Legislative outlook on retirement issues for 2006

Congress has returned to Washington to face a challenging legislative agenda, with the FY ’08 budget, tax reconciliation and the ongoing and costly war in Iraq among the high visibility issues. Within the mix, Congress will also consider the fate of important retirement legislation by finalizing two separate bills.

For public sector employees there are several key provisions in separate House- and Senate-passed pension bills (HR 2830 and S1783) that could have a significant impact on building retirement security. Among the items within the bills worth watching as the conference committee develops the final version are:

• EGTRRA — The House bill calls for making permanent The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provisions that relate to retirement plans and IRAs, including increased contribution limits and catch-up provisions that would otherwise expire after 2010.

• 401(k) changes — This Senate bill would permit state and local governments to open 401(k) plans and provides for the coordination of contribution limits with 457 plans. (Total contribution no greater than the limit for each plan.) The effective date for plan years would be beginning after 2005 and the Senate bill exempts pre-1986 plans from coordination rules.

• IRA portability — The Senate bill would expand portability for IRAs including direct rollovers to a Roth IRA from a 457 plan, rollovers between a 403(b) plan and other qualified plans for after tax money (Senate bill) and both bills allow rollovers of benefits received by non-spouse beneficiaries.

• Waive withdrawal penalty — The Senate bill contains a provision that would waive the 10 percent early withdrawal penalty for distributions from a governmental defined benefit pension plan to a qualified public safety employee who separates from service after age 50. Under current law the penalty is waived for public safety workers after age 55. There is a similar provision in the House bill that would waive the 10 percent early distribution penalty for public safety employees who participate in governmental pension plans with a "Deferred Retirement Option Plan (DROP)" benefit feature.
• Health care — The House bill has several retiree health provisions, one of which would allow public safety officers who retire or become disabled to make tax-free distributions of up to $5,000 annually from governmental pension plans (457 plans) if the distribution is used to purchase health or long-term care insurance.

Of all the provisions in both pension bills, making key provisions of EGTRRA permanent (the provisions expire in 2010) may be the most interesting to public employees and plan sponsors. For example, the annual contribution limits — now set at $15,000 — would revert to pre-EGTRRA limits of $8,500 (plus indexing subsequent to 2001). IRA limits also would roll-back from the phased-in $5,000 (in 2008) to a pre-2001 $2,000 annual limit.

Clearly, Congress has much work to do before these proposals, or variations of these bills, become law. As we have in the past, ICMA-RC will continue to work with key industry groups and state and local representatives to see that public employees are represented on the issues that could have an impact on building retirement security.

Meanwhile, ICMA-RC will monitor events and report on our Web site and in future editions of The Vantagepoint newsletter the progress of legislative and regulatory developments.