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Pension Simplification Plan

Table of Contents

    High Priority Actions:

    Simplify Pension Plans For Small Business
  1. The NEST -- A Simplified Plan for Small Business
  2. Repeal the Family Aggregation Rule
  3. Eliminate Special Restrictions on Plans Maintained by the Self-Employed
  4. Simplify Substantial Owner Rules Relating to Plan Terminations

    Improve And Expand 401(k) Plans:

  5. Eliminate Uncertainty and Monitoring of Contributions Through Design-Based Safe Harbors
  6. Facilitate Testing by Using Prior Year Data
  7. Improve Fairness of Corrective Distribution Rules
  8. Permit Tax-Exempt Organizations to Maintain 401(k) Plans
  9. Conform 401(k) Distribution Rules for Rural Cooperatives

    Simplify Pension Rules

  10. Eliminate Excessive Testing By Simplifying the Definition of "Highly Compensated Employee"
  11. Exempt Defined Contribution Plans from the Minimum Participation Rule
  12. Eliminate Special Vesting Schedule for Multiemployer Plans
  13. Allow Triennial Actuarial Valuations for Multiemployer Plans
  14. Eliminate Partial Termination Rules for Multiemployer Plans
  15. Eliminate the Combined Plan Limit on Contributions and Benefits (Section 415(e))
  16. Simplify Contributions and Benefits Limits for Governmental Plans and Multiemployer Plans
  17. Allow Tax-Exempt Organizations to Provide Excess Benefit Plans
  18. Simplify Deduction Rules for Multiemployer Plans
  19. Repeal Rule Requiring Employer Plans to Commence Minimum Distributions Before RetirementSimplify Taxation of Annuity Distributions

    Improve Administration of Prohibited Transaction Rules

  20. Simplify Prohibited Transaction Exemption Procedures
  21. Simplify Prohibited Transaction Exemptions for Self-Directed ERISA Plans

    Streamline Pension Plan Reporting And Disclosure

  22. Streamline ERISA Annual Report (Form 5500 Series)
  23. Provide Uniform Information Reporting Penalties
  24. Simplify ERISA Advance Notice of Benefit Reductions
  25. Streamline the ERISA Summary Plan Description Filing Requirements

    Prevent Loss of Benefits

  26. Expand PBGC's Missing Participant Program

    Other Proposals

  27. Miscellaneous Simplification Provisions
  28. Elimination of Half-Year Requirements
  29. Provide Consistent Treatment for Disabled Employees
  30. Eliminate Unintended Cost of Reversions for Government Contractors
  31. Allow IRS to Determine Church Plan Status Under ERISA
  32. Extend Date for Adoption of Plan Amendments


"The most important job of our government in this new era is to empower the American people to succeed in the global economy. We've got to have a government that can be a real partner in making this new economy work for all of our people. We ought to foster more savings and personal responsibility."

President Clinton -- January 24, 1995


In the twenty years since Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA) to protect the pension promises made to employees, the pension laws and regulations have become extremely complicated. There are many reasons: the desire of employers to have a high degree of flexibility in designing plans that best suit their work force; policy decisions to try to ensure that all employees receive similar tax and savings benefits from retirement plans as are available to highly compensated employees and business owners; the need to prevent specific tax-shelter abuses; and limitations on pension accumulations to raise revenue.

While each of these may be good causes, and the private sector pension system has been greatly strengthened as a result of ERISA, the cumulative result -- together with virtually annual legislative changes -- had been to raise compliance and administrative costs to a level where many small employers, in particular, feel they cannot offer retirement plans to their employees. For example, while 73% of full-time workers in private firms with 1000 or more workers were covered by retirement plans in 1993, only 24% of those in firms with fewer than 100 employees were covered.

It is time to cut through complex rules that are outmoded, redundant, or no longer necessary to achieve policy goals. With these changes, more employers, both large and small, can make the smart decision: to provide their employees with a simple, tax-advantaged way to save for retirement. And, by reducing administrative expenses, more of the money spent by employers to maintain pension plans can go to benefits, rather than to lawyers, accountants, consultants and actuaries.

We can do this without opening the system to abuses or breaking the bank:

We can tell employers with 401(k) plans that if they make a meaningful contribution on behalf of each employee, or provide a smaller contribution plus a significant match, we'll give them a safe harbor from antidiscrimination testing that is so complex and expensive that the federal government exempted its own pension plan from the requirements.

We can make life even simpler for the smallest employers -- those with 100 or fewer employees. We can let them combine the advantages of both IRAs and 401(k) plans to provide a new, simple plan -- we call it the National Employee Savings Trust or NEST -- where no discrimination testing is required, there are simple limits on contributions, and employees manage their own accounts.

We can stop treating family employees like mere appendages of a business owner, letting wives and husbands, and sons and daughters who work hard in family businesses earn pension benefits of their own.

We can turn the seven-part definition of "highly compensated employee" into a two-part definition that's so easy an employer could figure it out without a lawyer or accountant.

We can get rid of a limit on contributions and benefits for employees who have two types of plans with the same employer, leaving in place a simpler rule enacted in 1986 to replace it. The limit is so complicated that virtually no one computes it correctly.

We can reduce the application to defined contribution plans of rules meant primarily for defined benefit plans. And we can reduce the application to multiemployer plans of rules meant primarily for single employer plans.

We can give employees of tax-exempt organizations the opportunity to participate in the 401(k) defined contribution plans available to other employers.

We can make sure that all participants in pension plans will get the benefits they have earned when their retire, even if their employer terminates the plan -- or even goes out of business -- and the employee has years to retirement.

We can repeal a provision of ERISA that requires employers to send us copies of plan documents we simply warehouse -- only to have us ask them for another copy when an employee asks us for one!

These changes, and most of the other proposals in this report will require legislation. However, over the years there has been strong bipartisan support in Congress for pension simplification, and we are hopeful that our sensible, cost-effective proposal will be adopted.

But there is simplification that we can do administratively too:

We can significantly simplify both the content and the means of filing the annual report that pension and health and welfare plans file with the government to enable us to check compliance with the law.

We can make it much easier for plans to get permission to enter into transactions that are in the best interest of the plan but that technically are prohibited transactions.

We can make certain that employers don't have to send employees duplicative notices or notices of plan changes that don't affect them.

Increasing the retirement income security of American workers is important, and increasing retirement plan coverage and benefits is a logical and effective way for the public and private sectors to work together with individual workers to achieve this goal. The package we are presenting today is a cost-effective beginning. We intend to continue to work with all concerned parties and with the Congress to ensure greater simplification of our pension system and greater retirement income security for all American workers.

Highlights of the High Priority Actions

Although this report proposes 29 High Priority Actions for pension simplification, six of these actions are of particular importance in achieving the goals of simplification.

Offer the "National Employee Savings Trust" - NEST - A simplified pension plan for small businesses

Small businesses are least able to deal with the complexity of current law, and their employees are the least likely to be covered by a retirement plan today. Therefore, we propose a new, simple retirement plan for employers with 100 or fewer employees. As many as 15 million workers who have no employer retirement plan could become eligible for the new plan, which would be known as the National Employee Savings Trust, or "NEST."

The NEST would operate through individual IRA accounts for employees, and would incorporate the most attractive features of the 401(k) plan, the fastest growing employer retirement plan in America today. By eliminating or greatly simplifying many of the rules that apply to other qualified retirement plans, including 401(k)s, the NEST would remove the key obstacles that currently deter many small employers from setting up retirement plans.

        For example, for purposes of the NEST, this proposal would eliminate:

        The proposal would simplify:

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