Tax Cuts and Savings Plans

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Tax Cuts and Savings Plans

By Albert B. Crenshaw, the Washington Post

February 3, 2004

The Bush administration yesterday rolled out an array of tax cuts, savings incentives, loophole closers and collection initiatives that officials said would encourage investment, promote trade, combat abuse and simplify the tax laws.

The proposal, outlined by Treasury Department officials, would also make it easier for companies that operate traditional pension plans to convert them to "cash balance" plans -- a process that has stirred heated controversy in recent years.

If enacted in its entirety, the administration's tax plan would cost the government $1.24 trillion over 10 years -- almost $1 trillion of that from extending the tax cuts passed by Congress last year, and making permanent both those cuts and others enacted in 2001 and scheduled to expire after 2010.

Many of the items on the list presented yesterday by the Treasury Department have been proposed before, including lifetime and retirement savings accounts (LSAs and RSAs), in which Americans could deposit $5,000 each year. Anyone, including children, could have an LSA, and anyone with wages could have an RSA. Contributions would not be tax-deductible, but earnings inside the account would not be taxed, and withdrawals would generally be tax-free.

Assistant Treasury Secretary Pamela F. Olson said the contribution amounts were reduced in this year's proposal, from $7,500 last year, to meet criticism that they would undermine existing retirement plans, especially in small businesses.

The proposal would also simplify the present system of 401(k) and similar employer-sponsored retirement plans by consolidating them all into a single, uniform type of plan called an employer retirement savings account, or ERSA. And it would create individual development accounts (IDAs) for low-income individuals that would give sponsoring financial institutions a 100 percent tax credit for matching savings contributions of up to $500.
The proposals came under immediate attack from Democrats in Congress, who cited the ballooning national debt and a federal deficit that could reach $521 billion this year. Sen. Tom Harkin (D-Iowa) called the Bush budget "sadly out of touch" for asking for "another $1.2 trillion in tax cuts for the wealthy."

The proposal on cash-balance plans, though, seems likely to get attention on Capitol Hill. Last month, the legislators asked the Treasury Department for a legislative proposal on these pensions, and Olson said officials had already been working on one and thus were able to include it in the budget.

Traditional pensions tend to reward long-serving employees but do not do as well for those who change jobs frequently. Cash-balance plans are more easily portable but may provide smaller pensions to long-serving workers. When a company converts, older workers sometimes find they will ultimately receive smaller pensions, and in some cases see benefits cease to increase for years while the formula for the new plan catches up with the old one -- a process dubbed "wear-away."

The administration would deem cash-balance plans to be not age-discriminatory as long as certain tests were met, something corporate sponsors have pushed for since a recent court case ruled they were discriminatory. The proposal also would allow companies to convert if they gave workers benefits during the five years after conversion that were at least as valuable as those they would have earned under the old plan. It would also ban "wear-away."

Any company that improperly reduced benefits would be charged an excise tax equal to any savings it realized from the cuts. But companies that were losing money and also operating underfunded pension plans would not be subject to the tax, potentially rendering the protections moot for some workers, officials said.

Private pension experts were cautious in reacting to the pension proposal, since many of its details have not been disclosed or even worked out.

"Treasury deserves a lot of credit for trying to move the discussion forward. There's general agreement that the survival of cash-balance plans is fairly integral to the future survival of the [traditional pension] system," said Kyle Brown of benefits consultant Watson Wyatt Worldwide. He and others expressed reservations about how the plan might work in practice.

Also in the Treasury plan are a wide range of tax cuts, including deductions for charitable contributions by non-itemizers, a refundable tax credit for the purchase of health insurance and an exclusion of the value of employer-provided computers for telecommuters.

It would also crack down on leasing deals between taxpayers, who get deductions, and "tax-indifferent parties," such as foreign entities and U.S. subway systems and municipal water authorities, who aren't taxed on their income. The Equipment Leasing Association promptly termed that a tax increase.