Government Proposal May Reduce Employee Benefits

NEW PROPOSAL MAY REDUCE EMPLOYEE PENSION BENEFITS

A bill was introduced into the House of Representatives that aims to close a tax loophole that enables Fortune 500 companies to provide executives with generous retirement benefits. However, the Retirement Fairness Act of 2009 may force smaller companies to close their pension plans or further reduce 401k benefits, leaving many employees without a way to save.

The proposal is designed to prohibit highly paid executives from receiving larger retirement benefits at the expense of lower paid employees. However the proposal would also apply to 401ks, and other pension plans, requiring them to include part-time employees in determining certain minimum coverage testing.

Current law allows companies to exclude from 401k and pension benefits, any employee who does not work at least 1,000 hours during the year or 20 hours per week. The proposal would force companies to include some or all part-time employees in their traditional pension plans and 401ks.

While the new law is intended to stop retirement abuses by larger companies, in a time of economic instability the proposal would hurt small businesses. Small business owners have cut back on their 401k matching contributions due to the recession. This new proposal may force businesses owner to make larger 401k contributions to part-time employees. This comes at a bad time as many small business owners are still trying to recover from the recession. Most small business owners don’t have the cash flow to offer part timers 401k benefits. Small businesses not willing to or who can’t afford to offer 401k benefits to part time employees might close their 401ks or significantly reduce benefits. That would hurt employees who are relying on their 401k as their sole source of income.

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