Compliance February 2, 2004

They're Back: Bush Reintroduces ERSAs, RSAs, and LSAs

February 2, 2004 (PLANSPONSOR.com) - As widely expected, the Bush Administration's FY 2005 budget reintroduced a provision to consolidate a variety of workplace retirement plans into a single offering, as well as once again suggesting two new savings programs.
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According to a US Treasury Department news release, Employer Retirement Savings Accounts   (ERSAs) would consolidate 401(k), SIMPLE 401(k), 403(b), and 457 employer-based defined contribution accounts into a single plan, which the administration said would be more easily established by an employer. This latest budget proposal is modified from a similar ERSA item in last year’s budget (See  ERSAs Bear Major Changes for Plan Sponsors ).

The announcement said ERSA administration would be easier because:

  • A single nondiscrimination test would apply to ERSA contributions, as compared to the double test that currently applies to 401(k) plan contributions.
  • Employers could avoid nondiscrimination testing altogether if they satisfy a simplified safe harbor.
  • ERSAs sponsored by state and local governments and section 501(c)(3) organizations would not be subject to nondiscrimination testing under certain circumstances.
  • A simple custodial ERSA would be allowed for employers with 10 or fewer employees to help reduce costs to small businesses and encourage them to offer plans. The custodial ERSA would be similar to a current-law IRA. Employers would be exempt from annual reporting requirements and provided relief from most ERISA fiduciary rules similar to the relief provided to sponsors of SIMPLE IRAs.

The 2005 proposal also reintroduces two consolidated savings accounts: Retirement Savings Accounts (RSAs) and Lifetime Savings Accounts (LSAs) that will allow everyone to contribute — with no limitations based on age or income status.   According to the announcement, taxpayers will be able to convert existing tax-preferred savings into these new accounts in order to consolidate and simplify their savings arrangements. RSA and LSA contribution limits will be $5,000 per year – a change from the 2004 proposal, which had a contribution limit of $7,500.

“Americans want a secure future:   simplifying savings will help them reach that goal,” said   Treasury Assistant Secretary for Tax Policy Pam Olson, in the announcement “The savings options proposed today will give all Americans the opportunity and flexibility they need to save for their retirement security and other needs. The proposals make saving simple for everyone and for every purpose.   They stress the importance of getting off the spending couch and into the savings gym.”

More details are available at http://www.treas.gov/press/releases/js1131.htm .

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