No more cross-testing, permitted disparity or top-heavy in D.C. Plans

KJohnson · January 31, 2003

Treasury put out a press-release regarding Bush's new pension/ira proposals. It can be viewed here:

http://www.ustreas.gov/press/releases/kd3816.htm

Does the budget proposal related to ERSAs affect any other defined contribution plans?

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 The other coverage testing alternatives would be repealed.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 The top heavy rules would be repealed for defined contribution plans.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.

MGB · January 31, 2003

What is really odd is the next question which states that nothing is changing for DB plans. Which means they would have different definitions of comp. and HCE and would still be subject to top heavy, etc.

Scuba 401 · January 31, 2003

does this affect pure profit sharing plans? the last question seems to indicate it does not but it is a bit confusing.

david rigby · January 31, 2003

I think MGB's comment from yesterday is still applicable.

http://benefitslink.com/boards/index.php?showtopic=18218

Other items are not affected because they haven't gotten around to them yet.

AndyH · January 31, 2003

Where is ASPA on this?

MGB · January 31, 2003

Besides making comments to the press, no organization has any input into the process yet.

These are only descriptions of what Bush will be including in his proposed budget for 2003-2004. That doesn't even rise to the level of proposed legislation yet. Don't forget, the Administration has absolutely no authority to create law.

Someone in Congress (Portman-Cardin have already indicated they are holding up their reform bill to include this) will take his ideas and draft actual language to introduce in Congress. It isn't until then that the lobbyist organizations will have any affect on the process.

Mike Preston · January 31, 2003

I knew there was a reason I voted for Bush.

I don't know where ASPA is on this (I suspect they will not be terribly supportive), but it sure does seem to me to be the Actuary's Really, Really Full Employment Act of 2003.

Every single cross-tested plan will become a DB plan.

R. Butler · January 31, 2003

Really I only want to know one thing at this point; do I need to find a new job? We primarily handle DC plans. How long will it take me to become an actuary?

Mike Preston · January 31, 2003

Hopefully a very long time. ;-)

No, seriously, if you are serious you should check out the Society of Actuaries, the American Society of Pension Actuaries and the Joint Board for the Enrollment of Actuaries.

At a minimum you are looking at 1 year of intensive study in order to pass the Enrollment Exams, along with a "responsible actuarial experience" requirement which I believe is 2 years. although some of what you have done to date might qualify for the experience requirement.

MR · January 31, 2003

I'm not so sure about all cross-tested plans becoming db plans. We're writing alot of these types of plans and I don't think the idea of a required funding level would go over very well.

Mike Preston · January 31, 2003

There are a number of potential solutions to that problem. Before cross-testing we used to use them pretty effectively. Just because cross-testing is better doesn't mean that the old way has lost all of its effectiveness.

AndyH · January 31, 2003

Who's idea was this, and what are their email addresses and phone numbers?

and p.s., Mike that was more true when the applicable interest rates were above 5% and before 15 years of negative legislation and regulation.

Mike Preston · January 31, 2003

I have no clue who the people responsible for it are.

Your point is a good one. If we can use this as a springboard to make defined benefit plans more rational, with some flexibility in funding, I think the result would be marvelous. I'm not holding my breath, however.

goldtpa · February 1, 2003

Since I handle mostly DC Plans and will be out of a job in 2004, I would like to practice my new lines...

....Can I Super Size that for you??

AndyH · February 1, 2003

well, I voted for Bush last time, but not next time. No way I'll vote for Bush after this..........or Hillary, or Lieberman, or Evans, or Kerry or Gary Hart; certainly not Gephart or Daschle; certainly not Sharpton .............hmmm. Does Ross Perot support this proposal? Maybe Powell will have quit by then and be available?

2muchstress · February 2, 2003

As mentioned earlier, the only thing the Bush administration is doing is trying to score politically. The administration's domestic agenda has been lacking with the Iraq crisis, and approval rates have been slipping. Democratic candidates are starting to line up, and for the first time during his pregnancy, Bush is starting to look vulnerable.

What do administrations do when they are becoming vulnerable? They throw out the same stuff the people always want to hear - prescription coverage for the elderly, research for more efficient use of natural resources, toss in some money for AIDS research, throw in some tax cuts, and then top it off with a naive plan about how to shore up worker's retirement. All those issues play well to the general voting public. Issues that the administration has never been concerned with before, but has to be concerned with now or risk losing in two years.

Fortunately Congress will have to pass the laws, but I'm still debating whether 535 idiots is better than just one.

2muchstress · February 2, 2003

Um, I meant presidency - not pregnancy. That would be interesting!

mbozek · February 2, 2003

To put this all in a musical perspective perhaps you should consider the following lyrics while contemplating the future:

"Its the end of the world as we know it and I feel fine" by REM

"You dont need weatherman to know which way the wind blows. "

R. Dylan, Subterranean Homesick Blues.

"Woke up this morning and got myself a beer.

"Cause the future is uncertain and the end is always near.

"Let it roll baby, roll."

The Doors, Roadhouse Blues

February 3, 2003

I agree with MR's comment . . . I doubt DBs will suddenly come into favor in the absence of cross tested plan designs. Employers don't want investment risk in the market's current environment. Furthermore, a promised benefit at retirement is definitely a turnoff, particularly if you are a small business. No, the whole idea of this proposal providing an attractive alternative to the current DC platter of design options is just baloney.

February 3, 2003

Let me start by saying I'm a Bush fan.

But...

I agree the proposal does make the statement (intentional or not) that cross testing is only valid in a defined benefit arrangement. The lack of faith in market performance is sort of contradictory to the proposal of permitting nonguaranteed Social security investment accounts. Although, I realize the social security proposal is intended more for younger people.

However, do you agree that top heavy should be eliminated and account types should be consolidated? I haven't heard an overwhelming reason to keep the different rules for salary deferrals under 401k, 403b, and 457.

Blinky the 3-eyed Fish · February 3, 2003

Mike, you need 3 years of responsible actuarial experience. That just means more time for us actuaries to rule the pension world like the Roman Empire dominated once.

All hail actuaries!

mwyatt · February 4, 2003

Actually, this is an interesting comment here:

"I agree the proposal does make the statement (intentional or not) that cross testing is only valid in a defined benefit arrangement."

In one sense, maybe the tradeoff of testing on a benefits basis should be the guarantee of the future investment return, which a DB plan does do. In the late 90s 8.5% looked pretty conservative; now, not so sure about this.

What I've been watching for is someone in Congress to reconsider the "standard interest rate" definition of 7.5%-8.5% as promulgated in the 401(a)(4) regs. When codified in the early 90's this looked reasonable. Maybe not so now (try a CT plan at 5% - doesn't look quite as appetizing).

AndyH · February 4, 2003

Imagaine how many problems would be solved if they changed the "applicable interest rate" to meet the requirements of a "standard" interest rate, i.e. 7.50%-8.50%.

david rigby · February 4, 2003

Additional reading material from Treasury website. Start on page 118:

http://www.treasury.gov/press/releases/rep...luebook2003.pdf

mwyatt · February 4, 2003

Pax, thanks for the link. Always best to look at the source and not count on arithmetically challenged reporters to provide the real scoop.

What is unsaid is on page 127 is the application to DB plans. Would integration (er permitted disparity, I'm showing my age) be also eliminated? Would the comp and HCE definitions also carry over to DB plans?

I'm also assuming that the elimination of cross-testing would not only blast out New Comp plans but also eliminate age-based and target benefit plans.

Of course this is all a proposal at this point; many, many issues on the government's plate right now that are more important than tinkering with retirement accounts...

AndyH · February 4, 2003

Mwyatt, I wish I could agree, but this is just like TEFRA; budget deficit savings at the expense of retirement plans. I think it is central to the budget.

mwyatt · February 4, 2003

Actually, the ERSA proposal doesn't in of itself seem to be of the "revenue enhancement" ilk found in the 80s. The only revenue trick I see is in the LSA and RSA accounts (let's get the revenue now, and forget that we just gave away all future claims to taxation when the monies come out). In fact, the revenue estimates on p. 127 seems to indicate that there will be revenue loss to the government. If this was a revenue enhancement strategy, you would have seen cutbacks in the 415 limits I would think.

If you're referencing the elimination of CT plans, I could see your disappointment (I wasn't making any comment good or bad about their existence - we do a number ourselves). Of course as an actuary, I must admit (like Mike Preston's previous comment) that I might shed a few crocodile tears over their demise while I'm handing over the DB proposal;) to the client.

Actually, I was kind of wondering in my previous comment re: the standard interest rate when the SRI would move to the APR, not the other way around. I think that we're in a very different environment than was found in the late 80s with regards to prevailing rates.

Scuba 401 · February 4, 2003

what is going to happen to all of us lawyers?

R. Butler · February 4, 2003

I have a CPA, QKA, and a JD. I just spent a year or better teaching myself cross-tested plans. I vote Republican. Now all of its down the tubes. I am going to apply at the mall this evening.

mwyatt · February 4, 2003

Well, let's not all line up to jump off the bridge just yet. Better to see what Congress does (you know, the branch of government that actually makes the law) before we start planning new careers as short-order cooks...

AndyH · February 4, 2003

Bankrupcy law will soon become hot again; start mass mailings to TPA firms.

I'd put my money on ASPA before I put it on the Democrats to preserve 401(a)(4) and "pension reform". Remember that victory? We hardly knew ye.

But this will be a real uphill battle from the comments that I've read so far.

Mike Preston · February 4, 2003

Any truth to the rumor that as part of the President's plan, the enrollment exams will increase from 2 to 4 and will be 8 hours each and there will be a 7 year experience requirement?

No?

Shucks.

Well, that's ok.

There apparently will be enough to do for all actuaries.

Seriously, does anybody really think that this thing will pass in its current form?

February 4, 2003

If 401(a)(4) is repealed. Does the plan permit the following:

Plan provides 401k, 3% safe harbor, and profit sharing to HCEs only.

HCEs get profit sharing amount up to 415 limit.

Mike Preston · February 4, 2003

I think they were talking about modifying the regs, not literally the repeal of 401(a)(4) itself.

mwyatt · February 4, 2003

Who knows? Obviously, given the relative connections displayed by some members of our message community, this proposal came as somewhat of a surprise (or did it?). IMHO, nothing coming out of the Administration is as important to our economy and country as Secretary Powell's appearance at the UN tomorrow morning. The rest of this is somewhat of a sideshow at this point in time.

February 5, 2003

Very interesting and amusing to read all the comments! Actually, the tax code as it relates to retirement plans is absolutely and unequivocally the most complicated pile of useless garbage in this country! I too have spent more than half my life studying this area of the law, trying to stay on top of it all and attempt to have some type of life for myself. When it's all said and done at the end of the day, what have I accomplished? NOTHING! I preserved a tax deduction for someone that lives in a country with trillions of dollars of debt! The folks I supposedly helped to save for their retirement lost literally all of their earnings in the most horrible market I could have ever imagined. Meanwhile, there are plenty of folks out there making a legitimate contribution to society....building homes, curing diseases, teaching children, exploring space. Today was a particularly bad day..... trying to explain to a client that you can terminate a profit sharing plan, allow distributions, and set up another one next week, BUT you can't do the same with a 401(k)....if you let employees have their salary deferral contributions, you are prohibited from establishing another 401(k) plan for 12 months...but it's certainly OK to distribute $1,000,000 in employer money and still set up a different plan. Now where's the sense in that? I felt like an idiot explaining that one! Anyway, although I make a living doing this pile of garbage, I have to say, it definitely needs to be overhauled and perhaps abolished all together. How about abolishing the income tax while we're at it and instituting a national sales tax instead?!!!!!

david rigby · February 5, 2003

Careful. You might get both!

February 6, 2003

Mike Preston asked, "Seriously, does anybody really think that this thing will pass in its current form?"

I don't know what form it will take, but the mutual fund industry is getting behind the proposal and we should expect them to be aggressive in lobbying for passage. Here is just a sampling of recent comment:

"The administration's plan is a milestone. If Congress enacts it, long-term savings and investment opportunities truly will be within the reach of every working American." (Matthew P. Fink is president of the Investment Company Institute, the national association of the mutual fund industry.)

Fidelity Investments today applauded President Bush's initiatives to expand and simplify savings for millions of Americans. (Fidelity in press release dated January 31, 2003)

"This is a tremendous opportunity! If these proposals are passed, Americans would have easy-to-use, tax-advantaged savings vehicles for a number of different goals including retirement, college, home purchases, medical expenses, and more," says John Mroz, Manager of Retirement and College Planning Services for Strong Financial Corporation. "With America's dismal savings rate, these proposals are a breath of fresh air." (Strong press release dated January 31, 2003)

President Bush's budget proposal correctly targets increased saving and investment as a critical economic need. Incentives to raise the level of saving and investment have double value: they help individuals and families provide more effectively for their own economic security, while creating a pool of capital that fuels economic growth and creates jobs. (Merrill Lynch in press release date January 31, 2003)

mbozek · February 6, 2003

The asset gatherers (e.g., financial institutions, mutual funds, etc) will support this legislation because it will reduce the cost and complexity of maintaining the assets. They can get rid of their TPA organizatons and still collect asset management fees.

February 6, 2003

I agree and any legislation that reduces the need for TPAs is good public policy. The current structure doesn't work because it requires good TPAs. The need for good TPAs far exceeds the supply. There are too many mistakes. Because very few (perhaps no one) can run can follow all the rules all the time, the rules need to change.

February 6, 2003

To regulate or not to regulate, that is the question. We already passed legislation that produced simple 401ks, simple IRAs, and safe harbors. Employers do not have to choose something other than simple and safe harbor plans. The question is whether plans outside the box need restrictions. I'd like to think that TPAs, whether they are good or bad, provide a meaningful service in ensuring those who venture outside the box aren't taking advantage of the system. I'd also like to think that the evolution of current regulations were developed to permit flexibility while also defining what taking advantage of the system is.

What is "taking advantage of the system." It occurs when an employer or key people take advantage of tax breaks simply by being labeled an employer without providing equivalent benefits to all members of the employer. If we don't care about providing equivalent benefits, then why not scrap the idea of employer plans all together. If the employer wishes, they can put money in my roth account as an employee perk, but don't call it an employer plan.

I think ASPA is going the wrong route in this arguement personally. Yes, I see the LSA and RSA provides a limit greater than 402(g), but I don't see limits on employer contributions to employer plans. 415 hasn't gone away. The small employer who is only worried about putting $15K away shouldn't have a 401k now. The combination of a simple IRA contribution and what we can put into a roth and coverdale IRA's gives the same benefit. 529 plans allow $10k w/o tax issues right. I don't see anything in the proposed employer retirement plan rules that prevents an employer from contributing amounts up to the 415 limit, and if this new simplified nondiscrimination testing is meant to be the sole nondiscrimination test for all contributions to the plan, what's stopping an employer from taking advantage of the system? I don't get it.

Mike Preston · February 6, 2003

I agree that the country would be better off with a host of simplifications. And the rules on ERSA's are fine as they will encourage understanding of the rules as to employee deferral, simplify choices as to non-discrimination within the four corners of salary deferral and therefore promote savings.

The creation of the LSA's and RSA's however, discourages capital formation as they require saving by individuals on a non-deductible basis. This just isn't going to happen for the vast majority of workers. Even saving on a deductible basis has not been popular outside employer plans. Witness the lack of traditional IRA contributions by those eligible. But if the employer has the incentive to retain or create a plan removed by the elimination of disparities, the worst of all worlds has been implemented.

While I don't think it is good public policy to force employers into defined benefit plans as they are currently regulated, if the defined benefit plan rules were substantially simplified and, at the same time, substantially modified to provide more flexibility, it MIGHT begin to sound like good public policy.

But, right now, it is merely something that will dramatically reduce retirement savings for the people who need it most. Oh, it will mean an increase in business for me. A big increase. But I still don't think it makes sense in its current form, my previous tongue-in-cheek comments notwithstanding.

R. Butler · February 7, 2003

Good news in the Washington Post today. GOP doesn't back Bush savings plan.

Happy Days are here again.

MGB · February 7, 2003

Even more important about the article is that Portman ® doesn't back it. The vehicle for getting the Presiden't proposal moving in Congress is the Portman-Cardin legislation. Instead of adding the President's proposal to it, they are going to introduce their legislation without it next week.

See http://www.washingtonpost.com/wp-dyn/artic...6-2003Feb6.html

February 8, 2003

That's NOT good news. That's horrible news. The President's proposal is great because it reduces the need for TPAs. Portman's just jealous he didn't present it to the public.

Mike Preston · February 8, 2003

Let me guess, Do, you work for an asset gatherer?

austin3515 · February 8, 2003

REgardless of whether its a good idea or not, timing is important, and the timing here is ridiculous!

It was bad enough that after every single plan in the country was required to be rewritten from soup to nuts for GUST.

Then Georgie Porgie passes EGTRRA and it was back to the drawing board again. Treasury is still digging themselves out of that whole, as tons of regulations still need to be issued.

Now we're going to overhaul it again? More amendments? More restatements? Is he basically admitting that EGTRRA was a mistake?

Also, talk about class warfare! How many people can take advantage of these opportunities? $7,500 each in LSA and whatever the new IRA thingamabob is called, $15K to ERSA's. That's $30K a year! Every American must realize that this another break for the rich - as if EGTRRA wasn't enough!

It does nothing to address that the lower income people will still do noting to save, to say nothing of middle america. D- Georgie!

But go kick some butt over in the Middle East! You've got this pension geeks support in those efforts!

BFree · February 8, 2003

The use of "class warfare" here makes me fell like I'm watching a shouting match on cable t.v. where style rules over substance.

Allowing the "rich" to save more is not a detriment to the "not rich," in and of itself. And, If you were "not rich" and you maxed out your Roth IRA last year, you may like being able to put more into a similar account (especially if your employer no longer sponsored a 401k plan).

To the extent that this legislation decreases the desire to have employer-funded contributions made to plans, that is bad for the not rich. But "warfare" it isn't.

To the extent that this legislation increases the budget deficit in future years, that may or may not be bad. But it is beyond most people's skills at predicting with precision and certainly not germane to a discussion looking at this from a perspective of killing employer-sponsored DC plans.

I agree with many of the other comments in the posts that try to use "class warfare" to make a point. I just think it is an over-used term whose meaning has been lost.

austin3515 · February 8, 2003

Perhaps it wasn't the best use of the term, but the point is it is geared to improve the saving abilities of the rich (as was most of EGTRRA)

Scuba 401 · February 9, 2003

Do, clearly you are not aware that the vast majority of this board earns their living from the complexity of these plans. any so called tax reform that dimininshes our ability to earn a living will be of course be considered bad. however, this plan is bad for the average employee for the reasons cited by ASPA. small business owners will have no incentive to sponsor plans under this proposal. this proposal makes it highly unlikely that the average worker will receive an annual 3 or 4% matching or profit sharing contribution.

No more cross-testing, permitted disparity or top-heavy in D.C. Plans

Recommended Posts

Guest LauraH

Guest pjb

Guest pjb

Guest deathbycashcall

Guest rmeigs

Guest Do

Guest pjb

Guest Do

Create an account or sign in to comment

Create an account

Sign in

Important Information