Significant changes to the pension and health plan rules which may actually simplify the running of benefit programs for certain employers and employees recently became federal law.
Effective For 1997 Plan Years
- Excise Tax Moratorium
A three year suspension of the lifetime excess distribution excise tax for installments distributions over $155,000 per year (indexed) or lump sums exceeding $755,000 a year (indexed) is established. Such distributions, however, would be subject to the usual income tax. Persons with total qualified retirement assets of over $1,000,000 should, considering their age, retirement and estate plans, evaluate with their tax advisor whether they should take a larger distribution during the three years to attempt to control excise tax problems in the future.
- Leased Employees
Under certain conditions, independent contractors (such as owner/operator truck drivers or temporary services personnel) could have been considered leased employees who would have to be considered for purposes of the employer's benefits regardless of whether the contractor met all the usual independent contractor tests for payroll tax purposes. Such a worker would now have to be subject to the direct supervision or control of the employer receiving their services for the worker to be considered a leased employee. This means that companies with a significant number of independent contractors who perform services on a full-time basis may have more flexibility in their benefit plans.
- Family Aggregation
Married couples who are employed by the same employer are no longer considered as one employee for most of the retirement plan limits.
- 401(k) Testing
The definition of who is considered a highly compensated employee is simplified and a 401(k) plan can, based on the average salary deferrals and matching contributions provided to non-highly compensated employees as a group, know at the beginning of a plan year what the highly compensated employees will be able to defer and keep in the 401(k) plan.
- Multiple Plan Rules
The minimum participation rule that each retirement plan cover the lesser of 40% or 50 of considered employees now only applies to defined benefit plans. This may provide more flexibility for controlled groups of employers who sponsor different defined contribution plans.
- SIMPLE Plan
Employers with 100 or fewer employees can offer a SIMPLE plan (which is similar to a salary reduction SEP) and have very limited testing requirements so long as a significant employer contribution is made to the plan. New Salary Reduction SEPs (SARSEPS) are no longer permitted.
- Medical Savings Account
Employers with less than 50 employees who offer a high deductible health plan or no health plan at all are eligible to be one of 750,000 test medical savings accounts (MSA). The MSA (a trial project which is set to expire in the year 2000) works like an IRA except that distributions for qualifying medical expenses for the employee and their dependents can be withdrawn tax-free.
- Self Employed Health Expenses
Expenses for a self-employed person's health premiums and long-term care insurance premiums are, in certain cases, deductible.
- Health Plan Portability
Changes in pre-existing condition limitations (for plan years beginning after June 30, 1997) will increase health insurance portability. While many Minnesota insured health plans already meet many of the preexisting condition limitation provisions of this federal law, all employers are supposed to give notice of rule changes to their employees by no later than November 1, 1996.
- Minimum Distributions
The minimum distribution rules are changed to permit non-owner employees who continue to work past 70² to delay drawing their retirement benefits until they actually retire.
Effective For 1998 Plan Years
- S Corporation ESOPs
S corporations can sponsor Employee Stock Ownership Plans (ESOPs); however, many of the special tax benefits available to leveraged ESOPs are not available.
- Annual Plan Limits Expanded
The Section 415 limit on annual allocations to an employee's retirement plan account will be expanded by any pretax salary deferrals an employee may make to a Section 125, 401(k) or 403(b) Plan.
Effective For 1999 Plan Years
- 401(k) Testing Avoided
The testing of salary deferrals and matching contributions as a group of the non-highly compensated participants (which often will limit the amount of income a highly compensated employee can shelter under 401(k) plan) will be eliminated if the employer makes certain matching or profit sharing contributions. This will make it much easier for employers to offer a 401(k) plan program that the highly compensated employees can effectively use.
Effective For 2000 Plan Years
- Combined Plan Limit
An employee who is a participant in both a defined benefit and defined contribution (such as 401(k) or profit sharing) plan does not have his benefits under each plan subject to a combined Section 415 limit.
The laws also require that the government provide employers with standard language to explain many of these changes and other complex rules which affect these benefits. For retirement plans, plan amendments to comply with these changes will not be required before the end of the 1997 plan year.