The Pension Preservation and Savings Expansion Act of 2003

On April 11, Representatives Rob Portman (R-Ohio) and Benjamin Cardin (D-Md.) introduced The Pension Preservation and Savings Expansion Act of 2003 (H.R. 1776). Some of the highlights of the Bill are outlined below.

• The Bill would make permanent the retirement and pension provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), otherwise scheduled to expire in 2010.
• The annual increase in contribution limits for elective deferrals, catch-up contributions and IRA contributions would be accelerated to be fully effective in 2004.
• The tax credit for low and moderate-income individuals’ contributions to IRAs or employer-sponsored retirement plans, scheduled to expire at the end of 2006, would be expanded and made permanent.

• The Bill would expand the availability of rollovers (direct rollovers to Roth IRAs, rollovers to a spouse’s IRA, rollovers by non-spouse beneficiaries, and rollovers to and from SIMPLE and SEP IRAs).
• Transfers or mergers between 401(a) or 403(a) plans and 403(b) arrangements would be allowed.
• Employees would be able to rollover up to $500 of unused amounts from health care flexible benefit accounts into retirement plans, subject to certain contribution limits. The Bill also would allow retirees to pay health care premium payments on a pre-tax basis with retirement plan distributions.

• The minimum required distribution rules would be liberalized (gradually raising the age component of the required beginning date and adjusting it to prevent two required distributions in a single year, implementing a good faith compliance rule for governmental plans, and reducing the excise tax for failing to take a required minimum distribution from 50% to 20%).
• The Bill would permit that qualified domestic relations orders include orders issued after a divorce.
• Incentives would be provided to encourage distributions in the form of annuity, rather than a lump sum payment (income exclusion of a portion of lifetime annuity payments, additional method for satisfaction of minimum required distribution rules, and treatment of distributions that include an annuity contract as lump sum distributions).
• ERISA section 404(c) would be amended to provide protection to plan fiduciaries in connection with default rollover options.
• Employers would be able to transfer unclaimed benefits of "missing participants" from either a defined benefit pension plan or a defined contribution plan to the Pension Benefit Guaranty Corporation ("PBGC").
• The "substantially equal periodic payment" exception to the 10% penalty tax for premature distributions would be clarified.
• An employer maintaining a section 414(r) separate line of business would be able to apply the requirements of section 410(b) separately to each line of business.
• The Bill would provide for intermediate sanctions, rather than disqualification, for certain inadvertent plan qualification failures, eliminate income inclusion for non-highly compensated employees upon plan disqualification, and instruct the IRS to continue to improve its retirement plan self-correction program.
• Guidance on electronic plan administration would be provided.
• The age 35 limit for a waiver of a Qualified Preretirement Survivor Annuity would be repealed.
• The $5,000 cash-out limitation would become subject to cost of living adjustments.

• The legislation would provide for the phase-in of a new interest rate based on long-term corporate bond rates to replace the 30-year Treasury bond rate.
• The applicability of the section 401(a)(26) minimum participation rules would be limited.
• The legislation also would provide targeted funding relief for certain multiemployer pension plans by permitting an election between separate and aggregate treatment for purposes of applying the funding rules and deduction limitations, permitting an emergency investment loss funding method, and requiring the Treasury Department to update mortality assumptions for blue collar workers.
• The Bill would modify rules regarding deduction limits where an employer maintains both a defined contribution and a defined benefit plan.
• Employee contributions to private-sector defined benefit plans would be treated as pretax rather than after-tax.
• Valuation data collection would be made easier.
• The Bill would modify a number of PBGC provisions and would include a reduced premium for new and small plans.

• Employees would be provided with new rights to diversify company stock.
• The Bill would require employers to provide new investment education notices to employees.
• The Bill provides that the vesting schedule for all employer contributions must be at least as generous as three-year cliff vesting or six-year graded vesting.
• The period for certain corrective distributions would be extended from 2½ months to 6 months following the end of the year.
• Employers with defined contribution plans would be allowed to fund a portion of retiree medical expenses on a pre-tax basis.
• ERISA Section 404(c) would be amended to provide additional protection to plan sponsors who maintain "automatic contribution trust arrangements" (i.e., negative elections).
• Rules regarding the provision of investment blackout period notices would be added.
• The Bill would direct the Secretary of the Treasury to evaluate possible ways to lessen the effects of market volatility on defined contribution plan savings.

• Public safety workers would be allowed to receive "DROP" benefits -- credits to an account in lieu of increases in accrued pension benefits -- without the imposition of the 10% tax on early distributions.
• State and local government employees would have improved abilities to purchase additional service credit.
• A new section 459, applicable to tax-exempt organization plans, would tax "excess" deferred compensation when there is no longer a substantial risk of forfeiture.
• The moratorium on the application of nondiscrimination rules to state and local government plans would be extended to all government plans.

• Employers would be permitted to convert a SIMPLE plan to a regular 401(k) plan at any time.
• A salary-reduction only SIMPLE plan would be available, and SIMPLE 401(k)s would be given more flexibility in matching contributions.
• A new reverse match SEP would be created, and employers would be able to make level dollar contributions to SEPs.
• The increase in the premature distribution penalty for certain distributions from SIMPLE plans would be eliminated.
• Simplified reporting requirements would apply to one-participant retirement plans and plans with fewer than 25 employees.

• Disabled individuals would be permitted to make IRA contributions from non-wage sources of income.
• Income eligibility limits for making deductible IRA contributions would be increased.
• A correction mechanism permitting the return of impermissible distributions would be introduced.

• The Bill would impose an excise tax on excessive employer payments to senior executives in the period prior to bankruptcy.
• The definition of "excess benefit plan" under ERISA would be extended to include plans providing benefits in excess of compensation limits and 401(k)/401(m) contribution limits.
• Certain incentive stock option and employee stock purchase plan options would be excluded from employment taxes.

Representatives Portman and Cardin have also prepared a summary of the Bill, which is available on www.sablaw.com.