New retirement legislation comes to the defense of widows, young people, and new parents. But for small and medium-size companies, it could be a nightmare.
The news left Ruth M. Godbold numb. Her husband of 30 years, Will M. Godbold, was dead, and now, she was told, she couldn't collect a penny of his pension benefits. And, to make bad matters worse, it was partly his fault. Several years before he reached retirement age, Will had been asked by his employer to make a choice. He could provide Ruth with a survivor benefit that would guarantee her a portion of his pension if he died before he retired, or he could forgo that option and thereby boost their old-age income.
He opted for the latter. "All I can figure," his 59-year-old widows says, "is that since he had always been healthy -- until those months when he got cancer -- he may have just decided to take the gamble that he would live as long as I would. Or maybe he just didn't understand what he was signing, and his pride kept him from asking somebody to explain it to him." Whatever the reason, Mrs. Godbold ended up empty-handed.
Her case is not all that unusual. Estimates are that fewer than 11% of the country's 15 million women over the age of 65 collect private pensions -- compared to 29% of men in that age group. The reason is that, until recently, most plans were not requird to provide automatic survivor benefits, even though the average age of widowhood in the United States is a surprisingly young 56 years.
In order to address what many people feel were obvious inequities in the pension system, Congress last year passed the Retirement Equity Act of 1984. Unfortunately, the act has created a whole new set of problems for employers, who, in effect, are being asked to shoulder the costs of the legislation.
Generally, provisions of the new Retirement Equity Act, which takes effect this month, mandate that employers offer automatic preretirement and retirement survivor benefits to employees' spouses. And it prohibits workers from opting out of those benefits unless they secure their spouses' approval -- in writing. In addition, the act slashes the age at which employers must allow employees to participate in company-sponsored pension programs. It permits new parents to take extended maternity and paternity leaves without losing out on future retirement income. And it provides for the distribution of pension benefits to divorced spouses.
From the companies' point of view, the new law will be expensive, and not just because it requires them to provide benefits to a whole new range of recipients. According to Robert L. Hauser, a tax partner in the Cincinnati office of Deloitte Haskins & Sells, implementing the law involves significant new paperwork, which will no doubt prove to be a burden for smaller companies. Employers will have to amend their pension plans to meet the law's various provisions. Then they will have to submit these updated documents to the Internal Revenue Service for approval -- a complicated procedure that requires expensive legal and accounting time.
All this, moreover, comes hot on the heels of a whole set of complex changes dictated by 1982's Tax Equity and Fiscal Responsibility Act. "I understand Congress was trying to do certain things," says David B. Behrmann, a partner in the Indianapolis office of Geo. S. Olive & Co., a regional accounting firm. "But when you're amending these plans every year, it's a big pain in the neck."
The new act also forces businesses to become tax advisers to employees who cash out or take payments from their pension plans. For starters, employees must be told that the money they receive will not be taxed currently if it is rolled over to another qualified pension plan (or to an individual retirement account) within 60 days. Also, employers have to explain the special tax rules that apply to pension-plan distributions, such as 10-year averaging regulations -- a complicated method of computing tax on lump-sum distributions. That is no easy task when one is dealing with relatively unsophisticated taxpayers.
Employers are bothered most by the questions the legislation leaves unanswered, particularly with regard to employees who provide incorrect or false information to their employers. Suppose a worker tells his employer that he is single. The company doesn't provide survivor benefits. Then, a year later, the man dies, and the employer discovers that he had a wife and three children. Must the company fork over a survivor benefit anyway?
Accountants and other pension-planning experts aren't sure. According to Leon Schneider, a senior pension consultant in the New York City office of KMG Main Hurdman, the accounting firm; and Larry L. Grudzien, tax supervisor in the Chicago office of Laventhol & Horwath, another accounting firm, they probably won't know for certain until the issue winds up in court.
Generally speaking, the act affects pension plans for fiscal years that begin on or after January 1, 1985. The legislation isn't retroactive, so it won't provide relief to people whose spouses died before this year. Also, notes Alice Quinlan, government relations director of the Older Women's League, in Washington, D.C., the equity act applies only to so-called private pensions, meaning those retirement benefits paid out by businesses. Civil service, military, foreign service, and state and local pension plans aren't included in the law.
Here are summaries of the key provisions of the equity act:
Survivor benefits. The act demands that preretirement and retirement survivor benefits be included in all retirement plans that qualify for tax exemptions under the Internal Revenue Code. The exception to this rule is profit-sharing and other defined-contribution programs whose participants have willed their benefits to their spouses.
The law dictates that survivor benefits be paid in the form of an annuity, says Richard A. Goodman, a tax partner in the Chicago office of Laventhol & Horwath. An annuity, simply stated, is a payment that is made yearly, quarterly, or at some other regular interval for a specified period of time, such as a person's lifetime.
