Magazine article Government Finance Review

Vital Public Pension Provisions Become Law

Magazine article Government Finance Review

Vital Public Pension Provisions Become Law

Article excerpt

GFOA and many other public organizations have been working for nearly a decade to pass many necessary provisions for public pension plans, participants, and beneficiaries. On August 20, 1996, these provisions were finally signed into law as part of the small business tax/minimum wage law (PL104-188).

Congress had passed many of these public pension amendments on three prior occasions but as part of larger, highly controversial budget packages that were vetoed for unrelated reasons. This marked the first instance that these provisions were included in a more narrow piece of legislation. Described below are the act's pension provisions of importance to public-sector plans.

Section 415 Changes

The new act modifies [section]415 provisions of the Internal Revenue Code (IRC) to mitigate conflicts between state and local government pension benefits and federal tax law and to simplify compliance for state and local government pension plans.

Section 415 limits the annual pension contribution or benefit level a public or private employer may fund. Pension plans must comply with these limits to receive or maintain their tax-qualified status. Public-sector plans, however, also must comply with local statutes and contract law, many of which define the benefit formula to be used by public pension plans. For long-service public employees, the locally established benefit formula may have violated [section]415 limits. Thus, some public pension plans are attempting to comply with conflicting laws. Provisions of PL104-188 enable them to pay the level of benefits promised without jeopardizing the tax-status of the trust.

Pension Contribution and Benefit Limits. Several of the PL104-188 changes concern the application of [section]415 limits to state and local governments to account for the special circumstances of their plans. A few changes apply to private- and public-sector plans alike, as all plans have encountered difficulty in applying the [section]415 limits.

* The 100 percent of compensation limitation on defined benefit pension plan benefits will not apply to governmental plans.

* State and local governments now are permitted to maintain excess-benefit plans to pay that part of participants' benefits which exceeds the limits imposed by [section]415.

* Preretirement survivor and disability benefits provided under governmental plans are exempted from the [section]415(b) early retirement reduction and reduction for service/participation of less than 10 years.

These provisions of the law are effective for limitation years beginning on or after January 1, 1995. The law states that these provisions do not infer previous noncompliance by governmental plans and provides direction to the Internal Revenue Service to enforce [section]415 rules consistent with these changes.

Definition of Compensation for Defined Contribution [section]415 Purposes. An employee's payment to a defined contribution pension plan is limited to the lesser of $30,000 (for 1996) or 25 percent of the participant's compensation. For all qualified pension plans, PL104-188 changes the definition of compensation, effective for limitation years beginning on or after January 1, 1998, to include elective employee contributions to certain employee benefit plans, including [section]401(k) plans and similar arrangements, [section]457 nonqualified deferred compensation plans, and [section]125 cafeteria plans.

Section 415(e) Combined Plan Limit. Currently, an overall limit on contributions and benefits applies to individuals who are participants in both a defined benefit pension plan and a defined contribution pension plan (private and public plans). The new law, however, repeals the combined plan limit for years beginning on or after January 1, 2000. Until the repeal is effective, the excise tax on excess distributions imposed on participants is suspended.

Correction of Interest and Mortality Rate Provisions. …

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