A host of pension, stock compensation, and executive compensation legislative initiatives are on the table as the 108th Congress gets underway. Here is a very brief overview of the legislative landscape for 2003.
Economic Growth Bill ¯ The first tax bill to be considered by Congress is likely to be based upon the $674 billion “economic growth and job creation” proposal released by President Bush on January 7. The centerpiece of the President’s proposed package is a controversial proposal to eliminate the double taxation of corporate dividends by (1) allowing shareholders to exclude dividends from income to the extent they are paid out of corporate earnings that have already been taxed at the corporate level, and (2) providing shareholders with a step-up in basis to the extent already-taxed corporate earnings are reinvested in the company. The proposal would not change the treatment of dividends received by tax-favored retirement plans and would not impact dividends paid by entities not subject to a corporate-level tax (e.g., S corporations and real estate investment trusts).
Some critics of the dividend proposal have argued that it could disadvantage retirement plans, municipal bonds and other tax-favored investments by making taxable investments more attractive. Other critics have argued that the proposal could distort the investment decisions made by plans and plan participants by affecting the types of investments they choose to hold in tax-favored retirement plans. Given the size of the dividend exclusion proposal and the controversy it has generated, it appears unlikely that it will be enacted in its current form.
The President’s economic growth proposal does not contain any pension proposals, despite reports before it was unveiled that it would include an acceleration of the retirement plan contribution limit increases enacted as part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). It is, however, possible that acceleration of the EGTRRA contribution limit increases, legislation to replace the 30-Year Treasury rate for certain pension purposes (discussed below), and possibly other pension proposals could be added to the economic growth legislation as it is considered by Congress.
Enron-Related Pension Legislation ¯ Last year, much of the Congressional action on pension legislation was focused upon Enron-related proposals to reform the defined contribution plan rules. It appears that Congress will once again consider Enron-related legislation this year, possibly as part of broader pension reform legislation. House Education and the Workforce Chairman John Boehner (R-OH) and Rep. Sam Johnson (R-TX) are planning to re-introduce the Enron-related bill (H.R. 3762) approved by the House last April, and it is possible that the House will consider the bill in the first half of this year. Sen. Charles Grassley (R-IA), who will be Chairman of the Finance Committee this Congress, also plans to re-introduce the Enron-related bill (S. 1971) approved by the Finance Committee last year, possibly with Finance Committee Ranking Member Max Baucus (D-MT) as a co-sponsor.
Deferred Compensation Legislation ¯ Congress is also likely to re-visit some version of the nonqualified deferred compensation legislation considered last year by Ways and Means Committee Chairman Bill Thomas (R-CA) and the Senate Finance Committee. We understand that the Bush Administration is planning to propose a repeal of the longstanding limitation (sec. 132 of the Revenue Act of 1978) on the issuance of Treasury guidance on nonqualified deferred compensation in its fiscal year 2004 budget proposal, which it plans to release on February 4. A similar proposal was contained in the Enron-related bill (S. 1971) approved by the Senate Finance Committee last year, and is likely to be included in the Enron-related legislation that Finance Committee Chairman Grassley plans to introduce this Congress (discussed above). We also understand that Ways and Means Committee Chairman Thomas plans to include a nonqualified deferred compensation provision in the new version of his international tax bill, but that it will not be the far-reaching proposal ¯ affecting rabbi trusts and various early distribution practices ¯ contained in last year’s bill (H.R. 5095). One possibility is that he will include a repeal of sec. 132 of the Revenue Act of 1978, with a direction to Treasury and IRS to target abusive practices such as the use of “insolvency triggers.”
EGTRRA-Related Legislation ¯ Congress is likely to consider legislation to make permanent the pension provisions enacted in EGTRRA, either as part of Enron-related or other pension legislation or as part of legislation to make all of the provisions enacted in EGTRRA permanent. In addition, Congress is likely to include in any pension legislation moving through Congress some or all of the Portman-Cardin proposals that were dropped from EGTRRA for procedural reasons.
“Next Generation” of Pension Reform ¯ Reps. Rob Portman (R-OH) and Ben Cardin (D-MD), the lead sponsors of the pension legislation enacted as part of EGTRRA, are currently drafting a “next generation” of pension reform bill which they hope to introduce in the next month or so. The bill is likely to include the proposals to accelerate the contribution limit increases enacted in EGTRRA and provide relief from the minimum required distribution rules that were included in the “investors’ relief” bill (H.R. 5553) introduced by Reps. Portman and Cardin at the end of last year. The bill is also likely to include a number of other retirement plan reform proposals, including proposals to make defined benefit plans, SEPs, and SIMPLE plans more attractive to sponsors.
ESPP/ISO Withholding Legislation ¯ Proposed regulations that threatened to require FICA and FUTA tax withholding on qualified employee stock purchase plan and incentive stock option transactions beginning in 2003 are now on indefinite hold (Notice 2002-47). The IRS imposed an indefinite moratorium on such withholding in the face of provisions included in Enron-related pension legislation that would have permanently exempted these transactions from any withholding requirements. End-of-the year efforts to enact permanent legislative relief failed, but there is a good chance that permanent relief will be enacted this year, either as part of a stand-alone bill or as part of pension reform or other tax legislation. Just last week, Rep. Amo Houghton (R-NY) and approximately 20 co-sponsors reintroduced Rep. Houghton’s bill (H.R. 286) to provide permanent relief from such taxes. The proposal is also likely to be included in the Enron-related legislation that Rep. Boehner and Sen. Grassley plan to introduce.
30-Year Treasury Rate Replacement Legislation ¯ In recent years, interest rates on 30-Year Treasuries have diverged greatly from their historical relationship to the yield on corporate bonds, particularly after the announcement by Treasury in October 2001 that it would no longer issue 30-Year Treasuries. Temporary relief enacted in 2002 for the deficit reduction minimum funding requirements expires at the end of the 2003 plan year. The House and Senate tax and labor committees are planning to consider legislation this year to replace the 30-Year Treasury rate with a new benchmark for pension funding, Code section 415, lump sum, and PBGC premium purposes. Benefits groups have proposed substituting a blend of corporate bond rates for purposes of these calculations. It is, however, possible that Congressional consideration of a 30-Year Treasury replacement could be impacted by possible future Bush Administration proposals to increase PBGC premiums and beef up pension funding requirements for certain plans.
