Improve And Expand 401(k) Plans:
Simplify Pension Rules
Simplify Taxation of Annuity Distributions
Improve Administration of Prohibited Transaction Rules
Streamline Pension Plan Reporting And Disclosure
Prevent Loss of Benefits
Other Proposals
"The most important job of our government in this new era is to empower the American people to succeed in the global economy. We've got to have a government that can be a real partner in making this new economy work for all of our people. We ought to foster more savings and personal responsibility."
President Clinton -- January 24, 1995
In the twenty years since Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA) to protect the pension promises made to employees, the pension laws and regulations have become extremely complicated. There are many reasons: the desire of employers to have a high degree of flexibility in designing plans that best suit their work force; policy decisions to try to ensure that all employees receive similar tax and savings benefits from retirement plans as are available to highly compensated employees and business owners; the need to prevent specific tax-shelter abuses; and limitations on pension accumulations to raise revenue.
While each of these may be good causes, and the private sector pension system has been greatly strengthened as a result of ERISA, the cumulative result -- together with virtually annual legislative changes -- had been to raise compliance and administrative costs to a level where many small employers, in particular, feel they cannot offer retirement plans to their employees. For example, while 73% of full-time workers in private firms with 1000 or more workers were covered by retirement plans in 1993, only 24% of those in firms with fewer than 100 employees were covered.
It is time to cut through complex rules that are outmoded, redundant, or no longer necessary to achieve policy goals. With these changes, more employers, both large and small, can make the smart decision: to provide their employees with a simple, tax-advantaged way to save for retirement. And, by reducing administrative expenses, more of the money spent by employers to maintain pension plans can go to benefits, rather than to lawyers, accountants, consultants and actuaries.
We can do this without opening the system to abuses or breaking the bank:
We can tell employers with 401(k) plans that if they make a meaningful contribution on behalf of each employee, or provide a smaller contribution plus a significant match, we'll give them a safe harbor from antidiscrimination testing that is so complex and expensive that the federal government exempted its own pension plan from the requirements.
We can make life even simpler for the smallest employers -- those with 100 or fewer employees. We can let them combine the advantages of both IRAs and 401(k) plans to provide a new, simple plan -- we call it the National Employee Savings Trust or NEST -- where no discrimination testing is required, there are simple limits on contributions, and employees manage their own accounts.
We can stop treating family employees like mere appendages of a business owner, letting wives and husbands, and sons and daughters who work hard in family businesses earn pension benefits of their own.
We can turn the seven-part definition of "highly compensated employee" into a two-part definition that's so easy an employer could figure it out without a lawyer or accountant.
We can get rid of a limit on contributions and benefits for employees who have two types of plans with the same employer, leaving in place a simpler rule enacted in 1986 to replace it. The limit is so complicated that virtually no one computes it correctly.
We can reduce the application to defined contribution plans of rules meant primarily for defined benefit plans. And we can reduce the application to multiemployer plans of rules meant primarily for single employer plans.
We can give employees of tax-exempt organizations the opportunity to participate in the 401(k) defined contribution plans available to other employers.
We can make sure that all participants in pension plans will get the benefits they have earned when their retire, even if their employer terminates the plan -- or even goes out of business -- and the employee has years to retirement.
We can repeal a provision of ERISA that requires employers to send us copies of plan documents we simply warehouse -- only to have us ask them for another copy when an employee asks us for one!
These changes, and most of the other proposals in this report will require legislation. However, over the years there has been strong bipartisan support in Congress for pension simplification, and we are hopeful that our sensible, cost-effective proposal will be adopted.
But there is simplification that we can do administratively too:
We can significantly simplify both the content and the means of filing the annual report that pension and health and welfare plans file with the government to enable us to check compliance with the law.
We can make it much easier for plans to get permission to enter into transactions that are in the best interest of the plan but that technically are prohibited transactions.
We can make certain that employers don't have to send employees duplicative notices or notices of plan changes that don't affect them.
Increasing the retirement income security of American workers is important, and increasing retirement plan coverage and benefits is a logical and effective way for the public and private sectors to work together with individual workers to achieve this goal. The package we are presenting today is a cost-effective beginning. We intend to continue to work with all concerned parties and with the Congress to ensure greater simplification of our pension system and greater retirement income security for all American workers.
Highlights of the High Priority Actions
Although this report proposes 29 High Priority Actions for pension simplification, six of these actions are of particular importance in achieving the goals of simplification.
Offer the "National Employee Savings Trust" - NEST - A simplified pension plan for small businesses
Small businesses are least able to deal with the complexity of current law, and their employees are the least likely to be covered by a retirement plan today. Therefore, we propose a new, simple retirement plan for employers with 100 or fewer employees. As many as 15 million workers who have no employer retirement plan could become eligible for the new plan, which would be known as the National Employee Savings Trust, or "NEST."
The NEST would operate through individual IRA accounts for employees, and would incorporate the most attractive features of the 401(k) plan, the fastest growing employer retirement plan in America today. By eliminating or greatly simplifying many of the rules that apply to other qualified retirement plans, including 401(k)s, the NEST would remove the key obstacles that currently deter many small employers from setting up retirement plans.
For example, for purposes of the NEST, this proposal would eliminate:
the special nondiscrimination test that applies to employees' 401(k) salary reduction contributions;
the special nondiscrimination test that applies to an employer's matching contributions;
the top-heavy rules;
the limit on profit-sharing plan deductions; and
employers' reporting requirements.
The proposal would simplify:
the limits on contributions;
the rules governing employees' eligibility to participate; and
employers' disclosure requirements.
A NEST could provide for employer contributions and for 401(k)-type tax-favored employee contributions by salary reduction. And employers could use their contributions to encourage each of their employees to contribute by offering to "match" employees' salary reduction contributions dollar-for-dollar for the first 3% of employee compensation and at least 50 cents on each contributed dollar for the next 2% of employee compensation. All NEST contributions would be made to an IRA established for each participating employee, and employers would contribute according to either of two "safe harbor" formulas.
The 401(k) plan generally allows employees to contribute toward their retirement savings on a tax-favored, salary reduction basis. These plans often provide for the employer to make contributions that "match" the employee contributions. Yet in order to ensure that lower paid workers get reasonable contributions compared to those received by the highly paid, extensive and often costly nondiscrimination tests apply.
We propose two important simplifications to the complex nondiscrimination tests that apply to 401(k) plans. In addition, we would allow employers (regardless of size) that sponsor 401(k) plans to avoid the nondiscrimination tests altogether by making the same type of safe harbor contributions that would apply to the NEST.
Repeal the family aggregation rule. We propose to repeal the so-called family aggregation rule. Currently, multiple family members employed by the same firm are penalized if one of them either owns 5% or more of the firm, or is one of the ten highest paid employees. This unfairly prevents the family members from receiving the full retirement benefits they could have if they were unrelated employees. In addition, the family aggregation rule greatly complicates nondiscrimination testing, particularly for family-owned or operated businesses.
Repeal the combined limit. We propose to repeal the excessively complex "combined limit" that currently applies to an employee's contributions and benefits when an employee participates in both a defined contribution plan and a defined benefit plan of the same employer. The calculation of this limit -- often referred to as section 415(e) of the Internal Revenue Code -- is exceedingly cumbersome. It requires information concerning a plan participant's entire work history, and it is commonly performed incorrectly. The goals of the combined limit are already adequately met by an excise tax enacted by Congress in 1986.
Simplify the definition of "highly compensated employee" to ease plan administration. We also propose to simplify radically the definition of "highly compensated employee." Virtually every nondiscrimination test for pension plans (and health and welfare plans) involves identifying the employer's highly compensated employees. This term is currently defined by reference to a complicated seven-part test that considers pay for both the current and preceding year. In addition, this test classifies many middle-income workers as "highly compensated employees" who are, as a result, prohibited from receiving better benefits.
Our proposal replaces the seven-part test with a simple two-part test: a highly compensated employee would be anyone who either owns more than 5% of an employer or is paid more than $80,000, based on pay in the prior year. The $80,000 threshold would save many middle-income Americans from being disadvantaged by nondiscrimination rules that were originally meant to help them.
Exempt defined contribution plans from the minimum participation requirement. Every qualified defined benefit plan and defined contribution plan currently must cover at least 50 employees or, in smaller companies, 40% of all employees of the employer. This minimum participation rule was generally intended to prevent the use of individual defined benefit plans to give high paid employees better benefits than those provided to others under a separate plan. Because the abuses addressed by the rule are unlikely to arise in the context of defined contribution plans, the rule adds unnecessary administrative burden and complexity for those plans. We would repeal the requirement for defined contribution plans.
Streamline Form 5500 reporting for all pension plans
Each year, over 750,000 pension and welfare benefit plans are required to file the Form 5500 with the Internal Revenue Service (IRS). The form provides detailed information concerning a plan's financial condition, funding, investments and operations, and allows the pension enforcement agencies to evaluate compliance with the complex pension rules. The form is filed and processed as if it were a tax return, although it is an annual information report. In accordance with a National Performance Review (NPR) recommendation, we propose to significantly simplify and shorten the form and to develop software that will allow plans to file the form electronically, using a self-editing program. The new form will be available for public comment before the end of 1995 and completed early in 1996. The revised filing system will be implemented for 1996 plan years, for which returns must be filed in July 1997.
Simplify and expedite the prohibited transaction exemption process
A "prohibited transaction" is generally any transaction between a plan and a person who is considered a "party in interest" or a "disqualified person." Prohibited transactions may trigger an excise tax and civil and criminal liability. On the other hand, many transactions that are technically prohibited are inconsequential or are completely consistent with a plan fiduciary's responsibilities to participants, and so the Department of Labor (DOL) grants exemptions in most cases. However, the current DOL process, which treats each requested exemption as unique and entitled to all statutory procedural protections, can take up to two years. We would, administratively, guarantee a DOL response within 45 days for transactions DOL determined to be substantially similar to exemptions previously granted to the same or other plans. In addition, we would simplify the process for exempting another class of prohibited transactions -- involving self-directed accounts -- that both the IRS and DOL currently must act on, by designating DOL the primary decision-maker and limiting the time within which the IRS must object or concur.
Expand the Pension Benefit Guaranty Corporation's missing participant program to enable more of those promised a pension to get it, even if their company goes out of business
Under the Retirement Protection Act, enacted in December, employers who are terminating defined benefit plans guaranteed by the PBGC must register "missing" participants -- participants the plan sponsor cannot locate, who have often left the company's employment years earlier -- with the PBGC and either transfer funds to the PBGC or purchase annuities for these participants. Previously missing participants who learn of a plan's termination can then contact the PBGC rather than having to trace the funds of an often-defunct employer. In addition, the PBGC has developed a fairly effective system for tracing such participants and providing them benefits. We propose to expand this program to defined benefit plans (other than governmental plans) that are not guaranteed by the PBGC and to defined contribution plans.
Simplify Pension Plans For Small Business The NEST -- A Simplified Plan for Small Business
Action: Create a new, simple retirement savings plan targeted to small employers and designed to encourage coverage of all employees. The new plan would be known as the National Employee Savings Trust ("NEST").
Background: The administrative cost and complexity associated with traditional qualified retirement plans often discourage small employers from sponsoring these plans. For employers with few employees, the cost of maintaining the plan may even exceed the benefits provided to employees. As a result, pension coverage of employees of small employers is significantly lower than the pension coverage of employees of larger employers. Existing plans designed for small employers are generally perceived as overly complicated and impractical. Where these plans are used, there is significant noncompliance with the statutory requirements.
Description: A NEST is a tax-favored retirement savings plan designed to provide small employers with a simple, cost-effective means of providing a retirement plan for their employees. It achieves these goals primarily by eliminating several complex nondiscrimination tests that apply to traditional qualified plans and, instead, simply requires an employer to make NEST contributions in accordance with one of two specified plan designs. The key features of the NEST are:
Any employer with 100 or fewer employees would be eligible to maintain a NEST.
Each employee, age 21 or older, who completed two years of service with the employer would participate in the NEST. However, an employer would not be required to make nonelective contributions for an employee with less than $5,000 of compensation for the year.
The NEST would have to be designed to satisfy one of the following two formulas:
(1) The employer contributes at least 3% of pay for each eligible employee. In addition employees may be given the opportunity to make salary reduction (or "elective") contributions.
(2) The employer contributes at least 1% of pay for each eligible employee. In addition, employees must be given the opportunity to make elective contributions. Employee elective contributions of up to 3% of compensation must be matched by the employer dollar-for-dollar. The employer match for elective contributions above 3% of compensation (and up to 5% of compensation) must be at least 50 cents per dollar of elective contributions. No employer matching contribution is allowed for elective contributions in excess of 5% of compensation.
All contributions would be made to an IRA and would be immediately 100% vested. However, withdrawal of any NEST contribution would be restricted for two years.
An employee's annual elective contributions to a NEST would be limited to $5,000. Employer nonelective contributions would be limited to 5% of an employee's compensation (of up to $150,000). No other contribution or deduction limits would apply to the NEST.
An employer would generally be allowed to make contributions for all employees to the same financial institution. However, an employee could subsequently move the NEST funds to an IRA at another financial institution.
NEST accounts would be portable -- NESTs could originate and receive rollovers from any other IRA, and NESTs could receive rollovers from qualified plans.
Repeal the Family Aggregation Rule
Action: Eliminate the rule that requires certain highly compensated employees and their family members to be treated as a single employee.
Background: Under current law, if an employee is a family member of either a more-than-5% owner of the employer or one of the employer's 10 highest-paid highly compensated employees, then any compensation paid to the family member and any contribution or benefit under the plan on behalf of the family member is aggregated with the compensation paid and contributions or benefits on behalf of the highly compensated employee. Therefore, the highly compensated employee and the family member(s) are treated as a single highly compensated employee. For purposes of this rule, an employee's "family member" is generally a spouse, parent, grandparent, child, or grandchild (or the spouse of a parent, grandparent, child, or grandchild).
A similar family aggregation rule applies with respect to the $150,000 annual limit on the amount of compensation that may be taken into account under a qualified plan. (However, under these provisions, only the highly compensated employee's spouse and children or grandchildren under age 19 are aggregated.)
These family aggregation rules greatly complicate the application of the nondiscrimination tests, particularly for family-owned or operated businesses, and may unfairly reduce retirement benefits for the family members who are not highly compensated employees.
Description: The family aggregation rules would be repealed.
3. Eliminate Special Restrictions on Plans Maintained by the Self-Employed
Action: Eliminate the special plan aggregation rules that apply to certain qualified employer retirement plans maintained by self-employed individuals.
Background: Prior to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), numerous special rules applied to qualified retirement plans that covered self-employed individuals. Almost all of these special rules were repealed by TEFRA. However, special aggregation rules that do not apply to other qualified retirement plans still apply to qualified plans that cover an "owner-employee" (i.e., a sole proprietor of an unincorporated trade or business or a more-than-10% partner of a partnership). These aggregation rules generally require affected plans to be treated as a single plan and affected employers to be treated as a single employer. For example, under one of the special rules, if an owner-employee controls more than one trade or business, then any qualified plans maintained with respect to those trades or businesses must be treated as a single plan and all employees of those trades or business must be treated as employed by a single employer. The special aggregation rules afford plan participants little, if any, protection because they are largely duplicative of the general aggregation rules that apply to all qualified employer plans, including plans that cover self-employed individuals.
Description: The special aggregation rules for qualified plans that cover owner-employees would be repealed.
Simplify Substantial Owner Rules Relating to Plan Terminations
Action: Simplify the rules that phase in PBGC-guaranteed benefits for a "substantial owner" who is a participant in a terminating plan.
Background: ERISA contains very complicated rules for determining the PBGC-guaranteed benefits of an individual who owns more than 10 percent of a business (a "substantial owner") and who is a participant in the business's terminating plan. These rules were designed to prevent a substantial owner from establishing a plan, underfunding it, and terminating it in order to receive benefits from the PBGC. Under the rules, the PBGC guarantee with respect to a participant who is not a substantial owner is generally phased in over five years from the date of the plan's adoption or amendment. However, for a substantial owner, the guarantee is generally phased in over thirty years from the date the substantial owner begins participation in the plan. The substantial owner's benefit under each amendment within the 30 years before plan termination is separately phased in. As a result, when a plan covering a substantial owner is terminated, the PBGC must obtain plan documents from as long as 30 years ago. This is frequently difficult if not impossible.
Description: The same five-year phase-in that currently applies to a participant who is not a substantial owner would apply to a substantial owner with less than a 50% ownership interest. For a substantial owner with a 50% or more ownership interest (a "majority owner"), the phase-in would depend on the number of years the plan has been in effect, rather than on the number of years the owner has been a participant. Specifically, the guaranteeable plan benefit for a majority owner would be 1/30 for each year that the plan has been in effect. (Benefits under plan amendments would not be separately phased in.) Under this approach, the fraction would be the same for each majority owner, eliminating the need for separate computations based on documents as many as 30 years old. However, a majority owner's guaranteed benefit would be limited so that it could not be more than the amount that would be guaranteed under the regular five-year phase-in applicable to other participants.
IMPROVE AND EXPAND 401(k) PLANS
Eliminate Uncertainty and Monitoring of Contributions Through Design-Based Safe Harbors
Action: Provide design-based nondiscrimination safe harbors that would give employers the option of avoiding all ADP (actual deferral percentage) and ACP (average contribution percentage) testing.
Background: The ADP test generally applies to the elective contributions (typically made by salary reduction) of all employees eligible to participate in a 401(k) plan. The test requires the calculation of each eligible employee's elective contributions as a percentage of the employee's pay. The ADP test is satisfied if the plan passes either of the following two tests: (1) the average percentage of elective contributions for highly compensated employees does not exceed 125% of the average percentage of elective contributions for nonhighly compensated employees, or (2) the average percentage of elective contributions for highly compensated employees does not exceed 200% of the average percentage of elective contributions for nonhighly compensated employees, and does not exceed the percentage for nonhighly compensated employees by more than two percentage points. The ACP test is almost identical to the ADP test, but generally applies to employer matching contributions and after-tax employee contributions under any qualified employer retirement plan.
The annual application of these tests, and correcting violations of these tests, is complicated and often costly. Most cases require either constant monitoring and adjustments of contributions over the course of the year or complicated correction procedures and information reporting after the end of the year.
Description: The proposal would provide two alternative "design-based" safe harbors. If a plan were properly designed, the employer would avoid all ADP and ACP testing. Under the first safe harbor, the employer would have to make nonelective contributions of at least 3% of compensation for each nonhighly compensated employee eligible to participate in the plan. Alternatively, under the second safe harbor, the employer would have to provide a 100% matching contribution on an employee's elective contributions up to the first 3% of compensation, and a match of at least 50% on the employee's elective contributions up to the next 2% of compensation. The second safe harbor also would require the employer to make a nonelective contribution of at least 1% of compensation for each eligible nonhighly compensated employee.
Under both safe harbors, the nonelective employer contributions and the matching employer contributions would be nonforfeitable immediately (i.e., 100% vested) and generally could not be distributed prior to the participant's death, disability, termination of employment, or attainment of age 59 1/2. In addition, each employee eligible to participate in the plan would have to be given notice of his or her rights and obligations under the plan within a reasonable period before any year begins.
Facilitate Testing by Using Prior Year Data
Action: Adopt a look-back method for determining allowable contribution levels for highly compensated employees in order to eliminate the need for on-going testing or post-year-end corrections.
Background: The ADP test and the ACP test generally compare the average contributions for highly compensated employees for the year to the average contributions for nonhighly compensated employees for the same year. Because the current year average for the nonhighly compensated employees is not known until the end of the year, this almost always requires either constant monitoring and adjustments over the course of the year or complicated correction procedures and information reporting after the end of the year.
Description: To eliminate this unnecessary uncertainty and complexity, the proposal would modify the ADP and ACP tests to require the average contributions for highly compensated employees for the current year to be compared to the average contributions for nonhighly compensated employees for the preceding year.
Improve Fairness of Corrective Distribution Rules
Action: Provide a method for correcting nondiscrimination test violations that does not disproportionately favor the most highly compensated employees.
Background: Under current law, when the ADP or ACP test is violated, correction is made by reducing the excess contributions of highly compensated employees beginning with employees who have deferred the greatest percentage of pay. This method illogically favors the most highly paid of the highly compensated employees: their contributions, as a percentage of pay, are likely to be lower than the percentage contributions of lower-paid highly compensated employees, even if the dollar amount of their contributions is higher. For example, if an officer makes $65,000 and contributes $5,000 (7.7% of pay), his contribution would be reduced before that of a CEO who makes $150,000 and contributes $9,000 (6% of pay). In addition, it is usually simpler to determine the total dollar amount contributed by an employee than to determine what percentage of pay that dollar amount represents.
Description: The simplified correction method would require excess contributions to be distributed first to those highly compensated employees who deferred the highest dollar amount for the year. Under this method, the lower paid highly compensated employees would no longer be disadvantaged by the correction method.
Permit Tax-Exempt Organizations to Maintain 401(k) Plans
Action: Modify the tax law to delete the Code provision that prohibits organizations exempt from income tax, including Indian tribes, from maintaining section 401(k) plans.
Background: Except for certain plans established before July 2, 1986, an organization exempt from income tax is not allowed to maintain a 401(k) plan. This rule prevents many tax-exempt organizations from offering their employees retirement benefits on a salary reduction basis. Although tax-sheltered annuity programs can provide similar benefits, many types of tax-exempt organizations are also precluded from offering those programs.
Description: The proposal would delete the Code provision that prohibits organizations exempt from income tax, including Indian tribes, from maintaining 401(k) plans.
Conform 401(k) Distribution Rules for Rural Cooperatives
Action: Conform the distribution rules for 401(k) plans maintained by rural cooperatives with the distribution rules that apply to other 401(k) plans.
Background: Under a 401(k) plan, distributions are allowed only after separation from service, death, disability, attainment of age 59 1/2, and certain other specified events. However, 401(k) plans maintained by rural electrical cooperatives or cooperative telephone companies are money purchase pension plans. Therefore, in accordance with the distribution restrictions generally applicable to pension plans, these plans cannot allow distributions on account of a participant attaining age 59 1/2.
Description: The rules for 401(k) plans of rural cooperatives would be conformed to those that apply to other 401(k) plans by allowing distributions after attainment of age 59 1/2. (Note: Proposal 28 would change the age 59 1/2 rule to an age 59 rule.)
SIMPLIFY PENSION RULES
Delete Unnecessary Tests and Special Rules
Eliminate Excessive Testing By Simplifying the Definition of "Highly Compensated Employee"
Action: Simplify the definition of "highly compensated employee" that is used to test qualified employer retirement plans for nondiscrimination.
Background: A qualified employer retirement plan must satisfy a variety of nondiscrimination tests to ensure that it does not discriminate in favor of "highly compensated employees." As a result, all of the nondiscrimination tests require the employer to identify its "highly compensated employees." This term is currently defined by reference to a complicated test that consists of seven major elements. An employee is treated as a highly compensated employee for the current year, if, at any time during the current year or the preceding year, the employee:
(1) owned more than 5% of the employer,
(2) received more than $100,000 (as indexed for 1995) in annual compensation from the employer,
(3) received more than $66,000 (as indexed for 1995) in annual compensation from the employer and was one of the top-paid 20% of employees during the same year, or
(4) was an officer of the employer who received compensation greater than $60,000 (as indexed for 1995).
However, these four rules are modified by three additional rules.
(5) An employee described in any of the last three categories for the current year but not the preceding year is treated as a highly compensated employee for the current year only if he or she was among the 100 highest paid employees for that year.
(6) No more than 50 employees or, if fewer, the greater of three employees or 10% of employees are treated as officers.
(7) If no officer has compensation in excess of $60,000 (for 1995) for a year, then the highest paid officer of the employer for the year is treated as a highly compensated employee.
This test is not only complicated, it classifies many middle-income workers as "highly compensated employees" who are then prohibited from receiving better benefits than others.
Description: The current seven-part test would be replaced by a simplified two-part test: an employee would be a "highly compensated employee" for the current year only if the employee owned more than 5% of the employer during the current or preceding year or had compensation from the employer of more than $80,000 (indexed annually for cost of living) during the preceding year. This dollar threshold would mean that many middle-income Americans would no longer be subject to nondiscrimination restrictions.
Exempt Defined Contribution Plans from the Minimum Participation Rule
Action: Eliminate the requirement that a defined contribution plan cover at least 50 employees or, in smaller companies, 40% of all employees of the employer.
Background: Under current law, every qualified defined benefit plan or defined contribution plan is required to cover at least 50 employees or, in smaller companies, 40% of all employees of the employer. This rule was generally intended to prevent an employer from establishing individual defined benefit plans for highly compensated employees in order to provide those employees with more favorable benefits than those provided to lower paid employees under a separate plan. The rule prevents an employer from favoring one small group of participants over another by, for example, covering them under two separate plans and funding one plan better than the other.
As applied to defined contribution plans, the minimum participation rule adds complexity for employers without delivering commensurate benefits to the system.
The 50 employee/40% rule currently acts as a largely redundant backstop to the nondiscrimination rules designed to prevent qualified retirement plans from unduly favoring the top group of employees. Since 1986, when the minimum participation rule was enacted (along with other, more extensive nondiscrimination requirements), regulations have further limited the potential for discriminatory practices that originally caused the minimum participation rule to be applied to plans other than individual defined benefit plans.
All defined contribution plans are generally fully funded and, therefore, there is no risk that an employer will favor participants in one plan over participants in another by providing more favorable funding.
Thus, the abuses intended to be addressed by the minimum participation requirement are unlikely to arise in the context of defined contribution plans. This requirement adds unnecessary administrative burden and complexity with respect to these plans.
Description: The minimum participation rule would be repealed for defined contribution plans.
Eliminate Special Vesting Schedule for Multiemployer Plans
Action: Eliminate the 10-year vesting schedule currently allowed only for multiemployer plans, so that multiemployer plans will be subject to the same 5- or 7-year vesting schedules as all other qualified employer retirement plans.
Background: The accrued benefits of a collectively bargained employee under a multiemployer pension plan are not currently required to become nonforfeitable (i.e., "vested") until the employee has completed 10 years of service. If the employee's employment terminates before then, all benefits can be lost. Accrued benefits of all other employees (i.e., employees under all non-multiemployer plans and any noncollectively bargained employees under a multiemployer plan) must vest after five years of service, or after seven years if partial vesting begins after three years.
Description: The special 10-year vesting rule applicable to multiemployer plans would be repealed.
Allow Triennial Actuarial Valuations for Multiemployer Plans
Action: Allow multiemployer plans to return to triennial, rather than annual, actuarial valuations.
Background: An employer's annual deduction for contributions to a defined benefit plan is generally limited to the amount by which 150% of the plan's current liability (or, if less, the plan's accrued liability) exceeds the value of the plan's assets. Because the annual calculation of the 150% limit requires an actuarial valuation, defined benefit plans are required to have an actuarial valuation no less frequently than annually. However, under a separate proposal (see proposal 18), the 150% limit would be eliminated for multiemployer plans and, therefore, annual valuations would be unnecessary and overly burdensome for these plans.
Description: Actuarial valuations would be required no less frequently than every three years, rather than annually, for multiemployer plans.
Eliminate Partial Termination Rules for Multiemployer Plans
Action: Eliminate the partial termination rules for multiemployer plans.
Background: When a qualified employer retirement plan is terminated, all plan participants are required to become 100% vested in their accrued benefits to the extent those benefits are funded. In order to prevent an employer from evading this rule simply by amending the plan to exclude nonvested employees or by laying off nonvested employees before terminating the plan, a qualified employer retirement plan must also provide that, upon a "partial termination," all affected employees must become 100% vested in their benefits accrued to the date of the termination, to the extent the benefits are funded.
Whether a partial termination has occurred in a particular situation is generally based on the specific facts and circumstances of that situation, including the exclusion from the plan of a group of employees who have previously been covered by the plan, by reason of a plan amendment or severance by the employer. In addition, if a defined benefit plan stops or reduces future benefit accruals under the plan, a partial termination is deemed to occur if, as a result, a potential reversion of plan assets to the employer is created or increased.
Over the years, court decisions have left unanswered many key questions as to how to apply the partial termination rules. Accordingly, applying the rules can often be difficult and uncertain, especially for multiemployer plans. For example, multiemployer plans experience frequent fluctuations in participation levels caused by the commencement and completion of projects that involve significant numbers of union members. Many of these terminated participants are soon rehired for another project that resumes their active coverage under the plan. In addition, it is common for participants leaving one multiemployer plan's coverage to maintain service credit under a reciprocal agreement if they move to the coverage of another plan sponsored by the same union. As a result, these participants do not suffer the interruption of their progress along the plan's vesting schedule that ordinarily occurs when an employee stops being covered by a plan.
Given these factors, and the related proposal to require multiemployer plans to vest participants after five (instead of the current 10) years of service, the difficulties associated with applying the partial termination rules to multiemployer plans outweigh the benefits.
Description: The requirement that affected participants become 100% vested in their accrued benefits (to the extent funded) upon the partial termination of a qualified employer retirement plan would be repealed with respect to multiemployer plans.
Simplify Rules Governing Contributions and Deductions
Eliminate the Combined Plan Limit on Contributions and Benefits (Section 415(e))
Action: Repeal the extremely complex combined limit on contributions and benefits that applies when an employee is covered under both a defined contribution plan and a defined benefit plan of the same employer.
Background: An employee who participates in a qualified defined benefit plan and a qualified defined contribution plan of the same employer must currently satisfy a combined plan limit. This limit is satisfied if the sum of the "defined benefit fraction" and the "defined contribution fraction" is no greater than 1.0.
The defined benefit fraction measures the portion of the maximum permitted defined benefit that the employee actually uses. The numerator is the projected normal retirement benefit, and the denominator is generally the lesser of 125% of the dollar limitation for the year ($120,000 for 1995), or 140% of the employee's average compensation for the three years of employment in which the employee's average compensation was highest.
The defined contribution fraction measures the portion that the employee actually uses of the maximum permitted contributions to a defined contribution plan for the employee's entire career with the employer. The numerator is generally the total of the contributions and forfeitures allocated to the employee's account for each of the employee's years of service with the employer. The denominator is the sum of a calculated value for each of those years of service. The calculated value is the lesser of 125% of the dollar limitation for that year of service ($30,000 for 1995), or 35% of the participant's compensation. Because of the historical nature of this fraction, its computation is extremely cumbersome and requires the retention of various data for an employee's entire career.
The combined plan limit is not the only Code provision that safeguards against an individual accruing excessive retirement benefits on a tax-favored basis. There are maximum limits for both defined benefit and defined contribution plans. In addition, a 15% "excess distribution" penalty was enacted in 1986 to achieve many of the same goals as the combined plan limit. A distribution is generally considered an "excess distribution" to the extent all distributions to an individual from all of the individual's qualified employer plans and IRAs exceed $150,000 during a calendar year. The limit is $750,000 for a lump sum distribution. Excess distributions made after death are subject to an additional estate tax of 15%. Other rules also protect against excessive benefits.
Because other provisions of the Code go far toward ensuring that an individual cannot accrue excessive retirement benefits on a tax-favored basis, the extreme complexity of the combined plan limit is not justified.
Description: The combined plan limit (Code section 415(e)) would be repealed.
Simplify Contributions and Benefits Limits for Governmental Plans and Multiemployer Plans
Action: Exempt governmental plans and multiemployer plans from certain limitations on benefits and contributions.
Background: Annual additions to a defined contribution plan for any participant are limited to the lesser of $30,000 (for 1995) or 25% of compensation. Annual benefits payable under a defined benefit plan are limited to the lesser of $120,000 (for 1995) or 100% of "three-year-high average compensation." If benefits under a defined benefit plan begin before social security retirement age, the dollar limit must be reduced. Reductions in the dollar or percentage limit may also be required if the employee has fewer than 10 years of plan participation or service. Certain special rules apply to governmental plans.
These qualified plan limitations are uniquely burdensome for governmental plans, which have long-established benefits structures and practices that may conflict with the limitations. In addition, some state constitutions may prohibit the changes needed to conform the plans to these limitations.
These limitations also present problems for many multiemployer plans. These plans typically base benefits on years of credited service, not on a participant's compensation. In addition, the 100%-of-compensation limit is based on an employee's average compensation for the three highest consecutive years. This rule often produces an artificially low limit for employees in certain industries, such as building and construction, where wages vary significantly from year to year.
Description: The rules for governmental plans and multiemployer plans would be modified to eliminate the 100-percent-of-compensation limit (but not the $120,000 limit) for such plans, and to exempt certain survivor and disability benefits from the adjustments for early commencement and for participation and service of less than 10 years. In addition, certain employee salary reduction contributions could be counted as "compensation" for purposes of applying the limitations on benefits and contributions. To the extent that governmental employers have previously made elections that would prevent them from utilizing these simplification provisions, the proposal would allow those employers to revoke their elections.
Allow Tax-Exempt Organizations to Provide Excess Benefit Plans
Action: Exempt "excess benefit plans" from the restrictions on nonqualified deferred compensation provided under section 457 of the Code.
Background: The amount of compensation provided to an employee under a nonqualified deferred compensation arrangement maintained by a for-profit organization generally is not subject to any limitation. In addition, such deferred compensation is not taxable to the employee until it is paid or otherwise made available to the employee to draw upon at any time.
In contrast, with few exceptions, section 457 of the Code subjects all nonqualified deferred compensation arrangements maintained by state and local governments and tax-exempt organizations to special, more restrictive rules. First, the amount deferred for any participant under such arrangements must generally be limited to $7,500 per year. Second, if this dollar limit and other restrictions are not satisfied, the deferred compensation is taxed to the participant in the first taxable year in which the compensation is not subject to a substantial risk of forfeiture, even if the compensation is not paid or otherwise made available to the participant until a later date.
An "excess benefit plan" is a nonqualified deferred compensation plan maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations on annual contributions and benefits imposed by section 415 of the Code (i.e., the lesser of $30,000 or 25% of compensation for a defined contribution plan, and the lesser of $120,000 or 100% of compensation for a defined benefit plan). If an employee's qualified plan contributions or benefits exceed these limits, an excess benefit plan may provide the excess contributions or benefits on a nonqualified basis. Thus, an excess benefit plan simply provides to certain employees -- those whose contributions or benefits are reduced by the limits -- contributions or benefits that are already provided to other employees under a qualified plan. However, even though there is no opportunity under an excess benefit plan to provide management employees with disproportionately higher benefits than those provided to lower paid employees, the restrictions of section 457 still apply to such a plan if it is maintained by a state and local government or tax-exempt organization. These employers are therefore at a distinct disadvantage in attempting to provide all employees with proportionate contributions or benefits.
Description: The proposal would exempt excess benefit plans of state and local governments and tax-exempt organizations from section 457. The exemption would not apply to an excess benefit plan that also provides benefits in excess of other qualified plan limitations.
Simplify Deduction Rules for Multiemployer Plans
Action: Repeal the 150% limitation on deductible contributions for multiemployer plans.
Background: An employer's annual deduction for contributions to a defined benefit plan is generally limited to the amount by which 150% of the plan's current liability (or, if less, 100% of the plan's accrued liability) exceeds the value of the plan's assets. The 150%-of-current-liability limit is intended to limit the extent to which an employer can deduct contributions for liabilities that have not yet accrued.
However, an employer has little, if any, incentive to make "excess" contributions to a multiemployer plan. The amount an employer contributes to a multiemployer plan is fixed by the collective bargaining agreement, and a particular employer's contributions are not set aside to pay benefits solely to the employees of that employer. Moreover, no reversions are permitted from multiemployer plans.
Description: Because the 150% limit on deductible contributions needlessly complicates the deduction rules for multiemployer plans, the 150% limit would be eliminated for those plans. Therefore, the annual deduction for contributions to a multiemployer plan would be limited simply to the amount by which the plan's accrued liability exceeds the value of the plan's assets.
Eliminate and Simplify Rules Governing Distributions
Repeal Rule Requiring Employer Plans to Commence Minimum Distributions Before Retirement
Action: Eliminate the requirement that distributions from a qualified employer plan to an employee (other than a more-than-5% owner) who continues to work for the employer maintaining the plan must begin at age 70 1/2.
Background: Under current law, an employee who participates in a qualified employer retirement plan must begin taking distributions of his or her benefit by the April 1 following the year in which he or she reaches age 70 1/2. Generally, the so-called "minimum distribution" for any year is determined by dividing the employee's account balance or accrued benefit by the employee's life expectancy as of that year. If the employee is still working and accruing new benefits at age 70 1/2, the new benefits must be taken into account to determine the minimum amount required to be distributed for the same year. In effect, a portion of each year's new benefit accrual is required to be distributed in the same year. This almost simultaneous pattern of contributions and required distributions causes considerable complication and confusion.
Description: The requirement to distribute benefits before retirement would be eliminated, except for employees who own more than 5% of the employer that sponsors the plan. Instead, distributions would have to begin by the April 1 following the later of the year in which the employee reached age 70 1/2 or the year in which the employee retired from service with the employer maintaining the plan. If payment of an employee's benefits were delayed past age 70 1/2 pursuant to this rule, the benefits ultimately paid at retirement would have to be actuarially adjusted to take into account the delay in payment. Without this adjustment, the delay in payment could cause the employee to "lose" the benefit payments that would otherwise have been paid between age 70 1/2 and retirement.
The age 70 1/2 requirement would continue to apply to IRAs. Because an IRA is not maintained by an employer, the initial payment date for an IRA cannot be tied to retirement from the employer maintaining the plan. (Note: Proposal 28 would change the age-70 1/2 rule to an age-70 rule.)
Action: Replace the existing multiple and complex rules for calculating the taxable portion of an annuity payment with a single, simplified method that is currently allowed as an alternative method.
Background: If an employee makes after-tax contributions to a qualified employer retirement plan or IRA, those contributions (i.e., the employee's "basis") are not taxed upon distribution. When the plan distributions are in the form of an annuity, a portion of each payment is considered nontaxable basis. This nontaxable portion is determined by multiplying the distribution by an exclusion ratio. The exclusion ratio generally is the employee's total after-tax contributions divided by the total expected payments under the plan over the term of the annuity.
The determination of the total expected payments, which is based on the type of annuity being paid, often involves complicated calculations that are difficult for the average plan participant. Yet the burden of determining the exclusion ratio almost always falls on the individual receiving the distribution.
Because of the difficulty an individual may face in calculating the exclusion ratio, and in applying other special tax rules that may be applicable, the IRS in 1988 provided a simplified alternative method for determining the nontaxable portion of an annuity payment. However, this alternative has effectively added to the existing complexity because taxpayers feel compelled to calculate the nontaxable portion of their payments under every possible method in order to ensure that they maximize the nontaxable portion.
Description: A simplified method for determining the nontaxable portion of an annuity payment, similar to the current simplified alternative, would become the required method. Taxpayers would no longer be compelled to do calculations under multiple methods in order to determine the most advantageous approach.
Under the simplified method, in most cases, the portion of an annuity payment that would be nontaxable is generally equal to the employee's total after-tax employee contributions, divided by the number of anticipated payments listed in a table (based on the employee's age as of the annuity starting date).
Improve Administration of Prohibited Transaction Rules
Simplify Prohibited Transaction Exemption Procedures
Action: Develop a prohibited transaction class exemption
that would allow the DOL to expeditiously process exemption requests that
involve prohibited transactions substantially similar to those described in
individual exemption previously granted to the same or another plan.
Background: A "prohibited transaction" is generally any
transaction between a plan and a person who is considered a "party in interest"
or "disqualified person" with respect to the plan. Unless exempt by statute or
by an "individual" or "class" exemption, a prohibited transaction may trigger
an excise tax under the Code, and may give rise to civil or criminal liability
under ERISA. The DOL generally has authority to exempt any person or
transaction, or class of persons or transactions, from the prohibited
transaction rules under both the Internal Revenue Code and ERISA.
Under the statute, an exemption may not be granted unless the DOL finds that
the exemption is: (1) administratively feasible, (2) in the interests of the
plan and of its participants and beneficiaries, and (3) protective of the
rights of participants and beneficiaries of such plan. In addition, notice of
a proposed exemption must be published in the Federal Register, and interested
parties must be notified of the proposed exemption and be given an opportunity
to comment and a hearing to present their views. Under these mandatory
procedures, it can take up to two years to obtain an individual exemption.
Description: A class exemption, to be developed by the
DOL, would exempt all transactions that the DOL determined to be substantially
similar to previously granted individual exemptions. For transactions within
its scope, the class exemption would guarantee a DOL response within 45 days.
Simplify Prohibited Transaction Exemptions for Self-Directed ERISA Plans
Action: Simplify the prohibited transaction exemption procedures
for plans with participant-directed accounts ("404(c) plans").
Background: ERISA sets forth certain fiduciary responsibilities
that apply with respect to pension plans. For this purpose, a fiduciary
includes, among others, any person who exercises any discretionary control
respecting the management or disposition of plan assets. However, ERISA
section 404(c) generally provides that, if a plan participant exercises control
over assets in his or her account, the participant will not be deemed to be a
fiduciary by reason of the exercise of such control, and no person who is
otherwise a fiduciary will have fiduciary liability as a result of the
participant's exercise of control. Because of this exemption, a participant's
direction of the investment of his or her account will not give rise to a
prohibited transaction under ERISA. Such participant direction may, however,
give rise to a prohibited transaction under the Code.
Reorganization Plan No. 4 of 1978 generally provides the DOL with authority to
grant exemptions from the prohibited transaction provisions of both ERISA and
the Code. However, the Reorganization Plan also provides that, with respect to
transactions that are exempt from ERISA's prohibited transaction provisions
pursuant to ERISA section 404(c), the Secretary of Treasury has the authority
to grant exemptions from the prohibited transaction provisions of the Code. As
a result, if a 404(c) plan wishes to take advantage of a DOL prohibited
transaction class exemption, the 404(c) plan must apply to the IRS for an
exemption from the prohibited transaction provisions of the Code, whereas a
non-404(c) plan can rely on the DOL class exemption with respect to both the
ERISA and Code prohibited transaction rules. A similar issue arises with
respect to individual exemptions as well.
The DOL has developed significant prohibited transaction exemption expertise
since the effective date of the Reorganization Plan. Therefore, in the vast
majority of cases, it is inefficient and needlessly time-consuming for the IRS
to process these exemption requests.
Description: The IRS would issue a class exemption that would
provide a prohibited transaction exemption for all transactions under a 404(c)
plan for which the DOL has granted a class exemption, unless the IRS
notified the DOL otherwise within a prescribed time after being notified that
the DOL's class exemption was pending. The IRS class exemption would also
provide an exemption for any transaction under a 404(c) plan for which the DOL
has granted an individual exemption, but only if the IRS explicitly
concurred with the individual exemption within a prescribed time.
STREAMLINE PENSION PLAN REPORTING AND DISCLOSURE
Streamline ERISA Annual Report (Form 5500 Series)
Action: Streamline the Form 5500 Series annual reporting requirements for employee benefit plans, and pursue methods for simplifying and expediting the receipt and processing of Form 5500 information and data through the use of advanced computer technologies.
Background: Each year, over 750,000 pension and welfare benefit plans are required to file an annual return/report (the Form 5500 Series) regarding their financial condition, investments, and operations. The Form 5500 series was developed by the DOL, PBGC, and IRS (the "Agencies") to enable employers and plan administrators to satisfy their statutory annual reporting obligations under Titles I and II of ERISA and the Internal Revenue Code by filing a single form. The Form 5500 Series is the primary source of information concerning the operation, funding, assets, and investments of pension and other employee benefit plans. Accordingly, the Form 5500 Series is not only an important enforcement and research tool for the Agencies, but a source of information and data utilized by other federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies. The Form 5500 Series is currently received and processed by the IRS through three designated IRS Service Centers.
The Agencies recognize that compliance with Form 5500 Series annual reporting requirements is a lengthy and complex process, resulting in the imposition of approximately 35 million burden hours on the universe of filers annually. The Agencies also recognize that the receipt and processing of the Form 5500 Series through the systems established for the receipt and processing of tax returns results in compliance and processing inefficiencies and delays. Currently, it costs the Agencies approximately $22 million annually to receive and process Form 5500 Series reports. In an effort to both reduce reporting burdens and facilitate annual reporting compliance, the Agencies are attempting to substantially simplify the Form 5500 Series. The Agencies are also examining ways by which to simplify and expedite the receipt and processing of the Form 5500 Series, while substantially reducing filer compliance burdens and government processing costs, through the use of an electronic filing system and government-provided personal computer software.
The Agencies believe that meaningful burden hour and cost reductions can be achieved only through an integrated implementation of changes to both the Form 5500 Series and the processing system. The National Performance Review (NPR) determined that manual preparation and processing of the Form 5500 Series are time-consuming and costly to the federal government and filers alike. The NPR concluded that an automated processing system, with the availability of personal computer software for the preparation and filing of the Form 5500 Series, should reduce filer costs of preparing forms and government processing costs, while enhancing the government's ability to protect the benefits of American workers as a result of more timely and accurate information.
Description: The current Form 5500 Series would be significantly revised to streamline or eliminate certain information that the Agencies determine is not required to discharge their statutory responsibilities. Following development of a revised Form 5500 Series, the Agencies would pursue establishment of an automated filing system for receipt and processing of Form 5500 Series information and data, as well as computer software to be made available for Form 5500 Series filers.
Provide Uniform Information Reporting Penalties
Action: Conform the penalties for failure to provide information reports with respect to pension payments with the general penalty structure for failure to provide information returns under the Code.
Background: The penalty structure for failure to provide information reports with respect to pension payments is currently separate and different from the penalty structure that applies to information reporting in other areas. The penalty for failure to file a Form 1099-R is currently $25 per day per return, up to a maximum of $15,000 per year per return. The penalty for failure to file Form 5498 is currently a flat $50 per return, with no maximum, regardless of the number of returns.
In contrast, the penalty for failure to file any other information return is generally $50 per return up to $250,000 per year, with lower penalties and maximums if the return is filed within specified times. (The penalty is $15 per return filed late but within 30 days and $30 per return filed late but on or before August 1.) Lower maximums also apply to persons with gross receipts of no more than $5 million. The penalty for failure to furnish a payee statement is $50 per payee statement up to $100,000 per year. Separate penalties apply in the case of intentional regard of the requirement to furnish a payee statement.
Description: In order to provide uniformity, the penalties for failure to provide information reports with respect to pension payments would be conformed to the general penalty structure. Thus, the penalty for failure to file Form 1099-R would generally be reduced. The penalty for failure to file Form 5498 would generally remain the same as under current law, but would no longer be unlimited. In addition, for both Form 1099-R and Form 5498, the penalties would be reduced if the forms were filed late but within specified times. Under the conformed penalty structure, the penalty for failure to file Form 1099-R would generally be reduced for any return that was late by more than two days.
Simplify ERISA Advance Notice of Benefit Reductions
Action: Issue administrative guidance stating that the statutory 15-day advance notice of plan amendments significantly reducing the rate of future benefit accrual need not be given to any person who will be unaffected by the reduction.
Background: ERISA (section 204(h)) provides that a pension plan may not be amended to significantly reduce the rate of future benefit accrual unless the plan administrator provides a written notice to participants, certain persons entitled to plan benefits under a domestic relations court order, and any union representing plan participants. The notice is required to set forth the plan amendment and its effective date, and must be provided after the amendment has been adopted but not less than 15 days before its effective date. Concerns have been expressed about the risk that the statute might be interpreted to require that notice of an amendment affecting only certain employees be provided to all participants, including retirees, terminated vested employees, and other classes of participants who would clearly be unaffected by the amendment but who might be confused or inappropriately alarmed if they received the notice.
The notice requirement originated in a legislative proposal to require notice of a complete cessation of benefit accrual ("freezing" a plan). It was subsequently expanded to cover significant reductions in the rate of accrual.
A pension plan termination includes, and goes beyond, a complete cessation of benefit accruals. ERISA requires an employer terminating a plan covered by PBGC insurance to give 60-day advance notice to participants of the employer's intent to terminate. In this case, the additional 15-day advance notice of a reduction in benefit accruals is redundant.
Description: Treasury/IRS would issue administrative guidance making clear that the ERISA notice is not required to be given to any individual who will be unaffected by the plan amendment. The guidance would also state that the notice is not required when a plan covered by PBGC insurance issues a notice of intent to terminate in accordance with ERISA's plan termination requirements. In addition to addressing other issues relating to the ERISA notice, the guidance would clarify that, pursuant to the terms of the statute, the notice is required only for reductions in the rate of benefit accrual.
Streamline the ERISA Summary Plan Description Filing Requirements
Action: Eliminate the requirement that all summary plan descriptions (SPDs) be filed with the DOL, and authorize the DOL to obtain SPDs from plan administrators for purposes of responding to individual requests or monitoring compliance.
Background: Under ERISA, administrators of employee pension and welfare benefit plans are required to furnish each participant and beneficiary with an SPD, summaries of material modifications to the SPD (SMMs), and, at specified intervals, an updated SPD. Filed SPDs, SMMs, and updated SPDs are required to be made available for public disclosure. These requirements are administered by the DOL's Pension and Welfare Benefits Administration (PWBA). The SPD is intended to provide participants and beneficiaries with important information concerning their plan, the benefits provided by the plan, and their rights and obligations under the plan. The primary purpose of having SPDs filed with the DOL is to have them available for participants and beneficiaries who are unable or reluctant to request them from their plan administrators. However, because SMMs are not required to be filed with DOL until 210 days after the end of the plan year, there is little, if any, certainty that the SPD information on file with the DOL at any given point in time is up-to-date.
PWBA annually receives approximately 250,000 SPD and SMM filings. Although PWBA's cost for maintaining a filing, storage, and retrieval system for SPDs is relatively small, approximately $52,000 annually, compliance with the SPD filing requirements costs plan administrators approximately $2.5 million annually, with the annual imposition of an estimated 150,000 burden hours. On average, PWBA receives requests annually for about two percent of the filed SPDs. Many of the requests for SPDs come from researchers and others who are not plan participants and beneficiaries. While there is some limited benefit from the federal government receiving and storing SPDs, the costs to the public and private plan administrators clearly outweigh the benefits. This conclusion is consistent with the findings of the National Performance Review.
Description: The proposal would amend ERISA to eliminate the requirement that all SPDs be filed with the DOL, and would authorize the DOL to obtain SPDs from plan administrators for purposes of responding to individual SPD requests or monitoring compliance with the SPD requirements. This approach would substantially reduce costs and burdens for public and private plan administrators, while preserving the ability of the DOL to assist participants who are unable or reluctant to request SPDs from their plan administrators.
Prevent Loss of Benefits
Expand PBGC's Missing Participant Program
Action: Extend the missing participant program to be established by the PBGC to defined benefit plans not covered by the PBGC and to defined contribution plans.
Background: When a qualified employer retirement plan is terminated, there may be plan participants who cannot be located after a diligent search. If the plan is a defined benefit plan covered by the PBGC, the plan administrator must generally distribute plan assets by purchasing irrevocable commitments from an insurer to satisfy all benefit liabilities. If the plan is a defined contribution plan or other plan not covered by the PBGC, plan assets still must be distributed to participants before the plan is considered terminated.
Because of the problems that a plan administrator may face under these rules when plan participants cannot be located, the Retirement Protection Act (RPA), enacted as part of the General Agreement on Tariffs and Trade (GATT) in 1994, provided special rules for the payment of benefits with respect to missing participants under a terminating plan. The rules require the plan administrator to (1) transfer the missing participant's designated benefit to the PBGC or to purchase an annuity from an insurer to satisfy the benefit liability, and (2) provide the PBGC with information and certifications with respect to the benefits or annuity as the PBGC may specify. These rules will be effective after final regulations to implement them are adopted by the PBGC.
As currently enacted, these RPA rules would apply only to defined benefit plans that are covered by PBGC. Yet other defined benefit plans, as well as defined contribution plans, face similar problems when they terminate.
Description: The PBGC's program for missing participants would be expanded to defined benefit plans (other than governmental plans) not covered by the PBGC and to defined contribution plans (other than governmental plans). This would provide employers with a uniform method of dealing with missing participants, and would provide missing participants with a central repository location for locating their benefits once a plan has been terminated.
OTHER PROPOSALS
Miscellaneous Simplification Provisions
Elimination of Half-Year Requirements
Background: Distributions from qualified plans and IRAs prior to age 59 1/2 are subject to a 10% penalty. In addition, under certain plans (such as 401(k) plans), distributions before age 59 1/2 are generally prohibited. Minimum distributions from IRAs and qualified employer plans are required to begin upon attainment of age 70 1/2. (Note: Proposal 19 would eliminate the requirement that distributions from qualified employer plans begin by age 70 1/2 for employees, other than more-than-5% owners, who have not yet retired.)
Description: To simplify these provisions, all references to age 59 1/2 would be changed to age 59, and all references to age 70 1/2 would be changed to age 70.
Provide Consistent Treatment for Disabled Employees
Background: An employer may elect to continue making deductible contributions to a defined contribution plan on behalf of disabled employees who are not highly compensated.
Description: In order to simplify the rules for disabled workers and to encourage contributions for disabled workers, the need for an employer to make an election would be eliminated and plans would generally be allowed to provide for contributions for disabled highly compensated employees, as well as for disabled nonhighly compensated employees.
Eliminate Unintended Cost of Reversions for Government Contractors
Background: If a pension plan terminates and "excess assets" revert back to the employer, that reversion is subject to an excise tax as high as 50%. However, certain government contracting regulations require that a portion of any reversion from a plan maintained by a government contractor be paid to the United States. The portion paid to the United States is nevertheless subject to the reversion excise tax. Because the excise tax was intended to apply only to amounts received by the employer, government contractors that face plan terminations may experience unintended and unreasonably high costs.
Description: Amounts that are required to be repaid to the United States by reason of the applicable government contracting regulations would be exempt from the reversion excise tax.
Allow IRS to Determine Church Plan Status Under ERISA
Background: An employer retirement plan that satisfies the definition of a "church plan" under ERISA is generally exempt from Title I of ERISA. An employer retirement plan that satisfies a very similar definition of a "church plan" under the Internal Revenue Code is exempt from certain current Code requirements, such as current-law minimum coverage and vesting. However, under the Code, a church plan can make an election to be subject to these requirements. A plan that makes such an election is no longer exempt from ERISA.
As a result of these rules, a plan that wishes to be sure of its status as a church plan must currently seek both a private letter ruling from the IRS (which requires a user fee) and an advisory opinion from the DOL. The DOL begins its review only after the plan obtains a private letter ruling. However, despite the similarity of the ERISA and Code definitions of "church plan," there is room for disagreement between the DOL and the IRS. If the DOL requires a church plan to be modified in order to satisfy the ERISA definition, the plan may be required to obtain another private letter ruling (and pay another user fee) regarding the status of the modified plan.
Under current law, the Code election that results in ERISA coverage applies only to pension plans; it does not apply to health and other welfare benefit plans. A church employer may, therefore, end up with a pension plan that is subject to ERISA and a welfare benefit plan that is exempt from ERISA. This may create confusion among employees who participate in both plans. In addition, the welfare benefit plan is subject to any applicable state law, while ERISA preempts the application of state law to a pension plan that elects ERISA coverage.
Description: ERISA would no longer provide a separate definition of "church plan." Instead, ERISA would provide that a plan that satisfied the definition of a church plan contained in the Code would be exempt from ERISA. In addition, ERISA would be amended to allow a church plan that is a welfare benefit plan to elect ERISA Title I coverage after providing notice to the DOL in accordance with DOL regulations, but only if the employer made a similar election for its pension plans. The DOL would, therefore, reserve the right to deny ERISA coverage to a welfare benefit plan where appropriate.
Extend Date for Adoption of Plan Amendments
Background: Plan amendments that are made to reflect amendments to the Internal Revenue Code must generally be made by the employer's income tax return due date for the employer's taxable year in which the change in the law occurs.
Description: In order to ensure that plan sponsors have adequate time to amend plan documents for the pension simplification provisions, an extended amendment period would be provided.