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


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Do is probably just some nut case that wanted to rankle some feathers. The Washington Post article was very good news.

I think the other point that the President's proposal missed, or should I say reported incorrectly, was that the compliance cost was a major deterrent for a small business owner to start a qualified plan. I don't buy that for a minute.

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Before the cheering stops remember that this administration does not walk away from challenges (Iraq) or opposition to its agenda (elimination of the estate tax). Also the tax proposal is revenue driven as well as agenda driven- the administration wants to decrease deductions to DC plans and increase revenue by having people convert pre tax assets to after tax assets. The agenda is to limit taxation to consumption by rewarding savings. One way or the other there will be revenue gains from retirement plans to reduce the deficits. Finally will ASPA be able to match the heavy campaign contributions by financial institutions to senior republicans on the tax committees to influence this legislation?


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You make some very good points, and I don't pretend to have a crystal ball or insider information, but I don't see this going anywhere. If the Posts' sources are correct, it is already practically off the table. Right now this proposal has gotten very little press and attention. If the republican's are already telling Bush that is won't fly, then now is his chance to take it off the table without getting egg on his face. If he does it now when very few people are already aware of it, it will be as if it never existed.


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"Right now this proposal has gotten very little press and attention."

If it were only true. The reality is that there has been and continues to be lots of press coverage on this story. Just look at Benefits Buzz on Benefitslink.com. Seems like every other item has to do with this issue.

There are so many articles that we are having to pick and choose which we will add to our daily digest. My phone has not quit ringing from reporters looking for background and comment.

Hard to say were these proposals will go, but I doubt they will go forward in their current form. Still, don't expect the concepts to go away. Parts of the proposals are just liable to show up in other "pension reform" legislation.

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"...the tax proposal is revenue driven as well as agenda driven..."

Nope. Perhaps someone else has already stated this: this is the way to create a zero percent capital gains tax rate without the politically unpopular use of that terminology.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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The pension proposal is revenue driven because it replaces pretax deferral (IRAs/457) plans with after tax savings which will increase the govt's take in the next 4 years. 401k deferrals will decline as non hces elect to contribiute to RSAs and LSAs making it difficult for HCEs to contribute on pre tax basis. Also the proposal provides for conversion from pre tax accounts to after tax accounts by paying the tax over four years. Finally the pension changes are aimed at lowering dc contributions by eliminating the ways in which larger contributions can be made for owners and HCEs (e.g., intgergration, cross testing). Small plan sponsors will not increase contributions for non HCEs in order to continue the same contributions for themselves but will more likely terminate the dc plans and make contributions to the RSAs and LSAs. Whether the elimination of taxation on distributions in the future years is 0 capital gains or 0 income tax is irrevalent- the result will reduce federal income tax on distributions after W leaves office.


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We already have 529s, coverdales, roths, and now roth 401ks. Nobody complained about these plans based on a future tax revenue standpoint.

Why not combine coverdales and roths into ERSAs ($7500 limit) with the same roth comp limit and eliminate IRAs prospectively? Deductible IRAs are a minimal future tax revenue producer anyway. Just get rid of RSAs or only make them available from wages (not self-employment income or HCE in a corporation) and the employer doesn't sponsor a 401k plans. The net affect is basically the same as what we have now. The problem seems to be the addition of the RSAs as an added retirement option which I agree would discourage employer plans. Also, if we limited RSAs as above, perhaps install limits that's similar to a 401k, allow 415 to apply instead, permit pretax or roth taxation option for amts up to 402g, and also permit cross testing.

From a tax revenue standpoint, the present value of receiving X tax dollars today is the same is receiving X dollars plus earnings in the future. Tax deferrals can be argued to be a possible negative revenue producer because retirees may be in a smaller tax bracket than at the time of a deferral.

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I remember some criticism of Roth IRAs etc. when enacted both because it added complexity and because it increased current tax revenues at the expense of future tax revenues. However, even if there wasn't criticism then, the LSAs will prove to be much more popular, and hence a bigger drain on future revenues, so the criticism is fair.

If one assumes that investments' rate of return will be the same as inflation, it makes no theoretically difference whether Congress collects the taxes now or in the future. However, given the funding problems with Medicare and Social Security that will require much greater tax revenues in the future, many of us think that saving through the Roth-style tax treatment is a poor idea.

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Guest Happy Actuary

For perspective, remember the scare about 5-6 years ago re: the flat tax. That, too, would have messed up our very fun TPA industry. People got worried for a while, but it never came to fruition.

It doesn't seem like a serious enough threat (yet) for people to jump into the EA exams.

As to preserving new comp in a DB format, wouldn't that place more emphasis on cash balance plans? - they quack the most like new comp.

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  • 3 months later...

Thanks KJohnson, now I'm not going to be able to sleep tonight because I'll be up worrying about my job.

Specifically, the proposal would: eliminate the ADP and ACP nondiscrimination tests; allow plans to satisfy the nondiscriminatory benefit rules by adopting a safe harbor contribution design; modify coverage rules by allowing a plan to meet the nondiscrimination rules by complying with a ratio percentage coverage test under which 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; authorize permitted disparity and cross-testing for defined contribution plans; repeal the top-heavy rules; define compensation for all purposes under a defined contribution plan as the amount reported on Form W-2 for wage withholding, plus the amount of ERSA deferrals; and adopt a simplified definition of highly compensated employees that would be based on the Social Security wage base.

Actually this seems to be somewhat different than the initial proposal. If I remember correctly the intial plan pretty much eliminated everyhting, but a deferral and a pro-rata profit sharing allocation. This may be a little more palatable. I need more details. I don't know my head is hurting already.

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  • 5 months later...

Just a note on the post above, you have to sign up as an online member of the Times to view the article. It's free, and you don't get a bunch of junk e-mail.

Or you can go out and spend a buck on the paper if you can get it (it nice to have it delivered every morning!).

Remember: two wrongs don't make a right, but three rights make a left.

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Guest Roger Hawthorne

This proposal is consistent with the political notion that regulation, for whatever end, is destructive or merely a hindrance at best. Nothing new here.

For a real eye opener read some of the policy papers issued by the Heritage Foundation and the American Enterprise Institute regarding defined benefit plans. These 'think-tanks' are policy pipelines into the White House and they take the tact that pension plans should be phased out because of various developments in our country's business climate--the decline of job security, more control for the average worker over his/her retirement funding--i.e. shifting the burden of funding one's retirement from the ER to the worker, etc. The point is is that these people are in the business of eroding the public's confidence in something that is really in their best interest--the security offered by defined benefit plans. Bush has these people at his legislative creative core.

If you think this is ridiculous, just take the 'privatization' of Social Security as an example. Several years ago this idea was lucirous. But this scam is alive and kicking and is very likely to happen in some form or another if President Bush gets another crack at it after 2004.

Since I've strayed from the range a bit, I have to add that I do enjoy the commentary of Mike Preston and Andy H quite a bit. These guys know their stuff and their presence on this board makes it so much better. But honestly guys, what on God's green earth were you thinking of when you looked at Bush in 2000 and decided, "He's the man for the job!" This guy didn't even know Social Security was a federal program, yet he was adamant of the assertion that privatization would fix it. With both houses of Congress, anything is possible.

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But honestly guys, what on God's green earth were you thinking of when you looked at Bush in 2000 and decided, "He's the man for the job

Won't go to far with this, but ....

I don't agree with Bush on every issue, particularly the retirement plan proposals, but there were plenty of reasons to vote for him. He is pro-life; he is for the sanctity of marriage, he supposedly was going to curb so-called social welfare programs (I would propose he hasn't done that.); even though I don't agree with the retirement proposals I am generally for tax code simplification; & although I haven't thought too much about it, I wouldn't dimiss at least limited 'privatization' of Social Security. The only argument I've heard against it is that participant could lose their retirement. First, that is a reason to limit it, but we really need to change the thought pattern that social security is our retirment vehicle. Second, I was unaware that the government was doing so well with the money.

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Guest Roger Hawthorne

Fair enough R. Butler.

The government's handling of SS's money has nothing to do with the problem of investment return. Social Security is a pay-as-you-go system. There is nothing to invest, unless the census numbers fluctuate up or down, which they do, resulting in a surplus (invested in notes, guaranteed by the full faith and credit of the USA) until needed to pay benefits, or a debt--requiring a tax hike.

Creating a carve-out plan like the Archer-Shaw plan [bush's model] proposal puts a guaranteed benefit at risk--the market can be cruel, likewise, those on the brink of poverty (including the 10% of all retirement-aged cititzens of this country-with SS benefits as is) are really thrown to the dogs. Societal obligation mean nothing to these privatizers--every man for himself--or the law of the jungle.

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Per Sal's ERIAS views the Bush administration is going to repackage its proposals for the 2004 contest. They still propose substantial distasterous results for the private sector plan industry.

Are we writing letters? Are we making calls? ASPA has a PAC jflores@aspa.org). We need to be vocal on this one. Take some time to draft a comment to the President, legislators, and whoever else will listen.

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  • 2 months later...



This Department of Treasury press release may be viewed at: http://www.treas.gov/press/releases/js1131.htm

Today the Treasury Department announced that the Presidents FY 2005

Budget includes the following savings initiatives: Retirement Savings

Accounts, Lifetime Savings Accounts, Employer Retirement Savings

Accounts, and Individual Development Accounts

The first proposal would create two consolidated savings accounts:

Retirement Savings Accounts (RSAs) and Lifetime Savings Accounts

(LSAs) that will allow everyone to contribute -- with no limitations

based on age or income status. Individuals will be able to convert

existing tax-preferred savings into these new accounts in order to

consolidate and simplify their savings arrangements.

RSA and LSA contribution limits will be $5,000 per year. This

contribution limit is modified from last years FY04 Budget proposal,

which had a contribution limit of $7,500.

Americans want a secure future: simplifying savings will help them

reach that goal, stated Treasury Assistant Secretary for Tax Policy

Pam Olson. The savings options proposed today will give all

Americans the opportunity and flexibility they need to save for their

retirement security and other needs. The proposals make saving simple

for everyone and for every purpose. They stress the importance of

getting off the spending couch and into the savings gym.

The second proposal would create Employer Retirement Savings Accounts

(ERSAs) to promote and simplify employer sponsored retirement plans.

The proposal would consolidate 401(k), SIMPLE 401(k), 403(b), and 457

employer-based defined contribution accounts into a single type of

plan more easily established by any employer.

This proposal is modified from the previous FY04 Budget proposal to

enhance flexibility and encourage small businesses to fund a custodial

ERSA for their employees. Employers with 10 or fewer employees would

be able to fund an ERSA by contributing to a custodial account, which

is similar to a current-law IRA.

The third proposal would create Individual Development Accounts (IDAs)

help lower-income individuals save. This proposal would provide

dollar-for-dollar matching contributions of up to $500 targeted to

lower income individuals. Matching contributions would be supported

by a 100 percent credit to sponsoring financial institutions.

The Presidents Proposal to Expand Tax-Free Savings

Description of Proposal


$5,000 annual contribution limit (indexed for inflation).

Available to all individuals no income limits

(contributions cannot exceed compensation), no age limits.

Contributions would be nondeductible (like Roth IRAs).

Earnings would accumulate tax-free, and qualified

distributions would be excluded from gross income.

Qualified distributions could be made after age 58 or in the

event of death or disability.

Nonqualified distributions: Distributions in excess of prior

contributions would be included in income and subject to an additional


Conversions to RSAs: Roth IRAs, Traditional and Nondeductible IRAs

Roth IRAs would be renamed RSAs and benefit from the new

rules for RSAs.

Existing traditional and nondeductible IRAs could be

converted into an RSA by taking the conversion amount into gross

income, similar to a current-law Roth conversion.

No income limit would apply to the ability to convert.

Existing traditional and nondeductible IRAs that are not

converted to RSAs could not accept any new contributions after 2004.

New traditional IRAs could be created to accommodate

rollovers from employer plans, but they could not accept any new

individual contributions.

Individuals wishing to roll an amount directly from an

employer plan to an RSA could do so by taking the rollover amount

(excluding basis) into gross income (i.e., converting the rollover,

similar to a current law Roth conversion).

Several of the withdrawal exceptions would be eliminated,

increasing the likelihood that money set aside for retirement is there

for retirement.


$5,000 annual contribution limit (indexed for inflation).

Available to all individuals no income limits, no age


Contributions would be nondeductible (like Roth IRAs).

Earnings would accumulate tax-free and all distributions

would be excluded from gross income.

No minimum required distribution rules would apply at any age

throughout owners life.

Contribution limit of $5,000 applies to the individual owner

of the account, not the contributor.

o Contributors could make annual contributions to the accounts of

other individuals.

o Annual aggregate contributions to an individuals accounts could not

exceed $5,000.

Consolidation to LSAs:

Individuals could convert balances from Coverdell Education

Savings Accounts (ESAs) or Qualified Tuition Plans (QTPs) to LSAs.

Individuals could continue to contribute to ESAs and QTPs as

under current law.

Health Savings Accounts (HSAs) and Archer Medical Savings

Accounts (MSAs) would be retained.


One Retirement Plan: Employer Retirement Savings Accounts would

combine the array of existing retirement plans into one simple uniform


o 401(k)

o SIMPLE 401 (k)

o 403 (b)

o Governmental 457



Access: Available to all employers

Simplified Administrative Rules: The new plan would be much simpler

for employers to administer, so employers who are not already

sponsoring a plan, especially smaller employers without the resources

for administering plans, will be more likely to offer a retirement

savings program for their employees.

A single nondiscrimination test would apply to ERSA

contributions, as compared to the double test that currently applies

to 401(k) plan contributions.

Employers could avoid nondiscrimination testing altogether if

they satisfy a simplified safe harbor.

ERSAs sponsored by state and local governments and section

501©(3) organizations would not be subject to nondiscrimination

testing under certain circumstances.

A simple custodial ERSA would be allowed for employers with

10 or fewer employees to help reduce costs to small businesses and

encourage them to offer plans. The custodial ERSA would be similar to

a current-law IRA. Employers would be exempt from annual reporting

requirements and provided relief from most ERISA fiduciary rules

similar to the relief provided to sponsors of SIMPLE IRAs.

The rules applicable to defined benefit plans would not be affected by

this proposal.


Individual Development Accounts would create accounts with

dollar-for-dollar matching contributions targeted to lower income


Dollar-for-dollar matching contributions provided to

individuals up to $500.

Single filers with incomes below $20,000, joint filers with

incomes below $40,000 and head of household filers with incomes below

$30,000 would be eligible.

Matching contributions supported by 100 percent tax credit

for sponsoring financial institutions that provide matches to


A $50 per account credit for financial institutions to cover

ongoing costs of maintaining and administering each account and

providing financial education to participants.

Qualified withdrawals of contributions and matching funds for

higher education, first-time home purchase, and small business


The Presidents Proposal to Expand Tax-Free Savings

Important for the Future

Continues to Build an Ownership Society

The United States is increasingly an ownership society. More than

half of all households 84 million individual investors own stock

directly or through stock mutual funds.

The savings package further promotes an ownership society by:

o improving access by removing barriers to tax preferred saving.

o making savings simpler by reducing complexity and unifying the


o improving fairness by providing the benefits of tax preferred

savings to those least able to save for the very long-term.

Through the savings package, taxpayers get the benefit of paying the

tax man upfront, rather than when withdrawing funds for retirement or

other needs. Taxpayers receive the full return on investments giving

them greater certainty about the amounts available for their

retirement and other needs.

A majority of taxpayers will be able to move all of their savings in

a few short years into tax free savings accounts. This will allow

taxpayers to avoid the complexities of reporting financial income on

their tax returns and filing a schedule B and Schedule D.

Increased education and financial literacy will help raise awareness

of the importance of savings.

o Financial services firms will be more focused on counseling clients

on maximizing financial security rather than the intricacies of the

tax rules adding value instead of paper work.

Enhances Low- and Moderate-Income Savings Opportunities

The savings package simplifies individuals savings decisions.

o Complex and confusing eligibility rules are replaced with one rule

for both LSAs and RSAs: everyone can contribute.

o The special rules that dictate what qualifies as a penalty free

withdrawal are replaced with one rule under LSAs: all distributions

are tax-free.

Tax preferred savings would become universally available.

o Individuals saving will correspond more directly to their needs

rather than to the special uses prescribed by the tax laws.

o The availability of tax preferred savings opportunities to the low

income under current law is largely illusory. The flexibility of LSAs

allows access to tax preferred savings regardless of an individuals

savings horizon and use.

o The current alphabet soup of accounts are available to low and

moderate income taxpayers, but their shear complexity, for all

practical purposes, closes them to low and moderate income taxpayers

who dont have access to the sophisticated tax and financial advice

needed to take advantage of them.

o Low-income individuals, in particular, may not have the resources to

save for long into the future.

o Low-income individuals are the most likely to need their savings in

an emergency, and the most likely to pay penalties for early

withdrawal under current law.

Uniform and simple rules will encourage financial services firms to

market tax preferred savings more aggressively and to spend their

resources on financial education and literacy.

Dollar-for-dollar matching contributions up to $500 would be made

available to lower income individuals through Individual Development

Accounts (IDAs). The matching contributions would be supported by a

tax credit to financial institutions.

Promotes Retirement Savings

The ERSA proposal simplifies and unifies employer plan rules in a

number of important ways. ERSAs will be much easier for employers to

adopt and administer and will help reduce the costs to employers.

ERSAs consolidate all types of employer plans into a single

simplified plan.

ERSA custodial accounts, available to employers with 10 or fewer

employees, would be exempt from annual reporting requirements and

provided relief from fiduciary rules.

Lower administrative costs under ERSAs will translate into higher

investment returns to employer plan participants, which will help

encourage participation.

More uniform employer plan rules may lead to greater competition

between financial services firms, which may further help drive down

costs and increase returns to investors.

Encourages Savings and Promotes Economic Growth

The package promotes savings in several ways.

o These proposals remove the current law penalty on saving. The

after-tax return to savings is increased through greater access to tax

preferred savings. Higher after-tax returns encourage savings.

o The simpler and more uniform rules for individual savings vehicles

will encourage more savings.

o Lower costs for setting up and maintaining employer plans will

increase returns and encourage additional savings.

o More uniform rules for employer plans will foster more competition

for investor funds among financial services firms. More competition

lowers costs and translates into higher returns to investors, further

encouraging savings.

Greater savings translates into more investment, greater capital

accumulation, and higher living standards in the future.

Greater savings means a more secure future for Americans of all

income levels.

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So What? Yesterdays NY Times carried a front page article which reported that the Pres. would not push for an expansion of retirement savings accounts in the 05 budget because of an estimated 400B deficit for 05. This type of proposal is deliberately put into the FY 05 budget so that it can be eliminated at a later date. There is less support to pass this legislation this year than there was last year. This topic comes under the doesnt have the chance of a snowball in hell category.


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Guest DFerrare

Won't this proposal be a short-term revenue enhancer since taxes will be paid on current contributions and conversions now?

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I'd like to recommend that the proponents of this stuff (Pam "I'll slip this in in while Treasury Secretary O'Neill is in Africa with Bono" Olsen et al) be volunteered as the first Mars flight crew, and have em give it a shot in '05 instead of waiting all those years until 2020 or 2030. Then maybe we can test fire the new Star Wars missile defense system at their contrail.

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