House Majority Leader Richard Armey and Sen. Richard Shelby, R-Ala., are offering employers a simplification of pension laws beyond their wildest dreams.
But the proposal to pluck out huge chunks of the tax code pension sponsors love to hate also could free them to dispense with pension plans for rank-and-file workers, and remove any incentive for small business owners to set up pension plans for anyone other than themselves.
Even so, observers say the proposal has no chance of passage this year, and possibly ever, depending on the outcome of the 1996 presidential elections.
Some Washington-based pension lobbyists welcome the two congressmen's efforts. James A. Klein, executive director of the Association of Private Pension and Welfare Plans, called the proposal "an overall cleansing of the troublesome rules that plague the pension system currently."
But others warn the bill could prompt companies to shrink their pension plans to a select group of highly paid executives.
The Armey-Shelby proposal erases all of the rules intended to ensure pension plans do not favor top executives over lower-paid employees. It would give employers a free hand to offer richer pensions to executives and nothing to the rank and file, observes Gerald Cole, special counsel for employee benefits research at Milliman & Robertson Inc., Washington.
Doug Koopman, an aide to Mr. Armey, says the congressman's perspective is: "An employer and employee agree on a bundle of benefits, including wages and fringe benefits. Nothing in the tax proposal disturbs that bundle fundamentally."
Mr. Armey introduced his proposal in mid-July along with an identical measure offered by Sen. Shelby. Mr. Armey's recent proposal is a more sweeping version of the legislation he offered last year. The Armey-Shelby bill also would:
Repeal all of the rules governing top-heavy plans. Now employers must speed up vesting schedules for lower level employees if they want to offer generous benefits to top executives.
Erase all caps limiting the amounts of benefits employers can give to employees when they retire. Current law limits to $120,000 the maximum companies can pay out in annual pensions to employees when they retire at age 65. Employees quitting work at a younger age receive considerably less.
Wipe out the 15% excise tax retired employees must pay on pensions that exceed $150,000 from all plans in a year, and the 10% penalty employees must pay on early withdrawals they make from retirement plans.
Eliminate penalties on reversions of pension assets that exceed 125% of current liabilities. The reversions would, however, be counted as part of a company's taxable income in that year.
Counterbalancing tax reform
Frank McArdle, manager of the Washington office of Hewitt Associates, says Mr. Armey needed to throw in the simplification measures to counterbalance his tax reform plan's lower tax rate (17%), which would otherwise lower employers' incentives to offer pension plans.
But lawmakers aren't expected to pass any tax reform legislation until well after the 1996 presidential elections. Even Mr. Armey acknowledges his proposal is intended simply to stake out his position on the issue.
Some observers doubt his proposal would ever fly.
More modest bill introduced
Meanwhile, a more modest pension simplification bill, S. 1006, was introduced by Sens. David Pryor, D-Ark., and Orrin Hatch, R-Utah, June 29. Steve Glaze, tax counsel to Mr. Pryor, said the fate of pension simplification depends on how hard pension groups lobby members of Congress.
"There will be many twists and turns. It's critical pension simplification be raised to a level (of visibility) between now and Labor Day because it's not there yet," he said.
Because the pension simplification bill also would cost the U.S. Treasury, the legislation will have to jockey with other causes dearer to Republican hearts. One provision - expanding 401(k) plans to governmental units and tax-exempt organizations - is estimated to cost the government $225 million over five years, according to a report by the Joint Committee of Taxation issued in November 1993, the last time the committee came up with a price tag for the pension simplification bill.
And the other key provision - allowing employers to skip the non-discrimination tests for 401(k) plans as long as they match employee contributions up to a specified level - could cost the U.S. government $700 million to $800 million over five years because employees would be contributing more. That estimate comes from Will Sollee Jr., counsel in the Washington office of Kirkpatrick & Cody and a former Democratic tax counsel to the Senate Finance Committee.
"We are going to make every effort possible to include as many pension simplification or miscellaneous tax provisions in any (tax) bill we get. The problem is some of the pension simplification provisions cost money and it's not clear how we could pay for it," said a key Republican congressional aide who asked not to be identified.
Mr. Sollee agreed. "I don't get the sense it is at the top of anybody's list."
Among the objectives of pension legislation:
Small and midsized companies would find it easier to prove their 401(k) plans are not discriminatory. Simplification also would clarify the definitions of highly paid employees and leased employees, and would allow governmental units and tax-exempt organizations to offer 401(k) plans.
Complicated calculations by employers would be eliminated. The calculations are used to prove employers have not exceeded caps on benefits for employees from both a traditional defined benefit pension plan and 401(k)-type retirement plans.
Favorable tax treatment of lump-sum distributions would be killed. Now, retirees may average the distribution over five years.
The family aggregation rules would be repealed. Those rules limit the amount of benefits small-business owners can receive if spouses and other family members work in the same company. The rules lump family members together and allow benefits to be calculated only on the first $150,000 of salary, even if a husband and wife each earn that much.
A tax credit of up to $10,000 would be given to small businesses with fewer than 50 employees that set up retirement plans. The bill also would expand simplified employee pension plans to small businesses with up to 100 workers; the current limit is 25 employees.
Piggybacking pension measures
Few pension measures are big enough to clear Congress on their own and usually must be attached to larger bills. In this case, pension simplification legislation is expected to be tied this year to the budget reconciliation bill - a gargantuan tax bill that lawmakers are expected to craft sometime this fall. It will stitch together proposals from various congressional committees to come up with savings to meet earlier agreed upon spending targets.
Even if the measure passes Congress, President Clinton could veto it. The White House has threatened to veto any budget bill that would cripple key government agencies and nip at the president's favored programs.
Still, pension lobbyists are optimistic some or all of the pension simplification legislation will get enacted this year. Their reasons:
The cost of the measure, around $2 billion, pales in comparison with other items on the Republican agenda.
The issue gained higher visibility after the president strongly endorsed it in June.
Pension simplification has broad support from both Republicans and Democrats, and from small business. It passed Congress twice in the early 1990s but was vetoed by President Bush because it was attached to a bigger tax bill. The measure was revived and passed the House in the last session but fizzled in the Senate.
The measure introduced by Messrs. Pryor and Hatch was followed by a similar bill introduced in the House in July by Reps. Rob Portman, R-Ohio, and Benjamin L. Cardin, D-Md.