WASHINGTON -- The nation's budget surplus has ended Congress' money-grabbing raids on the pension system.
That's the message from the inclusion of a slew of pension provisions in tax legislation crafted by the House and Senate tax-writing committees, despite President Clinton's vow to veto the package Republicans ultimately send him.
The House and Senate tax bills restore some of the cuts inflicted on pension funds between 1982 and 1993. But don't cheer too soon. Because of the threatened veto, not every provision will make it into the final tax package.
"The tax bills that pass the House and the Senate before the (August) recess will be the blueprints from which they will work, so it does matter what is in the packages," said James M. Delaplane Jr., vice president of retirement policy at the Association of Private Pension and Welfare Plans, representing large employers.
Among the provisions in H.R. 2488, the Financial Freedom Act of 1999, and The Taxpayer Refund Act, that please employers the most:
* Letting employees sock away more money in retirement plans, including letting workers older than 50 contribute more money to their retirement plans to make up for earlier years when they couldn't.
* Raising the compensation limits on which employee contributions to all defined contribution plans are based.
* Phasing out the funding limit that caps employer contributions to pension plans at 150% of the current liability.
* Reducing the Pension Benefit Guaranty Corp. flat rate insurance premium for new pension plans covering fewer than 100 workers to $5 per participant for the first five years.
* Allowing job-hoppers to take retirement savings from one employer-sponsored plan to another.
* Allowing companies offering employer stock ownership plans to claim tax deductions on dividends paid to employees even if they choose to reinvest those dividends directly in the ESOP.
"The symbolism of increasing the limits is the most important piece of the legislation at least in part because of the perception of the direction the government is going from cutting savings to increasing savings," said Randolf H. Hardock, partner at the Washington law firm of Davis & Harman.
Under both bills, the limit on employee contributions to 401(k)-type retirement plans, for example, would rise to $15,000, up from $10,000 now. Workers covered in small-business SIMPLE plans would be able to contribute up to $10,000, up from $6,000. The House bill also would let workers covered by Section 457 plans to eventually contribute up to $15,000 while the Senate bill would allow up to $12,000.
Also, the House bill would not let contributions to 401(k) and 403(b) plans count against contribution limits for 457 plans.
Boon for older workers
For older workers, those over 50, the House bill would let participants in 401(k)-type plans and SIMPLE retirement plans contribute up to another $5,000 extra (indexed for inflation). The Senate version would let older workers contribute up to another 50% of the increased limits to their employer-sponsored retirement plans as well as individual retirement accounts.
Moreover, under the Senate bill, employers would not have to run non-discrimination tests on the catch-up contributions to prove they do not discriminate against lower paid workers.
At any rate, when both the higher limits and the catch-up provision are fully implemented, workers could put in $22,500 annually -- including $7,500 in a catch-up provision -- under the Senate bill. Under the House bill, workers' contributions would cap out at $20,000 in 2005.
In addition to raising the contribution limits, the bills also would raise the compensation limits on which employee contributions are based.
Under current law, participants may contribute up to 25% of pay or $30,000, whichever is less. The Senate bill would let employees stash up to one year's pay, although they still would not be able to put more than $15,000 into 401(k)-type plans (plus the "catch-up" contribution if they are 50 or older). The House version would raise the ceiling so workers could contribute up to $40,000 or a year's salary, whichever is less. The House bill also would increase to $160,000 from $130,000 the annual benefit employees can collect from a defined benefit plan, while the Senate bill did not have a similar provision. And the House bill would let employers take up to $200,000 of an employee's salary into account in basing pension benefits, up from $160,000 now. The Senate bill does not have a corresponding provision.
New PBGC proposals
In addition to the provision reducing the PBGC flat rate premium for new defined benefit plans, a second provision would phase in the variable-rate premium for new plans so employers would not pay the full premium until the sixth year.
Under current law, employers pay a flat premium of $19 per participant; underfunded plans also pay an additional premium of $9 per participant per $1,000 of unfunded vested benefits. Yet another provision would expand the PBGC's missing participant program to industrywide labor pension plans and defined contribution plans. The rationale for the PBGC premium cuts was to spur the creation of defined benefit pension plans, especially among smaller businesses.
Ironically, the Clinton administration also has been pushing for these provisions, which were included in the president's fiscal 2000 budget.
In the end, however, the PBGC provisions were dropped from the House tax bill, much to the disappointment of employer groups and the Clinton administration.
"If it doesn't get in (to the combined House and Senate tax bills), we would continue to propose it. We think it is good policy to encourage new defined benefit plans," said Judy Schub, assistant executive director for legislative affairs at the PBGC.
The job-hopper provision would allow workers who switch between the private sector and government jobs to move their retirement money between 401(k) retirement plans and 403(b) or 457 plans. A second "portability" provision would allow workers to move their money from IRAs and into 401(k)-type employer-sponsored retirement plans and back. Finally, the bills would permit workers to roll over after-tax contributions between employer-sponsored plans and IRAs.
These provisions, which were also part of President Clinton's budget package earlier this year, are considered to be a shoo-in for the final bill because they promote portability of retirement dollars at a negligible cost. Current law does not permit workers to move their money between 401(k) and 403(b) or 457 retirement plans. Nor does current law permit transfer of retirement dollars to employer-sponsored plans from regular IRAs, except when those IRAs contain money originally rolled over from employer plans. Moreover, while some plans might now allow employees to make after-tax contributions to retirement plans, that money can't be transferred to a traditional IRA or other plans.
The bills also would phase out the funding limit that caps employer contributions to pension plans at 150% of the current liability. Employers that pay in more than that now cannot deduct their contributions and must pay a 10% excise tax on the excess contribution. The House and Senate tax bills would remove the funding ceiling over time.
Helping the rich?
But critics warn that many of the provisions in the House and Senate tax bills will enable the rich to tuck away more money in tax-favored retirement plans, while hurting the ability of rank-and-file workers to save for their old age.
The legislation would "roll back critical protections for low- and average-wage earners, while providing costly and unneeded tax breaks for company executives and other highly paid employees," said Karen Ferguson, director of the Pension Rights Center, Washington.
Particularly irksome to the PRC, The Center on Budget and Policy Priorities, the American Association of Retired Persons and the Feminist Majority, among others, is a provision in the House and Senate tax bills that would weaken so-called top-heavy rules that ensure lower income workers at small, family-owned businesses get equitable pensions.
Under the current rules, small-business retirement plans that offer the majority of their benefits to top or "key" employees and family members automatically must offer a minimum benefit for rank-and-file workers and speed up the vesting of their benefits. But changes proposed in the House and Senate tax packages would exempt plans from the rules if they already qualify for protections from non-discrimination rules because they offer a minimum set of benefits. Moreover, the changes would not consider family members to be automatically treated as key employees unless they are also top earners. The proposed changes also would take employer matching contributions into account in calculating the minimum benefits. Moreover, the tax proposals would exempt from the definition of "key" employees all those earning less than $150,000 a year under the House bill, but not under the Senate bill. But the PRC and the other organizations, in a letter to lawmakers last week warned, "Changes that weaken the rules could result directly in reduced benefits for lower paid employees in plans that already provide most of their benefits to higher paid workers."
But Brian Graff, executive director of the American Society of Pension Actuaries, an Arlington, Va.-based organization that works with small businesses, rebuts those charges. "Everyone recognizes that approximately 80% of small business employees do have an opportunity to save. Relaxing the top-heavy rules would give these employees a chance to achieve retirement security in the future," he said.
Then too, the Senate Finance Committee bill would expand the ability of Americans to save through IRAs. Under current law, workers can contribute only $2,000 each annually (a married couple can contribute $4,000) to either tax-deductible IRAs or after-tax Roth IRAs. The Senate Finance Committee proposal would increase contributions to $5,000 over time, so a married couple would be able to contribute $10,000.
Moreover, the Senate tax bill also eliminates income ceilings on individuals and families contributing to Roth IRAs and lifts the income ceiling for individuals and families to contribute to tax-deductible IRAs. Moreover, those who want to convert traditional IRAs to Roth IRAs can do so if they make less than $1 million, up from the $100,000 limit at present. But before the package can reach Mr. Clinton's desk, the separate tax packages must clear their respective houses, and be melded together.
House lawmakers approved their tax package July 22 by a 223-208 vote. The Senate is scheduled to vote on the legislation this week.