State:
Free Special Resources
Get Your FREE Special Report. Download Any One Of These FREE Special Resources, Instantly!
Featured Special Report
Claim Your Free Cost Per Hire Calculator
This handy calculator lets you plug in your expenses for recruiting, benefits, salaries, and more.

Graphs automatically generate to show you your annual cost per hire and a breakdown of where you are spending the most money.

Download Now!
January 31, 2003
Bush Proposes Retirement-Plan Changes
For a Limited Time receive a FREE Compensation Market Analysis Report! Find out how much you should be paying to attract and retain the best applicants and employees, with customized information for your industry, location, and job. Get Your Report Now!
Below is the Bush administration's announcement that it will seek changes in the types of retirement accounts available to working Americans. Note the "Frequently Asked Questions" section at the end of the announcement.

January 31, 2003
KD-3816

President’s Budget Proposes Bold Tax-Free Savings and Retirement Security Opportunities for All Americans

“Americans can help secure their own future by saving.Government must support policies that promote and protect saving.And saving is the path to independence for Americans in all phases of life, and we must encourage more Americans to take that path.” -President George W. Bush

Today the Treasury Department announced that the President’s Budget will include two bold new expanded savings proposals covering all Americans.

The first creates two new consolidated savings accounts: Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts, (RSAs) that will allow everyone to contribute -- with no limitations based on age or income status.Individuals will be able to convert existing accounts into these new accounts in order to consolidate and simplify their savings.

“These bold new accounts will give more hardworking Americans the chance to save so they can enrich their lives and strengthen their retirement security,” stated Treasury Assistant Secretary for Tax Policy Pam Olson.“They make saving simple for everyone and for every purpose.No longer will individuals have to worry about the confusing alphabet soup of six different savings accounts.No longer will people have to worry about the endless maze of confusing rules.The two simple accounts will have one powerful goal -- making saving for everyday life and retirement security easier and more attractive.”

The second proposal creates Employer Retirement Savings Accounts (ERSAs) to promote and vastly simplify employer sponsored retirement plans by consolidating 401(k), SIMPLE 401(k), 403(b), and 457 employer-based defined contribution accounts into a single type of plan that can be more easily established by any employer.

Lifetime Savings Accounts

Lifetime Savings Accounts (LSAs) can be used for any type of saving.LSAs will help millions of Americans save in one tax favored account for any purpose, including their children’s education, a new home, healthcare needs, or to start their own business.The new LSA will allow an individual, regardless of age or income, to contribute $7,500 a year and make penalty free withdrawals at any time -- with no holding period.Like current law Roth IRAs, contributions will not be deductible but earnings will accumulate tax-free, and distributions will be tax free as well.Unlike current education accounts and MSAs, with LSAs, taxpayers will not need to carefully anticipate future qualified expenses and allocate savings among tax-preferred accounts.Taxpayers will not be required to document qualified expenses, financial institutions will not need to explain complicated rules to participants, and the government will not need to verify the qualifying expenses.

Prior to January 1, 2004, individuals may convert balances in an Archer Medical Savings Account (MSA), Coverdell Education Savings Account, and Qualified State Tuition Plan to LSAs.Balances in these accounts may not be converted to LSAs after 2003.

The $7,500 contribution limit will be indexed for inflation in future years.

LSA's are good for average Americans because:

• They can simply save more tax free.

• More low and moderate-income taxpayers will participate.Many do not participate now because they are more likely to face a penalty if they need the funds. Knowing they can access the money at anytime for any purpose will encourage them to set money aside and allow them to receive tax-free earnings from their first dollar of savings.

• It takes away the hassle factor.The combination of universal eligibility and unrestricted tax-free withdrawals greatly simplifies the whole process, making it more likely that average taxpayers will participate, especially inexperienced savers.Many low- and moderate-income taxpayers will conveniently be able to put all their financial assets in one place; this will greatly simplify their taxes because they will no longer receive taxable investment earnings.

Retirement Savings Accounts

Retirement Savings Accounts (RSAs) can be used only for retirement saving.The new RSA will improve and simplify savings opportunities for all Americans by consolidating traditional IRAs, nondeductible IRAs and Roth IRAs, each of which has a confusing and different set of rules regarding eligibility and tax treatment, into one streamlined type of account with rules similar to current law Roth IRAs. Up to $7,500 (in addition to amounts contributed to an LSA) could be contributed to an RSA.Like current law Roth IRAs, contributions will not be deductible but earnings will accumulate tax free and distributions after age 58 (or death or disability) will be tax free.

Existing Roth IRAs will be unaffected (except that they will be renamed RSAs).Existing traditional and nondeductible IRAs may be converted into RSAs; those not converted to RSAs could not accept any new contributions (other than rollover contributions); no one would be required to convert.

The $7,500 contribution limit will be indexed for inflation in future years.

Complex eligibility restrictions for IRAs under current law confuse taxpayers and cause some to avoid contributing to IRAs, even if they are eligible to contribute.IRA income limits were imposed in 1986 greatly limiting eligibility.Studies have shown that participation after 1986 fell among lower-income taxpayers, even among those still eligible to make deductible contributions.

RSAs are good for average Americans because:

• More Americans will save for retirement. Repeal of the income limits will eliminate the confusion and complexity associated with determining eligibility and will encourage participation.

• It makes saving for retirement simple and easy.Individuals will not be required to make minimum distributions from the accounts during their lifetime, simplifying financial planning in retirement.

• More will be set aside for retirement. Current IRAs allow for withdrawals for many non-retirement purposes.Each withdrawal from an IRA potentially reduces retirement funds.Having a separate retirement account will help individuals plan for both non-retirement and retirement needs.

Employer Retirement Savings Accounts

There are currently multiple tax-preferred, employer-based retirement savings accounts with similar goals but different rules regulating eligibility, contribution limits, tax treatment, and withdrawal restrictions.The Budget proposal will consolidate 401(k), thrift, 403(b), and governmental 457 plans as well as SARSEPs and SIMPLE IRAs into a streamlined and simpler account, Employer Retirement Savings Accounts (ERSAs), which can be sponsored by any employer.

Assistant Secretary Olson stated, “The overwhelming complexity of current rules imposes substantial burdens on employers and workers.Because employer sponsorship of a retirement plan is voluntary, this complexity discourages many employers from offering any plan at all.This is especially true of small employers who together employ about 4 out of every 10 American workers.It's one important reason why only 50% of working Americans have any pension plan at all.I'm confident that simpler rules will encourage employers to create new plans for their employees because creating a qualified plan will be much easier.”

ERSAs will follow the existing rules for 401(k) plans, but these rules will be greatly simplified.For example, both the definition of compensation and the minimum coverage requirement will be simplified and the top heavy rules will be repealed.Nondiscrimination requirements for ERSA contributions will be satisfied by a single test and many firms may choose to adopt a new designed-based safe harbor to avoid this test altogether.The proposal simplifies qualification requirements while maintaining their intent of providing broad-based coverage of employees.By reducing unnecessary complexity, the proposal significantly reduces employer compliance costs.

Complexity and the associated compliance costs are often cited as a reason the coverage rate under an employer retirement plan has not grown above about 50 percent overall, and has remained under 25 percent among employees of small firms.Firms that are currently not offering retirement plans because of compliance costs will be more likely to offer such plans under the proposal, increasing coverage and participation.

ERSAs are good for workers because:

• Coverage and participation will increase because firms that are not currently offering retirement plans because of the complexity and compliance costs will be more likely to offer such plans under the proposal.

• More small businesses will be able to cover more workers. The reduction in red tape will remove a barrier that discourages small business owners from offering this benefit to their employees.Small businesses employ about two-fifths of American workers, but the pension coverage rate has consistently remained under 25 percent among employees of small firms.

• Employees will benefit because firms currently offering employer plans will have reduced compliance costs.

Frequently Asked Questions Regarding the LSA/RSA and ERSA Proposals

LSA/RSA Provisions

I have been contributing to IRAs for years.Will I have to stop?

After 2003, you will no longer be able to contribute to an IRA.However, your ability to contribute to both an LSA and an RSA will give you much more flexibility to save for your future.You will be able to save up to $7,500 (indexed in the future for inflation) in an LSA plus up to $7,500 (indexed in the future for inflation) in an RSA for a total of $15,000 in tax-preferred savings.In addition, you will have much more flexibility to take distributions for what you deem appropriate when you deem it appropriate.

Will there be any income limitations on making contributions to LSAs or RSAs?

There are no income limitations on making contributions to LSAs.You can make a contribution to an LSA even if you have no wage income.Thus, you can make contributions on behalf of your children or other family members, in order to help them save for home ownership, health emergencies, education, retirement, or other future costs.While there are no maximum income limitations on making contributions to RSAs, you may not contribute more than your compensation (wages) income to an RSA.

What tax benefits do I receive if contributions are not deductible?

While all contributions to LSAs and RSAs will be nondeductible, all distributions from LSAs and RSAs (except for RSA distributions prior to age 58, death or disability) will be excludible from taxable income.As a result, all investment earnings can be distributed tax free.This is the same tax treatment as current law Roth-IRAs.

Which tax treatment would be better for me: an old-style deductible IRA or a new Roth-style RSA?

For the vast majority of individuals it doesn’t make a difference:After-tax income in retirement is the same whether contributions are tax free and distributions are taxed or contributions are taxed and distributions are tax free.The only exceptions to this rule are individuals who change tax brackets after they retire.If an individual’s tax rate declines in retirement, deductible contributions are better; if an individual’s tax rate increases in retirement, Roth treatment is better.

Will I continue to be able to contribute to Archer medical savings accounts, Coverdell education savings accounts and qualified state tuition programs?

Yes. The LSA/RSA proposal will not affect your ability to contribute to MSAs, ESAs, or QSTPs.Many taxpayers may prefer the increased flexibility of the new LSAs as their tax-preferred savings vehicle.

Can I convert my existing IRAs, MSAs, ESAs, and QSTPs to an LSA or RSA?

You may convert an MSA, ESA, or QSTP to an LSA anytime before January 1, 2004.In the case of a conversion of a QSTP or ESA, no amount would be taxable in the year of the conversion while a conversion of an MSA to an LSA will result in taxation of the total amount converted in the year of the conversion.

You may convert a traditional IRA to an RSA at any time.The amount converted will be taxable except to the extent that you have basis in your IRA.If you convert prior to January 1, 2004, you will be able to spread the tax on the conversion over a four-year period.For conversions on or after January 1, 2004, the total taxable amount will be included in your gross income for the year of the conversion.

Will the Saver’s Credit still be available after the enactment of the LSA/RSA proposal?

Yes. The Saver’s Credit will be available for elective deferrals and LSA/RSA contributions made prior to 2007.

What will happen to the new deemed IRA provision?Will employer plans still be able to offer them?

Deemed IRAs will become deemed RSAs and will be subject to the rules applicable to RSAs.

Who will be able to become trustees for the LSAs and RSAs?

The rules that now apply to IRAs regarding who can be a trustee will apply to LSAs and RSAs.Thus, the trustee will have to be a bank or another person who demonstrates to the IRS that the manner in which they will administer the trust will be consistent with the rules applicable to LSAs and IRAs.

Will LSAs and RSAs be permitted to be held in the form of an annuity?

Yes. LSAs and RSAs may be held in the form of a nontransferable annuity contract issued by an insurance company that meets the rules that currently apply to individual retirement annuities.

Can I make LSA or RSA contributions on behalf of other persons, such as my children or spouse?

Yes, you may make LSA or RSA contributions on behalf of any other individual.However, total contributions made on behalf of an individual may not exceed $7,500 for LSAs and $7,500 (or compensation income, if less) for RSAs.In the case of a married couple filing jointly, RSA contributions up to $7,500 can be made for each spouse (including, for example, a homemaker who does not work outside the home) if the combined compensation of both spouses is at least equal to the contributed amount.

Will catch-up contributions be available for LSAs or RSAs?

Catch-up contributions will not be available for LSAs or RSAs, but the limits applicable to all individuals in LSAs and RSAs will be significantly greater than the existing IRA limits, even with catch-up.

ERSA Provision

Which types of employer-sponsored plans would be replaced by the new ERSA?

The ERSA would replace all types of funded plans with employee contributions.Thus, ERSAs would replace 401(k) plans, SIMPLE 401(k) plans, 403(b) plans, governmental 457 plans, salary reductions simplified employee pensions (SARSEPs), and SIMPLE IRAs.The ERSA would not replace nongovernmental 457 plans.

Are there any types of employers who would not be able to sponsor an ERSA?

No. Any employer would be able to sponsor an ERSA.

Will the ERSA proposal have any effect on the amount that an employee will be able to defer under existing law?

The amount that an employee will be able to defer under an ERSA will be $12,000 (increasing to $15,000 in 2006) plus, once the employee reaches age 50, a catch-up contribution of $2,000 (increasing to $5,000 in 2006).This is the same that an employee may defer under a regular 401(k) plan, a 403(b) plan, a SARSEP or a 457 plan, but it is greater than the amount permitted under a SIMPLE 401(k) or SIMPLE IRA.

Will after-tax contributions be permitted under an ERSA?

Yes. After tax contributions will be permitted to an ERSA, and accounts attributable to such contributions made after 2003 will be treated much like the new RSAs.Distributions from such accounts will generally be exempt from taxation and the accounts will not be subject to the required minimum distribution rules until after the death of the participant.

Will governments with grandfathered 401(k) plans and public schools with 403(b) plans still be able to allow deferrals up to the maximum under a 403(b) or 401(k) plan as well as the maximum under a 457 plan?

No. Once ERSAs are in place, all covered employees will be able to defer only the maximum applicable to ERSAs.

Will employers have to terminate their existing plans and transfer the assets to an ERSA?

No. Beginning in 2004, all 401(k) plans will become ERSAs.SIMPLEs, SARSEPs, 403(b) plans, and governmental 457 plans may continue in existence indefinitely, but may not accept any future contributions after 2004.

What nondiscrimination tests will apply to ERSAs?

The same simplified nondiscriminatory coverage requirement will apply to ERSAs (other than those covering only state and local government employees) that will apply to all other defined contribution plans.(See Q&A below).An ERSA will satisfy the nondiscriminatory benefit requirements if the average contribution percentage for nonhighly compensated employees is no greater than 6% and the average contribution percentage for highly compensated employees does not exceed 200% of the average contribution percentage for nonhighly compensated employees.If the average contribution percentage for nonhighly compensated employees is greater than 6%, then the average contribution percentage for highly compensated employees may be any amount.

Will state and local governments and charitable organizations be subject to the nondiscriminatory benefit requirement?

ERSAs covering only employees of state and local governments will be exempt from the nondiscriminatory benefit requirement.An ERSA covering only employees of a charitable organization will be subject to the nondiscriminatory benefit requirement only if it allows after tax contributions.In any event, an ERSA covering employees of a charitable organization will be subject to a universal availability requirement regarding the ability of employees to make deferrals under the plan.That is, all employees of the organization must be permitted to elect to make deferrals of more than $200.

Is there a safe-harbor design under which an employer will not be required to apply the general nondiscriminatory benefit rule described above?

Yes. A plan can satisfy the nondiscriminatory benefit rule through any one of the following safe harbor employer contribution designs:

1. The employer makes a nonelective contribution on behalf of each participant in the plan equal to 3% of the employee’s compensation,

2. The employer makes a matching contribution equal to 50% of each employee’s deferrals (up to 6% of compensation), or

3. The employer makes a matching contribution that does not increase based on the level of an employee’s deferrals and the match is equal to the amount that would be made under a 50% match (up to 6% of compensation), such as a match of 100% of each employee’s deferrals (up to 3% of compensation).

Does the budget proposal related to ERSAs affect any other defined contribution plans?

Yes. The proposal includes the following provisions that would greatly simplify the administration of all defined contribution plans:

1. There would be a single test to show that the plan meets the nondiscrimination rules with respect to coverage -- ratio-percentage coverage.Under this test, the percentage of an employer’s nonhighly compensated employees covered under a plan would have to be at least 70% of the percentage of the employer’s highly compensated employees covered under the plan.The other coverage testing alternatives would be repealed.

2. Permitted disparity and cross-testing would be prohibited for defined contribution plans.

3. The top heavy rules would be repealed for defined contribution plans.

4. There would be a uniform definition of compensation for all purposes for defined contribution plans – the amount reported on form W-2 for wage withholding, plus the amount of ERSA deferrals.

5. A simplified definition of highly compensated employee would be adopted under which all individuals with compensation for the prior year above the Social Security wage base for that year would be considered to be highly compensated employees.

Does the ERSA proposal have any effect on defined contribution plans that do not involve employee deferrals or employee after-tax contributions?In other words, does the proposal affect pure profit sharing plans, stock bonus plans, and money purchase pension plans?

Other than the simplifications discussed in the preceding question, the ERSA proposal would not affect the rules applicable to employer contributions to defined contribution plans, other than safe harbor nonelective contributions or matching contributions.

Does the ERSA proposal have any effect on defined benefit plans?

No, the proposal would not affect the rules applicable to defined benefit plans.

Links

Featured Free Resource:
Cost Per Hire Calculator
Twitter  Facebook  Linked In
Follow Us
HCMNPWS1
Copyright © 2024 Business & Legal Resources. All rights reserved. 800-727-5257
This document was published on https://Compensation.BLR.com
Document URL: https://compensation.blr.com/Compensation-news/Retirement-Planning/ERISA/Bush-Proposes-Retirement-Plan-Changes-150214