A provision in the Republican tax package that would let companies tap surplus pension fund assets for five years might become permanent.
That change would result in billions of dollars leaking from the private pension system. The Pension Benefit Guaranty Corp. estimates companies would pull out as much as $30 billion over the next five years alone.
Another provision - eliminating non-discrimination testing for 401(k) plans - probably would benefit small and midsized 401(k) plan sponsors more than large companies. The latter, experts say, simply won't be able to afford the much richer employer matches necessary to receive the safe harbor.
Both proposals are contained in tax legislation that has been approved by House and Senate tax-writing committees; lawmakers in both chambers were scheduled to deliberate late last week on the entire budget package into which the tax measures will be folded.
The pension reversion provision tells companies lawmakers recognize their need for flexibility in financing their pension funds, says Ken Kies, chief of staff on the Joint Committee of Taxation, that prepared the cost estimates for the Republican budget package in both chambers.
"This is the beginning. The right thing to do would be to make it permanent," Mr. Kies said.
Mr. Kies noted a 1990 tax code amendment - allowing companies to use surplus pension assets to pay retiree medical costs - began as a five-year package, but then was extended for another five years.
Other pension experts, including employee benefits attorneys, agreed the reversion proposal has a good chance of becoming permanent.
Republican lawmakers and lobbyists representing large companies maintain the provision would encourage companies with shortfalls in their pension funds to put more money in, knowing they could easily remove excess assets in a pinch.
Clinton administration officials and some pension lawyers believe that argument is disingenuous.
For one thing, current tax law prevents companies with fully funded pension funds from making further tax-deductible contributions. Those that do so risk paying stiff penalties.
"This is a five-year window for companies to take the money and run. There's nothing in here that would encourage companies to fund up," commented Martin Slate, executive director of the Pension Benefity Guaranty Corp.
Senate, House versions differ
The Senate version of the provision, which would let companies pull out surplus pension assets to pay for the current year's cost of other employee benefits, is expected to raise $4.7 billion through the end of the decade. Companies would not have to pay any excise taxes although they would have to declare the reversions as taxable income.
The more expansive House version would let companies use pension fund surpluses for any purpose and is estimated to raise about twice as much by the year 2000. However, companies withdrawing money from their pension funds after July 1, 1996, would have to pay a 6.5% excise tax on top of income taxes.
Under both versions of the provision, however, companies could not siphon money out of their pension funds unless they have sufficient assets to maintain at least a 25% cushion on top of current liabilities, or to meet all their accrued and future liabilities.
The 401(k) safe harbor proposal, meanwhile, is identical in both chambers, except the Senate's version would be effective in 1998, the House version in 1996.
If the costly testing is eliminated, higher-paid employees no longer would be prevented - because lower paid employees weren't contributing enough - from deferring the maximum allowable ($9,240 in 1995) to their 401(k) plans.
Safe harbors have a 'catch'
There's a catch, however. Under one safe harbor, companies must match 100% of employee contributions up to 3% of pay and match at least 50% of the next 2% of pay for non-highly compensated workers.
The formula also requires an equal employer match for highly compensated and non-highly compensated workers.
Under a second safe harbor provision, employers would be exempt from non-discrimination testing if they provide an automatic 3% contribution of salary for every eligible employee, regardless of whether they are currently enrolled in the 401(k) plan now.
Both formulas are much richer than the typical corporate 401(k) match of 50% of up to 6% of pay deferred by the employee, said Frank McArdle, manager of the Washington research office of Hewitt Associates L.L.C.
Mr. McArdle said the contribution requirements would increase the cost of an average employer's contributions by about one-third.
Executives at some big companies, such as Marriott International Inc., Bethesda, Md., say the safe harbor proposal would be too expensive. Marriott has 45,000 participants in a $1.1 billion profit-sharing plan with a 401(k) feature.
Chevron Corp., in San Francisco, with 32,600 employees in a $3.6 billion 401(k) plan, already meets the match requirements most of the time, said Brendan O'Shaughnessy, benefits analyst.
Chevron's company match fluctuates, depending on profit-sharing components. "We would not, I think, want to get into a situation where we had to guarantee a profit-sharing match in a given year, in order to get the safe harbor," he said.
But WorldCom Inc., Boca Raton, Fla., would seriously consider meeting the safe harbor requirements, said Dona Miller, director of human resources/employee benefits.
"I know it will cost something for our company to increase its contributions, but it would be worth it for us," she said.
WorldCom has about 7,000 participants in its $100 million-plus 401(k) plan.
Ms. Miller said the company already matches 100% on the first 3% of salary deferral, so going the extra step and adding a second match of 50 cents on the next 2% of salary would be worth serious consideration.
Hewitt's Mr. McArdle also noted the proposal required employer contributions to be immediately and fully vested, thus eliminating account forfeitures when a non-vested employee terminates employment. "Only about one-third of employers now offer full and immediate vesting. Many companies with high turnover, especially in retail industries, rely on forfeiture dollars to make their future contributions to active employees," he said.
Jeff Croyle, a principal at employee benefits consultant Kwasha Lipton, Fort Lee, N.J., agreed. "The initial reaction of many companies will be that the requirements are just too expensive. It's a safe harbor that few, if any companies, can meet today."
The Republican tax package that cleared the Senate Finance Committee Oct. 19 also contained a handful of other provisions added on to the "pension simplification" grab-bag of measures that had been approved by the House Ways and Means Committee last month.
In many cases, the provisions were added to lower the cost of the pension simplification package and make it more palatable.
Among the differences between Senate and House proposals:
The Senate Finance Committee jettisoned a provision that would have let public employers offer 401(k) plans or 457 plans, but not both. The Senate provision would still let tax-exempt organizations set up 401(k) plans.
The Senate committee also deleted a provision in the House package that would have prevented public employers from dipping into 457 plan assets by sheltering them in separate trusts, solely for the benefit of employees. Because 457 plan assets are not set aside in trusts akin to 401(k) plan assets, employers may freely access that money, jeopardizing retirement savings of millions of public sector employees around the country. Public employers had lobbied hard for the creation of such trusts following the Orange County fiasco.
The Senate Finance Committee also added a provision enabling small businesses to offer hassle-free retirement plans. Small business owners, with fewer than 100 employees, would get a tax credit of up to $500 for setting up new retirement plans and would not have to conduct onerous non-discrimination tests. Under the provision, employers could create either individual retirement accounts or 401(k) plans for their employees. Employers would have to match employee contributions of up to 3% of workers' salaries, except under tough economic times, when they could lower the match to 1% of pay for no more than two years.
Unlike the House version, the Senate Finance Committee eliminated, for three years, the 15% excise tax on huge pension payouts - annuities in excess of $150,000 a year, or lump sum payments in excess of $750,000. That provision is estimated to raise $124 million by the year 2000 through income taxes small business owners, entrepreneurs and professionals are expected to pay during the three-year window. But some pension experts worry it might tempt small business owners to shut down their pension plans that also cover their employees. That's because current law prevents participants from taking out money from pension plans unless they retire or the plans are shut down.
Companies that violate tax law, such as by borrowing money from their pension plans, or putting in more money than allowed under the law, would have to shell out a higher penalty to the tax man. The Senate tax package doubles the penalty to 10% from the current 5%.
Because few companies want to break the law, pension experts note this was another provision thrown into the pot to raise money - in this case $17 million by the end of the decade.