401(k)’s returning to the public sector?

It appears very likely that if a Senate pension bill is approved, it will include a provision allowing public sector employers to once again adopt 401(k) plans.

The provision was proposed by Sen. Craig Thomas (R-WY), a strong supporter of Employee Retirement Savings Accounts (ERSA), which were included in the Bush Administration initial budget proposal. The ERSA would close existing employer plans and create a single new one. Those plans were opposed in the public sector because public employers don’t want to lose certain favorable 457 plan provisions, such as an exemption from the 10% penalty for early withdrawal.

The Senate proposal includes the following provisions:

• Addition of 401(k) plans will be voluntary
• The bill would not change existing 457 or 403(b) plan provisions (e.g., early withdrawal, etc.)
• The 401(k) maximum contribution limits will be coordinated with 457 and 403(b) maximum contribution limits. That means:
  • 457 and 403(b) will continue to allow 2× the limit ($30,000 in 2006)
  • 457 and 401(k) will allow 1× the limit ($15,000 in 2006)
  • 403(b) and 401(k) will allow 1× the limit ($15,000 in 2006)
  • Grandfathered 401(k) and 457 will remain uncoordinated, which currently allows savers to contribute 2× the limit

The recent bill passed by the House Ways and Means Committee did not include the 401(k) provision, although it could be added in the final House bill or during a House-Senate conference committee that prepares the final legislation. Because of the short legislative calendar and the amount of pending legislation, chances of adoption this year are dim, but legislators appear committed to try.