Masonry Magazine January 1973 Page.23
TAXES
By MIRIAM MCD. MILLER
PRIVATE PENSION SECURITY BILL OF 1973
The Private Pension Security Bill of 1973 is one of the most important pieces of legislation affecting the lives of working men to be placed before the Congress in many a year. While the bill is a lengthy one and somewhat complicated, most taxpayers will be interested in its contents.
The following comes from the Senate Finance Committee Report on S.1179, which has just been released.
Some of the basic purposes of the bill are to increase the number of individuals participating in retirement plans; make sure that those who do participate in such plans do not lose their benefits as a result of unduly restrictive forfeiture provisions or failure of the plan to accumulate and retain sufficient funds to meet its obligations; and finally to make the tax laws relating to such plans fairer by providing greater equality of treatment under such plans for the different taxpaying groups involved.
In 1970 there were about 30 million people who were covered by some sort of qualified private pension plan. This new legislation is intended to greatly increase the number of individuals participating in employer-financed plans. The new provisions are thought to be part of a necessary and evolutionary process which should be built upon the existing laws affecting private pension plans.
As with so many aspects of tax enforcement, these new pension plan provisions will continue to rely on voluntary action of employers (and employees under contributory plans) for the establishment of qualified retirement plans. No one is or will be compelled to establish a retirement plan. The Finance Committee regards the favorable tax treatment afforded to both employers and employees as quite substantial. The Committee believes that properly designed tax incentives are the most effective way of inducing the creation of plans to make improvements that are so desperately needed. It is hoped that these tax advantages alone will induce employers, who have not previously done so, to now set up private pension plans. If enacted, this legislation will remedy a serious social problem in this country providing for retirement income for individuals who have spent their lives in useful and socially productive work and who must look forward to inadequate income for their needs when they retire. It is anticipated that by allowing this new favorable tax treatment to private pension plans that the government will experience an annual net revenue loss estimated to be as much as $130 million.
INADEQUATE COVERAGE
While the number of private pension plans has continued to increase, statistics still indicate that one-half of all employees in private nonagricultural employment still have no pension coverage. One factor that has kept many employees without pension coverage, and one which this legislation is thought to correct, is the restrictions in many plans concerning when employees would become eligible to participate in the established pension plan.
In an effort to increase the number of employees who participate in a pension plan, the bill provides that a qualified plan cannot require an employee to serve longer than one year or attain an age greater than 30 (whichever occurs later) as a condition of eligibility to participate in a plan. This provision of the bill would apply to all plans adopted after the date of enactment of this bill.
For plans in existence when the bill is enacted, the effective date of the provision would be January 1, 1976. However, an exception is made for plans which have been established on the basis of collective bargaining agreements. These plans would not be subject to this new participation provision until the expiration of the collective bargaining agreement or January 1, 1981, whichever is sooner.
INADEQUATE VESTING
One of the major thrusts of the new legislation is to promote early permanent rights in a pension plan for employees. A permanent or vested right is defined by the Committee as a right to receive pension benefits if an employee leaves or loses his job before retirement age. And, even though many private plans (over two-thirds of the private retirement plans) do now provide vested rights to benefits before retirement, usually employees do not acquire vested rights until they serve a fairly long time with the employer and/or are fairly up in years. As the law stands now, many employees with substantial periods of service with an employer lose retirement benefits on separation from employment before retirement.
According to the provisions of the bill, a qualified plan must provide a participant with vested rights to at least 25% of his accrued benefits derived from his employer's contributions after 5 years of service. Then the minimum vesting percentage is required to be increased by 5 percentage points for each of the next 5 years and by 10 percentage points for each of the following 5 years after that. It follows, therefore, that 50% vesting is required after 10 years of participation and 100% after 15 years of participation. Provision is also made to allow an individual who becomes a participant in a qualified plan to count up to 5 years of pre-participation service for purposes of determining his vesting percentage.
As with the new participation provisions, the new vesting provisions will be effective January 1, 1976 for plans currently in effect, and with the effective dates the same for plans begun subsequent to enactment of the bill, or plans that resulted from collective bargaining agreements. Existing plans which provide for full 100% vesting no later than at the end of 10 years of covered service will be exempt from compliance with the new vesting standard until 1981.
The Committee pointed out that it had reached the conclusion that any adequate and feasible minimum vesting provision should be gradual, i.e., the employee should be given a vested right to a specified percentage of his accrued pension benefits after serving for a stated period of service.