Senate Finance Committee Chairman Grassley (R-Iowa) and Sen. Max Baucus (D-Mont.) introduced the Retirement Savings and Security Act of 2001 (S. 742), said to be “virtually identical” to legislation passed unanimously by the Senate Finance Committee last September. The legislation has 15 co-sponsors in the Senate.
While similar to H.R. 10, the Portman-Cardin bill introduced in the House last month, there are some key differences.
The bill would also provide a tax credit of up to 50% of contributions that employers with fewer than 50 employees make to qualified retirement plans on behalf of non-highly compensated employees, up to 3% of compensation.
The credit would apply for the first three years of a newly-established plan, which must provide accelerated vesting and a 1% nonelective employee contribution to qualify.
Employers with less than 100 employees could get a maximum $500 annual tax credit towards the administrative costs of establishing a retirement plan, also for up to three years. It would also eliminate the “new plan fee” to receive a determination letter from the Internal Revenue Service stating that the plan is qualified.
The proposed bill would also set the premium for a small employer plan at $5 per participant for the first five years of a plan, rather than the current $19/participant. Any applicable variable premium rates would be phased in for new and small plans.
Among other items, the bill would:
- increase benefit/contribution limits for qualified plans, along the lines of the provisions of H.R. 10
- permit owners of partnerships and S Corporations to receive plan loans under the same rules applicable to employees and owners of incorporated businesses
- count employer matching contributions toward top-heavy minimum contribution requirements and simplify the definition of key employee
- exclude elective deferrals in applying the deduction limits to other contributions.
- increase the annual limitation on the amount of deductible contributions to a profit-sharing or stock bonus plan from 15% to 25% of compensation
- eliminate the 25% of salary rule for defined contribution plans
- reduce the maximum vesting period to three years from five under current law
- simplify the minimum distribution rules, and reduce the excise tax applicable to failures from 50% to 10%
- reduce the hardship participation penalty to 6 months from 12 months currently
- allow for rollovers between 401(k)s, 403(b)s, 457 plans, or an IRA to a 401(k), 403(b) or governmental 457 plan of a subsequent employer
- allow for rollovers of after-tax contributions to a new employer plan (if they were willing to accept them)
- give the IRS the ability to waive the 60-day rule on rollovers
- conform the treatment of 401(k) plans to the treatment of defined benefit plans and money purchase plans in “same desk” situations, so that when an employee’s company is acquired by another business, the employee would meet the separation from service definition
- repeal the current liability full funding limit on employer contributions to defined benefit plans
- increase the notice requirements when a pension plan amendment “significantly” reduces future benefit accruals
- require annual benefit statements for participants in defined contribution plans, and one every three years in defined benefit plans (unless provided an annual notice of their right to get one from their employer)
- employer-provided retirement planning would be deemed not to constitute a taxable fringe benefit
- repeal the multiple use test
- Increase the maximum IRA contribution limit to $3,000 in 2002, $4,000 in 2003 and $5,000 in 2004, with indexing in subsequent years
- Gradually increase the adjusted gross income levels for making IRA contributions to $60,000 for single taxpayers and $100,000 for married couples filing joint returns
- Increase the maximum qualified plan and IRA contribution limit by 50% for taxpayers over age 50
- exclude from gross income distributions from an IRA made to qualified charitable causes
The Senate bill would provide a nonrefundable tax credit of 50% for up to $2,000 in contributions for couples making up to $30,000 (or singles making up to $15,000) to make to a qualified retirement plan. The credit would be phased out completely for couples with income over $50,000 and singles making $25,000. It would sunset after five years.
Read the text of S. 742.