>Most critically from a plan sponsor and participant standpoint, the new The Pension Preservation and Savings Expansion Act of 2003 (or as some have termed it, Portman/Cardin III), would make permanent the retirement savings provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), currently scheduled to sunset at the end of 2010. The bill, introduced today by Representatives Ben Cardin (D-Maryland) and Rob Portman (R-Ohio), would also accelerate increases in retirement savings limits – making them fully effective in 2004. That would lift 401(k) contribution limits to $15,000 next year, $10,000 for SIMPLE plans, $5,000 for IRAs, and catch-up contributions to a full $5,000 for 401(k)s (see benefit limits ).
>The bill, which includes key provisions of earlier legislation from Portman/Cardin, as well as Representative Earl Pomeroy’s (D-North Dakota) H.R. 518, the Retirement Account Portability Improvement (RAPI) Act, would also make permanent the low-income saver’s credit, currently slated to expire at the end of 2006. Also broaden eligibility to single tax-payers making up to $30,000 and marrieds up to $60,000, and increasing the maximum amount of the credit to 60% of the first $2,000 in contributions (see Credit Worthy ).
>Significantly for plan sponsors struggling to navigate beleaguered pension plans through the “perfect storm” of low interest rates, slumping asset values and looming liabilities, the bill would institute a new interest rate benchmark to replace the 30-year Treasury bond rate, which has plunged as a result of the discontinuation of the 30-year Treasury bond. The new benchmark would be based on long-term conservative corporate bond rates to “ensure that the funding, premium, and lump sum calculations are based on a rational and realistic interest rate”, according to the Congressmen.
>The legislation would also provide targeted funding relief for multi-employer plans, and will instruct Treasury to update mortality table assumptions to “more accurately reflect the life expectancy of particular worker populations”, while also correcting “glitches” in the pension funding rules. The bill would also allow private sector pension plan employee contributions to be made on a pre-tax basis, as they are currently for public-sector plans.
>As proposed previously by the Portman/Cardin duo, the new bill would raise the triggering age for required minimum distributions to 75 from the current 70 ½, reflecting increases in life expectancy since the rule was enacted in 1962. Additionally, the exise tax for not taking the proper amount would be cut to 20% of the amount not taken, from 50% at present. “Enough to deter gaming while avoiding draconian penalties on seniors who make innocent mistakes,” according to a news release from the Congressmen.
>Annuity distributions would be encouraged, by allowing individuals making up to $90,000 a year to exclude up to $2,000 in annual retirement plan income if paid via an annuity.
>Employers would be given fiduciary safe harbors to make it easier to use default rollover options, and a new program would be established that would allow employers to send “lost participants” to the Pension Benefit Guaranty Corporation (PBGC), which already maintains a Missing Participants program from defined benefit programs.
>In addition to accelerating the deductible amount for IRAs, the bill would eliminate IRA marriage penalties and allow IRA investors to return funds to their accounts when distributions have been made in error.
>The bill would improve the purchase of service credits by state and local workers, and so-called "DROP" accounts, special pension plans for public safety workers that allow workers to roll their pensions over to plan accounts, will be enhanced.
>Rollovers, either full or partial, to spousal IRAs would be allowed under the proposed legislation. Simlarly, non-spousal beneficiaries would be allowed to roll those distributions into IRAs, as spouses can today. Workers would be allowed to roll over as much as $500 of unused money from a flexible spending account (FSA) to their retirement account (401(k), 457, 403(b), or IRA) at the end of the year, rather than forfeit the unused money.
>The new bill would incorporate the Portman/Cardin Employee Retirement Savings Bill of Rights, which was approved by the House Ways and Means Committee a year ago (see Portman-Cardin Unveil Second Pension Reform Bill ). It would include new rights for participant diversification of contributions made in company stock (after either three or five years of service, depending on the nature of the contribution). It would also call on the Treasury Department to evaluate possible ways to lessen the impact of market volatility on defined contribution plan savings.
>The bill would require employers to provide new investment education notices to workers, an explanation of accepted investment principles (such as diversification), both upon enrollment in their 401(k) plan and quarterly thereafter. The legislation would allow workers to pay for retirement planning expenses on a pre-tax basis. An exise tax would be imposed on "excessive corporate payments" to senior executives in the period prior to bankruptcy.
>Small business owners would be authorized to make additional contributions to SIMPLE plans for all workers, and would be allowed to "step up" from a SIMPLE plan to a 401(k) plan in mid-year. Additionally, employers would have the low-cost option of setting up a salary-reduction only SIMPLE plan, while SIMPLE 401(k)s would be given the same flexibility on matching contributions as SIMPLE IRAs under the provisions of the new bill.
>A new reverse match SEP (Simplified Employee Pension) would be introduced, one that would allow employees to contribute twice as much as employers contribute to SEP accounts. The bill would also end the current payroll tax small businesses (proprietorships, partnerships, S corps) pay on employer contributions made to retirement plans.
>The bill would allow retirees to pay healthcare premiums with pre-tax dollars, and would give employers with defined contribution plans the ability to pre-fund retiree medical expenses on a pre-tax basis via a new mechanism.
>In addition to those changes, the Portman/Cardin proposal would call for the vesting schedule for non-matching contributions to be the same as that for matching contributions currently - either vested all at once after three years, or gradually over six years of service. The bill would clarify that qualified domestic relations orders (QDROs) are valid even if issued after a divorce. It would also permit disabled workers to contribute to an IRA from non-wage sources.
>Portman and Cardin noted that the bill will continue to deal with regulatory simplification, including improving the IRS' retirement plan self-correction program, enhancing the use of electronic technology for plan operations, and the removal of "barriers" that have impeded the adoption of catch-up contributions. The bill does not make any changes to the current top-heavy rules.
The Portman-Cardin legislation is being co-sponsored by Rep. Nancy Johnson (R-Connecticut), Rep. Earl Pomeroy (D-North Dakota), Rep. Roy Blunt (R-Missouri), Rep. Ellen Tauscher (D-California), Rep. Elton Gallegly (R-California), Rep. Albert Wynn (D-Maryland), Rep. Fred Upton R-Michigan), and Rep. Dennis Moore (D-Kansas).