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"I'm from the government. I'm here to help." An
old joke has it that those are the scariest words in the English language.
Jokes aside, some of those government folks are actually
trying to make it easier for you to save for retirement. The only problem is that politics
keeps getting in the way of passing a new law that would raise retirement contribution
limits and make it easier for job hoppers to roll their retirement money into a new
employer's plan.
Pension reform provisions affecting 401(k), 403(b) and 457
retirement plans were among the casualties of the gridlock in Washington, D.C. this year.
Capitol Hill tea-leaf-readers say it's too early to tell if pension reform laws will pass
in 2000 or in 2001.
Now is a good time to take stock of the pending legislation
attached to the 1999 tax bill to see where Congress is headed with retirement and pension
reform. The major issues the proposed law addresses are making retirement funds more
portable, raising contribution limits, giving older folks a chance to boost their savings,
and offering new tax breaks to encourage more low-wage earner participation in retirement
plans.
Portability - You Can Take Your
Retirement Money With You
If you've ever quit a job at a non-profit corporation to
take one with a for-profit company, you've probably run afoul of one of the most vexing
parts of the retirement system Congress created. You can't transfer the money saved in a
403(b) plan, the defined contribution plan most non-profit and educational institutions
offer their employees, to a 401(k) plan, the most common defined-contribution plan offered
by for-profit companies.
This problem is rooted in the fact that Congress passed the
laws that define various defined contribution plans in different years. 401(k) plans
traditionally were offered by for-profit corporations, 457 plans by state and local
governments and 403(b) plans by educational institutions and non-profit corporations. At
the time those laws were passed, workers weren't as mobile as they are today.
"When you move from a non-profit to a for-profit, the
current tax code doesn't allow you to put the money into one large account. People end up
cashing out," said Amy Goffe, spokeswoman for Rep. Earl Pomeroy, D-N.D. "To
incent savings you need to be able to roll over or take savings with you."
This will be possible if legislation proposed by
Representatives Pomeroy and Jim Kolbe (R-Ariz.) passes. Their Retirement Account
Portability Act (RAP) was folded in with other pension reforms proposed by Benjamin
Cardin, D-Md., and Rob Portman, R-Ohio. The Portman-Cardin bill was finally rolled into
the 1999 tax bill.
"What was in the tax bill is considered the blueprint
for 2000," said James Delaplane, vice president, retirement policy, with the
Association of Private Pension and Welfare Plans (APPWP).
RAP will let workers roll over money from any qualified
employer-sponsored retirement plan to another. So you could roll money saved in a 457 plan
into a 403(b) plan, or 401(k) plan, depending on what your employer offers.
One thing the proposed law won't do is force employers to
accept rollover contributions. That will be left up to individual companies. The law would
make it possible if the employer were willing. Some employers refuse to take rollover
contributions because they're worried about receiving workers' money from unqualified
retirement plans. A retirement plan has to be qualified to receive tax-deferred status. If
a company receives money from an unqualified plan, its own plan could lose its
qualification.
Larger Contributions, Shorter Vests
Congress also wants you to be able to save more and get
control of your money faster.
The proposed law calls for raising the 401(k) maximum
pre-tax contribution to $15,000 a year from the current $10,000. (It's going up to $10,500
in 2000.) Further, the maximum combined employee-employer contribution would rise to
$40,000 a year from $30,000, and the rule limiting defined contributions to 25% of salary
would be repealed, Delaplane said.
Congress also plans to shorten the time allowed for
employer-matching contributions to vest. It's not unusual for workers to wait a while
before employer-matching contributions actually belong to them. Many employers use this
waiting period as a way to retain employees. That said, about 20% of employers generously
make their matching contributions immediately available, according to a 1998 study of
retirement plans by KPMG, LLC.
Source: KPMG, LLC
If the proposed laws pass, workers will gain control of
employer matching contributions faster. Currently, the law permits employers to wait a
maximum of five years to grant employees their matching contributions if they are vested
all at once (so-called cliff vesting). If the match vests gradually, a bit at a time, the
maximum length of time an employee can be made to wait is seven years.
The tax-bill proposal calls for employers using a
cliff-vesting schedule to give employees their matching contributions within three years.
Employers using a graded vesting schedule would have to turn over that money within six
years.
One thing to remember is that employee contributions to the
plans are always fully vested. In other words, the money is yours and you can take it with
you if you leave your job.
Catch-ups For Older Workers
Older workers, those 50 years old and older, would get a
retirement break in the proposed law as well. They would be able to make what is known as
catch-up contributions.
Say you're 57 years old and only started saving for
retirement at age 50. It would be a challenge to build up a large account balance by age
65 only with a $10,000 (or even $10,500!) a year maximum contribution to your 401(k) plan.
With a catch-up contribution, you would be able to
contribute an additional 50% of the limit. So, for 1999, your annual maximum contribution
would rise by $5,000 to $15,000. If the proposed $15,000 limit were to become law, the
maximum would be $22,500!
"The theory is a lot of baby boomers have been focused
on other needs" and need this break to build up their accounts, said Delaplane, of
the APPWP. For example, this provision would benefit people who bowed out of the workforce
for a number of years to raise their children.
Tax Breaks For Low-Wage Earners
Larger contributions have been criticized by some as a
giveaway to the rich, so legislators have come up with a provision directly targeted
toward low- and middle-income wage earners. Pomeroy is proposing what's known as a
"first credit."
This is a non-refundable tax credit that is equal to 50% of
a worker's contribution to a qualified pension plan or IRA. The tax credit is offered only
on the first $2,000 contributed to a qualified pension plan or IRA. So, if you contribute
$2,000 to an IRA or a 401(k), you receive a $1,000 tax break -- the maximum that would be
allowed.
Even with this tax credit, any money you contributed to a
qualified plan or IRA could also be deducted from your adjusted gross income.
This tax credit is phased out for higher-income workers.
Individuals with adjusted gross income over $41,000 and households with income over
$61,000 wouldn't be eligible for this tax break.
Other Issues
Included in the tax bill law are several reforms to make it
easier and less costly for small- and medium-sized businesses to set up retirement plans
for their workers, Delaplane said.
Congress doesn't plan to change IRA contribution limits in
the proposed legislation. Some legislators want to raise the maximum IRA contribution from
$2,000 a year to $5,000 a year. However, that move might be too costly. It is estimated
that the Portman-Cardin proposal would cost $15 billion over 10 years, whereas changing
the IRA contribution would cost $30 billion over the same time.
It may also take a while before Congress standardizes the
maximum contribution limits for different plans. Currently, the maximum annual
tax-deductible contribution to 401(k) and 403(b) plans is $10,000, but for a 457 plan,
it's $8,000. For a SIMPLE 401(k) plan, used by small employers, the maximum contribution
is $6,000 a year.
In the future, it's likely Congress will look at retirement
plan fees and spousal rights, Delaplane said. Some lawmakers want to see whether 401(k)
plans should provide annuity coverage for surviving spouses, Delaplane said.
Chances For Passage
Retirement has become a primary issue on Capitol Hill,
Delaplane said.
Lawmakers realize that the aging baby-boom generation is
starting to think more about retirement. Indeed, 401(k) and retirement plans are the
second most popular benefit with employees, a survey of 100 human resources managers
showed. Health insurance was workers' favorite benefit, said the survey from insurance
company Assurex International and the Educational Publishing Research Center, released in
November.
Delaplane's observation is validated by the fact that the
Portman-Cardin legislation had more than 155 co-sponsors in the House of Representatives
in 1999. That was up from seven co-sponsors who signed on to similar legislation proposed
in the 105th Congress in 1997 and 1998, said Susan Sullam, spokeswoman with Rep. Cardin.
The biggest obstacle to pension reform enactment in the
year 2000 is the sharp division that exists in Washington politics, not the level of
popularity of the reform itself.
"Politically, next year it may be difficult to do
anything," said William Pierron, director of legislative affairs with the Employee
Benefit Research Institute. The reason: 2000 is an election year and not much happens in
Congress during election years, he said.
If pension reforms resurface in 2000, most likely such laws
would be attached to minimum-wage or tax-cutting legislation. Those were the two laws
pension reforms were attached to in 1999.
So, if we get through 2000 without pension reform being
passed, it stands a good chance in 2001, Pierron said.
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