Retirement Relief

Congress is making it easier for entrepreneurs to offer pensions.

Magazine Contributor

November 1, 2000 4 min read

This story appears in the November 2000 issue of Entrepreneurs Start-Ups magazine. Subscribe »

It looks like Congress will lift the heaviest sections of the "top heavy" rules that stop many small businesses from offering pension plans. But that's only one of the reforms in a bill (H.R. 1102) that was working its way through Capitol Hill at the end of the 2000 session. The bill passed the House on July 19 by a vote of 401-25, making passage by the Senate a near certainty. Ditto for President Clinton's signature.

"Reform is critical if we are to encourage businesses to offer a pension benefit now, while many workers still have time to build for their retirement," says Bruce Josten, executive vice president of the U.S. Chamber of Commerce. "Without reform, more workers will be forced to rely on Social Security, which is already facing financial difficulty."

The bill contains both large- and small-business-friendly provisions that Reps. Rob Portman (R-OH) and Benjamin Cardin (D-MD) have been pushing since the 1995 White House Conference on Small Business made pension reform the No. 7 priority issue out of a total of 60. Portman explains that less than 20 percent of small businesses with 25 or fewer employees offer any kind of pension coverage today.

James Delaplane of the Association of Private Pension & Welfare Plans says entrepreneurs have been hesitant to establish company pension plans because of limits on contributions. The Portman-Cardin bill increases the maximum contribution by an individual (employee or employer) to a 401(k)-type plan from $10,500 to $15,000 by 2005. The maximum total contribution from company and individual would go from $30,000 to $40,000.

The bill also includes regulatory relief provisions. The key ones have to do with the "top heavy" rules, which require small businesses to make at least a 3 percent contribution to pension plans for lower-paid employees and vest those employees faster than would be the case with a non-top-heavy 401(k). Those regulations were put in place so companies couldn't discriminate in favor of their highest-paid workers. Delaplane says 401(k) "safe harbor" plans, which today are subject to the top-heavy rules, would be totally exempt under Portman. Other changes would make it easier for companies to calculate whether they're subject to those rules.

"H.R. 1102 preserves the safeguards for non-highly compensated employees so that they are fully protected, while stripping away the unnecessary and overlapping rules so that true simplification is achieved," says Paula Calimafde, a pension lawyer and member of the board of directors for the Small Business Legislative Council. (For information on complying with current pension plan regulations, see "Tax Talk".)

Community development breaks: In an effort to goose development of poor urban and rural communities, Congress will pass a bipartisan proposal called Community Renewal. The price of passage was building on the concept of the Empowerment Zones that President Clinton signed into law when he came to office. The first 40 Renewal Communities will be in poor areas and be notable for regulatory and tax relief given to companies who invest there. For example, individuals will pay no capital gains taxes on the sale of renewal businesses or business assets held for more than five years. The nine new Empowerment Zones allowed under the bill will offer some of the same incentives the zones now offer, plus upgraded benefits like a 15 percent wage credit for companies, which has been limited to only some of the zones. The House passed the bill (H.R. 4923) by a vote of 394-27 in late July, and the Senate was expected to follow suit at press time.

Merger fees may be reduced: The House Judiciary Committee passed a bill (H.R. 4194) that reduces the regulatory requirements on small companies that merge. In many instances, the Securities and Exchange Commission wouldn't have to be notified in the event of a merger, for example.

Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.

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