Budget Reconciliation Takes Final Shape

Transcription

1 THE ERISA INDUSTRY COMMITTEE 1726 M St.. N.W.. #1101 Washington. DC 2W ) (X) FAX October 18, 1990 Budget Reconciliation Takes Final Shape The House approved a budget reconciliation bill (H.R.5835) on Oct. 16, while the Senate continued its budget debate as this EER goes to press. Scrambling to complete action on a bill in the wake of an Oct. 5 defeat of the budget summit accord (see Oct. 3 EER) and the subsequent approval of a continuing resolution that expires Oct. 19, Congressional committees quickly approved measures with specific spending cuts and tax increases to avoid automatic spending cuts and the possibility of another federal government shutdown. President Bush has threatened to veto the House-passed version. Bipartisan-Bicameral Agreement on Benefits Provisions The proposals from both the House and Senate tax and labor committees reflect unusual bipartisan agreement on employee benefits issues. The linking of termination-reversion and retiree health transfer provisions in particular was the result of intense political maneuvering. The retiree health proposal, strongly advocated by a number of major employers, had been thwarted by Sen. Howard Metzenbaum's (D-OH) ability to block it unless it was accompanied by a termination-reversion bill. To "get the issue behind them," the tax and labor committee members and leadership agreed to retiree health transfers, which are expected to raise $1 billion over five years, while putting behind them what they considered to be the perennial and irksome termination-reversion issue. Drafters appear to have specifically rejected provisions that would have increased employer liabilities for projected benefits (see Metzenbaum's bill (S.685), Apr. 7, 1989 EER). Budget Reconciliation... 1 Leased Employees & Full Funding...4 Betts Enacted... 4 FASB Approves Draft... 4 MSP Matching Program... 5 Contents (Continued on p. 2) Organized Labor' s Agenda... 6 Washington Representatives... 6 Round-up... 6 Items Available... 8

2 ERIC: October 18, 1990 The Executive Report: 2 In other action, committee members were persuaded to exclude revenue raisers suggested earlier, such as limits on includable compensation, 401(k) and cafeteria plan restrictions, and user fees, as well as joint trusteeship and other nonrevenue-related issues. The committees did, however, raise $120 million from an increase in the Pension Benefit Guaranty Corporation (PBGC) premium. Reversions & Retiree Health in House Package The Ways and Means Committee's reversion provision approved by the House would increase the excise tax on reversions from 15 percent to 20 percent, and to 50 percent in the case of a nonbankrupt employer that does not establish or maintain a qualified replacement plan to which a cushion of 30 percent of the surplus has been transferred. The cushion is transferred tax free. If the replacement plan is a defined contribution plan, the cushion and interest on it must be allocated to participants within seven years. If pro rata benefit increases are provided as part of the plan termination, the required cushion would be reduced to 25 percent. The retiree health transfer provision follows the budget summit agreement: it allows up to five annual tax-free transfers of defined benefit plan assets that exceed the greater of (1) the lesser of 150 percent of current liability and the plan's accrued liability, or (2) 125 percent of current liability, to a 401(h) account to pay for current-year retiree health expenses. The provision also requires that accrued retirement benefits under the pension plan be immediately vested and that the employer maintain retiree health expenditures at least at the same dollar level for retiree health benefits for the four years following the transfer. The House bill also would increase the PBGC premiums. The flat-rate premium would be increased from $16 to $19 per participant and the variable rate premium would be raised from $6 per $1,000 to $9 per $1,000, with a cap of $53 (up from the current $34). H.R.5835 also would: + increase the cap on wages subject to the Medicare hospital insurance tax from the projected 1991 wage base of $54,300 to $100,000; + extend the Medicare Secondary Payer (MSP) program's data matching provision (see related story), which is scheduled to expire after Sept. 30, 1991, through Sept. 30, 1995; 4 extend through Sept. 30, 1995 the current provision requiring Medicare to be the secondary payer for disabled beneficiaries who are covered by employer health plans; and 4 extend the federal unemployment tax surtax, which is scheduled to expire at the end of the year, through 1995.

3 ERIC: October 18, 1990 The Executive Report: 3 Senate's Proposal The Senate measure (S.3209), largely fashioned by Senate leaders and the Senate Finance Committee, includes the same termination-reversion/retiree health and PBGC premium increase provisions that were adopted by the House. The bill also would extend the MSP matching program and the MSP provision for disabled beneficiaries through fiscal year It would raise the Medicare wage cap to $89,000 and extend the federal unemployment tax surtax through In addition, S.3209 would: 4 extend for 15 months the tax treatment of employer-provided educational assistance and group legal services; + extend primary employer coverage for end-stage renal disease from the current 12 months to 24 months, before Medicare becomes primary; + require states to pay premiums for coverage of a beneficiary under an employer's health plan when doing so is more costeffective than furnishing Medicaid services directly; + create a regulatory mechanism to define "core" benefits that must be offered as part of Medigap insurance policies and prohibit the knowing sale of duplicative policies to individuals; and 4 include a child care compromise fashioned by Senate leaders and the Administration. Other Committees' Input The labor committees also agreed to the terminationreversion/retiree health provisions and PBGC premium increases. The House labor committee's package paralleled provisions in the House-approved bill with respect to reversions and retiree health but called for a 50 percent excise tax on termination reversions if no replacement plan was established. The Senate labor committee's proposal called for a 20 percent cushion to be maintained for a follow-on pension plan instead of the 30 percent that was approved. The Senate labor committee also voted to increase penalties for OSHA violations; the House deleted such provisions from its bill. Both House and Senate labor committees included the PBGC premiums increase that the House approved. In the House, the labor committee had also included the House-passed child care provisions (H.R.3), which was stripped from the final House bill, and established new minimum and maximum civil penalties for employers engaged in certain unfair labor practices. And, the House Energy and Commerce Committee had authorized state Medicaid agencies to "buy in" to employerprovided health coverage and extended to 18 months the MSP provisions for end-stage renal disease.

4 ERIC: October 18, 1990 The Executive Report: 4 Leased Employees, Full Funding Modifications Advance in "Noncontroversial" Bill An amendment offered by Rep. J. J. Pickle (D-TX) to a small business tax incentives bill would repeal the "historically performed" test under the leased employee rules and replace it with a control test. The small business bill (H.R.5826) was introduced Oct. 13 by House Ways and Means Committee Chairman Dan Rostenkowski (D-IL). The amendment is one of 28 "relatively noncontroversial amendments" under consideration by the committee. Under the revised definition, which ERIC has advocated since 1987, an individual would be treated as a leased employee if the recipient organization controls the manner in which services are performed. Another amendment approved by the committee would direct the Treasury Department to raise the 150 percent full funding limit on pension plans that cover few retirees so that the employer may continue making pension plan contributions. To pay for the revenue loss, Treasury also would be required to lower current full funding limits for plans with more retirees. This proposal had surfaced previously under last year's budget reconciliation bills (see Oct. 13, 1989 EER). Other amendments affecting benefit plans also might be offered in the markup; amendments approved by the committee might resurface in the budget reconciliation conference. Betts Enacted President Bush late Oct. 16 signed the Betts bill (S.1511, P.L ) that had been approved by the Senate on Sept. 24 and by the House on Oct. 3 (see Oct. 3 EER). The President delayed signing the bill until Congress approved a technical amendment (H.R.5759) clarifying which benefits may be offset against an employee's severance payment. The American Association of Retired Persons had attempted to block the bipartisan agreement reached on the technical correction; the Senate approved the amendment Oct. 16 and the House passed it Oct. 17. FASB Approves Retiree Health Accounting Rules The Financial Accounting Standards Board (FASB) approved changes to the accounting standards for postretirement benefits other than pensions. The 4-3 vote on Oct. 17 came after 20 months of debate on the exposure draft (see Feb. 27, 1989 EER). FASB is expected to publish the rules by the end of the year after they are written by the technical staff and formally adopted in December. The new rules, which would be effective in

5 ERIC: October 18, 1990 The Executive Report: , would require employers to implement accrual accounting for health and other postretirement benefits. The FASB rules explanation will be on ERIC 9 a Quarterly Program Oct New Secondary Payer Matching Program Detailed Marc Thomas, Director of the Health Care Financing Administration's (HCFA) Division of Operational Initiatives, reviewed for ERIC's Welfare Benefits Committee HCFA's new computer matching program to recover Medicare payments for claims that should have been paid by other payers (see Oct. 3 EER) under the Medicare Secondary Payer (MSP) program. The data matching program will not be operational before next January, Thomas said at the Committee's Oct. 2 meeting. Under the data matching program, the IRS and the Social Security Administration will provide to HFCA information on Medicare beneficiaries or their working spouses, Thomas said. HCFA will then provide a list to the employers to verify employer health coverage for these named individuals. Initially, Thomas noted, employers will be asked to provide the names and addresses of the health plans covering the identified individuals for the period 1983 to date; the period of their employment; and the type of health coverage. Employers will be required to respond to HCFA's request for information within 30 days, he added. Acknowledging that the 30- day time frame might be difficult for some large employers to meet, Thomas said that HCFA "just wants to hear from the employers" during that period. "If you don't have the information, tell us within 30 days," he said. The penalty for not providing the required information up to $1,000 for each worker for whom an inquiry is made will not be imposed on employers that contact HCFA and make a good-faith effort to provide the information, according to Thomas. Members of ERIC's Welfare Benefits Committee expressed concern with the data reporting requirements, including the unavailability of data, the difficulty in retrieving some of the information, and the need for the specific questions they will be asked. Thomas said that the questionnaire is in final draft form. An ERIC Task Force made up of Welfare Benefits Committee members will be working on the issues raised by the new MSP program. Other ERIC members interested in participating in the Task Force are urged to contact the ERIC office. The Welfare Benefits Committee also discussed the status of Betts legislation and the employment-related provisions of the federal budget summit agreement (see related stories), and heard a presentation by Michael Schiffer (Vice President, Cigna Corp.) on state initiatives inhibiting development of managed care programs (see Oct. 3 EER).

6 ERIC: October 18, 1990 The Executive Report: 6 On Organized Labor's Agenda Members of ERIC's Retirement Security Committee, meeting Oct. 3, heard Meredith Miller, Assistant Director with the Employee Benefits Department of the AFL-CIO, discuss some of the issues organized labor is expected to pursue in 1991 and the years ahead. Among the areas of concern, Miller noted, are ERISA enforcement and joint trusteeship of single employer pension plans. Organized labor opposes increases in the Pension Benefit Guaranty Corporation's premiums included in federal budget proposals, she said. The AFL-CIO is also taking a serious look at pension investment issues, including takeover bills at the state level and corporate governance. The federation is developing investment guidelines and may support a securities transfer excise tax with a carve-out for pension fund investments. Another long-term project would address pension coverage and portability issues. The Retirement Security Committee also addressed supplemental comments on IRS's proposed nondiscrimination regulations (see Oct. 3 EER) as well as the status of Betts legislation and the federal budget summit agreement (see related stories). Washington Representatives Meet ERIC's Washington Representatives were briefed on the Department of Labor's organizational and operational structure. Shelby Hoover, an attorney with Jones, Day, Reavis & Pogue and a former official with the DoL's Division of Plan Benefit Security in the Office of the Solicitor, reviewed the Department's responsibilities regarding ERISA and the DoL's relationship with other governmental agencies. Also discussed at the Oct. 1 meeting were the employmentrelated provisions in the federal budget summit agreement and the prospects for its enactment, and the status of and outlook for the Betts bill (S.1511) and its effect on employers' plans. Round-up 1) The deadline for automatic approval of funding method changes for pension plans has been extended under IRS Notice The notice extends through plan years beginning on or before Dec. 31, 1991 the effective date of Rev. Proc , which generally permitted plans to change to any acceptable funding method through 1989 without seeking approval from the Treasury Secretary. IRS Notice appears in the Oct. 22 Internal Revenue Bulletin. 2) Senate conferees' counteroffer on the child care bill (H.R.3) continues to reject the House-proposed phaseout of the tax exclusion for employer-

7 ERIC: October 18, 1990 The Executive Report: 7 provided dependent care assistance. The Senate offer would expand the earned income tax credit to be paid from an extension of the three percent telephone excise tax. The Senate conferees also continue to insist on the establishment of a tax credit for individuals who purchase health insurance for their dependent children and on a refundable dependent care tax credit. Meanwhile, Senate leaders and the White House announced they have reached an agreement on a child care bill that might be incorporated into the Senate budget reconciliation bill. Although specifics of the bill have not been released, it reportedly includes the Senate conferees' counteroffer. 3) The Senate blocked a final vote on a bill to cut social security payroll taxes. The vote on Oct. 10 was on a point of order raised against the bill (S.3167) sponsored by Sen. Daniel Patrick Moynihan (D-NY). The measure was similar to Moynihan*s earlier proposal (see Feb. 14 EER) but would have changed the phase-in period and the maximum wage base that is subject to the social security tax. 4) Proposed regulations interpreting the economic performance requirement in section 461(h) of the Internal Revenue Code might preclude an employer from deducting qualified plan contributions before the taxable year in which the related services are performed. A Treasury official has indicated informally that the Treasury's principal objective in applying the economic performance requirement to qualified plan contributions is to prohibit what the Treasury considers to be "abusive" practices that are designed to permit employers to accelerate deductions for contributions to defined contribution plans. However, the proposed regulations, which were issued on June 7, 1990, also appear to apply to defined benefit and welfare benefit plans. 5) U.S. Supreme Court heard oral arguments on Inaersoll-Rand v. McLendon (No ) on Oct. 9, to determine whether ERISA preemption extends to wrongful discharge claims under state law. The Court is reviewing the decision reached by the Texas Supreme Court, which held that an "atwill" employee who was terminated shortly before becoming fully vested states a wrongful discharge claim under state law (see Nov. 16 EER). 6) Retroactive regulations from Treasury and the IRS would be prohibited under a bill (S.3161) sponsored by Sens. David Boren (D-OK) and David Pryor (D-AK). The "Taxpayer Regulatory Relief Act" would require that all regulations implementing broad legislative guidelines issued by the department and agency be prospective from the date of issuance in final form. Under the bill, taxpayers would be deemed to satisfy the legal requirements if they made a good-faith reasonable effort to interpret the statute during the period between the effective date of the statute and the effective date of the regulations. 7) The insurance industry spent 11 times more money to provide health benefits than if the same benefits had been provided under a singlepayer system such as Canada's national health care system, according to a study by Citizen Action, a national consumer organization. The study attributed the high costs to excessive administrative and marketing expenses. While the commercial insurance industry spent 33.5 cents for administration, marketing, and other overhead costs, Medicare spent 2.3 cents and Canada spent 3 cents, the study reported. Insurance industry spokesmen rejected the findings, arguing that the study failed to take into account, among other things, efficiencies of self-funded plans. 8) Independent auditors would be required to detect and report illegalities that would have a material effect on a company's financial statements, under the omnibus crime bill (H.R.5269) approved Oct. 5 by the House. The whisleblower provision, which is unrelated to any Labor Department ERISA enforcement proposal, would require auditors to report illegalities uncovered under any law to corporate management, corporate board, and the Securities and Exchange Commission. The bill would apply

8 ERIC: October 18, 1990 The Executive Report: 8 to all public companies whose stock is registered under the Securities Exchange Act. It also would require auditors to review a company's report on its internal control structure. The Senate version (S.1970), which was approved in July, does not include a similar provision. Items Available The ERIC office has the following items available. Write to: 1726 M Street, N.W., Suite 1101, Washington, DC * Excerpts from tax-writing committees' budget reconciliation packages (Ways and Means, Ways and Means Democrats, and Finance) * Excerpts from labor committees' budget reconciliation packages (Education and Labor and Labor and Human Resources) * Excerpts from House Energy and Commerce Committee's budget reconciliation package * HCFA's draft pamphlet on MSP information for employers + House crime bill (H.R.5269) amendment requiring independent auditors to detect and report certain illegalities * S.3161, prohibiting retroactive application of Treasury Department regulations and rulings * Older Workers Benefit Protection Act, P.L (Betts)B ERIC 1726 M Street Northwest Suite 1101 Washington, DC FIRST CLASS U.S. POSTAGE PAID Merrifield, VA Permit No. 801 Jeff Lewis Staff Director, Minority Special Committee on Aging SH 628 Hart Senate Office Building United States Senate Washington, DC First Class