ERIC Jul 21, 2003
ERIC Proposal in Portman-Cardin Bill Advances but
Political Dispute Clouds Future
SUMMARY: Following an extraordinary lobbying effort by ERIC
Members, the House Ways and Means Committee this morning reported a
modified Portman-Cardin bill (H.R.1776) that substantially advanced the
ERIC pension funding position first unveiled in August of 2002 over a
contrary position put forward by the Administration. The new bill replaces
the 30-year Treasury rate with a corporate bond rate for 2004, 2005, and
2006 for pension funding and variable rate premium purposes. In 2006 it
takes a first step toward coordinating the lump sum rate with the funding
rate. The Administration had proposed a corporate rate for 2004 and 2005
followed by a phase-in to a yield curve. The new bill makes no mention of
use of a yield curve in the future. The bill also contains several other
provisions of interest to ERIC members (outlined below).
Committee
action, however, erupted in a bitter political dispute over the rights of
the majority and minority and Democratic objections to moving quickly on a
bill they had had only a short time to review. In the course of the
dispute, Democratic committee members left the committee room to a private
room nearby, acrimonious exchanges occurred between certain committee
members, and police were summoned to the Ways and Means Committee. This
was followed by an extraordinary debate on the House floor on a motion by
the Democratic Minority Leader to disapprove of the actions of Ways and
Means Committee Chairman Bill Thomas's (R-CA) in conducting the committee
meeting and to rescind the Committee's action to report H.R.1776. The
motion was tabled 170-143 by a straight party line vote.
During
the debate, Democratic members did not voice objections to the content of
the bill but focused on process, including reporting the bill from the
Committee while no Democrats were in the room. Thus, the bill's future is
very uncertain, and plans to pass the bill in the full House next week
have been put on hold.
KEY PROVISIONS OF BILL: The
long-awaited new bill reduces the $230 billion H.R.1776 to a bill of $50
billion over ten years. A preliminary review of the bill follows.
Provisions of interest to major employers in what has been dubbed
"Portman-Cardin lite" include:
- 30-year Treasury: Replace the 30-year Treasury bond with the rate of
interest on amounts conservatively invested in long-term corporate bonds
for the years 2004, 2005, and 2006. Current law applies to lump sums in
2004 and 2005, but in 2006, the lump sum interest rate would be the
lower of (1) the corporate rate or (2) the 30-year rate plus 20% of the
differential between the 30-year rate and the corporate rate.
- Deduction Limit: Provide an exception to the 25% of compensation
limit where an employer sponsors both a DB and a DC plan for
contributions to the DC plan of up to 6% of compensation.
- Acceleration of Increases: The $15,000 limit on 401(k) contributions
and $5000 limit on catch-up contributions would apply for 2004 rather
than 2006.
- Universal Availability: Amends the universal availability
requirement for catch-up contributions regarding collectively bargained
employees, non resident aliens, and separate lines of business.
- Stock Options & Employment Taxes: The law is clarified that
employment taxes do not apply to stock options.
- Low Income Savers: The low income savers credit is extended to 2011
and the credit rate raised for some categories.
- Vesting: Vesting rules that now apply to employer matching
contributions would apply to all employer contributions to DC plans.
- Rollovers: Rollover rules are expanded to non-spouse beneficiaries
as well as to Roth IRAs (from a qualified plan), and are permitted from
an annuity to a qualified plan.
- Minimum Distribution Rules: The age at which an individual must
begin distributions is increased to 72 in 2004 and 75 in 2008, and the
excise tax on failure to make distributions is decreased from 50% to
20%.
- Transfers to PBGC: Automatic rollovers of involuntary distributions
exceeding $1000 as well as benefits under terminating DC plans may be
transferred to the PBGC under the missing participants program.
- Excess Contributions: The period to correct excess contributions is
increased from 2 1/2 months to 6 months after the close of the plan
year.
- Intermediate Sanctions: Expand the ability of sponsors to correct
inadvertent failures and restrict the use of the "maximum payment
amount." [NOTE: A provision in the original bill objected to by ERIC
that would have exempted NHCE's from the tax consequences of
disqualification was deleted from the new bill.] In addition, the
Treasury is to update and improve the EPCRS voluntary correction
program.
- Exception to Early Withdrawal Tax: The substantially equal periodic
payment rule is modified.
- Distribution of Annuity Contract: The law is clarified that a
distribution of an annuity contract from a tax-qualified plan may be
treated as part of a lump sum distribution, providing NUA treatment for
employer securities in the distribution.
Change in Form of Plan: Under certain conditions an
employer can change the form of a plan.
- Notice and Consent: The applicable distribution notice may be
provided up to 180 days in advance of the distribution, but shall also
describe the consequences of failing to defer receipt of the
distribution.
- Overpayments to PBGC: The PBGC may pay interest on overpayments of
premiums.
Provisions which appear to have been
substantially modified from the original bill include:
- Annuity Tax Break Restricted: In what may be a problem for ERIC
members, a provision to provide special tax treatment for payments made
in the form of an annuity would not include distributions from defined
benefit plans.
- Minimum Participation Rule: Reform of the rule requiring DB plans to
benefit the lesser of 50 employees or 40% of all employees appears to be
limited to certain circumstances.
- Employee Contributions to DB Plans: In some instances such
contributions may be made on a pre-tax basis.
Provisions in H.R.1776 excluded from the new bill
include:
- Provisions allowing for employee pre-tax payments for retiree health
coverage and employer prefunding of retiree health benefits.
- EGTRRA permanence.
- Timing of plan valuations
- Extension of the 30-year Treasury "temporary fix" to 2001
- Actuarial value of assets in exempting plans from the VRP
- Development of a blue collar mortality table
- Group legal services
- Repeal of the gateway test for separate line of business
- Pre-retirement survivor annuity waivers
- Several other provisions that amend ERISA
A FULL
DESCRIPTION OF THE NEW BILL HAS BEEN PUBLISHED BY THE JOINT COMMITTEE ON
TAXATION AT
http://www.house.gov/jct/x-69-03.pdf
For questions or comments, contact:
Janice Gregory, Vice
President
jgregory@eric.org
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