Tax change will end pension plans for some workers

A change in tax laws may cause employees of some small businesses to lose their private pension plans. While employers in the past have set aside a significant amount of money - tax deferred - for private pension plans, some will now have less to shelter.

This is the result of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), pension consultants and accountants say. The act is causing the business community to ''heave a resigned sigh,'' says Philip M. Alden.

Mr. Alden, vice-president of Towers, Perrin, Forster & Crosby, a management consulting firm specializing in compensation, says the new law means inconvenience for corporations, because essentially all of them will have to overhaul their retirement plans. The law will especially burden small companies, he says.

One point of TEFRA - at least in regard to retirement plans - is to equalize corporate plans with Keoghs, plans for self-employed people. It does this by lowering the amount corporations can contribute to defined contribution plans (where a company puts a set amount of money into an employee's account each year) and to defined benefit plans (where a firm promises to pay an employee a specific amount upon retirement). The amount that can be contributed to Keoghs, on the other hand, is being raised.

Another goal of the law is to eliminate discriminatory, or ''top heavy,'' plans. A plan is top heavy when more than 60 percent of a company's accrued retirement benefits go to key employees. The act requires that companies falling under this category improve the benefits of rank-and-file employees. These companies will have to provide non-key employees with a more rapid vesting schedule - indicating the number of years an employee needs to work before becoming eligible for some retirement benefits. They will also have to increase minimum benefits for lower-paid workers.

Smaller companies, say accountants and pension consultants, will be hurt by the law for two reasons:

* People that have incorporated primarily for the tax advantage of putting large amounts of money into a pension plan, such as lawyers, doctors, and entertainers, will lose part of that tax shelter because of the lowered maximum contribution allowed for a plan.

At the moment, for instance, the maximum yearly funding allowed for a defined benefit plan is $136,425 or 100 percent of salary - whichever is less. Under the new law, which takes effect Jan. 1, the maximum will fall to $90,000. The maximum yearly contribution to a defined contribution plan is $45,475 or 25 percent of income. Under the new law, it will be reduced to $30,000. These amounts will be frozen until 1986, when cost-of-living adjustments can be made.

* Because of the ''top heavy'' restrictions, ''we will see wholesale termination of small business plans,'' says Gerald Facciani, president of Professional Plan Administrators Inc., a Cleveland-based firm.

''If an owner has the choice of either increasing pension funding for rank-and-file workers by 30 or 40 percent or terminating the plan, he'll terminate. He has plenty of other tax shelter avenues which he can put his money into. He doesn't have to provide a plan,'' Mr. Facciani emphasizes.

He says more than 60 percent of all corporate plans are top heavy.

Kenneth Shapiro, a partner of Hay Associates, another compensation consulting firm, says that decreasing the maximum benefit contributions ''is an inconsistent thing to do.''

On the one hand, he says, ''Congress wants to promote the growth of private pension plans. Yet it is requiring reduced funding of plans - thus reducing pensions.''

He adds that the ''top heavy'' rules will also affect very large companies. Because they will no longer be able to offer their top executives as much, ''they will make up the difference with supplemental plans (plans not funded by the pension trust but by payroll). This is a lousy way to do it.''

A Hay survey shows that about 25 percent of corporations now have supplemental plans, but ''that figure will double now,'' Mr. Shapiro says. The problem with relying ''too heavily'' on supplemental, nonfunded plans, he explains, ''is that it could be saddling future management with expenses'' when the time comes to make the promised payments out of the payroll.

The people to really benefit from the TEFRA changes will be those who adopt Keogh plans, or who are now under Keogh plans, says William Spiro, of Seidman & Seidman, a large accounting firm. At present, the maximum amount a self-employed person can contribute to a Keogh is $15,000 or 15 percent of earned income. In 1984 this will rise to 20 percent or $30,000 - whichever is less. Cost-of-living adjustments will be allowed in 1986.

A report from Seidman & Seidman points out one small change as a result of new act which should be noted. Retirees will now have a choice as to whether they would like to have taxes withheld from their private pension checks or whether they would like to get the full amount on their checks and pay taxes later. The tax withholding is scheduled to begin Jan. 1 for pension payments exceeding $5,400 per year, and will occur by default unless the retiree indicates he wants his pension money left untouched.