The following was received by E-Mail via the CUPA List Service and is provided for your information:
Just getting back from the National Convention and a few days in Boston, I thought the group might be interested on an update on the tax bill. As you may of heard, after a month of contentious discussion, debate, and closed-room negotiations, Congress passed the conference agreement on the Taxpayer Relief Act (H.R.2014) on July 31. The House passed the bill 389 to 43; the Senate followed suit, voting 92 to 8 to send the measure to President Clinton for his consideration. Passage of the legislation, which aims to provide $94 billion in net tax cuts over a five-year period, completes congressional action on the spending and tax legislation designed to meet the targets agreed to by President Clinton and Congress in the context of their balanced budget agreement.
As part of the budget agreement with the President, Congress agreed to pass two separate measures to balance the budget and in specific order. The Balanced Budget Act of 1997 (H.R.2015), is the spending legislation intended to cut federal spending by $137.24 billion to balance the budget by the year 2002 through a combination of changes to Medicare, Medicaid, entitlement, and other areas. H.R.2015 passed both the House and Senate the week of July 28. President Clinton signed both H.R.2014 and H.R.2015 into law on August 5, 1997.
With other higher education associations and organizations, CUPA worked on several of the provisions in the tax bill, including supporting a permanent retroactive extension of section 127 for undergraduate- and graduate-level education; opposing efforts to curtail qualified tuition reduction programs under section 117(d); supporting a permanent moratorium of the general nondiscrimination requirements for government pension plans; and clarifying that pre-tax contributions to a section 125 plan, or elective deferrals to a retirement plan, are taken into consideration as compensation for purposes of the definition of compensation in calculating annual maximum deferral limits. Although not all of CUPA's public policy goals were achieved, the strong support of the CUPA membership in contacting congressional offices on call-in days and in completing the Section 117 (d) Survey was instrumental in our efforts. The Government Relations Department of CUPA is extremely grateful to all those institutions that helped in this effort.
What follows is a preliminary review of the key provisions of interest to human resource professionals in higher education in the Taxpayer Relief Act (H.R.2014). Other provisions included in the tax bill will be reported on in upcoming issues of the CUPA News.
IRC Section 127 Employer Provided Educational Assistance_Under prior law, Internal Revenue Code (IRC) Section 127 allowed employees to exclude up to $5,250 a year in tuition, books, and fees for non-job-related education on the undergraduate or graduate level. The last extension of section 127 was included in The Small Business Job Protection Act of 1996 (P.L.104-188), which extended section 127 from January 1, 1995, to July 1, 1997. The exclusion for graduate-level courses, however, expired for those courses taken after June 30, 1996 . Conference Agreement: Provides a three-year extension for IRC section 127 employer provided undergraduate-level educational assistance from July 1, 1997, to May 31, 2000. An extension for graduate-level courses was not included in H.R.2014.
IRC Section 117(d) Qualified Tuition Reduction Programs_Under current law, IRC section 117(d) generally provides for an exemption from income for money received as a qualified scholarship by an individual for use at an institution of education. Subsection (d), Qualified Tuition Reduction, allows employees of a college or university, the employee's spouse, and/or dependent(s) to have exclusions from income for any "qualified tuition reduction." This includes the cost of tuition, books, and school supplies but does not extend to room and board. Section 117 covers only educational expenses at an undergraduate level and does not cover educational expenses of an employee, spouse, or dependents at a graduate level. In addition, section 117(d)(5) generally provides that, in the case of a graduate student who is a degree candidate and who is working in a teaching or research capacity, tuition reductions are excluded from taxable income.
Conference Agreement: The conference agreement makes no changes to current law section 117(d) as it applies to Qualified Tuition Reduction.
Nondiscrimination for State and Local Government Plans_Under current law, regulations require that retirement plans do not discriminate in terms of either the group of employees that is covered by the retirement plan or the type of benefits provided to employees. Retirement plans were originally required to comply with the nondiscrimination rules by the first day of the plan year after 1988. However, the effective date for compliance with the nondiscrimination pro- visions has been delayed several times by the Internal Revenue Service (IRS). In Notice 92-36, the IRS extended the effective date for compliance with nondiscrimination rules to plan years beginning on or after the later of January 1, 1999, or 90 days after the opening of the first legislative session beginning on or after January 1, 1999, if that legislative body does not meet continuously. For plan years beginning before the extended effective date, governmental plans are deemed to satisfy the nondiscrimination requirements.
Conference Agreement: Makes permanent the moratorium of the general nondiscrimination requirements for pension plans maintained by state and local governments. This provision applies to taxable years beginning on or after the date of enactment. For taxable years beginning before the date of enactment, plans maintained by state and local governments are deemed to have been in compliance with the nondiscrimination provisions.
Modification of IRC Section 403(b) Exclusion Allowance_Under current law, nontaxable contribution to a IRC section 403(b) annuity cannot exceed the maximum exclusion allowance, which is the excess, if any, of 1) 20 percent of an individual's includible compensation multiplied by years of service; or 2) the aggregate employer contributions for an annuity excludable for any prior taxable years. The individual may choose, however, to have the maximum exclusion allowance calculated under IRC Section 415. The Small Business Job Protection Act amended the section 415 definition of compensation for purposes of calculating annual maximum deferral limits, allowing pre-tax contributions to a section 125 plan or elective deferrals to a retirement plan to be taken into consideration as compensation. The Act, however, failed to amend the definition of compensation for purposes of calculating the annual maximum deferral limits for 403(b) plans to allow pre-tax contributions to a section 125 plan or elective deferrals to a retirement plan to be taken into consideration as compensation.
Conference Agreement: Clarifies IRC Section 403(b)(3) to allow pre-tax contributions to a section 125 plan, or elective deferrals to a retirement plan_including 457 plans_to be taken into consideration as compensation for purposes of the definition of compensation in calculating annual maximum deferral limits. The provision would be effective for plan years after December 31, 1997.
Taxability of Pension Business of TIAA-CREF and Mutual of America_Present law provides that an organization described in sections 501(c)(3) or (4) of the IRC is exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. When this rule was enacted in the 1986 Tax Reform Act, TIAA-CREF and Mutual of America were specifically grandfathered in the provision to exclude from tax that portion of the business attributable to pension business. This includes income generated through the investment of contingency reserves maintained by these organizations in accordance with state insurance regulations, which are designed to ensure that contractual obligations can be fulfilled in the event of unanticipated adverse financial circumstances. Pension business is defined as the administration of any plan described in section 401(a) of the IRC that includes a trust exempt from tax under section 501(a), any plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b) of the IRC, any individual retirement plan described in section 408 of the IRC, and any eligible deferred compensation plan to which section 457(a) of the IRC applies.
Conference Agreement: Repeals the grandfather rules applicable to that portion of the business of TIAA-CREF and Mutual of America attributable to pension business. Both organizations would be treated for federal tax purposes as stock life insurance companies. The proposal would be effective for taxable years after December 31, 1997. Contributions made by or on behalf of faculty and staff, earnings, and assets that accumulate on those contributions will continue to accumulate free of tax. However, earnings on the contingency reserve fund would be treated as investment income and taxed.
New Technologies in Retirement Plans_Under current law, it is not clear if an employer who sponsors or administers an employee benefit plan may use new technologies to satisfy the various Employee Retirement Income Security Act (ERISA) reporting requirements for notice, election, consent, recordkeeping, and participant disclosure. These new technologies include use of telephonic response systems, computers, and e-mail.
Conference Agreement: Directs the Secretaries of the Treasury and Labor to issue guidance facilitating the use of new technologies for employment plan purposes. The guidance is to be designed to: 1) interpret the notice, election, consent, disclosure, and time requirements under the Internal Revenue Code of 1986 and ERISA relating to retirement plans as applied to the use of technologies by plan sponsors and administrators while maintaining the protection of the rights of participants and beneficiaries; and 2) clarify the extent to which writing requirements under the IRC shall be interpreted to permit paperless transactions. This provision is effective on enactment and requires that guidance be issued no later than December 31, 1998.
Employer Provided Transportation Benefits_Under current law, an employer is allowed to provide transportation fringe benefits to its employees tax free up to $60 a month in transit passes and up to $165 per month for parking expenses. The benefits must be provided in addition to, and not in lieu of, compensation. In addition, the benefits cannot be provided through a IRC Section 125 cafeteria plan.
Conference Agreement: Amends IRC Section 132(f)(4) to allow an employer to offer the employee a choice of receiving the employer-provided parking or the value of the parking in cash. The amount of the cash offered would be includible in the employee's income only if the employee chose the cash instead of the parking. The restriction prohibiting these benefits from being offered through a IRC Section 125 cafeteria plan would still apply. The provision would be effective for tax years after December 31, 1997.
If you have any questions on the H.R.2014 or any other issue, please call me at 202-429-0311, Ext. 390 or e-mail at maitken@cupa.org.