Panel Acts to Curb 401(k) Savings Plans

The House Ways and Means Committee, under attack by President Reagan for the first time for making changes in his tax overhaul proposal, agreed Wednesday to place new restrictions on special retirement savings programs known as 401(k) plans.

The committee moved to limit to $7,000 the maximum annual contributions to the 401(k) plans, under which about 12 million employees currently defer taxes on a percentage of their incomes until retirement. The current limit is $30,000, and most employers match all or part of their employees’ contributions.

At the same time, employees would be required to reduce allowable contributions to an Individual Retirement Account by the same amount applied to a 401(k). Thus, an individual who contributed $2,000 or more to a 401(k) would be unable to take advantage of an IRA, whose maximum annual contribution is $2,000.

Savings for Couples

In addition, the committee rejected Reagan’s proposal to expand the maximum IRA contribution for couples in which there is a nonworking spouse. Under current law, such couples are limited to a total IRA contribution of $2,250 but Reagan had recommended that the total be expanded to $4,000.

The panel further moved to prohibit nonprofit organizations and state and local governments from setting up any 401(k) plans in the future. However, the organizations and governments would continue to be allowed to operate other types of retirement plans.

The committee also made other, lesser changes in the rules affecting 401(k) plans designed to prevent upper-income employees from receiving excessive benefits under any tax revision package.

Reagan’s Complaint

Reagan, who had voiced no criticism of the committee since it began rewriting his tax proposal more than a month ago, had proposed to eliminate 401(k) plans. Few lawmakers expected the panel to approve his recommendation, however.

In a speech Wednesday before a group of former campaign workers, Reagan said: “We need the kind of tax reform that we originally proposed, and not with some of the waterings-down that are taking place as they discuss it up there.”

In its closed-door deliberations, the committee has made a number of changes in Reagan’s tax package, particularly his proposal to raise the personal exemption from its current $1,040 to $2,000, tentatively settling on an exemption of $1,500.

Committee Chairman Dan Rostenkowski (D-Ill.) also has informally agreed to retain the popular deduction for state and local taxes that Reagan had wanted to abolish. Such a move is likely to mean that the panel will not push the top personal tax rate as low as the 35% level the President seeks.

‘Lines in the Sand’

Rostenkowski has said repeatedly that Reagan promised to refrain from comment on the committee’s efforts until after the panel had finished its work. Although Rostenkowski was not available for comment Wednesday, other Democrats on the committee quickly blasted Reagan.

“I don’t know what he’s got to complain about,” Rep. Sam Gibbons (D-Fla.) observed tartly. “He never produced a bill of his own. All the Reagan Administration has ever done is draw a few lines in the sand and tell us we shouldn’t cross them.”

Lobbyists for pension programs said they were angry about the new 401(k) rules, which are aimed at raising about $18 billion over five years compared to current law.

Rostenkowski “is a desperate man seeking desperate solutions,” complained Stuart Brahs, executive director of the Assn. of Private Pension and Welfare Plans, who argued that the proposal would reduce incentives to save.

‘Not the Death Knell’

But he acknowledged that despite the limits, “this is not the death knell of the private pension system by a long shot.”

Meanwhile, the committee also moved to raise about $60.5 billion over five years by changing the ways companies account for profits and losses. The committee voted to eliminate so-called “completed-contract” accounting as a tax break heavily used by defense contractors and other large construction firms, but agreed to allow certain small firms to continue to benefit in limited cases.

The panel also moved to require all firms with more than $5 million in sales to stop using the cash method of accounting, but exempted lawyers, accountants, doctors and other professionals from the tougher rules.