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Although prospects for enactment are slim this year, the stage is set for changes in several programs designed to encourage Americans to set aside more of their income for retirement. That will funnel more money into equities and other investments.
Changing the rules on retirement plans is a key part of the GOP tax plan. Republicans already have pushed through bills to phase out the estate tax and ease the marriage tax penalty. Next up is pension reform, which has been a high-priority item of small business groups for years.
Enactment this year is in doubt. Many Democrats complain that the GOP pension bill doesn't provide enough relief to lower-incomers. But chances are good for many of the provisions down the road. They're likely to resurface next year if there's no tax compromise this fall.
Increasing the ceilings on contributions to retirement plans is the linchpin of the measure (H.R. 1102) recently approved by the House:
- Individual retirement account (IRA) and Roth IRA payin limits would be raised in $1000 increments from the current $2000 to $3000 after this year, $4000 in '02 and $5000 in subsequent years. People 50 or older would be allowed to put in $5000 starting in '01.
- The cap on employees' 401(k) contributions would be boosted from the current $10,500 to $11,000 next year, $12,000 in '02, $13,000 in '03, $14,000 in '04 and $15,000 thereafter. Ditto for limits on deferrals to 403(b) annuities and 457 plans for clergy and those who work for educational organizations, tax-exempt organizations and state and local governments. Payins to 401(k)s or 403(b)s wouldn't count against the 457 payin lid. Ceilings would be raised an extra $5000 for individuals age 50 and over.
- Roth 401(k) plans would be established. Similar to their Roth IRA cousins, there would be no tax deduction for payins, and withdrawals at retirement would be tax free.
- The maximum payins to SIMPLE plans-small business 401(k) plans-would be hiked to $10,000 by '04 from $6000 now.
The measure would allow larger total payins for other tax-qualified plans too:
- For defined-contribution plans, such as 40l(k)s, profit-sharing and SIMPLE plans, up to $40,000 could be put in, an increase of $10,000.
- For defined-benefit plans (traditional pensions), the limit would rise to $160,000 from $135,000.
- Plan contributions could be based on salary of up to $200,000 instead of $170,000. That's the top amount on which contributions to profit sharing and other accounts are computed.
- As much as 100% of pay could be put into plans. The limit now is 25%. Of course, the contributions still couldn't exceed the applicable dollar caps-for example, the 401(k) current yearly limit of $10,500. The 100% rule would replace a complicated 403(b) exclusion allowance.
Rollover options for payouts from IRAs and plans would be broadened. Distributions could be rolled over from any type of plan to any other one. Employee after-tax contributions could be moved to another plan or IRA. The Internal Revenue Service (IRS) could OK untimely rollovers if the IRA owner wasn't responsible for the timing. Restrictions on plan loans to owner-employees would be eased. But IRA owners still would not be allowed to borrow from their accounts. Vesting of employer matching payins would be accelerated a bit. And the IRS could not charge small companies for approving new plans.
Employers would also benefit some under the proposed changes. Deductions would rise to up to 20% of compensation paid to profit-sharing plans. The current maximum is 15%.
The House recently approved a version of this reform bill by a vote of 401 to 25. A whopping 182 Democrats crossed over to vote in favor of passage-no doubt a "politically safe" vote made to garner popularity with constituents while knowing that President Clinton will veto the bill in the end. Clinton will demand more provisions for lower-income families, such as the proposed government-subsidized retirement savings accounts. Add in the fact that the bill will no doubt pass through the Senate but not with a veto-proof majority, and it's clear that this bill in its current form is doomed to fail. But the political appeal of pension law changes is likely to grow stronger as baby boomers think more about retirement.
Many of the pension provisions also appear in another pending bill, one that would increase the minimum wage and provide tax relief for small businesses. There's still an outside chance that some of them could end up passing this fall when Clinton and the Republicans strike a deal on hiking the minimum wage.
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