Retirement Plans with Individual Accounts: Federal Rules and Limits (CRS Report for Congress)
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| Release Date |
Revised Feb. 27, 2003 |
| Report Number |
98-171EPW |
| Authors |
James R. Storey; Paul Graney |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
As the federal income tax grew in importance during the 1940s, 1950s, and
1960s, employers devised ways in which employees could defer receipt of a part of
their pay to postpone taxation of that income. These salary deferrals often are
intended to be used in retirement, and most of these plans penalize cash withdrawals
before a certain age, except in case of death, disability, or financial hardship. Thus,
they often are called salary reduction retirement plans. Use of salary reduction
retirement plans is widespread. In 1993, 37% of civilian nonagricultural wage and
salary employees were covered by these plans, an increase from 27% in 1988.
The manner in which deferred compensation plans were initially established
varied among employment sectors. Business firms’ plans differed from those of
educational organizations, which in turn differed fromgovernment plans. The various
plan types were codified over the years as Congress responded to regulatory
initiatives by the Internal Revenue Service and to concerns about loss of revenue and
the fairness and integrity of these plans. The resulting statutes reflected the unique
history of each plan type. Congress began to move toward more uniformity in the
rules governing the different types of salary reduction plans in 1986 with passage of
the Tax Reform Act of 1986 (P.L. 99-514), which contained several provisions that
reduced disparities in plan rules. In 1996, Congress made additional changes in plan
rules in the Small Business Job Protection Act of 1996 (P.L. 104-188), and further
changes were made a year later by the Taxpayer Relief Act of 1997 (P.L. 105-34).
Thisreport describes each type ofsalary reduction retirement plan authorized by
federal law: individual retirement accounts (IRAs), §401(k) plans, the Federal
Employees’ThriftSavingsPlan, §403(b) plans, §457 plans,salary reduction simplified
employee pension (SARSEP) plans, and savingsincentive match plansfor employees
ofsmall employers(SIMPLE). The rules governing plans are then presented in regard
to: eligibility, vesting, tax treatment of contributions, limits on contributions, limits
on investments, withdrawal options, and tax treatment of withdrawals. Exceptions
to the general rules are noted. This report is updated annually.
An employee becomes eligible to participate in a plan once minimum
requirements regarding age and length of service are met. An employee’s
contributions must be vested (i.e., become the individual’s legal property) at once;
employer contributions need not be vested until a tenure requirement has been met,
which generally cannot exceed 5 years. Contributions to these plans and the
investment earningsthey accrue usually are notsubject to the federal income tax until
the funds are withdrawn. Annual contributions are limited, the ceilings varying by
plan type. There are some statutory controls on allowable types of investments. An
individual accountholder often may borrow from vested funds. Withdrawals may be
made in the form of annuities, lump sums, or as untaxed rollovers into other taxdeferred
plans.
