Vexed Over a Question of Vesting

QUESTION: Am I considered to be covered by a company pension plan if I’m not vested at all? The question could become important to a lot of people if the Senate Finance Committee version of tax reform becomes law and IRA participants covered by company retirement plans can no longer take a tax deduction for IRA contributions they make.--M. H.

ANSWER: Unfortunately for all of the employees who stand to lose hundreds of dollars a year in tax benefits if this proposal is enacted, vesting makes no difference whatsoever. Regardless of whether you have just joined your company’s retirement plan or have been in it long enough that you are fully vested--that is, entitled to receive all of your benefits upon leaving the company--you would lose one of the biggest benefits of an IRA under the Senate Finance Committee proposal.

This proposal, the most controversial in the Senate Finance package, has many consumer groups up in arms. But, if you’re looking for a bright side, at least the rules don’t completely return IRA holders to pre-1982 days. Back then, anyone enrolled in a pension plan at work couldn’t even open an IRA. The Senate Finance Committee proposal permits IRAs by workers with employer-sponsored retirement plans; it just doesn’t permit a tax deduction for the contributions.

So why would you even bother to contribute to an IRA if you have a plan at work? The interest earned on the money contributed to an IRA would continue to be tax-free--until you retire and start withdrawing the money. So, your money would still build faster than if you put it into a traditional savings account and the interest income is taxed immediately.

Since you brought up the question of vesting, you might be interested in knowing that the Senate Finance Committee’s plan also recommends a new vesting formula. It’s a complicated one. But, basically, it would entitle many employees to become vested in their company plans sooner than they are now, meaning that employers would be required to give out the benefits they promise people more quickly than now. Under current law, many employees don’t have to be fully vested for 10 years. Under the proposal, seven years would be the maximum.

And what about the House version of tax reform? It proposes nothing new on vesting. But then, neither does it propose taking away the IRA tax benefit.

Strictly from a benefits point of view, employers are generally happier with the Senate Finance version than with the House plan because the House proposal creates a whole new layer of monitoring requirements. In other words, the battle should be a good one.

It is, of course, impossible to predict whether the IRA proposal will survive the coming congressional debate. But here’s the scenario that some employee benefits consultants are working under: The plan should go to the full Senate by early June, go into a House-Senate conference committee by mid- or late August and be signed into law, if it gets that far, by Labor Day.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Los Angeles Times, 780 Third Ave., Suite 3801, New York, N.Y. 10017.