At a time when everyone's attention is on other things--the newly-elected president, the stock market, basketball and football--a giant retirement bill (H.R. 1102) is moving quietly through Congress. A quartet of features politically popular to both parties is driving this bill. Even President Clinton's initial objections have been alleviated.
Senator Roth (R-DE) stated that with the unanimous Senate Finance Committee vote, "we are one step closer to helping millions of Americans prepare for a secure retirement by allowing them to save more in their IRAs, 401(k)s, 403(b)s, 457 and SIMPLE plans. This legislation will help small employers and make it easier to transfer funds between plans to better meet employee needs. And it has special provisions for a non-refundable matching tax credit for low and moderate income savers."
Key provisions driving this legislation, include:
| For: | Against: | |
| Increase contributions ceilings in IRAs, 401(k)s |
Increased savings; Increased coverage |
Shifting current assets into retirement plans without increasing overall savings |
| Allow catch-up IRA contributions |
Helping women; Increasing savings |
Allow wealthy to shift assets and save more, but not help others |
| Reduce salary- discrimination rules of retirement plans |
Increasing number of easing administrative burdens |
Allow employers to exclude more rank-and-file workers from participating |
| Change rules regarding cash-balance pension plans |
Encouraging employers to continue pension plans |
Reduced pension pay-outs and reverse pension protections |
This legislation addresses both worker and policy concerns. It is specifically aimed at the smaller employer and the low- and moderate-income workers. Key ingredients:
* IRA limits (including Roth IRA) would rise to $3,000 in 2001 and $5,000 in 2003. Workers 50 or older could contribute even more. Income ceilings on deductible IRA contributions would also be increased. More high-income workers could contribute to Roth IRAs.
* 401(k) limits would increase from $10,500 to $11,000 in 2001 and to $15,000 after 2004. 403(b) and 457 plan contributions would be similarly affected. Again, workers over 50 could contribute larger amounts.
* SIMPLE plan contributions would increase from $6,000 to $10,000 annually.
A new Roth 401(k) would be created. This would be similar to Roth IRAs where there is no deduction for contributions but there is a provision for tax-free withdrawals at retirement.
* Allow savers over age 50 to contribute an additional $5,000 "catch-up" contribution to an IRA (the Senate version pegs this at $7,500).
* Other tax-qualified plans are affected. Benefit limits for defined benefit plans (pensions) would increase to $160,000, up from $135,000. Plan contributions could be based on a salary of as much as $200,000. The percentage of pay cap for contributions would be increased from 25% to 100%. In addition, employers could deduct up to 25% of pay contributed to a profit-sharing plan.
* Provisions aimed at lower paid workers have given the bill added momentum. Low- and middle-income savers (less than $50,000 for couples and $25,000 for singles) would get a tax credit, up to $1,000, for contributions to IRAs and employer-sponsored plans. The credit would vary with the employee's adjusted gross income.
* Small business would be encouraged to set up retirement plans with up to a 50% credit for contributions made on behalf of lower-paid employees. They could also claim a credit for new plan set-up costs.
* High-income employees would see a doubling of the income limit for Roth IRA conversions. Couples could convert to a Roth in 2001 as long as their adjusted gross income was under $200,000.
While the key provisions of the bill have created excitement and bi-partisan support, critics point to some of the other provisions as problematical. Some Treasury and Labor officials are concerned that certain provisions could roll back 1980s legislation that increased retirement plan coverage, thereby excluding more middle- and lower-income workers.
--Nondiscrimination rules. Currently: Must provide coverage for 70% of workers earning less than $85,000. Change? Could reduce coverage to 20% - 30%.
--Top-heavy rules. Currently: If more than 60% of contributions are for the benefit of owners and officers, an employer must contribute 3% of pay, with three-year vesting, to other employees. Change? Eliminate top-heavy rules in some plans and dilute them in others.
--Cash balance issues. There is disagreement as to the bill's actual impact (see table above).
Advocates suggest that it is unlikely that employers would cut benefits in the current tight labor market and strong economy. While there has been some decrease in the number of pension plans, Labor Department statistics indicate that the number of medium and large pension plans have stayed relatively stable since pension reform in the 1980s, with most of the terminated plans being essentially tax shelters covering one or a few people.
Little attention is being given to other provisions (about 30). These include:
* Allow owner loans from 401(k)
* Discontinue required distribution of plan documents to all employees
* Allow additional contributions to over-funded plans
* Faster vesting
* Easier rollovers between plans, permitting consolidation of 401(k), 403(b) and 457 plan funds
* Allow small business owners (with no employees) to shelter up to 100% of income
More than 70 million Americans lack an employer-sponsored plan, causing retirement security to be an increasing concern. Gene Sperling, director of President Clinton's National Economic Council, stated, "Our approach is to be supportive of pro-savings measures such as these, while fighting to make [the bill] more equitable for low-income savers and removing provisions that would reduce income for average- and low-income workers."
All retirement legislation is a balancing act. This bill is no exception. Reducing nondiscrimination, "top-heavy" and other rules is balanced by increasing contribution limits for IRAs and 401(k)s, which may result in plan changes and in types of plan used. Would savings actually increase? Currently, less than 5% of IRA participants and 4% of 401(k) participants respectively make the maximum contribution.
Broad support in Washington, D.C., suggests that there is widespread interest and demand at the local level. The furor over cash-balance plans suggests that retirement security is a major concern for people--your clients. Retirement plans need to be an important part of your product line--for your sake as well as well as theirs.
The bill's prospects appear to be excellent. Momentum has been building. It is politically pleasing to almost everybody. The passage of the House bill was followed by unanimous action by the Senate Finance Committee. Final passage awaits the full Senate and resolution of smaller differences by a joint House Senate Committee.
Of course, in the meantime, we will have the new administration in Washington, the stock market, basketball and football. *