August 21, 1996, Special EditionStephen H. Cypen, Esq., Editor
SMALL BUSINESS JOB PROTECTION ACT OF 1996 BECOMES LAW
As expected (see C&C Newsletter for July 1996), President Clinton on August 20, 1996 signed into law the Small Business Job Protection Act of 1996 (HR 3448). Because of the significance of this legislation, we have decided to issue a Special Edition dealing with the new law. The following amendments to the Internal Revenue Code are presented in the order in which they appear.
Section 1434: For years beginning after December 31, 1997, elective deferrals to Deferred Compensation Plans (Section 457) and Cafeteria Plans (Section 125) will be considered compensation for purposes of limitations on contributions and benefits. In light of the subsequent provision repealing the "100 percent of compensation rule" as to public plans, this amendment would seem to affect only private plans.
Section 1444: Currently, Section 415 limits annual payment of defined benefits to the lesser of (1) 100 percent of average compensation for the highest 3 years or (2) $120,000 (for 1996), as indexed for inflation. (See C&C Newsletter for August, for predicted 1997 limits.) In certain cases, the dollar limit is reduced for early retirement or if an employee has less than 10 years of plan participation. Effective for years beginning after December 31, 1994, the "100 percent of compensation rule" does not apply to governmental plans. In addition, the law clearly provides that the early retirement reduction and phase-in of dollar limits will not apply to disability and survivor benefits. The law also will permit public employers to maintain excess benefit plans without regard to the usual limits set forth in Section 457. Finally, any TAMRA "grandfather election" made pursuant to Section 415(b)(10)(C) -- we know of one -- may be revoked by the end of the third plan year beginning after enactment of the new law. Note, "[n]othing in the amendments made by this section shall be construed to imply that a governmental plan...fails to satisfy the requirements of section 415 of such Code for any taxable year beginning before January 1, 1995."
Section 1447: A Section 457 plan currently has maximum annual deferrals equal to the lesser of (1) $7,500 or (2) 33-1/3 percent of compensation (net of the deferral). Effective for years beginning after December 31, 1996, inter alia, annual deferrals will be indexed in $500 increments. However, the base period shall be the calendar quarter ending September 30, 1994.
Section 1448: As we unfortunately know from the Orange County, California debacle, assets in a Section 457 plan must remain solely the property and rights of the employer, subject only to the claims of the employer's general creditors. Effective January 1, 1999, assets in a Section 457 plan maintained by a public employer and now in existence must be held in trust (which the law accords tax-exempt status). Presumably, any Section 457 plan established after enactment, would be immediately governed by the new requirement.
Section 1452: For those participants who may be affected by the "combined plan limit," it has been repealed with respect to limitation years beginning after December 31, 1999. As you probably know, Section 415 contains a limitation on defined benefits (see Section 1444 above) and one on defined contributions (generally $30,000 for 1996 and 25% of compensation), which includes after-tax contributions to a defined benefit plan. Until now, it also contained an overall limit if a person participated in both a defined benefit pension plan and a defined contribution plan.
Section 1457: If you believe it's just a matter of time until public plans become subject to qualified domestic relations orders (QDROs), you may be interested to know that the Secretary of the Treasury is directed to develop, not later than January 1, 1997, sample language for inclusion in a form for a QDRO which meets the requirements of law.
Section 1465: "If any amendment made by this subtitle requires an amendment to any plan or annuity contract, such amendment shall not be required to be made before the first day of the first plan year beginning on or after January 1, 2000, if-- (1) during the period after such amendment takes effect and before such first plan year, the plan or contract is operated in accordance with the requirements of such amendment, and (2) such amendment applies retroactively to such period."
Section 1605: This section appears in subtitle F entitled "Revenue Offsets" and not in subtitle D entitled "Pension Simplification." Basically, Section 104(a) has been amended to provide that "emotional distress shall not be treated as a physical injury or physical sickness." (See C&C Newsletter for August, for discussion of a recent case involving Section 104(a) of the Internal Revenue Code.)
Section 1704: In subtitle G entitled "Technical Corrections" are amendments relating to treatment of certain veterans' reemployment rights. As we predicted when the Uniformed Services Employment and Reemployment Rights Act (USERRA) became effective almost two years ago, several sections of the Internal Revenue Code required amending to account for annual contribution and deferral limits. Also, the amendments make clear that returning employees have the shorter of three times the duration of their military service or five years to make up contributions. Logically, these amendments are retroactive to December 12, 1994.
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