Blogging Employee Benefits

February 6, 2006

Pensions in the Blue Book

Filed under: Legislation, Pensions — Fuguerre @ 4:09 pm

Pension provisions included in the General Explanations of the Administration’s Fiscal Year 2007 Revenue Proposals (i.e., the “Blue Book”), released today by the Treasury Department, largely reflect proposals that have been advanced by the Administration in prior years. [JS-4011]

  • Pension Funding Reform – See Administration’s Proposal for Pension Reform.
      Note – The Administration has been actively engaged in the legislative process that has led to H.R. 2830 and S. 1783, currently headed toward a conference committee that would develop compromise legislation addressing many of the areas targeted by the Administration’s proposal. Future BeneBlog postings will focus on new developments in the 2007 Blue Book on this issue, if any.
  • Market Interest Rates for Lump Sum Distributions – The value of defined benefit plan accrued benefits payable as a single sum would be determined on the basis of interest rates drawn from a zero-coupon corporate bond yield curve.
      Note – This is also currently covered in the H.R.2830/S.1783 legislative development.
  • Cash Balance Conversions – For each of the first five years following conversion of a traditional defined benefit plan to a cash balance pension plan, benefit accruals for each participant would be required to be at least as valuable as would have been earned under the former plan. No wear-away of normal or early retirement benefits would be permitted. Age discrimination law would be clarified to stipulate that a cash balance plan would not violate the rules as long as pay credits for older participants are at least as great as those for younger participants. Whipsaw would be eliminated by allowing a plan to determine the value of accrued benefits as equivalent to a participant’s hypothetical account balance, provided the plan does not credit interest in excess of a market rate of return. All changes would be made prospectively, without inference as to past conversions or plan designs.
      Note – This is also currently covered in the H.R.2830/S.1783 legislative development.
  • Employer Retirement Savings Accounts (ERSAs) – ERSAs would consolidate all types of employer-sponsored qualified defined contribution plans that permit employee deferrals or employee after-tax contributions, including 401(k), SIMPLE 401(k), 403(b), SIMPLE IRAs, SARSEPs, thrift, and governmental 457(b) plans. ERSAs would generally follow a simplified version of existing rules for 401(k) plans. For plans where the average contribution percentage for nonhighly compensated employees (NHCEs) exceeds 6%, no nondiscrimination test would be required; otherwise, the average contribution for highly compensated employees could not exceed double that of the NHCEs. A design-based safe harbor would be available to ERSAs with vested employer contributions (excluding deferrals) of at least 3% of compensation.
  • EGTRRA Permanence – EGTRRA, which included numerous pension and benefit provisions, sunsets at the end of 2010. Permanent extension is proposed.
  • Retirement Savings Account (RSA) – Current-law IRAs would be consolidated into RSAs. Individuals could contribute up to $5,000 annually (or taxable earnings, if less), indexed for inflation. Contributions would be nondeductible, but inside build-up would be exempt, and qualified distributions would be excluded from taxable income.
  • Tax-Free IRA Charitable Withdrawals – Distributions made from any IRA after age 65 would be excludable from taxable income if made directly to a qualified charitable organization. Normal charitable deduction rules would continue to apply.
      Note – Although no parallel proposal is made for distributions from a qualified plan, any such amonts that qualify for rollover to an IRA could effectively gain access to this new rule.

The 2007 Blue Book also included detail on some of the HSA elements of the Administration’s revenue game-plan, as well as other issues relating to health care and other employee benefits. For subsequent BeneBlog attention.

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