>For one thing, the 91-page substitute (the original bill was about 200 pages long) was less expensive, roughly $50 billion over 10 years, rather than the $230 billion estimated cost of the original version of The Pension Preservation and Savings Expansion Act of 2003 (H.R. 1776) when it was introduced in April (see Unfinished Business, Regulatory Relief Top Portman/Cardin Bill ).
>Most critically, the chairman’s amendment would put in place a composite high-quality corporate bond index as a replacement for the 30-year Treasury bond interest rate for three years. Original co-sponsor Representative Ben Cardin (D-Maryland) said that period is likely to be extended to five years on the floor. “At the end of the day, we want something longer than three years,” he said, according to Washington-based publisher BNA. Plan sponsors and unions appear to be in alignment on the need for a longer-term solution for this vexing issue. The use of the 30-year Treasury bond rate, which has dipped to record lows in the wake of Treasury’s decision to cease issuing new bonds several years ago, has had a sweeping and deleterious impact on the funding status of the nation’s pension plans.
>Since 2002, companies have been operating under temporary relief through an expanded range around the now defunct 30-year Treasury rate used to calculate defined benefit funding status – relief that is set to expire at the end of 2003. That rate has dropped to record, albeit artificial, lows in recent years, in effect inflating the amount of cash that companies with defined benefit pension plans must set aside to fulfill funding requirements.
>Under the bill approved by the House Ways & Means Committee on Friday (see House Offers Sausage-Making Spectacle ), the new corporate bond rate, which is likely to reduce lump-sum amount calculations for workers who elect that option from their pension plans, would be applied to lump-sum distributions in the third year (2006). That interest rate would be the lower of the corporate bond rate or the 30-year Treasury rate plus 20% of the difference between it and the corporate bond rate. Lower interest rates inflate the value of lump sums, since they result in an assumption that more cash will be required up front to accumulate promised benefits.
On Friday Treasury Secretary John Snow said in a prepared statement that the action on the Portman-Cardin bill “begins the process” of improving retirement security. Earlier this month, the Bush Administration unveiled its proposal to phase in a bond rate yield curve for calculating pension funding obligations and lump-sum distributions (see Bush Pushes Pension Reform Proposal ). However, that proposal has drawn a tepid response from plan sponsors, lawmakers, and unions (see Experts Say Administration Pension Proposal A Step in the Right Direction, But ….
>A likely future controversy is the proposed increase of the age at which participants must begin taking distributions - from the current 70 ½ (which was established in 1962, when lifespans were shorter) to age 75, under both the Portman-Cardin and Thomas versions of the bill. That provision in the version approved by Ways and Means on Friday, would raise the age to 72 from 2004 through 2007, and increase it to age 75 in 2008 and beyond. That provision represents roughly half ($24 billion) of the cost of the newly approved bill.
>Only about a week ago, a "Dear Colleague" letter in opposition to that provision in H.R. 1776 was circulated and signed by a dozen Democrats (including Reps. Pete Stark, Robert Matsui, and Charles Rangel), who took issue with raising of the minimum required distribution age to 75 from the current 70.5. The letter claims that changing the rule "creates an additional tax break for those who need it least." It also says the rule would only help "wealthy individuals in their early to mid-70s who do not need their money for retirement."
>Other key provisions are:
- Contribution limit increases enacted under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) would be accelerated, with the $15,000 maximum contribution limit to take effect in 2004, rather than 2006 as under current law (as well as an acceleration of the $5,000 contribution limit for individual retirement accounts that was originally slated for 2008).
- The saver's credit (see Credit Worthy ) would be extended through 2010, and the proportion of the credit applicable to those in certain income ranges would be increased.
- Catch-up contribution levels would be accelerated
- A provision to exclude a portion of retirement annuity income from taxes was pared down to apply to only the first five years of defined contribution plan annuity payments, and limited to the first 10% of annuity payments received during the year, not to exceed half of the tax code Section 415(c) benefit limit (currently $40,000) - though that exclusion is phased out, based on income levels.
- Specific exclusion of incentive stock options and employee stock purchase plans from wages for the purpose of assessing withholding taxes.