Tax Bill Would Change the Pension Rules for Employers and Employees

Before exiting for a one-month recess, Congress passed a 10-year $792 billion tax cut that contains a host of retirement incentives for employers and employees. The bill would allow employees to sock away more money in pre-tax accounts such as 401(k) plans and would permit older workers to contribute even more. In addition, the new rules would allow workers to contribute after-tax money to their 401(k) or 403(b) plan and would make rollovers between plans easier.

Will the bill become law?
Probably not in its present form. President Clinton has repeatedly threatened to veto any tax cut as large as the one Congress has passed. However, the President and congressional Democrats appear amenable to a smaller overall cut, somewhere in the vicinity of $300 billion over 10 years.

It remains to be seen whether Congress and the President can get together this fall. But the package just passed by Congress will serve as the blueprint for any final agreement that may be reached later in the year. So employers need to be aware of the possible changes on the table.

Higher pre-tax contributions.
The bill would gradually increase the maximum amounts that employees can contribute on a pre-tax basis to 401(k) plans and tax-sheltered 403(b) annuities. Presently, the limit is $10,000 per year. Congress would gradually increase this limit until it reaches $15,000 in 2005. The limit would then be adjusted for inflation. In addition, the maximum annual pre-tax contributions that could be made to a SIMPLE plan would gradually increased until the limit reaches $10,000 in 2004. This limit would also be adjusted for inflation. SIMPLE plans are geared to small employers.

Catch-up contributions for older workers.
The contribution limits under 401(k) plans, 403(b) annuities, SIMPLE plans, 457 plans, and IRAs would be increased for workers who are age 50 or older. These older workers would be able to contribute more. The amount of additional contributions permitted would rise gradually. By year 2005, older workers would be able to contribute 50% more than other employees to such plans.

After-tax 401(k) and 403(b) plans allowed.
Employers would be allowed to provide participants in 401(k) plans and 403(b) plans with the opportunity to contribute to these plans on an after-tax basis. Qualified distributions from such accounts would be tax-free to the employees, similar to the Roth IRA concept.

Easing rollover rules for qualified plans and IRAs.
With an increasingly mobile workforce, legislators are looking to make pensions more “portable,” so that workers can transfer more of their accrued benefits from job to job. Toward this end, Congress has changed the rules to allow rollovers of distributions between qualified plans, 403(b) annuities, and 457 plans. Also, the new rules would allow IRA distributions to be rolled over into a qualified plan, 403(b) annuity, or 457 plan. The 60-day period for making a valid rollover could be waived under certain circumstances, including cases of casualty, disaster, or other events beyond the reasonable control of the individual.

Cite: The text of relevant portions of the tax bill as passed by Congress are reproduced at 29,102 of the CCH PENSION PLAN GUIDE.

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