Senate Approves "Taxpayer Refund Act" Including Retirement Provisions

Washington, DC, August 3, 1999 - On July 30, the Senate approved on a vote of 57 to 43 S. 1429, the "Taxpayer Refund Act of 1999," the Senate version of H.R. 2488. Provisions of interest to regulated investment companies (RICs) and their shareholders include tax, pension, and education proposals. However, the bill contains a "sunset" provision designed to comply with procedures under the Congressional Budget Act of 1974 by which Congress implements spending and tax policies contained in a budget resolution. Specifically, the bill provides that all of its provisions and amendments that are in effect on September 30, 2009 will cease to apply as of that date. This bill will be reconciled at conference with the House bill. As with the House-passed tax legislation, President Clinton has indicated that he would veto the bill if it were presented to him in its current form because of the magnitude of the bill's tax cut provisions.

Tax Provisions
Among other tax provisions, the bill would allow an individual to deduct the first $1,000 of net capital gain for each taxable year. The deduction generally would not be available to (1) dependents claimed as an exemption on another taxpayer's return; (2) a married individual filing a separate return for the taxable year; or (3) an estate or trust. In applying the provision to RICs and other pass-through entities, the determination of when a sale or exchange occurs would be made at the entity level. The deduction for capital gains generally would apply to taxable years beginning after December 31, 2005.

The bill would also treat any gain (or loss) from the sale of a collectible (such as gold bullion) as short-term capital gain (or loss), without regard to the collectible's actual holding period. Under the bill, any gain from the sale or exchange of an interest in a partnership, S corporation, or trust that is attributable to unrealized appreciation in the value of collectibles held by such entity would be treated as collectibles gain. This provision effectively would eliminate application of the 28 percent rate to collectibles gain. The provision would apply to sales and exchanges of collectibles after December 31, 2005.

Pension Provisions
Most of the pension provisions would become effective December 31, 2000. The bill would increase annual contribution limits to IRAs, Roth IRAs, deductible IRAs, and employer-sponsored retirement plans. For individuals aged 50 and older, it would also create "catch-up" contributions to IRAs and employer-sponsored plans. The bill would eliminate the 25 percent of compensation limitation on contributions to defined contribution plans, require faster vesting of employer contributions, modify the top-heavy rules, and create a new type of plan, the Simplified Small Employer Defined Benefit Plan. The new plan is also known as "Secure Assets for Employees" or the SAFE plan.

SAFE plans, which would be available to employers with 100 employees or less, would not be subject to nondiscrimination, top-heavy, minimum participation and coverage, or minimum funding rules. In lieu of these requirements, employees would receive a minimum defined benefit under the plan that is equal to 1,2, or 3 percent of compensation, plus a higher benefit if plan asset investment returns exceed actuarial assumptions described in the bill. The plan may take into account up to 10 prior years of service. All benefits would be fully vested at all times.

S. 1429 would facilitate increased portability among various types of plans and IRAs by allowing rollovers to and from 401(k)s, 403(b)s, 457s, and IRAs. Employer acceptance of rollovers would be voluntary. Finally, the bill would also liberalize qualified tuition programs