Congress Listens to Small Business Retirement Plan Sponsors - For Now

The future of “cross tested” retirement plans, a staple of entrepreneurial small businesses, hangs in the balance because of pending legislation currently being considered by the House Ways and Means Committee and the Senate Finance Committee.  At issue is The Retirement Fairness Act of 2009, which proposes the elimination of cross testing in addition to other pension reforms.

Cross testing allows profit sharing plans to take into account a participant’s age and projected retirement benefits in determining annual employer plan contributions.  This permits an extra allocation for older participants (frequently the business owner herself) which is an incentive for small businesses to maintain such profit sharing plans.

Congressman Lloyd Doggett of Texas had taken aim at cross tested plans to (in the words of the bill) “prevent the overstatement of benefits payable to non-highly compensated employees.”  Eliminating cross testing is viewed by Congressman Doggett and the bill’s co-sponsors as closing a loophole that permits unfair treatment of lower paid workers. 

The American Society of Pension Professionals and Actuaries, with the help of the grassroots support of small business plan sponsors, convinced lawmakers that eliminating cross testing would cause thousands of retirement plans to be terminated and would adversely affect millions of American workers.  For now, the proposal to eliminate cross testing will not be included in the bill.  But Congressman Doggett will be allowed to conduct future hearings on cross testing, so the issue may not go away. 

With members of the Obama Administration such as Peter Orszag, Director of the Office of Management and Budget, on record as being opposed to cross testing, it is possible that cross testing could be a target of future legislation.  So, small businesses may have dodged a bullet – but stay tuned for future developments.