MAY - JUNE 2001

Play a Part In the  Policymaking Process

Updated: 29 May 2001

Pension Reform Provisions Survive Last-Minute Tax Bill Negotiations

House and Senate negotiators worked hard last week to assemble a workable tax bill to put before Congress prior to its week-long Memorial Day recess. Shortly after noon on Saturday, the Senate approved the compromise bill, the Economic Growth and Tax Relief Reconciliation Act (H.R.1836) on a roll-call vote (53 to 33 -- with 9 Senators not voting). The House approved the same bill hours earlier by a vote of 240 to 154 -- with 39 Representatives not voting. Included in the final agreement were important IRA expansion and pension reform provisions supported by IEEE-USA and other engineering societies. As passed by the Congress, the bill:

1) Expands contribution limits for traditional and Roth IRAs from the current $2,000 a year to: $3,000 in 2002 through 2004; $4,000 in 2005 to 2007; and $5,000 in 2008

2) Authorizes additional "catch-up" contributions to traditional and Roth IRAs for individuals 50 and above by $500 in 2002 and by $1,000 in 2006

3) Increases allowable contribution limits to 401(k), 403(b) and Section 457 state and local government plans from the current $10,500 to: $11,000 in 2002; $12,000 in 2003; $13,000 in 2004; $14,000 in 2005; and $15,000 in 2006

4) Increases allowable contributions to SIMPLE plans from the current $6,000 to: $7,000 in 2002; $8,000 in 2003; $9,000 in 2004; and $10,000 in 2005

5) Authorizes additional catch-up contributions to all plans other than Savings Incentive Match for Employees (SIMPLE) plans by: $1,000 in 2002; $2,000 in 2003; $3,000 in 2004: $4,000 in 2005; and $5,000 in 2006. SIMPLE plan catch-ups will be 50 percent of catch-ups applicable to other plans

6) Establishes a non-refundable income tax credit for elective contributions by certain low income individuals to IRAs and qualified plans (sunsets at the end of 2006)

7) Establishes a tax credit for new retirement plan expenses incurred by small businesses (100 or fewer employees) for the first three years of the plan

8) Reduces cliff vesting requirements for employer matching contributions to defined contribution plans from the current 5 to 3 years

9) Improves portability by facilitating rollovers to and from qualified retirement plans, 403(b) tax-deferred annuities; Section 457 plans and IRAs

10) Strengthens notification requirements for plan amendments that will result in a significant reduction in future plan benefit accruals

Efforts in the House to preserve the President's desired reduction of the top marginal income tax rate from 39.6 percent to 33 percent had put at risk a number of Senate-backed provisions -- including pension reform. As legislators and lobbyists converged on Capitol Hill late last week to rally their forces, there was little anyone could do but wait and see what would emerge in the House-Senate compromise. In the end, pension reform provisions were left largely intact due to their relatively low cost and their broad bipartisan support in both houses of Congress.

When ratified by the President, the compromise will reduce incrementally the top rate to 35 percent beginning in 2006. The plan is expected to cost an estimated $1.35 trillion over 10 years. The total estimated cost of the IRA expansion and pension reform provisions in the conference agreement will be $21.6 billion over 5 years and $49.6 billion over 10 years. All of the provisions of the tax bill are set to expire in 2010.

Also included in tax plan -- of interest to IEEE-USA -- were educational provisions that will: raise allowable contribution limits to educational savings accounts to $2,000; extend the $5,250 income tax exclusion for employer provided educational assistance for graduate and undergraduate level courses; increase income eligibility phase-out ranges for the deductability of interest on student loans; and establish an above-the-line deduction for qualified higher education expenses in 2002 through 2005.