Mooney, Green, Baker & Saindon, P.C.

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Legal Report

August 1997

This is another of a series of periodic reports on new laws and other important legal developments affecting labor and pension law.

Balanced Budget Bill Brings Big Bulging Benefits

The recent bipartisan agreement to balance the federal budget in our lifetimes brings with it a bevy of goodies for young and old. However, this report will not attempt to provide details, or even a summary, of most of the provisions that make up the two massive bills that embody that agreement. Rather, this report is limited to summarizing those matters that most affect labor and benefits issues.

Educational Expense Provisions

Early Withdrawals for Educational Expenses--The new bill includes a number of provisions aimed at helping to ease the burden of paying for higher education. Among these are provisions permitting the withdrawal of pension money (including IRA and 401(k) funds) to pay for higher education expenses, without the 10% penalty that is normally applied to early withdrawals.

Educational IRAs--In addition, the bill creates a new savings vehicle, known as the Educational Individual Retirement Account ("Educational IRA" or "EIRA"). Taxpayers are permitted to put up to $500 per year into these accounts, provided they have adjusted gross income ("AGI") of $95,000 or less ($150,000 for married taxpayers filing jointly). Taxpayers with higher incomes may be able to contribute lesser amounts under a phase-out formula. Unlike contributions to a normal IRA, contributions to an EIRA are not tax deductible. However, the earnings on the account are nontaxable. Moreover, unlike an IRA, those earnings are never taxed, as long as the account balance is spent for higher education. These provisions become effective in 1998.

Deductibility of Educational Loan Interest--Congress has restored, albeit on a limited basis, the tax deductibility for interest on educational loans. Taxpayers with an AGI of less than $55,000 ($75,000 for married taxpayers filing jointly) may deduct up to $1000 beginning in 1998, rising to $2500 in 2001. Taxpayers with higher AGIs may be able to deduct less, under a phase-out formula.

Restoration of Educational Assistance Exclusion -The exclusion from income for employer-provided educational assistance benefits has been, once again, extended. This time, it has been extended for all courses beginning on or before May 31, 2000.

Expansion of Availability of IRAs

Income Limits Raised-The law currently restricts the ability of taxpayers who participate in pension plans from contributing to IRAs, depending upon their income levels. Congress has begun to raise those income limits beginning in 1998 to $30,000 ($50,000 for married taxpayers filing jointly) rising annually to $50,000 ($80,000 for married taxpayers filing jointly) by the year 2005. The existing phase-out rules (reducing below $2000 the amount that taxpayers may contribute based upon their higher incomes) remain unchanged.

Spouses Not Counted-Under current IRA rules, a taxpayer is treated as participating in a pension plan if his or her spouse participates in such a plan. Beginning 1998, this will no longer be true for taxpayers earning less than $150,000.

Roth IRAs-Congress has created a second new type of IRA, known as the Roth IRA. Roth IRAs are similar to normal IRAs, except that the contributions to them are not deductible. These are intended for people who cannot make their full $2000 deductible IRA contribution because they participate in a pension plan and their incomes exceed the specified limits. Like a normal IRA, earnings on the assets of a Roth IRA are not taxed until they are withdrawn. In general, the contribution limit for a Roth IRA is the balance of the $2000 that could not be contributed to a normal IRA.

Elimination of Penalty for First Home Purchase-Congress has eliminated the 10% early withdrawal penalties for withdrawals of up to $10,000 in pension money (including IRA and 401(k) money) if it is spent on the purchase of a first home.

Self-Employed Deduction for Health Insurance

Beginning in 1998, the percentage of health insurance costs that self-employed individuals may deduct will gradually increase from the current 40%, reaching 100% in 2007.

Tax Payment Provisions

Under the new bill, subject to regulations by the Treasury Department, you will now be able to pay your taxes by credit card. Oh happy days!

Pension Provisions

Mandatory Cash-Out Level Increased-The value of a pension benefit that may be cashed out without a participant's consent has been increased from $3500 to $5000, beginning for all new plan years.

Bad-Guy Offsets Permitted--Although the rules prohibiting the assignment and alienation of pension benefits have generally prohibited the attachment of benefits earned by wrong-doers, including those convicted of a crime, a common law exception has developed permitting a plan to offset against the benefit earned by a fiduciary who has breached his or her duty to that plan. E.g., Crawford v. La Boucherie Bernard, 815 F.2d 117 (D.C. Cir. 1987). This exception has now been codified. A plan is now permitted to offset against the benefit of someone who has either been convicted of a crime against the plan, is subject to a civil judgment regarding a fiduciary violation concerning the plan, or who has entered into a settlement agreement with the DOL or PBGC requiring such offset.

Modified Reporting Requirements-Plans will no longer be required to file summary plan descriptions ("SPDs") and summaries of material modifications ("SMMs") with the DOL, unless requested to do so by the agency. This does not relieve plans from their current obligations to provide SPDs and SMMs to participants, and to file annual reports (form 5500) with DOL.

Change in Full Funding Limitation-Under current law, pension plans are considered fully funded (so that contributions received by the plans are not deductible) if their assets exceed 150% of their liabilities on a termination basis. Beginning in 1999, the 150% figure will be gradually increased until it reaches 170% in 2005.

Limitations on Investing 401(k) Deferrals in Employer Securities-The law will now prohibit 401(k) plans from investing more than 10% of its assets that were derived from elective deferrals (or the earnings on those deferrals) in employer securities or real property.

Line Item Veto-New York Medicaid

Under the existing Medicaid program, the federal government matches state Medicaid expenditures. However, the Medicaid statute reduces the amount matched by any amounts that a state finances by taxes and fees imposed on health care providers, unless those taxes and fees are uniformly imposed on all non-public medical providers. New York had adopted a health care tax that applies only to non-public, non-charitable hospitals that refuse to accept Medicare and Medicaid assignments, which resulted in the reduction of its matching Medicaid funds. Although the bill as passed carved out an exception for the New York tax, that provision was eliminated by the first use of the line item veto in the history of the Republic. Tough luck, New York.

Medicare Changes

Medicare+Choice Program--Currently, individuals receiving Medicare may opt out of the standard program and into certain approved HMOs. This program has been substantially expanded in the new Medicare+Choice program. Along with the existing HMO programs, choices will include private insurance, and plans that include elements of different types of programs. In addition, the trial Medical Savings Account program enacted last year has been extended, and coordinated with the Medicare+Choice provisions. One key requirement of the statute is that sufficient information must be provided to permit the eligible individuals to make an informed choice.

Curing Medicare-The bill attempts to create a long-term solution to the problems with the Medicare system by creating several commissions to study those problems, and by initiating a host of new pilot programs.

New Coverage-Coverage has been added under Medicare for mammography, pap smears and pelvic exams, and screening for prostate and colorectal cancers. In addition, Medicare will now cover training of, and certain materials for, diabetics to enable them to self-manage their conditions. For rural areas, coverage will now be provided on an experimental basis for consulting with a physician by telephone.

This general summary does not even begin to examine most of the numerous taxing and spending provisions contained within the new bills. Besides a few clarifying provisions that relate to employee benefit plans, the bills include such things as the reduction in the capital gains tax, an increase in the individual exemption, special tax relief for Microsoft, and, perhaps most importantly, a substantial reduction in the excise tax on hard cider.

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