Lobbyists Seeking Stay of Key Tax-Law Rules
Washington--Lobbyists from business and education groups are racing against the clock to win Congressional approval this term for a measure that would delay for a year the effective date of a federal law making some fringe benefits taxable.
At issue is Section 89 of the new federal tax code enacted in 1986. Under that provision, such benefits as life-insurance annuities and paid health-care plans will become taxable in January if they are found to be part of a program that discriminates against lower-paid workers.
Educators said last week that some of the perquisites enjoyed by top school administrators nationwide may be affected by the law. And they warned that many school districts are not now prepared to deal with the logistical and other problems involved in the law's implementation.
"This is going to catch a bunch of people by surprise," predicted Bruce Hunter, the associate executive director of the American Association of School Administrators.
Administrators who are having their contracts renewed this year are reviewing the law's ramifications with their boards, he said. But those who are not may have little understanding of its possible implications for their tax status.
In addition, school districts are working in a virtual legal vacuum as they try to determine the ins and outs of the law's compliance requirements, said Katharine Herber, a tax lobbyist for the National School Boards Association here.
"Once again, Congress has acted and left a void," she said. "There are law firms in this town that have people working on Section 89 seven days a week."
To provide school officials with what Ms. Herber called "breathing room," education groups have allied themselves in their lobbying effort with some 200 other organizations representing various business interests. The measure that they are trying this month to shepherd through the Senate would make a number of technical corrections to the 1986 tax code.
In addition to the one-year delay on the fringe-benefit provision, the 900-page legislative proposal contains modifications that would prevent the Internal Revenue Service from taxing the sick leave and vacation pay accrued by employees of government and nonprofit organizations.
It also would alter the taxation requirements for employer-paid education compensation. And it contains language that would adjust the code's pension provisions to ease an excessive tax burden on retired teachers in the states of Hawaii, Pennsylvania, and Washington.
But passage of the measure in this term, observers said, has been complicated by several factors: the Congress's rush to adjourn by the end of September, the fact that the Senate Finance Committee's chairman, Lloyd Bentsen, is running for Vice President, and lawmakers' concern that the combined changes proposed have no impact on the federal treasury.
"We're worried that they are not going to get it done," said Mr. Hunter of the aasa "Everything has to fall just right."
Ms. Herber, however, predicted that if Senator Bentsen returns to Washington from the campaign trail, "we may have a shot at it."
Though several features of the adjustment measure would have impact on school districts and their employees, its deferment of Section 89 is receiving the lion's share of attention from education groups.
That provision represented an attempt in the 1986 tax-reform legislation to end discrimination in the awarding of fringe benefits by requiring that they meet specific criteria to retain tax-exempt status.
Section 89 sets forth a discrimination test for benefits programs that includes the following requirements:
Ninety percent of the lower-paid employees must be eligible to participate in the same fringe-benefits plan that is offered to highly compensated employees, and their benefits under the plan must be at least 50 percent as valuable as those provided for the highly paid employees.
At least 50 percent of the lower-paid employees must be eligible for any individual component of the benefits package, such as a life-insurance, health-care, or retirement benefit.
The benefits plan may not contain any provisions relating to eligibility that discriminate against lower-paid employees.
If any single fringe benefit violates the anti-discrimination guidelines, the employees classified as highly paid must pay taxes on the amount they receive that is above what is offered to lower-paid employees.
But according to many observers here, lingering confusion over the compliance procedure is making it difficult for some business firms, government agencies, and nonprofit organizations to determine the status of their plans or employees.
"There's this mad scrambling across the United States as employers are trying to determine whether or not their plans are discriminatory,'' said Ms. Herber.
For school districts, she said, this means trying to calculate the value of benefit plans for each group of employees, determining how many employees are considered highly compensated under Section 89, and then tallying up the number of lower-paid employees who participate or should participate in the benefits.
The proposed Senate bill would delay Section 89's effective date from Jan. 1, 1989, to Jan. 1, 1990. Supporters said the delay would give businesses and other organizations time to figure out how the provision is supposed to work--and the government time to issue more detailed guidelines.
"We don't necessarily want it repealed," Ms. Herber said. "People need breathing room so they can figure out how to put this together."
She said that to calculate the value of a benefits package, "you would almost have to write to every former employee and find out how much in benefits they received."
The school-boards lobbyist added, however, that benefit plans offered by many smaller districts probably would pass the discrimination test because of their small number of employees classified as "highly compensated."
But Mr. Hunter said he was concerned that many districts and administrators might still be unaware of the section and its ramifications.
Many superintendents of schools, he said, receive special benefit items as part of their compensation, such as life-insurance annuities, that may be taxable under the new law. And in some districts, he noted, principals, program directors, and associate superintendents as well may fall into the "highly compensated" category and be taxed for any special perquisites they receive.
Education groups are also seeking in the Senate bill to reverse an irs ruling that makes taxable the sick leave, vacation pay, compensation time, and disability pay carried over by employees from one year to the next.
In the irs interpretation, those accrued benefits constitute "nonelective deferred compensation" and are taxable under section 457 of the 1986 tax-reform law even for government workers and employees of nonprofit organizations.
Those who support the reversal of that interpretation say it is without basis. They argue that the Congress, in enacting section 457, was attempting to extend the tax-exempt status of so-called 401-K plans to include employees of nonprofit organizations. State and local government employees were already provided such tax-exempt status.
The Senate measure would also address the tax-code provision that makes taxable any employer-provided educational assistance. The 1986 tax law removed the $5,400 allowable in tax-free employer-paid assistance.
The House, which has already passed its version of the corrections legislation, extended the tax-free status of the educational benefit for three years, retroactive to Dec. 31, 1987. But it also put a $1,500 cap on such assistance.
The changes proposed would not exclude from federal taxable income any employer-paid program that leads to a degree.
That would mean, Ms. Herber noted, that teachers enrolled in district-paid education courses leading to an advanced degree would not have a tax advantage.
But the measure would allow businesses to provide retraining or enrichment programs for employees that would not be taxed.
Also to be modified by the pending legislation is a tax provision that has resulted in double payments by teachers in Hawaii, Pennsylvania, and Washington of federal taxes on their retirement funds.
In Pennsylvania, teachers paid state and federal income taxes on their contributions to the retirement fund until 1984, when a state policy change allowed them to take advantage of the federal government's so-called three-year rule.
That rule allowed teachers to make a lump-sum withdrawal of three years' worth of pension funds on the assumption that the money withdrawn had come from their own contributions--and, thus, had already been taxed as income. Under the 1986 federal rules, however, the lump-sum withdrawal is subject to federal taxation.
According to Walt Carmo, assistant executive director of government relations for the Pennsylvania State Education Association, the legislation before the Congress would allow teachers in his state and others with similar policies to make the lump-sum withdrawal without paying the federal tax.
Mr. Carmo said he was optimistic that the Senate would take some action before adjourning this month. "I think they want to get this behind them," he said.