TO: NASRA Directors

FROM: Jeannine Markoe Raymond

DATE: January 22, 1999

RE: Legislative Update

 

Intent on showing the public that there is other business underway in the Capitol City besides the impeachment trial of the president, the 106^th Congress has launched its first legislative session with the introduction of a series of legislative proposals. As expected, a large number of initiatives have been introduced surrounding Social Security, employer-provided pensions, and other retirement savings opportunities. Policies in these areas were also presented in President Clinton's 1999 State of the Union address.

Currently, the bulk of the legislation surrounds the financial standing of the Social Security system. In addition, the pension-related legislation primarily addresses Individual Retirement Accounts and private pension plans. (A summary of new legislative proposals is attached). However, members of Congress and the Administration have stated their intention to soon address public-sector provisions…

• President’s Budget

Preliminary discussions with Administration officials have revealed that the President intends to introduce public pension portability provisions in his FY2000 budget proposal. Provisions permitting rollovers among various deferred compensation and defined contribution plans and allowing assets in all DC plans to be transferred/rolled into public sector defined benefit plans to purchase service credits are expected. These provisions are anticipated to follow the Retirement Account Portability (RAP) Act of 1998 (HR 3503 and S 2329 in the 105^th Congress) supported by NASRA members last year. It remains uncertain as to whether other public sector provisions, such as increasing benefit limits, enhancing 457 plans, increasing catch-up contributions and removing compensation-based contribution levels are also under consideration. The President’s budget proposal is slated to be released February 1, 1999.

• Reintroduction of Bipartisan Pension Tax Proposals

House--Representatives Rob Portman (R-OH) and Ben Cardin (D-MD) are expected to reintroduce their far-reaching bipartisan pension legislation (HR 3788 in the 105^th Congress) this year. Last year’s proposal included public pension portability provisions, 457 simplification and flexibility, benefit and contribution limit increases, removal of compensation-based contribution limitations, and increases in catch-up contributions, among other items. Representative Cardin will be outlining the outlook for his and other House pension tax initiatives at the NASRA-NCPERS-NCTR Joint Legislative Meeting on Tuesday, January 26^th.

Senate--Senate Finance Committee members Charles Grassley (R-IA), Bob Graham (D-FL), Jim Jeffords (R-VT), Max Baucus (D-MT), Orrin Hatch (R-UT) and John Breaux (D-LA) also plan to reintroduce their bipartisan pension tax legislation this year (S 2339 in the 105^th Congress). While not as extensive as the House legislation, the proposal included public pension portability provisions, minor 457 simplification, removal of compensation-based contribution limitations, and catch-up contributions for all salary reduction plans. Review of the scope of this year’s legislation and consideration of additional provisions are currently underway.

Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) will soon introduce his own pension tax legislation addressing increased IRA, 401(K) and 403(b) contributions, allowing after-tax contributions to 401(k) an d403(b) plans, new catch-up contribution provisions, and removal of compensation-based limits, among other things. There are no public pension provisions in Chairman Roth’s legislation, however, staff indicated that the Chairman was hopeful that such provisions would again be addressed in legislation forwarded by other members of the Senate Finance Committee. Senate Finance Committee staff will be discussing these and other retirement initiatives at the Monday, January 25^th, lunch meeting.

President's Social Security Framework

While these pension initiatives are anticipated, currently, the top legislative priorities in both Houses of Congress surround providing tax cuts, education initiatives, military spending, reducing illegal drugs and, most importantly, financing the Social Security system. Senate and House Republican leaders have reserved the first bills of the 106^th congress, S. 1 and H.R.1 for the president's Social Security plan. Although a formal proposal has yet to be introduced, President Clinton did put forth his Framework to Save Social Security Now, While Meeting America's Challenges for the 21^st Century in his State of the Union Address. The framework would strengthen Social Security by:

• Transferring 62 percent of the projected budget surpluses over the next 15 years--more than $2.7 trillion to the Social Security system.

• Investing a portion of the transferred surpluses in the private sector to achieve higher returns for Social Security - "just as any state or local government, or private pension does" - after working with Congress to devise a mechanism to ensure that the investments are made independently and without political interference. The administration has stated its support using a broad-based neutral approach managed by the private sector with minimum administrative costs.

• Included in the final proposal should also be provisions that: 1) reduce poverty among elderly women - particularly windows, who have a poverty rate nearly twice the overall poverty rate for older Americans; and 2) Eliminate the confusing and out-dated earnings test.

• After Social Security Reform Is Secured - Consistent With the President's "Save Social Security First" Commitment - the President Proposes To:

--Strengthen Medicare for the 21st Century. The President's framework will reserve 15 percent of the projected surpluses for Medicare, ensuring the Medicare Trust Fund is secure for 20 years. The President believes that these new resources should be sued to help achieve broader, bipartisan reforms - which should include a prescription drug benefit.

--Create New universal Savings Accounts - USA Accounts. The President's framework will reserve 11 percent of the projected surpluses to create new Universal Saving Accounts (USAs) so all working Americans can build wealth to meet their retirement needs. To help Americans save and to strengthen our current pension system, the government will provide an equal dollar contribution for most Americans. In addition, the government will match a portion of each additional dollar an individual puts voluntarily into his/her USA account - with larger matches going to lower-income workers.

--Prepare America for the Challenges of the Future. The President's framework will reserve 11 percent of the projected surpluses for military readiness and pressing national domestic priorities, such as education and research.

Republicans Criticize Private Investment Proposal, Citing State and Local Pension Investment Politicization. Republican leaders have already criticized the President's framework, particularly the provision to invest a portion of the transferred surpluses in the private sector to achieve higher returns for Social Security - "just as any state or local government, or private pension does." A slew of testimony, articles, and news releases critical of state and local government investments have already been released (attached). Similarly skeptical of state and local pension fund investment practices, the Securities and Exchange Commission is currently exploring "pay-to-play" practices in the public pension fund arena. Robert Plaze, Associate Director of the Division of Investment Management at the SEC will be discussion the SEC examination into this area at the Tuesday Joint Legislative Conference.

As you can see, is it apt to be a very busy session of Congress!

106^th Congress, Retirement-related Proposals

Despite the fact that Congress has not been in session a full month, and an impeachment trial is currently underway in the Senate, a slew of legislation, particularly in the retirement area, has already been introduced this Congress. The following is a very brief summary of some of the retirement security legislation that has been introduced thus far in the 106^th Congress:

• Enhanced Savings Opportunity Act: S 60 (Grassley). This bill would effectively repeal the current 25% compensation limit on employee and employer contributions under IRC Section 415(c). The bill is also intended to remove the compensation-based limits on other salary reduction plans, including 403(b) and 457 plans. The dollar caps under these plans would be retained under the bill.
• Rollovers From Cafeteria Plans: HR 27 (Dreier). This legislation was reintroduced to allow the carryover of unused nontaxable benefits under cafeteria plans and flexible spending arrangements. The bill would allow the amounts to be transferred in a trustee-to-trustee transfer, or to be contributed within 60 days of the date of the distribution, to IRAs, 401(k)s, 403(b)s, 457s, medical savings accounts, or education individual retirement accounts.
• Puerto Rican Source Tax Fairness Act: HR 182 (McCollum). This proposals would clarify that retirement income from pension plans of the government of Puerto Rico shall be exempt from nonresident taxation in the same manner as state pension plans.
• IRA Increases and Withdrawals: HR 188 (McCollum). H.R. 188 would increase IRA contributions to $4,500 and allow penalty-free withdrawals from IRAs for long-term care, unemployment, financially-devastating medical expenses, and first-time home purchases.
• Family Retirement Savings Act of 1999: HR 226 (Pomeroy). This bill would allow low-income individuals a credit against income tax for contributions to individual retirement accounts.
• IRA Distributions: HR 252 (Saxton). This legislation would remove the requirement of a mandatory beginning date for distributions from individual retirement accounts.
• IRA Withdrawals: HR 253 (Saxton). This bill would amend the Internal Revenue Code of 1986 to allow penalty-free withdrawals from retirement plans to provide medical care for relatives who are 55 years old or older.
• Long-Term Care Advancement Act of 1999: HR 275 (Smith, Shays). Legislation would provide for an exception from penalty tax and exclusion from income for certain amounts withdrawn from certain retirement plans for qualified long-term care insurance and a credit for taxpayers with certain persons requiring custodial care in their households; to Ways & Means.
• Small Employer Retirement Opportunities: HR 352 (Blunt). This bill would amend the Internal Revenue Code of 1986 to provide additional retirement savings opportunities for small employers, including self-employed individuals.
• Freedom and Privacy Restoration Act of 1999: H.R. 220 (Paul). Would amend title II of the Social Security Act and the Internal Revenue Code of 1986 to protect the integrity and confidentiality of Social Security account numbers issued under such title, The bill would prohibit the establishment in federal, state and local governments of any uniform national identifying number, and to prohibit govnernment agencies from imposing standards for identification of individuals on other agencies or persons.
• Personal Retirement Account Act of 1999: HR 263 (Roth). This bill would be a 5-year program of personal Social Security retirement accounts for "working Americans" funded by a portion of the budget surplus.
• Earnings Limitation: HR 288 (Sweeney), HR 47 (Stump), S 279 (McCain). These bills would amend title II of the Social Security Act so as to remove the limitation upon the amount of outside income that an individual may earn while receiving benefits thereunder.
• Social Security Tax on Tax-Exempt Interest: HR 291 (Sweeney). This bill would amend the Internal Revenue Code of 1986 to provide that tax-exempt interest shall not be taken into account in determining the amount of Social Security benefits included in gross income.
• Social Security Trust Funds Protection Act: H.R. 37 (Livingston). This bill would amend the Congressional Budget and Impoundment Control Act of 1974 to protect the Social Security trust funds by taking them off-budget.
• Social Security Solvency Act of 1999: S 21 (Moynihan). This reintroduced legislation is considered by many to be one of the most thorough Social Security reform proposals. Among other things, this legislation would lower the Social Security payroll tax and allow workers to participate in voluntary individual accounts financed with proceeds from the tax cut, or workers could increase their take home pay by half of the cut. The bill would also reduce federal cost-of-living adjustments by modifying the CPI, would gradually phase in a retirement age increase, would increase the amount of wages subject to taxation above the current $68,500, and would repeal the earnings test beginning in 2003. The legislation would also require the mandatory participation in Social Security by all newly hired state and local government employees.
• Social Security Taxable Income: H.R. 48 (Stump). This bill would repeal the 1993 increase in income taxes on Social Security benefits.
• Social Security Budget Transparency Act of 1999: H.R. 74 (Bilbray). Provides that outlays and revenues totals of the old-age, survivors, and disability insurance program under title II of the Social Security Act and of the related provisions of the Internal Revenue Code of 1986 shall be excluded from official budget pronouncements of the Office of Management and Budget and the Congressional Budget Office.
• Senior Tax Relief Act of 1999: H.R. 107 (Knollenberg). This legislation would repeal the 1993 increase in income tax on Social Security benefits, repeal the earnings limitation on Social Security recipients, and repeal the estate and gift taxes.
• Social Security Exemption for Clergy: H.R. 133 (English and Coyne). Would permit the revocation by members of the clergy of their exemption from Social Security coverage.
• Social Security Preservation Act of 1999: H.R. 147 (HallHALL). This legislation would amend title II of the Social Security Act to ensure the integrity of the Social Security trust funds by requiring the managing trustee to invest the annual surplus of such trust funds in marketable interest-bearing obligations of the United States and certificates of deposit in depository institutions insured by the Federal Deposit Insurance Corporation, and to protect such trust funds from the public debt limit.
• Notch Fairness Act of 1999: H.R. 148 (Hall). Amends title II of the Social Security Act to allow workers who attain age 65 after 1981 and before 1992 to choose either lump sum payments over four years totaling $5,000 or an improved benefit computation formula under a new 10-year rule governing the transition to the changes in benefit computation rules enacted in the Social Security Amendments of 1977.
• Social Security Strengthening and Protection Act of 1999: H.R. 160 (Royce). Would amend title II of the Social Security Act to ensure the integrity of the Social Security trust funds by providing for investment of such trust funds in marketable interest-bearing obligations of the United States, and to protect such trust funds from the public debt limit.
• Social Security Benefits Fairness Act of 1999: H.R. 163 (Holden and others). Amends title II of the Social Security Act to provide that a monthly insurance benefit thereunder shall be paid for the month in which the recipient dies, subject to a reduction of 50 percent if the recipient dies during the first 15 days of such month, and for other purposes.
• Social Security Preservation Act: H.R. 167 (Klink). Would reaffirm the off-budget status of the old-age, survivors, and disability insurance program under title II of the Social Security Act..
• Deduction for Social Security Taxes: HR 105 (Knollenberg). This bill would amend the Internal Revenue Code of 1986 to allow individuals a deduction for Social Security taxes.
• Surplus Protection Act of 1999: H.R. 196 (Minge and others). Would amend the Balanced Budget and Emergency Deficit Control Act of 1985 to extend and clarify the pay-as-you-go requirements regarding the Social Security trust funds. The bill would amend the budget act to address net budget increases rather than simply deficit increases.
• Social Security Preservation Act of 1999: H.R. 219 (Paul). This legislation would amend title II of the Social Security Act to ensure the integrity of the Social Security trust funds by requiring the Managing Trustee to invest the annual surplus of such trust funds in marketable interest-bearing obligations of the United States and certificates of deposit in depository institutions insured by the Federal Deposit Insurance Corporation, and to protect such trust funds from the public debt limit.
• Strengthening Social Security Act of 1999: H.R. 249, HR 250, HR 251(Sanford). These bills would amend the Internal Revenue Code of 1986 and the Social Security Act to provide for personal investment plans funded by employee Social Security payroll deductions, to extend the solvency of the old-age, survivors, and disability insurance program, and for other purposes.
• Repeal of Social Security Tax Increase: S 286 (McCain). This legislation would repeal the increase in the tax on social security benefits.

105^TH CONGRESS IN REVIEW

As you know, the 105^th Congress forwarded retirement legislation in record number. The Taxpayer Relief Act of 1997 was enacted into law the first session, providing governmental plans with relief from nondiscrimination testing requirements and Internal Revenue Code restrictions, among other things. The Savings Are Vital to Everyone's Retirement Act of 1997 was also signed into law at the end of the first session, requiring a National White House/Congress Retirement Savings Summit to be convened every four years and launching a national retirement savings education campaign.

In its second session, members of the 105^th Congress turned their attention to further pension reforms, including increasing pension coverage and participation, providing greater pension security, simplifying plan administration, allowing greater pension portability, and increasing the maximum contribution and benefit limits. Additionally, the issue of Social Security reform moved to the forefront of national policy discussions.

Despite the voluminous number of pension tax initiatives in 1998, none received formal consideration by Congress. The usual vehicle for pension tax legislation, a budget reconciliation bill, was off the table as lawmakers were unable to reach a final budget agreement. Other potential vehicles came and went, including IRS restructuring legislation, an unrealized budget surplus bill, a failed tobacco litigation settlement, and a very narrow tax cutting bill. With most of the attention focused on the White House scandal, little was accomplished at the end of the legislative session. There were minor retirement-related items included in the FY 1999 omnibus spending measure, and Congress did pass securities litigation reforms requiring securities class actions against nationally traded companies to be brought in federal court, which included a very narrow exemption for state and local governments and their pension plans.

Most federal lawmakers stated their intention to reintroduce pension tax initiatives early in the 106^th Congress, possibly as part of broader retirement policy packages, such as Social Security reform. We have already seen significant retirement-related legislation forwarded in the first few weeks of the new Congress, and expect an even greater number of proposals this year.

The following is a summary of some of the public pension-related items enacted and proposed last Congress. These summaries, as well as a regulatory synopsis, are also posted on the Federal Relations section of the NASRA web site, www.nasra.org. The text and further summaries of the legislation will also be included in the NCPERS Legislative Conference binder that will be handed out Tuesday, January 26. Further information and text of particular provisions can also be located at the congressional legislative web site, Thomas, at http://thomas.loc.gov.

105^th CONGRESS

ENACTED LEGISLATION

• The Taxpayer Relief Act of 1997 (PL 105-34). This law, enacted on August 5, 1997, includes numerous provisions that pertain to state and local government pension plans:

—Permanent Testing Moratorium. The 20-year moratorium on the application of pension nondiscrimination tax rules for governmental plans is made permanent. The provision is effective for taxable years beginning on or after the date of enactment. A governmental plan is treated as satisfying the coverage and nondiscrimination tests for taxable years beginning before the date of enactment.

—Purchase of Service Credit. A new IRC Section 415(n) was enacted to provide relief from former Internal Revenue Code restrictions on purchases of permissive service credit in public defined benefit plans. The new rules apply to contributions made in years beginning after December 31, 1997, however, transition relief is provided.

—Dollar Limitations for Police and Fire Employees. Reductions in the §415(b) dollar limit for early retirement would not apply to police or fire personnel. This provision is effective for years beginning after December 31, 1996.

—Survivor Benefits for Safety Officers Killed in the Line of Duty. Annuities paid to survivors of public safety officers (both police and fire personnel) killed in the line of duty are excludable from taxable income. This is similar to the tax treatment of benefits provided for survivors of military service personnel killed in combat. The provision applies to amounts received in taxable years beginning after December 31, 1996, with respect to individuals dying after that date.

—Connecticut Heart and Hypertension Disability Tax Remedy. The new law provides that certain disability benefits received by former police officers and firefighters in the state of Connecticut are not taxable.

—Modification of the 403(b) Exclusion Allowance. The exclusion allowance is modified to include elective employee contributions and cafeteria plan contributions in the definition of compensation.

—Increase in 457 Cash-out. Permitted cash-outs of small, inactive (the employee has not contributed any money to the plan within 24 months) accounts are now allowed for balances up to $5,000 (up from $3,500).

—Repeal of Excess Distribution and Excess Retirement Accumulation Tax. The 15 percent excise tax on excess distributions is repealed for excess distributions received after December 31, 1996 and the 15 percent estate tax on excess retirement accumulations effective is repealed with respect to descendants dying after December 31, 1996.

—Modified Table for Joint and Survivor Annuities. For joint and survivor annuities beginning after December 31, 1997, a modified table is provided for determining the portion of each pension distribution that represents a return of basis.

—Technology for Pension Administration. The Secretaries of the Treasury Department and the Department of Labor are directed to facilitate the use of technology in pension plan operations and are required to issue guidance on the use of new technologies for plan purposes no later than December 31, 1998. In accordance with this provision, the Treasury Department and the IRS recently asked for comments on the paperless administration of retirement plans on (Announcement 98-62).

 

• The Savings Are Vital to Everyone's Retirement (SAVER) Act of 1997 (P.L. 105-92). This law was enacted on November 19, 1997 and is designed to increase retirement savings by launching a public education campaign and convening a national retirement savings summit. The first summit was held June 4-5, 1998 and additional summits are scheduled for 2001 and 2005. The bill mandates the participation of the congressional majority and minority leadership and the chairpersons and ranking members of all related congressional committees. Additionally, 200 delegates are to be appointed to each Summit, half are to be appointed by the president and half are to be appointed by elected leaders of the other party. The bill also directs the DOL to maintain an ongoing program of education and outreach to the public through public service announcements, public meetings, creation of educational materials, and the establishment of a site on the Internet.

• Securities Litigation Reforms (P.L. 105-353). This law was enacted on November 3, 1998 and would require all securities class actions against nationally traded companies to be brought in federal, rather than state, court. A narrow exemption was included for state and local governments and their pension funds, however, it would only apply if the entities are named plaintiffs and have authorized the action.

• FY 1999 Omnibus Appropriations Measure. Included in the FY 1999 omnibus appropriations measure was a provision to again open the option for state and local government entities to exempt student employees from FICA taxation. Also included in the measure was a provision barring the Commodity Futures Trading Commission from changing the way it oversees the over-the-counter derivatives market for six moths, giving Congress until next spring to determine how best to regulate OTC derivatives.

• Internal Revenue Service Restructuring and Reform Act of 1998: P.L. 105-206. On July 22, 1998, the President signed this legislation into law to reform the Internal Revenue Service. The agency will now be governed by an independent board of directors made up of six private citizens, an IRS employee representative, the IRS Commissioner, and the Secretary of the Treasury. Another noted feature gives taxpayers new rights and protections, including shifting the burden of proof onto the agency instead of the individual regarding audits. The final bill also contains a number of provisions that do not directly deal with IRS restructuring, such as those dealing with capital gains, Roth IRAs, and a number of technical corrections to the Taxpayer Relief Act of 1997. The IRS is also undergoing the biggest reorganization since 1952, separating the agency into four divisions, including an employee plans area.

Pension Tax Proposals

• Pension Coverage and Portability Act of 1998: S 2339 (Graham, Grassley and others). On July 21, 1998, Senate Finance Committee Members Bob Graham (D-FL), Charles Grassley (R-IA), Jim Jeffords (R-VT), Max Baucus (D-MT), Orrin Hatch (R-UT) and John Breaux (D-LA) introduced this comprehensive bipartisan pension tax package to expand coverage for small businesses, enhance fairness for women and families, increase pension plan portability, strengthen pension security and enforcement, and reduce red tape. The bill includes a number of proposals that would apply to public plans, including: permitting rollovers between various types of deferred compensation and defined contribution plans, allowing rollovers and transfers from all pension plans to public DB plans to purchase permissive service credits, clarifying the tax treatment of 457 distributions upon divorce, increasing the 25 percent of compensation limit, repealing the coordination requirements for 457 plans, and exempting governmental mirror plans from section 457 limits.

• Retirement Security for the 21st Century Act of 1998: HR 3788 (Portman and Cardin). House Ways and Means Committee Members Rob Portman (R-OH) and Benjamin Cardin (D-MD) introduced this bipartisan pension legislation on May 5, 1998 to simplify plan administration and encourage pension portability, coverage, participation and savings. The legislation includes provisions to allow portability among various types of defined contribution and deferred compensation plans and to allow transfers/rollovers from these plans to public defined benefit plans to purchase permissive service credits. The bill would also increase the maximum contribution and benefit limits under Section 415, and increase the 401(a)(17) limits to pre-1985 levels. The bill would further repeal the 457 coordination requirements, increase flexibility for 457 distributions, clarify the tax treatment of 457 plans upon divorce, would exempt governmental mirror plans from the 457 limits, and increase the percent of compensation limit.

• Retirement Account Portability Act of 1998: HR 3503 (Pomeroy, Kolbe and Others), S 2329 (Jeffords, Bingamon, Graham). On March 19, 1998 Reps. Earl Pomeroy (D-ND) and Jim Kolbe (R-AZ) introduced this legislation to promote the portability of retirement benefits by removing existing barriers between various types deferred compensation, defined contribution and defined benefit plans. Among other items, the bill would permit rollovers between all deferred compensation, defined contribution and IRA plans, and would allow transfers and rollovers from all such plans to public defined benefit plans to purchase service credits. The bill has over 30 co-sponsors in the House and has received the official endorsement of the White House. Companion legislation, S 2329, was introduced in the Senate on July 17, 1998 with minor modifications.

• Retirement Security Act of 1998: S 2249 (Daschle and Others) / Retirement Accessibility, Security and Portability Act of 1998: HR 4152 (Gejdenson and Others). On June 25, 1998, Democratic leaders unveiled pension reform legislation that incorporates provisions from three bills introduced in the Senate and seven bills introduced in the House and is based on President Clinton’s 1998 pension tax proposal. Among numerous other provisions, the bills would allow rollovers to and from 403(b) plans, rollovers from 457plans, and rollovers and in-service transfers from all DC plans to public DB plans to purchase service credits. The bills provide a number of simplification provisions for small business, but would also require more reporting, disclosure and enforcement requirements, particularly for 401(k) plans. The bills would additionally repeal Social Security integration.

• 21^st Century Retirement Act: S 2635 (Breaux, Gregg) and HR 4823 (Kolbe, Stenholm). These bills were recently put forth following the recommendations of the National Commission on Retirement Policy--a bipartisan, bicameral group chaired by members of Congress and the businesses community, and established by the Center for Strategic and International Studies. The recommendations of the group were to address all three legs of the retirement security stool, and were introduced as three separate House and Senate bills to address each area. The legislation introduced regarding employer-provided pensions, included portability measures, such as allowing rollovers between all DC plans, and allowing rollovers and transfers from all DC plans to public DB plans to purchase service credits. However, unlike the report by the NCRP, the legislative proposals would no longer allow for new 457s or 403(b)s, instead requiring that new plans be 401(k)s. Existing 457 and 403(b) plans would be unaffected, as the restriction would just apply to new plans. Nevertheless, it was only 12 years ago that Congress imposed a provision prohibiting 401(k) plans. Now it would mandate them. Many public pension advocates have voiced concern regarding the potential impacts of the new proposal, suggesting that a better policy would be to make all plans available and allow jurisdictions to choose the plan that best suits their workforce.

• Rollover Contributions From Deferred Compensation Plans Of State And Local Governments: HR 3554 (McNulty). This bill was introduced on March 25, 1998 and would allow rollover contributions to individual retirement plans from deferred compensation plans maintained by state and local governments and would allow state and local governments to maintain 401(k) plans. The rollover provisions were incorporated in S 2249 and HR 4152.

• Rollovers From Cafeteria Plans: HR 3552 (Dreier). On March 25, 1998, this legislation was introduced to allow the carryover of unused nontaxable benefits under cafeteria plans and flexible spending arrangements. The bill would allow the amounts to be transferred in a trustee-to-trustee transfer, or to be contributed within 60 days of the date of the distribution, to IRAs, 401(k)s, 403(b)s, 457s, medical savings accounts, or education individual retirement accounts.

• Flexible Spending Accounts: S 2304 (Bennett). This legislation was introduced on July 14, 1998 and would allow individuals to carry over up to $500 of unused funds form their flexible spending accounts into the next year or to deposit such funds into an IRA, a 401(k) retirement plan or a Medical Savings Account.

• Pension Expansion and Portability: HR 3672 (Neal). Based on the President's 1998 Pension Package, this proposal is aimed at increasing pension coverage, participation and portability. The bill would allow workers to contribute to IRAs through payroll deduction plans at work, would provide tax credits to small businesses that establish pension plans, and would create a new, simplified defined benefit pension plan for small employers. The proposal will further seek faster vesting of employer matching contributions to 401(k) plans, would expand pension right-to-know provisions for workers and spouses, and would simplify pensions and increase retirement savings.

• Business Bankruptcy Reform Act: S 1914 (Grassley). This bill was introduced on April 2, 1998 and would revise the business provisions of the bankruptcy code. Proposed amendments to the legislation would clarify that the funds set aside in a governmental or other qualified retirement trust for an individual’s retirement security are exempt from a bankruptcy estate.

• Pension Improvement Act of 1998: HR 3101 (Neal). Introduced on January 27, 1998, this bill would require that employers permit lump sum distributions from all DC and DB to be rolled over to individual retirement accounts within three months after separation of service and would permit involuntary cash-outs only when the distribution is rolled into an IRA. It also would permit penalty-free distributions from IRAs during unemployment and would accelerate the vesting schedule for private defined contribution plans.

• Public Plan Funding Legislation: HR 509, HR 510 / Retirement Protection Act of 1998: HR 3450 (Andrews). HR 509 and HR 510 would create private rights of action by plan participants if changes in public pension plan funding are not reviewed by a three-member board. If a state does not set up such a review board, each participant in the plan has the right to sue. These private rights of action are not limited to funding changes, but apply to any action taken by the fiduciaries that "violates the terms of the plan." Rep. Andrews (D-NJ) recently introduced the Retirement Protection Act of 1998, which, among other items, includes the plan funding provisions in HR 509 and HR 510.

• Comprehensive Pension and Retirement Security Act of 1997: HR 83 (Schumer). One provision in this bill would require defined benefit pension plans to offer each participant the opportunity to elect coverage under a defined contribution plan in lieu of the defined benefit plan coverage. The employer contributions to the defined contribution plan would need to be at least equivalent to the contributions to the defined benefit plan. Unless this option was offered, the defined benefit plan would lose its tax-exempt status. The bill makes a number of other tax code and ERISA changes, including an increase in the 10% early distribution penalty to 100%.

• Retirement Savings Assistance Act: HR 4123 (Weller). The legislation, introduced on June 24, 1998, would permit an additional $2000 annual catch-up contribution to 457, 403(b), and 401(k) plans for individuals between ages 35 and 50 who have not been active participants in a 401(a), 403(b) or 457 during the five prior years. A $10,000 annual catch-up contribution would be permitted for individuals 50 and older. The bill would also increase the section annual dollar limits on contributions to $40,000 and the 25% of compensation limit to 100% of compensation.

• Family Leave Pension Relief Act of 1998: HR 4178 (Price). This legislation was introduced on June 25, 1998 and would require that periods of leave taken under the Family and Medical Leave Act be treated as hours of service for purposes of pension participation and vesting rules.

• Safety Officer Benefits for Emergency Workers: HR 3608 (Cramer). This bill would allow emergency workers to be eligible for certain public safety officer death benefits. It would amend the Omnibus Crime Control and Safe Streets Act of 1968 to provide that rescue squad and ambulance crews, employees of the Federal emergency and Management Agency (FEMA), and employees of State and local government emergency management and civil defense agencies would be among those eligible for public safety officer death benefits under the law.

• Enhanced Savings Opportunities Act: S 1856 (Grassley) and HR 3663 (Leach). S 1865 was introduced in the Senate on March 25, 1998 and would increase the Section 415(c) 25% of compensation limit to 100%, and conform 403(b) regulations to reflect the repeal of 415(e). HR 3663 was introduced as companion legislation in the House on April 1, 1998.

• Pension ProSave Act: S 957 (Jeffords and Bingamon). This bill was introduced on June 25, 1997 and would create a pension portability clearinghouse to provide employers simplified plan administration and employees with a portable benefit.

• Secure Assets for Employees (SAFE) Plan Act of 1997: HR 1656 (N. Johnson, Fawell and Pomeroy). In order to encourage defined benefit plans among small employers, this bill creates a simplified, portable defined benefit plan and provides a safe-harbor from many of the complicated qualified plan rules. Such a defined benefit plan could be funded through either an IRA or a trust that invests in restricted securities. The bill was introduced on May 16, 1997 and has been included in large-scope pension bills such as HR 3788, S 2329 and S 889. Modified versions of the SAFE Act have also been included in the President's Pension Tax Package, S 2249, HR 4152, HR 3870, S 2130 and HR 3672.

• Comprehensive Women's Pension Protection Act of 1997: S 320 (Moseley-Braun) and HR 766 (Kennelly). These bills would modify the tax code and ERISA to provide more spousal rights, disclosure and education to women regarding pensions. The bills would phase-out Social Security integration and require spousal consent for lump-sum distributions from 410(k) plans, among other things. A number of provisions were incorporated in S. 2249 and HR 4152.

• Women's Investment and Savings Equity (WISE) Act of 1997: S 620 (Gregg) and HR 1496 (McClollum and Dunn). S. 620 was introduced on April 17, 1997 to allow deductible IRAs for homemakers without regard to spousal participation in employer-sponsored pension plan, and would allow persons who are absent from the workplace for Family and Medical Leave Act eligible situations or are unable to participate in the workforce because of a dependent child to make catch-up contributions to 401(k) plans. Employer are permitted, but not mandated to match such catch-up contributions. HR 1496 was introduced as companion legislation on April 30, 1997. Provisions were included in larger pension packages (S 889 and S 883).

• Women's Pension Equity Act of 1997: HR 1105 (Lowey). This bill was introduced on March 18, 1997 and would require the Secretary of the Treasury to develop a model spousal consent form and a model QDRO, and to publicize the creation of these forms in public outreach efforts undertaken by both the Secretaries of the Treasury and Labor.

• Retirement Income, Security, and Savings Act of 1997: S 883 (Gregg). This legislation was introduced on June 11, 1997 and contains provisions for a simplified defined benefit plan for small businesses (same as the SAFE Act), and requirements for Treasury and DOL to facilitate the use of technology in pension plan operations, among other things. Several provisions were passed as part of the Taxpayer Relief Act of 1997.

• Retirement Security for the 21^st Century Act of 1997: S 889 (Graham, Grassley and Hatch). Introduced on June 12, 1997, this bill included many pension simplification provisions that were passed as part of the Taxpayer Relief Act of 1997, including the permanent moratorium on the application of nondiscrimination rules for governmental plans.
• The Retirement Security Act of 1997: S. 14 (Daschle) and HR 1130 (Gejdenson). S 14 was introduced on January 21, 1997 by the Senate Democratic leadership to promote pension security. Provisions include 401(k) asset investment diversification and various provisions regarding the audit process, vesting schedules and regulation of private plans. The permanent nondiscrimination moratorium for governmental plans was also included. HR 1130 was introduced as companion legislation on March 19, 1997. A few of the provisions in these bills were passed as part of the Taxpayer Relief Act of 1997. A number were incorporated in S. 2249, the Retirement Accessibility, Security and Portability Act of 1998 and in HR 4152, the Retirement Security Act of 1998.

Social Security Reforms

The following is a small sample of the many bills introduced in the 105^th Congress regarding Social Security:

• National Dialogue on Social Security Act: HR 3546 (Archer, Kasich, Bunning and Others). On April 29, 1998 the House voted to create a national commission charged with finding ways ensure the long-term viability and stability of the Social Security system (H.R. 3546). The legislation was introduced by Ways and Means Committee Chairman Bill Archer (R-TX), Budget Committee Chairman John Kasich (R-OH), and Social Security Subcommittee Chairman Jim Bunning (R-KY), and is supported by the House leadership. The bill would establish an eight-member panel, with four members appointed jointly by the Speaker of the House and the Senate Majority Leader, two by the president, and two jointly by the Senate and House Minority Leaders. The commission members are to represent multiple generations with a stake in the viability of the Social Security system, with at least one member representing employees’ interests and one member representing employers’ interests. They would be required to issue a report by February 1, 1999, which must include only recommendations that are approved by at least six of the eight members.

• Creation of Social Security Panel: HR 3095 (Archer, Kasich). This legislation would establish a bipartisan panel to design a single set of legislative and administrative recommendations for Social Security reform. It would create an eight-member panel comprised of both public- and private-sector representatives, and would be required to issue a report by February 1, 1999.

• Social Security Solvency Act: HR 179 (Moynihan). Considered by many to be one of the most thorough Social Security reform proposals is legislation introduced by Senator Daniel Patrick Moynihan (D-NY). Among other things, this legislation would lower the Social Security payroll tax by 2 percentage points (from 12.4% to 10.4%) between 2001 and 2024 with the payroll tax remaining below 12.4% until 2045. Workers would be permitted to participate in voluntary individual accounts financed with proceeds from the 2% tax cut, or workers could increase their take home pay by 1%. The bill would also reduce federal cost-of-living adjustments by modifying the CPI, would gradually phase in a retirement age increase, would increase the amount of wages subject to taxation above the current $68,500, and would repeal the earnings test beginning in 2003. The legislation would also require the mandatory participation in Social Security by all newly hired state and local government employees beginning in 2001.

• Personal Retirement Accounts: HR 2782 (Sanford). Legislation introduced by Rep. Mark Sanford (R-SC), would fully privatize the Social Security System by requiring all individuals to maintain an IRA-like "Personal Retirement Account" (PRA) administered by a custodian. Under the proposal, both employees and employers would contribute 6% of salary. Of the total 12% employer and employee contributions, 8% would go to employees’ PRA account and 4% would help pay for benefits under the current Social Security system. Individuals could contribute more to their PRA if they wished. A mandatory insurance premium would be levied on the PRA accounts to purchase a guaranteed minimum annual benefit. HR 2782 would provide various pay-out options, would cap COLAs, would increase the retirement age, would continue a trust for Social Security disability payments, and would mandate coverage for all newly hired sate and local government employees. The concept of personal retirement accounts has also been forwarded by House Speaker Newt Gingrich and House Budget Committee Chairman John Kasich. Both lawmakers propose using the projected budget surplus to create such accounts as an addition to the current Social Security system.

• Social Security Reform: S 321 (Gregg). This bill would create personal investment plans funded by employee Social Security payroll deductions of one percent. To increase the solvency of the overall Social Security system, this bill would increase the retirement age to 70 and the early retirement age to 65 by 2029 and continue to gradually increase the ages after that. The bill would also reduce the Consumer Price Index for Social Security purposes by 0.5 percentage point each year.

• Two-Tiered System: HR 3082 (N. Smith). This legislation would establish a two-tiered Social Security System that would include both a basic defined benefit and a personal retirement account carved out of the system.

• Pilot Program for Individual Social Security Accounts: HR 3560 (N. Smith). This bill would establish a pilot program for workers under age 21 to hold private retirement accounts funded by future budget surpluses.

• Investment of Social Security Trust Funds in Stock Market: HR 3822 (N. Smith). The legislation would require investment of the Social Security trust funds in equities and would take the trust funds off budget. Congressman Earl Pomeroy (D-ND) recently announced plans to draft legislation that would invest up to half of Social Security assets in the stock market. A recent GAO report, Implications of Government Stock Investing for the Trust Fund, the Federal Budget and the Economy (GAO/AIMD/HEHS-98-74) addresses issues that are likely to be debated regarding such proposals.

• Social Security Offset Bills: HR 2273 (Jefferson and Others), S 1365 (Mikulski and Others). These bills would modify the government pension offset provision so that there would be no offset in cases where the combined total benefit (the earned government pension plus the spousal benefit or survivor's benefit) did not exceed $1,200. If the combined total benefit exceeded $1,200, then two-thirds of the amount over $1,200 would be used as an offset for the survivor's or spousal benefit. Currently, two-thirds of a spouse's total earned government pension is applied to reduce his or her spousal or survivor's benefit. There are over 150 cosponsors of the House legislation and 14 cosponsors of the senate bill. The offset provisions were also incorporated into S 2249 and HR 4152.

• Social Security Integration: S 320 (Moseley-Braun, Murray) and HR 766 (Kennelly). Integration with Social Security allows a pension to be combined with Social Security to achieve overall retirement income objectives. Section 401(l) of the Internal Revenue Code allows for several methods for integration. These bills, among other provisions, would repeal Sec 401(l) and related sections of 401(a) after January 1, 2004. This provision has been a component in other pension packages, including S 2249 and HR 4152.

• Mandatory Medicare/Increase in Eligibility Age and Certain Premiums (Blue Dog Budget Proposal, Senate Medicare Plan). The House "Blue Dog" Coalition's FY1998 budget outline that produced a budget surplus by FY 2002 included a provision extending the Medicare hospital insurance tax to those Federal, state and local workers who are not currently covered. A similar provision was included in the Senate's initial Medicare Plan proposal. The final Medicare plan passed by the Senate in 1997 included additional monthly Part B premiums for higher-income Americans, on top of what is already scheduled to be paid, and a gradual increase of the eligibility age to 67. None of these proposals were included in the final 1997 legislation.

• Medicare Commission. Membership is complete for the commission charged with making recommendations by March 1999 for keeping Medicare financially sound. The panel includes: Sen. Bill First (R-TN); Sen. Phil Gram (R-TX); Sen. Bob Kerrey (D-NE); Sen. John Rockefeller (D-WV); Rep. Michael Billirakis (R-FL); Rep. Greg Ganske (R-IA); Rep. John Dingell (D-MI); Rep. Jim McDermott (D-WA); Rep. Bill Thomas (R-CA); Stuart Altman, health economist; Illlene Gordon, Medicare beneficiary; Samuel H. Howard, President & CEO Phoenix Health Care Corp.; Deborah Steelman, health policy specialist; Laura Tyson, economics professor; Bruce Vladeck, former HCFA administrator; Anthony Watkins, chief executive HIP Health Plan.

• 10 Percent Tax Act: HR 3620 (Gephardt). This legislation was introduced on April 1, 1998 and would impose a maximum federal income tax of 10% on three-quarters of families in the United States. According to reports from the sponsor, the 10 Percent Tax Act would reduce the tax rate by broadening the current tax base and eliminating $50 billion in "corporate welfare." The legislation would also eliminate nearly all deductions except the one for mortgage interest and the preferred tax status of health insurance. The plan calls for retaining the progressive nature of the current tax system through five tax brackets from 10% to a maximum 34%. Gephardt said the proposal would not increase the deficit. Fringe benefits (except health care), employer and employee pension contributions and tax-exempt interest would be included in income. Inside build-up in pensions would continue to be excluded from income as in current law. In addition, a portion of pension distributions would be nontaxable to reflect the non-exclusion of the contribution to the plan. Early withdrawal penalties would continue to apply.

• Flat Tax: HR 1040 (Armey) and S 1040 (Shelby). HR 1040 would apply a 20% single tax rate (17% starting in 1999) to individuals and businesses. A hefty standard deduction is provided to make the proposal more progressive and itemized deductions are eliminated. Salary-reduction contributions to plans such as 401(k), 457 and 403(b) would no longer receive income tax advantages. However, the bill would significantly simplify the rules relating to qualified retirement plans by repealing the nondiscrimination test for all plans, the top heavy rules, the 401(a)(17) compensation limits, the minimum participation and coverage rules, ADP and ACP tests, various contribution and benefit limits, and the tax on employer reversions of pension assets. S 1040 would also replace the current income tax with a flat tax regime featuring a single tax rate of 17 percent and hefty standard deductions.

• National Retail Sales Tax: HR 1325 (Shaefer). This legislation would replace current federal taxes (including income, estate and gift, and most excise taxes) with a national retail sales tax. All tax rules governing employer-sponsored pensions would no longer apply.

• Savings and Investment Relief Act of 1998: HR 4213 (Solomon, Menendez). This legislation would cap SEC fees on transactions to ensure that they do not exceed the agency's budget needs. Currently the SEC takes in 372% of its budget in transaction fees and the excess amounts go into the general fund of the federal government.

• Fairness in Securities Act: HR 4269 (Hobson, Forbes). This bill would reduce the 1934 Securities Exchange Act Section 31 fee rate on sales of securities from 1/300 of 1 percent to 1/600 of 1 percent.

• Decimalization: HR 1053 (Oxley and Markey) and S 838 (Bryan). This legislation would change U.S. stock pricing from fractions to decimals. It is designed to bring the U.S. in line with other industrialized nations that now use decimal pricing. Hearings were held in the House, but the House bill was withdrawn when the Nasdaq Stock Market and the New York Stock Exchange agreed to shift to the use of decimals.

• Commodity Exchange Act Amendments: S 257 (Lugar, Harkin, Leahy), HR 467 (Ewing). These bills would make a number of changes to the Commodity Exchange Act to clarify the limits of the Commodity Futures Trading Commission's authority, exempt certain futures and options contracts from CFTC jurisdiction, and require the CFTC to conduct cost-benefit analysis on new rules and regulations, among other things.

• Financial Derivatives Supervisory Improvement Act: HR 4062 (Leach), HR 4507 (R. Smith) , Omnibus Appropriations Measure. HR 4062 and HR 4507 would prevent the CFTC from moving forward with possible regulatory action regarding the OTC derivatives market until Congress has had a full opportunity to review the situation. In the FY 1999 funding measure for the CFTC, appropriators barred the commission from changing the way it oversees the over-the-counter derivatives market for six moths, giving Congress until next spring to determine how best to regulate OTC derivatives.

• Mutual Fund Performance: HR 4822 (Gillmore). This legislation would require the Securities and Exchange Commission to require the improved disclosure of tax effects of portfolio transactions on mutual fund performance, and for other purposes.