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LEGAL REPORT

Winter (Vol. 2), 2002

This is one in a series of reports on recent changes in the law, provided as a service by Mooney, Green, Baker & Saindon, P.C.

President Signs Economic Stimulus Package

Last fall, the Republican-controlled House of Representatives passed a bill that, according to critics, was jam-packed with all sorts of goodies and tax breaks for major corporations and rich individuals under the guise of “economic stimulus.” That bill went nowhere. More recently, the Democrat-controlled Senate passed a scaled-down version of an economic stimulus package that was primarily intended to provide relief to the newly-unemployed. In the end, a package far closer to the Senate version passed both Houses of Congress and, on March 9, was signed into law.

The new legislation, known as the “Job Creation and Work Assistance Act of 2002" (“JCWAA”) provides for a 13-week extension of unemployment benefits for those states that opt into the program (the cost is fully subsidized by the Federal Government). The JCWAA includes an automatic trigger that provides a further 13-week extension of benefits in states with insured unemployment rates (i.e., the percentage of workers eligible for unemployment benefits ) remaining at 4 percent or higher. However, these extensions are only available to workers who first filed their claim for unemployment benefits on or after March 15, 2001 (after the beginning of the recession).

The JCWAA also contains a few technical changes relating to pension plans. For example, under prior law, pension plan funding rates were pegged to the rates payable from 30-year treasury bonds. The artificially low interest rates for such bonds, caused both by the Federal Reserve having dropped short-term rates and by the Treasury Department’s decision to discontinue offering 30-year bonds, has made many pension plans appear far more underfunded than they really are. Under the JCWAA, plans will be able to use rates as high as 120 percent of the 30-year treasury bill rates for years 2002 and 2003. Along the same lines, in determining a pension plan’s underfunded liability for purposes of calculating the variable premium payable to the Pension Benefit Guaranty Corporation, plans will now use a rate that is 100% of the treasury bill rate, rather than 85% of that rate, for years 2002 and 2003. Both of these fixes are temporary, until a more permanent solution can be devised.

On the health benefit side, the JCWAA extends the Mental Health Parity Act, which expired at the end of September, 2001. The extension is through the end of 2003, although, peculiarly, the period from October 1, 2001 through January 31, 2002 is carved out. Additionally, the statutory provisions authorizing the creation of so-called “Medical Savings Accounts” are extended by an extra year, through the end of 2003.

The JCWAA also contains some “technical corrections” to the recently enacted “Economic Growth and Tax Relief Reconciliation Act” (“EGTRRA”). Apparently, some plans that incorporated statutory limitations on contributions and benefits by reference (particularly the Section 415 limits and the limits on compensation taken into account in determining benefits) were unhappy when Congress raised those limits, providing, in essence, automatic increases. Under JCWAA, plans will have until June 30, 2002, to reduce benefits back to their pre-EGTRRA levels without violating ERISA’s anti-cutback rules.

Other technical corrections relating to employee benefit plans include provisions clarifying that:

elective deferrals to a simplified employer plan are not subject to new deduction limits and not considered in applying limits to other SEP contributions;

the combined 25 percent deduction limit for plans does not apply if the only contributions are elective deferrals (without any matching contributions or other employer contributions);

a person who receives a distribution from a qualified pension plan or IRA must deduct the amount of that distribution from the amount that he or she can contribute to an IRA; and

distributions made after a severance from employment are taken into account for only one year in determining whether a plan is top-heavy.

In addition to a large number of miscellaneous clarifications and technical corrections to the tax laws in general, the bill contains an number of substantive tax provisions, including the following:

a provision permitting the issuance of certain form 1099s electronically, rather than on paper;

expansion of existing provisions exempting from income tax certain governmental payments for the support of foster children;

permitting primary and secondary school teachers to deduct up to $250 for their out-of-pocket expenses for books and other teaching supplies;

the 10% tax credit for the purchase of electric cars, as well as other tax credits for certain expenses relating to “clean fuel” vehicles, are extended to the end of 2003, and then phased out, in yearly steps, until it expires entirely at the end of 2006;

tax credits for certain alternative energy sources are extended by two years until the end of 2003;

existing tax credits for employers who hire from certain high-need groups (including families eligible to receive benefits under the Temporary Assistance for Needy Families Program; high-risk youth; qualified ex-felons; vocational rehabilitation referrals; qualified summer youth employees; qualified veterans; families receiving food stamps; and persons receiving certain Supplemental Security Income benefits) are extended for two years through the end of 2003; and

existing “welfare to work” employer tax credits are extended through the end of 2003.

Among the “stimulus” provisions of the JCWAA, there is a new 30% depreciation “bonus” for certain capital investments; the period for carrying-back losses from years ending in 2001 and 2002 is extended from two years to five years; and a number of tax breaks relating to financing activities have been extended.

Finally, the JCWAA also creates a “Liberty Zone” in the area of New York City most affected by the terrorist attack of September 11. Although most of the benefits are in the form of business and investment tax credits and other tax breaks, the bill permits the city or state to issue tax exempt bonds for the purpose of reconstructing both commercial and residential properties within the Liberty Zone (as well as for certain large projects outside the Zone). Businesses and residents within the Liberty Zone will receive an estimated $5 billion in tax benefits. Overall, the bill is estimated to result in $51.2 billion pumped into the economy during fiscal year 2002, and a total of $93.9 billion during the five year period from years 2002 through 2007.

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