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Stephen H. Rosen, guest columnist and President American Society of Pension Professionals & Actuaries (ASPPA) 08-30-05 "E Pluribus Unum." That's our motto. America is diverse, yet unified. And what unifies us is our staunch belief in independence, self-reliance. By that, I mean the power to sustain oneself, rather than rely on the charity of others. And, the best way to achieve self-reliance is work. As I see it, undermining the motivation to work, especially in retirement when one is not obligated to do so, makes no sense. Read our guest columnist's opinion on new IRS regulations which might undermine what makes America the land of the free, independent, and self-reliant. Dr. David Demko, gerontologist and editor.  The Internal Revenue Service (IRS) recently released proposed regulations under Section 415 of the Internal Revenue Code. This is the Section which sets forth maximum allowable benefits.
Of special concern is the proposed benefit limitations under “Defined Benefit” Plans. These plans promise a fixed benefit at retirement, payable for life. However, in small plans, this benefit is almost always taken in the form of a lump sum, which is then rolled into an IRA. Issues pertaining to the proposed regulations are presented in the following question-answer format which summarizes the possible impact of the proposed changes upon current and future retirees. Have the revised regulations made significant changes? Yes. Unfortunately, the regulations change some key rules, some of which have been in place for over 30 years. These proposed changes may well limit the amount of retirement benefits available to older workers. American Society of Pension Professionals & Actuaries (ASPPA) is concerned about this, and is arguing against these changes. These changes involve: (a) limiting which years of compensation can be recognized for plan purposes, and (b) capping the amount of compensation for certain purposes. What kinds of problems are caused by limiting which years of compensation can be recognized? For over 30 years, the IRS has allowed a plan sponsor to recognize all years of compensation for purposes of determining their maximum allowable benefit. Even compensation earned before the plan was established could be used. However, the proposed regulations provide that only compensation earned after the plan was adopted can now be recognized. Many small businesses have a set amount of funds at year-end. This fixed amount must cover both: (a) the compensation paid to the owner, plus (b) the contribution available for the plan. In years before the plan is established, all of this money would have been paid out as “compensation”. Thus, compensation prior to the establishment of the plan is often higher than compensation after the establishment of the plan, because in the earlier years, there was no plan contribution which had to be paid from the year-end funds. In general, the larger the compensation which is recognized by the plan, the larger the (tax-deductible) contribution can be. By recognizing “pre-plan” compensation, which is presumably larger, a business owner can create a higher benefit and a higher tax deduction. The proposed regulations would remove this ability to recognize pre-plan compensation, and would, thus, substantially diminish available contributions. Will the cap on compensation be harmful? In certain cases, it will be. This becomes especially harmful for a participant who defers the commencement of his retirement income beyond age 65. Under current law, the maximum allowable benefit is “indexed”, so that it has the same “Present Value”, regardless of the age at which it commences. Under the proposed regulations, because of technical changes that the IRS has proposed (i.e., capping compensation for purposes of determining the maximum allowable benefit), this indexing would cease after age 67. Accordingly, as one aged beyond that, the maximum benefit (which is partly based upon the now-capped compensation) would itself become capped. Since the available lump sum is the Present Value of that capped benefit, the available lump sum will start to diminish. At advanced ages, it would be quite possible that the owner may not be able to actually take all of their pension funds out without incurring a huge excise tax, payable to the IRS. Is this change supported by law? No. The IRS’ own training manuals, as well as the underlying Tax Code, both state that this proposed cap is inappropriate. Can anything be done about this? Although the official IRS comment period has closed, it is not too late to write to the IRS to state your disagreement with these two changes. This is especially true given the severe cutbacks, the unfairness, and the conflicts with prior procedures and the underlying tax law. Stephen H. Rosen, MSPA, is a Certified Pension Consultant who specializes in the design and implementation of qualified retirement plans. A graduate of Rutgers University, he is a Member of the American Academy of Actuaries and currently serves as the President of American Society of Pension Professionals & Actuaries (ASPPA). ASPPA is a national professional society of benefits professionals advocating for the employer-based retirement system. AgeVenture welcomes opinions and responses from responsible sources on issues in Aging America. Submissions may be edited to fit available space (500w or less). See related articles in AgeVenture archives. AgeVenture Lifestyle Features AgeVenture Headline News |