1 See Institute Memorandum to Pension Members No. 24-97 dated June 20, 1997.
June 20, 1997
TO: PENSION COMMITTEE No. 22-97
RE: SENATORS GREGG AND GRAHAM/HATCH INTRODUCE PENSION BILLS
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Late last week, two bills including a number of significant retirement security proposals
were introduced in the Senate. S. 883, Retirement Income, Security, and Savings Act of 1997, is
sponsored by Senator Gregg, along with several members of the Senate Republican Retirement
Security Task Force, and S. 889 Retirement Security for the 21st Century Act, a bi-partisan bill,
is sponsored by Senators Graham and Hatch. The major provisions of the bills are summarized
below and copies of both bills are attached.
S. 883 Retirement Income, Security, and Savings Act of 1997 - The Gregg Bill
1. Expansion of Income Limits for Deductible IRAs. This bill raises the income limitations
applicable to deductible IRAs beginning in 1997 over a period of four years until the year 2001,
in which the income limitations would be eliminated and indexes the $2,000 deductible IRA
limit for inflation in increments of $500.
2. IRA Plus Account. The bill establishes the IRA Plus Account, a back-loaded IRA, which is
essentially identical to the IRA Plus Account included in the Senate Finance Committee Budget
Reconciliation Legislation.1
3. Spousal IRAs. The bill provides for "spousal delinking" for IRAs by providing that an
individual’s participation in a pension plan is not treated as participation by their spouse.
4. Catch-Up Contributions. The bill requires qualified plans and SIMPLEs to permit
participants to make additional elective deferrals under the plan for certain periods during
which they are out of the workforce. Qualified plans would be required to permit participants
on eligible maternity or paternity leave to make additional elective deferrals applicable to such
periods of leave. In addition, qualified plans and SIMPLEs would be required to permit
participants to make additional elective deferrals under a plan for a period up to 18 years
during which a participant did not participate in a plan while raising a dependent child. For
the "families with children" catch-up provision, eligible participants may contribute up to 120%
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of the applicable dollar limitation for each year. The participant is responsible to certify
eligibility for participation under the "families with children" catch-up provision.
5. Matching Contributions for the Self-Employed. The bill allows partners in a partnership and
self-employed individuals to receive matching contributions to a 401(k) plan, including
SIMPLE plans, under the same rules that apply to employees of a partnership, sole
proprietorship and incorporated entities.
6. IRA Payroll Deductions. The bill provides that employers may establish a payroll deduction
system whereby employees, not including self-employed individuals, may contribute to IRAs.
Payroll deduction IRAs are available to employers that do not sponsor a qualified retirement
plan.
7. Pension Portability. The bill permits rollovers and trustee-to-trustee transfers with respect to
457 plans. Under the bill, participants in a 457 plan may rollover their accounts to an IRA, a
qualified trust or an annuity plan pursuant to section 403(a) and amounts in these plans or
accounts may be rolled over to a 457 plan account. Participants in a 403(b) plan also could
rollover their accounts to an eligible retirement plan, including a 457 plan. The bill provides
protection to plans that accept rollover money from qualified plans by providing that receiving
plans would not be deemed disqualified merely by accepting rollover money from other
qualified plans that subsequently become disqualified. In addition, a defined contribution plan
that agrees to accept rollover money from another qualified plan will not become disqualified
merely because the receiving plan does not provide some or all of the distribution options
available under the original plan, assuming certain notice requirements are met.
8. Economically Targeted Investments. The bill prohibits the Department of Labor from
promoting economically targeted investments, either directly or indirectly. This provision
overrides Interpretive Bulletin 94-1 issued by the Secretary of Labor regarding investments in
economically targeted investments.
9. Technologies in Retirement Plans. The bill directs the Secretary of Labor and the Secretary of
the Treasury to issue coordinated guidance by July 1, 1998 regarding the use of new
technologies with respect to notice, election, consent, recordkeeping, reporting and other
operational requirements for plans. This coordinated guidance must also address the extent to
which state laws that require paper transactions are preempted and the extent to which
requirements under the Internal Revenue Code permit paperless transactions.
10. Nondiscrimination and Minimum Participation Rules for Government Plans. The bill
exempts governmental plans from nondiscrimination requirements of section 414(q) and the
minimum participation standards of section 410.
11. Elimination of Certain Filing Requirements. The bill repeals the ERISA requirement that
plans file a summary plan description and material modification description with the
Department of Labor.
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S. 889 Retirement Security for the 21st Century Act - The Graham-Hatch Bill
1. Matching Contributions for the Self-Employed. The bill allows partners in a partnership and
self-employed individuals to receive matching contributions to a 401(k) plan, including
SIMPLE plans, under the same rules that apply to employees of a partnership, sole
proprietorship and incorporated entities. In addition, owners of S corporations and
partnerships could receive plan loans under the same rules as employees of incorporated
entities.
2. IRA Payroll Deductions. The bill provides that employers may establish a payroll deduction
system whereby employees, not including self-employed individuals, may contribute to IRAs.
Payroll deduction IRAs would be available to employers that do not sponsor a qualified
retirement plan. Under the Graham/Hatch bill, employers also must provide employees with
information about the plan, information on how to make informed investment decisions and on
how to achieve retirement objectives. Information provided pursuant to this subsection would
not be considered investment advice under ERISA.
3. Modification of Top Heavy Rules. The bill repeals the family aggregation rules such that for
the purposes of the 5% owner test, ownership of company stock by a spouse, child, grandchild
and parent is no longer imputed to the individual. The definition of key employee is modified
to include highly compensated officers, as defined under section 414, 5% owners and 1%
owners with an annual compensation greater than $150,000. Under this provision, employee
elective contributions may be excluded for top heavy purposes and employer matching
contributions would be counted for top heavy purposes.
4. Spousal IRAs. The bill provides for "spousal delinking" for IRAs by providing that an
individual’s participation in a pension plan is not treated as participation by his or her spouse.
5. Repeal of section 415’s 25% limit of compensation rule. The bill repeals the 25% limit on
contributions to defined contribution plans under section 415(c).
6. Catch-Up Contributions. The bill requires qualified plans and SIMPLEs to permit
participants on eligible maternity or paternity leave to make additional elective deferrals under
the plan with respect to such periods of leave. Employer matching catch-up contributions are
voluntary. Elective deferrals and employer matching contributions are subject to the applicable
qualified plan limitations in the year to which the catch-up contribution relates, not the year in
which the catch-up contribution is made.
7. Three-Year Vesting for Matching Contributions. The bill reduces the vesting schedule for
employer contributions to defined contribution plans to three years from five years.
8. Pension Portability. The bill permits rollovers and trustee-to-trustee transfers of accounts
among various defined contribution plans. This provision is voluntary on the part of the
employer and, as drafted, permits participants to transfer their account balances in a 401(k),
403(a), 457, or IRA to the 401(k), 403(a) or 457 plan of a subsequent employer. The Secretary is
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directed to prescribe regulations that provide for the separate accounting for such rollovers.
Plans that accept rollover money from other plans will not be disqualified in the event that the
originating plan becomes disqualified. In addition, a defined contribution plan that agrees to
accept rollover money from another qualified plan under this provision will not become
disqualified merely by failing to provide all or some of the forms of distribution previously
available to the participant under the original plan, assuming certain notice requirements are
met.
9. Limitations on Investment in Employer Stock. The bill limits to not more than 10% the
amount of employee elective deferral that may be invested in employer stock, but does not limit
the amount of employer contributions that may be invested in employer stock.
10. Periodic Benefit Statements. The bill requires that defined contribution plans provide
individual benefit statements to participants annually and requires defined benefit plans to
provide individual benefit statements to participants every three years.
11. Prohibition of Qualified Loans Through Credit Cards. The bill prohibits qualified plans
from issuing loans through credit cards.
12. Nondiscrimination and Minimum Participation Rules for Government Plans. The bill
exempts governmental plans from nondiscrimination requirements of section 414(q) and the
minimum participation standards of section 410.
13. Elimination of Certain DOL Filings. The bill eliminates the ERISA filing requirements for
Summary Plan Descriptions and the Summary of Material Modifications with the Department
of Labor.
14. Electronic Notification. The bill directs the Secretary of the Treasury and the Secretary of
Labor to issue coordinated guidance by July 1, 1998 regarding the use of electronic technology
for notice, election, consent, recordkeeping and other operational requirements for retirement
plans. This coordinated guidance must also address the extent to which state laws that require
paper transactions are preempted and the extent to which requirements under the Internal
Revenue Code permit paperless transactions.
15. Increased Cash-Out Limits. The bill raises the cash-out limit for employees separating from
service to $5,000 from $3,500 and indexes this limit for inflation in increments of $500.
We will keep you informed of developments on these legislative proposals.
Kathryn A. Ricard
Assistant Counsel - Pension
Attachments (in .pdf format)