At Last – Congress Passes Pension Reform

May 28, 2001 ( - Despite last minute jostling and being tied to a sometimes controversial tax package, pension reform finally got through Congress Saturday, on its way to President Bush's desk. The President is expected to sign the bill after lawmakers return from the Memorial Day recess in early June.

For plan sponsors, the surviving bill, the Economic Growth &Tax Relief Reconciliation Act of 2001, is refreshingly similar to the latest version of the Portman-Cardin bill (HR 10), both in terms of content and timing.

Among other things, the bill:

  • Boosts contribution limits to 401(k)s, 403(b)s and 457 plans to $15,000/year over the next several years ($11,000 next year)
  • Increases the 415(b) (maximum annual benefits) dollar limit (to $160,000 next year)
  • Increases 415(c) dollar limit to $40,000 next year (from $35,000 at present)
  • Permits plan loans for partners and subchapter s shareholders
  • Allows elective deferrals to be excluded from the 404 deduction limits
  • Exempts new small employer plans (those with less than 100 employees) from having to pay a user fee for a determination letter
  • Offers a tax credit for the start-up costs of a new small business retirement plan (less than 100 participants)
  • Increases the profit-sharing deduction limit to 25% (from 15% at present)
  • Increases 415(c) compensation limit to 100% of compensation from 25% at present
  • Enhances portability provisions, allowing rollovers between defined contribution plans without restriction, as well as between IRAs and employer plans
  • Top-heavy testing simplified, including repeals of the 5-year lookback
  • All matching contributions must vest within three years
  • Multiple use test repealed
  • Allows qualified plan catch-up contributions for those age 50 and above ($1,000 next year for qualified plans)

The catch-up contributions are exempt from nondiscrimination testing, if all employees over age 50 participating are eligible to make a catch-up.

As for cash balance plans, the final bill adopted the language from the House version that essentially directs Treasury to expand the ERISA 204(h) notice for plan amendments significantly reducing benefit accruals.

»  Clickhere for a more complete listing of the pension provisions

Four “Score”

The 417-page $1.35 trillion tax bill compromise was reached by Rep. Thomas (R-Ca.), Senator Grassley (R-IA) and Sens. Baucus (D-MT) and Breaux (D-La) after an all-day Friday meeting in a second-floor Capitol room.

The bill passed the Senate by a 58-33 vote just hours after the House approved it by a 240-154 margin, with 28 Democrats joining all voting Republicans.  Just two Republican Senators voted against the measure, Sens. Chaffee (RI) and McCain (AZ), while a dozen Democratic Senators crossed the aisle in support of the measure.

However, the final compromise bill assumes that most tax cuts expire on December 31, 2010 so that all the relief would fit under the $1.35 trillion ceiling. The provisions also would end in 2010 unless renewed by a future Congress.

Other Benefits

Aside from pension reform, the bill also includes other benefits for employers.  Beginning next year businesses will be eligible for a tax credit of 25% of actual child care expenses they provide and 10% of the cost of child care resource and referral services they offer, with a cap of $150,000 per tax year, according to CCH.

The bill also includes a permanent extension of the exclusion for employer-provided educational assistance (up to $5,200/year, and expands it to encompass gradu