<nobr>Jul 21, 2003</nobr>

ERIC Proposal in Portman-Cardin Bill Advances but Political Dispute Clouds Future

SUMMARY: Following an extraordinary lobbying effort by ERIC Members, the House Ways and Means Committee this morning reported a modified Portman-Cardin bill (H.R.1776) that substantially advanced the ERIC pension funding position first unveiled in August of 2002 over a contrary position put forward by the Administration. The new bill replaces the 30-year Treasury rate with a corporate bond rate for 2004, 2005, and 2006 for pension funding and variable rate premium purposes. In 2006 it takes a first step toward coordinating the lump sum rate with the funding rate. The Administration had proposed a corporate rate for 2004 and 2005 followed by a phase-in to a yield curve. The new bill makes no mention of use of a yield curve in the future. The bill also contains several other provisions of interest to ERIC members (outlined below).

Committee action, however, erupted in a bitter political dispute over the rights of the majority and minority and Democratic objections to moving quickly on a bill they had had only a short time to review. In the course of the dispute, Democratic committee members left the committee room to a private room nearby, acrimonious exchanges occurred between certain committee members, and police were summoned to the Ways and Means Committee. This was followed by an extraordinary debate on the House floor on a motion by the Democratic Minority Leader to disapprove of the actions of Ways and Means Committee Chairman Bill Thomas's (R-CA) in conducting the committee meeting and to rescind the Committee's action to report H.R.1776. The motion was tabled 170-143 by a straight party line vote.

During the debate, Democratic members did not voice objections to the content of the bill but focused on process, including reporting the bill from the Committee while no Democrats were in the room. Thus, the bill's future is very uncertain, and plans to pass the bill in the full House next week have been put on hold.

KEY PROVISIONS OF BILL: The long-awaited new bill reduces the $230 billion H.R.1776 to a bill of $50 billion over ten years. A preliminary review of the bill follows.

Provisions of interest to major employers in what has been dubbed "Portman-Cardin lite" include:

• 30-year Treasury: Replace the 30-year Treasury bond with the rate of interest on amounts conservatively invested in long-term corporate bonds for the years 2004, 2005, and 2006. Current law applies to lump sums in 2004 and 2005, but in 2006, the lump sum interest rate would be the lower of (1) the corporate rate or (2) the 30-year rate plus 20% of the differential between the 30-year rate and the corporate rate.
  
  
• Deduction Limit: Provide an exception to the 25% of compensation limit where an employer sponsors both a DB and a DC plan for contributions to the DC plan of up to 6% of compensation.
  
  
• Acceleration of Increases: The $15,000 limit on 401(k) contributions and $5000 limit on catch-up contributions would apply for 2004 rather than 2006.
  
  
• Universal Availability: Amends the universal availability requirement for catch-up contributions regarding collectively bargained employees, non resident aliens, and separate lines of business.
  
  
• Stock Options & Employment Taxes: The law is clarified that employment taxes do not apply to stock options.
  
  
• Low Income Savers: The low income savers credit is extended to 2011 and the credit rate raised for some categories.
  
  
• Vesting: Vesting rules that now apply to employer matching contributions would apply to all employer contributions to DC plans.
  
  
• Rollovers: Rollover rules are expanded to non-spouse beneficiaries as well as to Roth IRAs (from a qualified plan), and are permitted from an annuity to a qualified plan.
  
  
• Minimum Distribution Rules: The age at which an individual must begin distributions is increased to 72 in 2004 and 75 in 2008, and the excise tax on failure to make distributions is decreased from 50% to 20%.
  
  
• Transfers to PBGC: Automatic rollovers of involuntary distributions exceeding $1000 as well as benefits under terminating DC plans may be transferred to the PBGC under the missing participants program.
  
  
• Excess Contributions: The period to correct excess contributions is increased from 2 1/2 months to 6 months after the close of the plan year.
  
  
• Intermediate Sanctions: Expand the ability of sponsors to correct inadvertent failures and restrict the use of the "maximum payment amount." [NOTE: A provision in the original bill objected to by ERIC that would have exempted NHCE's from the tax consequences of disqualification was deleted from the new bill.] In addition, the Treasury is to update and improve the EPCRS voluntary correction program.
  
  
• Exception to Early Withdrawal Tax: The substantially equal periodic payment rule is modified.
  
  
• Distribution of Annuity Contract: The law is clarified that a distribution of an annuity contract from a tax-qualified plan may be treated as part of a lump sum distribution, providing NUA treatment for employer securities in the distribution.
  

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