How the new tax bill may affect your pension plan

Perhaps you're self-employed, with a pension plan of your very own. Maybe you're a top executive lured to your job by lucrative retirement benefits. You could be a professional whose accountant insisted you incorporate for pension purposes.

Or you might be an entry-level clerk, someone who rates getting a desk of your own a more pressing need than retirement planning.

For you and other groups, changes in pension law may turn out to be the sleeper provisions of the Tax Equity and Fiscal Responsibility Act of 1982.

The bill, designed to raise $98 billion by 1985, contains ''a laundry list of changes to pension . . . rules that will have a more wide-ranging impact than has been foreseen in the news,'' according to a newsletter of pension plan specialists, Meidinger Inc. Among other things, the bill would:

* Require tax be withheld from pensions, unless recipients specifically request an exemption.

* Liberalize rules governing ''Keough'' pension plans for the self-employed.

* Cut by one-third the maximum benefit most corporate pension plans can pay.

* Slap new rules on ''top heavy'' plans that favor high-level executives, requiring such plans to devote more attention to lower-paid employees.

* Make incorporation for pension purposes far less attractive for doctors, lawyers, and other professionals.

Why does a tax bill contain changes in pension law? While taxes must be paid on retirement benefits when they are received, pension plan participants can deduct contributions from current income tax. They also benefit from the tax-free accumulation of earnings on their pension savings. Corporations, for their part, are allowed tax deductions for the money they contribute to pension plans.

Tightening these rules will save $1.8 billion by 1985, according to congressional estimates.

In addition, the moves are intended to eliminate the distinction between corporate and self-employed pension plans, and to close pension plan loopholes for the wealthy, say retirement experts.

The new withholding requirement will affect the most people. Beginning next year, unless pensioners ask the government to keep its hands to itself, tax will be withheld on pension payments, with the amount usually determined by the wage withholding tables.

Those who will benefit most by the pension rule changes are the self-employed with HR 10 ''Keough'' pension plans. Contribution and benefit ceilings will be raised. Keough assets need no longer be held by a bank or other depository institution. Individuals will be able to serve as their own trustee. In general, Keoughs will now be just as attractive as corporate plans.

''These are significant changes for the self-employed,'' says David Kautter, tax partner at Arthur Young.

Conversely, rules governing corporate plans have been tightened, though the changes will likely affect only high-level executives and those toward the bottom of the company pyramid.

Corporate defined benefit plans (plans that promise to pay a predetermined annual amount) will be able to pay out a maximum of $90,000 a year, down from the currently legal $136,425. Defined contribution plans (where employees pay in a preset amount, then simply reap all returns) will be limited to accepting $30, 000 annually from each employee.

''Top heavy'' plans - where more than 60 percent of accrued benefits go to high-level employees - are slapped with some special distribution rules, beginning in 1984. The rules are intended to make the plans less attractive for the highly paid. Top heavy retirement systems will also be required to provide minimum benefits for lower-level workers.

Perhaps the most controversial change, at least as far as tax accountants are concerned, deals with the tax treatment of professional service corporations - lawyers, dentists, or other professionals who have incorporated a group practice. Often, such corporations were formed merely to take advantage of lucrative pension laws. The tax bill permits the IRS to simply disregard the corporate tax status of professional service corporations, beginning in 1983.

Next: How the new tax bill affects business and investment decisions

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