================================================== BenefitsLink Newsletter New U.S. tax and labor law materials on the net pertaining to employee benefits, for employers, participants and service-providers. ================================================== MORAL OF THE STORY: DON'T WATCH EITHER SAUSAGE OR LEGISLATION WHILE IT'S BEING MADE In this special edition of the BenefitsLink Newsletter, we're pleased to reprint (with permission) Sal Tripodi's excellent summary of federal pension legislation that's been percolating through Congress. ------------------------------------------------------------ (Adv.) TRI Pension Services (TRIPS), started in 1994, is committed to providing consulting, professional training, and reference material in ERISA-related subjects. We provide these services to pension professionals (third party administrators, attorneys, accountants, actuaries, and pension consultants), as well as to employers who sponsor pension plans, and the human resource and pension departments of such employers. The founder of the company, Sal Tripodi, has over 20 years of experience in ERISA, and is nationally recognized as a leading expert in the field. http://www.cybERISA.com ------------------------------------------------------------ Tax bills with pension provisions moving through Congress (added July 23, 1999) -- On July 22, 1999, the House of Representatives passed the Financial Freedom Act of 1999. On July 21, 1999, the Senate Finance Committee reported out the Taxpayer Refund Act of 1999, which the Senate is expected to consider next week. Both bills contain a number of significant pension related proposals. The following summary lists the pension provisions in these bills. Where the provision appears in both bills, the reference "both bills" appears at the end of the item. Where the provision appears only in the Financial Freedom Act of 1999, which is the House bill, the reference "FFA 1999 only" appears at the end of the item. Where the provision appears only in the Taxpayer Refund Act of 1999, which is the Senate bill, the reference "TRA 1999 only" appears at the end of the item. Please note that there is a Senate Democrats substitute to the Senate Finance Committee's bill, which is not included in the summary below. Also, the House removed provisions from the FFA 1999 which relate to Titles I and IV of ERISA, but it is expected that those provisions will be reinstated in conference, so we have included those items in the summary. 1) increases in the following dollar limits - compensation limit under section 401(a)(17) from $160,000 to $200,000 (FFA 1999 only), section 415(b) annual benefit dollar limit for defined benefit plans from $130,000 to $160,000 (with reduction only if benefit commences before age 62, rather than before social security retirement age) (FFA 1999 only), section 415(c) annual additions dollar limit for defined contribution plans from $30,000 to $45,000 (FFA 1999 only), elective deferral dollar limit under section 402(g) from $10,000 to $15,000 (both bills), annual deferral limit for section 457 plans from $8,000 to $15,000 in the FFA 1999 or to $12,000 in the TRA 1999, elective deferral limit for SIMPLE plans from $6,000 to $10,000 (both bills); 2) annual additions compensation limit for defined contribution plans, under section 415(c), increases from 25% to 100% (both bills); 3) permit sole proprietors, partners, and S corporation shareholders who are plan participants to receive participants loans (both bills); 4) simplify the key employee definition for top heavy purposes - both bills contain provisions, but they differ: FFA 1999 eliminates "top 10 owner test" and increases compensation requirement for officer test to $150,000; also eliminates the 4-year lookback to determine who is a key employee; TRA 1999 repeals family attribution with respect to the key employee definition, but does not make any of the changes in the FFA 1999; 5) matching contributions would count toward satisfying the top heavy minimum contribution, and safe harbor 401(k) plans that provide the safe harbor matching contribution would be deemed to satisfy the top heavy rules (both bills); 6) top heavy testing would use only a 1-year lookback, rather than a 5-year lookback, to include prior distributions from the plan (except in-service distributions would still be subject to the 5-year lookback) (FFA 1999 only); 7) no minimum accrual would be required in top heavy defined benefit plans that are frozen (FFA 1999 only); 8) "Roth 401k" arrangements would be permitted (i.e., employee foregoes the income tax deduction for the elective deferral to the 401k plan and in exchange receives tax-free distributions attributable to the elective deferral (and income attributable to such deferral) (both bills); 9) employers could deduct 401k contributions in full without reducing the deduction limit for other employer contributions to profit sharing or stock bonus plans (i.e., 15% deduction limit would still apply to other employer contributions, such as matching contributions or discretionary nonelective contributions) (both bills); 10) reduced PBGC premiums for new plans (both bills, but only the FFA 1999 contains a cap on the variable rate premiums for plans with fewer than 25 participants); 11) extra $5,000 added to the elective deferral limit under section 402(g) for employees who have attained age 50 (both bills - TRA 1999 does not require the additional contribution to be included in discrimination testing, but FFA 1999 does); 12) reduction of the excise tax on failure to make minimum distributions from 50% to 10% (FFA 1999 only); 13) simplification of rules relating to post-death minimum distributions (FFA 1999 only); 14) more portability for benefits - rollovers would be permitted between all types of employer-sponsored plans (qualified plans, 403(b) plans, 457 plans), after-tax employee contributions could be rolled over, and taxable IRA funds could be rolled into qualified plans, 403(b) plans or 457 plans, even if the IRA is not a conduit IRA (both bills); 15) defined contribution plans would be allowed to eliminate any form of distribution, so long as a lump sum distribution is available, except as provided in regulations (FFA 1999 only); 16) the "same desk" rule would be eliminated for purposes of determining whether an employee has a distributable event from a 401k plan (i.e., would simplify issues relating to whether distributions could be made from a 401k plan maintained by a company being acquired by another company that will offer employment to the seller's employees but will not maintain the seller's plan) (both bills); 17) repeal of the "150% of current liability" funding limit for post-2003 plan years (with phase-out in earlier years) (both bills) 18) PBGC's missing participant program would be expanded to cover defined contribution plans at the election of the plan sponsor (both bills); 19) the 20% penalty under ERISA section 502(l), relating to recovery against a fiduciary for a fiduciary breach, would be made discretionary with the DOL (this will allow the DOL to proceed with a more effective voluntary correction program for fiduciary violations) (FFA 1999 only); 20) no excise tax would apply to nondeductible contributions made by an employer to a defined benefit plan, to the extent the contributions do not exceed the accrued liability full funding limit (would eliminate the current law requirement that the plan have at least 100 participants to qualify for this exception from the excise tax) (both bills); 21) expanded notice requirements under ERISA section 204(h) (relating to significant reduction in future benefit accruals) (both bills contain provisions, but the provisions differ); 22) repeal of the multiple use test for 401k plans (FFA 1999 only); 23) the maximum 90-day notice period for distributions would be increased to six months under FFA 1999, but would be increased to 12 months under TRA 1999 (i.e., notice given January 1 could cover all distributions through June 30 under the House bill and all distributions through December 31 under the Senate bill); 24) summary annual reports (SARs) would no longer be mandatory - could be provided only upon the participant's request (both bills); 25) business with fewer than 25 employees would be permitted to file Form 5500-EZ (FFA 1999 only); 26) SAFE plans would be permitted, which are a SIMPLE-type of defined benefit plan (TRA 1999 only); 27) Deferral limits under section 457 plans would no longer be reduced by deferrals made to section 403(b) and 401(k) plans (FFA 1999 only); 28) Waiver of user fee for determination letter requests made by small employers (defined in manner similar to SIMPLE rules) (both bills, but TRA 1999 would waive the fee only if the sponsor did not maintain a plan within the last 3 years); 29) Minimum benefit rule under section 415 for defined benefit plans would be increased from $10,000 to $40,000 (FFA 1999 only); 30) Accelerated vesting requirements on matching contributions (both bills); 31) Treasury would be required to amend its regulations regarding 401(k) hardship withdrawals to reduce the suspension period for the participant's deferrals from 12 months to 6 months (TRA 1999 only); 32) QDRO tax rules would be applied to section 457 plans, so that spouses who are awarded benefits under a QDRO would be taxed on the distributions for federal tax purposes (both bills); 33) Relief from tax code section 411(d)(6) with respect to optional forms of benefit attributable to benefits transferred under an elective transfer transaction, currently in section 1.411(d)-4, Q&A-3, of the Treasury regulations, would be added to the tax code (both bills); 34) Rollovers would be excluded from the involuntary cash-out limit determination (e.g., a participant could be involuntarily cashed out so long as his non-rollover vested account is $5,000 or less, even though the total vested account exceeds $5,000 when the rollover is taken into account) (both bills); 35) Participant benefit statements would be required once a year for defined contribution plan participants (both bills); 36) Excess benefit plans for Title I purposes would be redefined to include benefits that are calculated by reference to sections 401(a)(17) (compensation dollar limit), and 402(g) (elective deferral limit), in addition to the section 415 limits (FFA 1999 only). Most of the above provisions would be effective for years beginning after December 31, 2000. Plan amendments would not be required until the end of the 2003 plan year under FFA 1999 or the end of the 2002 plan year under the TRA 1999. If these proposals are enacted in this session, it is possible that the IRS will extend the GUST remedial amendment period to accommodate these changes as well. ================================================== To unsubscribe: send email to majordomo@majordomo.net with "unsubscribe BL-newsletter" in the body of the message. Anyone can subscribe by sending email to majordomo@majordomo.net with "subscribe BL-newsletter" in the body of the message. Help wanted? Job wanted? See http://EmployeeBenefitsJobs.com/