As Americans start receiving their government rebate checks this month, thanks to President Bush’s $1.3 trillion tax cut, corporate retirement plan sponsors find themselves sifting through a slew of new pension provisions that are also part of the bill, and that could completely reshape plan designs.
The majority of the 417-page Economic Growth and Tax Relief Reconciliation Act, signed in late May, outlines more than four dozen rules that promise sponsors greater design flexibility and some simplification, in an effort to increase employee participation and encourage employers to initiate or expand their savings programs.
“Companies now have substantial opportunities to make their retirement plans more effective at attracting, retaining, and motivating employees,” says David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America. “This is a chance to take out a blank sheet of paper.”
Receiving the most headlines has been the tax bill provision that gradually raises the limit on annual contributions to 401(k) plans from $10,500 to $15,000. Wray predicts the new law will increase savings levels by more than 50 percent by 2006, when the new maximum contribution level will take effect. But additional regulations for both defined contribution and defined benefit plans go even further, and are expected to increase the number of small companies that offer retirement plans, improve pension portability, and permit greater participation by higher-paid employees.
The following are some of the highlights.
While these provisions don’t take effect until January, and await guidance from the Internal Revenue Service, it’s not too soon for plan sponsors to determine the potential impact of the new law on a company’s benefits structure, experts say. But they add that these are among the most substantial changes to come along in 25 years, and advise stepping back and taking a fresh look. “I would work to make specific changes that connect the plan to the company’s strategic goals,” says Wray, “and not just implement changes on an ad hoc basis.”