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11,000 persons receiving occupational disability payments under railroad retirement would face significant tax increases should this provision be enacted.

In light of the great sacrifices made by railroad retirees, this proposal is unjust. Retirees have seen their tier I COLA deferred for 6 months, and have had COLA increases equal to 5 percent of their tier I benefits subtracted from tier II benefits as a result of the Railroad Retirement Solvency Act of 1983. Railroad retirees' tier I benefits are now subject to tax in an identical manner as Social Security benefits, and tier II benefits have become taxable under the same rules as private pension benefits.

These changes have already lessened the value of railroad retirement benefits as a source of adequate retirement income. A greater tax increase would further frustrate the current expectations of railroad retirees and near retirees. Therefore, AARP opposes the proposal to further reduce the retirement income of thousands of beneficiaries who have already made sacrifices. STATEMENT OF CHESTER J. SALKIND, EXECUTIVE DIRECTOR,

AMERICAN SOCIETY OF PENSION ACTUARIES Mr. SALKIND. My name is Chester Salkind. The primary focus of my testimony today will be to express our opposition to the proposed user fees for IRS determination letters and for private ruling letters. I will also briefly touch on the PBGC premium. We think a case could be made for user fees if the benefit of the services was primarily to the individual charged.

We are concerned about the proposed $100 for determination letters. We believe the primary beneficiary is not the taxpayer utilizing these procedures, but the country as a whole, since these procedures are very important to the private pension system.

We will also indicate how these procedures assist the IRS in making the administration of pension laws easier and lessening the burden of costs to the IRS.

I would like to provide a little background on the determination letter process. Although it is not mandatory to seek a determination letter, it is almost the universal practice to request a determination letter in order to be sure that a pension plan meets the applicable requirement for plan qualification when a plan that is intended to qualify is initially adopted or when such a plan is subsequently amended.

It is very important that a plan which is intended to be a qualified plan is considered to be one by the IRS, both to the plan sponsor from the perspective of deductions, and to the participants, from the perspective of avoiding current taxation on nonforfeitable benefits.

Few plan sponsors dare wait until an audit to find out whether a plan is qualified, and their employees would certainly be at risk if the plan sponsor did so since they would owe current taxes on nonforfeitable benefits, to the extent funded, if the plan is found to be nonqualified upon audit.

Incidentally, an audit does not necessarily occur every year. It may not occur for several years, which would compound the problem.

By way of additional background, we point out that pension laws are complex to start with, and have undergone frequent changes in the last few years.

Thus, we are not talking about a one time $100 fee when a plan is initially submitted after adoption. Essentially we are talking about a series of $100 fees as the annual amendments are submitted.

From the pace of past legislation and the likely pace of future legislation, it seems certain annual amendments will be required over the next few years, if not into the indefinite future. I think the above discussion demonstrates why the determination letter process is critical to the private pension system.

I now would like to show the advantages to the country of the private pension system. A qualified plan by definition is one which does not discriminate in benefits or contributions against the rank and file employees. Qualified plans provide significant retirement benefits to millions of our citizens as well as providing a vast investment pool, currently almost $1 trillion, which helps maintain our economy.

Incidentally, currently about 59 percent of nonagricultural workers are covered under the private system. Again, while the $100 user fees would not be significant to a large plan sponsor, they may well be significant to the small plan sponsor. And I will add, by reference, most of our members work in the small plan area. It might be significant, particularly when considered in combination with the heavy administrative expenses that the small plan sponsor has already had to bear by virtue of legislation that has been enacted over the last few years.

I would also like to touch upon why the determination letter process is advantageous to the IRS, essentially for the same reason that it is advantageous to the employer and his employees. It assures that in the vast bulk of cases plans which are considered by the employer and his employees as qualified when they file their returns are in fact qualified. If this process were not available it would certainly increase the necessity for retroactive recomputations of taxes both for the employer and his employees if the plan on audit is found not to be a qualified one.

With respect to the proposed user fees for private ruling letters, we believe it is good public policy to encourage people to seek private letter where uncertainty exists rather than discouraging them with a user fee.

Clearly there is much uncertainty in the pension area, and I would like to disagree with a comment made by the representative of the IRS distinguishing, on an absolute basis, between private ruling letters and revenue rulings, one being of a general nature and one being of a particularly private nature. The fact is that while private ruling letters are technically applicable only to a particular situation, in many cases they are published and provide a general awareness of the IRS position on the matters discussed. This serves to ease the compliance problem for the IRS. And again, as in the case of the determination letters, the burden of the user fee would fall most nearly on the less wealthy taxpayer.

I see my time is running short, so I will just briefly summarize our position on the PBGC premium.

We feel it is inappropriate to consider a premium increase apart from the issue of making changes in the underlying program which the payment is designed to support. In addition to that, we favor a consideration of a graded premium which would vary with the extent of the assets, the premium being high when the plan assets are low and lower when the plan assets are high.

Admittedly this is a complex area and, as previously stated, we believe it should be considered in the context of the overall insurance program.

One more comment and I will conclude on that. In terms of the IRS and the cost of administration of the pension laws, we think that the best thing that Congress could do in the pension area is to restore stability, which would reduce the necessity for continuous changes and continuous processing problems to the IRS resulting from those changes.

Thank you very much. [The prepared statement follows:) STATEMENT OF CHESTER J. SALKIND, EXECUTIVE DIRECTOR, AMERICAN SOCIETY OF

PENSION ACTUARIES The American Society of Pension Actuaries is a national professional society whose 2,000 members provide actuarial, consulting services to approximately 30% of the qualified retirement plans in the United States.

We would like to comment on two user fee proposals, which are of particular concern to us—the proposal to establish a $100 fee for the determination of the tax status of pension plans and for private ruling letters, and the proposal to increase the PBGC single employer premium from $2.60 to $7.50 per participant.

A little background on the $100 fee for determination letters is appropriate. Although it is not mandatory to do so, it is almost the universal practice to request an advanced determination letter that a pension plan meets the applicable requirements for tax qualification when a plan which is intended to qualify is initially adopted or when such a plan is subsequently amended. It is critical, in the vast majority of cases, that a plan be considered by the IRS to be qualified, both to the plan sponsor from the perspective of deductions, and to the participants, from the perspective of avoiding current taxation on nonforfeitable benefits. Few plan sponsors dare wait until an audit to find out whether a plan is qualified, and their employees would certainly be at risk if the plan sponsor did so since they would owe current taxes on non-forfeitable benefits, to the extent funded, if the plan is found to be nonqualified upon audit. Incidentally, an audit of the plan may not occur until a number of years after the plan is adopted.

By way of additional background, we point out that pension laws are complex to start with, and have undergone frequent changes in the last few years. The enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Deficit Reduction Act of 1984 (DEFRA), the Retirement Equity Act of 1984 (REA), prospective technical corrections to DEFRA and REA, and the absence of final regulations in many areas covered by these statutes have assured the necessity of annual amendments over the last few years, and for the next few. The vast array of pension legislative proposals now being discussed makes it likely that annual plan amendments will be required for many years into the future.

Under such circumstances, it seems highly inappropriate to charge a user fee for seeking a determination letter that a plan is qualified. It is not the plan sponsor's fault that the pension laws are compelx and frequently changed. A qualified plan, by definition, is one that does not discriminate in coverage or benefits against the rank and file employees. Qualified plans provide significant retirement benefits to millions of our citizens as well as providing a vast investment pool, currently almost a trillion dollars, which helps maintain our economy. While $100 user fees would not be significant to a large plan sponsor they may well be significant to the small plan sponsor, particularly when combined with the heavy administrative expenses that already have to be borne by the small plan sponsor as a result of legislation enacted in the last few years.

Aside from the effect of the user fee on retirement plan formation, we are concerned that it may encourage maintenance of plans which have not been the subject of determination letters. We again point out that the determination letter process is voluntary. To discourage request for determination letters would increase the prevalence of plans which, for one reason or another, fail to qualify. This, in turn, would add to the expense of tax administration as it became necessary to revise numerous tax returns to reflect adjustments made necessary by the non-qualified status of the plan.

With respect to the proposed fees for private ruling letters, we believe it is good public policy to encourage people to seek private letters where uncertainty exists, rather than discouraging them with a user fee. Clearly there is much uncertainty in the pension area. It should also be noted that while private ruling letters are technically applicable only to a particular situation, in many cases they are published, and provide a general awareness of the IRS position on the matters discussed. This serves to ease the compliance problem for the IRS. And again, as in the case of the determination letters, the burden of the user fee would fall most heavily on the less wealthy taxpayer.

With regard to the proposed increase in the PBGC premium payment for single employer plans, we believe it is inappropriate to consider a premium increase apart from the issue of making changes in the underlying program which the payment is designed to support. In addition, we believe that consideration should be given to establishing graded PBGC premiums which are highest when assets are at the low end of a funding corridor, and which reach zero when assets are at the high end of the corridor. This would be a more equitable arrangement than a fixed premium. Admittedly, this is a very complex area, and, as previously stated, should be considered in the context of a review of the overall insurance program.

We would be happy to provide any additional information that the Committee may desire.

Mr. Downey. Thank you, Mr. Salkind.
Mr. Duncan.
Mr. DUNCAN. Thank you, Mr. Chairman.
I want to thank both of you gentlemen.

Mr. Hurst, you indicate that the tobacco tax should be earmarked for the Medicare Program. Would you favor increasing or extending the tax to luxury items.

Mr. HURST. I am not aware of that. Mr. DUNCAN. It has been proposed that we also tax luxury items. May I say that I neither produce nor consume tobacco products, but it has been said that tobacco is sort of the working man's product instead of the wealthy man's. We don't tax cigars, but do you think it should be extended to cigars, all tobacco products?

Mr. HURST. I get back to the luxury. I can see where we are thinking in terms of the cigarettes being harmful and therefore relating to medical care. With luggage it is a necessity-

Mr. DUNCAN. I said the luxury items.

Mr. HURST. We have not considered that and I am not prepared to really answer that.

Mr. DUNCAN. What about all tobacco products, cigars—would you think they should be taxed?

Mr. HURST. You raise a very good point, sir, and we will consider that.

Mr. DUNCAN. Are you aware of the fact that some of the Governors, and many of them not from the tobacco States, think that is one item that should be left to the States for revenue purposes, especially since the Federal Government has reduced payments to the States and local governments.

The Boyden Report recommended I think that that should be left to the exclusive jurisdiction of the States for revenue purposes, and some States, again not the tobacco States, have voted consistently, I think, to raise the tobacco tax for local and State purposes in the interest that we-you are aware of that, I am sure.

Mr. HURST. Yes, sir. I am aware of some of that. I am from a tobacco State myself. I know of that.

Mr. DUNCAN. Do you think there is some justification for that request from the Governors?

Mr. HURST. Well, it depends whether I am up here or down home. Up here I am speaking in terms of a national issue for the association. I am thinking more in terms of the country as a whole rather than my own State.

Mr. DUNCAN. I thank both of you gentlemen again.

Mr. Downey. Thank you, Mr. Duncan. We thank our witnesses for testifying

The committee will stand in recess until 2 o'clock.

(Whereupon, at 12:02 p.m., the committee recessed, to reconvene at 2 p.m.]

AFTERNOON SESSION

Mr. Russo (presiding). The committee will please come to order.

On this panel we will have the following witnesses: Mr. Thomas Travis, Mr. Bill St. John, Ms. Marjorie Shostak, Mr. James Landry, and Mr. Alan Spurney.

We are going to have a vote, too. I think we ought to recess the committee for 15 minutes and be back at 2:15 and go ahead with the panel.

[Brief recess.] Chairman ROSTENKOWSKI. The committee will resume its sitting.

Mr. Travis, if you are ready to begin your testimony, the committee is ready to receive it.

STATEMENT OF THOMAS G. TRAVIS, CHIEF COUNSEL, NATIONAL

BONDED WAREHOUSE ASSOCIATION, ALSO ON BEHALF OF THE
BONDED STORE DEALERS OF AMERICA ASSOCIATION; UNITED
EXPORTING TRADING ASSOCIATION; THE INTERNATIONAL AS-
SOCIATION OF AIRPORT DUTY-FREE STORES; THE WINE &
SPIRITS WHOLESALERS OF AMERICA ASSOCIATION; AND THE
NATIONAL ASSOCIATION OF BEVERAGE IMPORTERS, ACCOM-
PANIED BY LAWRENCE GROSS, PRESIDENT, VAN BRUNT WARE-
HOUSES, INC., AND PRESIDENT OF THE NEW YORK/NEW
JERSEY WAREHOUSEMEN'S ASSOCIATION, AND A MEMBER OF
THE BOARD OF DIRECTORS OF THE NATIONAL BONDED WARE-
HOUSE ASSOCIATION; AND ABRAHAM TUNIC, WASHINGTON
COUNSEL, WINE & SPIRITS WHOLESALERS OF AMERICA ASSO-
CIATION
Mr. TRAVIS. Thank you.

Mr. Chairman, my name is Thomas Travis. I am general counsel to the National Bonded Warehouse Association. I am accompanied by Lawrence Gross, president of Van Brunt Warehousing, Inc. of New Jersey, who is also president of the New York/New Jersey Warehousemen's Association and a member of our board of directors.

Also accompanying us is Abraham Tunic, Washington counsel to the Wine & Spirits Wholesalers of America.

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