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1987 Federal Tax Policy Memo 1 (1987)

handle is hein.tera/fetxcyemo0011 and id is 1 raw text is: TAX FOUNDATION
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DAL A POI M

Editor: Edward A. Sprague, Senior Vice President-Program Planning and Tax Policy

Congress and the Workplace
By Frank B. McArdle

The second session of the 99th Congress adjourned Octo-
ber 18, 1986. In many ways, it was a remarkable Congress.
Tax reform was of course its crowning achievement. But this
last session was equally important for other pieces of legisla-
tion passed or considered.
How is it that Congress, in passing tax reform, sought to
lighten the load of government and of tax considerations on
private-sector decisions, and ended up involving itself ever
more deeply in the workplace, particularly with respect to
retirement income, health insurance, and other voluntary
employee benefit matters?
What Does Tax Reform Do to Employee Benefits?
Tax practitioners and employers are struggling to digest
this massive bill as quicaly as possible but are up to their ears
in this task. Not only must they move quickly to comply with
the employee benefit provisions, but in addition, the new
law will force them to undertake complete reappraisal of
their current employee benefit packages.
The effects on benefits come from two directions: from the
numerous provisions directly aimed at employee benefits
and from the changes in the tax rates. The direct provisions,
which took up 114 pages of the Act itself and 179 pages of the
Conference Report, aie i'ntnded to produce more compara-
ble employee benefit coverage of rank-and-file employees
and of highly compensated employees. The pension
changes would increase the number of workers with a
vested interest in their pensions by some 2 million workers
in the first year alone. It would increase pension amounts for
rank-and-file employees by limiting the coordination with
Social Security benefits. And it would mandate broader and
more comparable coverage of rank-and-file employees un-
der pension, health, life insurance and other plans. Educa-
tion assistance and group legal services will lose their tax
ABOUT THE AUTHOR
FRANK B. McARDLE is director of Education and
Communications for the Employee Benefit Research
Institute (EBRI), a public policy research organization
based in Washington, D.C. Before joining EBRI, he
worked as a legislative and policy analyst for the U.S.
Senate Special Committee on Aging and the U.S. De-
partment of Health and Human Services. His Ph.D. is
from the University of Virginia.
The following remarks are adapted from an address
to the Tax Foundation's 38th National Conference in
December 1986. The opinions expressed are those of
the author and do not necessarily reflect those of the
Tax Foundation.

JANUARY/FEBRUARY 1987

exclusion in 1988; employer-provided transportation bene-
fits were allowed to expire.
If rank-and-file workers are the intended beneficiaries,
higher-paid employees are the intended losers from the
benefits provisions. Certainly the higher paid will enjoy
lower tax rates. But they suffer potential losses in benefits.
Some examples: restrictions on 401(k) salary reduction con-
tributions; a new limit effective in 1989 of $200,000 on the
amount of compensation that can be taken into account
under all qualified plans; a new excess benefit tax of 15
percent on most annual distributions over $112,500; and
sharply reduced maximum benefits paid to early retirees
under defined benefit plans.
Changes in the welfare benefit areas, like health and life
insurance, also aim for the same effects: an intended broad-
ening of benefits because of tighter nondiscrimination rules
that also reduce tax-favored benefits payable to the higher
paid. Government staff have argued that reduced tax-
favored benefits for the highly paid constitute more com-
parable coverage of rank and file and highly paid, when you
view the benefits in terms of dollars, rather than as a percent
of their compensation.
Effect of Tax Rates
Despite its good intentions, some unintended conse-
quences of the new legislation may actually slow the future
growth of benefit coverage and even result in less coverage
in that sector of the economy-the small employer sector-
where benefit coverage is the least available today. A top rate
of 28 percent for the owners of a small business and 15
percent rate for 80 percent of taxpayers may make cash more
attractive than benefits, which are also more difficult and
more costly to administer under the new rules. The desir-
ability of deferring compensation for nonretirement pur-
poses under qualified plans is also called into question,
because of new penalties on early withdrawals and the ex-
pectation that future tax rates may be higher than the new
rates. Finally, because of the new restrictions on the higher
paid, many employers will face the option of removing the
higher paid from their general qualified benefit plans, which
could result in a deterioration in benefits for rank-and-file
employees. As more of their compensation is provided
through nonqualified plans, the higher compensated may
lose their stake in the general benefit plan. Obviously,
whether nondiscrimination rules cause expanded and more
comparable coverage of rank-and-file employees or reduce
tax benefits for the highly paid will differ from employer to
employer.
Employee benefits will remain an important piece of total
compensation, but the changes in their tax effectiveness may

Material in Federal Tax Policy Memo may be reproduced freely. Credit to Tax Foundation would be appreciated.

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