The French Pension Reform Act 2010

  Claude G. Vala

SOCIAL ENVIRONMENT

At last, after two months of heated parliamentary debate, eight mass demonstrations with between one and three million people marching against the reform, the torching of a few cars, the blockade of fuel depots and oil refineries, and strikes that - unlike 15 years ago - failed to bring public transport to a halt, the latest French Pension Reform has been passed by Parliament.

Even though the media may have shown some dramatic images, these protests pale in comparison with the civil unrest that surrounded the introduction of the British 'poll tax' in the early 1990s or that sometimes occur when G8 or G20 meetings take place.

However, one must remember that retirement at 60 instead of 65 was granted in 1982 by former President Francois Mitterand (commonly known as "Uncle Francois') and was considered by many to be a great social advance.

French people have mixed feelings about this reform: anger and submissiveness at the same time. Anger inasmuch as, hardly a generation later, the reform is clawing back two years - presumably the best - out of Uncle Francois' original gift; also it represents a left/right political conflict as it is a right-wing government that is pulling down part of a left-wing-era social victory. And quiet submissiveness insofar as 20 years of reports and communication have finally convinced the population the system is no longer economically sustainable.

Even though the left-wing opposition parties have vowed to go back to retirement at 60 should they be returned to power in 2012, very few - even among their followers - believe they will effectively do so; or, if they do, it would be a window-dressing exercise with the mythical age 60 attached to punishing early retirement offsets.

Deliberately, this article does not discuss the reasons for the reform. They are as everywhere else: more pensioners living longer with fewer contributors and all this during the aftermath of a severe recession, thereby inducing ballooning deficits. It focuses instead on the key provisions of the reform and their consequences.

REFORM: A RECURRING EXERCISE

Reforming the French pension system, whether in the private or public sectors, has become a repetitive exercise. The 2010 private-sector reform is the successor of the 1993 and 2003 reforms and a 2008 minor update and, as it is meant to balance the system by 2018 but no later, it is already planned that a new reform will take place in 2018 or shortly after. Meanwhile, the public-sector pension system was reformed in 2007, and some of the measures that now concern the private sector will be extended to the public sector, but only from 2017. 

Incidentally, it is worth noting that the present President's possible second and last mandate will end in May 2017, thereby leaving the next reform to his successor!

It is also planned that, starting in 2013, a review will be launched to analyze whether it is possible to replace the present State pension system - which is based on the number of years' contributions or age - with a points-based system, very _,much like the compulsory complementary plans ('ARRCO' and 'AGIRC') have done since the beginning. However, given the complexity of the assignment, it will probably not be phased in, gradually if at all, before the period 2020-30.

FRENCH PENSIONS: A VERY COMPLEX SYSTEM

The new reform Law runs over a mere 118 articles and will need a number of government decrees to deal with the detail. This is why its application will not begin before July 2011.

The new Law deals only with private-sector State pensions, which are not the main part of managers' and professionals' total pensions as they cannot exceed EUR 15,000. However, they are the cornerstone to which all other pensions are tied.

This article is therefore limited to a discussion of pensions for the 18 million employees in the private sector and does not review pensions in some 36 other plans covering civil servants, public-sector workers, the armed forces, the self-employed, independent professionals, nurses, lawyers, the clergy and a few others. This is in order to avoid writing a thick handbook or even a serial lasting until the next reform.

Unlike in most other countries, the bulk of French pensions for most of the population is a pay-as-you-go system split between the State pension scheme and two quasi-governmental compulsory complementary plans.

The Fix Is In: Common Plan Mistakes

Periodically the Internal Revenue Service (IRS) publishes an article that it calls "The Fix Is In: Common Plan Mistakes" that present common mistakes that happen in retirement plans.  These articles describe a common problem, how it happened, how to fix it and how to lessen the probability of the problem happening again.  Over the course of the next several months, we will be reproducing some of those articles that we believe would be helpful to you in the day-to-day administration of your plan.

Failure to Limit Contributions for a Participant

Background:

A qualified 401(k) plan must provide limits for contributions and forfeitures allocated to a participant's account. The total of employer contributions, employee contributions and forfeitures allocated to a participant's account cannot exceed the limits under §415(c) of the Internal Revenue Code.

Section 415(c) generally provides that during a limitation year (the calendar year, unless another 12-month period is specified in the plan), the total of employer contributions, employee contributions and forfeitures made for a participant cannot exceed the lesser of  $40,000 or 100% of the participant's compensation.

Section 415(d) of the Code provides for a cost of living adjustment to the $40,000 dollar limit. In 2007, the dollar limitation was $45,000.

For 401(k) plans, the types of contributions subject to the limit include:

• elective contributions (pre-tax or Roth);
• after-tax employee contributions;
• employer matching contributions; and 
• employer profit-sharing contributions.

The Problem:

In 2007, John earned $100,000 in compensation as an employee of the QP Corporation and was a participant in QP Corporation's 401(k) Plan. The plan permits elective contributions and provides a 100% matching employer contribution for the first $8,000 in elective contributions, as well as discretionary profit-sharing contributions. The plan does not allow an employee to designate any portion of his or her elective contribution as a Roth contribution. QP did not allocate any forfeitures to participants in 2007. During 2007, QP made contributions totaling $58,000 for John consisting of:

• elective contributions: $15,000
• employer matching contributions: $8,000
• employer profit-sharing contributions: $35,000

The 2007 contribution limit for John is $45,000 (the lesser of $45,000 or 100% of John's $100,000 compensation). Accordingly, the $58,000 contributions made for John in 2007 exceeded the limitation under §415(c) by $13,000.

QP discovered the failure to limit the contributions for John in early 2009.

Finding the Mistake:

In order to find the mistake, the plan administrator should timely prepare allocation schedules showing amounts contributed and allocated for plan participants. The allocated amounts should include all employer contributions, employee contributions (including elective contributions) and forfeiture allocations. The allocation schedules should be reviewed periodically by comparing total allocations to the Code §415(c) limitations.

Fixing the Mistake:

If contributions for a participant include both employer and employee elective contributions, then correction for contributions that exceed the employee's limitation under §415 should be made, to the extent required, in the following manner:

Step 1: Distribute unmatched elective contributions (adjusted for earnings) to the affected participant. If any excess remains, then proceed to Step 2.

Step 2: Distribute elective contributions (adjusted for earnings) that are matched, and forfeit related matching contributions (adjusted for earnings). If any excess remains, then proceed to Step 3.

Step 3: Forfeit other profit-sharing contributions.

The employer should report the corrective distribution made to the participant on Form 1099-R. The participant should include the distribution as income but does not have to pay the 10% additional tax on early distributions under §72(t) of the Code. In addition, the participant may not rollover the corrective distribution to another qualified plan or to an IRA.

The plan sponsor should transfer the forfeited employer contributions (profit-sharing or matching) to an unallocated account. These amounts are used to reduce employer contributions in the current year and, if applicable, subsequent year(s).

Applying these steps, the correction of the excess contribution of $13,000 for John would be as follows:

Step 1: John made $7,000 in unmatched elective contributions (elective contributions of $15,000 less $8,000 that QP matched). The plan must distribute the $7,000 (adjusted for earnings) to John. After the distribution, there is still an excess contribution of $6,000 that the plan must correct, to the extent possible, under Step 2.

Step 2:  John made $8,000 in matched elective contributions. The plan must distribute $3,000 in matched elective contributions (adjusted for earnings) and forfeit the corresponding matching contribution of $3,000 (adjusted for earnings). This step fully corrects John's remaining $6,000 excess.

As a result, John will receive a total distribution of $10,000 (adjusted for earnings). John must include the entire corrective distribution in his income. However, John will not have to pay the additional 10% tax on early distributions under §72(t) of the Code. The distribution is not eligible for rollover to another qualified plan or an IRA. In addition, the plan will forfeit $3,000 (adjusted for earnings) from John's matching contribution account. This amount will be transferred to an unallocated account and used to reduce employer contributions required for the current year and if applicable, subsequent year(s).

Correction Program(s) Available:

QP Corporation may use the correction programs described in Revenue Procedure 2008-50 to correct the mistake.

Avoiding the Mistake:

The employer should monitor employees' elective contributions made during the limitation year. After determining the corresponding matching contribution under the terms of the plan, the employer should consider the §415 limitations while determining (a) the amount of the discretionary profit-sharing contribution and (b) where appropriate, the manner in which the profit-sharing contribution could be allocated among plan years.

Page Last Reviewed or Updated by IRS: February 04, 2011

US Life Expectancy Surpasses 78

Centers for Disease Control and Prevention Press Release - March 16, 2011

The age-adjusted death rate for the U.S. population fell to an all-time low of 741 deaths per 100,000 people in 2009 - 2.3 percent lower than the 2008 rate, according to preliminary 2009 death statistics released on March 16th by Centers for Disease Control's (CDC) National Center for Health Statistics. This marks the 10th year in a row that U.S. deaths rates have declined.

Life expectancy at birth increased to 78.2 years in 2009, up slightly from 78.0 years in 2008. Life expectancy was up two-tenths of a year for males (75.7 years) and up one-tenth of a year for females (80.6 years). Life expectancy for the U.S. white population increased by two-tenths of a year. Life expectancy for black males (70.9 years) and females (77.4 years) was unchanged in 2009. The gap in life expectancy between the white and black populations was 4.3 years in 2009, two-tenths of a year increase from the gap in 2008 of 4.1 years.

The findings come from "Deaths: Preliminary Data for 2009," which is based on death certificates provided to NCHS through the National Vital Statistics Reporting System from all 50 states, the District of Columbia and U.S. territories.

Other findings:

• Age-adjusted death rates declined significantly for 10 of the 15 leading causes of death in 2009:
• heart disease (declined by 3.7 percent),
• cancer (1.1 percent),
• chronic lower respiratory diseases (4.1 percent),
• stroke (4.2 percent),
• accidents/unintentional injuries (4.1 percent),
• Alzheimer's disease (4.1 percent),
• diabetes (4.1 percent),
• influenza and pneumonia (4.7 percent),
• septicemia (1.8 percent), and
• homicide (6.8 percent.)

• In 2009, suicide passed septicemia (blood poisoning) to become the 10th leading cause of death. Although the U.S. suicide rate did not change significantly between 2008 and 2009, the number of suicides increased from 35,933 in 2008 to 36,547 in 2009 (1.7 percent increase). Deaths from septicemia declined 1 percent from 35,961 in 2008 to 35,587 in 2009. Otherwise, the rankings for the 15 leading causes of death did not change between 2008 and 2009.

• Overall, there were 2,436,682 deaths in the United States in 2009 - 36,336 fewer than in 2008 (1.5 percent decrease.)

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