Update on Pension Reform Legislation

June 2006

House and Senate negotiators on the pension bills missed their self-imposed Memorial Day deadline without reaching final agreement on a pension bill. The optimistic goal is to work out remaining issues in the first two weeks of June, pass the conference agreement and send it to the President before the next Congressional recess for July 4^th. At the least, they hope to reach agreement on the tough defined benefit issues so that staff can draft language over the July 4^th recess. However, it is possible that due to continuing delays, a final bill will not emerge until a “lame duck” session after the November elections.

Overview

The defined benefit funding issues, especially special rules for airlines, are the main drivers of the bill and also have been the major sticking points. Negotiators directed their staffs to draft language over the week-long Memorial Day recess and had hoped to resolve the remaining issues when they return the following week.

House and Senate leaders added a number of “must-do” expired tax provisions — the most well-know is the Research & Development tax credit — to the pension bill. While the expiring provisions add a new sense of urgency to the bill, the cost of extending the provisions adds to the overall price tag for the bill. As negotiators try to wrap up the bill, they will be reviewing each provision on the basis of merit and revenue cost and as with every negotiation there will be winners and losers. As our number one priority, ICMA-RC is working with key groups and coalitions urging Congress to make the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent.

Specifics

The principle negotiators, Senators Grassley, Baucus, Enzi, Kennedy, and Representatives Thomas, and McKeon were engaged in face-to-face negotiations just prior to the Memorial Day recess and began to make progress. They have not officially addressed the defined contribution portions of the bill, which are not as controversial as the defined benefit funding provisions but cost money to accomplish. The outlook on key governmental defined contribution issues is as follows:

• Permanency for the retirement provisions in EGTRRA: has bi-partisan support but is costly. Success will largely depend on the total cost of the bill.
• Permits states and local government to maintain a 401(k) plan
• Expands portability for IRAs, including direct rollovers to a Roth IRA from 457 plans: It is likely that the final bill will include expanded portability for IRAs because there is general agreement that the rules need to be simplified so that individuals can more easily roll over assets to IRAs.
• Allows public safety officers to make tax-free distributions for retiree health care (up to $5,000 annually) from their governmental retirement plan, such as 457 plans. Pressures on the cost of the bill could cause this provision to be pared back by cutting the distribution amount allowed on an annual basis.
• Waives the 10 percent penalty for early withdrawal at age 50 (a change from 55) for distributions from defined benefit plans for public safety workers. Since both bills have similar provisions it is very likely to be in the final pension package. Like the other public safety provision, it could be modified to reduce the cost.