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Here we go again; maybe this time Bush will get these retirement plan revisions (Note: we left the prior Bush proposals to consolidate & simplify retirement plans intact following this current assessment)

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03/08/2005 NEWS:  Bush simplification's are re-Introduced in the House & Senate

Republican lawmakers revived legislation that would allow Americans to put $5,000 a year in tax-sheltered investment accounts, a bid to lift personal savings rates that are near the lowest on record. Legislation designed to create "simplified" savings and retirement accounts has been introduced in both the House and the Senate. The bill introduced in the Senate on March 8, 2005 by Senator Craig Thomas (R-Wo) & in the House by Rep. Sam Johnson (R-Tex) is called the "Savings Account Vehicle Enhancement", or "SAVE" initiative (S. 547 & H.R. 1163, The savings proposals include a.) Lifetime Savings Accounts, b.) Retirement Savings Accounts, and c.) Employer Retirement Savings Accounts -- LSAs, RSAs, and ERSAs). With Treasury Secretary John Snow by their sides, Johnson and Thomas announced the renewal of this three-pronged approach to savings. LSAs and RSAs each have a $5,000 annual contribution limit, non-deductible contributions, and tax-free earnings. Lifetime Savings Accounts have no minimum distribution rules and can be converted from Coverdell Education Savings Accounts and Qualified Tuition Plans. Balances under the different IRA plans can be converted to an RSA. The Employment Retirement Savings Accounts (ERSA) will combine and streamline current rules for 401k, simple 401k, 403b, Governmental 457, SARSEP, or simple IRA accounts. President Bush proposes bolstering retirement savings by setting up personal investment accounts funding by diverting a portion of Social Security payroll taxes. The Johnson-Thomas initiative would ``supplement'' and ``complement'' those efforts, Snow said. Under the proposal, holders could withdraw from their lifetime accounts at any time to pay for anything from braces to a car or truck. Contributions would have to stay in retirement accounts until the holder turns 58. Johnson and Thomas also proposed an Employer Retirement Savings Account that would combine 401(k) and other employer- sponsored plans under one program & ERSA will be available to all employers. 

Summary of the new, revised proposal to Expand Tax-Free Savings:  

LIFETIME SAVINGS ACCOUNTS (LSA)

  1. $5,000 annual contribution limit (indexed for inflation).
  2. Available to all individuals - no income limits, no age limits.
  3. Contributions would be nondeductible (similar to Roth IRAs).
  4. Earnings would accumulate tax-free and all distributions would be excluded from gross income.
  5. No minimum required distribution rules would apply at any age throughout owner’s life.
  6. Contribution limit of $5,000 applies to the individual owner of the account, not the contributor.
  7. Contributors could make annual contributions to the accounts of other individuals.
  8. Annual aggregate contributions to an individual’s accounts could not exceed $5,000.
  9. Conversion: This is a brand new vehicle, but balances from Coverdell Education Savings Accounts (ESAs) or Qualified Tuition Plans (QTPs) could be converted to LSAs. Individuals could continue to contribute to ESAs and QTPs as under current law. Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs) would be retained.

RETIREMENT SAVINGS ACCOUNTS (RSA)

  1. $5,000 annual contribution limit (indexed for inflation).
  2. Available to all individuals no income limits (contributions cannot exceed compensation), no age limits.
  3. Contributions would be nondeductible (like Roth IRAs).
  4. Earnings would accumulate tax-free, and qualified distributions would be excluded from gross income.
  5. Qualified distributions could be made after age 58 or in the event of death or disability.
  6. Nonqualified distributions: Distributions in excess of prior contributions would be included in income and subject to an additional tax.
  7. Conversion: Roth, Traditional, and Nondeductible IRAs could be converted to RSAs.

 EMPLOYER RETIREMENT SAVINGS ACCOUNTS (ERSA)

  1. One Retirement Plan: Employer Retirement Savings Accounts would combine the array of existing retirement plans into one simple uniform regime:
  2. 401(k)
  3. SIMPLE 401(k)
  4. 403(b)
  5. Governmental 457
  6. SARSEPs
  7. SIMPLE IRAs
  8. Access: Available to all employers

The OLD Bush Proposals:

Bush retirement-savings plans will resurface in February (04) budget

President Bush left his plans to boost savings through new tax-free accounts out of the State of the Union address, but that doesn’t mean they are dead, administration officials say. The plans will be unveiled in the president’s Feb. 2, 2004 budget. Treasury Department spokeswoman Tara Bradshaw said. “We are committed to advocating and advancing these proposals with Congress to get them passed this year,” Bradshaw said. --  Many thought the new plans — Lifetime Savings Accounts, known as LSAs, and Retirement Savings Accounts, or RSAs — would feature prominently in the State of the Union address but Bush didn’t mention either. He did mention a long-standing proposal to allow younger workers to invest part of their Social Security taxes in private accounts managed by Wall Street firms. “Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account,” Bush said. These new accounts are much more ambitious. Under the latest version of the lifetime savings plan, a married couple would be allowed to put $10,000 after-tax money into a savings account. They wouldn’t be taxed on gains generated by the investments and the money could be used without restrictions. In essence, the LSA would eliminate capital-gains taxes to some degree on general savings and investing. Bush proposed LSAs last year at a far higher level — $15,000 per individual and $30,000 per couple — but dropped the idea after it came under attack as a back-door attempt to eliminate capital-gains levies. The savings plan, which would restrict withdrawals until retirement age, is meant to consolidate the hodgepodge of tax-advantaged retirement accounts, from traditional IRAs and Roth IRAs to SEPs and Keogh plans. Despite the administration’s reduction in the LSA contribution limit, the proposal is certain to be controversial. Wall Street firms back the proposal because of the potential of large investment fees. Budget experts in Washington, D.C., argue the plans would make the long-term fiscal problems substantially worse. The Urban Institute-Brookings Tax Policy Center said revenue loss from the plans would reach $50 billion annually because the government would be precluded from collecting taxes on so many investments. Democrats have opposed the proposals as primarily benefiting only the wealthiest Americans. Insurance firms worry the plan might harm the annuity and 401(k) businesses. Charles Gabriel, an analyst at Prudential Equity Research Group, said he didn’t think Congress would take up the new savings plans during the election year. There are serious doubts tax cutters in the Republican Party will be able to pass a tax bill this year with the federal budget deficit approaching $500 billion, he said. “The Bush administration likes the theology behind these accounts,” Gabriel said. “But these things were ill-fated the way they were handled initially.”  [ Download an 11 page .pdf summary ]

ç Current retirement plan compliance issues

FROM THE OFFICE OF PUBLIC AFFAIRS February 2, 2004 JS-1131

The President’s Savings Proposals: Tax-Free Savings and Retirement Security Opportunities for all Americans

Today the Treasury Department announced that the President’s FY 2005 Budget includes the following savings initiatives: Retirement Savings Accounts, Lifetime Savings Accounts, Employer Retirement Savings Accounts, and Individual Development Accounts

The first proposal would create two consolidated savings accounts: Retirement Savings Accounts (RSAs) and Lifetime Savings Accounts (LSAs) that will allow everyone to contribute -- with no limitations based on age or income status.  Individuals will be able to convert existing tax-preferred savings into these new accounts in order to consolidate and simplify their savings arrangements.

• RSA and LSA contribution limits will be $5,000 per year. This contribution limit is modified from last year’s FY04 Budget proposal, which had a contribution limit of $7,500.

“Americans want a secure future:  simplifying savings will help them reach that goal,” stated Treasury Assistant Secretary for Tax Policy Pam Olson.  “The savings options proposed today will give all Americans the opportunity and flexibility they need to save for their retirement security and other needs. The proposals make saving simple for everyone and for every purpose.  They stress the importance of getting off the spending couch and into the savings gym.”

The second proposal would create Employer Retirement Savings Accounts (ERSAs) to promote and simplify employer sponsored retirement plans.  The proposal would consolidate 401(k), SIMPLE 401(k), 403(b), and 457 employer-based defined contribution accounts into a single type of plan more easily established by any employer.

• This proposal is modified from the previous FY04 Budget proposal to enhance flexibility and encourage small businesses to fund a custodial ERSA for their employees. Employers with 10 or fewer employees would be able to fund an ERSA by contributing to a custodial account, which is similar to a current-law IRA.

The third proposal would create Individual Development Accounts (IDAs) help lower-income individuals save.  This proposal would provide dollar-for-dollar matching contributions of up to $500 targeted to lower income individuals.  Matching contributions would be supported by a 100 percent credit to sponsoring financial institutions. 

The administration said ERSA administration would be easier because:

  • A single nondiscrimination test would apply to ERSA contributions, as compared to the double test that currently applies to 401(k) plan contributions.
  • Employers could avoid nondiscrimination testing altogether if they satisfy a simplified safe harbor.
  • ERSAs sponsored by state and local governments and section 501(c)(3) organizations would not be subject to nondiscrimination testing under certain circumstances.
  • A simple custodial ERSA would be allowed for employers with 10 or fewer employees to help reduce costs to small businesses and encourage them to offer plans. The custodial ERSA would be similar to a current-law IRA. Employers would be exempt from annual reporting requirements and provided relief from most ERISA fiduciary rules similar to the relief provided to sponsors of SIMPLE IRAs.

The President’s Proposal to Expand Tax-Free Savings Description of Proposal

RETIREMENT SAVINGS ACCOUNTS (RSA)
 $5,000 annual contribution limit (indexed for inflation).
 Available to all individuals – no income limits (contributions cannot exceed compensation), no age limits.
 Contributions would be nondeductible (like Roth IRAs).
 Earnings would accumulate tax-free, and qualified distributions would be excluded from gross income.
 Qualified distributions could be made after age 58 or in the event of death or disability.
 Nonqualified distributions: Distributions in excess of prior contributions would be included in income and subject to an additional tax.

Conversions to RSAs: Roth IRAs, Traditional and Nondeductible IRAs
 Roth IRAs would be renamed RSAs and benefit from the new rules for RSAs.
 Existing traditional and nondeductible IRAs could be converted into an RSA by taking the conversion amount into gross income, similar to a current-law Roth conversion.
 No income limit would apply to the ability to convert.
 Existing traditional and nondeductible IRAs that are not converted to RSAs could not accept any new contributions after 2004.
 New traditional IRAs could be created to accommodate rollovers from employer plans, but they could not accept any new individual contributions.
 Individuals wishing to roll an amount directly from an employer plan to an RSA could do so by taking the rollover amount (excluding basis) into gross income (i.e., “converting” the rollover, similar to a current law Roth conversion).
 Several of the withdrawal exceptions would be eliminated, increasing the likelihood that money set aside for retirement is there for retirement.

LIFETIME SAVINGS ACCOUNTS (LSA)
 $5,000 annual contribution limit (indexed for inflation).
 Available to all individuals – no income limits, no age limits.
 Contributions would be nondeductible (like Roth IRAs).
 Earnings would accumulate tax-free and all distributions would be excluded from gross income.
 No minimum required distribution rules would apply at any age throughout owner’s life.
 Contribution limit of $5,000 applies to the individual owner of the account, not the contributor.
o Contributors could make annual contributions to the accounts of other individuals.
o Annual aggregate contributions to an individual’s accounts could not exceed $5,000.

Consolidation to LSAs:
 Individuals could convert balances from Coverdell Education Savings Accounts (ESAs) or Qualified Tuition Plans (QTPs) to LSAs.
 Individuals could continue to contribute to ESAs and QTPs as under current law.
 Health Savings Accounts (
HSAs) and Archer Medical Savings Accounts (MSAs) would be retained.

EMPLOYER RETIREMENT SAVINGS ACCOUNTS (ERSA)  -- One Retirement Plan: Employer Retirement Savings Accounts would combine the array of existing retirement plans into one simple uniform regime:
o 401(k)
o SIMPLE 401 (k)
o 403 (b)
o Governmental 457
o SARSEPs
o SIMPLE IRAs

Access: Available to all employers

Simplified Administrative Rules: The new plan would be much simpler for employers to administer, so employers who are not already sponsoring a plan, especially smaller employers without the resources for administering plans, will be more likely to offer a retirement savings program for their employees.

 A single nondiscrimination test would apply to ERSA contributions, as compared to the double test that currently applies to 401(k) plan contributions.

 Employers could avoid nondiscrimination testing altogether if they satisfy a simplified safe harbor.

 ERSAs sponsored by state and local governments and section 501(c)(3) organizations would not be subject to nondiscrimination testing under certain circumstances.

 A simple custodial ERSA would be allowed for employers with 10 or fewer employees to help reduce costs to small businesses and encourage them to offer plans. The custodial ERSA would be similar to a current-law IRA. Employers would be exempt from annual reporting requirements and provided relief from most ERISA fiduciary rules similar to the relief provided to sponsors of SIMPLE IRAs.

The rules applicable to defined benefit plans would not be affected by this proposal.

INDIVIDUAL DEVELOPMENT ACCOUNTS (IDAs)
Individual Development Accounts would create accounts with dollar-for-dollar matching contributions targeted to lower income individuals.

 Dollar-for-dollar matching contributions provided to individuals up to $500.
 Single filers with incomes below $20,000, joint filers with incomes below $40,000 and head of household filers with incomes below $30,000 would be eligible. 
 Matching contributions supported by 100 percent tax credit for sponsoring financial institutions that provide matches to individuals.
 A $50 per account credit for financial institutions to cover ongoing costs of maintaining and administering each account and providing financial education to participants.
 Qualified withdrawals of contributions and matching funds for higher education, first-time home purchase, and small business capitalization.
 

The President’s Proposal to Expand Tax-Free Savings Important for the Future

Continues to Build an Ownership Society

• The United States is increasingly an ownership society.  More than half of all households – 84 million individual investors – own stock directly or through stock mutual funds. 

• The savings package further promotes an ownership society by:

o improving access by removing barriers to tax preferred saving.
o making savings simpler by reducing complexity and unifying the rules.
o improving fairness by providing the benefits of tax preferred savings to those least able to save for the very long-term.

• Through the savings package, taxpayers get the benefit of paying the tax man upfront, rather than when withdrawing funds for retirement or other needs.  Taxpayers’ receive the full return on investments giving them greater certainty about the amounts available for their retirement and other needs. 

• A majority of taxpayers will be able to move all of their savings in a few short years into tax free savings accounts.  This will allow taxpayers to avoid the complexities of reporting financial income on their tax returns and filing a schedule B and Schedule D.

• Increased education and financial literacy will help raise awareness of the importance of savings. 
o Financial services firms will be more focused on counseling clients on maximizing financial security rather than the intricacies of the tax rules – adding value instead of paper work.

   Enhances Low- and Moderate-Income Savings Opportunities

• The savings package simplifies individuals’ savings decisions. 
o Complex and confusing eligibility rules are replaced with one rule for both LSAs and RSAs:  everyone can contribute.   
o The special rules that dictate what qualifies as a penalty free withdrawal are replaced with one rule under LSAs:  all distributions are tax-free. 

• Tax preferred savings would become universally available. 
o Individuals’ saving will correspond more directly to their needs rather than to the special uses prescribed by the tax laws.
o The availability of tax preferred savings opportunities to the low income under current law is largely illusory.  The flexibility of LSAs allows access to tax preferred savings regardless of an individual’s savings horizon and use.
o The current alphabet soup of accounts are available to low and moderate income taxpayers, but their shear complexity, for all practical purposes, closes them to low and moderate income taxpayers who don’t have access to the sophisticated tax and financial advice needed to take advantage of them.
o Low-income individuals, in particular, may not have the resources to save for long into the future.
o Low-income individuals are the most likely to need their savings in an emergency, and the most likely to pay penalties for early withdrawal under current law. 

• Uniform and simple rules will encourage financial services firms to market tax preferred savings more aggressively and to spend their resources on financial education and literacy.
 
• Dollar-for-dollar matching contributions up to $500 would be made available to lower income individuals through Individual Development Accounts (IDAs).  The matching contributions would be supported by a tax credit to financial institutions.

Promotes Retirement Savings

• The ERSA proposal simplifies and unifies employer plan rules in a number of important ways.   ERSAs will be much easier for employers to adopt and administer and will help reduce the costs to employers.  

• ERSAs consolidate all types of employer plans into a single simplified plan. 

• ERSA custodial accounts, available to employers with 10 or fewer employees, would be exempt from annual reporting requirements and provided relief from fiduciary rules. 

• Lower administrative costs under ERSAs will translate into higher investment returns to employer plan participants, which will help encourage participation.

More uniform employer plan rules may lead to greater competition between financial services firms, which may further help drive down costs and increase returns to investors.

Encourages Savings and Promotes Economic Growth

• The package promotes savings in several ways.
o These proposals remove the current law penalty on saving.  The after-tax return to savings is increased through greater access to tax preferred savings.  Higher after-tax returns encourage savings.
o The simpler and more uniform rules for individual savings vehicles will encourage more savings. 
o Lower costs for setting up and maintaining employer plans will increase returns and encourage additional savings.
o More uniform rules for employer plans will foster more competition for investor funds among financial services firms.  More competition lowers costs and translates into higher returns to investors, further encouraging savings.

• Greater savings translates into more investment, greater capital accumulation, and higher living standards in the future.

• Greater savings means a more secure future for Americans of all income levels. 

bullet The American Society of Pension Actuaries (ASPA) announces it will now support the Bush revised savings proposals since they will result in greater retirement plan coverage and consequently greater retirement savings for working Americans. Representatives of ASPA's Government Affairs Committee have met with senior Administration officials on numerous occasions to express serious concerns about the possible impact of last-year's savings proposals on small business retirement plan coverage. Significantly, many of the revisions to the new proposal were made in response to these concerns raised by ASPA. Both the Lifetime Savings Account (LSA) and Retirement Savings Account (RSA) contribution limits have been reduced from $7,500 to $5,000, and important nondiscrimination testing flexibility has been retained, which has been a critical factor in promoting new small business retirement plans. According to ASPA Executive Director, Brian H. Graff, Esq., "We are very pleased that the Administration has responded to our concerns. If enacted, the new proposals will expand workers' savings options while still maintaining the necessary incentives for small business owners to provide employer-sponsored retirement plans to workers."  According to Bruce Ashton, Esq., ASPA President, "(I)n meeting with Treasury officials, it was clear they sincerely wanted to achieve the appropriate balance between individual savings incentives and incentives to establish workplace retirement plans. With the revised proposals, we believe they have succeeded in this effort." As compared to last year's proposals, ASPA believes the revised savings proposals will on balance promote greater small business retirement plan coverage, enhancing the retirement security of a vital sector of our nation's workforce. The revised proposals will significantly reduce the costs to small businesses of establishing and maintaining retirement plans for their employees. According to Graff, "It's critical that small business workers still have the ability to participate in employer-sponsored retirement plans since studies prove that moderate income workers are much more likely to save in an employer-sponsored plan than in individual savings vehicles." ASPA is a national organization of retirement plan professionals dedicated to the preservation and enhancement of the private pension system in the United States. For more information about ASPA, please visit www.aspa.org  For additional ASAP commentary on this topic, please visit this page
bullet The American Society of Pension Actuaries (ASPA) Position on current Mutual Funds issues:  Amendments to Rules Governing Pricing of Mutual Fund Shares (Release No. IC-26288; File No. S7-27-03) For official details from ASPA please visit this page

January 25, 2004  - Because this important legislative topic (LSAs, RSAs & ERSAs) is back in the news, we decided to post selected articles (see below) from previous AASC HR & Benefits News newsletters:

  1. From the 2nd Quarter 2003 - AASC HR & Benefits News newsletter: Prior Bush proposals:  Bush proposed new savings programs & a reorganization of defined contribution plans (see 1st Quarter News)  Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts (RSAs) And Employer Retirement Savings Accounts (ERSAs) which consolidates 401(k), SIMPLE 401(k), 403(b), governmental 457, SARSEPs, and SIMPLE IRAs into ERSAs Plus liberalized Section 125 Medical FSA rules Proposed Effective Date: in 2003. These Bush proposals are still Viable & good plans but look for more proposals like the newer Portman/Cardin ideas NOTE: the Wall Street Journal (05/05/03) reports the Senate Finance Committee's tax package may not include the dividend-tax relief that President Bush wants unless they can muster more support for it & said Finance Chairman Charles Grassley (R., Iowa) is inclined to leave it aside.
     

  2. Selected articles from the 1st Quarter 2003 - AASC HR & Benefits News newsletter:    Bush’s new tax-advantaged savings programs & reorganization of defined contribution plans This follows the Administrations earlier proposal to end the double taxation of dividends. Under the proposal, public and private corporations will determine an "excludable dividend amount" that reflects income of the corporation that has been fully taxed. Dividends that do not exceed the excludable dividend amount will be tax-free for shareholders. If a corporations excludable dividend amount exceeds the dividend it pays (or if the corporation does not pay dividends) each shareholders basis in stock will be increased annually by the amount of retained excludable income per share. This later provision will significantly lower the effective capital gains tax for many equities, perhaps even eliminating the tax in some circumstances. Our opinionated assessment: These Bush proposals are good (especially the brilliant dividend strategy developed by R. Glenn Hubbard)

This new proposal would consolidate retirement savings accounts into:

  1. Lifetime Savings Accounts (LSAs) 

  2. Retirement Savings Accounts (RSAs)

  3. Employer Retirement Savings Accounts (ERSAs) which consolidates 401(k), SIMPLE 401(k), 403(b), governmental 457, SARSEPs, and SIMPLE IRAs into ERSAs.

Employer Retirement Savings Accounts (ERSAs) Some of the changes in ERSAs include:

  • There would be a single test to show that the plan meets the nondiscrimination rules with respect to coverage - ratio-percentage coverage for all defined contribution plans. Under this test, the percentage of an employer’s non-highly compensated employees covered under a plan would have to be at least 70% of the percentage of the employer’s highly compensated employees covered under the plan. The other coverage testing alternatives would be repealed.
  • Permitted disparity (age and service weighting, Social Security offset) and cross-testing would be prohibited for all defined contribution plans.
  • The top heavy rules would be repealed for all defined contribution plans.
  • There would be a uniform definition of compensation for all purposes for all defined contribution plans - the amount reported on form W-2 for wage withholding, plus the amount of elective deferrals.
  • A simplified definition of highly compensated employee would be adopted for all defined contribution plans under which all individuals with compensation for the prior year above the Social Security wage base for that year would be considered to be highly compensated employees.
  • New non-discrimination tests (not applicable to government plans). Plans will be nondiscriminatory if:
  1. Non-highly compensated average deferral percentage is more than six percent, or,
  2. if non-highly compensated average deferral percentage is six percent or less and highly compensated average deferral percentage is less than two hundred percent of non-highly compensated average deferral percentage.
  • The current 401(k) safe harbor plan designs will be replaced with the following alternatives that will satisfy the nondiscrimination rules (note - the proposal is silent on immediate vesting):
  1. If the employer makes a non-elective contribution on behalf of each participant in the plan equal to 3% of      the employee’s compensation.
  2. If the employer makes a matching contribution equal to 50% of each employee’s deferrals (up to 6% of compensation),
  3. If the employer makes a matching contribution that does not increase based on the level of an employee’s deferrals and the match is equal to the amount that would be made under a 50% match (up to 6% of compensation), such as a match of 100% of each employee’s deferrals (up to 3% of compensation).

NOTE: ERSAs should have no effect on other types of defined contribution plans, including "pure" profit sharing plans, stock bonus plans, and money purchase pension plans – other than the simplifications relating to definitions of compensation, highly compensated workers and coverage and no impact on defined benefit plans.

Q&A: on ERSA Provisions

  1. Which types of employer-sponsored plans would be replaced by the new ERSA? The ERSA would replace all types of funded plans with employee contributions. Thus, ERSAs would replace 401(k) plans, SIMPLE 401(k) plans, 403(b) plans, governmental 457 plans, salary reductions simplified employee pensions (SARSEPs), and SIMPLE IRAs. The ERSA would not replace nongovernmental 457 plans.
  2. Are there any types of employers who would not be able to sponsor an ERSA? No. - Any employer would be able to sponsor an ERSA.
  3. Will employers have to terminate their existing plans and transfer the assets to an ERSA? No. Beginning in 2004, all 401(k) plans will become ERSAs. SIMPLEs, SARSEPs, 403(b) plans, and governmental 457 plans may continue in existence indefinitely, but may not accept any future contributions after 2004.
  4. Will the Saver’s Credit still be available after the enactment of the LSA/RSA proposal? Yes. The Saver’s Credit will be available for elective deferrals and LSA/RSA contributions made prior to 2007.
  5. What nondiscrimination tests will apply to ERSAs? The same simplified nondiscriminatory coverage requirement will apply to ERSAs (other than those covering only state and local government employees) that will apply to all other defined contribution plans. (See Q&A below). An ERSA will satisfy the nondiscriminatory benefit requirements if the average contribution percentage for nonhighly compensated employees is no greater than 6% and the average contribution percentage for highly compensated employees does not exceed 200% of the average contribution percentage for nonhighly compensated employees. If the average contribution percentage for nonhighly compensated employees is greater than 6%, then the average contribution percentage for highly compensated employees may be any amount.
  6. Will state and local governments and charitable organizations be subject to the nondiscriminatory benefit requirement? ERSAs covering only employees of state and local governments will be exempt from the nondiscriminatory benefit requirement. An ERSA covering only employees of a charitable organization will be subject to the nondiscriminatory benefit requirement only if it allows after tax contributions. In any event, an ERSA covering employees of a charitable organization will be subject to a universal availability requirement regarding the ability of employees to make deferrals under the plan. That is, all employees of the organization must be permitted to elect to make deferrals of more than $200.
  7. Does the ERSA proposal have any effect on defined contribution plans that do not involve employee deferrals or employee after-tax contributions? In other words, does the proposal affect pure profit sharing plans, stock bonus plans, and money purchase pension plans? Other than the simplifications discussed in the preceding question, the ERSA proposal would not affect the rules applicable to employer contributions to defined contribution plans, other than safe harbor nonelective contributions or matching contributions.
  8. Does the ERSA proposal have any effect on defined benefit plans? No, the proposal would not affect the rules applicable to defined benefit plans.

ERSAs  Employer Retirement Savings Accounts will combine the current array of existing retirement plans into One simple uniform plan, including:

  • 401(k)
  • 403(b)
  • SARSEPs
  • SIMPLE 401(k)
  • Governmental 457
  • SIMPLE IRAs

Access:

  • Available to all employers

Expansion:

  • Increase employee deferrals from $13,000 in 2004 to $16,000 in 2006

  • indexed for inflation

  • $5,000 catch-up contributions for ages 50 and over effective 2006

  • After-tax or pre-tax contributions permitted.

  • Maximum total contribution (including employer contributions) up to $40,000.

  • Simplified Rules for All Defined Contribution Plans

  • The three types of nondiscriminatory coverage tests would be narrowed to a single coverage test: plans would be required to cover a percentage of nonhighly compensated employees that is not less than 70 percent of the percentage of highly compensated employees that are covered.
  • Permitted disparity and cross-testing would no longer be permitted for defined contribution plans.
  • There would be a uniform definition of compensation for applying the rules to defined contribution plans: compensation for purposes of withholding on wages, plus elective deferrals.
  • The definition of "highly compensated employee" would be anyone with compensation above the Social Security wage base for the prior year.
  • The top-heavy rules would be repealed.
  • The rules applicable to defined benefit plans would not be affected by this proposal.

    Details:

    Conversions: Convert existing 401(k) and thrift plans to ERSAs. SIMPLEs, SARSEPs, 403(b)s and governmental 457s could continue, but could not accept contributions after 2004.

    Simplified Nondiscrimination Testing:

  • If nonhighly compensated employees’ average is more than 6%;

  • then highly compensated employees’ deferred compensation is unrestricted.

  • If nonhighly compensated employees’ average is 6% or less;

  • then highly compensated employees’ deferred compensation must be less than 200% of that average.

  • Test generally does not apply to State & local government plans; does not apply to charitable organization plans unless they have matching or after-tax contributions. Charitable organization plans must permit all employees to make deferrals of at least $200.

    Repealed:

  • Actual deferral percentage test (401(k) plans).
  • Actual contribution percentage tests (thrift plans and matching contribution plans)
  • Safe-Harbor:

  • Two design-based safe-harbors for employers who provide:
      1. 3% non-elective contribution for all participants,
      2. 50% matching employer contribution on all elective employee contributions up to 6% of compensation.

    Distributions from after-tax accounts attributable to contributions after 2003 would be tax-exempt, thus accelerating the effective date of the Roth 401(k) provision of EGTRRA from 2006 to 2004.

    Effective Date: ERSAs would become effective for years beginning after December 31, 2003.

    President's Proposal for Expanded Tax-Free Savings Opportunities: Lifetime Savings Accounts (LSA) and Retirement Savings Accounts (RSA)

    Lifetime Savings Accounts (LSAs)

  • $7,500 annual contribution limit
  • Available to all individuals -- no income limits, no age limits
  • Contributions would be nondeductible
  • Earnings would accumulate tax-free and all distributions would be excluded from gross income
  • The $7,500 contribution limit would be indexed to inflation
  • No minimum required distribution rules apply at any age throughout owner’s life
  • Contribution limit of $7,500 applies to the individual owner of the account, not to the contributor
    1. Contributors could make annual contributions to the accounts of other individuals
    2. Annual aggregate contributions to an individual’s accounts could not exceed $7,500

    Retirement Savings Account (RSA)

  • $7,500 annual contribution limit
  • Available to all individuals -- no income limits (contributions cannot exceed compensation), no age limits
  • Contributions would be nondeductible (like Roth IRAs)
  • Earnings would accumulate tax-free, and qualified distributions would be excluded from gross income.
  • The $7,500 contribution limit would be indexed to inflation
  • No minimum required distribution rules apply at any age throughout owner’s life
  • Qualified distributions made after age 58 or in the event of death or disability
  • Nonqualified distributions: Distributions in excess of prior contributions would be included in income and subject to an additional tax
  • Conversions to LSAs and RSAs

    No conversions are required Individuals are permitted to convert balances from Archer Medical Savings Accounts (MSAs), Coverdell Education Savings Accounts (ESAs) or Qualified State Tuition Plans (QSTPs) to LSAs before January 1, 2004.

  • ESAs and QSTPs include after-tax contributions. Thus, conversions to LSAs would not be included in income.
  • MSA contributions are not taxed. Thus, MSA conversions would be included in income
  • Roth IRAs

  • Roth IRAs would be renamed RSAs and benefit from the new rules for RSAs.
  • Traditional and Nondeductible IRAs

  • Existing traditional and nondeductible IRAs could be converted into an RSA by taking the conversion amount into gross income, similar to a current-law Roth conversion.
  • No income limit would apply to the ability to convert.
  • Taxpayers who convert before January 1, 2004 could include the conversion amount in income ratably over four years.
  • Conversions made on or after January 1, 2004 would be included in income in the year of the conversion.
  • Existing traditional or nondeductible IRAs that are not converted to RSAs could not accept any new contributions after 2003.
  • New traditional IRAs could be created to accommodate rollovers from employer plans, but they could not accept any new individual contributions.
  • Individuals wishing to roll an amount directly from an employer plan to an RSA could do so by taking the rollover amount (excluding basis) into gross income (i.e., "converting" the rollover, similar to a current law Roth conversion).
  • Effective Date: Both LSAs and RSAs would become effective in 2003.

    Summary Description of Current Law Retirement Savings Accounts

    Under current law, there are three different types of IRAs each subject to different rules regarding eligibility, contributions, tax treatment, and withdrawals.

    Rules:

  • Aggregate limit on contributions to all IRAs: $3,000, scheduled to increase to $5,000 by 2008; catch-up contributions of $500 (increasing to $1,000 in 2006) available for those age 50 and over; contributions may not be greater than compensation.
  • Early distributions from IRAs are generally subject to an additional 10 percent tax.
  • Currently, penalty-free withdrawals are allowed for a long list of qualified expenses not related to retirement, and this list has grown over time.
  • Traditional Deductible

  • Contributions permitted only if under age 70˝.
  • Contributions are deductible if eligible.
  • Eligibility for the deduction is phased out above certain income levels if the worker is covered by an employer-sponsored retirement plan.
  • In 2003, eligibility for deduction phases out between incomes of $60,000 and $70,000 for married filers and between $40,000 and $50,000 for others.
  • Distributions are included in gross income.
  • Distributions prior to age 59˝ for an impermissible purpose are included in gross income and subject to an additional tax.
  • Entire amount must be distributed over the expected life of the individual beginning at age 70˝.
  • Traditional Nondeductible IRAs

  • Similar rules apply as above, except contributions are non-deductible and all workers are permitted to contribute.
  • Roth IRAs

  • Individuals of any age may make contributions.
  • Account earnings accumulate tax free.
  • Allowable contributions are phased out for workers with incomes above certain levels.
  • A qualified Roth IRA distribution is excluded from gross income.
  • Distributions in excess of prior contributions are included in income and subject to an additional tax.
  • Assistant Secretary Olson stated, "The overwhelming complexity of current rules imposes substantial burdens on employers and workers. Because employer sponsorship of a retirement plan is voluntary, this complexity discourages many employers from offering any plan at all. This is especially true of small employers who together employ about 4 out of every 10 American workers. It's one important reason why only 50% of working Americans have any pension plan at all. I'm confident that simpler rules will encourage employers to create new plans for their employees because creating a qualified plan will be much easier."

    ERSAs will follow the existing rules for 401(k) plans, but these rules will be greatly simplified.

    For example, both the definition of compensation and the minimum coverage requirement will be simplified and the top heavy rules will be repealed. Nondiscrimination requirements for ERSA contributions will be satisfied by a single test and many firms may choose to adopt a new designed-based safe harbor to avoid this test altogether. The proposal simplifies qualification requirements while maintaining their intent of providing broad-based coverage of employees.

    By reducing unnecessary complexity, the proposal significantly reduces employer compliance costs.

    Complexity and the associated compliance costs are often cited as a reason the coverage rate under an employer retirement plan has not grown above about 50 percent overall, and has remained under 25 percent among employees of small firms. Firms that are currently not offering retirement plans because of compliance costs will be more likely to offer such plans under the proposal, increasing coverage and participation.

    ERSAs are good for workers because:

    1. Coverage and participation will increase because firms that are not currently offering retirement plans because of the complexity and compliance costs will be more likely to offer such plans under the proposal.
    2. More small businesses will be able to cover more workers. The reduction in red tape will remove a barrier that discourages small business owners from offering this benefit to their employees. Small businesses employ about two-fifths of American workers, but the pension coverage rate has consistently remained under 25 percent among employees of small firms.
    3. Employees will benefit because firms currently offering employer plans will have reduced compliance costs.

    Bush budget proposes 125 FSA changes The Bush administration's proposed fiscal 2003 budget would permit flex-plan sponsors to allow participants with health flexible spending accounts (FSAs) to keep up to $500 in unspent funds for use the following year. Alternatively, unused FSA account balances (up to $500) could be taken as taxable cash (includible in gross income) or transferred to a defined contribution retirement plan or to an MSA. Modifying the "use it or lose it" rule encourages "savings for unexpected medical expenses".

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    Thank you to the PSCA, ASPA, EBIA, IRS, DOL PWBA (EBSA) and CFO Magazine for source materials used in developing this informational document. Before taking any action always consult your attorney and your public accountant for legal and specific tax advice. AASC & FBA provide recordkeeping and administration services and we are not engaged in the practice of law; we do not render legal advice, so please consult your tax attorney regarding these matters.

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