The proposed changes, as passed recently by the House Ways and Means Committee, are contained in a bill entitled the “Comprehensive Retirement Security and Pension Reform Act of 2001” (CRSPRA). While the bill would have a broad impact on pension plan law, your clients will be most interested in the proposals that would:
Income limits. CRSPRA would not eliminate or alter the income limits that determine an individual’s ability to make contributions to traditional or Roth IRAs. However, in the past few years, similar IRA proposals would have simplified and eased these income limits. It is possible that these former proposals will again be considered as part of this year’s pension reform package. After all, it has to be remembered that income limits for IRA contributions did not exist prior to 1987.
Vesting. CRSPRA would institute faster vesting schedules for employer matching contributions. Generally, for plan years beginning after December 31, 2001, a plan would have to ensure an employee with either the right to (1) 100% of employer matching contributions at three years of service, or (2) 20% of employer matching contributions for each year of service beginning at the end of the second year (e.g., 20% at the end of the second year and 100% after six years).
Pension plan provisions similar to CRSPRA’s have been raised in Congress during the past two years and they have not survived the legislative process. Times change and this year the provisions have wide bipartisan support. As a result, it is highly likely that we will see significant pension legislation signed into law within the next few months.
IRA PROPOSALS
Maximum contribution. Under CRSPRA, the maximum contribution amount for all IRAs (traditional and Roth) would be raised from the current $2,000 to $5,000. The increase in the maximum contribution would be phased in over the next three tax years. Thus, for most individuals, the maximum IRA contribution would be $3,000 for 2002, $4,000 for 2003, and $5,000 for 2004. For 2005 and thereafter, the maximum IRA contribution would be subject to an inflation adjustment. Former Senator Roth has commented that if the $2,000 IRA contribution limit had been adjusted for inflation since it first took effect in 1982, the current level would be about $5,000. In other words, the proposal would adjust the contribution level to take into consideration the increases in the cost of living index that have occurred over the past 20 years.
CATCH-UP PROPOSALS
CRSPRA would provide an additional savings opportunity to individuals who are close to retirement. The bill would increase the annual limits on
all employee plan contributions by $5,000 for individuals who are age 50 or over. The provision would go into effect for tax years beginning after December 31, 2001, and the $5,000 would
not be phased in. For example, assume that in 2002 an individual will reach age 50. Assume further that the individual is eligible to make a fully deductible contribution to a traditional IRA. Under CRSPRA, the regular maximum contribution for an IRA would be $3,000 in 2002. However, because the individual would be permitted an additional catch-up contribution, the individual would be entitled a make a maximum contribution of $8,000 ($3,000 regular plus $5,000 catch-up) to an IRA. It appears that this catch-up provision would also extend to pension plans such as 401(k)s, 403(b)s, and/or 457(b)s. After 2004, the catch-up amount would be indexed for inflation.
OTHER RETIREMENT
PROPOSALS
“Roth type” 401(k) and 403(b) plans. Employees would be permitted to make their 401(k) and/or 403(b) contributions to plans that would be similar to Roth IRAs. That is to say, the amount of the contributions would not be excluded from taxable income, but amounts paid from these “Roth type” plans would be tax-free. Under CRSPRA, employees could allocate their contributions between “regular” 401(k)/403(b) plans and “Roth type” plans. It is proposed that this provision go into effect as early as January 1, 2002.