Implementing the New Pension Provisions
in 2002 and Beyond
William Sweetnam, Jr., Benefits Tax Counsel, Department of Treasury
Jeannine Markoe-Raymond, Director of Federal Relations, NASRA
Cynthia L. Moore, Washington Counsel, NCTR

The conference’s first panel of pension experts discussed pension changes resulting from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that took effect on January 1 of this year, from both the federal and state perspective.

Bill Sweetnam, who is the Benefits Tax Counsel in the Department of Treasury, reviewed how a federal agency goes about interpreting EGTRRA and other retirement legislation to ensure equitable enforcement.

Sweetnam explained that the events of last September 11 have delayed publication of guidance on the new legislation. He stressed that part of the process that precedes publication of this material is consultation with the public employee pension systems.

Whenever Congress approves new pension legislation Treasury develops a variety of materials to respond to questions they anticipate receiving from pension systems and their enrollees. Sweetnam said these materials include sample plan notices, employer notices and employee notices. Guidance has been issued on catch-up contributions, saver's credit and 402(f) distributions. The agency is working on 457 regulations, which will then be followed by 403(b) and 401(k) regulations.

Sweetnam predicted that the Enron situation would lead to the introduction of several pension reform bills. Echoing the words of Sen. Voinovich, Sweetnam urged the attendees to show great vigilance. A bill that might propose changes to ERISA, for example, could have unintended consequences for public pensions by invoking a tax penalty. To avoid such problems, Sweetnam, who spent many years as a staffer on Capitol Hill, said that NCPERS’ members must establish and maintain close ties with members of Congress. “Let them know of your interest and availability to talk about pension issues. Encourage them to use your expertise.”

Jeannine Markoe-Raymond discussed the effect of EGTRRA on the Internal Revenue Code (IRC) and state pension programs. She noted not all states automatically conform to the IRC; they must adopt legislation to conform to the changes. Therefore, increased contributions and expanded rollovers may be permitted under federal law, but subject to taxation under state law. Furthermore, when the state codes do not conform, participants may also be subject to record-keeping requirements.

As an example, Markoe-Raymond explained that a participant might be allowed to contribute $11,000 to a 457 plan, which under federal law is tax deferred. However, under the applicable state law, only $8,500 may be tax-deferred, with $2,500 subject to state tax laws. She then discussed how in the same way rollovers between plans may also be treated differently by states. She encouraged NCPERS members to lobby their state legislators to ensure conformity with the new federal pension laws.

Cindie Moore discussed examples of retirement systems that have implemented the new transfer provisions under EGTRRA. The transfers allow an enrollee to buy back pension service credit. For example, some states are implementing early retirement provisions in which employees may purchase years of service credit using their deferred compensation plan assets. Under the transfer provision, they may move the money directly into their defined benefit plan.

For retirement systems still designing transfer programs, Moore had these recommendations:

1. Have separate forms for rollovers and transfers.
2. Cite on the forms the specific EGTRRA sections involved (§ 647 for transfers, § 641 for rollovers).
3. Consult your attorney or tax advisor before implementing the provision to ensure it complies with the relevant state law and the IRC.