[Congressional Record Volume 144, Number 35 (Wednesday, March 25, 1998)]
[Senate]
[Pages S2570-S2571]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself, Mr. Breaux, Mr. Jeffords, Mr. 
        Graham, Mr. Baucus, and Mr. Hatch):
  S. 1856. A bill to amend the Internal Revenue Code of 1986 to provide 
equitable treatment for contributions by employees to defined 
contribution pension plans; to the Committee on Finance.


                  the enhanced savings opportunity act

  Mr. GRASSLEY. Mr. President, I rise today to introduce legislation 
that lifts the unfair limits on how much people can save in their 
employer's pension plan. Last year, Congress took an important first 
step in helping people prepare for retirement through educating the 
public about private savings and pensions. But education can only go so 
far. We also must remove the barriers that prevent working Americans 
from achieving a secure retirement.

  Removing the barriers means taking a fresh look at some of the 
provisions in the Internal Revenue Code which discourage workers and 
employers from putting money into pension plans. One of the most 
burdensome provisions in the Internal Revenue Code is the 25 percent 
limitation contained within section 415(c). Under 415(c), total 
contributions by employer and employee into a defined contribution (DC) 
plan are limited to 25 percent of compensation or $30,000 for each 
participant, whichever is less. That limitation applies to all 
employees. If the total additions into a DC plan exceed the lesser of 
25 percent or $30,000, the excess money will be subject to income taxes 
and a penalty in some cases.
  To illustrate the need for elimination of the 25 percent limit let me 
use an example. Bill works for a medium size company in my home state 
of Iowa. His employer sponsors a 401(k) plan and a profit sharing plan 
to help employees save for retirement. Bill makes $25,000 a year and 
elects to put in 10 percent of his compensation into the 401(k) plan, 
which amounts to $2,500 per year. His employer will match the first 5 
percent of his compensation, which comes out to be $1,250, into the 
401(k) plan. Therefore, the total 401(k) contribution into Bill's 
account in this year is $3,750. In this same year Bill's employer 
determines to set aside a sufficient amount of his profits to the 
profit sharing plan which results in an allocation to Bill's account in 
the profit sharing plan the sum of $3,205. This brings the total 
contribution into Bill's retirement plan this year up to $6,955.
  Unfortunately, because of the 25 percent of compensation limitation 
only $6,250 can be put into Bill's account for the year. The amount 
intended for Bill's account exceeds that limitation by $705. Hence, the 
profit sharing plan administrator must reduce the amount intended for 
allocation to Bill's account by $705 in order to avoid a penalty. Bill 
is unlikely to be able to save $705, a significant amount that would 
otherwise be yielding a tax deferred income which would increase the 
benefit Bill will receive at retirement. Bill's retirement saving is 
shortchanged by $705 plus the tax-deferred earnings it would have 
generated.
  Now let us look at Irene. Irene works for the same company, but she 
makes $45,000 a year. She also puts in 10 percent of her compensation 
into the 401(k) plan, and her employer matches five percent of her 
salary into the account. That brings the combined contribution of Irene 
and her employer up to $6,750. She would also receive a contribution of 
$3,205 from the profit sharing plan. This brings the total contribution 
into Irene's pension plan for that year to $9,955. She is also subject 
to the 25 percent limit, but for Irene, her limit would not be reached 
until $11,200. She is able to put in her 10 percent, receive the five 
percent match and receive the full amount from the profit share because 
her amount doesn't exceed the limit.
  Despite the fact that Bill and Irene have the same discipline to add 
to their pension plans and save for their retirements, Bill is 
penalized by the 25 percent limitation. By lifting the 25 percent 
limit, we can provide a higher threshold of savings for those who need 
it most.
  Permitting additional contributions to DC plans will help women 
``catch up'' on their retirement savings goals. Women are more likely 
to live out the last years of their retirement in poverty for a number 
of reasons. Women have longer lifespans, they are more likely to leave 
the workforce to raise children or care for elderly parents, are more 
likely to have to use assets to pay for long-term care for an ill 
spouse, and traditionally make less money than their male counterparts. 
Anyone who has delayed saving for retirement will get a much needed 
boost to their retirement savings strategy if the 25 percent limit is 
eliminated for employees.
  Not only does this proposal help individual employees save for 
retirement but it also helps the many businesses, both small and large 
which are affected by 415(c). First, the 25 percent limitation causes 
equity concerns within businesses. Low and mid-salary workers do not 
feel as if the Code treats them equitably, when their higher-paid 
supervisor is permitted to save more in dollar terms in a tax-qualified 
pension plan.
  Second, one of the primary reasons businesses offer pension plans is 
to reduce turnover and retain employees. Employers often supplement 
their 401(k) plans with generous matches or a profit-sharing plan to 
keep people on the job. The 415(c) limitation inhibits their ability to 
do that, particularly for the lower-paid workers who are unfairly 
affected.
  Third, this legislation will ease the administrative burdens 
connected with the 25 percent limitation. Dollar limits are easier to 
track than percentage limits.
  Finally, I want to placate any concerns that repealing the 25 percent 
limit will serve as a windfall for high-paid employees. The Code 
contains other limitations which provide protection against abuse. 
First, the Code limits the amount an employee can defer to a 401(k) 
plan. Under section 402(g) of the Code, workers can only defer up to 
$10,000 of compensation into a 401(k) plan in 1998. In addition, plans 
still must meet strict non-discrimination rules that ensure that 
benefits provided to highly-compensated employees are not overly 
generous.
  The value to society of this proposal, if enacted, is undeniable. 
Increased savings in qualified retirement plans can prevent leakage, 
meaning the money is less likely to be spent, or cashed out as might 
happen in a savings account or even an IRA.
  There will be those out there who recognize that this bill does not 
address the impact of the 415 limit for all of the plans that are 
subject to it. I have included language that would provide relief to 
401(k) plans and 403(b)

[[Page S2571]]

plans, for example. Plans authorized by section 457 of the Code--used 
by state and local governments and non-profit organizations have not 
been specifically addressed. I want to assure organizations who sponsor 
457 plans that I support ultimate conformity for all plans affected by 
the 415(c) percentage limitation. Over the next couple of weeks, I hope 
to work with these organizations to identify the changes that are 
necessary to achieve equity and simplicity for their employees. In the 
mean time, this is a positive step toward enhancing the retirement 
savings opportunities of working Americans.
  We have begun to educate all Americans about the importance of saving 
for retirement, but if we educate and then do not give them the tools 
to allow people to practically apply that knowledge, we have failed in 
our ultimate goal to increase national savings. Let's help Americans 
succeed in saving for retirement. In helping them achieve their 
retirement goals, they help us to achieve our goal as policymakers of 
improving the quality of life for Americans.
  I would like to thank the Profit Sharing Council of America and the 
many members of the Retirement Savings Network for their considerable 
help in championing this proposal. I ask unanimous consent that their 
letter of support be included in the Record. I also want to thank an 
Iowa company, IPSCO, in Camanche, Iowa, and its many employees for 
bringing this issue to the forefront. I ask unanimous consent to 
include a letter from IPSCO in the Record, and note that their letter 
was accompanied by a petition signed by nearly 200 employees. Finally, 
I want to extend my appreciation to Senators Breaux, Jeffords, Graham, 
and Baucus for co-sponsoring this important bill. I encourage all of my 
colleagues to give careful consideration to lending your support to 
this legislation.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:
                                                   March 25, 1998.
     Hon. Charles E. Grassley,
     U.S. Senate,
     Washington, DC.
       We, the undersigned organizations, commend you for 
     introducing the Enhanced Savings Opportunity Act that repeals 
     the Section 415(c) 25% limitation currently imposed on 
     employees participating in defined contribution plans and 
     pledge our support of your efforts to obtain passage.
       This legislation promotes a conducive environment for 
     expanding the savings opportunities in employer-provided 
     retirement programs by removing one of the impediments that 
     prevents employees, especially lower-paid employees, from 
     taking full advantage of profit sharing, 401(k), 403(b), and 
     other defined contribution programs. It will also decrease 
     the burdensome testing currently imposed on plan 
     administrators and better enable companies to take advantage 
     of the new SIMPLE 401(k) program for small employers.
       For example, the Enhanced Savings Opportunity Act will 
     permit employees who leave and reenter the workforce, many of 
     whom are women, to make larger contributions when they are 
     working, in effect allowing them to ``catch up'' their 
     contributions. It will also promote equal treatment by 
     allowing all employees to defer up to $10,000 of their income 
     into a 401(k) plan. Finally, the existing section 415(c) 25% 
     limitation frequently requires that a company limit its 
     contributions to lower-paid employees who take full advantage 
     of the savings feature of a 401(k) plan. By modifying Section 
     415(c) you will permit more generous company matching and 
     profit-sharing contributions to its employees. Similarly, 
     your legislation will allow participants in 403(b) plans to 
     increase savings in those plans. We appreciate your efforts 
     to preserve equity by extending relief to 401(k), 403(b), and 
     other types of defined contribution plans.
       Again, thank you for introducing the Enhanced Savings 
     Opportunities Act. Please feel free to call on us as you move 
     forward to seek its enactment.
         American Bankers Association, American Council of Life 
           Insurance, American Society of Pension Actuaries, 
           APPWP--The Benefits Association, Association for 
           Advanced Life Underwriting, Employers Council on 
           Flexible Compensation, The ERISA Industry Committee, 
           Financial Executives Institute, Investment Company 
           Institute, National Association of Manufacturers, 
           National Employee Benefits Institute, National Rural 
           Electric Cooperative Association, National Telephone 
           Cooperative Association, Profit Sharing/401(k) Council 
           of America, Securities Industry Association, Small 
           Business Council of America, Society for Human Resource 
           Management, Stable Value Investment Association, and 
           United States Chamber of Commerce.
                                                                    ____

                                                   March 20, 1998.
     Hon. Charles Grassley,
     Washington, DC.
       Dear Senator Grassley: Currently Code 415(c) of the IRS 
     rules does not permit an employee to receive contributions 
     that total more than 25% of his or her income or more than 
     $30,000. The intent was meant to limit the contributions of 
     highly paid executives. Defined contribution plans have 
     become a very popular method to save for retirement, but the 
     rules have not kept pace with the times. Now, non-executives 
     are slighted by the rules that were designed to help them by 
     limiting the amount that can be put away for retirement.
       Since 1994 the 415(c) code has prevented IPSCO from 
     contributing the fully allocated, pretax funds, to each 
     employee's retirement fund. Each year several thousand 
     dollars of pretax money, earmarked for retirement, has been 
     disbursed as taxable income to many employees. The employee's 
     retirement plan is short changed, because the plan cannot 
     receive all of the funds that it should and the employee ends 
     up with taxable earnings that were intended for retirement. 
     Non-executive employees should not have artificial limits set 
     on their retirement savings.
       If your efforts are successful and a bill is passed to lift 
     the percentage limits on contributions to retirement 
     contributions this problem will be redressed.
           Yours truly,
                                                  IPSCO Employees.
                                 ______