October 8, 1992
TO: PENSION MEMBERS NO. 26-92
OPERATIONS MEMBERS NO. 38-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 59-92
RE: PENSION PROVISIONS OF REVENUE ACT OF 1992
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The Senate today approved the conference version of H.R.
11, which was passed by the House on October 6. The following
memorandum summarizes those pension provisions included in the
conference agreement. If the President does not sign the bill
within ten days after receiving it, it will not become law.
Anyone interested in obtaining copies of relevant Conference
Report and bill language may do so by calling the undersigned at
(202) 955-3516.
Individual Retirement Arrangements (IRAs)
The 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 $75,000 for individuals, or $100,000 for
joint filers, effective after December 31, 1994. 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.
Beginning in 1994, the bill also would 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
retirement plan coverage and 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 income limitations, and would
qualify for favorable tax treatment if accomplished before
January 1, 1994.
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Penalty-free withdrawals from IRAs, section 401(k) plans
and section 403(b) arrangements would be permitted 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1993, other than rollover contributions, could not be withdrawn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.
A separate provision would permit the rollover of up to
$25,000 of certain military separation pay into an IRA.
Pension Simplification
The bill also contains a number of pension simplification
provisions, including the expansion of the availability of salary
reduction simplified employee pensions (SARSEPs) to employers
with 100 or fewer employees and the repeal of the requirement
that at least half of the eligible employees actually participate
in the SARSEP. Although the bill would simplify the
nondiscrimination tests applicable to section 401(k) plans
through safe harbors, the safe harbors would not apply to
SARSEPs. These provisions would be effective for taxable years
beginning after December 31, 1993.
The bill does not include the PRIME account provisions of
the earlier Senate version of H.R. 11.
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
not be required to permit a direct rollover of, or withhold upon,
a distribution of $500 or less. A similar rule would apply to
distributions pursuant to qualified domestic relations orders.
In addition, the direct rollover and withholding
requirements would not apply to any distribution which is one of
a series of substantially equal periodic payments with respect to
which the annuity starting date is before January 1, 1993, or to
certain distributions paid on account of death, disability,
separation of service or plan termination that occurred before
January 1, 1993.
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The bill also clarifies that rollovers from a section
403(b) arrangement can only be made to an IRA or to another
section 403(b) arrangement, and that the notice requirement
applies to section 403(b) arrangements.
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
The bill does not include the provision of the earlier
Senate version of H.R. 11 that would have prohibited 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.
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,
effective for returns and statements the due dates for which are
after December 31, 1992. No reporting would be required for
designated distributions of less than $10, and the penalty for
failure to provide the notice required under section 402(f) of
the Code would be modified.
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We will keep you informed of developments.
Kathy D. Ireland
Associate Counsel - Pension