By Cynthia L. Moore
NCTR Washington Counsel
Information current as of December 10, 2001
Implementation
of Economic Growth and Tax Relief Reconciliation Act (EGATRRA)
Treasury Says 457 Issues Rank High on List of
Priorities
Bill Sweetnam, Benefits Counsel, Department of the
Treasury, says that 457s are a high priority as his department and the
IRS release guidance on EGATRRA and other issues.
He spoke to an attorneys’ group recently in Washington.
He stated that “as among 457, 401(k), and 403(b) plans, EGATRRA
made more changes to 457s than either of the other two plans.”
Accordingly, Treasury will be releasing an update of the 457
regulations shortly. In addition, guidance on withholding for 457s is “imminent.”
Treasury is also working on guidance for a variety of non-457
EGATRRA issues, including the 402(f) notice.
(See next item.)
402(f) Notice Guidance may be out before the New
Year
Mr. Sweetnam discussed the
requested guidance for the “402(f) notice.”
The notice is a written explanation to recipients of distributions
eligible for rollover treatment.
The guidance is necessary due to the EGATRRA changes.
Treasury is hoping to release it before the end of the year. Treasury may issue a separate notice for 457 plans.
Mr. Sweetnam said that it would be better to have a separate
notice. Employer securities,
after-tax contributions, and other issues are inapplicable to 457s.
The application of the 10% early withdrawal penalty is also different.
We should know something shortly.
Social Security
Framework of Reform Commission’s Final Report
Released
The Social Security Reform Commission issued on November 29 three
alternative recommendations that constitute a framework for its final
report. The report is expected
this week. The Commission
intends that the President and Congress evaluate the recommendations
as they decide ways to address Social Security’s future financial problems.
All the recommendations include adding private accounts to the
existing Social Security program.
Sources suggest that the Commission felt that a set of
recommendations rather than a single one was advisable because
of next year’s mid-term elections.
The Commission seems to imply that private accounts alone will
not provide for Social Security’s financial stability.
Two of the three alternatives combine a private account feature
with changes that will save Social Security money or decrease benefits,
depending on someone’s viewpoint.
The third alternative is a pure private account proposal; that
is, it does not include other ways to address Social Security’s problems.
The change proposed in the first alternative would effectively reduce
Social Security benefits. It
would replace the current wage factor now used in the calculation of
benefits with an inflation factor.
The inflation factor, which rises more slowly than the wage factor,
is already used in the calculation of the Social Security COLA. By contrast, the change recommended in the second alternative
would include mechanisms to encourage people to work longer, slow benefit
increases as people live longer, and transfer $12-13 billion per year
into Social Security from elsewhere in the federal budget.
Political considerations appear to underlay the Commission’s decision
to offer alternatives. Social
Security reform is a potentially explosive issue and discussion of it
next year during the mid-term Congressional election could pose problems.
Sources say that a range of options makes the issue less of a
target.
The Commission ordered staff to develop the alternatives into recommendations
for approval at the Commission’s final meeting, which will be on December
11.
Final Reform Commission Report Will Not Likely
Mention Mandatory Coverage
Efforts by opponents of mandatory Social Security coverage for
newly hired state and local workers appear to have borne fruit.
Sources say that the final report does not include mandatory
coverage. Previous commissions
looking at ways to short up the System have done so.
Rep. DeFazio’s Social Security Bill Provides for
Collective Investment of Trust Fund Not Private Accounts
Rep. Peter DeFazio (D-OR) has sponsored a bill that would set
up an Independent Social Security Investment Oversight Board to invest
a percentage of the Social Security trust fund in a mix of assets (H.R.
3315). Included would be U.S. government securities, fixed income
instruments, common stocks, and other investments as the board may provide
by regulation. The board
would invest an annually increasing percentage of the trust fund beginning
in 2004 at 8%, to a maximum of 40% in 2016 and each year thereafter. The board would be prohibited from exercising voting rights
associated with the ownership of securities in the trust fund.
Among other things, the legislation requires:
the investment of common stock to be in a commonly recognized
index that represents the U.S. equity markets; fiduciaries to follow
the same rules as those that govern the Thrift Savings Plan, the federal
employee 401(k)-type savings vehicle; and Department of Labor enforcement
of fiduciary breaches. The
board would be composed of a chair and four additional members, all
of whom are appointed by the President, by and with the advice and consent
of the Senate. The members
must have substantial experience, training, and expertise in the management
of financial investments and service in a fiduciary capacity.
The board members set the investment policy and hire investment
managers.
Issue Briefs
Two New Federal Laws Affect Public Safety Officer
Benefits (PSOB)
The President signed into law an increase in the amount of PSOB
for any public safety officer killed or totally disabled in the line
of duty on or after January 1, 2001 (Public Law 107-56) and an expedited
procedure for payment of the benefits (Public Law 107-37).
The new PSOB amount is $250,000, indexed for inflation, up from
$150,000. The provision
is part of the anti-terrorism bill known as “Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA PATRIOT) Act of 2001.
Under the expedited procedure, survivors of a public safety officer
will receive payments within 30 days, instead of the previous six to
twelve month wait. A survivor
is eligible if the public safety officer was killed or is suffering
a catastrophic injury as a direct and proximate result of a personal
injury in the line of duty in connection with the September 11 attacks.
Decision to Drop 30-year Treasury bond Could Require
Retirement System Changes
The U.S. Department of the Treasury recently decided to suspend the
issuance of its 30-year bonds.
Some state and local government retirement systems currently
use the bond rate in various calculations, for example, lump sum pay
outs. Retirement systems that have the authority to substitute a new
rate will be able to make the change with little interruption in their
usual operations. If the
rate is in statute, however, retirement administrators will need to
request their legislatures to make the appropriate changes.
In addition to the effect on certain state and local government plans,
Treasury’s decision has ramifications for private plans.
Plan administrators are required to use the bond as the discount
rate in calculating pension liabilities.
The rate is also used in determining whether a plan is underfunded
and if so, the premiums that must be paid to the Pension Benefit Guaranty
Corporation, the federal insurer of failed private pension plans.
Treasury says the bond is no longer needed to meet the government’s
financing needs now or in the future. Private plans are seeking legislation to replace the bond with
Moody’s AA corporate bond index or some other comparable rate.
Interest Grows in Clarification of the Tax Treatment
of Early Retirement and Severance Programs Offered by School Districts
School districts in a number of states have early retirement
and severance programs that pay out special benefits to qualifying teachers. A question has arisen about the tax treatment of these payments
because of an IRS interpretation.
The IRS position may require taxation of these payments long
before an individual actually receives the benefits.
The issue involves the application of Section 457(f) of the Internal
Revenue Code (IRC) to early retirement and severance programs (“programs”)
and an exemption under Section 457(e)(11).
Section 457(f) requires individuals who take part in programs
defined as “ineligible deferred compensation plans” to be taxed on the
program benefits in the first year in which the individual is not exposed
to a substantial risk of forfeiting those benefits.
Thus, in some cases, individuals are taxed on benefits that they
will not receive until long after they have paid the tax.
Section 457(e)(11) exempts “bona fide severance pay plans” from the
Section 457(f) rules. It
was felt that the exception would apply to the types of programs offered
by school districts. IRS
has taken a position, however, that a program does not constitute a
bona fide severance pay plan within the meaning of Section 457(e)(11)
unless payments are conditioned on an unanticipated termination of employment
or were made pursuant to a temporary early retirement incentive program.
The IRS position appears to apply to one state only, but if applied
elsewhere, might adverselyaffect programs around the country.
IRS has on its business plan a project to promulgate a definition of
“bona fide severance pay plan,” but the Agency does not apparently view
it as a priority. Meanwhile,
Senator Max Baucus (D-MT), chairman of the Senate Finance Committee,
is looking at ways to solve this problem through a legislative change.
Possible solutions include taxing an individual only after he/she
has actually received the benefit.
The top Republican on the Committee, Senator Charles Grassley
(R-IA) is also interested in the issue.
Savers Summit to be Held Next February
The second of three National Summits on Retirement Savings will
be held in Washington from February 27 until March 1.
The first summit took place in 1998. Individuals interested in
serving as delegates will be appointed shortly.
The agenda has not yet been announced.
NCTR to Participate in Anti-Economic Terrorism
Commission
NCTR has appointed George Philip, Executive Director
of the New York State Teachers’ Retirement System, to serve on a commission
to develop a protocol to aid the President in his efforts to wage economic
war on terrorism. Mr. Philip
is a member of NCTR’s Executive Committee.
The commission is being organized by Barbara Hafer, Treasurer
of Pennsylvania, and this year’s President of the National Association
of State Auditors, Comptrollers, and Treasurers (NASACT).
Ms. Hafer is concerned, among other matters, that “states’ pension
fund investments do not inadvertently support terrorism,” according
to an October 25 press release.
“Public pension funds can be used as a tool to defend our interests
by refusing to link American money to entities that threaten Americans
. . . but remember the goal is to fight terrorism, not negatively affect
economies.”
To set the foundation for the commission, Ms. Hafer hosted a conference
call recently with financial officers from states, as well as private
sector and Federal Reserve Board representatives.
The state representatives organized the commission to:
-
Develop an action plan to control the flow
of wealth that goes to
countries or companies that support terrorism and do it in a coordinated
global fashion.
-
Explore how technology can aid in this mission
and what resources
private industry can offer.
-
Review any linkage at the transaction level
by using teams of
specialists.
-
Review foundations that are held by banks,
including a closer
review of their charters. The commission presents an interesting
issue for NCTR members. Because
its goal is to assist with the war against economic terrorism by
refusing to link U.S. money to entities that support terrorism,
the commission could recommend that retirement systems divest themselves
of investments in companies that do business in countries deemed
to support terrorism. Setting aside the moral and political issues,
such divestiture could adversely affect earnings of retirement systems
and also affect retirement systems’ duties to act for the exclusive
benefit of plan participants.
It is important, therefore, that NCTR play a role in the
commission to ensure that retirement systems’ concerns are represented.
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