Wage Bill Also Broadened Pensions Rules Simplied For Firms That Offer 401(K) Plans

When President Clinton signed a bill to raise the minimum wage 90 cents an hour, most Americans focused on what it would mean to the nation’s lowest-paid, low-skilled workers. What received far less attention is that the bill contains what many experts consider the biggest pension reforms in at least a decade - benefiting the lower-class, middle-class and super-wealthy alike.

“There’s something for everybody,” said retirement expert Bruce J. Temkin. “This affects everyone.”

In general, the bill will help all workers by making it easier for companies to adopt or maintain 401(k) retirement plans. It erases mind-numbing rules, creates less-paperwork retirement plans, and corrects a decade-old oversight by extending 401(k)s to tax-exempt organizations and state and local governments.

The bill also addresses the back end of the retirement account: withdrawals. Notably, prudent middle- and upper-class savers soon might be able to shave their taxes by waiving excise taxes, postponing mandatory withdrawals until after age 70-1/2, and simplifying how you measure the bite on annuities.

Of course, there are some black linings to this silver cloud. The bill eliminates a common retirement plan for people in small businesses, kills a method for middle-class taxpayers to average out big withdrawals, and could cost the unwary more tax.

Here’s a look at some of the details, how they could affect you - and what you need to do to play them to your advantage.

What changes: If you do too good a job squirreling away money into your retirement plans, Uncle Sam lops off 15 percent if you withdraw more than $155,000 from government-approved retirement plans. That excise tax will be suspended for three years, a period determined by budgetary logic only a politician could understand.

The window could benefit people planning to withdraw a hefty chunk in one shot (say, to pay off a mortgage or buy a franchise they want to run in semi-retirement), whose plans hold at least $1 million, or whose balances could swell enough to eventually trigger excess distributions.

But don’t vault through the window hastily. “There’s a lot of emotion with excise taxes,” Temkin said. “This will cause a lot of chaos, because people will say, ‘Now’s your chance to buy that condo or that citrus grove in Hawaii.”’

While many people can save money, many experts predict this waiver actually will generate taxes by pulling savings from tax-protected accounts and subjecting them to income taxes on the withdrawals and the future earnings.

Crunch some numbers, factoring in income taxes and how much your money could grow if left untouched. Another factor that might push you through the window: retirement plans that are bulging when you die face a 15 percent excise tax anyway.

What changes: Many taxpayers have eased the tax bite on retirement withdrawals by electing to treat the money as if it were spread over five years, rather than all in one year. That option has been repealed. (People who hit age 50 by Jan. 1, 1986, can still qualify for 10-year averaging, however.)

This five-year averaging is dead after 1999.

This is arguably the biggest loss for the middle class in this legislation. Although upper-class investors already stuck in the top tax brackets will yawn, savers who would bound into a top tax bracket by tapping an account can save substantially.

Assess whether you truly need or want to pull out the money in big chunks. You might save by taking out money only as you need it and leaving the rest to grow tax-deferred. You also might consider annuitizing the account so you’ll receive steady annual payments to flatten out your withdrawals.

What changes: A Salary Reduction Simplified Employee Pension Plan, or SARSEP, is the first retirement plan many companies with 25 or fewer workers adopt. Under the new rules, you can’t establish a SARSEP after 1996. Existing plans can continue, however. (Simplified Employee Pensions, or SEP-IRAs, are not affected.)

Instead, companies will be able to choose from two new “SIMPLE” plans, short for Savings Incentive Match Plan. One is an IRA, the other a 401(k). Both are designed to be easy and inexpensive for companies with less than 100 workers to use.

You must open a SARSEP by Dec. 31.

As a business owner, you have four months to decide whether a SARSEP fits your company. As an employee, you could lobby your boss to consider a SARSEP, the upcoming SIMPLE plans or even a regular 401(k). Each has its pros and cons (employer and employee might differ on those judgments).

What changes: Families face tighter rules on how much money they can defer into government-approved retirement plans. Basically, family members are lumped together. Under the new rules each family member will be treated individually.

This is a boon to businesses that hire family members. For example, under the current rules, a husband and wife can use no more than a combined $150,000 of compensation when calculating how much they can shelter from tax. The new rules will allow them to use $150,000 each.