Legislation Enacted--105th

The Taxpayer Relief Act of 1997

The Savings are Vital to Everyone's Retirement (SAVER) Act

FY 1999 Omnibus Appropriations Measure

Internal Revenue Service Restructuring and Reform Act of 1998

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. P.L. 105-34 would make permanent the 20-year moratorium from the pension nondiscrimination tax rules for governmental plans. In doing so, it would end the nearly two decades of uncertainty surrounding how or if these private sector tax rules would be applied to pension plans maintained by state and local governments. This provision was put forth this Congress as part of many comprehensive pension reform packages (S 14, HR 1130, S 883 and S 889) and as bipartisan independent legislation (S 622 and HR 1740). The final report language clarifies that the exemption from the nondiscrimination and participation rules includes exemption from the ACP and ADP tests. It also provides that a cash or deferred arrangement under a governmental plan is treated as a qualified cash or deferred arrangement even though the ADP test is not in fact satisfied. 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. Go to Top Thomas' Legislative Summary GPO's PDF

Purchase of Service Credit. The Taxpayer Relief Act of 1997 provides relief from former conflicts between the Internal Revenue Servicešs application of the defined contribution limits and state and local government employeesš rights under state law to purchase permissive service credit in public defined benefit plans. The new law removes all limitations on the repayment of refunds under the plan (or another plan maintained by a state or local government employer within the same state). Other contributions to purchase permissive service credits are subject to one of two limits. Either 1) the accrued benefit derived from all contributions to purchase permissive service credit must be taken into account in determining whether the defined benefit pension plan limit is satisfied, or 2) all such contributions must be taken into account in determining whether the $30,000 limit on annual additions is met for the year (taking into account any other additions of the participant). These limits may be applied on a participant-by-participant basis.
No more than five years of permissive service credit can be purchased for "nonqualified service," defined as service other than service 1) as a federal, state, or local government employee, 2) as an employee of an association representing federal, state, or local government employees, 3) as an employee of an educational institution which provides elementary or secondary education, or 4) for military service. Service under 1), 2), or 3) is not qualified if it enables a participant to receive a retirement benefit for the same service under more than one plan. In addition, section 415 is violated if nonqualified service is taken into account for an employee who has less than five years of participation under the plan.

While the provision is effective with respect to contributions to purchase permissive service credits made in years beginning after December 31, 1997, a grandfather rule would apply. Under this rule, the defined contribution limits will not reduce the amount of permissive service credit an eligible participant is allowed under the terms of the plan as in effect on the date of enactment of the Act (August 5, 1997). For this purpose, eligible participants are "individuals who first became participants in the plan before the first plan year ends following the last day of the calendar year in which the next regular session (following the date of enactment of this Act) of the governing body with authority to amend the plan ends." Go to Top Thomas' Legislative Summary GPO's PDF
Dollar Limitations for Police and Fire Employees. IRC Section 415 requires that benefits paid from the plan to employees may not exceed an annual dollar limit ($125,000 in 1997). For employees retiring before the normal retirement age (62 years), this $125,000 limit is actuarially reduced for each year prior to age 62. P.L. 105-34 provides that reductions in the §415 dollar limit on benefits would not apply to police or fire personnel. This provision is effective for years beginning after December 31, 1996.Go to Top Thomas' Legislative Summary GPO's PDF

Survivor Benefits for Safety Officers Killed in the Line of Duty. P.L. 105-34 provides that annuities paid to survivors of public safety officers (both police and fire personnel) killed in the line of duty will be excludable from taxable income. This provision is similar to the tax treatment of benefits currently provided for survivors of military service personnel killed in combat. The report language also clarifies that the provision does not apply with respect to the death of a public safety officer if it is determined by the appropriate supervising authority that 1) the death was caused by the intentional misconduct of the officer or by the officers intention to bring about the death, 2) the officer was voluntarily intoxicated at the time of death, 3) the officer was performing his or her duties in a grossly negligent manner at the time of death, or 4) the actions of the individual to whom payment is to be made were a substantial contributing factor to the death of the officer. The provision applies to amounts received in taxable years beginning after December 31, 1996, with respect to individuals dying after that date. Go to Top Thomas' Legislative Summary GPO's PDF

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.Go to Top Thomas' Legislative Summary GPO's PDF

Modification of the 403(b) Exclusion Allowance. P.L. 105-43 increases permitted contributions to 403(b) plans by modifying the exclusion allowance to include elective employee contributions and cafeteria plan contributions in the definition of compensation. Go to Top Thomas' Legislative Summary GPO's PDF

Increase in 457 Cash-out. 457 plan changes enacted last year allowed employees to cash-out small (less than $3,500), inactive (the employee has not contributed any money to the plan within 24 months) account balances from 457 plans. P.L. 105-34 now allows up to $5,000 to be cashed-out from inactive accounts. Go to Top Thomas' Legislative Summary GPO's PDF

Repeal of Excess Distribution and Excess Retirement Accumulation Tax. The Act repeals both the 15 percent excise tax on excess distributions received after December 31, 1996 and the 15 percent estate tax on excess retirement accumulations effective with respect to descendants dying after December 31, 1996. Go to Top Thomas' Legislative Summary GPO's PDF

Modified Table for Joint and Survivor Annuities. For joint and survivor annuities beginning after December 31, 1997, P.L. 105-34 provides a modified table for determining the portion of each pension distribution that represents a return of basis. Report language indicates that the current application of the table for single life annuities to joint and survivor annuities understates the expected payments. In addition, it clarifies that the new table applies to benefits based on the life of more than one annuitant, even if the amount of the annuity varies by annuitant. Thus, for example, the new table applies to a 50 percent joint and survivor annuity. The new table does not apply to an annuity paid on a single life merely because it has additional features. e.g. a term certain. Go to Top Thomas' Legislative Summary GPO's PDF

The Savings Are Vital to Everyone's Retirement (SAVER) Act of 1997 (P.L. 105-92)

The Savings Are Vital to Everyone's Retirement Act (SAVER), HR 1377, was signed into law 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. 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. NASRA’s President-Elect, Sparb Collins (ND) and Vice President for Region II, Frank Ready (MS) were chosen as delegates to the 1998 Summit (Go to related Federal FAX Article). 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. Go to Top Thomas' Legislative Summary GPO's PDF

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

On July 22, the President signed legislation (HR 2676, P.L. 105-206) 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. One provision in the legislation lowers the holding period for the most favorable capital gains rate from 18 months to 12 months. Another part of the bill makes more than 40 substantive changes to fix a broad array of technical problems associated with the Taxpayer Relief Act of 1997, including omissions, errors, or ambiguities in statutory language. A number of Roth IRA provisions were also included in the bill, which one reporter characterized as making the complex rules even more complicated for many taxpayers. One IRA provision would no longer count money withdrawn from traditional IRAs as income for the purposes of determining whether an individual is under the $100,000 income limit for establishing a Roth IRA.

The IRS is also undergoing the biggest reorganization since 1952, separating the agency into four divisions, including an employee plans area. The plans for reorganization were announced six months ago by IRS Commissioner Charles A. Rossotti (See Feb 2 edition of the Federal FAX). The agency will restructure examination functions around four separate groups of taxpayers: individuals with wage investment income; small businesses; large businesses; and exempt plans, exempt organizations and state and local governments. Go to Top Thomas' Legislative Summary

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