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Q. What are the major provisions we should be aware of in the latest legislation affecting retirement plans?

A. The new legislation includes the Balanced Budget Act of 1997 and the Taxpayer Relief Act of 1997. Because this legislation covered extensive ground, this column will highlight the key points benefit professionals need to consider.

The major provisions affecting tax-qualified retirement plans include these:

Mandatory cash-outs.

This change allows employers to remove from their pension rolls former employees whose accrued benefits have a present value of up to $5,000. That's an increase from the former $3,500 cash-out limit. This means that if the present cash value of a former employee's pension at normal retirement age is $5,000 or less, the plan can distribute that amount to the former employee now rather than holding it until he reaches age 65. This provision, effective in 1998, is a plus for plans because it eliminates small dollar amounts from plans and therefore eases the administrative burden and cost of maintaining these small amounts.

Fifteen percent excise tax.

This tax is eliminated for excess distributions received Jan. 1, 1997, and thereafter. This is a real advantage for the individual and one less item with which plan administrators need to be concerned.

Full funding limit.

For qualified pension plans, the full funding limit is increased from the current 150% of current liability to 155% in 1999 and 2000; 160% in 2001 and 2002; 165% in 2003 and 2004; and 170% in 2005 and after. The additional contribution allowed by the new full funding limit must be amortized over 20 years. Currently, 10-year amortization is required. This amortization is effective for plan years beginning on or after Jan. 1, 1999.

The unamortized balance as of the close of the plan year prior to the 1999 plan year must be amortized over a period of years equal to 20 years, less the number of years since the amortization base was established.

This change is positive for those plans wishing to make larger contributions to their pension plans. However, this will not impact many plans.

Employer stock limitations.

No more than 10% of employee elective 401(k) deferrals may be required to be invested in employer stock. However, there are some exemptions:

For employee-elective 401(k) deferrals to an ESOP.

If the value of all defined contribution plans of the employer does not exceed 10% of the total assets of all qualified retirement of the employer.

If not more than 1% of an employee's eligible compensation deposited to the plan as an elective deferral is required to be invested in employer stock.

The effective date for this provision is for plan years beginning before 1999.

Because most corporate employer 401(k) plans provide for company stock, many plans may be affected by this change.


It is not necessary for a distributing plan to have a determination letter from the IRS in order for a plan receiving a rollover contribution to reasonably conclude that it is a valid rollover contribution. This eliminates the need for the distributing plans to provide a determination letter and of receiving plans to check for a determination letter for rollovers. This is a plus for plan administrators and employers. This change is effective Jan. 1, 1998.

New technologies.

The secretaries of treasury and labor are required to issue guidance designed to interpret the notice, election, consent, disclosure and time requirements under the IRS code and ERISA relating to retirement plans as applied to the use of new technologies by plan sponsors and administrators, while protecting rights of participants and beneficiaries. Also to be examined is the extent that paperless transactions can be utilized. The guidance is to be issued no later than Dec. 31, 1998, with final regulations not to be effective until the first plan year beginning at least six months after issuance of final regulations.

While the time line on this provision is a few years in the future, I am happy to see that these issues are under review. It is not too early to start thinking about how to improve the administration and communication of your plans through electronic means. The use of intranets and the Internet provides many opportunities to streamline plan administration.

These opportunities may include providing employees summary plan documents on a database on your intranet or e-mail system or allowing employees access to their benefit information via the Internet. Hopefully, clear guidance regarding electronic communication will be provided.

Ten percent excise tax.

There is an additional exception to the 10% excise tax on non-deductible employer contributions to a qualified retirement plan. This involves contributions to one or more defined contribution plans that are not deductible because they exceed the combined plan deduction limit. The exception only applies to the extent that contributions do not exceed the amount of the employer's matching contributions plus the elective deferral contributions to a 401(k) plan. This change is effective for taxable years beginning Jan. 1, 1998, and thereafter.

Summary plan descriptions.

Employee benefit plans no longer are required to file SPDs and summaries of material modifications, or SMMs, with the Department of Labor. However, the DOL may request an employer to furnish these documents. The fine for non-compliance is up to $1,000.

Again, this is a plus for plan administrators, as it is one less administrative task. However, the requirement for producing SPDs and SMMs remains. We still need to ensure that we develop the SPDs and SMMs and are prepared to furnish the materials if requested. Communication of employee benefits is today one of the most important functions of benefits.

This change does not affect the need to continually communicate the value and ensure understanding of our benefit programs to employees.


Although IRAs do not directly affect employers' retirement plans, plan administrators should be aware of them. There are now two types of IRAs: the Roth IRA and the standard deductible IRA.

The Roth IRA allows for a maximum post-tax contribution up to $2,000 (indexed) each year, reduced by contributions to deductible IRA. Contributions are phased out for incomes above $95,000 (single) and $150,000 (married). Distributions are not taxable if held for five years and distributed after age 591/2 or for death, disability, or first-time home expenses up to $10,000.

With the deductible IRAs, income limits are raised to $30,000 (single) from $25,000, and $50,000 (married) from $40,000. The income threshold for the single taxpayer will be gradually increased to $50,000 by 2005, with deductibility phased out at $60,000. The income threshold for married taxpayers will increase gradually to $80,000 by 2007, with deductibility fully phased out at $100,000. Penalty-free withdrawals will be allowed for first-time home purchase up to $10,000 or for qualified education expenses.

These changes in IRAs give individuals more flexibility to save for retirement outside of the company retirement plan.

Overall, the changes to retirement plans provided by this legislation are positive. It is very good to see legislation that eases the administrative burden of plan administrators and in some cases reduces plan participants' tax burden. While these changes are not monumental, they are changes in the right direction.

One word of caution for plan administrators is that the effective dates do vary widely. Make sure you mark your calendars accordingly.

Material in this article does not constitute accounting, tax, investment, legal or business advice. You should review your specific situation with professional advisers.

Would you like advice from an experienced colleague on a risk management, benefits management or actuarial problem? Four quarterly features in the Perspective section of Business Insurance can give you some answers.

Ask A Benefit Manager, Ask A Risk Manager, Ask A Benefit Actuary and Ask A Casualty Actuary answer written questions from readers on risk and benefits management issues and actuarial problems.

This month's column on employee benefit management issues is written by Dennis J. Nirtaut, managing director of compensation and benefits for Andersen Worldwide S.C. in Chicago. Christopher E. Mandel, director of risk management at

PepsiCo Restaurant Services Group in Louisville, Ky., answers questions on risk management issues. William J. Miner, an actuary with Watson Wyatt Worldwide in Chicago, answers actuarial questions on benefits issues. And, Richard E. Sherman, president of Richard E. Sherman & Associates Inc. in Ashland, Ore., answers actuarial questions in the casualty field.

Address your questions to ASK, Business Insurance, 740 N. Rush St., Chicago, Ill. 60611. Please give us your name, title and employer; however, Business Insurance will consider unsigned letters.