VII. INDIVIDUAL RETIREMENT ACCOUNTS (IRAs) IRAS fulfill a valuable purpose in providing a mechanism for retirement savings for employees who are unable to participate in qualified plans. However, IRAS must be carefully monitored to insure that they do not have a serious adverse impact on the continued growth of qualified plans. While qualified plans cover employees at all earnings levels, IRAs cover only a single individual, often at a high level of earnings. If the benefits of IRAS are increased, sponsors may be encouraged to terminate plans and to adopt discriminatory, employer-sponsored IRAs. In another vein, we are very concerned that IRA legislation and regulations have reached a point of complexity which places IRAS beyond the understanding of many of the persons it was designed to help. Individuals who have established IRAs often fail to realize that participation in a qualified plan for even one day of a tax year will cause them to be disqualified from IRA participation. They are similarly unaware of the severe penalties which occur if an improper contribution is made. A recent decision of the United States Tax Court highlights the unfairness of these complexities and penalties. (See Orzechowski v. Commissioner, 69 T.C. No. 62 (1978). Recommendations: 1. We recommend that IRAS be restricted as in Section 306 of S. 3017. As an alternative, "proprietors" should not be permitted to establish IRAs unless the "proprietor", as an employer, also maintains an employer-sponsored qualified plan. 2. We recommend that the technical complexities of ERISA highlighted in the Orzechowski case be eliminated. VIII. LIMITED EMPLOYEE RETIREMENT ACCOUNTS (LERAS) Although related to IRAS, LERAS offer an excellent means for encouraging greater plan participation. LERAS permit plan participants to make deductible contributions to their employer's qualified retirement plan, and strengthen the "partnership" between employer and employee. Such contributions are fully-vested and can substantially improve the ultimate retirement benefit. We do not believe that compensation limitations on deductible contributions are appropriate. When the inflation levels anticipated for the future are considered with the progressive income tax rate structure, it is readily apparent that such limitations soon become unrealistic, even if reasonable when adopted. We recognize that budget constraints necessarily place limitations on the amounts of deductible contributions. However, we contend that individual savings for retirement should be encouraged regardless of income level. On the other hand, a legislative mandate that all qualified plans provide for voluntary contributions should be carefully considered. A mandate could bring increased administrative expenses for larger plans, due to the necessity to establish additional individual accounts. Recommendations: We support provisions of S. 3017 permitting deductions for voluntary contributions to employee benefit plans. We do not support the income limitations. We question whether all plans should be required to permit voluntary contributions. We suggest that consideration be given to combining the LERA and IRA provisions as follows: LERAS would be available to plans and participants on a voluntary basis; IRAs would be available to participants whose plans do not provide for LERAS as well as to non-participants; "proprietors" would be precluded from establishing IRAs unless they also maintained an employer-sponsored qualified plan. The limitations on deductible amounts for IRAs and LERAS should be identical (i.e., $1500). IX. NON-QUALIFIED DEFERRED COMPENSATION ARRANGEMENTS. Non-qualified deferred compensation arrangements fulfill a number of valid objectives both from a business standpoint and a retirement standpoint. Although the Administration has withdrawn proposed regulations which would essentially eliminate such arrangements, it has proposed legislation which would severely restrict their use, particularly by small businesses and by the self-employed. The Administration proposals would significantly alter longstanding concepts of cash-basis accounting, and appear to take no accounting of the role non-qualified deferred compensation arrangements make in the broader spectrum of public and private employee benefit plans. Recommendation: We recommend that no legislative changes be made in laws dealing with non-qualified deferred compensation arrangements, pending completion of the studies now being conducted in the Congress with respect to public plans, and pending completion of the study of the Presidential Retirement Commission. continued. In the interim, existing law should be X. FIDUCIARY RESPONSIBILITY AND PROHIBITED TRANSACTIONS. should be maintained intact. (ERISA Section 404). We are concerned that the scope of the prohibited transaction provisions of ERISA is overly broad, and that employers and administrators are too often put to unnecessary and expensive burdens to seek administrative approval of transactions which are not only not harmful, but often in the best interest of a plan and its participants and beneficiaries. Furthermore, we strongly question whether it is appropriate to police prohibited transactions by excise taxes. Recommendation: We urge a return to the "adequate consideration" standard endorsed in H. R. 2, the original House version of ERISA. If enforcement is a serious problem, we would support simple agency notification procedures of transactions involving parties-in-interest. Enforcement should be by random audit with civil and/or criminal penalties assessed against prohibited transactions. (See also H.R. 7597). XI. INTEGRATION OF PRIVATE PLANS WITH SOCIAL SECURITY. Many employers cannot now afford both Social Security and a generous pension plan. Every dollar that must go toward Social Security is one less dollar that can go toward a private benefit plan. A vicious cycle has been created as supporters of Social Security point to the inadequate benefits under employer plans and ask for expanded government benefits. The increasing pressure to improve the Social Security system results in a further weakening of the private sector. Social Security discriminates against the higher paid employees, and as FICA taxes increase, the discrimination is compounded. In our view, integration is necessary and appropriate to provide all employees with total retirement benefits (from the private plan and Social Security) that are approximately equal as a percentage of pay. The Internal Revenue Service and the Congress have long recognized the validity and fairness of this objective. To abolish integration, or to impose integration requirements that negate the benefits of integration, (see H.R. 12078), in our judgement, would be unfair and would discourage the formation of new plans. well result in further plan terminations. plan terminations is often used loosely. Such action could The "threat" of However, there is clearly a breaking point at which increased governmentimposed complexities and restrictions will destroy employer incentive and initiative. We are gravely concerned that too many proposals in the employee benefit area have been offered |