FINAL TAX REFORM BILL HOLDS A FEW SUPRISES FOR EMPLOYERS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000400070044-6
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 3
• Document Creation Date: December 22, 2016
• Document Release Date: January 10, 2011
• Sequence Number: 44
• Publication Date: September 1, 1986
• Content Type: MISC

Approved For Release 2011/01/10: CIA-RDP89-00066R000400070044-6
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Tax Reform '86
September 1986
FINAL TAX REFORM BILL HOLDS A FEW SURPRISES FOR EMPLOYERS
Congress is expected to vote on a tax reform bill by September 30 and the President
is expected to sign it immediately. Our analysis of the just released 900-page sta-
tute and the-800-page Conference Committee report shows that, in general, the con-
ferees followed their previously issued summary of the bill's final provisions. But
among the changes we have discovered thus far are these:
? Executive compensation. Despite rumors to the contrary, there
appears to be nothing in the transitional rules that prohibits the
deferral of income from 1986 or 1987 to 1988. However, the IRS posi-
tion on this matter may remain an issue for employers and executives.
? Qualified plans. The-new participation rules, generally effective
for plan years beginning after 1988, have been clarified. Separate
lines of business may be taken into account in meeting each of the
rules, if a reasonable classification test is met.
? The effective date of the new $200,000 limit on compensation taken
into account under a qualified plan has been deferred to apply to
benefits accruing in years beginning after 1988 (later for certain
collectively bargained agreements).
? The integration rules have been revised and rewritten to make it more
difficult to use integration (details below).
? The bill appears to limit tax-exempt organizations' use of voluntary
unfunded deferred compensation arrangements (other than section
403(b) plans and section 457 plans).
? Welfare plan nondiscrimination rules have finally been clarified
(details below).
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? Contrary to rumors, the effective date of the limitation on deduc-
tions for interest paid on policyholder loans under corporate-owned
life insurance still applies to policies purchased after June 20,
1986.
New Social Security Integration Rules
In general, for an excess plan, benefits below. the plan's integration level must
equal at least 50% of benefits above the integration level. Similarly, for an off-
set plan, the offset may not reduce the benefit otherwise payable by more than 50%.
In addition:
For an excess plan, the percentage of benefit above the integration
level cannot exceed 3/4 of a percentage point times the employee's
years of service up to 35 (i.e., maximum spread is 26.25%).
Furthermore, the 3/4% will be reduced by future IRS regulations if
the integration level is above covered compensation (currently
$15,600 for those attaining age 65 in 1987).
For an offset plan, the amount of offset for total benefits is
limited to 3/4% of the participant's final average compensation times
years of service (up to 35). In calculating final average compen-
sation, earnings above the social security wage base are ignored.
However, if final average compensation, as calculated above, exceeds
covered compensation, the 3/4% factor will be reduced by IRS regula-
tion.
These changes are effective for plan years beginning on or after January 1, 1989,
with delayed effective dates for certain collectively bargained plans. Early
planning by employers will be required in order to meet the new requirements.
New Welfare Plan Nondiscrimination Tests
New nondiscrimination tests apply to group-term life and accident or health plans.
If a plan fails these new tests, "highly compensated participants" (the same group
as for qualified plans) will be taxable only on the discriminatory portion of
employer-provided coverage. Employers may elect to apply the new tests to certain
other welfare benefits, i.e., dependent care, educational assistance and group legal
benefits, instead of current law rules.
In general, the new eligibility test requires that:
-- at least 502 of employees eligible to participate in the plan must be
non-highly compensated,
-- at least 90% of the employer's non-highly compensated employees must
be eligible for a benefit that is at least 502 as valuable as the
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highest value benefit available to a highly compensated employee
under all plans of the same type (e.g., all accident or health
plans), and
-- the plan must not contain any eligibility provision that, by its
terms or otherwise, discriminates in favor of highly compensated
employees.
The benefits test requires that the average employer-provided benefit received by
non-highly compensated employees under all plans of the same type must be at least
75% of the average employer-provided benefit received by highly compensated
employees.
Employers will be able to aggregate dissimilar welfare plans to satisfy the benefit
test; combining, for example, group-term life and educational assistance plans.
Accident, or health plans must satisfy the benefit test on their own, but once they
have done so, they can be used to help non-health plans meet the 75% rule.
Employers may also opt for a special alternative test in lieu of the eligibility and
benefit tests. Under the alternative test, a plan must cover at least 80% of an
employer's non-highly compensated employees. A plan meeting this standard will be
deemed to satisfy both the new eligibility and benefit tests.
Cafeteria plans will still be subject to a general eligibility nondiscrimination
rule. However, cafeteria plan benefits will no longer be subject to additional non-
discrimination testing. Thus, if the welfare plans offered through a cafeteria plan
(such as a group-term life or a health plan) pass the new tests described above, no
additional benefit tests will be applied under the cafeteria plan rules, as is the
case under current law (i.e., current IRC S 125(g)(2) is repealed).
Finally, as anticipated, the welfare plan nondiscrimination rules will not become
effective for plan years beginning before January 1, 1988 at the earliest.
Keeping Informed
Undoubtedly, further review of the bill will add new insights and some confusion.
Nevertheless, it is likely that Congress will pass this bill and leave many of the
details to the regulators.
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