CHANGES EFFECTING PENSIONS

Repeal of Excise Tax on Distributions

Effective after December 31, 1996, the 15% estate tax on excess retirement accumulations and the currently suspended 15% excise tax on excess distributions have been repealed. Prior to this change, certain retirement plan distributions made after death were subject to an excise tax equaling 15% of any excess retirement accumulations. This excise tax was originally designed to place limitations on the total amount that a person could keep in tax-deferred savings .

Increase in Full-Funding Limit

The full-funding limit for defined benefit plans (the lesser of the plan's accrued liability based on projected benefits or 150% of the plan's current accrued benefit liability) is liberalized in stages for plan years beginning after 1998. The changes are listed below

Year Percentage Limit
1998 150%
1999 and 2000 155%
2001 and 2002 160%
2003 and 2004 165%
2005 and beyond 170%

Matching contributions for Self-Employed

Matching contributions of self-employed individuals are not treated as elective employer contributions - The treatment of matching contributions for self-employed individuals is the same as for other employees. Thus, matching contributions on behalf of self-employed individuals are not subject to the elective contribution limit ($9,5000 for 1997)

OTHER

Modification of 10% tax on non-deductible contributions - A 10% nondeductible excise tax is imposed on qualified plan contributions that exceed the deduction limit. There are two exceptions, The new law imposes a third exception.

Increase in tax on prohibited transactions - Certain transactions between a qualified plan and a disqualified person are prohibited in order to prevent persons with a close relationship to the qualified plan from using that relationship to the detriment of plan participants and beneficiaries. A two-tier excise tax is imposed on certain transactions between qualified retirement plans and disqualified persons. Under the new law, the first tier is increased from 10% to 15%. If the transaction is not corrected within the taxable period, a second tier tax of 100 percent of the amount involved may be imposed. The 100% second tier amount remains from the previous law.

Involuntary cash-outs of pensions - The limit on involuntary cash-outs of pension plan participants whose plan participation terminates is increased to $5,000 (from $3,500) for plan years after August 4, 1997. The $5,000 is not indexed for inflation