Clinton Administration's Retirement Savings and Security Act Introduced in Congress

Washington, DC, June 4, 1996 - Representative Gephardt (D-MO) and Senator Daschle (D-SD) have introduced the Clinton Administration's proposed Retirement Savings and Security Act (H.R. 3520 and S. 1818-1821) in the House of Representatives and Senate respectively. (The Senate split the legislation into four separate bills. Relevant proposals are in S.1818 and S.1821; S. 1819 proposes to amend the Railroad Retirement Act of 1974 and S. 1820 proposes to amend the Thrift Savings Plan for Federal employees.)

This bill is comprised of proposals previously announced by the President in April and includes a small employer pension plan, pension simplification, IRA expansion, revision of the ERISA plan audit requirements, and proposals to encourage pension portability. The small employer plan and the pension simplification proposals are similar to those in H.R. 3448, a bill recently passed by the House.

1. Small Employer Pension Plan
The Administration's bill includes the previously announced National Employee Savings Trust (NEST), a new savings vehicle for employers with less than 100 employees. The NEST proposal differs in detail from the SIMPLE plan proposed in H.R. 3448. Most significantly, its design-based formulas require greater employer contributions. An employer establishing a NEST plan would be required to make either (a) a nonelective contribution of 3 percent of compensation for each eligible employee or (b) a 1 percent nonelective contribution plus a matching contribution of 100 percent of the first 3 percent of pay deferred by an employee and 50 percent of the next 2 percent of pay deferred. The SIMPLE, by contrast, permits the employer to establish a plan without a mandatory nonelective contribution and a less generous matching contribution formula. Unlike the SIMPLE, NEST plans would be subject to the Section 401(a)(17) annual compensation limitation. The NEST imposes a two-year holding period on contributions and allocable earnings during which no withdrawals would be permitted. Employers establishing NEST plans would be relieved from certain fiduciary duties and reporting requirements under ERISA.

2. Pension Simplification
The bill includes numerous pension simplification reform proposals that are identical to those in H.R. 3448. There are, however, some differences in detail. For instance, the Administration's proposed Section 401(k) plan design-based nondiscrimination safe harbor imposes an additional 1 percent nonelective contribution requirement in addition to the matching requirement of the safe harbor, and the Administration's proposed, simplified definition of "highly compensated employee" would include all employees earning over $80,000, not only those included in the top 20 percent in terms of compensation.

3. IRA Expansion
As the Administration has proposed previously, the bill would expand access to deductible IRAs by increasing the income limitations, adjusting the IRA annual contribution limit for inflation, and creating a new nondeductible tax-free IRA in which contributions and earnings could be withdrawn tax-free after the satisfaction of a 5-year holding period. The Administration's bill also would permit penalty-free IRA withdrawals prior to age 59 1/2 for certain special purposes including first-time home purchase, higher education expenses, financially devastating medical and long-term care expenses, and cases of prolonged unemployment.

4. Pension Plan Audit Legislation
The bill includes a revised version of plan audit legislation that had been introduced previously by Senators Jeffords (R-VT) and Simon (D-IL) in late 1995. The proposal would repeal the ERISA Section 103(a)(3)(C) "limited scope audit" provision and impose additional reporting obligation on plan auditors who detect certain irregularities, such as embezzlement, extortion or kickbacks.

5. Pension Portability
The bill would provide an alternative method of nondiscrimination testing for 401(k) plans (the ACP and ADP tests) for plans that allow employees to participate before they complete one year of service. This proposed testing change is intended to encourage employers to permit immediate Section 401(k) plan participation for new employees by eliminating testing concerns.