REVIEW OF DRAFT CSRS REGULATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000800020004-1
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 8
• Document Creation Date: December 27, 2016
• Document Release Date: December 12, 2012
• Sequence Number: 4
• Publication Date: October 7, 1986
• Content Type: MISC

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7 October 1986
Review of Draft CSRS Regulation
Reference: Draft (Civil Service Retirement System
Comments/Suggestions
1. Reference: "Synopsis - (b) Policy"
Comments: Suggest expansion of last sentence of (b) Policy statement
"Effective 1 January 1987... will process all retirement claims and pay
all benefits" to include reference to the full range of administrative
functions that are cited under "(g) (2) Responsibilities" in the draft
regulation.
2. Reference: T. Eligibility for Participation"
Comments: Present draft wording is okay as regards normal cases. Suggest
confirm OGC's final opinion as regards eligibility for CSRS of certain 3rd
country foreign nationals who are not eligible for U.S. Social Security
coverage. If they are eligible for CSRS then provisions must be made for
them in the regulations.
3. a. Reference: "(g)(2) Responsibilities of the Office of Personnel"
Comments: Suggest expansion of wording of (2)(C) "Determine
entitlements to benefits based on the service of employees" to include
after the word determine, "and adjudicate disability, dependency, and
other claims for entitlements to benefits."
b. Reference: (2)(i) - Briefing of auditors
Comments: Suggest rewrite of this statement to include in briefings
definitive coverage of responsibilities and accountability of auditors
as regards protection of identities of sensitive Agency personnel.
c. Reference: (2)(j) - Polygraph for auditors
Comments: Suggest broader wording to the effect that CPM auditors
must meet security standards and successfully complete security
requirements prescribed by the Agency rather than focus on just the
polygraph requirement.
STAT
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d. Reference: (2)(k) - Request for Information from OPM
Comments: Suggest expansion of current wording to include other U.S.
Government officials who may be subject to informational request from
CIA. These are the same officials cited in the CIARDS regulation
e. Reference: (2) (1) Response to requests for information from OPM.
Comments: The proposed policy statement represents current Agency
policy based on statutory responsibility and authorities regarding
protecting intelligence sources and information (Title 50 U.S. Code
Sections 403 and 421-426).
More detailed comments are found in review comments relative to the
addendum papers "Policy Issues in
4. Other Suggestions
Consider adding another item under (g)(2) - Responsibilities of the Office
of Personnel, relative to the authority to waive recovery of payments owed
the Government when in the judgment of the Director of Personnel the
individual is without fault and recovery would be against equity and good
conscience. U.S. Code, Title 5 Section 8346 now provides Director, CPM
with this authority.
5. Policy Issues in
Reference: Memo dated 29 September 1986 same topic as above
Issue #2 - topic relative to limitations on information the office of
Personnel will provide CPM (i.e. - without identification of employees nor
data relative to size of the Agency).
Comments: Suggest that rationale for CIA restrictions on release to CPM
of employee identities, number of employees, etc., follows currently
established policy. Current policy is based on statutory authorities
contained in United States Code, Title 50.
Title 50, Section 403 (g) "Protection of Nature of Agency's Functions"
hold the Director of Central Intelligence responsible for protecting
intelligence sources and methods from unauthorized disclosure and
specifically exempts the Agency from disclosure of the organization,
functions, names, office titles, salaries and number of personnel employed
by the Agency.
Subchapter IV, Title 50, Section 421 through 426, "Protection of Certain
National Security Information" (based on P.L.-97-200 enacted in 1982,)
imposes severe penalties for the disclosure of the identities of sensitive
intelligence personnel to unauthorized sources.
STAT
STAT
STAT
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Title 50, Section ~zl through 426, "Protection of C,._tain National
Security Information" (based on P.L.-97-200 enacted in 1982,) imposes
severe penalities for disclosure of the identities of sensitive
intelligence personnel to unauthorized sources.
Section 423 of the Statute charges the President with submitting an annual
report to the Congressional Intelligence Committees on measures taken to
protect the identities of covert personnel. The President's annual report
is to be based on information provided by the DCI on measures instituted
to protect sensitive identifies and "on any other matters relevant the the
protection of the identities of covert agents."
The terms covert agent is defined in Section 426 and includes staff
officers and employees whose identities are classified information and who
are serving outside the United States or have within the last five years
served outside the United States.
Prior to using Title 50, Section 421 - 426 as the rationale for this
policy question outside the CIA, it must be confirmed whether the Agency
has provided the President with the information presented for the
President's annual reports as required by the statute.
If annual reports have not gone forward, only the Title 50 Section 403
references should be used.
STAT
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EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. D.C. 20603
July 31, 1986
44/"y
~ 6e%F. J r 3~j
Exccutir~ R sl
86. 3525X
Circular No. A-76
Revised
Transmittal Memorandum #3
MEMCRA1'DUM FOR HEADS OF EXECUTIVE DEPARTMENTS AND AGENCIES
SUBJECT: (De completion of A-76 Studies Until New
irement Factors Issued.
The "Federal Employees' Retirement System Act of 1986" was
enacted on June 6, 1986. Section 307 of this law states:
Sec. 307. USE OF "P10RM1AL-COST PERCENTAGE".
Notwithstanding any other provision of law, the normal-
cost percentage (as defined by section 8401(23) of title 5,
United States Code, as added by this Act) of the Federal
Employees' Retirement System shall be used to value the
cost of the System for all purposes in which the cost of
the System is required to be determined by the Federal
Government, including any comparisons between the cost
of performing commercial activities under contract with
corrercial sources and the cost of performing those
activities using Government facilities and personnel.
Since this provision became effective upon enactment, the
retirement rate (27.9 percent) issued in the August 1985 revision
to A-76 is not longer applicable. As a result, there is
currently no retirement factor for use in A-76 cost comparisons
that meets the legal requirement of Section 307.
All A-76 studies with bid/proposal openings on or after
June6,._1986, where the cost comparison decision (contract award
o;r cancellation of the solicitation) has not been approved will
bepostponed pending issuance of the new retirement factors, and
fno.Iusion in the cost calculations. We expect these factors to
be issued in August 1986.
This revision is effective upon publication.
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oution from an ESur tnat satisnes the preceaing conaitions win
not qualify for this exception from the early distribution tax unless
such distribution is attributable to assets that have been invested
in employer securities for the 5-year period. Tacking of investment
periods is permitted.
For example, amounts transferred to an ESOP would qualify for
the exception 3 years after transfer provided such amounts meet
the investment criteria for 2 years prior to such transfer. In addi-
tion, amounts transferred to an ESOP following a reversion from a
defined benefit pension plan would qualify for this exception if a
majority of such amounts are invested in employer securities upon
transfer and the 5 year investment requirement is met. The confer-
ees intend that a first-in, first-out rule be used for purposes of de-
termining the length of time a plan has held securities distributed
to a participant.
'lie conference agreement follows the effective date provisions of
if senate amendment.
Direct transfer option
The conference agreement does not contain the provision in the
Senate amendment.
In general
Under present law, a distribution of benefits from a tax-favored
retirement arrangement generally is includible in gross income
unless the amount distributed represents the employee's invest-
ment in the contract (i.e., basis). In the case of a distribution from
a qualified plan or an IRA, such a distribution is includible in the
year in which it is paid or distributed. Under a tax-sheltered annu-
ity, benefits are includible in income when paid or made available.
ump-sum distributions
ider present law, a lump-sum distribution from a qualified
pion may qualify for special 10-year forward income averaging. In
addition, the portion of a lump sum attributable to contributions
prior to January 1, 1974, may qualify for capital gains treatment.
Basis recovery rules
Present law provides special rules for the treatment of basis (e.g.,
emplolyee contributions) when an individual receives a distribution
from a tax-favored retirement arrangement. If an amount is re-
ceived before the annuity starting date (i.e., the date on which an
amount is first received as an annuity), the individual is treated as
first receiving employee contributions, which are nontaxable, and
then taxable income.
In the case of amounts received after the annuity starting date,
each payment received by an employee generally is treated, in
part, as a return of the employee's contributions and, in part, as
taxable income. The portion of each payment treated as a return of
to each payment as the employee's total contributions bear to the
total expected payments over the period of the annuity. In the case
of a straight-life annuity, the employee's life expectancy, as of the
annuity starting date, is treated as the period over which the annu-
ity is to be paid for purposes of computing his total expected return
under the contract. Where the employee dies prior to the expira-
tion of the employee's anticipated life expectancy, no deduction is
provided for the employee's unrecovered basis. On the other hand,
an employee whose actual life is longer than anticipated at the
time benefits commence effectively excludes from income an
amount in excess of the employee's total contributions.
In addition, under present law, a special rule applies under cer-
tain circumstances to annuity payments from qualified plans.
Under the special rule, if an individual's first 3 years of annuity
payments after the annuity starting date will equal or exceed the
individual's aggregate employee contributions, all distributions are
treated as a return of employee contributions (and thus nontax-
able) until all of the individual's employee contributions have been
recovered. Thereafter all distributions are fully taxable.
House Bill
Constructive receipt under a tax-sheltered annuity
Under the House bill, benefits under a tax-sheltered annuity are
includible in income only when benefits are actually received. The
provision is effective for distributions after December 31, 1985.
10-year averaging and pre-1974 capital gains treatment
Effective for distributions made after December 31, 1985, the
House bill repeals 10-year forward averaging, phases out pre-1974
capital gains treatment over a 6-year period, makes 5-year forward
averaging (calculated in the same manner as 10-year averaging
under present law) available for one lump-sum distribution re-
ceived by an individual after age 591/2 and, under a transition rule,
permits certain individuals to apply 5-year averaging to one lump-
sum distribution received before age 59'/2.
Under the House bill, individuals are permitted to make a one-
time election with respect to a single lump sum received after the
individual attains age 591/2 (1) to claim, pursuant to the 6-year
phase-out, capital gains treatment on that portion of the lump sum
(if any) attributable to amounts contributed prior to 1974 and (2) to
use 5-year forward averaging on the balance of the lump sum. In
addition, the House bill provides a special transition rule under
which any participant who attains age 50 before January 1, 1986, is
permitted to make one election with respect to a single lump-sum
distribution received prior to age 591/2 (1) to claim pre-1974 capital
gains treatment pursuant to the 6-year phase-out, and (2) to use 5-
year forward averaging on the balance of the lump sum.
The House bill also permits individuals who separate from serv-
ice in December 1985 and receive a lump-sum distribution in Janu-
ary 1986 to elect to treat the distribution as received in 1985 and to
claim 10-year averaging (and capital gains treatment if appropri-
ate) with respect to the distribution.
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 Basis recovery rules
1 591/2) to use 5-year forward averaging (under the new tax rates) or
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tributions from plans in which there are after-tax employee contri-
butions. Under the House bill amounts received prior to the annu-
ity starting date are treated as being made first out of taxable
amounts (employer contributions and income) and, second, as being
made out of nontaxable amounts (employee contributions). If an
employee is only partially vested in the portion of the employer's
benefits attributable to employer contributions (for example, in the
case of a plan with a graduated vesting schedule), the employee is
not taxed on a distribution to the extent that the distribution,
when added to any prior distributions under the plan, exceeds the
sum of (1) the employee's vested benefits attributable to employer
contributions, plus (2) income on the employee's contributions.
With respect to amounts received after the annuity starting date,
the special three-year basis recovery rule is eliminated. Thus, an
employee must include in income a portion of each payment made
on or after the employee's annuity starting date.
The House bill provides that in computing the portion of each
payment that may be excluded from income, the employee's expect-
ed total return is to be determined as of the date of the payment.
The bill limits the total amount that an employee may exclude
from income to the total amount of the employee's contribution. In
addition, if an employee's benefits cease prior to the date the em-
ployee's total contributions have been recovered, the amount of un-
recovered contributions is allowed as a deduciton to the annuitant
for his last taxable year. For purposes of the provisions of present
law relating to net operating losses, the deduction is treated as re-
lated to a trade or business of the employee.
The provisions relating to the basis recovery rules for amounts
received before a participant's annuity starting date are generally
effective for distributions made after December 31, 1985, but do not
apply to employee contributions made prior to January 1, 1986.
The repeal of the special 3-year basis recovery rule generally is
effective with respect to any individual whose annuity starting
date is after July 1, 1986.
Senate Amendment
Constructive receipt under a tax-sheltered annuity
The Senate amendment is the same as the House bill, except
that the provision is effective for distributions after December 31,
1986.
10-year averaging and pre-1974 capital gains treatment
The Senate amendment follows the House bill, except for the ef-
fective date and the special transition rule for individuals who
have attained age 50 before January 1. The general effective date
of the Senate amendment is taxable years beginning after Decem-
ber 31, 1986.
The Senate amendment provides a transition rule under which a
participant who has attained age 50 before January 1, 1986, is per-
mitted (1) to make one election (before or after attainment of age
quiremenL of attainment of age au -/2, ana (Z) to elect capital gains
treatment with respect to a lump-sum distribution, without regard
to the six-year phase-out of capital gains treatment. An election
under this transition rule to use income averaging on a lump sum
received prior to age 591/2 eliminates the availability of an election
count balance) under the plan as of the date of distribution or as of
such other time as the Secretary may prescribe. The Secretary is
authorized to prescribe appropriate rules for estimating the
amounts referred to in the prior sentence where precise calculation
would be unjustifiably burdensome.
If an employee is only partially vested in the portion of the em-
ployee's benefits attributable to employer contributions (for exam-
ple, in the case of a plan with a graded vesting schedule), the por-
tion of the employee's accrued benefit that has not yet vested is not
taken into account in determining the total value of the partici-
pant's accrued benefit.
With regard to post-annuity starting date distributions, the
Senate amendment follows the House bill.
The Senate amendment also provides basis recovery rules for dis-
tributions from an IRA to which nondeductible contributions have
been made. The rules are generally similar to the rules applicable
to distributions from qualified plans.
The provisions relating to the basis recovery rules for amounts
received before a participant's annuity starting date are generally
effective for distributions made after December 31, 1986, but do not
apply to employee contributions made prior to January 1, 1987 to
the extent that, on May 5, 1986, such contributions were available
for distribution under a plan before separation from service. Thus,
except in the case of plans in which substantially all contributions
are employee contributions, withdrawals made after the effective
date, but prior to an individual's annuity starting date, are to be
treated as made first from pre-1987 employee contributions that
were available for in-service withdrawal. After all such contribu-
tions have been recovered, any subsequent distributions are taxed
under the new pro-rata basis recovery rules of the bill. The repeal
of the special 3-year basis recovery rule generally is effective with
respect to any individual whose annuity starting date is after Janu-
ary 1, 1988.
after age 591/2 under the general rule.
Basis recovery rules
With respect to pre-annuity starting date distributions, the
Senate amendment modifies the basis recovery rules to provide for
pro-rata recovery of employee contributions. Thus, with respect to
a pre-annuity starting date distribution, a participant is entitled to
exclude that portion of the payment that bears the same ratio to
the total payment as the participant's after-tax employee contribu-
tions (and amounts treated as after-tax employee contributions)
bears to the total value of the participant's accrued benefit (or ac-
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Conference Agreement
Constructive receipt under a tax-sheltered annuity
The conference agreement follows the House bill and the Senate
amendment.
10-year averaging and pre-1974 capital gains treatment
The conference agreement follows the Senate amendment. Under
the conference agreement, if an individual who has attained age 50
by January 1, 1986, elects, pursuant to the transition rule, to retain
the capital gains character of the pre-1974 portion of a lump sum
distribution, the capital gains portion is taxed at a rate of 20 per-
cent. The 20 percent rate applies to all taxpayers, regardless of the
maximum effective capital gains rate under present law.
Basis recovery rules
Pre-annuity starting date
The conference agreement generally follows the Senate amend-
ment. However, under the conference agreement, employee contri-
butions to a defined contribution plan or a separate account of a
defined benefit plan (and the income attributable thereto) are
treated as a separate contract for purposes of section 72 and appli-
cation of the pro-rata rule. Thus, under the conference agreement,
if an employee withdraws employee contributions from such a plan
or account, then for tax purposes, the distribution will be consid-
ered to be part nontaxable, i.e., a return of employee contributions,
and part taxable, i.e., a distribution of earnings on those contribu-
tions. The distribution will not, however, be considered to be attrib-
utable to employer contributions. If an employee withdraws all
amounts attributable to employee contributions and such amount
is less than the employee's contributions, the employee may recog-
nize a loss.
Post-annuity starting date
The conference agreement follows the House bill and the Senate
amendment, except that it extends the separate contract rule to
post-annuity starting date distributions.
Rollovers
The conference agreement modifies the rules relating to rollovers
of partial distributions. Under the conference agreement, partial
distributions may be rolled over only if the distribution is due to
the death of the employee, is on account of the employee's separa-
tion from service (including the separation from service of a self-
employed individual) or is made after the employee has become dis-
abled. The requirement that a partial distribution not be one of a
series of periodic payments is eliminated.
Under a special rule, a distribution in satisfaction of the diversi-
fication requirements applicable under the agreement to employee
stock ownership plans may be rolled over even if the distribution
does not otherwise qualify for rollover treatment.
The conference agreement contains a special rule permitting
amounts deposited in certain financially distressed financial insti-
tutions to be rolled over into an IRA or qualified plan notwith-
standing that the rollover does not occur within 60 days of the date
of the original distribution to the employee. Under this rule, the
60-day period does not include periods while the deposit is frozen.
In addition, the individual has a minimum 10 days after the re-
lease of the funds to complete the rollover.
Individual retirement arrangements
The conference agreement follows the Senate amendment, with
modifications. (See discussion in Part A.1., above.)
Effective dates
The basis recovery rules are generally effective with respect to
distributions received after December 31, 1986. The repeal of the 3-
year basis recovery rule is effective with respect to individuals
whose annuity starting date is after July 1, 1986. The provision
limiting the income exclusion to the amount of the employee's in-
vestment in the contract applies to individuals whose annuity
starting date is after December 31, 1986.
The new rules with respect to partial distributions are effective
with respect to amounts distributed after December 31, 1986. The
special rule for frozen deposits is generally effective with respect to
distributions after the date of enactment. With respect to amounts
which were frozen and released prior to the date of enactment, the
rollover must be completed within 60 days following the date of en-
actment.
Present Law
An individual is permitted, under present law, to borrow from a
qualified plan in which the individual participates (and to use his
or her accrued benefit as security for the loan) provided the loan
bears a reasonable rate of interest, is adequately secured, provides
a reasonable repayment schedule, and is not made available on a
basis that discriminates in favor of employees who are officers,
shareholders, or highly compensated. However, no loan is permit-
ted under the Employee Retirement Income Security Act of 1974
(ERISA) or the Code from a qualified plan to an owner-employee
(i.e., a sole proprietor or more than 10-percent partner). Interest
paid on a loan from a qualified plan is deductible.
Subject to certain exceptions, a loan to a plan participant is
treated as a taxable distribution of plan benefits. An exception to
this general rule of income inclusion is provided to the extent that
the loan (when added to the outstanding balance of all other loans
to the participant from all plans maintained by the employer) does
not exceed the lesser of (1) $50,000 or (2) the greater of $10,000 or
one-half of the participant's accrued benefit under the plan. This
exception applies only if the loan must, by its terms, be repaid
within five years or, if the loan is used to acquire or improve a
principal residence of the participant or a member of the partici-
pant's family, within a reasonable period of time.
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House Bill
The House bill modifies the exception to the income inclusion
rule by reducing the $50,000 limit on a loan by the participant's
highest outstanding loan balance during the preceding 12-month
period.
In addition, the extended repayment period permitted for pur-
chase or improvement of a principal residence is amended to apply
only to the purchase of the principal residence of the participant.
Plan loans to improve an existing principal residence, to purchase
a second home, and to finance the purchase of a home or home im-
provements for other members of the employee's family are subject
to the 5-year repayment rule.
The House bill also requires that a plan loan be amortized in
level payments, made not less frequently than quarterly, over the
term of the loan.
The House bill also provides for the deferral of the deduction for
interest paid by (1) all employees on loan secured by elective defer-
rals under a qualified cash or deferred arrangement or tax-shel-
tered annuity, and (2) key employees with respect to loans from
any qualified plan or other tax-favored retirement plan. The defer-
ral is to be accomplished by denying a current deduction for the
interest paid and increasing the participant's basis under the plan
by the amount of nondeductible interest paid.
The provisions would be effective for amounts received as a loan
after December 31, 1985. Any renegotiation, extension, renewal, or
revision after December 31, 1985, of an existing loan is treated as a
new loan on the date of such renegotiation, etc.
Senate Amendment
As under the House bill, the Senate amendment modifies the ex-
ception to the income inclusion rule by reducing the $50,000 limit
on a loan by the participant's highest outstanding balance during
the preceding 12-month period.
In addition, the extended repayment period permitted for pur-
chase or improvement of a principal residence is amended to apply
only to the purchase of the principal residence of the participant or
a lineal descendant of the participant. Thus, for example, plan
loans to improve an existing principal residence, or to purchase a
second home, are subject to the 5-year repayment rule.
The provisions are generally effective with respect to loans made
after December 31, 1986. Any renegotiation, extension, renewal, or
revision after December 31, 1986, of an existing loan is treated as a
new loan on the date of such renegotiation, etc. The provision de-
nying basis is effective for interest paid after December 31, 1986.
The general effective date applies to the provision denying a deduc-
tion for interest paid on certain loans. Of course, prior to the effec-
tive date, the deductibility of interest will be subject to the general
limits on deductibility of interest contained in the conference
agreement.
Conference Agreement
The conference agreement follows the House bill, with modifica-
tions and clarifications as described below.
The conference agreement follows the House bill with respect to
the reduction of the $50,000 limit on loans, with a clarification.
Under the conference agreement, a loan, when added to the out-
standing balance of all other loans from the plan, cannot exceed
$50,000 reduced by the excess of the highest outstanding balance of
loans from the plan during the 1-year period ending on the day
before the date the loan is made over the outstanding balance of
loans from the plan on the date the loan is made.
For example, a participant with a vested benefit of $200,000 bor-
rows $30,000 from a plan on January 1. On November 1, the partic-
ipant wants to borrow an additional amount without triggering a
taxable distribution. At that time, the outstanding balance on the
first loan is $20,000. The maximum amount the participant can
borrow is $50,000, i.e., $20,000-$20,000-($30,000-$20,000).
The conference agreement follows the House bill with respect to
the principal residence exception to the 5-year repayment rule and
the level amortization rule. The conferees intend that the level
amortization requirement does not apply to a period when the em-
ployee is on a leave of absence without pay for up to 1 year. In ad-
dition, the requirement does not preclude repayment or accelera-
tion of the loan prior to the end of the commitment period. Thus,
for example, the provision does not preclude a plan from requiring
full repayment upon termination of employment.
The provisions are generally effective with respect to loans made
after December 31, 1986. Any renegotiation, extension, renewal, or
revision after December 31, 1986, of an existing loan is treated as a
new loan on the date of such renegotiation, etc.
Under the conference agreement, the deduction of interest on all
loans from a qualified plan or tax-sheltered annuity is subject to
the general limits on deductibility of interest contained in the con-
ference agreement. In addition, effective with respect to loans
made, renegotiated, extended renewed, or revised after December
31, 1986, no deduction is allowed with respect to interest paid on (1)
loans secured with elective deferrals under a qualified cash or de-
ferred arrangement or a tax-sheltered annuity, and (2) any loan to
a key employee (even if the interest on such loans is otherwise de-
ductible under the general interest provisions of the agreement).
Effective for interest paid after December 31, 1986, no basis is al-
lowed with respect to any interest paid on a loan from a qualified
plan or tax-sheltered annuity.
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