Bush's pension proposal

Tom Poje · January 31, 2003

[Full text of the press release with first details of the proposal:

http://benefitslink.com/cgi-bin/pr.cgi?dat...tabase_id=33984 ]

Good grief. check these suggested changes out!

Yes. The proposal includes the following provisions that

would greatly simplify the administration of all defined

contribution plans:

1. There would be a single test to show that the plan meets

the nondiscrimination rules with respect to coverage --

ratio-percentage coverage. Under this test, the percentage

of an employer’s nonhighly compensated employees covered

under a plan would have to be at least 70% of the

percentage of the employer’s highly compensated employees

covered under the plan. The other coverage testing

alternatives would be repealed.

2. Permitted disparity and cross-testing would be

prohibited for defined contribution plans.

3. The top heavy rules would be repealed for defined

contribution plans.

4. There would be a uniform definition of compensation for

all purposes for defined contribution plans – the amount

reported on form W-2 for wage withholding, plus the amount

of ERSA deferrals.

5. A simplified definition of highly compensated employee

would be adopted under which all individuals with

compensation for the prior year above the Social Security

wage base for that year would be considered to be highly

compensated employees.

Does the ERSA proposal have any effect on defined

contribution plans that do not involve employee deferrals

or employee after-tax contributions? In other words, does

the proposal affect pure profit sharing plans, stock bonus

plans, and money purchase pension plans?

Other than the simplifications discussed in the preceding

question, the ERSA proposal would not affect the rules

applicable to employer contributions to defined

contribution plans, other than safe harbor nonelective

contributions or matching contributions.

Does the ERSA proposal have any effect on defined benefit

plans?

No, the proposal would not affect the rules applicable to

defined benefit plans.

AndyH · January 31, 2003

Relax, it must be a hoax perpetrated by Ted Kennedy. Good hoax, Ted!

mbozek · January 31, 2003

No- Its due the inability of the IRS to administer all of the crazy provisions for Q plans with a reduced staff- In other words there are few resources available for regulation of an area that yields no revenue.

January 31, 2003

As a relatively new benefits attorney, I am somewhat fond of the complexity of the retirement plan rules because they provide work for me. Do others view these changes, if implemented, as a boon for attorneys, or with they make our work disappear?

AndyH · January 31, 2003

It'll make this message board and 3/4 of ASPA disappear, among other things. Hope they're on top of this.

Mike Preston · January 31, 2003

AndyH, no, it won't. It will force those who are in the business of providing retirement planning consulting to concentrate on, er, retirement concepts. Now, if only we could get rid of lump sums entirely we could return focus to where it belongs. Saving money for retirement.

AndyH · January 31, 2003

I'm going to dig out the cross tested final regulations and see if I can unscramble the coded message that says "payback's a bitch"!

mbozek · January 31, 2003

The hidden agenda is to reduce revenue loss by limiting er contributions to DC plans. Another part of the agenda is to eliminate deductible IRAs and permit all taxpayers to make contributions to Roth IRAs of up to $7500. The thinking is that taxpayers will be willing to trade current income tax deductions in return for elimination of taxation on all distributions to the owner, spouse and heirs which will create parity with non retirement investments in which dividends are tax free.

January 31, 2003

What are the odds that Bush's proposal will pass in anything close to its entirety?

I agree with mbozek about the hidden agenda. and AndyH, when you find that coded message, let me know where it is!

Tom Poje · January 31, 2003

The logic of the plan to make things simpler so maore people adopt plans makes no sense.

Such an animal already exists, and no one wants them.

Standardized plans.

But now they want to take away the ability to even integrate the plan. But you don't have to integrate anyway.

So really, the only change is getting rid of top heavy.

ok, a change to the definition of who is an HCE, but since the plan passes coverage, who cares.

so it looks like this proposal takes the standardized plan and gives you even less options in return for getting rid of top heavy.

But you can already do that if you adopt a safe harbor 401k.

mbozek · January 31, 2003

The idea is to reduce contributions to DC plans by requiring that ers make the same % contributions for non HCEs as owners and HCEs. Employers will not want to increase pension plan costs by contributing the same % of comp for all ee. Elimination of intergration could require doubling of er contributions for comp under FICA limit to make same % contribution for comp above the limit. The ers will either contribute less for HCEs or abandon such plans and employees will contribute $7500 to roth IRAs on an after tax basis with no revenue loss up front. The admin has to support DB plans in order shore up the PBGC which will continue to take big hits from the bankruptcy of airlines (UAL, USAIR) and steel cos (National, Bethelham, etc) not to mention Enron. PBGC added $8B in pension liabilities in 2002 which wiped out its surplus.

RTK · January 31, 2003

My cynical ear heard that the goal is to shift pre-tax saving to after-tax saving to maximize short term revenue. Note that the combination of LSA and RSA permits $15,000 of "tax-preferred savings" per individual per year (subject to RSA compensation). Now, ignoring the kids for the moment, I wonder where I can find that extra $30K for me and the spouse each year.

jevd · January 31, 2003

This makes for great discussion but the expected timing on this is impossible. Congress has to Digest, Debate, Decide & Deliver this legislation before the end of the year so the general public can notify their trustees/custodians to convert existing accounts to take advantage of four year tax break on the conversion.

Not to mention that the DEMS will say this is just another break for the rich. I also wonder where that loose 30k/yr is coming from?

Mike Preston · January 31, 2003

Defined benefit plan installations?

RTK · January 31, 2003

$7,500 for my LSA, $7,500 for my RSA, $7,500 for my spouse's LSA and $7,500 for my spouse's RSA

E as in ERISA · January 31, 2003

$7.500 to my LSA, $7,500 to my RSA, $15,000 to my ERSA

david rigby · February 1, 2003

Please don't forget to leave some for your EA.

Mike Preston · February 1, 2003

Where's Allan Sherman when you need him? How would Harvey and Sheila have reacted?

How do we pronounce ERSA? Is it three syllables (er-es-eh)?

If so, new lines can be added below the following:

They bought a house one day,

Financed by FHA.

It had a swimming pool

full of H2O.

Funded their RSA,

filled up their LSA

IBM's CBP

became an Er-S-A.

Transferred their IRA's

Switched their QSTP's

Now they'll pay no tax

until their dying day!

=====================

I know, I know. I won't give up my day job.

February 1, 2003

this could be....

only in the USA

Gilmore · February 1, 2003

I found the benefits attorney's comments on the previous page most amusing. Usually when things get "simplified" we work even harder.

February 3, 2003

What amazes me most about this proposal is the fact that Bush feel this is going to be an incentive for small businesses to implement retirement plans . . . all of our small businesses love the cross tested designs, particularly the blend of safe harbor with new comp. The complexities of these plans that Bush takes issue with aren't really the concern of the clients in terms of understanding the details. They certainly understand the basics, and we have never heard any complaints . . .

The saddest thing is, if the only options available for DC plans will essentially be "vanilla," we consultants will lose a large chunk of our client base to the big investment houses who can package these standardized retirement plans for lower fees. We consultants will certainly not be able to provide anything unique in terms of plan design, and that has always been our edge.

I'm depressed.

jevd · February 3, 2003

Mike Preston,

Its great to hear there's an Allen Sherman fan still out there. Maybe my LPs are worth something.

Lets All Call Up ATT & Protest to the President March!

jvd

February 3, 2003

Does anyone think this proposal will get passed?

mbozek · February 3, 2003

yes because the republicans control both houses with greater majorities than they had in 2001 and because the pension proposals will be part of the overall tax reduction package. There will be some tweaking in the proposals.

February 3, 2003

For what it's worth from a "cog:" I'm willing to bet that this proposal will remain as a package deal, perhaps with some modifications, but I'm sure pensions as we know them will be a thing of the past.

We've got a slew of financial institutions who will gain: banks, credit unions, mutual fund companies . . . (the IRS will surely be glad they don't have to audit cross-tested plans any more)!

Who will care about any outcry from the pension industry? How can an outsider truly appreciate the fine art of compliance mathematics and plan design? No, in one big sweep, it will all be gone, and our professional designations will be meaningless. (If the proposal passes, anyone can pass the C-4!)

AndyH · February 3, 2003

Were all the industry advocacy groups asleep at the switch?

This is from ASPA's most recent newsletter, about the Economic Stimulus Bill:

"The acceleration of some of the limit increases passed in EGTRRA .......and an increase in the required beginning date for minimum required distributions (e.g. 70 1/2 to 75) are some of the pension proposals currently being considered for this package"

Huh?!!!!!

This is from the "Washington Update" section!!!!!

Not a word about wiping out all DC plans as we know them and putting most of the people in this industry out of work.

February 4, 2003

I saw the article where Matthew P. Fink, President of the Investment Company Institute Hails Bush Savings and Retirement Proposals as "True Milestone."

I guess I'd be pleased if I knew most of the companies that I represented won't have to worry about liability for the poor compliance testing they did in the past.

FWIW, I don't have a problem with many of the changes that are going to be made. I do feel that eliminating Cross Testing and to a lesser extent the integration formula in DC plans will have a negative effect on small business owners wanting to install a plan. Hopefully, there will be some modifications to the proposal that will allow these formulas to stay in DC plans.

MGB · February 4, 2003

AndyH,

The economic stimulus bill and Bush's proposal are two completely different topics. No lobbyist group has any input whatsoever in anything Bush says. He makes these things up as he goes along (with nearly all of this coming from his listening to Pam Olsen at Treasury who doesn't talk to advocacy groups) and no one had heard anything about this prior to last week (I know that because I am in the middle of all information within ERIC, ABC, and the AAA, and to a lesser extent, ASPA). The advocacy groups can only be reactionary to it, rather than the standard proactive approach with ideas that go through Congress.

AndyH · February 4, 2003

I find it astounding that such a secret can be kept so quiet in Washington.

And what is scary about it is that the reduced tax deductions would seem to be part of the fuzzy math central to the entire budget.

Fredman · February 4, 2003

Originally posted by MGB
... I am in the middle of all information within ERIC, ABC, and the AAA, and to a lesser extsent, ASPA). The advocacy groups can only be reactionary to it, rather than the standard proactive approach with ideas that go through Congressional.

MGB, when do you expect reactions from these groups? I've read plenty of newspaper type opinions and now I'm looking forward to some more indepth thoughts on the plan.

AndyH · February 4, 2003

ASPA just came out yesterday "We must and shall prevail".

http://www.aspa.org/archivepages/gac/2003/...3/asap03-03.htm

MGB · February 4, 2003

The AAA is planning to discuss it during "Hill" visits the first week of April. ERIC and ABC will also be addressing this through whoever takes the lead in drafting actual legislation in Congress.

AndyH · February 4, 2003

But how strongly do AAA and ERIC object to it, since it has no impact on DB plans, and how much impact would it have on plans of large employers other than DB's?

As Mike Preston said, it is the actuaries full employment act. Who is going to oppose this strongly enough to make it fail, other than ASPA, which will become the incredible shrinking organization if this passes?

Maybe I should rephrase this, since the Democrats will oppose this, but for different reasons. Who is going to be able to fight and maintain something close to the status quo is the more appropriate question. The fact is that business planning will mean lots of layoffs if this drags on too long.

JanetM · February 4, 2003

Am in very cynical mood today - I think if they pass this it will only get modified down the road.

Think of the history -

SS was not taxable - now it is for many

Tax deductions got too big - add the AMT

Things get tight so they impose income limits on deductions.

IMHO I see that folks will have all this money stashed away, earning tax free income, so at retirement you get caught by AMT and tax on social security.

Just think what they could do to modify this in the next 20 or 30 years.

david rigby · February 4, 2003

If you think this has no impact on DB plans, you have not read between the lines yet, or thought forward a couple of years. BTW, I am referring to a negative impact.

However, every prior attempt at simplification has been "complification."

February 4, 2003

Two thoughts:

1. Federal Government, for the most part, does not have a grand record of "simplifying" anything. This is more likely to be subject to the law of unintended consequences.

2. Pensions started out simple - a promise to pay at retirement after a lifetime of service. Pension complication arose when company's began to renege on the promise. Further complications were added to stem further abuses as they arose. Are we now in a place where diminished governance will actually increase benefits to the employee? I'm thinking not.

stephen · February 4, 2003

If it passes as is I think it will simplify things greatly for a large (think huge) number of small business qualified plans. The owners will be told by their CPA's that they are spending $XX,XXX.XX per year to their consultant, ERISA attorney, TPA (and any other advisor they have for their plan) to get a similar benefit to what they can do via the proposal for free. Thus, it is my advice to terminate your qualified plan. If this happens there will be thousands of employees who will no longer save for retirement as they probably won't save on their own.

Christine Roberts · February 4, 2003

It seems to me that the Bush Administration's proposals re: ERSA are ignoring the lessons I thought we had learned about 401(k) plans - namely that the more discretion and control we give to individual taxpayers over their retirement savings, versus an employer funded and managed retirement scheme, the less they end up with in the end.

Even with the incentives of employer matching contributions, and current income tax deductions, many working people are saving only a small fraction of what they really need to live on during retirement. Can it really be that they will save more, if we take away the tax deduction and employer match?

This would be a problem even if you ingnored the grevious tax deficits the proposals will ultimately cause.....

stephen · February 4, 2003

If the plan goes through, where will the tax revenue come from in 20 years? Will the government change the rules again so your tax free withdrawals are not tax free?

david rigby · February 4, 2003

Yes!

That is the whole point, to shift the responsibility to later Presidents, later Congress, later taxpayers. Of course, every prior elected official has done the same thing.

JanetM · February 4, 2003

Geeze Pax - I thought I was the only cynical one here today.

"Never underestimate the ability of Sh*t to find a fan" especially in Washington.

February 5, 2003

When will this be voted on?

stephen · February 5, 2003

Currently this is a proposal by the President.

I believe:

The next step is for someone in the House of Representatives to propose a bill that would would need to pass a vote in the house.

Meanwhile, the same will have to happen in the senate.

Then the senate and congress have to agree on a final version.

Then the President can sign the bill into law.

The timetable set forth in the proposal is for this to be in effect for 2004. Which is an extremely short timetable. Although, with a Republican House, a Republican Senate, and a Republican President it may be possible.

Expect ASPA to fight this proposal:

The ASPA ASAP yesterday included "Small Business Workers Will Lose Retirement Benefits if Proposal is Enacted", "No issue is more central to ASPA's core mission of protecting and enhancing the private retirment system than this one. We must and shall prevail." and "But, it will be a very real catastrophe indeed to the millions of America's small business workers who loose their retirement benefits if this proposal is enacted."

Appleby · February 5, 2003

Link to the referenced ASPA/ASAP http://www.aspa.org/archivepages/gac/2003/...3/asap03-03.htm

Provided in today’s Benefitslink Newsletter located at http://benefitslink.com/2003/2003_02_05_re...retirement.html

February 5, 2003

ASPA is involved up to it's collective eyeballs on trying to kill this thing. The ASAP referenced earlier (written by Brian Graff; edited by me - I'm chair of the ASASP committe and a chair of the ASPA PAC) is just the beginning. ASPA was invovled in a press conference today with Congressman Earl Pomeroy (one of the congressional experts on retirement plan issues; on the house Ways and Means committe - and HE didn't even know about this before it was announced!) where the title was "Press Conference on the Harmful Effects of the Presidents’ New Retirement Savings Proposal".

The ASPA Government Affairs Steering Committee is meeting in Washington this weekend and has meetings scheduled with various folks on the hill on Monday and Tuesday. We are organizing and planning for what has to be done. This is a war and we will be soldiers fighting it!

Larry Starr.

Gilmore · February 5, 2003

Does NIPA get involved in this at all?

February 5, 2003

If they haven't in the past, now is the time!

AndyH · February 5, 2003

Thank you for your efforts, Larry. Go to it. Brian promised me in an email that this will not pass. I believe him, but it will take maximum effort.

February 5, 2003

Did Brian give the basis for his belief that this won't be passed? If so, would you mind sharing it? I am definitely relieved to hear that ASPA is working hard to kill this. Apart from my self-interest, it seems like terrible policy.

AndyH · February 5, 2003

No, he promised it would not pass and referenced an ASAP to be issued later that same day. The links to that were posted earlier in this thread.

Bush's pension proposal

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