) to provide that, if certain requirements are satisfied, employees of a tax-exempt charitable organization who are eligible to make salary reduction contributions under a Section 403(b) annuity may be treated as excludable employees for purposes of testing a Section 401(k) plan. Qualified retirement planning services provided to an employee and his or her spouse by an employer maintaining a qualified plan would generally be excluded from income and wages.

[30] The Secretary of the Treasury would be directed to exempt from the annual return requirement any plan that covers only the sole owner of a business that maintains the plan, or partners in a partnership that maintains the plan, if the total value of the plan assets as of the end of the plan year and all prior plan years does not exceed $250,000 and the plan meets certain other requirements. In addition, the Secretary of the Treasury would be directed to provide for the filing of a simplified annual return substantially similar to the Form 5500-EZ by a plan that meets certain requirements.

[31] The Secretary of the Treasury would be directed to continue to update and improve the Employee Plans Compliance Resolution System (EPCRS), giving special attention to:

o increasing the awareness and knowledge of small employers

 

concerning the availability and use of EPCRS;

 

 

o taking into account the special concerns and circumstances

 

that small employers face with respect to compliance and

 

correcting compliance failures;

 

 

o extending the duration of the self-correction period under the

 

Administrative Policy Regarding Self-Correction (APRSC) for

 

significant compliance failures;

 

 

o expanding the availability to correct insignificant compliance

 

failures under APRSC during audit; and

 

 

o assuring that any tax, penalty, or sanction that is imposed by

 

reason of a compliance failure is not excessive and bears a

 

reasonable relationship to the nature, extent, and severity of

 

the failure.

 

 

[32] The Secretary of the Treasury would be directed to issue regulations describing the circumstances under which a plan may be evaluated for discrimination in favor of highly-paid employees by means of a "facts and circumstances test," rather than through the mathematical formulas prescribed by current law. Under the bill, a plan maintained by any governmental entity would be exempt from the nondiscrimination and minimum participation rules.

[33] The Joint Committee on Taxation has estimated that the provisions of the bill that are intended to reduce regulatory burdens on pension plan sponsors would result in a loss of tax revenue totaling $0.256 billion, ($256 million) over 5 years.

[34] PROVISIONS RELATING TO PLAN AMENDMENTS. Any amendments to a plan or annuity contract required to be made by [sic] as a result of this legislation would not be required to be made before the last day of the first plan year beginning on or after January 1, 2003. In the case of a governmental plan, the date for amendments would be extended to the first plan year beginning on or after January 1, 2005. The Joint Committee on Taxation has estimated that this provision will have no effect on federal tax revenues.

 

FOOTNOTE

 

 

1 These provisions are designed to help workers with short- term or intermittent attachment to the labor force.

 

END OF FOOTNOTE
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