A Pain in the ERSA
President Bush's recent proposed pension legislation is receiving considerable attention within the industry, much of it adverse. Unsubstantiated rumours are circulating that pension professionals hurled dinner rolls at a Treasury representative during a recent benefits conference in Los Angeles. Whether there be any truth to this or not, it is safe to say that the prevailing mood is one of confusion. Let's consider what the cause might be for concern.
Bush's proposal would eliminate cross-testing, which allows employers to skew a large share of the contribution to the highly paid employees, and to some extent actually pick and choose the employees who will receive allocations under a defined contribution plan (within certain limits).
401(k), thrift plans, 457 plans, SEPs, SIMPLEs, and IRAs would be eliminated on an ongoing basis, and would be replaced with one simplified approach, called an Employer Retirement Savings Account, or ERSA.
If Bush's proposal passes, employers will be faced with essentially four alternative courses of action:
(1) adopt an ERSA
(2) adopt a traditional defined benefit plan,
(3) adopt a traditional money purchase or profit sharing plan with allocations across the board to all employees, or
(4) terminate their qualified plans altogether and (in some cases) increase base wages in return.
It is too early to predict what planning opportunities will be available under option (1) above. What starts out as simplified frequently ends up as more complex than what it was designed to replace. It is difficult to conceive of a plan so simple that no professional assistance will be required.
Traditional defined benefit plans (option (2)) will mean more work for actuaries, and ongoing administrative work for TPAs.
Option (3) will mean reduced consulting assignments for people specializing in the cutting edge design area, where tax avoidance and skewing of benefits to the highly paid is of primary importance. This type of design is typically found only in small plans, with less than, say, 50 participants.
Option (4) would mean a flurry of termination work followed by no work at all thereafter.
In summary, option (4) looks quite bleak and option (3) looks bleak for small plans. So, IF the proposal is passed unchanged, there might be indeed be a considerable shakeout within the pension industry.
Being veterans of a number of these episodes over the years, we at Demsey, Filliger & Associates recommend: "Don't panic now; maybe panic later."
How you or your organization is affected remains to be seen. If you have questions or concerns, please contact us using the phone numbers or email addresses contained within our web site www.demseyfilliger.com.
