Document: ERIC Submits Priorities for Regulatory Guidance Under EGTRRA : ERIC

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	Congress

ERIC Submits Priorities for Regulatory Guidance Under EGTRRA

By Hand

William Sweetnam, Esq.
Benefits Tax Counsel
Office of the Benefits Tax Counsel
U.S. Department of the Treasury
Room 1000
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20020

Re: Benefit Issues Requiring Priority Guidance under
The Economic Growth and Tax Relief Reconciliation Act

Dear Bill:

I am pleased to enclose ERIC's submission on issues requiring priority guidance under the employee benefit provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. As you know, ERIC has already submitted preliminary comments on the Act's catch-up contribution provisions. In addition, ERIC anticipates making one or more submissions on other issues raised by the Act's employee benefit provisions.

We hope that the comments will assist the Treasury in identifying and addressing the important employee benefit issues raised by the Act. We look forward to discussing the issues we have identified with you and your colleagues.

Respectfully submitted,

Mark J. Ugoretz
President

cc: Deborah Walker
William Bortz
Elizabeth Drigotis
W. Thomas Reeder
Enclosure

SUBMISSION OF THE ERISA INDUSTRY COMMITTEE
TO THE
TREASURY DEPARTMENT
REGARDING
BENEFIT ISSUES REQUIRING PRIORITY GUIDANCE UNDER
THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION
ACT

August 6, 2001

The ERISA Industry Committee ("ERIC") makes this submission to identify issues requiring priority guidance under the employee benefit provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "Act"). Because these views are preliminary, ERIC reserves the right to amend this submission.

ERIC has already provided the Treasury with its preliminary comments on the Act's catch-up contribution provisions. ERIC also anticipates that it will make one or more additional submissions on other issues raised by the Act's employee benefit provisions.

ERIC's Recommendations

Notice of Reduced Rate of Future Benefit Accruals (Act 659)

1. The Treasury should make it clear that the notice requirement in Code 4980F(e) does not apply to nonqualified deferred compensation plans.

Section 659 of the Act amends the Code to require an "applicable pension plan" to give advance written notice of a plan amendment that provides for a significant reduction in the rate of future benefit accrual. If a single-employer plan fails to comply with the notice requirement, the employer is subject to an excise tax. An "applicable pension plan" is defined by 659 to mean any defined benefit plan or an individual account plan that is subject to the funding standards of 412.

The Treasury should clarify that the notice requirement in the Code applies only to qualified plans. Although the statute does not state explicitly that this is so, it is evident that this is what Congress intended. For example, the notice requirement applies only to individual account plans that are subject to the 412 funding standards, which apply only to qualified plans. See Code 412(a). Similarly, Code 4980F(f)(2) provides that an "applicable pension plan" shall not include a church plan unless an election has been made to have the qualified plan participation, vesting, and funding rules apply. See also Code 4980F(f)(1), (3) (defining "applicable individual" by reference to 414(p)(8) and "retirement type subsidy" by reference to 411(d)(6)(B)(i)). These provisions confirm that Congress intended the Code provisions to apply only to tax-qualified plans.

2. The Treasury should make it clear that "applicable individuals" do not include individuals whose rate of future benefit accrual is not reasonably expected to be significantly reduced by the amendment, as determined in accordance with Treas. Reg. 1.411(d)-6, Q&A-9, such as deferred vested participants and actively employed participants who no longer accrue benefits in the plan because, for example, they have been transferred to a nonparticipating joint venture or they have otherwise been assigned to a position that is not covered by the plan.

Under 659, notice must be given to an "applicable individual," which is defined, with respect to a plan amendment, as each participant and alternate payee "whose rate of future benefit accrual under the plan may reasonably be expected to be significantly reduced by such plan amendment." Code 4980F(f)(1); ERISA 203(h)(8).

Consistent with the text of the statute, the Treasury should clarify that inactive participants who are no longer accruing benefits under the plan are not "active individuals" since their rate of future benefit accrual would not reasonably be expected to be significantly reduced by the plan amendment. Such individuals would include individuals identified in Treas. Reg. 1.411(d)-6, Q&A-9, such as deferred vested participants who are no longer working for the employer and actively employed participants who no longer accrue benefits in the plan because, for example, they have been transferred to a nonparticipating joint venture or they have otherwise been assigned to a position that is not covered by the plan.

3. The Treasury should make it clear that all required notices may be provided electronically. Code 4980F(g) and ERISA 204(h)(7) provide that the Secretary may by regulation allow any notice under 4980F(e) to be provided using new technologies. In accordance with this provision, the Treasury should permit employers to use new technologies to provide the required notice. As 4980F(e) and 204(h)(7) demonstrate, Congress has recognized that new technologies can be used to communicate effectively, efficiently, and promptly with employees. Moreover, employees are now accustomed to receiving important notices through the use of new technologies. The Treasury should make clear that new technologies can be used to provide the notice required by Code 4980F(e) and ERISA 204(h).

4. The Treasury's regulations should not become effective until it provides the public with an opportunity to comment on proposed regulations and until at least one year following publication of final regulations.

Section 659(c) provides that the amendments made by 659 will apply to amendments taking effect on or after the date of enactment, but that until the Treasury issues regulations under Code 4980F(e)(2) and (3) and ERISA 204(h), as amended, a plan will be treated as meeting the requirements of those provisions if it makes a good faith effort to comply with those requirements. The Treasury's regulations will address a complex subject that will require substantial thought, deliberation, and analysis. The Treasury should not publish regulations of this significance until it issues proposed regulations and receives the benefit of public comment on its proposal. Regulations issued without the benefit of public comment run a high risk of disserving both plan participants and plan sponsors.

Moreover, the regulations under 659 are likely to require employers to spend a considerable amount of time digesting the regulations' requirements and then designing, producing, and distributing notices in accordance with the regulations. We anticipate that a significant period of time will be required for employers to digest and implement the new requirements. We urge the Treasury to provide for an adequate period between the publication of the regulations and the date the regulations become effective. Too brief an interval will create confusion, consternation, and misinformation, and will damage both plan participants and the employee benefit system.

ESOP Dividend Deduction (Act 662)

1. The Treasury should make it clear that, under Code 404(k), a plan may impose reasonable rules regarding the frequency of election changes, including a rule that permits each participant to make an initial election and to change that election no more often than once a year thereafter or a rule that that permits each participant to change his election at any time on a prospective basis.

Section 662 of the Act amends Code 404(k) to permit a C corporation to deduct dividends paid on shares held by an ESOP where, at the election of participants or their beneficiaries, the dividends are either (a) payable in cash to participants or beneficiaries or paid to the plan and distributed in cash to participants or beneficiaries no later than 90 days following the close of the plan year or (b) paid to the plan and reinvested in qualifying employer securities.

Because the amendment to 404(k) does not prescribe the conditions under which participants and beneficiaries may make elections, the Treasury should provide that a plan may impose any reasonable rules regarding elections that it chooses as long as the plan's rules permit participants and beneficiaries to make informed, voluntary elections and to change their previous elections at least once a year.

Thus, a plan should be permitted to allow each participant to make an initial election and to change his election no more often than once a year thereafter or to impose a rule that permits each participant to change his election at any time on a prospective basis.

2. The Treasury should make it clear that a dividend declared in 2001, but not paid until 2002, may be deducted under the amended provisions of Code 404(k).

Section 662(c) provides that the amendments made by 662 apply to taxable years beginning after December 31, 2001. This raises the question whether the deductibility of a dividend declared before the amendments become effective, but paid after the amendments become effective, is governed by the amendments or by prior law.

Because 404(k) permits a C corporation to deduct dividends "paid" in cash during the taxable year, the payment date (not the dividend declaration date) should be controlling. See Code 404(k)(1). As a result, the deductibility of a dividend declared before the effective date, but paid after the effective date, is governed by the amendments to 404(k).

We recognize that 404(k)(4)(A) provides that the deduction under 404(k)(1) is "allowable in the taxable year of the corporation in which the dividend is paid or distributed to a participant or his beneficiary." Although the Act did not amend 404(k)(4)(A) to address the treatment of dividends retained by the plan in accordance with 404(k)(2)(A), there is no doubt that such dividends are deductible when "paid," as paragraphs (1), (2), and (4) of 404(k) provide.

3. The Treasury should make clear that a participant who elects to reinvest dividends in accordance with 404(k)(2)(A)(iii)(II) is not charged with constructive receipt of the dividends for income tax purposes.

Under 404(k)(2)(A)(iii)(II), a C corporation may deduct dividends on stock held by an ESOP that are, at the election of the participant or beneficiary, either (a) payable in cash to the participant or beneficiary or paid to the plan and distributed in cash to the participant or beneficiary no later than 90 days following the close of the plan year or (b) paid to the plan and reinvested in qualifying employer securities.

Under Code 402(a), only amounts actually distributed from a qualified plan are included in the gross income of the distributee. Dividends retained by the plan and invested in qualifying employer securities are not distributed to the participant or beneficiary and therefore are not included in the participant's or beneficiary's gross income.

Although the legislative history might be read otherwise, the most natural reading of the text of the amendment to 404(k) requires that only one of the payment alternatives (payment by the corporation directly to the participant or beneficiary or payment by the plan within 90 days after the close of the plan year) be made available to participants and beneficiaries, in addition to the right to elect to have the dividends retained in the plan. A plan that offers only the second payment option (payment by the plan) is entitled to deduct the dividends under 404(k), and under 402(a), the plan's participants and beneficiaries cannot be charged with constructive receipt of dividends retained by the plan.

The same analysis applies where a plan allows dividends, at the election of the participant or beneficiary, to be paid by the corporation directly to the participant or beneficiary. As the owner of the employer securities, only the plan (not the plan's participants or beneficiaries) is entitled to receive the dividends. If the corporation pays the dividends directly to a plan participant, for example, the corporation is paying the dividend on behalf of the plan (as the plan's agent), and the participant receives a distribution from the plan (by reason of the participant's rights under the plan) rather than a distribution from the corporation (which may not pay dividends to non-shareholders). As a result, 402(a) governs the tax treatment of any dividends paid the by the corporation in accordance with 404(k).

This is consistent with prior law under which a plan could permit an ESOP participant to elect to receive or not to receive dividends. In such circumstances, only the dividends actually paid in cash to participants were deemed distributed and eligible for deduction under 404(k). See Treas. Reg. 1.404(k)-1T, Q&A-2 & 3.

4. The Treasury should make clear that dividends that are reinvested in accordance with 404(k)(2)(A)(iii)(II) are not treated as annual additions for purposes of 415, as elective contributions for purposes of 401(k), or as employee contributions for purposes of 401(m).

Consistent with the views expressed in the immediately preceding comment, dividends that are reinvested by the plan should be treated as investment income rather than as annual additions, elective contributions, or employee contributions. Since the dividends are not deemed to be distributed from the plan, they represent income on current plan assets rather than contributions to the plan. See Treas. Reg. 1.401(a)(4)-2(c)(2)(iii), 1.401(k)-1(g)(3), 1.401(m)-1(f) ("employee contributions"), 1.415-6(b).

Increase in Compensation Limit (Act 611(c))

1. The Treasury should make it clear that the increased compensation limit under Code 401(a)(17) applies, in years beginning after December 31, 2001, to compensation for prior years. Section 611(c) of the Act increases the compensation limit for qualified plans from $150,000 (currently indexed to $170,000) to $200,000. Section 611(i)(1) provides that the amendments made by 611 apply to years beginning after December 31, 2001.

Under many defined benefit plans, a participant's benefits are based on the participant's average compensation over a period of years. The Treasury should make clear that, after the compensation limit is increased in 2002, the increased compensation limit may be applied to any prior years that are taken into account under the plan's benefit formula as well as the current year (e.g., 1998 through 2002 under a plan where benefits are based on high-5-years average pay). This is consistent with the way the Treasury has treated prior statutory amendments to the compensation limit. When the compensation limit was reduced to $150,000, for example, the Treasury required plans to apply the new limit to all prior years for purposes of calculating benefits accrued in years after the new, lower limit became effective. See Treas. Reg. 1.401(a)(17)-1(e).

In the past, the Treasury has adopted a different approach to cost-of-living adjustments to the compensation limit. In those circumstances, the Treasury's position has been that the new, higher limit may not be applied to prior years' compensation. See Treas. Reg. 1.401(a)(17)-1(b)(2). The change made by the Act is not a cost-of-living adjustment. It is an amendment to the statutory compensation limit. As a result, the relevant precedent is the Treasury's past treatment of amendments to the statutory compensation limit, and as a result, after the amendment becomes effective, the amendment should apply to all years taken into account under the plan's benefit formula.

There is no principled basis for taking a different position here merely because the limit has been increased rather than reduced. The Treasury should not take a "heads I win, tails you lose" position.

2. The Treasury should make it clear that a defined benefit plan may provide that the increased compensation limit under Code 401(a)(17) applies to prior years for some participants but not for others.

As explained in the previous comment, the increase in the compensation limit should apply, after it becomes effective, to all years of service taken into account under a plan's benefit formula. A plan should be permitted, however, to apply the new compensation limit to some, but not all, participants.

For example, a plan might wish to provide that the new compensation limit does not apply to the prior years' compensation of a participant who previously received a lump-sum distribution of the present value of his entire accrued benefit. Because such a participant might have received a lump-sum distribution of the remainder of his accrued benefit under the employer's "top-hat" plan, it would make no sense to amend the employer's qualified plan to increase the participant's prior years' compensation limit: such an amendment would entitle the participant to benefits that duplicate what he has already received under the "top-hat" plan. An amendment that applies the new statutory compensation limit to the prior years' compensation of some but not all participants should be permissible as long as it does not violate any other qualification requirement (e.g., the nondiscrimination requirements of Code 401(a)(4)).

Increase in Benefit Limits (Act 611(a))

1. The Treasury should clarify how the higher benefit limits apply to a participant in a non-calendar year plan who receives a lump-sum distribution of the present value of his accrued benefit during 2001.

Section 611(a) of the Act increases the dollar limit on benefits payable under a qualified defined benefit plan from $90,000 (indexed to $140,000 in 2001) to $160,000 and makes a number of other changes in the limit. Section 611(i)(2) provides that the amendments made by 611(a) apply to years ending after December 31, 2001.

Because 611(a) applies to years ending after December 31, 2001, it is unclear how the amendment applies to a plan with a non-calendar-year limitation year (e.g., a limitation year running from February 1, 2001 to January 31, 2002). The Treasury should make it clear that an employer may (but is not required to) amend such a plan to adjust benefits for the limitation year that straddles December 31, 2001. Thus, for example, if the plan has distributed the present value of a participant's benefit as a lump sum, the employer could (but is not required to) amend the plan to increase the participant's benefit to the extent permitted by the 415 limits as amended by 611(a) of the Act.

Sunset Provision (Act 901)

1. The Treasury should make it clear that the Act's sunset provision does not affect the calculation of the present value of a participant's accrued benefit.

Section 901 of the Act provides that the amendments made by the Act shall not apply to taxable, plan, or limitation years beginning after December 31, 2010, and that the Code and ERISA shall be applied and administered to such years as if the amendments made by the Act had never been enacted. The "sunset" provision in 901 should not affect the administration of employee benefit plans before the sunset date (the end of the last year beginning on or before December 31, 2010). If 901 were interpreted in this way, 901 would undermine Congress's objective of changing the applicable plan qualification rules before the sunset date. Moreover, because Congress could act to make the Act permanent, or at least to extend the sunset date, it is speculative to assume that the Act's provisions will expire on the sunset date.

Thus, if a plan distributes the present value of a participant's accrued benefit in a lump sum before the sunset date, the present value of the participant's accrued benefit should be calculated without regard to 901. (Of course, if Congress does not repeal or extend 901, distributions after the sunset date will be governed by the law then in effect.)

2. The Treasury should make it clear that the sunset provision does not affect the deduction limits and the minimum funding requirements for a defined benefit plan under Code 404 and 412.

Consistent with the preceding comment, the deduction limitations and minimum funding requirements for a defined benefit plan before the sunset date should be calculated without regard to the sunset provision in 901. For example, plan liabilities should be calculated on the basis of the compensation and benefit limits as amended by the Act, and without regard to the possible expiration of the Act's provisions on the sunset date. Any other interpretation of the sunset provision would, contrary to Congress's intent, accelerate the effective date of the sunset provision and reverse the changes made by the Act before the sunset date occurs.

3. The Treasury should make it clear that the sunset provision will not cause rollovers made on or before December 31, 2010, to become tainted as of January 1, 2011.

Consistent with the two preceding comments, rollovers made before the sunset date in accordance with the Code's rollover provisions (as amended by the Act) should not adversely affect the qualification of the plan that received the rollover, or have other adverse tax consequences, when the sunset date occurs.

If a rollover is made in accordance with the law in effect at the time of the rollover, the rollover should be fully effective and should have no adverse consequences. Any subsequent change in the rollover rules should not change the effectiveness of the rollover or impair the qualification of the plan that received the rollover in accordance with the law that was then in effect. A contrary interpretation of the Act would undermine Congress's intent by discouraging participants from making (and plans from receiving) rollovers in accordance with the Act before the sunset date occurs.

Low-Income Saver Tax Credit (Act 618)

1. The Treasury should provide that an employer's only responsibility under this provision is to enter the amount of each employee's pre-tax and after-tax contributions to qualified plans in an appropriate box or boxes on the Form W-2.

Section 618 of the Act provides a temporary nonrefundable tax credit for contributions made by eligible taxpayers to a qualified plan. The credit is available for both voluntary after-tax contributions and elective 401(k) contributions, as well as for other types of contributions (e.g., elective contributions to a 403(b) annuity or an eligible deferred compensation plan of a State or local government). The credit rate depends on the taxpayer's adjusted gross income, and the amount of the credit is reduced by taxable distributions received by the taxpayer and his spouse from qualified and other retirement plans.

In order to administer the tax credit, the Treasury will need information regarding the contributions made by employees to qualified plans. We recommend that the Form W-2 be revised to call for one or more entries regarding an employee's eligible contributions during the year. The employer's only reporting responsibility with respect to the credit should be to enter the appropriate contributions in the box or boxes on the Form W-2.

2. The Treasury should prescribe a standard description of the low-income saver tax credit that employers may (but are not required to) distribute to employees.

Although 618 does not require employers to notify their employees of the availability of the credit, many employers will wish to do so. In order to permit 618 to achieve its objective of encouraging increased retirement savings by lower-income taxpayers, the Treasury should publicize the availability of the credit by prescribing a standard notice and by permitting (but not requiring) employers to distribute the notice to their employees. (Some employers may wish to provide notices of their own or to provide no notices at all; the Treasury should not prevent employers from taking either approach.)

Hardship Distributions (Act 636)

1. The Treasury should make it clear that a calendar-year plan may (but need not) provide that if a participant is in the midst of a 12-month suspension period on January 1, 2002, the 12-month suspension period will expire on the later of (a) 6 months following the beginning of the suspension period or (b) January 1, 2002.

Section 636 of the Act requires the Treasury to revise the hardship distribution regulations under 401(k)(2)(B)(i)(V) to reduce from 12 months to 6 months the period an employee is prohibited from making contributions in order for a distribution to be deemed necessary to satisfy a financial need. See Treas. Reg. 1.401(k)-1(d)(2)(iv)(B)(4). Under 636, the revised regulations are required to apply to years beginning after December 31, 2001.

The effective date provision raises the question how the 6-month rule will apply to an employee with a 12-month suspension period that straddles the effective date of the amended regulation (the "effective date"). The Treasury's regulation should provide that a plan may provide that if a participant is in the midst of a 12-month suspension period on the effective date, the 12-month suspension period will expire on the later of (a) 6 months following the beginning of the suspension period or (b) the effective date. This rule will permit plans to use the 6-month rule as soon as Congress intended: at the beginning of the first plan year beginning on or after January 1, 2001 (but not before the employee has been subject to a suspension of at least 6 months). Of course, if a plan wishes to continue to adhere to enforce 12-month suspension periods that begin before the effective date and to apply the 6-month rule only to hardship withdrawals made on or after the effective date, the plan should be permitted to do so. The regulation provides a minimum suspension period, and plans are free to impose longer suspension periods if they so elect.

Employer-Provided Retirement Advice (Act 665)

1. The Treasury should make it clear that highly compensated employees are not deprived of the benefit of the exclusion for employer-provided retirement advice merely because the employer provides retirement advice only to employees approaching retirement age.

Section 665 amends Code 132 to provide that qualified retirement planning services are excludable from gross income. "Qualified retirement planning services" are defined as any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified plan. Section 665 further provides that the exclusion for qualified retirement planning services applies to a highly compensated employee only if those services are available on substantially the same terms "to each member of the group of employees normally provided education and information regarding the employer's qualified employer plans."

The legislative history, however, permits an employer to limit the class of employees to whom it provides retirement advice so long as the limitation is not based on compensation or position: "It is intended that the Secretary, in determining the application of the exclusion to highly compensated employees, may permit employers to take into consideration employee circumstances other than compensation and position in providing advice to classifications of employees. Thus, for example, the Secretary may permit employers to limit certain advice to individuals nearing retirement age under the plan." H.R. (Conf.) Rep. 107th Cong., 1st Sess. 284 (2001) (emphasis added).

Although employees of all ages can benefit from retirement savings advice, employees who are years away from retirement age have little need for the retirement planning advice covered by 665. Consistent with the legislative history, the Treasury's regulations should permit employers to provide retirement planning advice only to employees who have reached an age that is 10 or fewer years before the earliest retirement age under any retirement plan in which they participate. See Code 414(p)(4)(B). If employers are required to provide retirement planning advice to a larger group of employees, the additional cost could cause some employers to reduce the scope of their programs or to eliminate the programs altogether.

2. The Treasury should clarify that the exclusion for employer-provided retirement advice applies to surviving spouses of employees who died (a) in active service or (b) after separating from service.

Some major employers provide retirement counseling not only to active employees but also to the spouses of deceased active and former employees. As amended by 665 of the Act, Code 132(m)(1) defines "qualified retirement planning services" as "any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan" (emphasis added). The Treasury should make it clear that the term "spouse" includes the surviving souse of a deceased employee or former employee. This is consistent with the view that the Treasury has taken under the no-additional-cost services and qualified employee discount provisions of 132. See Treas. Reg. 1.132-1(b)(1)(iii).

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We hope that this submission will be helpful to the Department. If further discussion regarding the issues we have raised might be useful, please let us know.

THE ERISA INDUSTRY COMMITTEE

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