Tax Equity and Fiscal Responsibility Act (TEFRA)

The Tax Equity and Fiscal Responsibility Act (TEFRA) is a federal law enacted in 1982. It was primarily designed to reduce the federal budget deficit by raising taxes and cutting government spending. However, TEFRA also included provisions related to employee benefits, particularly in the area of retirement plans.

Key features of TEFRA as it pertains to employee benefits include:

• Limits on tax-deferred contributions: TEFRA introduced limits on the amount of money that employees and employers could contribute to certain retirement plans on a tax-deferred basis. For example, in 2021, the limit for 401(k) contributions is $19,500 per year for employees under age 50, with an additional catch-up contribution of $6,500 for those aged 50 and over.

• Increased vesting requirements: TEFRA increased the minimum vesting requirements for retirement plans. Specifically, employees must now be fully vested in employer contributions after three years of service, or after six years for a graded vesting schedule.

• Expanded coverage for part-time employees: TEFRA required retirement plans to extend coverage to part-time employees who work at least 1,000 hours per year. This provision was intended to help address concerns that many part-time employees, who tend to be women and minorities, were not able to participate in employer-sponsored retirement plans.

• Changes to IRA contributions: TEFRA also made changes to the rules governing Individual Retirement Account (IRA) contributions. The law introduced new contribution limits and eligibility requirements for deductible IRA contributions, and it also established the Roth IRA as a new type of retirement savings account.

Overall, TEFRA had a significant impact on the regulation of employee benefits, particularly in the area of retirement plans. By introducing new limits on tax-deferred contributions and vesting requirements, as well as expanding coverage to part-time employees, TEFRA helped to make retirement benefits more accessible and equitable for American workers.

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