Washington DC, July 17, 2001 (PLANSPONSOR.com) - In
a stunning turnaround, the Department of Labor (DoL) embraced
the Retirement Security Advice Act, legislation that would
offer employers more protection in providing investment
advice to plan participants.
Almost a year ago, under the previous administration,
the DoL took a significantly different stance on a similar
bill, introduced by Representative John Boehner (R-Ohio).
The department then argued that current law adequately
protected employers who were prudent in their selection of
an advice provider (see
The Details: How Far Can Education Go Without Crossing the
Line?
).
In today’s testimony before the Subcommittee for
Employer-Employee Relations, Ann Combs, the new Assistant
Secretary of Labor for Pension and Welfare Benefits, said a
statutory amendment would serve to provide the certainty
employers seek. She was referring to fiduciary issues,
which have frequently been cited as an employer concern in
providing advice.
Combs said she supports the bill and pursues the same
objectives as those proposed by the bill: protection for
participants, employers and service providers, a level
playing field, greater choice among advisers and the
expansion of investment advice for participants and
beneficiaries in 401(k) type plans.
The act aims to update federal law, which denies many
workers access to investment advice that could help them
manage their retirement savings. The passage of the federal
law predates the rise of employee-controlled pension plans,
such as 401(k)s.
May 6, 2002 (PLANSPONSOR.com) - A newly proposed
rule by the Internal Revenue Service to impose payroll taxes
on employee stock purchase plans has industry insiders up in
arms.
In particular, lobbyists for the tech industry are
chagrined because the rule would include ESPPs and other
plans currently exempt. ESPPs are widely used by employers
in the embattled sector.
ESPPs allow companies to take a portion of a
participant’s after-tax wages to purchase company stock at
a discounted rate – usually 10% to 15% below market price.
Participants can then choose whether to sell their stock
immediately or hold on to it.
The new rule would tax the discount, thus creating a new
problem for participants. Unless participants were to sell
the stock they receive through their company’s ESPP the
same day they receive it, they would owe money on the
earnings they have yet to receive. In turn, employers would
be required to pay the IRS a matching amount.
To add insult to injury, the new rule would create a
conundrum for employers and participants at the same time.
Employers would have to withhold payroll taxes without
knowing an actual amount to calculate withholdings on.
Participants, on the other hand, would have to sell their
stock to cover the cost of the tax. And, those participants
who sold quickly would be subject to higher taxes at the
end of the year because they would be disqualified from the
lower capital-gains tax.
On The Hill
The IRS put the new rule into effect last year when it
overturned the exemptions from payroll taxes on certain
kinds of stock. Soon after, the IRS decided to delay the
change so that it could clarify the effect the rule would
have. Last November the IRS came back, clarified the
changes and declared that the new rule would go into effect
on January 1, 2003.
Several members of Congress have proposed legislation to
block the regulation from taking effect, including Senator
Pat Roberts (R-Kan) and Senator Hillary Clinton (D-N.Y.).
Another bill sponsored by Representative Amo Houghton
(R-N.Y.) opposing the rule passed a House vote last
month.
Critics of the rule are skeptical that any final
legislation on the issue will come out of Congress this
year. They say the Republican House and Democratic Senate
are not likely to agree right away and other issues such as
the war on terrorism and the accounting industry’s problems
will most likely overshadow the debate on the new rule. The
IRS is planning a hearing on May 14.
Weighing In
Opponents of the new rule say it would add another level
of complexity to an already complicated process.
“Many people oppose this rule because it would
discourage employers from offering the programs due to the
new administrative and economic burdens it would impose,”
said Scott Roderick, director of publishing and information
technology at the National Center for Employee
Ownership.
Caroline Graves Hurley, tax counsel and director of tax
policy at the American Electronics Association, said the
new rule is troubling because it flies in the face of why
ESPPs were set up in the first place.
“Congress created these benefits to afford beneficiaries
better tax benefits,” she said. “By changing the rules the
IRS will create a significant tax increase on employers and
employees by imposing wage withholdings on income that is
not wages.”
Hurley continued that the Joint Committee on Taxation
released findings that found that the passage of the new
rule would turn into a $23 billion tax increase over the
next 10 years. However, she added that while over each
year, the increase might seem small; employers would feel
the changes the most.
John Scott, director of retirement policy at the
American Benefits Council agreed.
“Employees would have to sell their stock to pay for owning
the stock,” he said. “And employers would have to get into
a lot of modification issues to impose this proposal.”
To raise awareness about the issue, the AEA is teaming
up with ABC to sponsor an informational teleconference on
May 13th. Members of both groups will be on hand to answer
questions about the IRS’ regulatory aims and the history of
the plans.
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