Institute Testifies on Tax Code Simplification

Washington, DC, May 7, 2001 - The Institute has submitted a written statement to the Senate Finance Committee on its recent hearing on the Joint Committee on Taxation's study on the overall state of the federal tax system. The study includes various recommendations regarding simplifications to retirement and education savings tax incentives, including IRAs, 403(b) arrangements, 457 plans, and the HOPE and Lifetime Learning credits.

The Institute's testimony generally supports the Joint Tax Committee's efforts in recommending simplification of various retirement and education savings vehicles. Although the Joint Committee made various recommendations regarding retirement and education saving vehicles, the Institute focused its testimony on four basic areas:

I. IRA Eligibility Rules
The Institute's testimony strongly supports the Joint Committee's recommendation to repeal the IRA's complex eligibility rules, which primarily serve to deter lower and moderate income individuals from participating in the program. The Institute stated that a return to the "universal" IRA would result in increased savings by middle- and lower-income Americans. The Institute emphasized, however, that the nondeductible IRA should only be eliminated if the other recommended changes are made.

II. Individual Account Plan Rules
The Joint Committee's report recommends conforming the contribution limits of tax-sheltered annuities to the contribution limits of comparable qualified retirement plans. The Joint Committee notes that conforming the limits would reduce the recordkeeping and computational burdens related to tax-sheltered annuities and eliminate confusing differences between tax-sheltered annuities and qualified retirement plans. The Joint Committee also recommends allowing all state and local governments to maintain 401(k) plans. This, according to the Joint Committee's report, would eliminate distinctions between the types of plans that may be offered by different types of employers and simplify planning decisions.

The Institute supports these efforts to reduce the complexity associated with retirement plans-especially for workers trying to understand the differences between 401(k), 403(b), and 457 plans. The ability of workers to understand the differences among plan types becomes even more important as Congress considers enacting portability provisions, such as the "Comprehensive Retirement Security and Pension Reform Act of 2001" and the "Retirement Security and Savings Act of 2001." The Institute's testimony strongly supported portability and other efforts by Congress to simplify and conform rules that apply to different plan types in order to assist workers in understanding their retirement plans.

III. Required Minimum Distribution Rules
The Joint Committee suggests various significant changes to the RMD rules applicable to tax-qualified retirement plans and IRAs. Specifically, the Committee recommends that the RMD rules should be modified so that: (1) no distributions are required during the life of a participant; (2) if distributions commence during the participant's lifetime under an annuity form of distribution, the terms of the annuity will govern distributions after the participant's death; and (3) if distributions either do not commence during the participant's lifetime or commence during the participant's lifetime under a nonannuity form of distribution, the undistributed accrued benefit must be distributed to the participant's beneficiary or beneficiaries within five years of the participant's death. The Joint Committee states that the elimination of RMDs during the life of the participant and the establishment of a uniform rule for post-death distributions would significantly simplify compliance by plan participants and their beneficiaries, as well as plan sponsors and administrators.

The Institute indicated its support for the Joint Committee's efforts toward simplification of the RMD rules. However, the testimony notes that the specific recommendation must be further considered to ensure that there are no unintended consequences. For example, a rule that would require distribution of the entire account balance subject to the RMD rules within five years of the death of the participant could result in harmful consequences for the participant's beneficiary or beneficiaries. The Institute statement notes that the Internal Revenue Service recently released proposed regulations that significantly simplify the rules applicable to RMDs. Under the proposed regulations, in general, a beneficiary would be permitted to take RMDs over his or her lifetime. In cases where a participant names a spouse or child as beneficiary, the ability of that beneficiary to take RMDs over his or her life expectancy would generally be preferable to a requirement that the entire account be distributed within five years of the death of the participant.

IV. Education Savings Vehicles
The Institute's testimony supports the Joint Committee's recommendations with respect to simplifying education savings tax incentives. Specifically, the Committee recommends the following simplifications: