(7) Exclusion from income for meals and lodging Present Law Under the Code, certain meals and lodging furnished to an employee for the convenience of the employer are excluded from the employee's gross income. At the same time, the employer may still deduct the costs of such employee benefits (subject to the 80-percent deduction limitation with respect to business meals). Possible Proposals 1. The availability of this exclusion to corporate officers and significant shareholders could be restricted. 2. Employers could be denied a deduction for the direct operating costs of providing meals that are excludable from their employees' incomes on the grounds that they are furnished for the convenience of the employer. However, the employer could deduct such costs to the extent of reimbursements from the employees. Pros and Cons Arguments for the proposals 1. Corporate officers and significant shareholders can have significant influence over the corporation, which could effectively enable them to provide these tax benefits to themselves. 2. There is a significant tax subsidy with respect to meals provided for the convenience of the employer (since they are totally excludable from the employee's income), yet there is no compelling policy reason for the subsidy. This subsidy could be reduced by denying the deduction for providing such meals. Denying the deduction, rather than including the fair market value of the meals in income, avoids the problem that, in many cases under the particular circumstances under which a meal is furnished for the convenience of the employer, the fair market value of the meal may be difficult to determine. Arguments against the proposals 1. Corporate officers and significant shareholders who are employees should be treated like other employees. 2. Limiting the exclusion would cause administrative difficulties for employers and the IRS in valuing appropriately meals and lodging furnished to an employee for the convenience of the employer. 3. The fact that a meal is not includible in an employee's income should not affect the deductibility to the employer of providing the meal if it is a legitimate business expense provided for the convenience of the employer. b. Pensions (1) Treat loans from qualified plans as distributions Present Law Under present law, an individual is permitted to borrow from a qualified plan in which the individual participates (and to use his or her accrued benefit as security for the loan) provided certain requirements are satisfied. In certain cases, a loan to a plan participant is treated as a taxable distribution of plan benefits. This rule of income inclusion does not apply to the extent that the loan (when added to the outstanding balance of all other loans to the participant from all plans maintained by the employer) does not exceed the lesser of (1) $50,000 (reduced by the excess (if any) of (a) the highest outstanding balance of all other loans from all plans of the employer during the 1-year period ending on the day before the date on which the loan is made, over (b) the outstanding balance of such loans on the date the loan is made), or (2) the greater of $10,000 or one-half of the participant's accrued benefit under the plan. This exception applies only if the loan is required, by its terms, to be repaid within 5 years or, if the loan is used to acquire the principal residence of the participant, within a reasonable period of time. Possible Proposal Treat any loan from a qualified plan as a distribution of plan benefits that is includible in income to the extent the distribution is not treated as a return of the employee's investment in the contract under the normal basis recovery rules. Arguments for the proposal Pros and Cons 1. The proposal would make the treatment of loans from qualified plans consistent with the treatment of loans from IRAs. 2. The proposal would increase the likelihood that retirement benefits will be held until retirement by discouraging withdrawals through loans. 3. Under present law, in the case of a contributory plan, employers often provide favorable loan provisions in order to induce higher levels of participation by nonhighly compensated employees. The proposal would force employers to provide additional incentives (such as higher employer matching contributions) and, therefore, should increase the total plan benefits provided to nonhighly compensated employees. Arguments against the proposal 1. Often, an employee's retirement benefit is the employee's most significant source of savings. If loans from retirement plans are treated as taxable distributions, then an employee may not have a source of funds in the case of a medical or other emergency. 2. In the case of a contributory retirement plan, the absence of a favorable loan provision may discourage retirement saving and, therefore, reduce the aggregate amount that an employee has available for retirement income. 3. Unfavorable loan provisions treat an employee who participates in a pension plan less favorably than another borrower of plan assets. (2) Redefine full funding limitation for pension plans Present Law 'Inder present law, subject to annual limitations, an employer may make deductible contributions to a qualified defined benefit pension plan up to the full funding limitation. The full funding limitation is defined as the excess of (1) the accrued liability under the plan for projected benefits over (2) the plan assets. Projected benefits, unlike accrued benefits, are the benefits that are projected to be earned by normal retirement age, rather than the benefit accrued as of the close of the year. If a defined benefit plan is terminated, the employer's liability to plan participants does not exceed the plan's termination liability (i.e., the liability for benefits determined as of the date of the plan termination). A plan's termination liability may be significantly less than the plan's full funding limitation. Possible Proposal The full funding limitation could be defined as a multiple of a plan's termination liability for deduction and minimum funding purposes. Thus, an employer would be permitted to make a deductible contribution to a defined benefit plan for a year to the extent that, after the contribution, the plan's assets do not exceed some percentage (e.g., 150 or 200 percent) of the plan's termination liability. Arguments for the proposal Pros and Cons 1. An employer's accrued liability to employees under a defined benefit plan at any point in time does not exceed its liability for benefits in the event of plan termination (i.e., termination liability). An employer should not be permitted to deduct contributions to a defined benefit plan for liabilities that have not yet been incurred by the plan if the plan assets significantly exceed this accrued liability. This rule would ensure that the deductibility of employer contributions to pension plans is treated more consistently with the deductibility of payments for other accrued liabilities. 2. Under present law, an employer may systematically overfund its pension plan to obtain the benefit of a current deduction and tax-free growth, (i.e., in order to use the pension plan as a tax-favored savings arrangement). The present-law 10-percent excise tax on plan reversions does not adequately deter this systematic overfunding. |