The EGTRRA Conundrum

Congress has the opportunity, as it considers the latest round of pension reform, to alleviate the concerns of many plan sponsors with respect to the long-term design and administration of their qualified retirement plans. The pension reform bill passed by the House last fall contained a provision that would make the pension provisions enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 permanent. The Senate bill does not contain a similar provision, and this is one of the issues that must be resolved in conference.

Absent Congressional action, the changes made to the pension system under EGTRRA will sunset on Dec. 31, 2010. At that point, we would revert to the rules that were in effect prior to EGTRRA’s enactment. Reversion to the old rules would not only limit the amount that plan participants could save for retirement, but would also require extensive changes to current plan design and reprogramming of the systems that support plan administration. Examples include:

• While EGTTRA generally increased the amounts that participants could contribute to plans, it also created a new form of contribution; the “catch-up” contribution. Sponsors, plan providers and payroll providers made significant systems changes to capture catch-up elections and accept contributions. Those changes would need to be “undone” if catch-ups become a thing of the past.
• Prior to EGTRRA, section 415(c) limited annual contributions to a defined contribution plan to the lesser of $35,000 or 25% of compensation. EGTTRA raised the dollar limit to $40,000 – it now stands at $44,000 – and eliminated the percentage limitation. As a result, many plan sponsors increased the maximum percent that participants could contribute to levels well above 25%. If EGTRRA lapses, these limits will need to be lowered.
• EGTRRA simplified a number of the rules associated with plan administration, including repealing the “same desk” rule, eliminating the “multiple use” test from the discrimination testing regimen, simplifying the “top heavy” test and making it easier for participants to rollover distributions from different types of defined contribution plans. All these administrative complexities will be re-imposed in the absence of EGTRRA.
• Many employers are considering whether to amend their plans to include the designated Roth contributions that became effective at the beginning of 2006. The Internal Revenue Service has just released guidance on how these accounts will be administered and is still in the process of finalizing that guidance. Implementing a Roth program will require new education programs, major programming changes and coordination between employers, plan providers and payroll providers. If the availability of this option expires after 5 years, it brings into question whether it is worthwhile to make these changes.

There are a number of factors contributing to Congressional concerns regarding the permanence of EGTRRA’s pension provisions. First there’s the cost. The Joint Committee on Taxation recently set the 10-year price tag on making these provisions permanent at over $41 billion. It’s important to remember, however, that with the exception of a very few provisions, such as designated Roth contributions, these provisions do not result in tax avoidance, but simply defers the collection of taxes to the date when plan participants begin taking distributions.

There is also some thought that including the pension provisions of EGTRRA as part of broader effort to make all of EGTRRA permanent would increase overall likelihood of success. It would be unfortunate to hold programs that enhance future retirement security hostage to political maneuvering. Finally, it’s easy to say that Congress has plenty of time to act. After all, it’s only 2006 and these provisions won’t expire until the end of 2010.

But just as implementing these changes required significant programming efforts, undoing them may be just as time consuming. Employers and providers are already making decisions concerning the allocation of information technology resources for the next fiveyears. The uncertainty of whether major systems changes are looming diverts scarce resources from other projects that could provide greater administrative efficiency and enhance participant services.

There will always be legislative and regulatory changes that impact plan design and administration. Adapting to these changes is a task that sponsors and providers have become all too accustomed to. With EGTRRA permanence, Congress has an opportunity to be proactive and provide clarity to plan sponsors while at the same improving their employee’s chance of achieving their retirement goals.

Contributor Bob Holcomb is v.p. of Legislative and Industry Affairs for JPMorgan Retirement Plan Services.