September 30, 1992
TO: PENSION MEMBERS NO. 23-92
OPERATIONS MEMBERS NO. 33-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 53-92
RE: PENSION PROVISIONS OF SENATE TAX BILL
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The Senate late yesterday approved its version of H.R. 11,
which contains a number of the pension provisions that were
included in H.R. 4210, the tax legislation vetoed by the
President earlier this year. (See Institute Memorandum to
Pension Members No. 5-92, dated March 27, 1992.) Anyone
interested in obtaining copies of relevant Committee Report and
bill language may do so by calling the undersigned at (202) 955-
3516.
Individual Retirement Arrangements (IRAs)
The Senate bill would expand eligibility for deductible IRA
contributions. Under the bill, taxpayers covered by retirement
plans could fully deduct IRA contributions if their adjusted
gross incomes were under $80,000 for individuals, or $120,000 for
joint filers, effective after December 31, 1993. The IRA
deduction would be subject to a last-dollar offset to the limit
on elective deferrals to section 401(k) and similar plans. One
spouse’s coverage under a retirement plan would not affect the
other spouse’s eligibility for the deduction, and the income
limitations and the maximum deductible amount would be indexed
for inflation.
The provision would also permit the establishment of
special IRAs, the contributions to which would not be deductible,
but withdrawals from which would be tax free if attributable to
contributions held for more than five years. Contributions to
special IRAs would also be subject to the income limitations and
the last-dollar offset to the 401(k) plan limit. Penalty-free
transfers from deductible IRAs to special IRAs would be permitted
after December 31, 1992, subject to the income limitations, and
would qualify for favorable tax treatment if accomplished before
January 1, 1994.
Penalty-free withdrawals from IRAs, section 401(k) plans
and section 403(b) arrangements would be permitted for purchases
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of new American made automobiles during 1992 and 1993, and for
first-time home purchases, educational expenses, and medical
expenses, and from IRAs for the long-term unemployed, effective
after December 31, 1992. In addition, contributions to IRAs
after December 31, 1993, other than rollover contributions, could
not be withdrawn without penalty under the current exception for
taxpayers over age 59-1/2 unless they had been held in the
account for at least five years.
Pension Simplification
The bill also contains the pension simplification
provisions of H.R. 4210, with the exception of the liberalization
of the rollover rules and authorization of direct transfers from
qualified plans to IRAs, which were enacted earlier this summer
as part of the Unemployment Compensation Amendments Act of 1992.
(See Institute Memorandum to Pension Members No. 18-92,
Operations Members No. 24-92, and Transfer Agent Advisory
Committee No. 33-92, dated July 7, 1992.) The Senate version of
H.R. 11 includes modification of the rules concerning salary
reduction simplified employee pensions (SARSEPs) that were not
included in the House version. (See Institute Memorandum to
Pension Members No. 17-92, dated July 6, 1992.) The Senate bill
would also conform the eligibility requirements for all SEPs to
those applicable to qualified plans by providing that
contributions to a SEP must be made with respect to each employee
who has at least one year of service with the employer.
In addition, the Senate bill would authorize the
establishment of a new type of plan for small employers called
the PRIME account, which was proposed by Senator Packwood in
early 1991. A PRIME account would be an individual retirement
plan under which employees of employers with fewer than 100
employees could make elective pre-tax contributions of up to
$3,000 per year, with a 100 percent employer matching
contribution up to 3 percent of the employee’s compensation.
The SEP and the PRIME account provisions would be effective
for taxable years beginning after December 31, 1993.
Technical Corrections to 20 Percent Mandatory Withholding on
Nonperiodic Distributions
The bill also would make certain technical corrections to
the pension provisions of the Unemployment Compensation
Amendments Act of 1992. Under the technical corrections, neither
hardship withdrawals, withdrawals for first-time home purchases
or educational expenses, excess deferrals or contributions under
401(k) plans, excess aggregate contributions under section
401(m), nor deemed distributions with respect to plan loans that
are in default would be eligible for rollover or subject to
mandatory withholding. The bill would also provide a de minimis
exception to the direct rollover requirement so that a plan would
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not be required to permit a direct rollover of, or withhold upon,
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a distribution of $500 or less. A similar rule would apply to
distributions pursuant to qualified domestic relations orders.
The deadline for plan amendments would be extended to the first
day of the first plan year beginning on or after January 1, 1995.
Prohibition of State "Source Tax" on Periodic Distributions
In addition, the bill would prohibit a state from imposing
income tax on certain periodic pension distributions made to an
individual who is not a resident or domiciliary of the state. A
distribution from a qualified plan, a section 403(b) arrangement
or an IRA to a nonresident would be exempt from state income
taxation if it were part of a series of substantially equal
periodic payments (not less frequently than annually) for the
life or life expectancy of the recipient and his or her
beneficiary, or over a specified period of 10 years or more. The
prohibition against state taxation of nonresidents generally
would not apply to nonperiodic distributions; however, an
individual who had attained age 59-1/2 could make a one-time
election to exempt up to $25,000 (indexed) from such taxation.
Pension Information Reporting
Under the bill, penalty provisions applicable to
information reports with respect to pension payments would be
conformed to those applicable to other information reports.
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We will keep you informed of further developments
concerning pension legislation.
Kathy D. Ireland
Associate Counsel - Pension