A provision in Senate legislation that had investment advisors up in arms because it would reduce the value of inherited IRAs has been removed.
Industry officials said an amendment introduced to S. 1813, the Highway Investment, Job Creation and Economic Growth Act, by Sen. Harry Reid, D-Nev., Senate majority leader, last Thursday, effectively killed the provision without the need for floor action.
See also: Stretch IRAs Under Fire
As drafted, except for certain people, the provision would have forced inherited IRAs to be taxed over five years rather than the current lifetime of the beneficiary, as called for under current law.
According to Congressional analyst Ira Loss, Reid did so in anticipation that he could get the votes to move the omnibus highway bill to the floor.
However, Loss, said Reid was unable to do so. Furthermore, the bill is unlikely to become law this year.
According to William Sweetnam, a member of the Groom Group and a former top Treasury Department official during the Bush administration, the provision was removed because senators did not want to use a pension-related revenue raiser on a non-pension related bill.
A second reason it was removed is that the Senate leadership wanted to study the proposal more. “This is a big change and people wanted to more clearly understand the proposal and maybe modify it,” Sweetnam said.
Sweetnam accurately predicted to National Underwriter last week that the provision would be removed and replaced by an interest smoothing provision related to defined benefit plans.
Under the Reid amendment, defined benefit plan liabilities would continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years.
However, beginning in 2012 for purposes of the minimum funding rules, any segment rate must be within 15 percent of the average of such segment rates for the 10-year period preceding the current year.
This provision is estimated to raise just over $7 billion in revenue over 10 years. The stretch IRA provision, included in the bill by Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, would have raised $4.6 billion over 10 years.
But, Jason Hammersla, a spokesman for the American Benefits Council, said more work is needed on the provision.
“The Council appreciates the Senate’s attention to this critical interest rate problem for pension plan sponsors, but additional modifications will be necessary to ensure that the funding reform will be helpful for employers,” he said.
Hammesla said the proposal as written would do more harm than good because current artificially low interest rates are forcing companies to increase their contributions to defined benefit plans, money that could be better used for investment or hiring, “because the last 10 years are a combination of historically low interest rates and artificially low interest rates.”
A 25-year smoothing period is more appropriate, he said, because “the amendment as drafted would not help in any year and would have adverse effects in some years.”
The Financial Services Institute lauded the decision.
Dale Brown, FSI president and CEO, said, “With our economy in the shape it’s in, and saving for retirement more difficult than ever, it was critical that this troubling provision be stripped from the bill.”
Under the proposal, no lifetime tax deferral of inherited IRAs would be permitted except for a spouse, minor children or the disabled. Others, such as adult children, would only be permitted a five-year window to defer.
“With the provision requiring beneficiaries to pay taxes over five years, instead of spreading them over their lifetime, this would have greatly deterred saving at a time in our nation’s history when saving is already strained to say the least,” Brown said.
Meanwhile, the National Association of Insurance and Financial Advisors applauded toe removal of the stretch IRA provision.
“NAIFA is pleased that the Senate has removed changes to the distribution rules for inherited IRAs from the highway bill,” said NAIFA President Robert Miller. “We need to take a close look at the interest smoothing provision put in its place to make sure it won’t bring unintended consequences for Americans struggling to save for retirement.”