Conversation on Coverage | The Secure Assets for Employees (SAFE) Plan Act

This legislation was designed to address the lack of defined benefit coverage and limited savings opportunities for the employees of small employers. The bill would create a new safe harbor defined benefit retirement plan for small businesses which could provide all their employees with a secure, fully portable, benefit. It utilizes the best features of both defined benefit and defined contribution plans by providing a fully funded minimum defined benefit - with a higher benefit if investment returns exceed conservative expectations. The minimum defined benefit level of SAFE plans, which would be contributed by employers to each employee's plan annually, would be equal to 1 to 3 percent of compensation for each year of service. Small employers would be able to maintain financial flexibility by adjusting the size of their contributions to the plan depending on the yearly performance of their businesses. The benefits would be funded either through an individual retirement annuity ("SAFE Annuity") issued by regulated financial institutions or though a trust ("SAFE Trust") whose investments would be restricted.

Secure Assets for Employees ("SAFE") Plan Act of 1997

Following is a description of the SAFE Plan Act as introduced by Rep. Nancy Johnson (R-CT) and Rep. Earl Pomeroy (D-ND) in 1997:

SAFE plans will provide all small business employees with a secure, fully portable, defined retirement benefit they can count on without choking small business with complex rules and regulations small business cannot afford.

Fully Funded and Secure Retirement Benefit:

SAFE plan retirement benefits will be totally secure because they will be funded either through an individual retirement annuity ("SAFE Annuity") issued by regulated financial institutions or through a trust ("SAFE Trust") whose investments will be restricted to registered investment securities or insurance company products.
SAFE plans will always have to be fully funded so that there will be no shortfall in case of plan termination. The full cost of an employee's minimum defined benefit for each year of service is contributed to the SAFE plan by the employer when earned. Each employee will have an account - either with a SAFE Annuity or in the SAFE Trust - where plan assets will be held, and each year the employee will get an account statement, issued by the trustee, indicating the ash balance in the account and what the monthly benefit will be upon retirement (age 65).
SAFE plans will be required to use specified conservative actuarial assumptions (e.g., a 5% interest rate assumption) to ensure the minimum retirement benefit. In the unusual circumstance where actual investment returns do not meet the conservative actuarial expectations, the employer (utilizing the SAFE trust) will have to make a current contribution so that there are enough assets in each employee's account to fund the minimum defined benefit. With the SAFE Annuity, since the financial institution guarantees the minimum benefit no such employer contribution would be required.

Minimum Defined Benefit with Possible Higher Benefit

SAFE plans utilize the best features of both defined benefit and defined contribution plans by providing a fully funded minimum defined benefit with a higher benefit if investment returns exceed conservative expectations. With the SAFE Annuity, this is achieved by using individual participating deferred annuities which would have to guarantee the minimum defined benefit but also would have to give some opportunity for a higher benefit based on investment performance. In the case of a SAFE Trust, if the average return of the assets in the employee's account exceed the required conservative interest rate assumption (5%), the employee will receive a higher benefit.
At a minimum, employees will receive a benefit equal to 1%, 2%, or 3% of compensation for each year of service. For example, if an employee whose average salary was $40,000 has 25 years of service for an employer who elects a 3% benefit, the employee will retire with a minimum $30,000 annual benefit (which could be higher depending on investment performance). If the small business runs into financial difficulty in any year, it can elect to reduce the minimum benefit to 2% or 1%. The percentage benefit in any year must be the same for all employees.
In order to allow baby boomers to catch-up with their retirement savings, employers can elect to credit benefits for up to 10 prior years of service, provided such benefits are credited to all employees eligible when the plan is adopted and the prior service is funded over an equal number of years (e.g., funded over 5 years if the employee has 5 years of prior service). The full cost of the benefit for each year of prior service is funded at the same time as the benefit for the current year of service. Prior service could not be granted for prior years when the employee was covered under a defined benefit plan.
An employee's benefit is 100% vested at all times. Fully Portable Retirement Benefit § Employees participating in the SAFE Annuity who separate from service automatically hold an individual retirement annuity that will pay them at least the benefits they have earned (and possibly a higher benefit) upon retirement. They can even choose to continue to fund the annuity, and thus increase their retirement benefit, in accordance with current-law IRA rules.
Employees participating in the SAFE Trust will have their retirement benefits automatically converted to a SAFE Annuity, or, if they elect, have the cash balance in their account transferred to an individual retirement account (a "regular IRA"). Either an continue to be funded under current-law rules.
The benefit in a SAFE Annuity may be rolled over to another SAFE Annuity without restriction. However, in order to ensure adequate benefits for retirement, benefits in a SAFE Annuity and SAFE Trust will be subject to substantial distribution restrictions.

Easier to Administer

SAFE plans will have simplified reporting requirements, including a simplified actuarial report verifying that the employer satisfied the annual funding requirement.
SAFE plans will not be subject to complicated nondiscrimination rules or plan limitations. However, so that the benefits are fairly distributed to all employees, SAFE plans, like SIMPLE 401(k) plans, will be subject to the current-law annual limit on employee compensation ($160,000).
Since SAFE plans are always fully funded using conservative actuarial assumptions, expensive Pension Benefit Guarantee Corporations ("PBGC") insurance premiums will not be necessary.

Complements the SIMPLE Plan

SAFE plans can be used with SIMPLE plans or 401(k) plans. However, no other pension plans can be maintained if an employer maintains a SAFE plan.
Employer eligibility, employee eligibility, and the definition of compensation are the same under the SAFE plan as under the SIMPLE plan.
As with SIMPLE, employers using a SAFE Annuity can designate a financial institution.