March 16, 1992
TO: PENSION MEMBERS NO. 4-92
RE: PENSION PROVISIONS OF SENATE TAX BILL
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The Senate has approved its version of H.R. 4210, the
"Family Tax Fairness, Economic Growth and Health Care Access Act
of 1992". The bill contains a number of pension provisions of
interest to mutual funds.
Bentsen-Roth Deductible IRA
The provisions of the Bentsen-Roth revised IRA bill are
included with no substantive differences from S. 1921, the "Tax
Fairness and Savings Incentive Act of 1991", which had been
introduced in November 6, 1991. For a description of these
provisions, see Institute Memorandum to Members - One Per Complex
No. 58-91 and Pension Members No. 37-91, dated November 8, 1991.
The penalty-free withdrawal provisions which were a
separate section of the House version are included in the
Bentsen-Roth IRA portion of the Senate bill. The Senate version
would reduce the amount which may be withdrawn for qualified
higher education expenses by amounts received tax-free from U.S.
education savings bonds, while the House has no such limit.
Also, the House bill limits the amount which may be withdrawn
penalty free for first time homebuyers to $10,000, while the
Senate bill has no limit. Finally, in floor amendments,
provisions were added to the Senate version which would allow
penalty-free withdrawals for the purchase of new passenger
automobiles and for living expenses of unemployed persons. The
amendment related to purchases of new passenger automobiles also
deals with the withdrawals for first time homebuyers, but it is
unclear precisely what effect the amendment is meant to have on
the existing provisions of the bill. The floor amendment would
allow the amount withdrawn for purchase of new passenger
automobiles to be recontributed to the IRA over four years with
no tax at all on the withdrawal.
The IRA provisions of the bill generally would be effective
for taxable years beginning after December 31, 1992. However,
the provisions permitting penalty-free withdrawals would be
effective for taxable years beginning after December 31, 1991, as
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would be the provisions providing for the transfer from
deductible to special (nondeductible) IRAs. The provision
allowing penalty-free (and tax-free) withdrawals for purchases of
new passenger automobiles would expire December 31, 1992.
Pension Simplification
The section of the bill dealing with pension simplification
contains a number of provisions which either differ from the
corresponding provisions of the House bill or are entirely new.
See Institute Memorandum to Pension Members No. 3-92, dated
February 27, 1992, for information on the House version of the
pension simplification provisions common to both bills and not
otherwise described here, and for a description of the provisions
concerning the responsibilities of sponsors of master and
prototype plans, which are identical in both the House and Senate
versions of the bill.
Transfers Upon Plan Distributions
Under the House bill, a plan would be required to allow a
participant to have his or her distribution made as a trustee to
trustee transfer to another qualified plan or an individual
retirement account ("IRA"). The Senate bill, however, would
require basically all distributions to be made as transfers to an
"eligible transferee fund". An eligible transferee fund would
include an IRA or a defined contribution plan that provides for
transfers. Certain distributions would not be required to be
transferred directly to another plan, such as hardship
distributions, distributions after age 55, and distributions of
less than $500. The Senate bill would also repeal the
requirement that distributions begin at age 70 1/2 regardless of
whether the participant is still employed; instead, the required
distributions would have to begin on the later of age 70 1/2 or
retirement. The House bill contains no such provision.
The bill would generally be effective for taxable years
beginning after December 31, 1992, except the provisions
expanding the allowable rollover situations, which would be
effective upon enactment. The provision requiring distributions
to be made as transfers to eligible transferee plans would be
effective for distributions in plan years beginning after
December 31, 1993.
SARSEP Revisions
The SARSEP revisions in the House bill provide that for a
SARSEP to be exempt from the nondiscrimination requirements, the
employer would be required to make a mandatory 1 percent of
salary contribution to all employees, allow elective
contributions, and match those contributions 100 percent for the
first 3 percent of salary contributed to the plan and at a 50
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percent rate for the next 2 percent of salary. The Senate
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provision would require either a 3 percent of salary mandatory
contribution, or a match of elective contributions similar to
that in the House bill.
The bill provides that these provisions would be effective
for years beginning after December 31, 1992. Presumably, the
effective date is for plan years beginning after that date, but
the bill is not clear on that point.
Simplification of Nondiscrimination Test on Cash or
Deferred Plans
The Senate bill section concerning nondiscrimination tests
under Code sections 401(k) and (m) contains provisions not in the
House bill which deal with distributions of excess contributions.
The Senate bill would provide that where the highly compensated
group has excess contributions, the distribution of excess
contributions would be made first from those persons with the
highest dollar amount of deferrals, not from the persons with the
highest deferral percentage, as under current law.
This provision also applies to years beginning after
December 31, 1992, although the precise meaning of this provision
is unclear.
Elimination of the Half-Year Requirements
The Senate bill would eliminate the half-year requirements;
for example, changing age 59 1/2 to age 59 and age 70 1/2 to age
70. This provision would be effective for years beginning after
December 31, 1992.
Changes to Section 457 Plans
The Senate bill does not contain the provision in the House
bill which would have indexed the deferral limits of section 457
for inflation and which would allow certain in-service
distributions and new elections on the timing of the beginning of
distributions without treating the deferred income as having been
constructively received.
Standardization of Penalties Upon Failure to Provide
Pension Information Reports
Both the Senate and the House bills would conform the
information reporting penalties applicable to pension information
returns to the general information penalty reporting structure.
The House bill dealt with this provision in a section on
Administrative Provisions, while the Senate version is under
pension simplification. The effective date would be for returns
due after December 31, 1992.
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Date for Adoption of Plan Amendments
The Senate bill would provide that any plan amendments
required as a result of the bill would not have to be made before
the first plan year beginning on or after January 1, 1994,
provided that the plan is operated in compliance with the
applicable provision and is amended retroactive to the applicable
effective date.
Prohibition on State Taxation of Pension Income of Nonresidents
A floor amendment to the Senate bill added a provision
which would prohibit a state from taxing the retirement income of
a nonresident. The provision is aimed at those states which
attempt to tax pension income of former residents who earned the
pension while working in the state, then moved to a state with no
income tax upon retirement.
* * * *
Anyone who would like a copy of the bill language or the
Technical Explanation with respect to any provision should call
the undersigned at (202) 955-3521.
We will keep you informed of developments on this
legislation.
David J. Mangefrida Jr.
Assistant Counsel -Tax