[JPRT 114-1-15]
[From the U.S. Government Publishing Office]
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION
ENACTED IN THE 113TH CONGRESS
----------
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED]
MARCH 2015
GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 113TH CONGRESS
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION
ENACTED IN THE 113TH CONGRESS
__________
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED]
______
U.S. GOVERNMENT PUBLISHING OFFICE
93-497 PDF WASHINGTON : 2015 JCS-1-15
MARCH 2015
SUMMARY CONTENTS
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Page
Part One: An Act to Amend the Internal Revenue Code of 1986 to
Include Vaccines Against Seasonal Influenza Within the
Definition of Taxable Vaccines (Public Law 113-15)............. 3
Part Two: An Act to Rename Section 219(c) of the Internal Revenue
Code of 1986 as the Kay Bailey Hutchison Spousal IRA (Public
Law 113-22).................................................... 5
Part Three: Fallen Firefighters Assistance Tax Clarification Act
of 2013 (Public Law 113-63).................................... 7
Part Four: Philippines Charitable Giving Assistance Act (Public
Law 113-92).................................................... 8
Part Five: Gabriella Miller Kids First Research Act (Public Law
113-94)........................................................ 10
Part Six: Cooperative and Small Employer Charity Pension
Flexibility Act (Public Law 113-97)............................ 12
Part Seven: Revenue Provisions of the Highway and Transportation
Funding Act of 2014 (Public Law 113-159)....................... 29
Part Eight: Tribal General Welfare Exclusion Act of 2014 (Public
Law 113-168)................................................... 40
Part Nine: Consolidated and Further Continuing Appropriations
Act, 2015 (Public Law 113-235)................................. 42
Part Ten: An Act to Amend Certain Provisions of the FAA
Modernization and Reform Act of 2012 (Public Law 113-243)...... 114
Part Eleven: Grand Portage Band Per Capita Adjustment Act (Public
Law 113-290)................................................... 118
Part Twelve: Tax Increase Prevention Act of 2014 and the Stephen
Beck, Jr., Achieving a Better Life Experience Act of 2014
(Public Law 113-295)........................................... 119
CONTENTS
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Page
Introduction..................................................... 1
Part One: An Act to Amend the Internal Revenue Code of 1986 to
Include Vaccines Against Seasonal Influenza Within the
Definition of Taxable Vaccines (Public Law 113-15)............. 3
A. Addition of Vaccines Against Seasonal Influenza To
List of Taxable Vaccines (sec. 1 of the Act and
sec. 4132(a)(1) of the Code)....................... 3
Part Two: An Act to Rename Section 219(c) of the Internal Revenue
Code of 1986 as the Kay Bailey Hutchison Spousal IRA (Public
Law 113-22).................................................... 5
A. Kay Bailey Hutchison Spousal IRA (sec. 1 of the Act
and sec. 219(c) of the Code)....................... 5
Part Three: Fallen Firefighters Assistance Tax Clarification Act
of 2013 (Public Law 113-63).................................... 7
A. Payments by Charitable Organizations With Respect to
Certain Firefighters Treated as Exempt Payments
(sec. 2 of the Act)................................ 7
Part Four: Philippines Charitable Giving Assistance Act (Public
Law 113-92).................................................... 8
A. Acceleration of Income Tax Benefits for Charitable
Cash Contributions for Relief of Victims of Typhoon
Haiyan in the Philippines (sec. 2 of the Act)...... 8
Part Five: Gabriella Miller Kids First Research Act (Public Law
113-94)........................................................ 10
A. Termination of Taxpayer Financing of Political Party
Conventions; Use of Funds for Pediatric Research
Initiative (sec. 2 of the Act and sec. 9008 of the
Code).............................................. 10
Part Six: Cooperative and Small Employer Charity Pension
Flexibility Act (Public Law 113-97)............................ 12
A. Cooperative and Small Employer Charity Pension Plans
(secs. 3, 101-103 and 201-203 of the Act, new secs.
414(y) and 433 of the Code, and new secs. 210(f)
and 306 of ERISA).................................. 12
B. Election to Cease Treatment as an Eligible Charity
Plan (sec. 103(b) and (d) of the Act, sec. 430 of
the Code and sec. 303 of ERISA).................... 22
C. Deemed Election for Church Plans (sec. 103(c) and
(d) of the Act and sec. 410(d) of the Code)........ 25
D. Transparency in Annual Reports and Notices (secs. 3
and 104 of the Act and secs. 101(d), 101(f) and 103
of ERISA).......................................... 27
E. Sponsor Education and Assistance (secs. 3 and 105 of
the Act and sec. 4004 of ERISA).................... 28
Part Seven: Revenue Provisions of the Highway and Transportation
Funding Act of 2014 (Public Law 113-159)....................... 29
A. Extension of Highway Trust Fund Expenditure
Authority (sec. 2001 of the Act and secs. 9503,
9504 and 9508 of the Code)......................... 29
B. Funding of the Highway Trust Fund (sec. 2002 of the
Act and secs. 9503(f) and 9508(c) of the Code)..... 30
C. Pension Funding Stabilization (sec. 2003 of the Act
and secs. 430 and 436 of the Code)................. 32
D. Extension of Customs User Fees (sec. 2004 of the Act
and sec. 58c(j)(3) of Title 19 of the United States
Code).............................................. 38
Part Eight: Tribal General Welfare Exclusion Act of 2014 (Public
Law 113-168)................................................... 40
A. Indian General Welfare Benefits (sec. 2 of the Act
and new sec. 139E of the Code)..................... 40
Part Nine: Consolidated and Further Continuing Appropriations
Act, 2015 (Public Law 113-235)................................. 42
Division M--Expatriate Health Coverage Clarification Act of 2014. 42
A. Treatment of Expatriate Health Plans under ACA (sec.
3 of the Act)...................................... 42
Division N--Other Matters........................................ 58
A. Tax Technical Correction to Treatment of Certain
Health Organizations (sec. 2 of the Act and sec.
833 of the Code)................................... 58
Division O--The Multiemployer Pension Reform Act of 2014......... 59
A. Amendments to Pension Protection Act of 2006........ 59
1. Repeal of sunset of PPA funding rules (sec. 101
of the Act, sec. 221 of the Pension Protection
Act of 2006, secs. 431-432 of the Code and
secs. 304-305 of ERISA)........................ 59
2. Election to be in critical status (sec. 102 of
the Act, sec. 432 of the Code and sec. 305 of
ERISA)......................................... 63
3. Clarification of rule for emergence from
critical status (sec. 103 of the Act, sec. 432
of the Code and sec. 305 of ERISA)............. 66
4. Endangered status not applicable if no
additional action is required (sec. 104 of the
Act, sec. 432 of the Code and sec. 305 of
ERISA)......................................... 68
5. Correct endangered status funding improvement
plan target funded percentage (sec. 105 of the
Act, sec. 432 of the Code and sec. 305 of
ERISA)......................................... 70
6. Conforming endangered status and critical status
rules during funding improvement and
rehabilitation plan adoption periods (secs.
106, 109(a)(2)(B) and 109(b)(2)(B) of the Act,
sec. 432 of the Code and sec. 305 of ERISA).... 71
7. Corrective plan schedules when parties fail to
adopt in bargaining (sec. 107 of the Act, sec.
432 of the Code and sec. 305 of ERISA)......... 75
8. Repeal of reorganization rules for multiemployer
plans (sec. 108 of the Act, secs. 418-418E of
the Code and secs. 4241-4245 of ERISA)......... 76
9. Disregard of certain contribution increases for
withdrawal liability purposes (sec. 109 of the
Act, sec. 432 of the Code and sec. 305 of
ERISA)......................................... 77
10. Guarantee for preretirement survivor annuities
under multiemployer pension plans (sec. 110 of
the Act and sec. 4022A of ERISA)............... 80
11. Required disclosure of multiemployer plan
information (sec. 111 of the Act and secs.
101(k) and 107 of ERISA)....................... 81
B. Multiemployer Plan Mergers and Partitions........... 83
1. Mergers (sec. 121 of the Act and sec. 4231 of
ERISA)......................................... 83
2. Partitions of eligible multiemployer plans (sec.
122 of the Act and sec. 4233 of ERISA)......... 84
C. Strengthening the Pension Benefit Guaranty
Corporation (sec. 131 of the Act and sec.
4006(a)(3) of ERISA)............................... 88
D. Remediation Measures for Deeply Troubled Plans (sec.
201 of the Act, sec. 432 of the Code and sec. 305
of ERISA).......................................... 89
Division P--Other Retirement-Related Modifications............... 104
A. Substantial Cessation of Operations (sec. 1 of the
Act and sec. 4062(e) of ERISA)..................... 104
B. Clarification of the Normal Retirement Age (sec. 2
of the Act, sec. 411 of the Code, and sec. 204 of
ERISA)............................................. 110
C. Application of Cooperative and Small Employer
Charity Pension Plan Rules to Certain Charitable
Employers Whose Primary Exempt Purpose is Providing
Services with Respect to Children (sec. 3 of the
Act, sec. 414(y) of the Code, and sec. 210(f) of
ERISA)............................................. 112
Part Ten: An Act To Amend Certain Provisions of the FAA
Modernization and Reform Act of 2012 (Public Law 113-243)...... 114
A. Rollover of Amounts Received in Airline Carrier
Bankruptcy (sec. 1 of the Act and sec. 1106 of the
FAA Modernization and Reform Act of 2012).......... 114
Part Eleven: Grand Portage Band Per Capita Adjustment Act (Public
Law 113-290)................................................... 118
A. Equal Treatment of Certain Per Capita Income For
Purposes of Federal Assistance (sec. 2 of the Act). 118
Part Twelve: Tax Increase Prevention Act of 2014 and the Stephen
Beck, Jr., Achieving a Better Life Experience Act of 2014
(Public Law 113-295)........................................... 119
Division A--Tax Increase Prevention Act of 2014.................. 119
TITLE I--CERTAIN EXPIRING PROVISIONS............................. 119
A. Subtitle A--Individual Tax Extenders................ 119
1. Extension of deduction for certain expenses of
elementary and secondary school teachers (sec.
101 of the Act and sec. 62(a)(2)(D) of the
Code).......................................... 119
2. Extension of exclusion from gross income of
discharges of acquisition indebtedness on
principal residences (sec. 102 of the Act and
sec. 108 of the Code).......................... 120
3. Extension of parity for employer-provided mass
transit and parking benefits (sec. 103 of the
Act and 132(f) of the Code).................... 122
4. Extension of mortgage insurance premiums treated
as qualified residence interest (sec. 104 of
the Act and sec. 163 of the Code).............. 123
5. Extension of deduction for State and local
general sales taxes (sec. 105 of the Act and
sec. 164 of the Code).......................... 124
6. Extension of special rule for contributions of
capital gain real property made for
conservation purposes (sec. 106 of the Act and
sec. 170(b) of the Code)....................... 126
7. Extension of above-the-line deduction for
qualified tuition and related expenses (sec.
107 of the Act and sec. 222 of the Code)....... 129
8. Extension of tax-free distributions from
individual retirement plans for charitable
purposes (sec. 108 of the Act and sec.
408(d)(8) of the Code)......................... 130
B. Subtitle B--Business Tax Extenders.................. 134
1. Extension of research credit (sec. 111 of the
Act and sec. 41 of the Code)................... 134
2. Extension of temporary minimum low-income
housing tax credit rate for non-Federally
subsidized buildings (sec. 112 of the Act and
sec. 42 of the Code)........................... 137
3. Extension of military housing allowance
exclusion for determining whether a tenant in
certain counties is low-income (sec. 113 of the
Act and secs. 42 and 142 of the Code).......... 138
4. Extension of Indian employment tax credit (sec.
114 of the Act and sec. 45A of the Code)....... 139
5. Extension of new markets tax credit (sec. 115 of
the Act and sec. 45D of the Code).............. 140
6. Extension of railroad track maintenance credit
(sec. 116 of the Act and sec. 45G of the Code). 143
7. Extension of mine rescue team training credit
(sec. 117 of the Act and sec. 45N of the Code). 144
8. Extension of employer wage credit for employees
who are active duty members of the uniformed
services (sec. 118 of the Act and sec. 45P of
the Code)...................................... 145
9. Extension of work opportunity tax credit (sec.
119 of the Act and secs. 51 and 52 of the Code) 146
10. Extension of qualified zone academy bonds (sec.
120 of the Act and sec. 54E of the Code)....... 152
11. Extension of classification of certain race
horses as three-year property (sec. 121 of the
Act and sec. 168 of the Code).................. 154
12. Extension of 15-year straight-line cost
recovery for qualified leasehold improvements,
qualified restaurant buildings and
improvements, and qualified retail improvements
(sec. 122 of the Act and sec. 168 of the Code). 155
13. Extension of seven-year recovery period for
motorsports entertainment complexes (sec. 123
of the Act and sec. 168 of the Code)........... 158
14. Extension of accelerated depreciation for
business property on an Indian reservation
(sec. 124 of the Act and sec. 168(j) of the
Code).......................................... 159
15. Extension of bonus depreciation (sec. 125 of
the Act and sec. 168(k) of the Code)........... 160
16. Extension of enhanced charitable deduction for
contributions of food inventory (sec. 126 of
the Act and sec. 170 of the Code).............. 165
17. Extension of increased expensing limitations
and treatment of certain real property as
section 179 property (sec. 127 of the Act and
sec. 179 of the Code).......................... 167
18. Extension of election to expense mine safety
equipment (sec. 128 of the Act and sec. 179E of
the Code)...................................... 169
19. Extension of special expensing rules for
certain film and television productions (sec.
129 of the Act and sec. 181 of the Code)....... 170
20. Extension of deduction allowable with respect
to income attributable to domestic production
activities in Puerto Rico (sec. 130 of the Act
and sec. 199 of the Code)...................... 171
21. Extension of modification of tax treatment of
certain payments to controlling exempt
organizations (sec. 131 of the Act and sec. 512
of the Code)................................... 172
22. Extension of treatment of certain dividends of
regulated investment companies (sec. 132 of the
Act and sec. 871(k) of the Code)............... 173
23. Extension of RIC qualified investment entity
treatment under FIRPTA (sec. 133 of the Act and
secs. 897 and 1445 of the Code)................ 174
24. Extension of subpart F exception for active
financing income (sec. 134 of the Act and secs.
953 and 954 of the Code)....................... 175
25. Extension of look-thru treatment of payments
between related controlled foreign corporations
under foreign personal holding company rules
(sec. 135 of the Act and sec. 954(c)(6) of the
Code).......................................... 178
26. Extension of exclusion of 100 percent of gain
on certain small business stock (sec. 136 of
the Act and sec. 1202 of the Code)............. 179
27. Extension of basis adjustment to stock of S
corporations making charitable contributions of
property (sec. 137 of the Act and sec. 1367 of
the Code)...................................... 180
28. Extension of reduction in S corporation
recognition period for built-in gains tax (sec.
138 of the Act and sec. 1374 of the Code)...... 181
29. Extension of empowerment zone tax incentives
(sec. 139 of the Act and sec. 1391 of the Code) 183
30. Extension of temporary increase in limit on
cover over of rum excise taxes to Puerto Rico
and the Virgin Islands (sec. 140 of the Act and
sec. 7652(f) of the Code)...................... 189
31. Extension of American Samoa Economic
Development Credit (sec. 141 of the Act and
sec. 119 of Pub. L. No. 109-432)............... 190
C. Subtitle C--Energy Tax Extenders.................... 192
1. Extension of credit for nonbusiness energy
property (sec. 151 of the Act and sec. 25C of
the Code)...................................... 192
2. Extension of second generation biofuel producer
credit (sec. 152 of the Act and sec. 40(b)(6)
of the Code)................................... 194
3. Extension of incentives for biodiesel and
renewable diesel (secs. 153 of the Act and
secs. 40A, 6426 and 6427(e) of the Code)....... 195
4. Extension of credit for the production of Indian
coal facilities placed in service before 2009
(sec. 154 of the Act and sec. 45(e)(10) of the
Code).......................................... 198
5. Extension of credits with respect to facilities
producing energy from certain renewable
resources (sec. 155 of the Act and secs. 45 and
48 of the Code)................................ 198
6. Extension of credit for energy-efficient new
homes (sec. 156 of the Act and sec. 45L of the
Code).......................................... 199
7. Extension of special allowance for second
generation biofuel plant property (sec. 157 of
the Act and sec. 168(l) of the Code)........... 200
8. Extension of energy efficient commercial
buildings deduction (sec. 158 of the Act and
sec. 179D of the Code)......................... 202
9. Extension of special rule for sales or
dispositions to implement FERC or State
electric restructuring policy for qualified
electric utilities (sec. 159 of the Act and
sec. 451(i) of the Code)....................... 204
10. Extension of excise tax credits relating to
certain fuels (sec. 160 of the Act and sec.
6426 and 6427(e) of the Code).................. 206
11. Extension of credit for alternative fuel
vehicle refueling property (sec. 161 of the Act
and sec. 30C of the Code)...................... 207
D. Subtitle D--Extenders Relating to Multiemployer
Defined Benefit Pension Plans...................... 209
1. Multiemployer defined benefit plans (secs. 171-
172 of the Act and sec. 221(c) of the Pension
Protection Act of 2006, secs. 431-432 of the
Code, and secs. 304-305 of ERISA).............. 209
TITLE II--TECHNICAL CORRECTIONS.................................. 209
A. Tax Technical Corrections (secs. 201-220 of the Act) 209
B. Deadwood Provisions (sec. 221 of the Act)........... 217
TITLE III--JOINT COMMITTEE ON TAXATION........................... 217
A. Increased Refund and Credit Threshold for Joint
Committee on Taxation Review of C Corporation
Return (sec. 301 of the Act and sec. 6405 of the
Code).............................................. 217
Division B--Stephen Beck, Jr., Achieving a Better Life Experience
Act of 2014 or the Stephen Beck, Jr., Able Act of 2014......... 218
TITLE I--QUALIFIED ABLE PROGRAMS................................. 218
A. Qualified Able Programs (secs. 101-105 of the Act
and section 529 and new section 529A of the Code).. 218
TITLE II--OFFSETS................................................ 226
A. Modification Relating to Inland Waterways Trust Fund
Financing Rate (sec. 205 of the Act and sec. 4042
of the Code)....................................... 226
B. Certified Professional Employer Organizations (sec.
206 of the Act and new secs. 3511, 6652(n), and
7705 of the Code).................................. 227
C. Exclusion of Dividends from Controlled Foreign
Corporations from the Definition of Personal
Holding Company Income for Purposes of the Personal
Holding Company Rules (sec. 207 of the Act and sec.
543 of the Code)................................... 237
D. Inflation Adjustment for Certain Civil Penalties
Under the Internal Revenue Code (sec. 208 of the
Act and secs. 6651, 6652(c), 6695, 6698, 6699,
6721, and 6722 of the Code)........................ 239
E. Increase Continuous Levy Authority on Payments to
Medicare Providers and Suppliers (sec. 209 of the
Act and sec. 6331 of the Code)..................... 241
Appendix: Estimated Budget Effects of Tax Legislation Enacted in
the 113th Congress............................................. 243
INTRODUCTION
This document,\1\ prepared by the staff of the Joint
Committee on Taxation in consultation with the staffs of the
House Committee on Ways and Means and the Senate Committee on
Finance, provides an explanation of tax legislation enacted in
the 113th Congress. The explanation follows the chronological
order of the tax legislation as signed into law.
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\1\ This document may be cited as follows: Joint Committee on
Taxation, General Explanation of Tax Legislation Enacted in the 113th
Congress (JCS-1-15), March, 2014.
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For each provision, the document includes a description of
present law, explanation of the provision, and effective date.
Present law describes the law in effect immediately prior to
enactment and does not reflect changes to the law made by the
provision or by subsequent legislation. Reasons for change are
included based on Committee report language for provisions
reported by a Committee. For provisions enacted in bills that
went directly to the House and Senate floors without a
Committee report, no reasons for change are included in this
document.
In a case where a Committee report accompanies a bill, this
document is based on the language of the report. For a bill
with no Committee report but with a contemporaneous technical
explanation prepared and published by the staff of the Joint
Committee on Taxation, this document is based on the language
of the explanation.
Section references are to the Internal Revenue Code of
1986, as amended, unless otherwise indicated.
Part One is an explanation of the provisions of An Act to
amend the Internal Revenue Code of 1986 to include vaccines
against seasonal influenza within the definition of taxable
vaccines (Pub. L. No. 113-15).
Part Two is an explanation of the provisions of An Act to
rename section 219(c) of the Internal Revenue Code of 1986 as
the Kay Bailey Hutchison Spousal IRA (Pub. L. No. 113-22).
Part Three is an explanation of the provisions of the
Fallen Firefighters Assistance Tax Clarification Act of 2013
(Pub. L. No. 113-63).
Part Four is an explanation of the provisions of the
Philippines Charitable Giving Assistance Act (Pub. L. No. 113-
92).
Part Five is an explanation of the provisions of the
Gabriella Miller Kids First Research Act (Pub. L. No. 113-94).
Part Six is an explanation of the provisions of the
Cooperative and Small Employer Charity Pension Flexibility Act
(Pub. L. No. 113-97).
Part Seven is an explanation of the provisions of the
Highway and Transportation Funding Act of 2014 (Pub. L. No.
113-159).
Part Eight is an explanation of the provisions of the
Tribal General Welfare Exclusion Act of 2014 (Pub. L. No. 113-
168).
Part Nine is an explanation of the revenue provisions of
Consolidated and Further Continuing Appropriations Act, 2015
(Pub. L. No. 113-235).
Part Ten is an explanation of the provisions of An Act to
amend certain provisions of the FAA Modernization and Reform
Act of 2012 (Pub. L. No. 113-243).
Part Eleven is an explanation of the provisions of the
Grand Portage Band Per Capita Adjustment Act (Pub. L. No. 113-
290).
Part Twelve is an explanation of the provisions of the Tax
Increase Prevention Act of 2014 and the Stephen Beck, Jr.,
Achieving a Better Life Experience Act of 2014 (Pub. L. No.
113-295).
The Appendix provides the estimated budget effects of tax
legislation enacted in the 113th Congress.
The first footnote in each Part gives the legislative
history of the Act explained in that Part.
PART ONE: AN ACT TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO INCLUDE
VACCINES AGAINST SEASONAL INFLUENZA WITHIN THE DEFINITION OF TAXABLE
VACCINES
(PUBLIC LAW 113-15) \2\
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\2\ H.R. 475. The House passed H.R. 475 on June 18, 2013. The
Senate passed the bill without amendment on June 19, 2013. The
President signed the bill on June 25, 2013.
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A. Addition of Vaccines Against Seasonal Influenza To List of Taxable
Vaccines (sec. 1 of the Act and sec. 4132(a)(1) of the Code)
Present Law
Under present law, a tax is imposed on specified, taxable
vaccines sold by the manufacturer, producer, or importer
thereof.\3\ Manufacturers, producers, and importers are
responsible for paying 75 cents per dose of such specified,
taxable vaccines upon the sale of the vaccine, but the tax does
not apply if it has already been imposed on a prior sale of
such vaccine.\4\ Vaccines which include multiple, specified,
and taxable vaccines are taxed cumulatively--that is, if two
specified, taxable vaccines are combined, then the tax imposed
is $1.50 per dose.\5\ Similarly, fractional doses are taxed at
the same fraction of the amount of such tax imposed on a whole
dose.\6\ Doses which are used by manufacturers, producers, or
importers before being sold are taxed as if the vaccine were
sold by such manufacturers, producers, or importers.\7\
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\3\ Sec. 4131. Unless otherwise specified, all section references
are made to the Internal Revenue Code of 1986, as amended.
\4\ Sec. 4132(b)(4).
\5\ Sec. 4131(b)(2).
\6\ Sec. 4132(c)(3).
\7\ Sec. 4132(c)(1).
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Currently, section 4132(a)(1)(N) includes any trivalent
vaccine against influenza as a specified, taxable vaccine.
Vaccines against influenza are changed each season to protect
against the influenza viruses that research indicates will be
most common during the upcoming season.\8\ Trivalent vaccines,
for example, protect against three different seasonal flu
viruses; quadrivalent vaccines, on the other hand, protect
against four different seasonal flu viruses.\9\ Seasonal
influenza vaccines that are not trivalent vaccines, such as
quadrivalent vaccines, are not currently specified, taxable
vaccines.
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\8\ Center for Disease Control, Key Facts About Seasonal Flu
Vaccine (March 6, 2014), available at http://www.cdc.gov/flu/protect/
keyfacts.htm.
\9\ Ibid.
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Explanation of Provision
The provision changes section 4132(a)(1)(N) to include any
trivalent vaccine against influenza or any other vaccine
against seasonal influenza.
Effective Date
For sales and uses, the provision is effective on or after
the later of (A) the first day of the first month which begins
more than four weeks after the date of enactment (June 25,
2013), or (B) the date on which the Secretary of Health and
Human Services lists any vaccine against seasonal influenza
(other than any vaccine against seasonal influenza listed by
the Secretary prior to the date of the date of enactment) for
purposes of compensation for any vaccine-related injury or
death through the Vaccine Injury Compensation Trust Fund.
For deliveries, in the case of sales on or before the
effective date described above for which delivery is made after
such date, the delivery date shall be considered the sale date.
PART TWO: AN ACT TO RENAME SECTION 219(C) OF THE INTERNAL REVENUE CODE
OF 1986 AS THE KAY BAILEY HUTCHISON SPOUSAL IRA (PUBLIC LAW 113-22)
\10\
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\10\ H.R. 2289. The House passed H.R. 2289 on June 25, 2013. The
Senate passed the bill without amendment on July 11, 2013. The
President signed the bill on July 25, 2013.
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A. Kay Bailey Hutchison Spousal IRA (sec. 1 of the Act and sec. 219(c)
of the Code)
Present Law
Under present law, an individual may make contributions to
an individual retirement arrangement (``IRA'').\11\ There are
two basic types of IRAs: traditional IRAs, to which both
deductible and nondeductible contributions may be made, and
Roth IRAs, to which only nondeductible contributions may be
made.
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\11\ Secs. 219, 408 and 408A. The principal difference between
traditional and Roth IRAs is the timing of income tax inclusion. For a
traditional IRA, an eligible contributor may deduct the contributions
made for the year, but distributions are includible in gross income to
the extent attributable to the deductible contributions and earnings on
the IRA (or to the extent distributions exceed the individual's basis
attributable to nondeductible contributions). For a Roth IRA, all
contributions are after-tax (that is, no deduction is allowed) but, if
certain requirements are met, distributions are not includible in gross
income.
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An annual limit applies to the aggregate contributions to
all of an individual's IRAs (both traditional and Roth) for a
taxable year. The contribution limit is generally the lesser of
a certain dollar amount (for 2013, $5,500 or $6,500 for an
individual age 50 or older) or the individual's compensation.
Thus, generally, if an individual's compensation for a year is
less than the dollar amount, the applicable limit for that year
is the amount of the individual's compensation. An individual
with no compensation for a year generally may not make any IRA
contributions for that year.
Under a special rule, in the case of a married couple
filing a joint return, a spouse with compensation lower than
the other spouse may include compensation of the other spouse
in determining his or her own IRA contribution limits.\12\
Specifically, for this purpose, compensation of the spouse with
lower compensation is the sum of (1) that spouse's
compensation, plus (2) the other spouse's compensation reduced
by any IRA contributions made by the other spouse. This rule
thus allows a spouse with no compensation to make contributions
up to the dollar limit by taking into account the other
spouse's compensation.
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\12\ Sec. 219(c).
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Explanation of Provision
The provision amends the heading of the Code section that
allows a spouse to include compensation of the other spouse in
determining his or her own IRA contribution limits, so that the
heading reads ``Kay Bailey Hutchison spousal IRA.''
Effective Date
The provision is effective on the date of enactment (July
25, 2013).
PART THREE: FALLEN FIREFIGHTERS ASSISTANCE TAX CLARIFICATION ACT OF
2013 (PUBLIC LAW 113-63) \13\
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\13\ H.R. 3458. The House passed H.R. 3458 on December 12, 2013.
The Senate passed the bill without amendment on December 13, 2013. The
President signed the bill on December 20, 2013.
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A. Payments by Charitable Organizations With Respect to Certain
Firefighters Treated as Exempt Payments (sec. 2 of the Act)
Present Law
In general, organizations described in section 501(c)(3)
are exempt from taxation. Such organizations are classified
either as private foundations or public charities. Public
charities include organizations that receive broad public
support (sec. 509(a)(1) or sec. 509(a)(2)), supporting
organizations (sec. 509(a)(3)), and organizations organized and
operated for testing for public safety (sec. 509(a)(4)).
Contributions to section 501(c)(3) organizations generally
are tax deductible (sec. 170). Section 501(c)(3) organizations
must be organized and operated exclusively for exempt purposes
and no part of the net earnings of such organizations may inure
to the benefit of any private shareholder or individual. An
organization is not organized or operated exclusively for one
or more exempt purposes unless the organization serves a public
rather than a private interest. Thus, an organization described
in section 501(c)(3) generally must serve a charitable class of
persons that is indefinite or of sufficient size.
Explanation of Provision
Under the provision, certain payments made by a public
charity described in section 509(a)(1) and (a)(2) are treated
as related to the purpose or function constituting the basis
for the organization's exempt status, if the payments are made
in good faith using a reasonable and objective formula that is
consistently applied. This provision applies to payments to:
(1) any firefighter who was injured as a result of the ambush
of firefighters responding to an emergency on December 24,
2012, in Webster, New York; (2) the spouse of any firefighter
who died as a result of such ambush; or (3) any dependent (as
defined in section 152 of the Code) of any firefighter who died
as a result of such ambush.
Effective Date
The provision applies to payments made on or after December
24, 2012, and before the later of (1) January 1, 2014, or (2)
the date which is 30 days after the date of enactment (that is,
30 days after December 20, 2013).
PART FOUR: PHILIPPINES CHARITABLE GIVING ASSISTANCE ACT (PUBLIC LAW
113-92) \14\
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\14\ H.R. 3771. The House passed H.R. 3771 on March 24, 2014. The
Senate passed the bill without amendment on March 25, 2014. The
President signed the bill on March 25, 2014.
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A. Acceleration of Income Tax Benefits for Charitable Cash
Contributions for Relief of Victims of Typhoon Haiyan in the
Philippines (sec. 2 of the Act)
Present Law
In general, under present law, taxpayers may claim an
income tax deduction for charitable contributions. The
charitable deduction generally is available for the taxable
year in which the contribution is made. The tax benefit of a
charitable contribution often is not apparent until the
following calendar year when the taxpayer's tax return is filed
and the taxpayer receives a refund or realizes a reduction in
taxes owed.
A donor who claims a charitable deduction for a charitable
contribution of money, regardless of amount, must maintain as a
record of the contribution a bank record or a written
communication from the donee showing the name of the donee
organization, the date of the contribution, and the amount of
the contribution.\15\
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\15\ Sec. 170(f)(17).
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Explanation of Provision
The provision permits taxpayers to treat charitable
contributions of cash made after March 25, 2014, and before
April 15, 2014, as contributions made on December 31, 2013, if
such contributions were for the relief of victims in areas
affected by Typhoon Haiyan. Thus, the effect of the provision
is to give taxpayers who make Typhoon Haiyan-related charitable
contributions of cash after March 25, 2014, and before April
15, 2014, the opportunity to accelerate their tax benefit.
The provision also clarifies the recordkeeping requirement
of section 170(f)(17) for monetary contributions eligible for
the accelerated income tax deduction described above. With
respect to such contributions, a telephone bill will also
satisfy the recordkeeping requirement if it shows the name of
the donee organization, the date of the contribution, and the
amount of the contribution. Thus, for example, in the case of a
charitable contribution made by text message and charged to a
telephone or wireless account, a bill from the
telecommunications company containing the relevant information
will satisfy the recordkeeping requirement.
Effective Date
The provision is effective on the date of enactment (March
25, 2014).
PART FIVE: GABRIELLA MILLER KIDS FIRST RESEARCH ACT (PUBLIC LAW 113-94)
\16\
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\16\ H.R. 2019. The House passed H.R. 2019 on December 11, 2013.
The Senate passed the bill without amendment on March 11, 2014. The
President signed the bill on April 3, 2014.
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A. Termination of Taxpayer Financing of Political Party Conventions;
Use of Funds for Pediatric Research Initiative (sec. 2 of the Act and
sec. 9008 of the Code)
Present Law
Section 9008 provides a mechanism for the financing of
presidential nominating conventions. The Secretary of the
Treasury is required to maintain a separate account within the
Presidential Election Campaign Fund for the national committee
of each major party and minor party. The Secretary is required
to deposit into each such committee's account the amount the
committee is entitled to receive with respect to any
presidential nominating convention. The deposits are drawn from
amounts designated by individual taxpayers at the time of
filing a Federal income tax return to be paid over to the
Presidential Election Campaign Fund.
With respect to any presidential nominating convention, the
national committee of a major party is entitled to receive
amounts that, in the aggregate, do not exceed $4 million
(indexed for inflation). For the 2012 presidential nominating
conventions, each major party was entitled to receive
$17,689,800. The national committee of a minor party generally
is entitled to receive an amount that bears the same ratio to
the major-party amount as (1) the number of popular votes the
minor party's presidential candidate received in the preceding
presidential election bears to (2) the average number of
popular votes received by major-party candidates in that
election.
If, after the close of a presidential nominating convention
and the payment of amounts to which a committee is entitled,
money remains in the account of a national committee, the
Secretary is required to transfer the remaining amounts to the
Presidential Election Campaign Fund. Additional rules address
the use of funds, limitations on expenditures, and the timing
of payments.
Explanation of Provision
The provision terminates the entitlement of any major party
or minor party to a payment under section 9008. All amounts in
each account maintained for the national committee of a major
party or minor party are to be transferred to a new fund in the
Treasury to be known as the ``10-Year Pediatric Research
Initiative Fund.'' Amounts in the Fund are available only for
the purpose provided in section 402A(a)(2) of the Public Health
Service Act,\17\ and only to the extent and in such amounts as
are provided in advance in appropriations Acts.
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\17\ Section 3 of the Gabriella Miller Kids First Research Act
(Pub. L. No. 113-94) amends the Public Health Service Act (42 U.S.C.
sec. 282) to address funding of the pediatric research initiative.
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The provision also makes various technical and conforming
changes to sections 9006, 9009 and 9012.
Effective Date
The provision is effective on the date of enactment (April
3, 2014).
PART SIX: COOPERATIVE AND SMALL EMPLOYER CHARITY PENSION FLEXIBILITY
ACT (PUBLIC LAW 113-97) \18\
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\18\ H.R. 4275. The House passed H.R. 4275 on March 24, 2014. The
Senate passed the bill without amendment on March 25, 2014. The
President signed the bill on April 7, 2014.
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A. Cooperative and Small Employer Charity Pension Plans (secs. 3, 101-
103 and 201-203 of the Act, new secs. 414(y) and 433 of the Code, and
new secs. 210(f) and 306 of ERISA \19\)
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\19\ ERISA refers to the Employee Retirement Income Security Act of
1974.
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Present Law
Defined benefit plans and minimum funding requirements
Types of plans
Qualified retirement plans, including defined benefit
plans, are categorized for some purposes as one of three types,
based on the number of employers that maintain the plan and the
type of employees covered by the plan. The three types are
single-employer plans, multiple-employer plans, and
multiemployer plans.
A single-employer plan is a plan maintained by one
employer. For this purpose, businesses and organizations are
that members of a controlled group, a group under common
control, or an affiliated service group are treated as one
employer (referred to as ``aggregation'').\20\ A single-
employer plan may cover employees who are also covered by a
collective bargaining agreement (``collectively bargained
employees''), pursuant to which the plan is maintained (a
``collectively bargained plan'').\21\ An employer may maintain
separate single-employer plans for collectively and
noncollectively bargained employees, or they may be covered by
the same plan.
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\20\ Secs. 414(b), (c), (m) and (o).
\21\ Treas. Reg. sec. 1.410(b)-6(d).
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A multiple-employer plan is a single plan maintained by two
or more unrelated employers (that is, employers that are not
treated as a single employer under the aggregation rules) and
which is not a multiemployer plan (as defined below).\22\
Multiple-employer plans are commonly maintained by employers in
the same industry. A multiple-employer plan may cover
collectively bargained employees or noncollectively bargained
employees.
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\22\ Sec. 413(c) and ERISA sec. 210(a).
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Multiemployer plans (also known as ``Taft-Hartley'' plans
and distinct from multiple-employer plans) are plans maintained
pursuant to one or more collective bargaining agreements with
two or more unrelated employers and to which the employers are
required to contribute under the collective bargaining
agreement(s).\23\ Multiemployer plans commonly cover
collectively bargained employees in a particular industry.
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\23\ Sec. 414(f) and ERISA sec. 2(37).
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Minimum funding requirements and PPA
Defined benefit plans maintained by private employers are
generally subject to minimum funding requirements under the
Code and ERISA.\24\ The employer or employers maintaining a
plan may be subject to an excise tax for a failure to make
required contributions unless a funding waiver is obtained.\25\
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\24\ The minimum funding requirements do not apply to most
governmental or church plans.
\25\ Sec. 4971.
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Before the Pension Protection Act of 2006 (``PPA''),\26\
the basic funding rules applicable to single-employer plans,
multiple-employer plans, and multiemployer plans were similar,
with an additional contribution requirement, referred to as the
``deficit reduction contribution'' (or ``DRC'') requirement,
for single-employer and multiple-employer plans.\27\ PPA
replaced the funding rules for single-employer plans and
multiple-employer plans with new rules, effective for plan
years beginning after December 31, 2007.\28\ However, PPA
provided a delayed effective date (``PPA delayed effective
date'') for certain multiple-employer plans, under which the
PPA funding rules apply as of the earlier of (1) the first plan
year for which the plan ceases to be an eligible cooperative
plan (described below) or (2) January 1, 2017.\29\ In the
interim, as discussed below, these plans continue to be subject
to the minimum funding rules in effect before PPA, with certain
modifications.
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\26\ Pub. L. No. 109-280.
\27\ Single-employer plans and multiple-employer plans have
generally been subject to the same funding rules. Under section
413(c)(4), in the case of a multiple-employer plan established by
December 31, 1988, the minimum funding requirement is generally
determined as if all plan participants are employed by a single
employer, and, in the case of a multiple-employer plan established
after December 31, 1988, each employer is treated as maintaining a
separate plan for purposes of the funding requirements unless the plan
uses a method for determining required contributions that provides for
any employer to contribute not less than the amount that would be
required if the employer maintained a separate plan. ERISA section
210(a)(3) provides that the minimum funding requirement for a multiple-
employer plan is determined as if all plan participants are employed by
a single employer.
\28\ Secs. 412 and 430 and ERISA secs. 302-303. For an explanation
of the funding requirements for single-employer plans as amended by
PPA, see Part I.D.2 of Joint Committee on Taxation, Present Law and
Background Relating to Qualified Defined Benefit Plans (JCX-99-14),
September 15, 2014, available at www.jct.gov.
\29\ PPA sec. 104.
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The PPA delayed effective date applies to a plan that was
in existence on July 26, 2005, and was an eligible cooperative
plan for the plan year including that date. A plan is treated
as an eligible cooperative plan for a plan year if it is
maintained by more than one employer and at least 85 percent of
the employers are (1) certain rural cooperatives \30\ or (2)
certain cooperative organizations that are more than 50-percent
owned by agricultural producers or by cooperatives owned by
agricultural producers, or organizations that are more than 50-
percent owned, or controlled by, one or more of these
cooperative organizations. A plan is also treated as an
eligible cooperative plan for any plan year for which it is
maintained by more than one employer and is maintained by a
rural telephone cooperative association.
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\30\ This is as defined in section 401(k)(7)(B) without regard to
(iv) thereof and includes (1) organizations engaged primarily in
providing electric service on a mutual or cooperative basis, or engaged
primarily in providing electric service to the public in its service
area and which is exempt from tax or which is a State or local
government, other than a municipality; (2) certain civic leagues and
business leagues exempt from tax 80 percent of the members of which are
described in (1); (3) certain cooperative telephone companies; and (4)
any organization that is a national association of organizations
described above.
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The PPA delayed effective date was extended to additional
plans, ``eligible charity plans,'' by the Preservation of
Access to Care for Medicare Beneficiaries and Pension Relief
Act of 2010 (``PRA 2010'').\31\ A plan in existence on July 26,
2005, is treated as an eligible charity plan for a plan year if
(1) it is maintained by more than one employer (determined for
this purpose without regard to the aggregation rules for groups
under common control) and (2) 100 percent of the employers
maintaining the plan are tax-exempt charitable
organizations.\32\
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\31\ Pub. L. No. 111-192.
\32\ Because separate employer status is determined without regard
to the aggregation rules, some eligible charity plans are not multiple-
employer plans. An organization is a tax-exempt charitable organization
if it is exempt from income tax under section 501(c)(3).
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Funding rules applicable to eligible cooperative and eligible charity
plans \33\
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\33\ These rules are found in section 412 and ERISA sections 302-
307 as in effect for plan years beginning before 2008.
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In general
Under the funding requirements applicable to eligible
cooperative and eligible charity plans (``eligible plans'')
until the PPA delayed effective date, a notional account called
a ``funding standard account'' is maintained, to which specific
charges and credits (including plan contributions) are made for
each plan year the plan is maintained. The minimum required
contribution for a plan year is the amount, if any, needed so
that the accumulated credits to the funding standard account as
of that plan year are not less than the accumulated charges
(that is, so the funding standard account does not have a
negative balance). If, as of the close of a plan year,
accumulated charges to the funding standard account exceed
credits, the plan has an ``accumulated funding deficiency''
equal to the amount of the excess, which may result in an
excise tax. For example, if, as of a plan year, the balance of
charges to the funding standard account would be $200,000
without any contributions, then a minimum contribution equal to
that amount is required to meet the minimum funding standard
for the year (that is, to prevent an accumulated funding
deficiency). If credits to the funding standard account exceed
charges, a ``credit balance'' results. The amount of the credit
balance, increased with interest, has the effect of reducing
future required contributions.
Charges and credits to the funding standard account
An acceptable actuarial cost method (referred to as a
funding method) must be used to determine the elements included
in a plan's funding standard account for a year. Generally, a
funding method breaks up the cost of benefits under the plan
into annual charges to the funding standard account consisting
of two elements for each plan year. These elements are referred
to as (1) normal cost and (2) supplemental cost. IRS approval
is required in order to change a plan's funding method.
The plan's normal cost for a plan year generally represents
the cost of future benefits allocated to the year by the
funding method used by the plan for current employees and,
under some funding methods, for separated employees.
Specifically, it is the amount actuarially determined that
would be required as a contribution by the employer for the
plan year in order to maintain the plan if the plan had been in
effect from the beginning of service of the included employees
and if the costs for prior years had been paid, and all
assumptions (such as interest and mortality) had been
fulfilled. A plan's normal cost for a plan year is charged to
the funding standard account for that year.
The supplemental cost for a plan year is the cost of future
benefits that would not be met by future normal costs, future
employee contributions, or plan assets. The most common
supplemental cost is that attributable to past service
liability, which represents the cost of future benefits under
the plan (1) on the date the plan is first effective or (2) on
the date a plan amendment increasing plan benefits is first
effective. Supplemental cost attributable to past service
liability is generally amortized (that is, recognized for
funding purposes) over 30 years by annual charges to the
funding standard account over that period. Other supplemental
costs that may apply (and the applicable amortization periods)
include the following: net experience losses, such as worse
than expected investment returns or actuarial experience (five
years); losses from changes in actuarial assumptions (10
years); and amounts necessary to make up minimum required
contributions for which a funding waiver was obtained (five
years).
A plan sponsor may obtain from the IRS an extension of up
to 10 years of the amortization periods applicable in
determining charges to the funding standard account. The
extension may be granted if the IRS determines that (1) the
extension would carry out the purposes of ERISA and would
provide adequate protection for participants and beneficiaries
under the plan, and (2) the failure to permit the extension
would (a) result in a substantial risk to the voluntary
continuation of the plan or a substantial curtailment of
pension benefit levels or employee compensation and (b) be
adverse to the interests of plan participants in the aggregate.
Factors that result in a supplemental loss can
alternatively result in a gain that is recognized by annual
credits to the funding standard account over a specified
amortization period, in addition to a credit for contributions
made for the plan year. These include a reduction in unfunded
past service liability as a result of a plan amendment
decreasing plan benefits (30 years); net experience gains, such
as better than expected investment returns or actuarial
experience (five years); and gains from changes in actuarial
assumptions (10 years). If minimum required contributions are
waived, the waived amount (referred to as a ``waived funding
deficiency'') is also credited to the funding standard account.
Actuarial valuations
Normal cost and supplemental costs under a plan are
computed on the basis of an actuarial valuation of the assets
and liabilities of a plan. An actuarial valuation is generally
required annually and is made as of a date within the plan year
or within one month before the beginning of the plan year.
However, a valuation date within the preceding plan year may be
used if, as of that date, the value of the plan's assets is at
least 100 percent of the plan's current liability (that is, the
present value of benefits under the plan, as described below).
For funding purposes, the actuarial value of plan assets
may be used, rather than fair market value. The actuarial value
of plan assets is the value determined on the basis of a
reasonable actuarial valuation method that takes into account
fair market value and is permitted under Treasury regulations.
Any actuarial valuation method used must result in a value of
plan assets that is not less than 80 percent of the fair market
value of the assets and not more than 120 percent of the fair
market value. In addition, if the valuation method uses average
value of the plan assets, values may be used for a stated
period not to exceed the five most recent plan years, including
the current year.
In applying the funding rules, all costs, liabilities,
interest rates, and other factors are required to be determined
on the basis of actuarial assumptions and methods, each of
which is reasonable (taking into account the experience of the
plan and reasonable expectations), or which, in the aggregate,
result in a total plan contribution equivalent to a
contribution that would be determined if each assumption and
method were reasonable. In addition, the assumptions are
required to offer the actuary's best estimate of anticipated
experience under the plan.
Deficit reduction contribution requirements
Under the deficit reduction contribution rules, an
additional charge to a plan's funding standard account is
generally required for a plan year if the plan's funded current
liability percentage for the plan year is less than 90
percent.\34\ A plan's funded current liability percentage is
generally the actuarial value of plan assets as a percentage of
the plan's current liability. In general, a plan's current
liability means the value of all liabilities to employees and
their beneficiaries under the plan. In determining current
liability, the interest rate and mortality table used are the
``third segment rate'' and the mortality table used in valuing
liabilities under the PPA funding rules.\35\
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\34\ An exception to the deficit reduction contribution
requirements applies if the plan's funded current liability percentage
for the plan year is at least 80 percent and, for at least two
consecutive plan years in the preceding three plan years, the plan's
funded current liability percentage was at least 90 percent. In
addition, the deficit reduction contribution requirements generally do
not apply to plans with 100 or fewer participants, and a pro-rata
portion of the deficit reduction contribution applies to plans with
more than 100 but not more than 150 participants.
\35\ The PPA delayed effective date provides for the use of this
interest rate. Under the rules in effect before PPA, the interest rate
used in determining current liability was based on a four-year weighted
average of interest rates on 30-year Treasury securities.
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The amount of the additional charge required under the
deficit reduction contribution rules is the sum of two amounts:
(1) the excess, if any, of (a) the deficit reduction
contribution (as described below), over (b) the contribution
required under the normal funding rules, and (2) the amount (if
any) required with respect to unpredictable contingent event
benefits. The amount of the additional charge cannot exceed the
amount needed to increase the plan's funded current liability
percentage to 100 percent, taking into account the expected
increase in current liability due to benefits accruing during
the plan year.
The deficit reduction contribution is generally the sum of
(1) the applicable percentage of the plan's unfunded current
liability, and (2) the expected increase in current liability
due to benefits accruing during the plan year.\36\ For this
purpose, the plan's unfunded current liability is the amount by
which (1) the plan's current liability exceeds (2) the
actuarial value of plan assets reduced by any credit balance.
The applicable percentage is generally 30 percent, but
decreases by 0.4 of one percentage point for each percentage
point by which the plan's funded current liability percentage
exceeds 60 percent. For example, if a plan's funded current
liability percentage is 85 percent (that is, it exceeds 60
percent by 25 percentage points), the applicable percentage is
20 percent (30 percent minus 10 percentage points (25
multiplied by 0.4)).
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\36\ If the use of a new required mortality table results in an
increase in a plan's current liability, the deficit reduction
contribution also includes the amount needed to amortize the increase
over 10 years (referred to as the ``unfunded mortality increase
amount'').
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A plan may provide for unpredictable contingent event
benefits, which are benefits that depend on contingencies that
are not reliably and reasonably predictable, such as facility
shutdowns or reductions in workforce. The value of any
unpredictable contingent event benefit is not considered in
determining additional contributions until the event has
occurred. The event on which an unpredictable contingent event
benefit is contingent is generally not considered to have
occurred until all events on which the benefit is contingent
have occurred. If an event on which unpredictable contingent
event benefits are contingent has occurred, the additional
charge to the funding standard account is increased to take the
unpredictable contingent event benefits into account.
Other rules
No contributions are required under these funding rules in
excess of the full funding limitation. The full funding
limitation is the excess, if any, of (1) the accrued liability
under the plan (including normal cost), over (2) the lesser of
(a) the market value of plan assets or (b) the actuarial value
of plan assets. However, the full funding limitation may not be
less than the excess, if any, of 90 percent of the plan's
current liability (including the expected increase in current
liability due to benefits accruing during the plan year) over
the actuarial value of plan assets.\37\
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\37\ In general, current liability is all liabilities to plan
participants and beneficiaries accrued to date, whereas the accrued
liability under the full funding limitation may be based on projected
future benefits, including future salary increases.
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In general, plan contributions required to satisfy the
funding rules must be made within 8\1/2\ months after the end
of the plan year. If the contribution is made by the due date,
the contribution is treated as if it were made on the last day
of the plan year. In the case of a plan with a funded current
liability percentage of less than 100 percent for the preceding
plan year, estimated contributions for the current plan year
must be made in quarterly installments during the current plan
year. The amount of each required installment is generally 25
percent of the lesser of (1) 90 percent of the amount required
to be contributed for the current plan year or (2) 100 percent
of the amount required to be contributed for the preceding plan
year. If a required installment is not made, interest applies
for the period of underpayment at a rate of the greater of (1)
175 percent of the Federal mid-term rate, or (2) the interest
rate used for funding purposes under the plan. If quarterly
contributions are required with respect to a plan, the amount
of a quarterly installment must also be sufficient to cover any
shortfall in the plan's liquid assets (a ``liquidity
shortfall''). In general, a plan has a liquidity shortfall for
a quarter if the plan's liquid assets (such as cash and
marketable securities) are less than a certain amount
(generally determined by reference to disbursements from the
plan in the preceding 12 months).
The IRS is permitted to waive all or a portion of the
contribution required under the minimum funding standard for a
plan year (a ``waived funding deficiency''). A waiver may be
granted if the employers responsible for the contribution could
not make the required contribution without temporary
substantial business hardship and if requiring the contribution
would be adverse to the interests of plan participants in the
aggregate. Generally, no more than three waivers may be granted
within any period of 15 consecutive plan years. The IRS is
authorized to require security to be provided as a condition of
granting a funding waiver if the sum of the plan's accumulated
funding deficiency and the balance of any outstanding waived
funding deficiencies exceeds $1 million.
Funding-related benefit restrictions
Under PPA, single-employer and multiple-employer defined
benefit plans are generally subject to funding-related benefit
restrictions.\38\ The PPA delayed effective date for eligible
plans applies also to the funding related benefit restrictions.
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\38\ Section 430 and ERISA section 206(g).
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Certain funding-related benefit restrictions that predate
PPA continue to apply to eligible plans until the PPA delayed
effective date.
As described above, if quarterly contributions are required
with respect to a plan and the plan has a liquidity shortfall,
the amount of a quarterly installment must also be sufficient
to cover the liquidity shortfall. If a quarterly installment is
less than the amount required to cover the plan's liquidity
shortfall, limits apply to the benefits that can be paid from a
plan during the period of underpayment. During that period, the
plan may not make any prohibited payment, defined as (1) any
payment in excess of the monthly amount paid under a single
life annuity (plus any social security supplement provided
under the plan) to a participant or beneficiary whose annuity
starting date occurs during the period, (2) any payment for the
purchase of an irrevocable commitment from an insurer to pay
benefits (for example, an annuity contract), or (3) any other
payment specified by the Secretary of the Treasury by
regulations.\39\
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\39\ Sec. 401(a)(32) and ERISA sec. 206(e).
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Subject to certain exceptions, if an employer maintaining a
plan is involved in bankruptcy proceedings, no plan amendment
may be adopted that increases the liabilities of the plan by
reason of any increase in benefits, any change in the accrual
of benefits, or any change in the rate at which benefits vest
under the plan.\40\ This limitation does not apply if the
plan's funded current liability percentage is at least 100
percent, taking into account the amendment.
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\40\ Sec. 401(a)(33) and ERISA sec. 204(i).
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Explanation of Provision
In general
As discussed below, the provision generally provides new,
permanent minimum funding rules under the Code and ERISA for
certain plans eligible for the PPA delayed effective date,
referred to as ``CSEC'' plans. A CSEC plan is a defined benefit
plan (other than a multiemployer plan) (1) that is an eligible
cooperative plan to which the PPA delayed effective date
applies (without regard to the January 1, 2017, end date), or
(2) that, as of June 25, 2010 (the date of enactment of PRA
2010), was maintained by more than one employer (taking into
account the aggregation rules for controlled groups and groups
under common control) and all of the employers were tax-exempt
charitable organizations.\41\
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\41\ See Part Nine, IV.C for an amendment to this definition.
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If a plan is treated as a CSEC plan, the delayed effective
date for the PPA funding rules ceases to apply to the plan as
of the first date the plan is treated as a CSEC plan.\42\
However, a plan described in (1) or (2) is not a CSEC plan if
the plan sponsor elects, not later than the close of the first
plan year beginning after December 31, 2013, not to be treated
as a CSEC plan.\43\ An election takes effect for the first plan
year beginning after December 31, 2013, and, once made, may be
revoked only with the consent of the Secretary of the Treasury.
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\42\ A plan maintained by employers treated as a single employer
under the aggregation rules is not a CSEC plan as defined under the
provision. Thus, not all eligible charity plans as defined for purposes
of the PPA delayed effective date come within the definition of CSEC
plan. Those that do not may continue to be covered by the PPA delayed
effective date.
\43\ If an election not to be treated as a CSEC plan is made with
respect to a plan eligible for the PPA delayed effective date, the plan
may continue to be covered by the delayed effective date unless making
an election as described in Part B.
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Funding rules for CSEC plans
In general
Under the provision, CSEC plans are permanently exempted
from the PPA funding rules generally applicable to single-
employer plans and multiple-employer plans. The provision
establishes new minimum funding rules for CSEC plans that are
similar to the rules applicable to eligible cooperative and
eligible charity plans under the PPA delayed effective date,
with the following modifications:\44\
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\44\ Under the provision, a CSEC plan's amortization bases for plan
years beginning before January 1, 2014, and related charges and credits
continue to apply. In addition, the minimum funding requirement for a
CSEC plan is determined as if all plan participants are employed by a
single employer.
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the deficit reduction contribution rules are
repealed with respect to CSEC plans,
new rules apply, as discussed below, to a
CSEC plan in ``restoration status,''
supplemental cost attributable to past
service liability and a reduction in unfunded past
service liability as a result of a plan amendment
decreasing plan benefits are amortized over 15 years
(rather than 30 years),
any funding method available to a CSEC plans
under the funding rules in effect before PPA continues
to be available under the CSEC rules,\45\
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\45\ As under present law, IRS approval is required for a change in
funding method.
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all costs, liabilities, interest rates, and
other factors are required to be determined on the
basis of actuarial assumptions and methods, each of
which is reasonable (taking into account the experience
of the plan and reasonable expectations),\46\ and
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\46\ As under present law, the assumptions are also required to
offer the actuary's best estimate of anticipated experience under the
plan.
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the IRS may grant an amortization period
extension to a CSEC plan if it determines that (1) the
extension would carry out the purposes of ERISA and
would provide adequate protection for participants and
beneficiaries under the plan, and (2) the failure to
permit the extension would result in a substantial risk
to the voluntary continuation of the plan or a
substantial curtailment of pension benefit levels or
employee compensation.
Rules relating to restoration status
If a CSEC plan is in funding restoration status for a plan
year, as discussed below, a special minimum contribution
requirement applies, the plan sponsor must adopt a funding
restoration plan, and the plan generally may not be amended to
increase benefits. Under the provision, not later than the 90th
day of a CSEC plan's plan year, the plan actuary of a CSEC plan
must certify to the plan sponsor whether or not the plan is in
funding restoration status for the plan year, based on the
plan's funded percentage as of the beginning of the plan year.
A CSEC plan is in funding restoration status for a plan
year if the plan's funded percentage as of the beginning of the
plan year is less than 80 percent. For this purpose, funded
percentage means the ratio (expressed as a percentage) that the
value of the plan's assets bears to the plan's funding
liability. A plan's funding liability for a plan year is the
present value of all benefits accrued or earned under the plan
as of the beginning of the plan year, determined using the
assumptions, including interest and mortality, used in other
funding computations with respect to plan. In making the
certification described above, the plan actuary may
conclusively rely on an estimate of (1) the plan's funding
liability, based on the funding liability of the plan for the
preceding plan year and on reasonable actuarial estimates,
assumptions, and methods, and (2) the amount of any
contributions reasonably anticipated to be made for the
preceding plan year.\47\ Reasonably anticipated contributions
for the preceding year are taken into account in determining
the plan's funded percentage as of the beginning of the plan
year.
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\47\ Because contributions for a plan year may be made up to 8\1/2\
months after the end of the plan year, some contributions for the
preceding year might not have been made by the time of the
certification.
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If a plan is in restoration status for a plan year, the
minimum required contribution is the greater of (1) the amount
otherwise required without regard to restoration status and (2)
the normal cost of the plan for the plan year.\48\ Thus, an
accumulated funding deficiency will result if contributions are
less than normal cost.
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\48\ In certain cases, a specific funding method, the entry age
normal funding method, must be used in determining normal cost for this
purpose.
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If a CSEC plan is certified as being in restoration status,
within 180 days after receipt of the certification, the plan
sponsor must establish a written funding restoration plan. If a
CSEC plan remains in funding restoration status for more than a
year, the plan sponsor must update the funding restoration plan
each year within 180 days after receipt of the certification of
restoration status. If a plan sponsor fails to adopt or update
a funding restoration plan as required, the plan sponsor may be
subject to an excise tax under the Code or an ERISA penalty of
up to $100 per day.
A funding restoration plan must consist of actions that are
calculated, based on reasonably anticipated experience and
reasonable actuarial assumptions, to increase the plan's funded
percentage to 100 percent over seven years, or, if sooner, the
shortest amount of time practicable. The funding restoration
plan is to take into account contributions required under the
minimum funding requirements (determined without regard to the
funding restoration plan).
If a CSEC plan is in funding restoration status for a plan
year, no plan amendment may take effect during the plan year if
it has the effect of increasing plan liabilities by means of
increases in benefits, establishment of new benefits, changing
the rate of benefit accrual, or changing the rate at which
benefits vest under the plan. However, this prohibition does
not apply to any plan amendment required to comply with any
applicable law. The prohibition ceases to apply with respect to
any plan year, effective as of the first day of the plan year
(or if later, the effective date of the amendment), if a plan
contribution is made, in addition to any contribution otherwise
required under the funding rules, in an amount equal to the
increase in the plan's funding liability as a result of the
plan amendment.
Funding-related benefit restrictions
Under the provision, CSEC plans are permanently exempted
from the PPA funding-related benefit restrictions. CSEC plans
are also exempted from (1) the restrictions on benefit
increases when an employer maintaining a plan is involved in
bankruptcy proceedings and (2) the ERISA restriction on
prohibited payments if a plan has a liquidity shortfall and a
quarterly installment is less than the amount required to cover
the liquidity shortfall.
Effective Date
The provision is generally effective for plan years
beginning after December 31, 2013. The provision allowing a
plan sponsor to elect out of CSEC status is effective on the
date of enactment (April 7, 2014).
B. Election to Cease Treatment as an Eligible Charity Plan (sec. 103(b)
and (d) of the Act, sec. 430 of the Code and sec. 303 of ERISA)
Present Law
PPA funding rules for single-employer and multiple-employer plans
In general
Under PPA, new Code and ERISA minimum funding requirements
apply to single-employer and multiple-employer defined benefit
plans, generally effective for plan years beginning after
December 31, 2007.\49\
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\49\ Secs. 412 and 430 and ERISA secs. 302-303. For further
explanation of the funding requirements for single-employer plans as
amended by PPA, see Part I.D.2 of Joint Committee on Taxation, Present
Law and Background Relating to Qualified Defined Benefit Plans (JCX-99-
14), September 15, 2014, available at www.jct.gov.
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Under these rules, the minimum required contribution with
respect to a plan for a plan year generally depends on a
comparison of the value of the plan's assets, reduced by any
prefunding balance or funding standard carryover balance (``net
value of plan assets''),\50\ with the plan's funding target
(the present value of all benefits accrued or earned as of the
beginning of the plan year) and the plan's target normal cost
(the present value of benefits expected to accrue or to be
earned during the plan year plus administrative expenses).\51\
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\50\ The value of plan assets is generally reduced by any
prefunding balance or funding standard carryover balance in determining
minimum required contributions. A prefunding balance results from
contributions to a plan that exceed the minimum required contributions.
A funding standard carryover balance results from a positive balance in
the funding standard account that applied under the funding
requirements in effect before PPA. Subject to certain conditions, a
prefunding balance or funding standard carryover balance may be
credited against the minimum required contribution for a year, reducing
the amount that must be contributed.
\51\ Specific interest and mortality assumptions generally apply in
determining a plan's funding target and target normal cost.
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If the net value of plan assets is less than the plan's
funding target, so that the plan has a funding shortfall
(discussed further below), the minimum required contribution is
the sum of the plan's target normal cost and the shortfall
amortization charge for the plan year (determined as described
below).\52\ If the net value of plan assets is equal to or
exceeds the plan's funding target, the minimum required
contribution is the plan's target normal cost, reduced by the
amount, if any, by which the net value of plan assets exceeds
the plan's funding target.
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\52\ If the plan has obtained a funding waiver within the past five
years, the minimum required contribution also includes the related
waiver amortization charge, that is, the annual installment needed to
amortize the waived amount in level installments over the five years
following the year of the waiver.
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Shortfall amortization charge
The shortfall amortization charge for a plan year is the
sum of the annual shortfall amortization installments
attributable to the shortfall bases for that plan year and the
six previous plan years. Generally, if a plan has a funding
shortfall for the plan year, a shortfall amortization base must
be established for the plan year.\53\ A plan's funding
shortfall is the amount by which the plan's funding target
exceeds the net value of plan assets. The shortfall
amortization base for a plan year is (1) the plan's funding
shortfall, minus (2) the present value of the aggregate total
of the ``shortfall amortization installments'' that have been
determined for the plan year and any succeeding plan year with
respect to any shortfall amortization bases for the six
previous plan years. The shortfall amortization base is
amortized in level annual installments (the ``shortfall
amortization installments'') over a seven-year period beginning
with the current plan year and using specified interest
assumptions.\54\
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\53\ If the value of plan assets, reduced only by any prefunding
balance if the employer elects to apply the prefunding balance against
the required contribution for the plan year, is at least equal to the
plan's funding target, no shortfall amortization base is established
for the year.
\54\ The shortfall amortization base for a plan year may be
positive or negative, depending on whether the present value of
remaining installments with respect to amortization bases for previous
years is more or less than the plan's funding shortfall. If the
shortfall amortization base is positive (that is, the funding shortfall
exceeds the present value of the remaining installments), the related
shortfall amortization installments are positive. If the shortfall
amortization base is negative, the related shortfall amortization
installments are negative. The positive and negative shortfall
amortization installments for a particular plan year are netted when
adding them up in determining the shortfall amortization charge for the
plan year, but the resulting shortfall amortization charge cannot be
less than zero (that is, negative amortization installments may not
offset normal cost).
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If the net value of plan assets for a plan year is at least
equal to the plan's funding target for the year, so the plan
has no funding shortfall, any shortfall amortization bases and
related shortfall amortization installments are eliminated.\55\
As indicated above, if the net value of plan assets exceeds the
plan's funding target, the excess is applied against target
normal cost in determining the minimum required contribution.
---------------------------------------------------------------------------
\55\ Any amortization base relating to a funding waiver for a
previous year is also eliminated.
---------------------------------------------------------------------------
PRA 2010 relief under the PPA rules
The Preservation of Access to Care for Medicare
Beneficiaries and Pension Relief Act of 2010 (``PRA 2010'')
allowed the sponsor of a plan subject to the PPA funding rules
to elect a 15-year amortization period, rather than a seven-
year amortization period, with respect to the shortfall
amortization bases for two plan years (``election years'') of
the four plan years beginning in 2008, 2009, 2010 and 2011.\56\
The use of the longer amortization period for an eligible plan
year had the effect of reducing the shortfall amortization
installments attributable to the shortfall amortization base
for that plan year, thus reducing required contributions for
the first seven years in the 15-year amortization period.
---------------------------------------------------------------------------
\56\ PRA 2010 also provided funding relief that could be elected
with respect to a plan eligible for the delayed PPA effective date
discussed below.
---------------------------------------------------------------------------
Under PRA 2010, if, in any of the five years following an
election year, the plan sponsor provides excessive compensation
to an employee (generally, compensation in excess of $1
million) or provides an extraordinary dividend or redemption
with respect to its stock, subject to certain limits, the
remaining shortfall amortization installments attributable to
the shortfall amortization base for the election year are
generally accelerated, increasing the required contribution for
that year.
PPA delayed effective date for eligible charity plans
As discussed in Part A, under PRA 2010, a delayed effective
date for the PPA funding rules applies to ``eligible charity
plans.'' A plan in existence on July 26, 2005, is treated as an
eligible charity plan for a plan year if (1) it is maintained
by more than one employer (determined for this purpose without
regard to the aggregation rules for groups under common
control) and (2) 100 percent of the employers maintaining the
plan are tax-exempt charitable organizations. Under the delayed
effective date, the PPA funding rules apply to an eligible
charity plan as of the earlier of (1) the first plan year for
which the plan ceases to be an eligible charity plan or (2)
January 1, 2017.\57\
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\57\ Because the PPA funding rules had already gone into effect for
plan years beginning after December 31, 2007, retroactive application
of the delayed effective date under PRA 2010 meant that some eligible
charity plans already using the PPA rules could be forced to change
back to the pre-PPA rules, resulting in administrative burden and
expense.
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Explanation of Provision
In general
The provision allows the plan sponsor of an eligible
charity plan (as defined under PRA 2010) to elect that the plan
cease being treated as an eligible charity plan for plan years
beginning after December 31, 2013. In the case of an eligible
charity plan that is not a CSEC plan as discussed in Part A,
the election has the effect of applying the PPA funding rules
for these years.\58\ A plan sponsor that makes an election may
also elect to use a special computation, as discussed below, in
applying the PPA funding rules to the first plan year beginning
after December 31, 2013. Either of these elections must be made
at the time and in the form and manner as prescribed by the
Secretary of the Treasury and may be revoked only with the
consent of the Secretary.
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\58\ In the case of an eligible charity plan that is a CSEC plan,
this result can be obtained by also making an election out of CSEC
treatment as described in Part A.
---------------------------------------------------------------------------
The provision also allows the plan sponsor of an eligible
charity plan (as defined under PRA 2010) to make a one-time,
irrevocable election not to be treated as an eligible charity
plan, retroactive to the first plan year beginning after
December 31, 2007.\59\ This election is made by providing
reasonable notice to the Secretary.
---------------------------------------------------------------------------
\59\ This election would affirm an eligible charity plan's
consistent use of the PPA funding rules plan year beginning after
December 31, 2007, rather than applying the PPA delayed effective date
as extended to eligible charity plans by PRA 2010.
---------------------------------------------------------------------------
Special funding computation
Under the special computation, for the first plan year
beginning after December 31, 2013, rather than a single
shortfall amortization base, a plan has (1) an 11-year
shortfall amortization base, (2) a 12-year shortfall
amortization base, and (3) a 7-year shortfall amortization
base.\60\ The shortfall amortization charges for the first plan
year beginning after December 31, 2013, and subsequent years
include the shortfall amortization installments attributable to
the three shortfall amortization bases. The shortfall
amortization installments attributable to the 11-year shortfall
amortization base and the 12-year shortfall amortization base
are determined as under the PPA rules, except that 11-year and
12-year periods, respectively, are substituted for the seven-
year amortization period applicable under PPA.
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\60\ Eleven years is the period that would remain as of 2014 if,
under PRA 2010, a 15-year amortization period had been used with
respect to a plan's shortfall amortization base for 2010, and twelve
years is the period that would remain as of 2014 if, under PRA 2010, a
15-year amortization period had been used with respect to a plan's
shortfall amortization base for 2011.
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The plan's 11-year shortfall amortization base is the
amount that, as of the first plan year beginning after December
31, 2013, would be the unamortized principal amount of the
shortfall amortization base that would have applied to the plan
for the first plan year beginning after December 31, 2009, if
the plan had never been an eligible charity plan,\61\ the plan
sponsor had elected a 15-year amortization period for that
year, and no event (such as excessive employee compensation)
had occurred to accelerate the shortfall amortization
installments attributable to the shortfall amortization base
for that year. Similarly, the plan's 12-year shortfall
amortization base is the amount that, as of the first plan year
beginning after December 31, 2013, would be the unamortized
principal amount of the shortfall amortization base that would
have applied to the plan for the first plan year beginning
after December 31, 2010, if the plan had never been an eligible
charity plan, the plan sponsor had elected a 15-year
amortization period for that year, and no event (such as
excessive compensation) had occurred to accelerate the
shortfall amortization installments attributable to the
shortfall amortization base for that year. The plan's 7-year
shortfall amortization base is the amount of the shortfall
amortization base for the first plan year beginning after
December 31, 2013, determined without regard to the special
computation, minus the sum of the plan's 11-year and 12-year
shortfall amortization bases.
---------------------------------------------------------------------------
\61\ If the plan had never been an eligible charity plan, shortfall
amortization bases under the PPA funding rules would have applied for
the previous two plan years beginning after December 31, 2007. Thus,
the shortfall amortization base for the first plan beginning after
December 31, 2009 would have been (1) the plan's funding shortfall for
that year, minus (2) the present value of the aggregate total of the
remaining shortfall amortization installments attributable to the
shortfall amortization bases for the two previous plan years.
---------------------------------------------------------------------------
Under the provision, the PRA 2010 rules relating to the
acceleration of shortfall amortization installments
attributable to the shortfall amortization base for the first
plan year beginning after December 31, 2013, are applied by
treating that year (and no other year) as an election year.
Effective Date
The provision is effective on the date of enactment (April
7, 2014).
C. Deemed Election for Church Plans (sec. 103(c) and (d) of the Act and
sec. 410(d) of the Code)
Present Law
PBGC insurance program
The Pension Benefit Guaranty Corporation (``PBGC'')
provides an insurance program for benefits under most defined
benefit plans maintained by private employers.\62\ Defined
benefit plans covered by the PBGC insurance program are
required to pay annual premiums to the PBGC.
---------------------------------------------------------------------------
\62\ ERISA secs. 4001-4402.
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If the assets of a single-employer plan are not sufficient
to pay benefits due under the plan and the plan terminates in a
distress termination (for example, in a bankruptcy proceeding
of the employer maintaining the plan), the plan becomes the
responsibility of the PBGC. The PBGC becomes the trustee of the
plan, takes control of any plan assets, and assumes
responsibility for benefits that cannot be provided from plan
assets, subject to certain limits.
Church Plans
A church plan is generally exempted from various Code
requirements otherwise applicable to qualified retirement
plans, including, in the case of a defined benefit plan that is
a church plan, the minimum funding requirements.\63\ A church
plan is also generally exempt from ERISA, including, in the
case of a defined benefit plan that is a church plan, the PBGC
insurance program.\64\
---------------------------------------------------------------------------
\63\ Secs. 401(a), last sentence, 410(c)(1)(B) and (d),
411(e)(1)(B), and 412(e)(2)(D). A church plan is also exempted from the
vesting and anti-cutback requirements generally applicable to qualified
retirement plans.
\64\ ERISA secs. 4(b)(2) and 4021(b)(3).
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A church plan is defined as a plan established and
maintained for its employees by a church or by a convention or
association of churches that is exempt from income tax.\65\ For
this purpose, an employee of a church or a convention or
association of churches includes an employee of an
organization, whether a civil law corporation or otherwise,
that is exempt from income tax and is controlled by or
associated with a church or a convention or association of
churches.
---------------------------------------------------------------------------
\65\ Sec. 414(e). A similar definition applies under ERISA section
3(33).
---------------------------------------------------------------------------
The exemption from the Code requirements does not apply if
the church or convention or association of churches maintaining
the plan makes an election to apply the Code requirements
(referred to as an ``electing'' church plan).\66\ This election
is irrevocable. If an election is made, the Code requirements
apply to the electing church plan in the same manner as other
plans. In addition, ERISA applies to an electing church plan.
With respect to coverage under the PBGC insurance program, an
electing church plan must notify the PBGC that it wishes to
have the provisions of the PBGC insurance program apply.
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\66\ Sec. 410(d) and Treas. Reg. sec. 1.410(d)-1. A church plan
with respect to which an election under section 410(d) is not made is
referred to as a ``nonelecting'' church plan.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, in certain circumstances, an
irrevocable election of electing church plan status is deemed
to have been made with respect to a church plan. An election is
deemed to have been made if (1) the plan was established before
January 1, 2014, (2) the plan meets the definition of a CSEC
plan, (3) the plan sponsor does not elect out of CSEC
treatment, and (4) the plan, plan sponsor, plan administrator,
or fiduciary remits one or more premium payments for the plan
to the PBGC for a plan year beginning after December 31, 2013.
If a deemed election is made, the plan covered by the
election is an electing church plan and is subject to the Code
requirements generally applicable to qualified retirement plans
and to ERISA.
Effective Date
The provision is effective on the date of enactment (April
7, 2014).
D. Transparency in Annual Reports and Notices (secs. 3 and 104 of the
Act and secs. 101(d), 101(f) and 103 of ERISA)
Present Law
Under ERISA, the plan administrator of a defined benefit or
defined contribution plan must file an annual report with the
Secretary of Labor. The annual report must contain certain
information about the plan, such as a statement of the plan's
assets and liabilities and contributions made for the plan
year.\67\
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\67\ Similar annual reporting requirements apply under the Code
(sections 6058 and 6059), and, under section 4065 of ERISA, the plan
administrator of a defined benefit plan must file an annual report with
the PBGC. A plan administrator complies with all of these Code and
ERISA reporting requirements by filing an Annual Return/Report of
Employee Benefit Plan, Form 5500 series, and providing the information
as required on the form and related instructions.
---------------------------------------------------------------------------
ERISA requires the plan administrator of a defined benefit
plan to provide an annual funding notice to each plan
participant and beneficiary, each labor organization
representing participants or beneficiaries, and the PBGC.
Certain information must be included in any funding notice,
regardless of the type of plan, that is, regardless of whether
the plan is a single-employer, multiple-employer or
multiemployer plan. Funding notices must also include
additional information that varies with the type of plan.
ERISA requires an employer maintaining a single-employer or
multiple-employer defined benefit plan to notify plan
participants and beneficiaries if the employer fails to make
contributions required under the funding rules. An exception
applies if the employer requests a funding waiver from the IRS.
However, if the waiver request is denied, the employer must
notify the employees of the failure to make required
contributions within 60 days after the denial.
Explanation of Provision
In connection with the funding rules for CSEC plans as
discussed in Part A, the provision revises the annual report
and certain notice requirements as described below.
The provision requires the annual report filed with respect
to a CSEC plan to include a list of participating employers and
a good faith estimate of the percentage of total contributions
made by the participating employers during the plan year.
The provision amends the annual funding notice requirements
to require a funding notice with respect to a CSEC plan to
include (1) a statement that different rules apply to CSEC
plans than apply to single-employer plans, (2) for the first
two plan years beginning after December 31, 2013, a statement
that, as a result of changes made by the Cooperative and Small
Employer Charity Pension Flexibility Act, the contributions to
the plan may have changed, and (3) in the case of a CSEC plan
in funding restoration status for a plan year, a statement that
the plan is in funding restoration status for the plan year. A
copy of the statement described in (3) must be provided to the
Secretary of Labor, the Secretary of the Treasury, and the
Director of the PBGC.
Under the provision, if an employer maintaining a CSEC plan
fails to make a required contribution, the employer must notify
plan participants and beneficiaries unless the employer
requests a funding waiver. However, if the waiver request is
denied, the employer must notify the employees of the failure
to make required contributions within 60 days after the denial.
Effective Date
The provision is effective for years beginning after
December 31, 2013.
E. Sponsor Education and Assistance (secs. 3 and 105 of the Act and
sec. 4004 of ERISA)
Present Law
Under ERISA, the PBGC board of directors selects a
Participant and Plan Sponsor Advocate, who generally acts as a
liaison between the PBGC, defined benefit plan sponsors, and
participants in defined benefit plans trusteed by the PBGC.
Explanation of Provision
Under the provision, the Participant and Plan Sponsor
Advocate is directed as part of his or her duties to make
himself or herself available to assist CSEC plan sponsors and
participants.
Effective Date
The provision is effective for years beginning after
December 31, 2013.
PART SEVEN: REVENUE PROVISIONS OF THE HIGHWAY AND TRANSPORTATION
FUNDING ACT OF 2014 (PUBLIC LAW 113-159) \68\
A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of
the Act and secs. 9503, 9504 and 9508 of the Code)
Present Law
In general
Six separate excise taxes are imposed to finance the
Federal Highway Trust Fund program. Three of these taxes are
imposed on highway motor fuels. The remaining three are a
retail sales tax on heavy highway vehicles, a manufacturers'
excise tax on heavy vehicle tires, and an annual use tax on
heavy vehicles. A substantial majority of the revenues produced
by the Highway Trust Fund excise taxes are derived from the
taxes on motor fuels. The annual use tax on heavy vehicles
expires October 1, 2017. Except for 4.3 cents per gallon of the
Highway Trust Fund fuels tax rates, the remaining taxes are
scheduled to expire October 1, 2016. The 4.3-cents-per-gallon
portion of the fuels tax rates is permanent.\69\
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\68\ H.R. 5021. The House Committee on Ways and Means reported H.R.
5021 on July 14, 2014 (H.R. Rep. 113-520 (Part 1)). The House passed
H.R. 5021 on July 15, 2014. The Senate passed the bill with an
amendment on July 29, 2014. The House disagreed to the Senate amendment
on July 31, 2014, and the Senate receded from its amendment the same
day. The President signed the bill on August 8, 2014.
\69\ This portion of the tax rates was enacted as a deficit
reduction measure in 1993. Receipts from it were retained in the
General Fund until 1997 legislation provided for their transfer to the
Highway Trust Fund.
---------------------------------------------------------------------------
Revenues from the excise taxes generally are dedicated to
the Highway Trust Fund. Dedication of excise tax revenues to
the Highway Trust Fund and expenditures from the Highway Trust
Fund are governed by the Code.\70\ As discussed below, the Code
authorizes expenditures (subject to appropriations) from the
Highway Trust Fund through September 30, 2014.
---------------------------------------------------------------------------
\70\ Sec. 9503. Unless otherwise stated, all section references are
to the Internal Revenue Code of 1986, as amended (the ``Code'').
---------------------------------------------------------------------------
Highway Trust Fund expenditure purposes
Section 9503 contains the operative rules for the transfer
of revenues to the Highway Trust Fund and for the expenditure
of monies from the Highway Trust Fund. In general, these rules
provide for transfer from the General Fund of ``gross
receipts'' from the Highway Trust Fund excise taxes to the
Highway Trust Fund. Amounts deposited in the Highway Trust Fund
are divided between a Mass Transit Account and a residual
account, the ``Highway Account.'' \71\ The Mass Transit Account
generally receives 2.86 cents per gallon of the Highway Trust
Fund motor fuels excise taxes.\72\ The balance of the motor
fuels tax receipts and all receipts from the three non-fuels
excise taxes are deposited in the Highway Account.
---------------------------------------------------------------------------
\71\ Sec. 9503(e)(1).
\72\ Sec. 9503(e)(2).
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The Highway Trust Fund expenditure purposes have been
revised with each authorization Act enacted since establishment
of the Highway Trust Fund in 1956. In general, expenditures
authorized under those Acts (as the Acts were in effect on the
date of enactment of the most recent such authorizing Act,
currently the Moving Ahead for Progress in the 21st Century Act
or ``MAP-21'' \73\) are specified by the Code as authorized
Highway Trust Fund expenditure purposes.\74\ The Code provides
that the authority to make expenditures from the Highway Trust
Fund for these purposes expires after September 30, 2014. Thus,
no Highway Trust Fund expenditures may occur after September
30, 2014, without an amendment to the Code.
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\73\ The short title for Pub. L. No. 112-141 is ``MAP-21'' and the
law is also known as the ``Moving Ahead for Progress in the 21st
Century Act.''
\74\ Sec. 9503(c)(1).
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Reasons for Change
The current Highway Trust Fund expenditure authority was
expiring after September 30, 2014. The Congress believed that
an extension of that authority, through May 31, 2015, would
give the Congress sufficient time to carefully consider a more
long-term reauthorization of the Highway Trust Fund and also
minimize disruption and provide some stability for State
transportation programs dependent on funding from the Highway
Trust Fund.
Explanation of Provision
The expenditure authority for the Highway Trust Fund is
extended through May 31, 2015. The Code provisions governing
the purposes for which monies in the Highway Trust Fund may be
spent are updated to include the ``Highway and Transportation
Funding Act of 2014.'' The provision also updates the Code
provisions governing the Leaking Underground Storage Tank Trust
Fund, and the Sport Fish Restoration and Boating Trust Fund.
Effective Date
The provision is effective on the date of enactment (August
8, 2014).
B. Funding of the Highway Trust Fund (sec. 2002 of the Act and secs.
9503(f) and 9508(c) of the Code)
Present Law
Public Law No. 110-318, ``an Act to amend the Internal
Revenue Code of 1986 to restore the Highway Trust Fund
balance'' transferred, out of money in the Treasury not
otherwise appropriated, $8,017,000,000 to the Highway Trust
Fund effective September 15, 2008. Public Law No. 111-46, ``an
Act to restore sums to the Highway Trust Fund,'' transferred,
out of money in the Treasury not otherwise appropriated, $7
billion to the Highway Trust Fund effective August 7, 2009. The
Hiring Incentives to Restore Employment Act transferred, out of
money in the Treasury not otherwise appropriated,
$14,700,000,000 to the Highway Trust Fund and $4,800,000,000 to
the Mass Transit Account in the Highway Trust Fund.\75\
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\75\ The Hiring Incentives to Restore Employment Act (the ``HIRE''
Act), Pub. L. No. 111-147, sec. 442.
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MAP-21 provided that, out of money in the Treasury not
otherwise appropriated, the following transfers were to be made
from the General Fund to the Highway Trust Fund:
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FY 2013 FY 2014
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Highway Account............. $6.2 billion........ $10.4 billion
Mass Transit Account........ .................... $2.2 billion
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MAP-21 also transferred $2.4 billion from the Leaking
Underground Storage Tank Trust Fund to the Highway Account in
the Highway Trust Fund.\76\
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\76\ Moving Ahead for Progress in the 21st Century Act (``MAP-
21''), Pub. L. No. 112-141, sec. 40201(a)(2) and sec. 40251.
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Reasons for Change
Both the Highway Account and the Mass Transit Account of
the Highway Trust Fund were nearing insolvency. If the Congress
did not act, it was anticipated that the Mass Transit Account
would have only $1 billion available by the end of the fiscal
year, and the Highway Account was expected to experience a
shortfall by August 2014.\77\ As a result, the Department of
Transportation had notified State transportation authorities
that beginning August 1, 2014, for programs funded out of the
Highway Account, the Department of Transportation would
undertake cash management procedures that would limit payments
and eliminate ``same-day'' reimbursements to States.\78\
Instead, payments would be made twice a month and incoming
funds would be distributed in proportion to each State's
Federal formula apportionment in the 2014 fiscal year.
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\77\ U.S. Department of Transportation, Highway Trust Fund Ticker
(July 9, 2014).
\78\ See, e.g., Anthony R. Foxx, Letter of Anthony R. Foxx,
Secretary of Transportation, to John R. Cooper, Transportation
Director, Alabama Department of Transportation (July 1, 2014).
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The Congress believed that additional funding for the
Highway Trust Fund should be provided in an amount sufficient
to avoid short-term disruption of Federally-funded
transportation programs, while giving the Congress enough time
to stabilize that Trust Fund's finances over the longer term.
The Congress further believed that this additional, short-term
funding should be provided to the Highway Trust Fund in a
manner that was budget-neutral and did not involve permanent
tax increases.
Explanation of Provision
The provision transfers from the General Fund $7.765
billion to the Highway Account of the Highway Trust Fund and $2
billion to the Mass Transit Account of the Highway Trust Fund.
The provision also transfers $1 billion from the Leaking
Underground Storage Tank Trust Fund to the Highway Account of
the Highway Trust Fund.
Effective Date
The provision is effective on the date of enactment (August
8, 2014).
C. Pension Funding Stabilization (sec. 2003 of the Act and secs. 430
and 436 of the Code)
Present Law
Minimum funding rules
A defined benefit plan maintained by a single employer is
subject to minimum funding rules that generally require the
sponsoring employer to make a certain level of contribution for
each plan year to fund plan benefits.\79\ The minimum funding
rules for single-employer defined benefit plans were
substantially revised by the Pension Protection Act of 2006
(``PPA'').\80\
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\79\ Sec. 412 and section 302 of the Employee Retirement Income
Security Act of 1974 (``ERISA''). For purposes of whether a plan is
maintained by a single employer, certain related entities, such as the
members of a controlled group, are treated as a single employer.
Different funding rules apply to multiemployer and multiple-employer
defined benefit plans, which are types of plans maintained by two or
more unrelated employers. A number of exceptions to the minimum funding
rules apply. For example, governmental plans (within the meaning of
section 414(d)) and church plans (within the meaning of section 414(e))
are generally not subject to the minimum funding rules. Under section
4971, an excise tax applies if the minimum funding requirements are not
satisfied.
\80\ Pub. L. No. 109-280. The PPA minimum funding rules for single-
employer plans are generally effective for plan years beginning after
December 31, 2007. Subsequent changes were made by the Worker, Retiree,
and Employer Recovery Act of 2008 (``WRERA''), Pub. L. No. 110-458; the
Preservation of Access to Care for Medicare Beneficiaries and Pension
Relief Act of 2010 (``PRA 2010''), Pub. L. No. 111-192; and MAP-21,
discussed further herein.
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Minimum required contributions
In general
The minimum required contribution for a plan year for a
single-employer defined benefit plan generally depends on a
comparison of the value of the plan's assets, reduced by any
prefunding balance or funding standard carryover balance (``net
value of plan assets''),\81\ with the plan's funding target and
target normal cost. The plan's funding target for a plan year
is the present value of all benefits accrued or earned as of
the beginning of the plan year. A plan's target normal cost for
a plan year is generally the present value of benefits expected
to accrue or to be earned during the plan year.
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\81\ The value of plan assets is generally reduced by any
prefunding balance or funding standard carryover balance in determining
minimum required contributions. A prefunding balance results from plan
contributions that exceed the minimum required contributions. A funding
standard carryover balance results from a positive balance in the
funding standard account that applied under the funding requirements in
effect before PPA. Subject to certain conditions, a prefunding balance
or funding standard carryover balance may be credited against the
minimum required contribution for a year, reducing the amount that must
be contributed.
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If the net value of plan assets is less than the plan's
funding target, so that the plan has a funding shortfall
(discussed further below), the minimum required contribution is
the sum of the plan's target normal cost and the shortfall
amortization charge for the plan year (determined as described
below).\82\ If the net value of plan assets is equal to or
exceeds the plan's funding target, the minimum required
contribution is the plan's target normal cost, reduced by the
amount, if any, by which the net value of plan assets exceeds
the plan's funding target.
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\82\ If the plan has obtained a waiver of the minimum required
contribution (a funding waiver) within the past five years, the minimum
required contribution also includes the related waiver amortization
charge, that is, the annual installment needed to amortize the waived
amount in level installments over the five years following the year of
the waiver.
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Shortfall amortization charge
The shortfall amortization charge for a plan year is the
sum of the annual shortfall amortization installments
attributable to the shortfall bases for that plan year and the
six previous plan years. Generally, if a plan has a funding
shortfall for the plan year, a shortfall amortization base must
be established for the plan year.\83\ A plan's funding
shortfall is the amount by which the plan's funding target
exceeds the net value of plan assets. The shortfall
amortization base for a plan year is: (1) the plan's funding
shortfall, minus (2) the present value, determined using the
segment interest rates (discussed below), of the aggregate
total of the shortfall amortization installments that have been
determined for the plan year and any succeeding plan year with
respect to any shortfall amortization bases for the six
previous plan years. The shortfall amortization base is
amortized in level annual installments (``shortfall
amortization installments'') over a seven-year period beginning
with the current plan year and using the segment interest rates
(discussed below).\84\
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\83\ If the value of plan assets, reduced only by any prefunding
balance if the employer elects to apply the prefunding balance against
the required contribution for the plan year, is at least equal to the
plan's funding target, no shortfall amortization base is established
for the year.
\84\ Under PRA 2010, employers were permitted to elect to use one
of two alternative extended amortization schedules for up to two
``eligible'' plan years during the period 2008-2011. The use of an
extended amortization schedule has the effect of reducing the amount of
the shortfall amortization installments attributable to the shortfall
amortization base for the eligible plan year. However, the shortfall
amortization installments attributable to an eligible plan year may be
increased by an additional amount, an ``installment acceleration
amount,'' in the case of employee compensation exceeding $1 million,
extraordinary dividends, or stock redemptions within a certain period
of the eligible plan year.
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The shortfall amortization base for a plan year may be
positive or negative, depending on whether the present value of
remaining installments with respect to amortization bases for
previous years is more or less than the plan's funding
shortfall. If the shortfall amortization base is positive (that
is, the funding shortfall exceeds the present value of the
remaining installments), the related shortfall amortization
installments are positive. If the shortfall amortization base
is negative, the related shortfall amortization installments
are negative. The positive and negative shortfall amortization
installments for a particular plan year are netted when adding
them up in determining the shortfall amortization charge for
the plan year, but the resulting shortfall amortization charge
cannot be less than zero (that is, negative amortization
installments may not offset normal cost).
If the net value of plan assets for a plan year is at least
equal to the plan's funding target for the year, so the plan
has no funding shortfall, any shortfall amortization bases and
related shortfall amortization installments are eliminated.\85\
As indicated above, if the net value of plan assets exceeds the
plan's funding target, the excess is applied against target
normal cost in determining the minimum required contribution.
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\85\ Any amortization base relating to a funding waiver for a
previous year is also eliminated.
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Interest rate used to determine target normal cost and funding target
The minimum funding rules for single-employer plans specify
the interest rates and certain other actuarial assumptions that
must be used in determining the present value of benefits for
purposes of a plan's target normal cost and funding target.
Present value is generally determined using three interest
rates (``segment'' rates), each of which applies to benefit
payments expected to be made from the plan during a certain
period.\86\ The first segment rate applies to benefits
reasonably determined to be payable during the five-year period
beginning on the first day of the plan year; \87\ the second
segment rate applies to benefits reasonably determined to be
payable during the 15-year period following the initial five-
year period; and the third segment rate applies to benefits
reasonably determined to be payable after the end of the 15-
year period. Under the funding rules as enacted in PPA (``PPA''
rules), each segment rate is a single interest rate determined
monthly by the Secretary of the Treasury, on the basis of a
corporate bond yield curve, taking into account only the
portion of the yield curve based on corporate bonds maturing
during the particular segment rate period. The corporate bond
yield curve used for this purpose reflects the average, for the
24-month period ending with the preceding month, of yields on
investment grade corporate bonds with varying maturities and
that are in the top three quality levels available. The
Internal Revenue Service (``IRS'') publishes the segment rates
each month.
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\86\ Solely for purposes of determining minimum required
contributions, in lieu of the segment rates, an employer may elect to
use interest rates on a yield curve based on the yields on investment
grade corporate bonds for the month preceding the month in which the
plan year begins (that is, without regard to the 24-month averaging
described above) (``monthly yield curve''). If an election to use a
monthly yield curve is made, it cannot be revoked without IRS approval.
\87\ Subject to an exception for small plans with no more than 100
participants, the annual valuation date for a plan must be the first
day of the plan year. Thus, except for small plans with valuation dates
other than the first day of the plan year, the period for which the
first segment rate applies begins on the valuation date.
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Under MAP-21, for plan years beginning after December 31,
2011, a segment rate determined under the PPA rules is adjusted
if it falls outside a specified percentage range of the average
segment rates for a preceding period. In particular, if a
segment rate determined under the PPA rules is less than the
applicable minimum percentage in the specified range, the
segment rate is adjusted upward to match the minimum
percentage. If a segment rate determined under the PPA rules is
more than the applicable maximum percentage in the specified
range, the segment rate is adjusted downward to match the
maximum percentage. For this purpose, an average segment rate
is the average of the segment rates determined under the PPA
rules for the 25-year period ending September 30 of the
calendar year preceding the calendar year in which the plan
year begins. The Secretary is to determine average segment
rates on an annual basis and may prescribe equivalent rates for
any years in the 25-year period for which segment rates
determined under the PPA rules are not available. The Secretary
is directed to publish the average segment rates each month.
The specified percentage range (that is, the range from the
applicable minimum percentage to the applicable maximum
percentage) for a plan year is determined by reference to the
calendar year in which the plan year begins as follows:
90 percent to 110 percent for 2012,
85 percent to 115 percent for 2013,
80 percent to 120 percent for 2014,
75 percent to 125 percent for 2015, and
70 percent to 130 percent for 2016 or later.
Funding-related benefit restrictions
Special rules may apply to a plan if its funding target
attainment percentage is below a certain level.\88\ A plan's
funding target attainment percentage for a plan year is the
ratio, expressed as a percentage, that the net value of plan
assets bears to the plan's funding target for the year. Because
a plan's funding target is a component of the plan's funding
target attainment percentage, the interest rate used in
determining the plan's funding target generally applies also in
determining the plan's funding target attainment
percentage.\89\
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\88\ For example, funding target attainment percentage is used to
determine whether a plan is in ``at-risk'' status, so that special
actuarial assumptions (``at-risk assumptions'') must be used in
determining the plan's funding target and target normal cost. A plan is
in at risk status for a plan year if, for the preceding year: (1) the
plan's funding target attainment percentage, determined without regard
to the at-risk assumptions, was less than 80 percent, and (2) the
plan's funding target attainment percentage, determined using the at-
risk assumptions (without regard to whether the plan was in at-risk
status for the preceding year), was less than 70 percent. A similar
test applies in order for an employer to be permitted to apply a
prefunding balance against its required contribution. That is, for the
preceding year, the ratio of the value of plan assets (reduced by any
prefunding balance) must be at least 80 percent of the plan's funding
target (determined without regard to the at-risk rules).
\89\ The adjustments to the segment rates under MAP-21 do not apply
for certain other purposes for which the segment rates are used, for
example, in calculating the limits on deductible contributions to
single-employer defined benefit plans under section 404.
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Restrictions on benefit increases, certain types of benefit
payments (``prohibited payments'') and benefit accruals
(collectively referred to as ``benefit restrictions'') may
apply to a plan if the plan's adjusted funding target
attainment percentage is below a certain level.\90\ The plan's
adjusted funding target attainment percentage is determined in
the same way as its funding target attainment percentage,
except that the net value of plan assets and the plan's funding
target are both increased by the aggregate amount of purchases
of annuities for employees, other than highly compensated
employees, made by the plan during the two preceding plan
years. Although anti-cutback rules generally prohibit
reductions in benefits that have already been earned under a
plan,\91\ reductions required to comply with the benefit
restrictions are permitted.
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\90\ Code secs. 401(a)(29) and 436 and ERISA sec. 206(g).
\91\ Code sec. 411(d)(6) and ERISA sec. 204(g).
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Under these rules, a prohibited payment generally means (1)
any payment in excess of the monthly benefit amount paid under
a single life annuity (plus any social security supplement), or
(2) any payment for the purchase of an irrevocable commitment
from an insurer to pay benefits. Prohibited payments generally
may not be made if the plan's adjusted funding target
attainment percentage is less than 60 percent. If a plan's
adjusted funding target attainment percentage is at least 60
percent, but less than 80 percent, prohibited payments may be
made, but subject to limits. In addition, prohibited payments
may not be made during any period in which the plan sponsor is
a debtor in a bankruptcy proceeding under Federal or State law
unless the plan's adjusted funding target attainment percentage
is at least 100 percent.
Annual funding notice
The plan administrator of a single-employer defined benefit
plan must provide an annual funding notice to each participant
and beneficiary, each labor organization representing such
participants or beneficiaries, and the Pension Benefit Guaranty
Corporation (``PBGC'').\92\ In addition to the information
required to be provided in all funding notices, in the case of
a single-employer defined benefit plan, the notice must include
(1) the plan's funding target attainment percentage for the
plan year to which the notice relates and the two preceding
plan years, (2) the value of the plan's assets and benefit
liabilities (that is, the present value of benefits owed under
the plan) for the plan year and the two preceding years,
determined in the same manner as under the funding rules, and
(3) the value of the plan's assets and benefit liabilities as
of the last day of the plan year to which the notice relates,
determined using the fair market value of plan assets (rather
value determined under the funding rules) and, in computing
benefit liabilities, the interest rates used in computing
variable-rate PBGC premiums.\93\
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\92\ ERISA sec. 101(f), originally enacted by section 103 of the
Pension Funding Equity Act of 2004, Pub. L. No. 108-218. Annual funding
notice requirements, with some differences, apply also to multiemployer
and multiple-employer plans.
\93\ In applying the funding rules, the value of plan assets may be
determined on the basis of average fair market values over a period of
up to 24 months. PBGC variable-rate premiums are based on a plan's
unfunded vested benefit liabilities, computed using the first, second
and third segment rates as determined under the PPA rules (without
adjustments under MAP-21), but based on a monthly corporate bond yield
curve, rather than a yield curve reflecting average yields for a 24-
month period.
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Under MAP-21, additional information must be included in a
single-employer plan's annual funding notice in the case of an
applicable plan year. For this purpose, an applicable plan year
is any plan year beginning after December 31, 2011, and before
January 1, 2015, for which (1) the plan's funding target,
determined using segment rates as adjusted to reflect average
segment rates (``adjusted'' segment rates), is less than 95
percent of the funding target determined without regard to
adjusted segment rates, (2) the plan has a funding shortfall,
determined without regard to adjusted segment rates, greater
than $500,000, and (3) the plan had 50 or more participants on
any day during the preceding plan year. Specifically, the
notice must include (1) a statement that MAP-21 modified the
method for determining the interest rates used to determine the
actuarial value of benefits earned under the plan, providing
for a 25-year average of interest rates to be taken into
account in addition to a two-year average, (2) a statement
that, as a result of MAP-21, the plan sponsor may contribute
less money to the plan when interest rates are at historical
lows, and (3) a table showing, for the applicable plan year and
each of the two preceding plan years,\94\ the plan's funding
target attainment percentage, funding shortfall, and the
employer's minimum required contribution, each determined both
using adjusted segment rates and without regard to adjusted
segment rates.
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\94\ In the case of a preceding plan year beginning before January
1, 2012, only the plan's funding target attainment percentage, funding
shortfall, and the employer's minimum required contribution determined
without regard to adjusted segment rates are required to be provided.
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Reasons for Change
The interest rates used in valuing pension liabilities are
intended to reflect market interest rates. However, interest
rates in recent years have been low compared to average
interest rates over the past 25 years. Recent low interest
rates result in higher values for pension liabilities and
higher required contributions in the near term. MAP-21 modified
the interest rates used in valuing pension liabilities to give
employers the option to effectively spread out the higher
contributions over a longer period of time than would otherwise
have been required. The Congress believed that continued low
interest rates made it appropriate to extend the policy enacted
in MAP-21.
Explanation of Provision
Applicable minimum and maximum percentages and annual funding notice
The provision revises the specified percentage ranges (that
is, the range from the applicable minimum percentage to the
applicable maximum percentage of average segment rates) for
determining whether a segment rate must be adjusted upward or
downward. Under the provision, the specified percentage range
for a plan year is determined by reference to the calendar year
in which the plan year begins as follows:
90 percent to 110 percent for 2012 through
2017,
85 percent to 115 percent for 2018,
80 percent to 120 percent for 2019,
75 percent to 125 percent for 2020, and
70 percent to 130 percent for 2021 or later.
In addition, for purposes of the additional information
that must be provided in a funding notice for an applicable
plan year, an applicable plan year includes any plan year that
begins after December 31, 2011, and before January 1, 2020, and
that otherwise meets the definition of applicable plan year.
Prohibited payments in bankruptcy
Under the provision, the adjusted segment rates do not
apply for purposes of whether prohibited payments may be made
from a plan during a period in which the plan sponsor is a
debtor in a bankruptcy proceeding under Federal or State law,
that is, for purposes of determining whether the plan's
adjusted funding target attainment percentage is at least 100
percent. Thus, the plan's adjusted funding target attainment
percentage, determined without regard to the adjusted segment
rates, must be at least 100 percent in order for prohibited
payments to be made.
Periods for determining segment rates
The provision revises the period of benefit payments to
which the segment rates (or adjusted segment rates) apply.
Under the provision, the first rate applies to benefits
reasonably determined to be payable during the five-year period
beginning on the plan's valuation date (rather than the first
day of the plan year as under present law); the second segment
rate applies to benefits reasonably determined to be payable
during the 15-year period following the initial five-year
period; and the third segment rate applies to benefits
reasonably determined to be payable after the end of the 15-
year period.\95\
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\95\ The provision does not change the requirement that the
valuation date for plans other than certain small plans must be the
first day of the plan year. Thus, the provision does not change these
periods for plans for which the valuation date must be the first day of
the plan year.
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Effective Date
The provisions relating to the applicable minimum and
maximum percentages and periods for determining segment rates
are generally effective for plan years beginning after December
31, 2012. Under a special rule, an employer may elect, for any
plan year beginning before January 1, 2014, not to have these
provisions apply either (1) for all purposes for which the
provisions would otherwise apply, or (2) solely for purposes of
determining the plan's adjusted funding target attainment
percentage in applying the benefit restrictions for that year.
A plan will not be treated as failing to meet the requirements
of the anti-cutback rules solely by reason of an election under
the special rule.
The provision relating to prohibited payments in bankruptcy
generally applies to plan years beginning after December 31,
2014, or, in the case of a plan maintained pursuant to one or
more collective bargaining agreements, to plan years beginning
after December 31, 2015. If certain requirements are met, a
plan amendment made pursuant to the provision may be
retroactively effective, the plan will be treated as being
operated in accordance with its terms during the period before
the amendment, and the plan will not be treated as failing to
meet the requirements of the anti-cutback rules solely by
reason of the amendment. In order for this treatment to apply,
the amendment must be made pursuant to the provision (or
pursuant to any regulation issued by the Secretary or the
Secretary of Labor under the provision), and the amendment must
be made by the last day of the first plan year beginning on or
after January 1, 2016, or such later date as the Secretary
prescribes. In addition, the plan must be operated as if the
plan amendment were in effect during the period (1) beginning
on the date the provision (or regulation) takes effect (or, in
the case of a plan amendment not required by the provision or
regulation, the effective date specified in the plan), and (2)
ending on the last day of the first plan year beginning on or
after January 1, 2016, or such later date as the Secretary
prescribes (or, if earlier, the date the amendment is adopted).
The amendment must also apply retroactively for that period.
D. Extension of Customs User Fees (sec. 2004 of the Act and sec.
58c(j)(3) of Title 19 of the United States Code)
Present Law
Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (``COBRA'') authorizes the Secretary
of the Treasury to collect passenger and conveyance processing
fees and the merchandise processing fees. Section 412 of the
Homeland Security Act of 2002 authorizes the Secretary of the
Treasury to delegate such authority to the Secretary of
Homeland Security. COBRA has been extended on several
occasions. The current authorization for the collection of the
passenger and conveyance processing fees is through September
30, 2023. The current authorization for the collection of the
merchandise processing fee is through September 30, 2023.
Reasons for Change
The Congress believed it was appropriate to extend the
specified Customs user fees.
Explanation of Provision
The provision extends the passenger and conveyance
processing fees and the merchandise processing fee authorized
under Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (``COBRA'') through September 30,
2024.
Effective Date
The provision is effective on the date of enactment (August
8, 2014).
PART EIGHT: TRIBAL GENERAL WELFARE EXCLUSION ACT OF 2014 (PUBLIC LAW
113-168)\96\
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\96\ H.R. 3043. The House passed H.R. 3043 on September 16, 2014.
The Senate passed the bill without amendment on September 18, 2014. The
President signed the bill on September 26, 2014.
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A. Indian General Welfare Benefits (sec. 2 of the Act and new sec. 139E
of the Code)
Present Law
Except as otherwise provided under the Code, gross income
means all income from whatever source derived. The general
welfare doctrine excludes certain payments from gross income.
Excludable payments generally consist of payments: (1) made
from a governmental fund, (2) for the promotion of general
welfare (on the basis of the need of the recipient), and (3)
that do not represent compensation for services. Examples of
excludable benefits include disaster relief, adoption
assistance, housing and utility subsidies for low income
persons, and government benefits paid to the blind.
Prior to 2012, there was some uncertainty concerning the
application of the general welfare doctrine to certain benefits
provided by Indian tribes to their members. Benefits that have
been scrutinized by the IRS include payments for housing,
cultural, education, and elder programs provided by Indian
tribal governments. The issue is whether the tribal governments
can provide such benefits tax-free to their members because
they are addressing a social welfare need, without considering
the financial need of the members. In response to requests from
tribes to provide guidance on this issue, the IRS issued Notice
2012-75 and Revenue Procedure 2014-35 (herein collectively
referred to as ``Rev. Proc. 2014-35''),\97\ which provides safe
harbors under which the IRS will presume that the individual
need requirement of the general welfare exclusion is met for
benefits provided under certain Indian tribal governmental
programs.
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\97\ Notice 2012-75, 2012-51 I.R.B. 715; Rev. Proc. 2014-35, 2014-
26 I.R.B. 1110.
---------------------------------------------------------------------------
Explanation of Provision
The provision contains similar requirements to Rev. Proc.
2014-35 in terms of which benefits would qualify for exclusion
under the general welfare doctrine, including that the benefits
(1) are provided pursuant to a specific Indian tribal
government program, (2) are available to any tribal member who
meets certain guidelines, (3) are for the promotion of general
welfare, (4) are not lavish or extravagant, and (5) are not
compensation for services. The Act, however, does not provide
specific examples of programs under which benefits would
qualify for exclusion.
The provision requires the Secretary of the Treasury
(``Secretary'') to establish a Tribal Advisory Committee to
advise on matters relating to the taxation of Indians. In
consultation with the Committee, the Act requires the Secretary
to establish and require training of IRS agents on Federal
Indian law and training of tribal financial officers about the
Act. The provision also requires the Secretary to suspend
audits and examinations of Indian tribal governments and tribe
members relating to the general welfare exclusion until this
education has been completed. The Secretary may waive interest
and penalties to the extent those penalties relate to excluding
a payment under the general welfare exclusion.
Effective Date
The provision applies to taxable years for which the tribal
member's refund statute of limitations period has not expired.
The provision contains a one-year waiver of the refund statute
of limitations period in the event that the period expires
before the end of the one-year period beginning on the date of
enactment (September 26, 2014).
PART NINE: CONSOLIDATED AND FURTHER CONTINUING APPROPRIATIONS ACT, 2015
(PUBLIC LAW 113-235) \98\
DIVISION M--EXPATRIATE HEALTH COVERAGE CLARIFICATION ACT OF 2014
A. Treatment of Expatriate Health Plans under ACA (sec. 3 of the Act)
Present Law
Affordable Care Act
The Patient Protection and Affordable Care Act (``PPACA'')
\99\ and the Health Care and Education Reconciliation Act of
2010 (``HCERA''),\100\ enacted in March, 2010, are collectively
referred to as the Affordable Care Act (``ACA''). The ACA made
various changes to the law with respect to health insurance
coverage in the individual and group markets and the law with
respect to group health plans. The changes to the individual
and group health insurance markets include, for example, the
establishment of American Health Benefit Exchanges, mandatory
community rating in health insurance premiums for the
individual and small group market, guaranteed issue for
purchasers of individual health insurance plans and insured
group health plans, and a prohibition against preexisting
condition limitations in health insurance plans, including
group health plans. The ACA also requires individuals to
maintain minimum essential health coverage and applicable large
employers to offer minimum essential coverage to their
employees. Finally, the ACA imposes new fees and excise taxes,
including for example, an annual fee on health insurance
providers and, effective for 2018, an excise tax on high cost
employer-sponsored health coverage.
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\98\ H.R. 83 (a bill relating to insular areas and freely
associated states energy) passed the House on September 15, 2014. The
bill passed the Senate with an amendment on September 18, 2014. The
House passed the bill with an amendment on December 11, 2014. The
Senate agreed to the House amendment on December 13, 2014. The
President signed the bill on December 16, 2014.
\99\ Pub. L. No. 111-148
\100\ Pub. L. No. 111-152.
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Requirements for group health plans and individual insurance
Rules for group health plans in effect before the enactment
of the ACA
Prior to the enactment of ACA, an employer was not required
to offer its employees coverage under a group health plan, but
any coverage offered was required to satisfy certain
requirements. A group health plan is a plan, including a self-
insured plan, of, or contributed to by, an employer or employee
organization to provide health care to the employees, former
employees, the employer, others associated or formerly
associated with the employer in a business relationship, or
their families.\101\
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\101\ Sec. 5000(b)(1). By definition, a group health plan is a plan
providing employment-related health benefits.
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The requirements for group health plans in effect prior to
the enactment of ACA include limitations on exclusions on
benefits for preexisting conditions, prohibition on
discrimination against individuals based on health status or
genetic information, guaranteed renewability of an employer's
participation in a multiemployer plan (generally a plan
providing benefits under collective bargaining agreements to
employees of two or more unrelated employers) or multiple-
employer welfare arrangement (generally a plan providing
benefits to employees of two or more unrelated employers, but
not under collective bargaining agreements), specified benefits
for mothers and newborns, mental health parity, and coverage
for students on medical leave of absence from school.\102\
Compliance with these requirements is enforced through an
excise tax.\103\ These requirements continue to apply to group
health plans after enactment of ACA. However, if one of these
pre-ACA requirement conflicts with an ACA requirement, the ACA
requirement applies.\104\
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\102\ These requirements for group health plans are contained in
Chapter 100 of the Code, sections 9801 et seq. Certain group health
plans (e.g., governmental plans and plans covering fewer than two
active employees) and certain types of coverage are exempt from these
Code requirements. Parallel requirements generally apply to group
health plans of private employers under part 7 of Title I of the
Employee Retirement Income Security Act of 1974 (``ERISA''), 29 U.S.C.
sec. 1181 et seq., to group health plans of State and local government
employers under Title XXVII of the Public Health Service Act (the
``PHSA''), 42 U.S.C. 300gg et seq., and to health insurance issued in
connection with group health plans under ERISA and the PHSA. Mirror
definitions of the term group health plan apply for purposes of ERISA
and the PHSA. This definition is similar to the definition under
section 5000(b)(1) of the Code. Under ERISA and the PHSA, a group
health plan is an employee welfare benefit plan established or
maintained by an employer or employee organization, or both, that
provides medical care for participants or their dependents directly or
through insurance, or otherwise. Similar requirements apply also under
the Federal Employees Health Benefits Program.
\103\ Sec. 4980D.
\104\ Sec. 9815.
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Additional requirements for group health plans and
individual health coverage added by the ACA
The ACA amended the PHSA to add requirements to group
health plans and individual health insurance coverage,\105\
that, subject to certain exceptions, apply under the Code and
ERISA to group health plans by cross-reference to the PHSA
provisions.\106\ Some of the additional requirements are
generally effective in 2010, specifically for plan years
beginning on or after September 23, 2010 (six months after
enactment of PPACA). Other requirements added by the ACA are
effective beginning in 2014, specifically for plan years
beginning on or after January 1, 2014.
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\105\ The Centers for Medicare and Medicaid Services (``CMS'') sent
letters, dated July 16, 2014, to the insurance commissioners of each of
the territories informing them that the Department of Health and Human
Service has determined that certain ACA requirements in the PHSA do not
apply to individual and group health insurance issuers in the United
States territories, for example, guaranteed availability, community
rating, medical loss ratio, and essential health benefits, but that the
group health plan rules generally do apply to the territories. The
letters indicated that the determination is based on the definition of
``state'' in Title I of the ACA. Section 1304(d) provides that, for
purposes of title I of the ACA, state is defined as the 50 States and
the District of Columbia, but the application of the group health plan
rules to the territories is not based on this definition.The letters
are available at: http://www.cms.gov/CCIIO/Resources/ Letters/
Downloads/letter-to-Francis.pdf;
http://www.cms.gov/CCIIO/Resources/Letters/Downloads/letter-to-
Ilagan.pdf;
http://www.cms.gov/CCIIO/Resources/ Letters/Downloads/letter-to-
Weyne.pdf;
http://www.cms.gov/CCIIO/Resources/ Letters/Downloads/letter-to-
Tanuvasa.pdf;
http://www.cms.gov/CCIIO/Resources/ Letters/Downloads/letter-to-
Igisomar.pdf.
\106\ Secs. 1001-1004, 1201, 1255 of PPACA, as amended by sections
10101 and 10103 of PPACA and section 2301(b) of HCERA. These
requirements are cross-referenced in section 9815 and ERISA section
716.
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The additional requirements under the ACA for group health
plans and individual health insurance coverage (as applicable)
are:
Required coverage of adult children up to
age 26 if the plan provides dependent coverage of
children, but a plan is not required to cover a child
of a child receiving dependent coverage;
Required coverage of preventive health
services with no cost-sharing (i.e., deductibles and
co-pays);
No lifetime limits or annual limits on
benefits;
No preexisting condition exclusions, and no
waiting periods of more than 90 days;
Guaranteed availability and renewability of
coverage;
Setting of premiums without regard to health
status (commonly referred to as ``community rating'')
and provision of essential health benefits; \107\
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\107\ These requirements apply to individual insurance and
insurance offered in the small group market, which, under section
1304(a)(3) and (b)(2) of PPACA generally means insurance for a group
health plan of an employer with an average of at least one but not more
than 100 employees.
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Prohibition on discrimination under an
insured group health plan in favor of highly
compensated individuals; \108\
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\108\ This ACA provision does not apply to self-insured health
plans, which, under Code section 105(h), have been subject to
nondiscrimination requirements since before ACA. These rules prohibit
such a plan from discriminating (both as to eligibility for coverage
and as to benefits provided under the plan) in favor of highly
compensated individuals. Under IRS Notice 2011-1, 2011-2 I.R.B. 259,
compliance with the ACA nondiscrimination prohibition for insured plans
is not required until regulations or other guidance has been issued.
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Additional choice of health care providers
and access to certain services;
Use of a uniform explanation of coverage and
standardized definitions (commonly referred to as a
summary of benefits and coverage or ``SBC'' and a
uniform glossary);
Required appeals process for benefit
denials, including an internal appeal and external
review;
Prohibition on the rescission of coverage,
except in the case of fraud or intentional
misrepresentation of material fact, and required
advance notice of cancellation of coverage;
Premium rebates for purchasers of health
insurance (not self-insured coverage) unless a
specified percentage of premiums is spent on health
care and activities that improve health care quality
(commonly referred to as medical loss ratio or ``MLR''
rule); \109\
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\109\ The MLR is a measurement that measures the percentage of
total premiums that insurance companies spend on health care and
quality initiatives, and not on administration, marketing and profit.
If a health insurer does not spend at least 80 percent of the premiums
(or 85 percent in the case of the large group market) it receives on
health care services and activities to improve health care quality, the
insurer must rebate the difference. A special rule applies in
calculating the MLR for expatriate policies. Issuers of expatriate
policies apply a special circumstances adjustment to the numerator of
their MLR by multiplying the total of the incurred claims plus
expenditures for activities that improve health care quality by a
factor of two beginning with the 2012 MLR reporting year. For purpose
of this MLR calculation, expatriate policies are policies that provide
coverage for employees, substantially all of whom are: working outside
of their country of citizenship; working outside of their country of
citizenship and outside the employer's country of domicile; or
individuals who are not United States citizens and who are working in
their home country.
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Access to additional data about the
particular health coverage, such as claims denials;
Statutory standards for programs to promote
health or prevent disease (commonly referred to as
``wellness'' programs);
Consistent coverage for individuals
participating in approved clinical trials; and
Consistent treatment of health care
providers.
Temporary relief from ACA group health plan rules for
expatriate plans
For plan years ending on or before December 31, 2015, under
transitional relief under Treasury guidance, expatriate health
plans are treated as satisfying the group health plan
requirements added by ACA, provided the group health plan
continues to satisfy the group health plan requirements in
effect prior to the enactment of ACA.\110\ For purposes of this
transitional relief, an expatriate health plan is an insured
group health plan with respect to which enrollment is limited
to primary insureds who reside outside of their home country
for at least six months of the plan year (or across two
consecutive plans years) and any covered dependents, and its
associated group health insurance coverage.\111\
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\110\ FAQs about the Affordable Care Act Implementation (Part
XIII), prepared by the Departments of Labor (``DOL''), Health and Human
Services (``HHS'') and the Treasury (``Treasury''), March 8, 2013, and
available at http://www.dol.gov/ebsa/faqs/faq-aca13.html.
\111\ Q&A-6 of Frequently Asked Questions about the Affordable Care
Implementation (Part XVIII) and Mental Health Parity Implementation,
prepared issued by DOL, HHS, and Treasury, January 9, 2014, and
available at: http://www.dol.gov/ebsa/faqs/faq-aca18.html.
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Annual fee on health insurance providers
Effective for 2014, an annual fee applies to any covered
entity engaged in the business of providing health insurance
with respect to United States (``U.S.'') health risks.\112\ The
aggregate annual fee for all covered entities is the applicable
amount. The applicable amount is $8 billion for calendar year
2014, $11.3 billion for calendar years 2015 and 2016, $13.9
billion for calendar year 2017, and $14.3 billion for calendar
year 2018. For calendar years after 2018, the applicable amount
is indexed to the rate of premium growth.
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\112\ Sec. 9010 of PPACA.
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The aggregate annual fee is apportioned among the providers
based on a ratio designed to reflect relative market share of
U.S. health insurance business. For each covered entity, the
fee for a calendar year is an amount that bears the same ratio
to the applicable amount as (1) the covered entity's net
premiums written during the preceding calendar year with
respect to health insurance for any U.S. health risk, bears to
(2) the aggregate net written premiums of all covered entities
during such preceding calendar year with respect to such health
insurance.
Tax on individuals without minimum essential coverage
Requirement to maintain coverage
Effective for 2014, the ACA added a requirement to the Code
that individuals be covered by a health plan that provides at
least minimum essential coverage or be subject to a tax \113\
for failure to maintain the coverage. If an individual is a
dependent \114\ of another taxpayer, the other taxpayer is
liable for any tax for failure to maintain the required
coverage with respect to the individual. The tax is imposed for
any month that an individual does not have minimum essential
coverage, unless the individual qualifies for an exemption for
the month.\115\
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\113\ Section 5000A.
\114\ Sec. 152.
\115\ Exemptions from the requirement to maintain minimum essential
coverage are provided for the following: (1) an individual for whom
coverage is unaffordable because the required contribution exceeds
eight percent of household income, (2) an individual with household
income below the income tax return filing threshold under section
6012(a), (3) a member of an Indian tribe, (4) a member of certain
recognized religious sects or a health sharing ministry, (5) an
individual with a coverage gap for a continuous period of less than
three months, and (6) an individual who is determined by the Secretary
of Health and Human Services to have suffered a hardship with respect
to the capability to obtain coverage.
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Minimum essential coverage
Minimum essential coverage includes government-sponsored
programs, eligible employer-sponsored plans, plans in the
individual market, grandfathered group health plans and
grandfathered health insurance coverage, and other coverage as
recognized by the Secretary of HHS in coordination with the
Secretary of the Treasury. Certain individuals present or
residing outside of the U.S.\116\ and bona fide residents of
territories of the U.S.\117\ are deemed to maintain minimum
essential coverage.
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\116\ This rule applies to any month that occurs during a period
described in section 911(d)(1)(A) or (B) which is applicable to an
individual. Such periods include: (1) for a United States citizen, an
uninterrupted period which includes an entire taxable year during which
the individual is a bona fide resident of a foreign country or
countries, and (2) for a United States citizen or resident, a period of
12 consecutive months during which the individual is present in a
foreign country at least 330 full days.
\117\ Bona fide residence in a territory is determined under
section 937(a). For this purpose, the territories include Puerto Rico,
Guam, the Northern Marianna Islands, American Samoa, and United States
Virgin Islands.
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Minimum essential coverage does not include coverage that
consists of certain excepted benefits.\118\ Excepted benefits
include: (1) coverage only for accident, or disability income
insurance; (2) coverage issued as a supplement to liability
insurance; (3) liability insurance, including general liability
insurance and automobile liability insurance; (4) workers'
compensation or similar insurance; (5) automobile medical
payment insurance; (6) credit-only insurance; (7) coverage for
on-site medical clinics; and (8) other similar insurance
coverage, specified in regulations, under which benefits for
medical care are secondary or incidental to other insurance
benefits. Other excepted benefits that do not constitute
minimum essential coverage if offered under a separate policy,
certificate or contract of insurance include long term care,
limited scope dental and vision benefits, coverage for a
disease or specified illness, hospital indemnity or other fixed
indemnity insurance or Medicare supplemental health insurance.
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\118\ Sec. 2791(c)(1)-(4) of PHSA (42 U.S.C. sec. 300gg-91(c)(1-
4)). A parallel definition of excepted benefits is provided in section
9832(c)(1)-(4).
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Tax on failure to maintain minimum essential coverage
The tax for failure to maintain minimum essential coverage
for any calendar month is calculated as one-twelfth of the tax
calculated as an annual amount. The annual amount is equal to
the greater of the flat dollar amount or the excess income
amount. The flat dollar amount is the lesser of sum of the
individual annual dollar amounts for the members of the
taxpayer's family and 300 percent of adult individual dollar
amount. The excess income amount is a specified percentage of
the excess of the taxpayer's household income for the taxable
year over the threshold amount of income required for income
tax return filing for that taxpayer. The total annual household
payment may not exceed the national average annual premium for
bronze level health plans offered through American Health
Benefit Exchanges that year for the family size. The tax is
phased in over the first three years. The individual adult
annual dollar amount is phased in as follows: $95 for 2014;
$325 for 2015; and $695 in 2016.\119\ For an individual who has
not attained age 18, the individual annual dollar amount is one
half of the adult amount. The specified percentage of income is
phased in as follows: one percent for 2014; two percent in
2015; and 2.5 percent beginning after 2015.
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\119\ For years after 2016, the $695 amount is indexed to CPI-U,
rounded to the next lowest multiple of $50.
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Premium assistance credit
In general
Effective for 2014, the ACA added a refundable tax credit
(the ``premium assistance credit'') to the Code which is
available to eligible individuals and families who purchase
health insurance through an American Health Benefit
Exchange.\120\ The premium assistance credit, which is
refundable and payable in advance directly to the insurer,
subsidizes the purchase of certain health insurance plans
through an American Health Benefit Exchange.\121\
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\120\ Sec. 36B.
\121\ Although the credit is generally payable in advance directly
to the insurer, individuals may choose to pay the total health
insurance premiums out-of-pocket and claim the credit at the end of the
taxable year.
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The premium assistance credit amount is generally the lower
of (1) the premium for the qualified health plan in which the
individual or family enrolls, and (2) the premium for the
second lowest cost silver plan \122\ in the rating area where
the individual resides, reduced by the individual's or family's
share of premiums.
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\122\ Under section 1302(d) of PPACA, a qualified health plan is
categorized by level (bronze, silver, gold or platinum), depending on
its actuarial value, that is the percentage of the plan's share of the
total costs of benefits under the plan. A silver level plan must have
an actuarial value of 70 percent.
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Minimum essential coverage and employer offer of health
insurance coverage
Generally, if an employee is offered minimum essential
coverage \123\ other than through the individual market,
including employer-provided health insurance coverage, the
individual is ineligible for the premium assistance credit.
However, mere eligibility for employer-sponsored minimum
essential coverage does not prevent an individual from being
eligible for the premium assistance credit if the employer-
sponsored coverage is not affordable or does not provide
minimum value. Coverage is affordable for this purpose if the
employee's share of the premium for self-only employer-provided
coverage is 9.5 percent or less of an employee's household
income. A plan provides minimum value for this purpose if the
plan's share of the total allowed cost of provided benefits is
at least 60 percent of such costs.\124\ Actual enrollment in
employer-sponsored minimum essential coverage makes an
individual ineligible for premium assistance credits even if
the coverage is not affordable or does not provide minimum
value.
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\123\ As defined in section 5000A(f).
\124\ Guidance on the calculation of minimum value is provided in
HHS regulations, 45 C.F.R sec. 145. The regulations provide safe harbor
methods for calculating whether a plan with certain standard features
provides minimum value, but a plan containing non-standard features
that are incompatible with the safe harbors may determine minimum value
through an actuarial certification from a member of the American
Academy of Actuaries. Further the regulations provide that a
calculation of minimum value must be made using a standard population
developed by HHS for such use and described summary statistics issued
by HHS. The standard population must reflect the population covered by
self-insured group health plans. Finally, in Notice 2014-69, HHS and
Treasury indicate that they intend to provide in regulations that plans
do not provide minimum value if the plan excludes substantial coverage
for in-patient hospitalization services or physician services (or
both). The notice provides that in the interim employees are not
required to treat a plan not providing these services as providing
minimum value for purposes of eligibility for the premium assistance
credit.
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Shared responsibility for employers
General requirement
Effective for 2014, the ACA also added to the Code
liability for an assessable payment on any applicable large
employer \125\ if one or more of its full-time employees is
certified to the employer as having received a premium
assistance credit \126\ or a cost-sharing reduction \127\ for
health insurance. The amount of the assessable payment depends
on whether the employer offers its full-time employees and
their dependents the opportunity to enroll in minimum essential
coverage under a group health plan sponsored by the
employer.\128\ An employer that offers its full-time employees
the opportunity to enroll in affordable minimum essential
coverage that provides at least minimum value is not subject to
the assessable payment.
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\125\ Sec. 4980H. Notice 2013-45, 2013-31 I.R.B. 116, Part III,
Q&A-2, provides that no assessable payments under section 4980H will be
assessed for 2014. In addition, no assessable payments for 2015 will
apply to applicable large employers that have fewer than 100 full-time
employees (taking into account full-time equivalent employees) and meet
certain other requirements. Section XV.D.6 of the preamble to the final
regulations under section 4980H, 79 Fed. Reg. 8544, 8574-8575, February
12, 2014.
\126\ Sec. 36B.
\127\ Sec. 1402 of the ACA.
\128\ Liability is dependent on one or more full-time employees
receiving a premium assistance credit or cost-sharing reduction, not on
individuals related to employees, such as an employee's spouse or
children.
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An applicable large employer is generally defined as an
employer having an average of at least 50 full-time employees
during the preceding calendar year. For purposes of whether the
employer has at least 50 full-time employees, besides the
number of full-time employees, the employer must include the
number of its full-time equivalent employees for a month,
determined by dividing the aggregate number of hours of service
of employees who are not full-time employees for the month by
120. In addition, in determining whether an employer is an
applicable large employer, members of the same controlled
group, group under common control, and affiliated service group
are treated as a single employer.\129\
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\129\ The rules for determining controlled group, group under
common control, and affiliated service group under section 414(b), (c),
(m) and (o) apply for this purpose.
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Amount of assessable payment
The assessable payment for not offering minimum essential
coverage is imposed monthly and is equal to the total number of
full-time employees of the employer in excess of 30 during the
applicable month (regardless of how many employees receive
premium assistance credits or cost-sharing reductions)
multiplied by one-twelfth of $2,000.\130\ The assessable
payment for offering coverage that is not affordable or does
not provide minimum value is imposed monthly and is equal to
one-twelfth of $3,000 for each full-time employee who receives
a premium assistance credit or reduced cost-sharing.\131\
However, the assessable payment in this case is limited to the
amount of the tax that would apply if the employer did not
offer coverage.
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\130\ Only one 30-employee threshold is allowed when multiple
employers are aggregated and treated as a single employer, such as for
a controlled group of employers.
\131\ For calendar years after 2014, both the $2,000 and $3,000
amount are increased by the percentage by which the average per capita
premium for health insurance coverage in the United States for the
preceding calendar year exceeds the average per capita premium for
calendar year 2013.
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Information reporting added by the ACA
The ACA added certain new information reporting
requirements related to the provision of health coverage. These
include a requirement that employers report the value of
employer-sponsored health coverage on Form W-2 \132\ and
certain reporting requirements related to the enforcement of an
individual's responsibility to maintain minimum essential
coverage and an employer's responsibility to offer its full-
time employees and their dependents the opportunity to enroll
in employer-sponsored minimum essential coverage (``individual
and employer responsibility reporting requirements''). Failure
to comply results in reporting penalties.
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\132\ Notice 2012-9 provides guidance on this reporting
requirement. The notice provides relief from the reporting requirement
in certain situations. For example, in the case of 2012 Forms W-2 (and
later years unless and until further guidance is issued), the notice
provides that an employer is not subject to the reporting requirement
if the employer was required to file fewer than 250 Forms W-2 for the
preceding calendar year. As another example, the notice provides that
an employer that contributes to the cost of health coverage provided
under a multiemployer plan is not required to report that cost on the
Form W-2.
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Reporting related to minimum essential coverage
Effective beginning 2014, the ACA requires that every
person that provides minimum essential coverage to an
individual during a calendar year report certain health
insurance coverage information to the IRS and furnish the same
information to the covered individual.\133\ The persons
required to report are generally health insurance issuers or
carriers for insured coverage, plan sponsors of self-insured
group health plan coverage, and the executive department or
agency that provides coverage under a government-sponsored
program. However, a health insurance issuer is not required to
report coverage in a qualified health plan in the individual
market enrolled in through an American Health Benefit Exchange.
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\133\ Sec. 6055 and Treas. Reg. sec. 1.6055-1 and -2. Pursuant to
Treas. Reg. sec. 1.6055-1(j), and Notice 2013-45, reporting entities
are not subject to penalties for failure to comply with this reporting
requirement for coverage in 2014.
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The information required to be reported includes: (1) the
name, address, and employer identification number (``EIN'') of
the entity required to file the report; (2) the name, address,
and taxpayer identification number (``TIN'') of the primary
insured (or other responsible individual); (3) the name and TIN
of each other individual obtaining coverage under the health
plan; (4) for each covered individual, the months for which,
for at least one day, the individual was enrolled in coverage
and entitled to receive benefits; and (5) any other information
specified in forms or published guidance. In the case of
coverage of an individual by a health insurance issuer under a
group health plan, the report must also include the name,
address, and EIN of the employer sponsoring the plan, whether
the coverage is a qualified health plan enrolled in through the
Small Business Health Options Program (``SHOP'') and the SHOP's
unique identifier.
Reporting related to applicable large employers offering
minimum essential coverage
Effective for 2014, an applicable large employer subject to
the requirement to offer minimum essential coverage to its
employees is required to report certain health insurance
coverage information to the IRS and furnish certain health-
coverage-related statements to its full-time employees.\134\
The information required to be reported to the IRS must include
(1) the name, address and EIN of the applicable large employer;
(2) the name and telephone number of the applicable large
employer's contact, (3) the calendar for which the information
is reported; (4) a verification as to whether the applicable
large employer offered to its full-time employees (and their
dependents) the opportunity to enroll in minimum essential
coverage under an employer-sponsored plan, by calendar month;
(5) the months during the calendar year for which minimum
essential coverage under the plan was available; (6) each full-
time employee's share of the lowest cost monthly premiums
(self-only) for coverage providing minimum value offered to
that full-time employee under an employer-sponsored plan, by
calendar month, (7) the number of full-time employees for each
month during the calendar year; (8) the name, address, and TIN
of each full-time employee during the calendar year and the
months, if any, during which the employee was covered under the
plan; and (9) any other information prescribed in forms,
instructions, or published guidance.
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\134\ Sec. 6056 and Treas. Reg. secs. 301.6056-1 and -2. Pursuant
to Treas. Reg. sec. 301.6056-1(j), and Notice 2013-45, reporting
entities are not subject to penalties for failure to comply with this
reporting requirement for coverage in 2014.
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The information required to be furnished to each full-time
employee is the e-mail address and employer identification
number of the applicable large employer, and the information
required to be reported to the IRS with respect to the full-
time employee.
Time for reporting
The time for filing the return with the IRS and for
furnishing the report to an individual or employee is the same
for the individual and employer responsibility reporting
requirements. For these two reporting requirements, the
information must be provided to individuals or full-time
employees by January 31 and must be filed with the IRS by
February 28 (or in the case of electronic filing by March 31).
An applicable large employer is permitted to combine the
reporting with respect to its full-time employees for both
reporting requirements.
Electronic furnishing of reports to individuals
The information furnished to individuals for both these
reporting requirement may be provided electronically if the
individual affirmatively consents to receiving the information
electronically and certain other requirements are
satisfied.\135\ One of the other requirements is providing the
individual, prior to, or at the time of the consent, a
disclosure statement informing the individual that the
information will be provided in a paper document if the
individual does not consent, the scope and duration of the
consent, the right to withdraw consent, the condition under
which the information will cease to be furnished
electronically, procedures for the individual to update the
information needed to contact the individual, and hardware and
software requirement for receiving the information
electronically.
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\135\ Treas. Reg. secs. 1.6055-2 and 301.6056-2.
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Patient-Centered Outcomes Research Trust Fund Excise Taxes
The ACA imposes excise taxes to fund the Patient-Centered
Outcomes Research Trust Fund (``PCORI Fund taxes'').\136\ These
excise taxes are effective for policy years ending after
September 30, 2012, and before October 1, 2019. For fiscal year
2014, the tax rate for specified health insurance policies is
$2.00 for each policy. For applicable self-insured plans, the
tax rate for fiscal year 2014 is also $2.00.\137\ In both
cases, the tax is determined by applying the applicable rate to
the average number of lives covered under the policy or plan.
After fiscal year 2014, each tax rate is indexed to reflect
projected annual increases in the per capita amount of national
health expenditures.
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\136\ Sec. 4375-4377.
\137\ For fiscal year 2013, a tax rate of $1.00 applied to policies
and plans.
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The taxes are imposed on the issuers of specified health
insurance policies or plan sponsors of applicable self-insured
health plans, including (with certain exceptions) governmental
entities, and Federal programs for providing medical care. The
taxes further are imposed both within the 50 States and the
District of Columbia, and in all U.S. territories.\138\
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\138\ No amount of these taxes is to be covered over to any
territory.
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A specified health insurance policy is an accident or
health insurance policy (including a policy under a group
health plan) that is issued with respect to individuals
residing in the U.S. (including U.S. territories).\139\
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\139\ A specified health insurance policy does not include a policy
substantially all of the benefits of which are excepted benefits under
section 9832(c).
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An applicable self-insured health plan is any plan
providing accident or health coverage if any portion of the
coverage is provided other than through an insurance policy and
such plan is established or maintained by (1) one or more
employers for the benefit of current or former employees, (2)
one or more employee organizations for the benefit of current
or former members, (3) a combination of (1) and (2), and (4)
certain other types of entities. The plan sponsor of an
applicable self-insured health plan is generally (1) in the
case of a plan established or maintained by a single employer,
the employer, and (2) in the case of a plan established or
maintained by an employee organization, the employee
organization.
Excise tax on high cost employer-sponsored health coverage
Effective for 2018, the ACA imposes an excise tax on the
provider of applicable employer-sponsored coverage if the
aggregate cost of the coverage for an employee (including a
former employee, surviving spouse, or any other primary insured
individual) exceeds a threshold amount (``high cost employer-
sponsored health coverage'').\140\ The tax is 40 percent of the
amount by which the aggregate cost exceeds the threshold
amount. For 2018, the annual threshold amount is $10,200 for
self-only coverage and $27,500 for other coverage (such as
family coverage), multiplied by the health cost adjustment
percentage, and then increased by an age and gender adjusted
excess premium amount.\141\
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\140\ Sec. 4980I.
\141\ The threshold is increased for coverage of certain
individuals: qualified retiree and participants in a plan sponsored by
an employer, the majority of whose employee are in a high risk
profession or are lineman for electrical or communication cable lines.
In determining the excess amount with respect to an employee (that is,
the amount by which the cost of employer-sponsored coverage for the
employee exceeds the threshold amount), the aggregate cost of all
employer-sponsored coverage of the employee is taken into account. For
this purpose, the cost of employer-sponsored coverage is generally
determined under rules similar to the rules for determining the
applicable premium for purposes of COBRA continuation coverage, except
that any portion of the cost of coverage attributable to the excise tax
is not taken into account. Cost is determined separately for self-only
coverage and family coverage. Special valuation rules apply to retiree
coverage, certain health FSAs, and contributions to HSAs and Archer
MSAs.
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The excise tax is imposed on the provider of the employer-
sponsored coverage (``coverage provider''). In the case of
insured coverage (i.e., coverage under a policy, certificate,
or contract issued by an insurance company), the health
insurance issuer is liable for the excise tax. In the case of
self-insured coverage, the person that administers the plan
benefits is generally liable for the excise tax. In the case of
employer contributions to an HSA or an Archer MSA, the employer
is liable for the excise tax.
Explanation of Provision
Exemption from ACA for qualified expatriate plans
Under the provision, the provisions of the ACA \142\ do not
apply with respect to the following: expatriate health plans;
employers with respect to expatriate health plans, solely in
their capacity as plan sponsors for expatriate health plans;
and expatriate health insurance issuers with respect to
coverage offered by such issuers under expatriate health plans.
Thus for example, the prohibition against lifetime limits does
not apply to expatriate health plans, employers acting as plan
sponsors with respect to these plans, and expatriate health
insurance issuers with respect to coverage offered by such
issuers under expatriate health plans. Further, for example,
the PCORI Fund taxes do not apply to expatriate health plans.
However, as described below, there are certain ACA provisions
that do apply to expatriate plans, employers in their capacity
as sponsors of expatriate health plans, and health insurance
issuers with respect to expatriate health plans.
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\142\ The exemption from the ACA does not apply to the provisions
of subtitle A of Title II of HCERA, which includes only education
provisions that are not health provisions.
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Qualified expatriate health plans and the requirements for individuals
to maintain and applicable large employers to offer minimum
essential coverage
The provision does not provide an exemption for individuals
from the requirements of the ACA including the requirement that
individuals maintain minimum essential coverage. Further the
provision specifically provides that there is no exemption for
applicable large employers that sponsor expatriate health plans
from the requirement that the employer offer all its full-time
employees the opportunity to enroll in employer-sponsored
minimum essential coverage.
However, the provision specifies that an offer of coverage
under an expatriate health plan under a group health plan is an
offer of employer-sponsored minimum essential coverage and,
thus, if the coverage offered is affordable and provides
minimum value, the employee is not eligible for premium
assistance credits. Further, an employee who enrolls in an
expatriate plan that is provided under a group health plan
satisfies the requirement to have minimum essential coverage
for purposes of the individual responsibility requirement and
is not eligible for the premium assistance credit (even if the
coverage is not affordable or does not provide minimum value).
In the case of individuals who are qualified expatriates
based on their status as members of a group (as described
below), an expatriate plan covering these individuals is deemed
to provide minimum essential coverage based on being a plan in
the individual market, and thus satisfies the requirement to
maintain minimum essential coverage.
Required reporting with respect to qualified expatriate coverage
The exemption from the ACA does not apply to the individual
and employer responsibility reporting requirements added by
ACA, except that statements furnished to individuals with
respect to expatriate health insurance may be provided through
electronic media and the primary insured with respect to
expatriate health insurance is deemed to have consented to
receive the statements in electronic form, unless the
individual explicitly refuses such consent.
Treatment of qualified expatriates and expatriate health plan coverage
under annual fee on health insurance providers
For calendar years after 2015, for purposes of applying the
annual fee on health providers, a qualified expatriate (and any
spouse, dependent, or any other individual enrolled in the
plan) enrolled in an expatriate health plan is not considered a
U.S. health risk. Thus, for calendar years after 2015, the same
amount of fee is assessed but, when the aggregate annual fee is
apportioned among the providers based on a ratio designed to
reflect relative market share of U.S. health insurance
business, coverage under an expatriate health plan is
disregarded in determining both the numerator and the
denominator of the ratio for calculating a provider's share of
the business.
For calendar years 2014 and 2015, coverage under an
expatriate health plan is taken into account if the coverage is
otherwise for a U.S. health risk. However, the amount of the
annual fee assessed on any expatriate health insurance issuer
is limited to the amount which bears the same ratio to the fee
amount determined by the Secretary of the Treasury with respect
to the expatriate health insurance issuer for each of these
calendar years (taking into account the expatriate health
coverage) as (1) the amount of premiums taken into account with
respect to such issuer for each such year, less the amount of
premiums for its expatriate health plans so taken into account,
bears to (2) the amount of premiums taken into account with
respect to such issuer for the year. The fee assessed on any
other issuer remains unchanged for 2014 and 2015. Thus, for
2014 and 2015, the total fees assessed on all issuers are less
than the total otherwise specified in ACA ($8 billion and $11.3
billion, respectively).
Application of high cost employer-sponsored coverage excise tax to
expatriate health coverage
The excise tax on high-cost employer-sponsored coverage
applies to coverage under an employer-sponsored expatriate
health plan for employees who are qualified expatriates because
they are assigned to work in the U.S. temporarily, as described
below. The high-cost employer-sponsored health coverage excise
tax does not apply to employer-sponsored expatriate health plan
coverage for employees who are qualified expatriates because
they are transferred temporarily to the U.S., as described
below.
Definitions
Definition of qualified expatriate
As described below, one of the required standards for
expatriate health plan is that substantially all of the primary
enrollees in such plan (or health coverage under the plan) are
qualified expatriates with respect to such plan or coverage.
Definition of qualified expatriate with respect to a group
health plan
Under the provision, there is a distinction in the
definition of a qualified expatriate under a group health plan
between individuals working in the U.S. temporarily and
individuals working outside the U.S. for certain periods during
a year. For individuals working temporarily in the U.S., a
qualified expatriate is a primary insured in a group health
plan whose skills, qualifications, job duties, or expertise is
of a type that has caused his or her employer to transfer or
assign him or her to the U.S. for a specific and temporary
purpose or assignment tied to his or her employment. For this
purpose, the term transfer means an employer has transferred an
employee to perform services for a branch of the same employer
or a parent, affiliate, franchise, or subsidiary thereof. A
further requirement for an individual working temporarily in
the U.S. is that, in connection with the transfer or
assignment, the primary insured must be reasonably determined
by the plan sponsor to require access to health insurance and
other related services and support in multiple countries, and
is offered other multinational benefits on a periodic basis
(such as tax equalization, compensation for cross border moving
expenses, or compensation to enable the expatriate to return to
their home country). For individuals working outside the U.S.
for periods during the year, a qualified expatriate is a
primary insured who is working outside of the U.S. for a period
of at least 180 days in a consecutive 12-month period that
overlaps with the plan year.
In determining whether a primary insured is a qualified
expatriate, U.S. includes only the 50 States, the District of
Columbia, and Puerto Rico. Thus, for purposes of determining
whether an individual is transferred or assigned temporarily to
the U.S. or is working outside the U.S., the territory of
Puerto Rico is treated as part of the U.S. but the other
territories are not part of the U.S.
Qualified expatriate based on being a member of a group of
similarly situated individuals
A qualified expatriate also includes an individual who is a
member of a group of similarly situated individuals, and the
group is formed for the purpose of traveling or relocating
internationally to service one or more of purposes permitted
for certain tax-exempt organizations,\143\ or similarly
situated organizations or groups (such as students or religious
missionaries). The group must not be formed primarily for the
sale of health insurance coverage. Finally the group must be a
group that the Secretary of Health and Human Services, in
consultation with the Secretary of the Treasury and the
Secretary of Labor, determines requires access to health
insurance and other related services and support in multiple
countries.
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\143\ The tax-exempt organizations are organizations exempt under
sections 501(c)(3) and (4).
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Expatriate health plan
The term expatriate health plan means a group health plan,
health insurance coverage offered in connection with a group
health plan, or health insurance coverage offered to certain
groups of individuals that meets certain standards. All
expatriate health plans must meet the following standards:
Substantially all of the primary enrollees
in such plan or coverage are qualified expatriates with
respect to such plan or coverage. In applying this
standard, an individual shall not be considered a
primary enrollee if the individual is not a national of
the U.S. and the individual resides in the country of
which the individual is a citizen.
Substantially all of the benefits provided
under the plan or coverage are not excepted
benefits.\144\
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\144\ For purposes of the definition of expatriate health plans,
excepted benefits is defined under section 9832(c). This definition
parallels the definition used under section 5000A(f)(3) which (as
discussed above under present law) provides that minimum essential
benefits does not include health insurance coverage which consists of
coverage of excepted benefits.
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If an expatriate health plan or coverage
provides dependent coverage of children, the plan or
coverage must make such dependent coverage available
for adult children until the adult child attains age
26, unless such individual is the child of a child
receiving dependent coverage.\145\
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\145\ This standard for expatriate health coverage is the same as
the ACA requirement for individual and group health plans that provide
dependent coverage of children, as described in present law.
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The plan or coverage must be issued by an
expatriate health plan issuer, or administered by an
administrator, that together with any other person in
the expatriate health plan issuer's or administrator's
controlled group,\146\ has licenses to sell insurance
in more than two countries, and, with respect to such
plan, coverage, or company in the controlled group:
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\146\ For this purpose, controlled group is defined as for purposes
of the annual fee on health insurance issuers.
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a. maintains network provider agreements that
provide for direct claims payments, directly or
through third party contracts, with health care
providers in eight or more countries;
b. maintains call centers, directly or
through third party contracts, in three or more
countries and accepts calls from customers in
eight or more languages;
c. processes (in the aggregate together with
other plans or coverage it issues or
administers) at least $1 million in claims in
foreign currency equivalents each year;
d. makes available (directly or through third
party contracts) global evacuation/repatriation
coverage;
e. maintains legal and compliance resources
in three or more countries; and
f. offers reimbursements for items or
services under such plan or coverage in the
local currency in eight or more countries.
The standards for an expatriate health plan that is a group
health plan or health insurance coverage offered in connection
with a group health plan include the following:
The plan or coverage provides coverage for
inpatient hospital services, outpatient facility
services, physician services, and certain emergency
services (comparable to such emergency services
coverage described in and offered under a service
benefit plan for plan year 2009 offered through the
Federal Employee Health Benefits program \147\ in
multiple countries as follows:
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\147\ This is a plan described in 5 U.S.C. sec. 8903(1) for plan
year 2009.
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a. Under a group health plan for qualified
expatriates temporarily assigned or transferred
to the U.S., both in the U.S. and in the
country or countries from which the individual
was transferred or assigned (accounting for
flexibility needed with existing coverage), and
such other country or countries as the
Secretary of HHS, in consultation with the
Secretary of the Treasury and the Secretary of
Labor, may designate (after taking into account
the barriers and prohibitions to providing
health care services in the countries as
designated).
b. For qualified expatriates working outside
the U.S. for a minimum period, in the country
or countries in which the individual is present
in connection with the individual's employment,
and such other country or countries as the
Secretary of HHS, in consultation with the
Secretary of the Treasury and the Secretary of
Labor, may designate.
The plan sponsor must reasonably believe
that the benefits provided by the expatriate health
plan satisfy a standard at least actuarially equivalent
to required minimum value.\148\
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\148\ This standard incorporates by reference the standard for
minimum value in section 36B that applies for purposes of determining
whether an offer of employer-sponsored coverage causes and an
individual to be ineligible for the premium assistance credit.
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The plan or coverage, and the plan sponsor
or expatriate health insurance issuer with respect to
such plan or coverage, satisfies the requirements for
group health plans in effect before the enactment of
the ACA.\149\
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\149\ The pre-ACA requirements for group health plans would apply
to expatriate group health plans absent this requirement but including
these requirements in the standards for expatriate group health plans
also conditions the exemption from the ACA requirements for an
expatriate group plan on satisfaction of the pre-ACA group health plan
rules.
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The standards for an expatriate health plan that provides
coverage to individuals who are qualified expatriates based on
being members of a group of similarly situated individuals
includes a requirement that the plan or coverage provide
coverage for inpatient hospital services, outpatient facility
services, physician services, and certain emergency services
(comparable to such emergency services coverage described in
and offered under a service benefit plan for plan year 2009
offered through the Federal Employee Health Benefits program)
in the country or countries as the Secretary of HHS, in
consultation with the Secretary of the Treasury and the
Secretary of Labor, may designate. The standards for the
expatriate health coverage for this group also include any pre-
ACA requirements under the PHSA that apply to health insurance
in the individual market.
Other terms used in the provision
A qualified expatriate issuer is a health insurance issuer
that issues expatriate health plans. The terms group health
plan, health insurance coverage, health insurance issuer, and
plan sponsor are defined by reference to the definition of
these terms provided in the PHSA. As described above, the
definitions of group health plan and plan sponsor provided in
the PHSA are generally the same as the definitions for these
terms in ERISA and the Code.
Regulatory authority
Under the provision, the Secretaries of the Treasury, HHS,
and Labor are authorized to promulgate regulations necessary to
carry out this provision, including such rules as may be
necessary to prevent inappropriate expansion of the application
of the exclusions under this provision from the ACA and
applicable regulations, and to amend existing annual reporting
requirements or procedures to include applicable qualified
expatriate health insurers' total number of expatriate plan
enrollees.
Effective Date
The provision is generally effective on the date of
enactment (December 16, 2014) and applies only to expatriate
health plans issued or renewed on or after July 1, 2015.
However, as described above, a special rule applies with
respect to the annual insurance fee for 2014 and 2015.
DIVISION N--OTHER MATTERS
A. Tax Technical Correction to Treatment of Certain Health
Organizations (sec. 2 of the Act and sec. 833 of the Code)
Present Law
Code section 833 provides three rules with respect to
certain health organizations meeting statutory requirements:
(1) the organization is taxable as if it were a stock property
and casualty insurance company; (2) a 25-percent deduction for
certain claims and expenses is allowed with respect to health
business of the organization; and (3) an exception is allowed
for such an organization from the application of the 20-percent
reduction in the deduction for increases in unearned premiums
that applies generally to property and casualty insurance
companies. Code section 833 applies a medical loss ratio
threshold.
Explanation of Provision
First, the technical correction provides that the only
consequences for not meeting the medical loss ratio threshold
are that the 25-percent deduction for claims and expenses and
the exception from the 20-percent reduction in the deduction
for unearned premium reserves are not allowed. The organization
is, however, treated as if it were a stock property and
casualty insurance company. Second, the technical correction
provides that, in calculating the medical loss ratio, the
organization includes both the cost of reimbursement for
clinical services provided to the individuals they insure and
the cost of activities that improve health care quality (not
just the former). This determination is made on an annual basis
and affects the application of the 25-percent deduction for
that year.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2009.
DIVISION O--THE MULTIEMPLOYER PENSION REFORM ACT OF 2014
A. Amendments to Pension Protection Act of 2006
1. Repeal of sunset of PPA funding rules (sec. 101 of the Act, sec. 221
of the Pension Protection Act of 2006, secs. 431-432 of the
Code and secs. 304-305 of ERISA)
Present Law
Multiemployer plans
A multiemployer plan is a plan to which more than one
unrelated employer contributes, that is established pursuant to
one or more collective bargaining agreements, and that meets
other requirements as specified by the Secretary of Labor.\150\
Multiemployer plans are governed by a board of trustees
consisting of an equal number of employer and employee
representatives, referred to as the plan sponsor. In general,
the level of contributions to a multiemployer plan is specified
in the applicable collective bargaining agreements, and the
level of plan benefits is established by the plan sponsor.
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\150\ Sec. 414(f) and ERISA sec. 2(37).
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Like other private defined benefit plans, multiemployer
defined benefit plans are subject to minimum funding
requirements under the Code and ERISA.\151\ An excise tax may
be imposed on the employers maintaining the plan if the funding
requirements are not met.\152\ Certain changes were made to the
funding requirements for multiemployer plans by the Pension
Protection Act of 2006 (``PPA'').\153\ Changes made by PPA are
generally effective for plan years beginning after 2007.
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\151\ Secs. 412 and 431 and ERISA secs. 302 and 304. Additional
rules apply to multiemployer plans that are in reorganization or
insolvent under sections 418-418E and ERISA sections 4241-4245.
\152\ Sec. 4971.
\153\ For further explanation of the funding rules applicable after
PPA, see Part I.D of Joint Committee on Taxation, Present Law and
Background Relating to Qualified Defined Benefit Plans (JCX-99-14),
September 15, 2014, available at www.jct.gov.
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General funding requirements for multiemployer plans
Minimum required contributions
In connection with the funding requirements for a
multiemployer plan, a notional account called a ``funding
standard account'' is maintained, to which specific charges and
credits (including plan contributions) are made for each plan
year the multiemployer plan is maintained. The minimum required
contribution for a plan year is the amount, if any, needed so
that the accumulated credits to the funding standard account as
of that plan year are not less than the accumulated charges
(that is, so the funding standard account does not have a
negative balance). If, as of the close of a plan year,
accumulated charges to the funding standard account exceed
credits, the plan has an ``accumulated funding deficiency''
equal to the amount of the excess. For example, if, as of a
plan year, the balance of charges to the funding standard
account would be $200,000 without any contributions, then a
minimum contribution equal to that amount is required to meet
the minimum funding standard for the year (that is, to prevent
an accumulated funding deficiency). If credits to the funding
standard account exceed charges, a ``credit balance'' results.
The amount of the credit balance, increased with interest, has
the effect of reducing future required contributions.
Funding method; charges and credits to the funding standard
account
In the case of a multiemployer plan, an acceptable
actuarial cost method (referred to as a funding method) must be
used to determine the elements included in its funding standard
account for a year. Generally, a funding method breaks up the
cost of benefits under the plan into annual charges to the
funding standard account consisting of two elements for each
plan year. These elements are referred to as (1) normal cost
and (2) supplemental cost.
The plan's normal cost for a plan year generally represents
the cost of future benefits allocated to the year by the
funding method used by the plan for current employees and,
under some funding methods, for separated employees.
Specifically, it is the amount actuarially determined that
would be required as a contribution by the employer for the
plan year in order to maintain the plan if the plan had been in
effect from the beginning of service of the included employees
and if the costs for prior years had been paid, and all
assumptions (for example, interest and mortality) had been
fulfilled. A plan's normal cost for a plan year is charged to
the funding standard account for that year.
The supplemental cost for a plan year is the cost of future
benefits that would not be met by future normal costs, future
employee contributions, or plan assets. The most common
supplemental cost is that attributable to past service
liability, which represents the cost of future benefits under
the plan (1) on the date the plan is first effective, or (2) on
the date a plan amendment increasing plan benefits is first
effective. Other supplemental costs may be attributable to net
experience losses (for example, worse than expected investment
returns or actuarial experience), losses from changes in
actuarial assumptions, and amounts necessary to make up funding
deficiencies for which a waiver was obtained. Supplemental
costs are amortized (that is, recognized for funding purposes)
over a specified number of years (generally 15 years) by annual
charges to the funding standard account over that period.
Factors that result in a supplemental loss can
alternatively result in a gain that is recognized by annual
credits to the funding standard account over a 15-year
amortization period (in addition to a credit for contributions
made for the plan year). These include a reduction in plan
liabilities as a result of a plan amendment decreasing plan
benefits, net experience gains (for example, better than
expected investment returns or actuarial experience), and gains
from changes in actuarial assumptions.
Extensions of amortization periods and sunset
Before and after PPA, the plan sponsor of a multiemployer
plan may obtain from the Secretary of the Treasury
(``Secretary'') an extension of up to 10 years of the
amortization periods applicable in determining charges to the
funding standard account. The extension may be granted by the
Secretary if the Secretary determines that (1) the extension
would carry out the purposes of ERISA and would provide
adequate protection for participants under the plan and (2) the
failure to permit the extension would (a) result in a
substantial risk to the voluntary continuation of the plan or a
substantial curtailment of pension benefit levels or employee
compensation and (b) be adverse to the interests of plan
participants in the aggregate. The sponsor must also provide
satisfactory evidence that notice of the request, including
certain information, has been provided to plan participants and
beneficiaries, any employee organization representing
participants, and the Pension Benefit Guaranty Corporation
(``PBGC'').
Under PPA, in addition to an amortization period extension
described above, the sponsor of a multiemployer plan certified
as meeting certain criteria may apply for an amortization
period extension of up to five years that is required to be
approved by the Secretary (referred to as an automatic
amortization period extension). Included with the application
must be a certification by the plan's actuary that (1) absent
the extension, the plan would have an accumulated funding
deficiency in the current plan year and any of the nine
succeeding plan years, (2) the sponsor has adopted a plan to
improve the plan's funding status, (3) taking into account the
extension, the plan is projected to have sufficient assets to
timely pay its expected benefit liabilities and other
anticipated expenditures, and (4) the required notice described
above has been provided. The period of any automatic
amortization period extension reduces the 10-year period for
which an extension described above may be granted by the
Secretary. Under PPA, the provision relating to automatic
amortization period extensions does not apply with respect to
any application submitted after December 31, 2014.\154\
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\154\ Sec. 431(d)(1)(C) and ERISA sec. 304(d)(1)(C).
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Shortfall funding method and sunset
Certain plans may elect to determine the required charges
to the funding standard account under the shortfall funding
method. Under this method, the charges are computed on the
basis of an estimated number of units of service or production
for which a certain amount per unit is to be charged. The
difference between the net amount charged under this method and
the net amount that otherwise would have been charged for the
same period is a shortfall loss or gain that is amortized over
subsequent plan years.
In general, the funding method used with respect to a
multiemployer plan may be changed only with approval of the
Secretary. However, under PPA, certain multiemployer plans may
adopt, use or cease using the shortfall funding method and the
adoption, use, or cessation of use is deemed approved by the
Secretary.\155\ Plans are eligible if (1) the plan has not used
the shortfall funding method during the five-year period ending
on the day before the date the plan is to use the shortfall
funding method; and (2) the plan is not operating under an
amortization period extension and did not operate under an
amortization period extension during the five-year period. In
general, plan amendments increasing benefit liabilities of the
plan cannot be adopted while the shortfall funding method is in
use. Under PPA, deemed approval of a multiemployer plan's
adoption, use, or cessation of use of the shortfall funding
method does not apply to plan years beginning after December
31, 2014.\156\
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\155\ Sec. 201(b) of PPA.
\156\ Sec. 221(c) of PPA.
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Additional requirements relating to endangered or critical status \157\
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\157\ Sec. 432 as enacted by sec. 212 of PPA, and ERISA sec. 305,
as enacted by sec. 202 of PPA. The rules relating to endangered and
critical status (including annual certification of status) apply only
to multiemployer plans in effect on July 16, 2006. Thus, any discussion
of these rules in this document applies to multiemployer plans in
effect on July 16, 2006.
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In general
Under PPA, additional funding-related requirements apply to
a multiemployer defined benefit pension plan that is in
endangered or critical status.\158\ In connection with the
endangered and critical rules, not later than the 90th day of
each plan year, the actuary for any multiemployer plan must
certify to the Secretary and to the plan sponsor whether or not
the plan is in endangered or critical status for the plan year.
If a plan is certified as being in endangered or critical
status, notice of endangered or critical status must be
provided within 30 days after the date of certification to plan
participants and beneficiaries, the bargaining parties, the
PBGC and the Secretary of Labor. Additional notice requirements
apply in the case of a plan certified as being in critical
status.
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\158\ Endangered status and critical status are defined in section
432(b)(1) and (2) and ERISA section 305(b)(1) and (2).
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Various requirements apply to a plan in endangered or
critical status, including adoption of and compliance with (1)
a funding improvement plan in the case of a multiemployer plan
in endangered status, and (2) a rehabilitation plan in the case
of a multiemployer plan in critical status. In addition,
restrictions on certain plan amendments, benefit increases, and
reductions in employer contributions apply during certain
periods.
In the case of a multiemployer plan in critical status,
additional required contributions (referred to as employer
surcharges) apply until the adoption of a collective bargaining
agreement that is consistent with the rehabilitation plan. In
addition, employers are relieved of liability for minimum
required contributions under the otherwise applicable funding
rules (and the related excise tax), provided that a
rehabilitation plan is adopted and followed.\159\ Moreover,
subject to notice requirements, some benefits that would
otherwise be protected from elimination or reduction may be
eliminated or reduced in accordance with the rehabilitation
plan.\160\
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\159\ Sec. 4971(g)(1)(A).
\160\ The rules for multiemployer plans in critical status include
the elimination or reduction of ``adjustable benefits,'' which include
some benefits that would otherwise be protected from elimination or
reduction under the anti-cutback rules under section 411(d)(6) and
ERISA section 204(g).
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In the case of a failure to meet the requirements
applicable to a multiemployer plan in endangered or critical
status, the plan actuary, plan sponsor, or employers required
to contribute to the plan may be subject to an excise tax under
the Code or a civil penalty under ERISA.\161\
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\161\ Sec. 4971(g) and ERISA sec. 502(c)(8). In addition, certain
failures are treated as a failure to file an annual report with respect
to the multiemployer plan, subject to a civil penalty under ERISA.
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Sunset of endangered and critical rules
The rules relating to endangered and critical status
generally do not apply to plan years beginning after December
31, 2014.\162\ However, if a multiemployer plan is operating
under a funding improvement or rehabilitation plan for its last
plan year beginning before January 1, 2015, that is, for its
2014 plan year, the multiemployer plan must continue to operate
under the funding improvement or rehabilitation plan during any
period after December 31, 2014, that the funding improvement or
rehabilitation plan is in effect, and all of the Code and ERISA
provisions relating to the operation of the funding improvement
or rehabilitation plan continue in effect during that period.
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\162\ Sec. 221(c) of PPA.
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Explanation of Provision
The provision repeals the PPA provisions under which the
rules relating to automatic extensions of amortization periods,
deemed approval of a multiemployer plan's adoption, use, or
cessation of use of the shortfall funding method, and
endangered and critical status cease to apply. As a result,
these rules apply on a permanent basis.
Effective Date
The provision is effective on the date of enactment
(December 16, 2014).
2. Election to be in critical status (sec. 102 of the Act, sec. 432 of
the Code and sec. 305 of ERISA)
Present Law
Not later than the 90th day of each plan year, the actuary
for any multiemployer plan must certify to the Secretary and to
the plan sponsor whether or not the plan is in endangered or
critical status for the plan year. If a plan is certified as
being in endangered or critical status, notice of endangered or
critical status must be provided within 30 days after the date
of certification to plan participants and beneficiaries, the
bargaining parties, the PBGC and the Secretary of Labor.
Additional notice requirements apply in the case of a plan
certified as being in critical status.
A multiemployer plan is in critical status for a plan year
if, as of the beginning of the plan year, it meets any of the
following definitions:
The funded percentage of the plan \163\ is
less than 65 percent and the sum of (1) the market
value of plan assets, plus (2) the present value of
reasonably anticipated employer and employee
contributions for the current plan year and each of the
six succeeding plan years (assuming that the terms of
the collective bargaining agreements continue in
effect) is less than the present value of all benefits
projected to be payable under the plan during the
current plan year and each of the six succeeding plan
years (plus administrative expenses),
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\163\ A plan's multiemployer funded percentage is the percentage
determined by dividing the value of plan assets by the plan's accrued
liability (that is, generally, the present value of plan benefits).
---------------------------------------------------------------------------
(1) The plan has an accumulated funding
deficiency for the current plan year, not taking into
account any amortization period extensions, or (2) the
plan is projected to have an accumulated funding
deficiency for any of the three succeeding plan years
(four succeeding plan years if the funded percentage of
the plan is 65 percent or less), not taking into
account any amortization period extensions,
(1) The plan's normal cost for the current
plan year, plus interest for the current plan year on
the amount of unfunded benefit liabilities under the
plan as of the last day of the preceding year, exceeds
the present value of the reasonably anticipated
employer contributions for the current plan year, (2)
the present value of vested (that is, nonforfeitable)
benefits of inactive participants is greater than the
present value of vested benefits of active
participants, and (3) the plan has an accumulated
funding deficiency for the current plan year, or is
projected to have an accumulated funding deficiency for
any of the four succeeding plan years (not taking into
account amortization period extensions), or
The sum of (1) the market value of plan
assets, plus (2) the present value of the reasonably
anticipated employer contributions for the current plan
year and each of the four succeeding plan years
(assuming that the terms of the collective bargaining
agreements continue in effect) is less than the present
value of all benefits projected to be payable under the
plan during the current plan year and each of the four
succeeding plan years (plus administrative expenses).
The first plan year for which the plan is in critical
status is referred to as the ``initial critical year,'' which
governs the timing of certain requirements and periods.
In making the determinations and projections applicable in
determining and certifying endangered or critical status (or
neither), the plan actuary must follow certain statutory
standards. The actuary's projections generally must be based on
reasonable actuarial estimates, assumptions, and methods that
offer the actuary's best estimate of anticipated experience
under the plan.\164\ In addition, the plan actuary must make
projections for the current and succeeding plan years of the
current value of the assets of the plan and the present value
of all liabilities to participants and beneficiaries under the
plan for the current plan year as of the beginning of the year.
The projected present value of liabilities as of the beginning
of the year must be based on the most recent actuarial
statement required with respect to the most recently filed
annual report or the actuarial valuation for the preceding plan
year. Any projection of activity in the industry or industries
covered by the plan, including future covered employment and
contribution levels, must be based on information provided by
the plan sponsor, which shall act reasonably and in good faith.
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\164\ Under section 432(i)(8) and ERISA section 305(i)(8), for
purposes of the endangered and critical rules, various actuarial
computations are based upon the unit credit funding method, regardless
of whether it is the funding method used in applying the general
funding requirements to the plan.
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Explanation of Provision
Election of critical status
Under the provision, if a multiemployer plan is not in
critical status for a plan year, but is projected to be in
critical status in any of the succeeding five years, as
determined and certified by the plan actuary, the plan sponsor
may elect critical status for the plan. An election of critical
status must be made within 30 days after the date the plan
actuary certifies the plan's status.
If a plan sponsor elects critical status for the plan, the
plan year for which the election is made is treated as the
first year for which the plan is in critical status, that is,
the initial critical year, regardless of the date, if any, on
which the plan first meets one of the otherwise applicable
definitions of critical status. Thus, a certification for a
later year that the plan is in critical status under one of the
otherwise applicable definitions does not result in a new
initial critical year. In addition, if a plan is in critical
status as a result of an election, it remains in critical
status until it meets the requirements for emergence from
critical status (as discussed below).
Additional certification and notice requirements
Under the provision, as part of the required annual
certification of a multiemployer plan's status for the plan
year, the plan actuary must certify whether the plan will be in
critical status for any of the five succeeding plan years. For
this purpose, the actuary's projections generally must be based
on reasonable actuarial estimates, assumptions, and methods
that offer the actuary's best estimate of anticipated
experience under the plan. However, the other statutory
standards applicable in determining and certifying a plan's
status as described above may be disregarded, except that a
multiemployer plan sponsor may not elect critical status for
the plan based on a certification made without regard to those
standards.
If a multiemployer plan sponsor elects critical status for
the plan, notice of the election must be included in the notice
of critical status provided to plan participants and
beneficiaries, the bargaining parties, the PBGC and the
Secretary of Labor. Notice of the election must also be
provided to the Secretary not later than 30 days after the date
of certification of the plan's status or such other time as the
Secretary may prescribe.
If a plan is certified by the plan actuary as projected to
be in critical status in any of the succeeding five years (but
not for the current plan year) and the plan sponsor does not
elect critical status for the plan, the plan sponsor must
provide notice of projected critical status to the PBGC within
30 days of the certification.
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
3. Clarification of rule for emergence from critical status (sec. 103
of the Act, sec. 432 of the Code and sec. 305 of ERISA)
Present Law
Extensions of amortization periods
As discussed above, under the general funding rules
applicable to multiemployer defined benefit plans, charges and
credits to the funding standard account are determined as the
amount needed to amortize costs, losses and gains over
specified periods, referred to as amortization periods.
Before and after PPA, the plan sponsor of a multiemployer
plan may obtain from the Secretary an extension of up to 10
years of the amortization periods applicable in determining
charges to the funding standard account. Under PPA, in addition
to an amortization period extension described above, the
sponsor of a multiemployer plan certified as meeting certain
criteria may apply for an amortization period extension of up
to five years that is required to be approved by the Secretary
(referred to as an automatic amortization period extension).
The period of any automatic amortization period extension
reduces the 10-year period for which an extension described
above may be granted by the Secretary.\165\
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\165\ Under PPA, the provision relating to automatic amortization
period extensions does not apply with respect to any application
submitted after December 31, 2014; however, as described in Part A.1,
the 2014 sunset date is repealed by section 101 of the Act.
---------------------------------------------------------------------------
Emergence from critical status
A multiemployer plan is in critical status for a plan year
if, as of the beginning of the plan year, it meets any of the
following definitions:
The funded percentage of the plan is less
than 65 percent and the sum of (1) the market value of
plan assets, plus (2) the present value of reasonably
anticipated employer and employee contributions for the
current plan year and each of the six succeeding plan
years (assuming that the terms of the collective
bargaining agreements continue in effect) is less than
the present value of all benefits projected to be
payable under the plan during the current plan year and
each of the six succeeding plan years (plus
administrative expenses),
(1) The plan has an accumulated funding
deficiency for the current plan year, not taking into
account any amortization period extensions, or (2) the
plan is projected to have an accumulated funding
deficiency for any of the three succeeding plan years
(four succeeding plan years if the funded percentage of
the plan is 65 percent or less), not taking into
account any amortization period extensions,
(1) The plan's normal cost for the current
plan year, plus interest for the current plan year on
the amount of unfunded benefit liabilities under the
plan as of the last day of the preceding year, exceeds
the present value of the reasonably anticipated
employer contributions for the current plan year, (2)
the present value of vested benefits of inactive
participants is greater than the present value of
vested benefits of active participants, and (3) the
plan has an accumulated funding deficiency for the
current plan year, or is projected to have an
accumulated funding deficiency for any of the four
succeeding plan years (not taking into account
amortization period extensions), or
The sum of (1) the market value of plan
assets, plus (2) the present value of the reasonably
anticipated employer contributions for the current plan
year and each of the four succeeding plan years
(assuming that the terms of the collective bargaining
agreements continue in effect) is less than the present
value of all benefits projected to be payable under the
plan during the current plan year and each of the four
succeeding plan years (plus administrative expenses).
If a multiemployer plan is certified in critical status,
the plan sponsor must adopt a rehabilitation plan. In general,
a rehabilitation plan is a plan consisting of actions,
including options or a range of options to be proposed to the
bargaining parties, formulated, based on reasonable anticipated
experience and reasonable actuarial assumptions, to enable the
multiemployer plan to cease to be in critical status within a
certain period (generally 10 years), referred to as the
rehabilitation period, and may include reductions in plan
expenditures (including plan mergers and consolidations),
reductions in future benefits accruals or increases in
contributions, if agreed to by the bargaining parties, or any
combination of these actions.\166\ A rehabilitation plan must
provide annual standards for meeting the requirements of the
rehabilitation plan.
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\166\ If the plan sponsor determines that, on exhaustion of all
reasonable measures, the multiemployer plan cannot reasonably be
expected to cease to be in critical status by the end of the
rehabilitation period, the rehabilitation plan must consist of
reasonable measures to cease to be in critical status at a later time
or to forestall insolvency.
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Under a specific rule, a multiemployer plan in critical
status remains in critical status until a plan year for which
the plan actuary certifies (in accordance with the annual
certification requirements) that the plan is not projected to
have an accumulated funding deficiency for the plan year or any
of the nine succeeding plan years, without regard to the use of
the shortfall method, but taking into account any amortization
period extensions.\167\ Thus, a multiemployer plan does not
emerge from critical status unless (1) it no longer meets any
of the definitions of critical status, and (2) the plan actuary
makes the certification described in the preceding sentence
with respect to the plan's not being projected to have an
accumulated funding deficiency.\168\
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\167\ Sec. 432(e)(4)(B) and ERISA sec. 305(e)(4)(B).
\168\ See Prop. Treas. Reg. sec. 1.432(b)-1(c)(6).
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Explanation of Provision
The provision amends the rule for emergence from critical
status to provide a rule for plans in critical status generally
and a special rule if a plan has an automatic amortization
period extension.
Under the general rule, a plan in critical status remains
in critical status until a plan year for which the plan actuary
certifies (in accordance with the annual certification
requirements) that the plan (1) does not meet any of the
definitions of critical status, (2) is not projected to have an
accumulated funding deficiency for the plan year or any of the
nine succeeding plan years, without regard to the use of the
shortfall method but taking into account any amortization
period extensions granted by the Secretary under the rules in
effect either before or after PPA, and (3) is not projected to
become insolvent for any of the 30 succeeding plan years.
Under the special rule, a plan in critical status that has
an automatic amortization period extension is no longer in
critical status (that is, the plan emerges from critical
status) if the plan actuary certifies for a plan year (in
accordance with the annual certification requirements) that the
plan (1) is not projected to have an accumulated funding
deficiency for the plan year or any of the 9 succeeding plan
years, without regard to the use of the shortfall method but
taking into account any automatic amortization period extension
(but not taking into account any amortization period extensions
granted by the Secretary), and (2) is not projected to become
insolvent for any of the 30 succeeding plan years. Under the
special rule, the plan is no longer in critical status,
regardless of whether the plan meets any of the otherwise
applicable definitions of critical status. If a plan emerges
from critical status under the special rule, the plan does not
reenter critical status for any subsequent plan year unless the
plan (1) is projected to have an accumulated funding deficiency
for the plan year or any of the nine succeeding plan years,
without regard to the use of the shortfall method but taking
into account any amortization period extensions (either
automatic or granted by the Secretary) or (2) is projected to
become insolvent for any of the 30 succeeding plan years.
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
4. Endangered status not applicable if no additional action is required
(sec. 104 of the Act, sec. 432 of the Code and sec. 305 of
ERISA)
Present Law
Not later than the 90th day of each plan year, the actuary
for any multiemployer plan must certify to the Secretary and to
the plan sponsor whether or not the plan is in endangered or
critical status for the plan year. If a plan is certified as
being in endangered or critical status, notice of endangered or
critical status must be provided within 30 days after the date
of certification to plan participants and beneficiaries, the
bargaining parties, the PBGC and the Secretary of Labor.
A multiemployer plan is in endangered status if the plan is
not in critical status and, as of the beginning of the plan
year, (1) the plan's funded percentage for the plan year is
less than 80 percent, or (2) the plan has an accumulated
funding deficiency for the plan year or is projected to have an
accumulated funding deficiency in any of the six succeeding
plan years (taking into account amortization period
extensions).\169\ A plan's multiemployer funded percentage is
the percentage determined by dividing the value of plan assets
by the plan's accrued liability (that is, generally, the
present value of plan benefits).
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\169\ A plan that meets the criteria in both (1) and (2) is in
``seriously endangered'' status. Special rules may apply to a plan in
seriously endangered status.
---------------------------------------------------------------------------
In the case of a multiemployer plan in endangered status, a
funding improvement plan must be adopted within 240 days
following the deadline for certifying a plan's status.\170\ A
funding improvement plan is a plan that consists of the
actions, including options or a range of options, to be
proposed to the bargaining parties, formulated to provide,
based on reasonably anticipated experience and reasonable
actuarial assumptions, for the attainment by the plan of
certain requirements. The plan sponsor must update the funding
improvement plan annually to reflect the circumstances of the
multiemployer plan.
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\170\ This requirement applies for the first plan year that the
plan is in endangered status. If a plan sponsor fails to adopt a
funding improvement plan by the end of the 240-day period after the
required certification date, an ERISA penalty of up to $1,100 a day
applies.
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The funding improvement plan must provide that, during the
funding improvement period, the plan will have a certain
required increase in its funded percentage and will not have an
accumulated funding deficiency for any plan year during the
funding improvement period, taking into account amortization
period extensions. In general, the plan's funded percentage
must increase such that the funded percentage as of the close
of the funding improvement period equals or exceeds a
percentage equal to the sum of (1) the funded percentage at the
beginning of the period, plus (2) 33 percent of the difference
between 100 percent and the percentage in (1).\171\ Thus, the
difference between 100 percent and the plan's funded percentage
at the beginning of the period must be reduced by at least one-
third during the funding improvement period.
---------------------------------------------------------------------------
\171\ The requirements may vary for plans in seriously endangered
status.
---------------------------------------------------------------------------
The funding improvement period is generally the 10-year
period beginning on the first day of the first plan year
beginning after the earlier of (1) the second anniversary of
the date of adoption of the funding improvement plan, or (2)
the expiration of collective bargaining agreements that were in
effect on the due date for the actuarial certification of
endangered status for the initial determination year and
covering, as of that due date, at least 75 percent of the
plan's active participants. The period ends if the plan is no
longer in endangered status or if the plan enters critical
status.
Explanation of Provision
Under the provision, a multiemployer plan that meets the
otherwise applicable criteria for endangered status is treated
as not being in endangered status for a plan year if (1) as
part of the certification of endangered status for the plan
year, the plan actuary certifies that the plan is projected to
no longer meet the otherwise applicable criteria for endangered
status as of the end of the tenth plan year ending after the
plan year to which the certification relates, and (2) the plan
was not in critical or endangered status for the immediately
preceding plan year.\172\ In that case, the plan sponsor must
provide notice to the bargaining parties and the PBGC that the
plan would be in endangered status but for treatment under the
provision as not being in endangered status.
---------------------------------------------------------------------------
\172\ The provision does not require the multiemployer plan to be
projected to have achieved the increase in the plan's funded percentage
by the end of the funding improvement plan that would be required under
a funding improvement plan.
---------------------------------------------------------------------------
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
5. Correct endangered status funding improvement plan target funded
percentage (sec. 105 of the Act, sec. 432 of the Code and sec.
305 of ERISA)
Present Law
In the case of a multiemployer plan in endangered status, a
funding improvement plan must be adopted within 240 days
following the deadline for certifying a plan's status. The
funding improvement plan generally must provide that--
during the funding improvement period, the
plan will have a certain required increase in its
funded percentage, and
the plan will not have an accumulated
funding deficiency for any plan year during the funding
improvement period.
A plan's multiemployer funded percentage is the percentage
determined by dividing the value of plan assets by the plan's
accrued liability (that is, generally, the present value of
plan benefits). In general, in order for a funding improvement
plan to be valid, it must reflect a projected increase in the
multiemployer plan's funded percentage such that the funded
percentage as of the close of the funding improvement period
equals or exceeds a percentage equal to the sum of (1) the
funded percentage at the beginning of the period, plus (2) 33
percent of the difference between 100 percent and the
percentage in (1). Thus, the difference between 100 percent and
the plan's funded percentage at the beginning of the period
must be reduced by at least one-third during the funding
improvement period.
The funding improvement period is generally the 10-year
period beginning on the first day of the first plan year
beginning after the earlier of (1) the second anniversary of
the date of adoption of the funding improvement plan, or (2)
the expiration of collective bargaining agreements that were in
effect on the due date for the actuarial certification of
endangered status for the initial determination year and
covering, as of that due date, at least 75 percent of the
plan's active participants. The period ends if the plan is no
longer in endangered status or if the plan enters critical
status.
As described above, the starting point for determining the
required increase in the plan's funded percentage under a
funding improvement plan is the plan's funded percentage as of
the beginning of the funding improvement period, rather than
its funded percentage as of the first plan year for which the
plan is in endangered status. Thus, in order for a funding
improvement plan to be developed, the plan's funded percentage
must be projected to the beginning of the funding improvement
period. In addition, any increase in the plan's funded
percentage that occurs before the funding improvement period
begins is not taken into account in determining whether a plan
has achieved the required increase in funded percentage.
As also described above, under a funding improvement plan,
the multiemployer plan must not be projected to have an
accumulated funding deficiency in any year in the funding
improvement period. Otherwise, a proposed funding improvement
plan is invalid, even if, under the funding improvement plan,
the multiemployer plan is projected not to have an accumulated
funding deficiency as of the end of the funding improvement
period.
Explanation of Provision
Under the provision, the starting point for determining the
required increase in a multiemployer plan's funded percentage
under a funding improvement plan is the plan's funded
percentage as of the beginning of the first plan year for which
the plan is in endangered status.
In addition, under a funding improvement plan, a
multiemployer plan must not have an accumulated funding
deficiency for the last plan year during the funding
improvement period (rather than for any year). Thus, a funding
improvement plan will not fail to be valid merely because the
multiemployer plan is projected to have an accumulated funding
deficiency for one or more years in the funding improvement
period, other than the last year.\173\
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\173\ The provision does not change the aspect of present law under
which a multiemployer plan that has an accumulated funding deficiency
(or, in some cases, a projected funding deficiency) is in critical
status, rather than endangered status. Thus, if the multiemployer plan
has an accumulated funding deficiency for any year in the funding
improvement period, it will be in critical status, rather than
endangered status.
---------------------------------------------------------------------------
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
6. Conforming endangered status and critical status rules during
funding improvement and rehabilitation plan adoption periods
(secs. 106, 109(a)(2)(B) and 109(b)(2)(B) of the Act, sec. 432
of the Code and sec. 305 of ERISA)
Present Law
In general
Various operational restrictions apply with respect to a
multiemployer plan that has been certified as being in
endangered or critical status.
Endangered status
During funding plan adoption period
Certain restrictions apply with respect to a multiemployer
plan in endangered status during the ``funding plan adoption
period,'' which is the period beginning on the date that the
plan is first certified as being in endangered status for a
plan year (referred to as the initial determination year) and
ending on the day before the first day of the funding
improvement period.\174\
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\174\ Sec. 432(d)(1)(A)-(C) and ERISA sec. 305(d)(1)(A)-(C).
---------------------------------------------------------------------------
During the funding plan adoption period, the plan sponsor
may not accept a collective bargaining agreement or
participation agreement that provides for (1) a reduction in
the level of contributions for any participants, (2) a
suspension of contributions with respect to any period of
service, or (3) any new or indirect exclusion of younger or
newly hired employees from plan participation. In addition,
during the funding plan adoption period, except in the case of
amendments required as a condition of qualified retirement plan
status under the Code or to comply with other applicable law,
no amendment may be adopted that increases the liabilities of
the plan by reason of any increase in benefits, any change in
the accrual of benefits, or any change in the rate at which
benefits vest (that is, become nonforfeitable) under the plan.
In the case of a plan in seriously endangered status,
during the funding plan adoption period, the plan sponsor must
take all reasonable actions (consistent with the terms of the
plan and present law) that are expected, based on reasonable
assumptions, to achieve an increase in the plan's funded
percentage and a postponement of an accumulated funding
deficiency for at least one additional plan year. These actions
include applications for extensions of amortization periods,
use of the shortfall funding method in making funding standard
account computations, amendments to the plan's benefit
structure, reductions in future benefit accruals, and other
reasonable actions.
After adoption of funding improvement plan (including
funding improvement period)
A multiemployer plan in endangered status may not be
amended after the date of the adoption of a funding improvement
plan so as to be inconsistent with the funding improvement
plan.\175\ In addition, a plan may not be amended after the
date of the adoption of a funding improvement plan to increase
benefits, including future benefit accruals, unless the plan
actuary certifies that the benefit increase is consistent with
the funding improvement plan and is paid for out of
contributions not required by the funding improvement plan to
meet the requirements of the funding improvement plan in
accordance with the schedule contemplated in the funding
improvement plan.\176\
---------------------------------------------------------------------------
\175\ Sec. 432(d)(2)(A) and ERISA sec. 305(d)(2)(A).
\176\ Sec. 432(d)(2)(C) and ERISA sec. 305(d)(2)(C).
---------------------------------------------------------------------------
During the funding improvement period, a plan sponsor may
not accept a collective bargaining agreement or participation
agreement with respect to the multiemployer plan that provides
for (1) a reduction in the level of contributions for any
participants, (2) a suspension of contributions with respect to
any period of service, or (3) any new direct or indirect
exclusion of younger or newly hired employees from plan
participation.\177\
---------------------------------------------------------------------------
\177\ Sec. 432(d)(2)(B) and ERISA sec. 305(d)(2)(B).
---------------------------------------------------------------------------
Critical status
After notice of critical status
In the case of a multiemployer plan in critical status,
certain distributions and purchases may not be made as of the
date notice of critical status is sent to participants and
beneficiaries.\178\ Specifically, payments in excess of a
single life annuity (plus any social security supplement, if
applicable) generally may not be made to a participant or
beneficiary who begins receiving benefits after the notice is
sent. In addition, annuity contracts to provide benefits may
not be purchased.
---------------------------------------------------------------------------
\178\ Sec. 432(f)(2) and ERISA sec. 305(f)(2).
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During rehabilitation plan adoption period
Certain restrictions apply with respect to a multiemployer
plan in critical status during the ``rehabilitation plan
adoption period,'' which is the period beginning on the date
that the plan is first certified as being in critical status
for a plan year (referred to as the initial critical year) and
ending on the day before the first day of the rehabilitation
period.\179\
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\179\ Sec. 432(f)(4)(A)-(B) and ERISA sec. 305(f)(4)(A)-(B).
---------------------------------------------------------------------------
During the rehabilitation plan adoption period, the plan
sponsor may not accept a collective bargaining agreement or
participation agreement that provides for (1) a reduction in
the level of contributions for any participants, (2) a
suspension of contributions with respect to any period of
service, or (3) any new direct or indirect exclusion of younger
or newly hired employees from plan participation. In addition,
during the rehabilitation plan adoption period, except in the
case of amendments required as a condition of qualified
retirement plan status under the Code or to comply with other
applicable law, no amendment may be adopted that increases the
liabilities of the plan by reason of any increase in benefits,
any change in the accrual of benefits, or any change in the
rate at which benefits vest under the plan.
After adoption of rehabilitation plan (including
rehabilitation period)
A multiemployer plan in critical status may not be amended
after the date of adoption of a rehabilitation plan to be
inconsistent with the rehabilitation plan.\180\ In addition, a
plan may not be amended after the date of the adoption of a
rehabilitation plan to increase benefits (including future
benefit accruals) unless the plan actuary certifies that the
increase is paid for out of additional contributions not
contemplated by the rehabilitation plan and, after taking into
account the benefit increases, the plan is still reasonably
expected to emerge from critical status by the end of the
rehabilitation period on the schedule contemplated by the
rehabilitation plan.\181\
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\180\ Sec. 432(f)(1)(A) and ERISA sec. 305(f)(1)(A).
\181\ Sec. 432(f)(1)(B) and ERISA sec. 305(f)(1)(B).
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Explanation of Provision
Restrictions applicable to endangered and critical plans
Under the provision, operational restrictions applicable
under present law only to multiemployer plans in endangered
status are eliminated. In addition, other operational
restrictions are modified and, as modified, apply both to plans
in endangered status and to plans in critical status. The
operational restrictions apply as described below.
During the period beginning on the date of the
certification of endangered status for the initial
determination year, or of critical status for the initial
critical year, and ending on the date of the adoption of a
funding improvement plan, or rehabilitation plan, the plan
sponsor may not accept a collective bargaining agreement or
participation agreement with respect to the multiemployer plan
that provides for a reduction in the level of contributions for
any participants, a suspension of contributions with respect to
any period of service, or any new direct or indirect exclusion
of younger or newly hired employees from plan participation. In
addition, during that period, no amendment of the plan that
increases the liabilities of the plan by reason of any increase
in benefits, any change in the accrual of benefits, or any
change in the rate at which benefits vest under the plan may be
adopted unless the amendment is required as a condition of
qualified retirement plan status under the Code or to comply
with other applicable law.
After the date of adoption of a funding improvement plan or
rehabilitation plan, a multiemployer plan in endangered or
critical status may not be amended so as to be inconsistent
with the funding improvement plan or rehabilitation plan, as
applicable. In addition, after the date of the adoption of a
funding improvement plan or rehabilitation plan, a
multiemployer plan in endangered or critical status may not be
amended to increase benefits, including future benefit
accruals, unless the plan actuary certifies that the increase
is paid for out of additional contributions not contemplated by
the funding improvement or rehabilitation plan, as applicable,
and, after taking into account the benefit increase, the
multiemployer plan is still reasonably expected to (1) in the
case of a plan in endangered status, meet the requirements of
the funding improvement plan in accordance with the schedule
contemplated in the funding improvement plan, and (2) in the
case of a plan in critical status, emerge from critical status
by the end of the rehabilitation period on the schedule
contemplated by the rehabilitation plan.
Restrictions applicable only to critical plans
The provision does not change the restrictions on certain
distributions and purchases that apply to a multiemployer plan
in critical status as of the date notice of critical status is
sent to participants and beneficiaries. Thus, as under present
law, payments in excess of a single life annuity (plus any
social security supplement, if applicable) generally may not be
made to a participant or beneficiary who begins receiving
benefits after the notice is sent. In addition, annuity
contracts to provide benefits may not be purchased.
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
7. Corrective plan schedules when parties fail to adopt in bargaining
(sec. 107 of the Act, sec. 432 of the Code and sec. 305 of
ERISA)
Present Law
Within 30 days of the adoption of a funding improvement
plan in the case of a multiemployer plan in endangered status,
or a rehabilitation plan in the case of a multiemployer plan in
critical status, the plan sponsor must provide the bargaining
parties schedules showing revised benefit structures, revised
contribution structures, or both, which, if adopted, may
reasonably be expected to enable the multiemployer plan to meet
the requirements of the funding improvement or rehabilitation
plan, as applicable. Certain schedules of contributions and
benefits are required to be provided to the bargaining parties
and, in each case, a particular schedule must be designated as
the default schedule under the funding improvement or
rehabilitation plan.\182\ With the annual update of a funding
improvement or rehabilitation plan, the plan sponsor must
update any schedule of contribution rates under the funding
improvement or rehabilitation plan to reflect the experience of
the multiemployer plan.
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\182\ A default schedule under a rehabilitation plan that includes
reductions in future benefit accruals must not reduce the rate of
benefit accruals below a specified minimum level.
---------------------------------------------------------------------------
If a collective bargaining agreement providing for
contributions under a multiemployer plan that was in effect at
the time the plan entered endangered or critical status
expires, and after receiving one or more schedules from the
plan sponsor, the bargaining parties fail to adopt a
contribution schedule provided by the plan sponsor and
consistent with the funding improvement or rehabilitation plan,
the plan sponsor must implement the default schedule 180 days
after the date on which the collective bargaining agreement
expires.
Present law does not provide authority for a plan sponsor
to implement an updated default schedule if, on expiration of a
later bargaining agreement, the bargaining parties fail to
agree on changes to contribution or benefit schedules necessary
to meet the requirements of the funding improvement or
rehabilitation plan.
Explanation of Provision
Under the provision, a schedule is to be implemented by the
plan sponsor in certain instances on the expiration of a
collective bargaining agreement subsequent to the collective
bargaining agreement that was in effect at the time a
multiemployer plan entered endangered or critical status.
Specifically, if a subsequent collective bargaining
agreement expires while the multiemployer plan is still in
endangered or critical status, as applicable, and after
receiving one or more updated schedules from the plan sponsor,
the bargaining parties fail to adopt a contribution schedule
with terms consistent with the updated funding improvement or
rehabilitation plan and a schedule received from the plan
sponsor, the plan sponsor must implement the schedule
applicable under the expired collective bargaining agreement
(whether adopted by the parties or implemented by the plan
sponsor), as updated and in effect on the date the collective
bargaining agreement expires. The plan sponsor is to implement
the updated schedule 180 days after the date on which the
collective bargaining agreement expires.
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
8. Repeal of reorganization rules for multiemployer plans (sec. 108 of
the Act, secs. 418-418E of the Code and secs. 4241-4245 of
ERISA)
Present Law
Certain modifications to the funding rules apply to
multiemployer plans in reorganization.\183\ A plan is in
reorganization for a year if the contribution needed to balance
the charges and credits to its funding standard account exceeds
its ``vested benefits charge.'' The plan's vested benefits
charge is generally the amount needed to amortize, in equal
annual installments, unfunded vested benefits under the plan
over (1) 10 years in the case of obligations attributable to
participants in pay status, and (2) 25 years in the case of
obligations attributable to other participants.
---------------------------------------------------------------------------
\183\ The reorganization rules predate the endangered and critical
rules enacted under PPA.
---------------------------------------------------------------------------
When a plan is in reorganization, an additional funding
requirement, the ``minimum contribution requirement'' applies.
Failure to meet the minimum contribution requirement results in
an accumulated funding deficiency. In general, the minimum
contribution requirement is an amount equal to the excess of
(1) the sum of the plan's vested benefit charge for the plan
year and the increase in normal cost for the plan year
attributable to plan amendments adopted while the plan was in
reorganization, over (2) if applicable, a special credit (the
``overburden credit''). A limitation applies to the minimum
contribution requirement so that the rate of increase in
contributions is generally limited to seven percent per year.
Subject to certain requirements (including notice to
participants, any employee organization representing
participants, and contributing employers), a multiemployer plan
in reorganization may also be amended to reduce or eliminate
accrued benefits (or benefit increases) that have been in
effect for less than 60 months and are not guaranteed by the
PBGC. Benefits may be reduced or eliminated notwithstanding the
anti-cutback rules, which generally require that accrued
benefits may not be decreased by plan amendment. Active and
inactive participants must generally be treated similarly with
respect to benefit reductions made under a plan in
reorganization.
If a multiemployer plan is in reorganization, the plan
sponsor is required to compare assets and liabilities to
determine if the plan will become insolvent in the future. A
plan is insolvent when its available resources in a plan year
are not sufficient to pay the plan benefits for that plan year,
or when the sponsor of a plan in reorganization reasonably
determines, taking into account the plan's recent and
anticipated financial experience, that the plan's available
resources will not be sufficient to pay benefits that come due
in the next plan year. Notwithstanding the anti-cutback rules,
an insolvent plan is required to reduce benefits to the level
that can be provided by the plan's assets. However, benefits
cannot be reduced below the level guaranteed by the PBGC. If a
multiemployer plan is insolvent, the PBGC guarantee is provided
in the form of unsecured loans to the plan (referred to as
financial assistance), regardless of the plan's ability to
repay the loan.\184\ However, if a plan were later to recover
from insolvency status, loans from the PBGC would have to be
repaid.
---------------------------------------------------------------------------
\184\ ERISA sec. 4261.
---------------------------------------------------------------------------
Explanation of Provision
The provision repeals the reorganization rules for
multiemployer plans. The provision also makes related
modifications to the insolvency rules, including a requirement
that, in the case of a multiemployer plan in critical status,
the plan sponsor compare assets and liabilities to determine if
the plan will become insolvent in the future. In addition,
under the provision, the rules relating to benefit reductions
under an insolvent plan do not apply to a multiemployer plan in
critical and declining status that is operating under benefit
suspensions (as discussed in Part D below).
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
9. Disregard of certain contribution increases for withdrawal liability
purposes (sec. 109 of the Act, sec. 432 of the Code and sec.
305 of ERISA)
Present Law
Withdrawal liability
An employer that withdraws from a multiemployer plan in a
complete or partial withdrawal is generally liable to the plan
in the amount determined to be the employer's withdrawal
liability.\185\ In general, a ``complete withdrawal'' means the
employer has permanently ceased operations under the plan or
has permanently ceased to have an obligation to contribute. A
``partial withdrawal'' generally occurs if, on the last day of
a plan year, there is a 70-percent contribution decline for the
plan year or there is a partial cessation of the employer's
contribution obligation.
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\185\ ERISA secs. 4201-4225. Under ERISA section 4219(d), the
prohibited transaction restrictions under ERISA section 406(a) do not
apply to any action permitted or required under the withdrawal
liability rules.
---------------------------------------------------------------------------
When an employer withdraws from a multiemployer plan, the
plan sponsor is required to determine the amount of the
employer's withdrawal liability, notify the employer of the
amount of the withdrawal liability, and collect the amount of
the withdrawal liability from the employer. In order to
determine an employer's withdrawal liability, a portion of the
plan's unfunded vested benefits is first allocated to the
employer, generally in proportion to the employer's share of
plan contributions for a previous period.\186\ The amount of
unfunded vested benefits allocable to the employer is then
subject to various reductions and adjustments. An employer's
withdrawal liability is generally payable, with interest, in
level annual installments. However, the amount of the annual
installments is limited, based on the amount of the employer's
previous contributions to the plan and its highest previous
rate of contribution, and the period over which installments
are paid is limited to 20 years. An employer's withdrawal is
the amount determined after application of these limits. In
addition, the plan sponsor and the employer may agree to settle
an employer's withdrawal liability obligation for a different
amount.
---------------------------------------------------------------------------
\186\ Under 29 C.F.R. sec. 4211.2, for this purpose, unfunded
vested benefits is the amount by which the value of vested benefits
under the plan exceeds the value of plan assets.
---------------------------------------------------------------------------
Disregard of employer surcharges and benefit reductions
As of the first plan year a multiemployer plan is certified
as being in critical status, certain plan contributions
(``surcharges''), in addition to the contributions required
under a collective bargaining agreement, apply to employers
otherwise obligated to make a contribution for that plan year.
For that first plan year, the surcharge is five percent of the
contribution otherwise required to be made under the applicable
collective bargaining agreement; for subsequent plan years, the
surcharge is 10 percent of contributions otherwise required.
The surcharge no longer applies with respect to employees
covered by a collective bargaining agreement (or other
agreement pursuant to which the employer contributes),
beginning on the effective date of a collective bargaining
agreement (or other agreement) that includes terms consistent
with a schedule of contribution and benefit rates that complies
with the rehabilitation plan. Surcharges may not be the basis
for any benefit accrual under the plan, and surcharges are
generally disregarded in determining the allocation of unfunded
vested benefits to an employer for purposes of the employer's
withdrawal liability.
In the case of a multiemployer plan in critical status,
certain distributions may not be made as of the date notice of
critical status is sent to participants and beneficiaries.
Specifically, payments in excess of a single life annuity (plus
any social security supplement, if applicable) may not be made
to a participant or beneficiary who begins receiving benefits
after the notice is sent. In addition, subject to providing
advance notice, the plan sponsor may make certain reductions to
adjustable benefits that the plan sponsor deems
appropriate.\187\ However, benefits generally may not be
reduced for a participant or beneficiary who began to receive
benefits before receiving notice of the multiemployer plan's
critical status. The elimination of any prohibited forms of
distribution and reductions in adjustable benefits are
disregarded in determining a plan's unfunded vested benefits
for withdrawal liability purposes.
---------------------------------------------------------------------------
\187\ Adjustable benefits means (1) benefits, rights, and features
under the plan, including post-retirement death benefits, 60-month
guarantees, disability benefits not yet in pay status, and similar
benefits; (2) any early retirement benefit or retirement-type subsidy
and any benefit payment option (other than the qualified joint-and-
survivor annuity); and (3) benefit increases that would not be eligible
for PBGC guarantee on the first day of the initial critical year
because the increases were adopted (or, if later, took effect) less
than 60 months before that first day. However, the level of a
participant's accrued benefit payable at normal retirement age may not
be reduced. The ability to eliminate prohibited forms of distribution
and to reduce adjustable benefits applies notwithstanding protection
for distribution forms and previously accrued benefits under the anti-
cutback rules, discussed in Part D below.
---------------------------------------------------------------------------
Explanation of Provision
The provision consolidates the present-law rules for the
disregard of benefit reductions and employer surcharges in
determining withdrawal liability with respect to a
multiemployer plan in critical status. In addition, under the
provision, employer surcharges are disregarded in determining
an employer's highest previous rate of contribution to the
plan. The provision also adds new rules relating to the
disregard of contribution increases under a funding improvement
plan in the case of a multiemployer plan in endangered status
or a rehabilitation plan in the case of a multiemployer plan in
critical status.
Under the new rules, if an increase in contribution rate or
other increase in contribution requirements (unless the other
increase is due to increased levels of work, employment, or
periods for which compensation is provided) is required or made
to enable a multiemployer plan to meet the requirements of a
funding improvement or rehabilitation plan, the increase is
generally disregarded in determining the allocation of unfunded
vested benefits to an employer and an employer's highest
contribution rate. For this purpose, an increase in
contribution rate or other increase in contribution
requirements is deemed to be required or made to enable the
multiemployer plan to meet the requirements of the funding
improvement or rehabilitation plan, except for (1) increases in
contribution requirements due to increased levels of work,
employment, or periods for which compensation is provided or
(2) additional contributions used to provide a permissible
increase in benefits, including an increase in future benefit
accruals.
The disregard of increases in contribution rate or other
increases in contribution requirements generally ceases to
apply as of the expiration date of the collective bargaining
agreement in effect when the multiemployer plan emerges from
endangered or critical status. However, after the plan emerges
from endangered or critical status, increases in contribution
rates for plan years during which the plan was in endangered or
critical status that were disregarded while the plan was in
endangered or critical status, continue to be disregarded in
determining an employer's highest contribution rate for those
plan years.
Effective Date
The provision is effective with respect to benefit
reductions and increases in contribution rates or other
required contribution increases that go into effect during plan
years beginning after December 31, 2014, and to surcharges the
obligation for which accrues on or after December 31, 2014.
10. Guarantee for preretirement survivor annuities under multiemployer
pension plans (sec. 110 of the Act and sec. 4022A of ERISA)
Present Law
QPSA requirement
Under the Code and ERISA, if a married participant in a
defined benefit plan dies before benefits begin, the plan
generally must provide a benefit for the participant's
surviving spouse in the form of a qualified preretirement
survivor annuity (``QPSA''), which is a survivor annuity for
the spouse that is at least 50 percent of the employee's
accrued benefit.\188\
---------------------------------------------------------------------------
\188\ Secs. 401(a)(11) and 417(c) and ERISA sec. 205(a) and (e).
---------------------------------------------------------------------------
PBGC guarantee of multiemployer plan benefits
Termination of a multiemployer defined benefit pension plan
can occur as a result of (1) the adoption of a plan amendment
providing that participants receive no credit under the plan
for any purpose for service with any employer after a date
specified in the amendment (referred to as ``freezing
accruals''), (2) the adoption of a plan amendment causing the
plan to become a defined contribution plan, or (3) the
withdrawal of every employer from the plan or the cessation of
the obligation of all employers to contribute to the plan
(referred to as ``mass withdrawal'').\189\
---------------------------------------------------------------------------
\189\ ERISA sec. 4041A. Unlike the termination of a single-employer
plan (and except in the case of multiemployer plan terminations
occurring before 1981), termination of a multiemployer plan does not of
itself result in the end of the operation of the plan or in the PBGC's
taking over the plan. Instead, the plan sponsor continues to administer
the plan.
---------------------------------------------------------------------------
If a terminated multiemployer plan becomes insolvent and
plan assets are not sufficient to pay benefits at the level
guaranteed by the PBGC, the PBGC will provide financial
assistance as needed to pay benefits at the guarantee
level.\190\ The PBGC benefit guarantee level for multiemployer
plans is the sum of 100 percent of the first $11 of vested
monthly benefits and 75 percent of the next $33 of vested
monthly benefits, multiplied by the participant's number of
years of service.
---------------------------------------------------------------------------
\190\ ERISA secs. 4261 and 4281.
---------------------------------------------------------------------------
The PBGC guarantee generally applies also to benefits
payable to the surviving spouse of a deceased participant.
However, in the case of a multiemployer plan, the PBGC
guarantees QPSA benefits only in the case of a surviving spouse
of a participant who dies before plan termination.
If a multiemployer plan that has not terminated becomes
insolvent, similar rules apply, including the provision by the
PBGC of financial assistance in an amount needed to provide
benefits at the guarantee level.
Explanation of Provision
Under the provision, for purposes of the PBGC guarantee of
benefits under a multiemployer plan, QPSA benefits under a
multiemployer plan that becomes insolvent or is terminated are
not treated as forfeitable solely because the participant has
not died as of the date the plan becomes insolvent or the
termination date of the plan. Thus, QPSA benefits payable to
the surviving spouse of a participant who dies after the plan
becomes insolvent or is terminated are eligible for the PBGC
guarantee (subject to guarantee limits).
Effective Date
The provision is effective with respect to multiemployer
plan benefit payments becoming payable on or after January 1,
1985, except that it does not apply if a surviving spouse has
died before the date of the enactment (December 16, 2014).
11. Required disclosure of multiemployer plan information (sec. 111 of
the Act and secs. 101(k) and 107 of ERISA)
Present Law
A plan administrator of a multiemployer plan must, within
30 days of a written request, provide a plan participant or
beneficiary, employee representative, or employer that has an
obligation to contribute to the plan with a copy of the
following:
1. any periodic actuarial report (including any
sensitivity testing) for any plan year that has been in the
plan's possession for at least 30 days,
2. any quarterly, semi-annual, or annual financial report
prepared for the plan by any plan investment manager or advisor
or other plan fiduciary that has been in the plan's possession
for at least 30 days, and
3. any application for an amortization period extension
filed with the Secretary.
Any actuarial report, financial report, or amortization
extension application provided to a participant, beneficiary,
or employer generally must not include any individually
identifiable information regarding any participant,
beneficiary, employee, fiduciary, or contributing employer, or
reveal any proprietary information regarding the plan, any
contributing employer, or any entity providing services to the
plan.
A person is not entitled to receive more than one copy of
any actuarial or financial report or amortization extension
application during any 12-month period. The plan administrator
may make a reasonable charge to cover copying, mailing, and
other costs of furnishing copies or notices, subject to a
maximum amount that may be prescribed by regulations. Any
information or notice required to be provided under the
provision may be provided in written, electronic, or other
appropriate form to the extent the particular form is
reasonably available to the persons to whom the information is
required to be provided.
In the case of a failure to comply with these requirements,
the Secretary of Labor may assess a civil penalty of up to
$1,000 per day for each failure to provide a notice.
Explanation of Provision
The provision expands the types of documents that a
multiemployer plan administrator is required to provide, within
30 days of a written request, to a participant or beneficiary,
employee representative, or employer that has an obligation to
contribute to the plan. Specifically, the plan administrator
must provide a copy of the following:
1. the current plan document (including any amendments
thereto),
2. the latest summary plan description of the plan,
3. the current trust agreement (including any amendments
thereto) or any other instrument or agreement under which the
plan is established or operated,
4. in the case of a request by an employer, any
participation agreement of the employer with respect to the
plan that relates to the employer's participation during the
current or any of the five immediately preceding plan years,
5. the annual report filed for the plan for any plan year,
6. the annual funding notice for the plan for any plan
year,
7. any periodic actuarial report (including any sensitivity
testing) for any plan year that has been in the plan's
possession for at least 30 days,
8. any quarterly, semi-annual, or annual financial report
prepared for the plan by any plan investment manager or advisor
or other plan fiduciary that has been in the plan's possession
for at least 30 days,
9. audited financial statements of the plan for any plan
year,
10. any application for an amortization period extension
filed with the Secretary and the determination on the
application, and
11. in the case of a plan in endangered or critical status
for a plan year, the latest funding improvement or
rehabilitation plan, and the contribution schedules applicable
with respect to the funding improvement or rehabilitation plan
(other than a contribution schedule applicable to a specific
employer).
A person is not entitled to receive more than one copy of
any document during any 12-month period. In addition, in the
case of documents 5 through 9 listed above, a person is not
entitled to receive a copy of a document that, as of the date
on which the document request is received by the plan
administrator, has been in the plan administrator's possession
for six years or more. If the plan administrator provides a
copy of a document listed above to any person on request, the
plan administrator is considered as having met any obligation
it may have under Title I of ERISA to furnish a copy of the
same document to the person on request.
The provision amends the record-keeping requirements of
Title I of ERISA to require the plan administrator to maintain
a copy of any report required to be filed, including the
documents listed above, and related records (as described in
the record-keeping requirements) and to keep the records
available for examination for at least six years. The provision
amends the enforcement provisions of Title I of ERISA to allow
an employee representative or an employer that has an
obligation to contribute to the plan to bring a civil action to
enjoin any act or practice that violates the requirement to
provide the documents listed above or, in the case of an
employer, to obtain appropriate equitable relief to redress a
violation or to enforce the requirement to provide the listed
documents.
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
B. Multiemployer Plan Mergers and Partitions
1. Mergers (sec. 121 of the Act and sec. 4231 of ERISA)
Present Law
Multiemployer plan insolvency
If a multiemployer plan is insolvent (that is, the plan's
available resources are not sufficient to pay benefits due
under the plan), benefits must be reduced to the level that can
be provided by plan assets. However, benefits cannot be reduced
below the level guaranteed by the PBGC. If plan assets are
insufficient to provide benefits at the PBGC guarantee level,
the PBGC provides financial assistance as needed to pay
benefits at the guarantee level.
Plan mergers and transfers
Under present law, a plan sponsor generally may not cause a
multiemployer plan to merge with one or more other
multiemployer plans, or engage in a transfer of assets and
liabilities to or from another multiemployer plan, unless the
following requirements are met:
the plan sponsor notifies the PBGC of the
merger or transfer at least 120 days before the
effective date of the merger or transfer,
no participant's or beneficiary's accrued
benefit will be lower immediately after the effective
date of the merger or transfer than immediately before
the effective date,
the benefits of participants and
beneficiaries are not reasonably expected to be subject
to suspension as a result of plan insolvency, and
an actuarial valuation of the assets and
liabilities of each of the affected plans has been
performed in accordance with PBGC regulations.\191\
---------------------------------------------------------------------------
\191\ See PBGC regulations at 29 C.F.R. sections 4231.1-4231.10 for
additional rules.
---------------------------------------------------------------------------
PBGC Participant and Plan Sponsor Advocate
Under ERISA, the PBGC board of directors selects a
Participant and Plan Sponsor Advocate, who generally acts as a
liaison between the PBGC, defined benefit plan sponsors, and
participants in defined benefit plans trusteed by the
PBGC.\192\
---------------------------------------------------------------------------
\192\ ERISA sec. 4004.
---------------------------------------------------------------------------
Explanation of Provision
The provision amends the ERISA rules governing mergers of
multiemployer plans by adding new rules relating to involvement
by the PBGC. Under the provision, when requested by the plan
sponsors of the relevant plans, the PBGC may take actions as it
deems appropriate to promote and facilitate the merger of the
plans. Before taking action, the PBGC must determine, after
consultation with the Participant and Plan Sponsor Advocate,
that the merger is in the interests of the participants and
beneficiaries of at least one of the plans and is not
reasonably expected to be adverse to the overall interests of
the participants and beneficiaries of any of the plans. Actions
taken by the PBGC may include training, technical assistance,
mediation, communication with stakeholders, and support with
related requests to other government agencies.
In order to facilitate a merger that the PBGC determines is
necessary to enable one or more of the plans involved to avoid
or postpone insolvency, the PBGC may provide financial
assistance to the merged plan if (1) one or more of the
multiemployer plans participating in the merger is in critical
and declining status (as described in Part D below), (2) the
PBGC reasonably expects that the financial assistance will
reduce the PBGC's expected long-term loss with respect to the
plans involved and is necessary for the merged plan to become
or remain solvent, (3) the PBGC certifies that its ability to
meet existing financial assistance obligations to other plans
will not be impaired by providing the financial assistance, and
(4) the financial assistance is paid exclusively from the fund
for basic benefits guaranteed for multiemployer plans.\193\
---------------------------------------------------------------------------
\193\ Thus, other Federal funds, including funds from the PBGC
single-employer plan program, may not be used for this purpose.
---------------------------------------------------------------------------
Not later than 14 days after the provision of financial
assistance under the provision, the PBGC must provide notice
thereof to the Committees of the House of Representatives
(``House Committees'') on Education and the Workforce and on
Ways and Means and the Committees of the Senate (``Senate
Committees'') on Finance and on Health, Education, Labor, and
Pensions.
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
2. Partitions of eligible multiemployer plans (sec. 122 of the Act and
sec. 4233 of ERISA)
Present Law
Reorganization, withdrawal liability, insolvency
Certain modifications to the funding rules apply to
multiemployer plans in reorganization.\194\ A plan is in
reorganization for a year if the contribution needed to balance
the charges and credits to its funding standard account exceeds
its ``vested benefits charge.'' The plan's vested benefits
charge is generally the amount needed to amortize, in equal
annual installments, unfunded vested benefits under the plan
over (1) 10 years in the case of obligations attributable to
participants in pay status, and (2) 25 years in the case of
obligations attributable to other participants. When a plan is
in reorganization, an additional funding requirement, the
``minimum contribution requirement'' applies. Failure to meet
the minimum contribution requirement results in an accumulated
funding deficiency.
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\194\ As discussed in Part A.8 above, section 108 of the Act
repeals the reorganization rules.
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If an employer withdraws from a multiemployer plan in a
complete or partial withdrawal, so that the employer's
obligation to contribute to the plan ceases or is reduced, the
employer is generally liable to the plan in the amount
determined to be the employer's withdrawal liability.\195\ An
employer's withdrawal liability is generally payable in level
annual installments over a period of up to 20 years.
Termination of a multiemployer plan does not end an employer's
obligation to make withdrawal liability payments to the plan,
though, in some circumstances, the amount of an employer's
withdrawal liability may be redetermined.\196\
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\195\ ERISA secs. 4201-4225.
\196\ Under ERISA sec. 4041A, termination of a multiemployer
defined benefit pension plan can occur as a result of (1) the adoption
of a plan amendment providing that participants receive no credit under
the plan for any purpose for service with any employer after a date
specified in the amendment (referred to as ``freezing accruals''), (2)
the adoption of a plan amendment causing the plan to become a defined
contribution plan, or (3) the withdrawal of every employer from the
plan or the cessation of the obligation of all employers to contribute
to the plan (referred to as ``mass withdrawal''). Unlike the
termination of a single-employer plan (and except in the case of
multiemployer plan terminations occurring before 1981), termination of
a multiemployer plan does not of itself result in the end of the
operation of the plan or in the PBGC's taking over the plan. Instead,
the plan sponsor continues to administer the plan.
---------------------------------------------------------------------------
If a terminated multiemployer plan becomes insolvent and
plan assets are not sufficient to pay benefits at the level
guaranteed by the PBGC, the PBGC will provide financial
assistance as needed to pay benefits at the guarantee
level.\197\
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\197\ ERISA secs. 4261 and 4281.
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The PBGC benefit guarantee level for multiemployer plans is
the sum of 100 percent of the first $11 of vested monthly
benefits and 75 percent of the next $33 of vested monthly
benefits, multiplied by the participant's number of years of
service. However, the guarantee level may be lower in the case
of a benefit that has been in effect for fewer than 60 months,
including benefits under a plan in effect for fewer than 60
months. In the case of a plan that is a successor to a
previously established plan, the time that the successor plan
is considered to be in effect for this purpose includes the
time the previously established plan was in effect.
Partition of a multiemployer plan
Under present law, if certain conditions are met, a
multiemployer plan may be partitioned, that is, separated into
two plans, by order of the PBGC in response to an application
by the plan sponsor. Before issuing a partition order, the PBGC
must provide notice to the plan sponsor and to the plan
participants and beneficiaries whose vested benefits will be
affected by the partition of the plan. In addition, the PBGC
must determine that--
a substantial reduction in the amount of
aggregate contributions under the plan has resulted or
will result from a Federal bankruptcy case or
proceeding with respect to an employer,
the plan is likely to become insolvent,
contributions will have to be increased
significantly to meet the minimum contribution
requirement in reorganization and prevent insolvency,
and
partition would significantly reduce the
likelihood that the plan will become insolvent.\198\
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\198\ The PBGC may also bring an action in Federal court for a
decree partitioning a multiemployer plan and appointing a trustee for
the terminated portion of a partitioned plan. Subject to the notice and
determinations required in order for the PBGC to order a partition, the
court may issue a partition order.
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The PBGC's partition order must provide for a transfer to
the plan created by the partition of no more than the vested
benefits of participants and beneficiaries that are directly
attributable to service with the employer involved in the
bankruptcy case or proceeding, as well as for the transfer of
an equitable share of plan assets. The plan created by the
partition order is treated as (1) a terminated plan with
respect to which only the employer involved in the bankruptcy
case or proceeding has withdrawal liability (and with respect
to which a lien in favor of the PBGC may apply), and (2) a
successor plan for purposes of determining the PBGC guarantee
level.
PBGC Participant and Plan Sponsor Advocate
Under ERISA, the PBGC board of directors selects a
Participant and Plan Sponsor Advocate, who generally acts as a
liaison between the PBGC, defined benefit plan sponsors, and
participants in defined benefit plans trusteed by the
PBGC.\199\
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\199\ ERISA sec. 4004.
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Explanation of Provision
The provision replaces the present-law partition rules with
a new set of rules. Under the new rules, on application by the
plan sponsor of an eligible multiemployer plan for a partition
of the plan, the PBGC may order a partition of the plan. Not
later than 30 days after submitting an application to the PBGC
for partition of a plan, the plan sponsor must notify the
participants and beneficiaries of the application, in the form
and manner prescribed by PBGC regulations.
For purposes of the provision, a multiemployer plan is an
eligible multiemployer plan if--
the plan is in critical and declining status
(as described in Part D below),
the PBGC determines, after consultation with
the Participant and Plan Sponsor Advocate, that the
plan sponsor has taken (or is taking concurrently with
an application for partition) all reasonable measures
to avoid insolvency, including maximum benefit
suspensions permitted in the case of a critical and
declining plan, if applicable,
the PBGC reasonably expects that a partition
of the plan will reduce the PBGC's expected long-term
loss with respect to the plan and is necessary for the
plan to remain solvent,
the PBGC certifies to Congress that the
PBGC's ability to meet existing financial assistance
obligations to other plans (including any liabilities
associated with multiemployer plans that are insolvent
or that are projected to become insolvent within 10
years) will not be impaired by the partition, and
the cost to the PBGC arising from the
proposed partition is paid exclusively from the fund
for basic benefits guaranteed for multiemployer
plans.\200\
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\200\ Thus, other Federal funds, including funds from the PBGC
single-employer plan program, may not be used for this purpose.
---------------------------------------------------------------------------
The PBGC must make a determination regarding a partition
application not later than 270 days after the application is
filed (or, if later, the date the application is completed) in
accordance with PBGC regulations. Not later than 14 days after
a partition order, the PBGC must provide notice thereof to the
House Committees on Education and the Workforce and on Ways and
Means and the Senate Committees on Finance and on Health,
Education, Labor, and Pensions, as well as to any affected
participants or beneficiaries.
The plan sponsor and the plan administrator of the eligible
multiemployer plan (the ``original'' plan) before the partition
are the plan sponsor and plan administrator of the plan created
by the partition order (the ``new'' plan). For purposes of
determining benefits eligible for guarantee by the PBGC, the
new plan is a successor plan with respect to the original plan.
The PBGC's partition order is to provide for a transfer to
the new plan the minimum amount of the original plan's
liabilities necessary for the original plan to remain solvent.
The provision does not provide for the transfer to the new plan
of any assets of the original plan.
It is expected that the liabilities transferred to the new
plan will be liabilities attributable to benefits of specific
participants and beneficiaries (or a specific group or groups
of participants and beneficiaries) as requested by the plan
sponsor of the original plan and approved by the PBGC, up to
the PBGC guarantee level applicable to each participant or
beneficiary. Thus, benefits for such participants and
beneficiaries up to the guarantee level will be paid by the new
plan. For each month after the effective date of the partition
that such a participant or beneficiary is in pay status, the
original plan will pay a monthly benefit to the participant or
beneficiary in the amount by which (1) the monthly benefit that
would be paid to the participant or beneficiary under the terms
of the original plan if the partition had not occurred (taking
into account any benefit suspensions and any plan amendments
after the effective date of the partition) exceeds (2) the
amount of the participant's or beneficiary's benefit up to the
PBGC guarantee level.
During the 10-year period following the effective date of
the partition, the original plan must pay the PBGC premiums due
for each year with respect to participants whose benefits were
transferred to the new plan. The original plan must pay an
additional amount to the PBGC if it provides a benefit
improvement (as defined under the rules for plans in critical
and declining status, discussed in Part D below) that takes
effect after the effective date of the partition. Specifically,
for each year during the 10-year period following the effective
date of the partition, the original plan must pay the PBGC an
annual amount equal to the lesser of (1) the total value of the
increase in benefit payments for the year that is attributable
to the benefit improvement, or (2) the total benefit payments
from the new plan for the year. This payment must be made to
the PBGC at the time of, and in addition to, any other PBGC
premium due from the original plan.
If an employer withdraws from the original plan within ten
years after the date of the partition order, the employer's
withdrawal liability will be determined by reference to both
the original plan and the new plan. If the withdrawal occurs
more than ten years after the date of the partition order,
withdrawal liability will be determined only by reference to
the original plan and not with respect to the new plan.
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
C. Strengthening the Pension Benefit Guaranty Corporation (sec. 131 of
the Act and sec. 4006(a)(3) of ERISA)
Present Law
In order to protect plan participants and beneficiaries
from losing retirement benefits, the PBGC, a corporation within
DOL, was created under ERISA to provide an insurance program
for benefits under most defined benefit plans maintained by
private employers, including multiemployer defined benefit
plans.\201\
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\201\ ERISA secs. 4001-4071. Governmental and church plans are
generally not covered by the PBGC insurance programs. In the case of
single-employer and multiple-employer defined benefit plans, the PBGC
guarantees a certain level of benefits if a plan is terminated without
sufficient assets to provide all benefits due under the plan.
---------------------------------------------------------------------------
In the case of multiemployer plans, the PBGC generally
insures plan insolvency, regardless of whether the plan has
terminated.\202\ In general, a plan is insolvent when its
available resources are not sufficient to pay the plan benefits
for a plan year. If it appears that available resources will
not support the payment of benefits at the level guaranteed by
the PBGC (described below), the PBGC will provide the
additional resources needed as a loan, referred to as financial
assistance. If the plan recovers from insolvency, it must begin
repaying the loans on reasonable terms in accordance with
regulations.
---------------------------------------------------------------------------
\202\ Under ERISA section 4041A, termination of a multiemployer
defined benefit pension plan can occur as a result of (1) the adoption
of a plan amendment providing that participants receive no credit under
the plan for any purpose for service with any employer after a date
specified in the amendment (referred to as ``freezing accruals''), (2)
the adoption of a plan amendment causing the plan to become a defined
contribution plan, or (3) the withdrawal of every employer from the
plan or the cessation of the obligation of all employers to contribute
to the plan (referred to as ``mass withdrawal''). Unlike the
termination of a single-employer plan (and except in the case of
multiemployer plan terminations occurring before 1981), termination of
a multiemployer plan does not of itself result in the end of the
operation of the plan or in the PBGC's taking over the plan. Instead,
the plan sponsor continues to administer the plan.
---------------------------------------------------------------------------
The PBGC benefit guarantee level for multiemployer plans is
the sum of 100 percent of the first $11 of vested monthly
benefits and 75 percent of the next $33 of vested monthly
benefits, multiplied by the participant's number of years of
service.
The PBGC multiemployer program is financed through the
payment of premiums by multiemployer defined benefit plans,
which are held in an interest-bearing Treasury fund. In the
case of a multiemployer plan, PBGC flat-rate premiums apply at
a rate of $12 per participant for 2014 with indexing
thereafter. For 2015, the indexed rate is $13 per
participant.\203\
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\203\ Under ERISA section 4022A(f), the PBGC is directed every five
years to determine the premium levels needed to support the existing
guarantee levels for multiemployer plans, and whether the guarantee
levels could be increased without increasing multiemployer plan
premiums, and to report on its determinations to the House Committees
on Ways and Means and on Education and Labor (now the House Committee
on Education and the Workforce) and to the Senate Committees on Finance
and Labor and Human Resources (now the Senate Committee on Health,
Education, Labor, and Pensions). If such a report indicates that a
premium increase is needed to support existing guarantee levels, by
March 31 of any calendar year in which congressional action under
section 4022A(f) is requested, the PBGC is directed to submit to the
Committees (1) changes to the guarantee schedule as would be needed in
the absence of premium increases, (2) premium increases needed to
support existing guarantee levels, and (3) a combination of changes to
the guarantee schedule at levels higher than under (1) with
corresponding premiums increases, but lower than under (2).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, in the case of a multiemployer plan,
PBGC flat-rate premiums apply at a rate of $26 per participant
for 2015 with indexing thereafter.\204\
---------------------------------------------------------------------------
\204\ For fiscal years 2016 through 2020, certain multiemployer
premium amounts are to be placed in a noninterest-bearing account and
any financial assistance provided to multiemployer plans is to be
withdrawn proportionately from the noninterest-bearing account and
other accounts within the multiemployer plan fund.
---------------------------------------------------------------------------
Not later than June 1, 2016, the PBGC is directed to submit
a report to Congress that includes (1) an analysis of whether
the premium levels enacted under the provision are sufficient
for the PBGC to meet its projected benefit guarantee
obligations under the multiemployer plan program for the 10-
and 20-year periods beginning with 2015, including an
explanation of the assumptions underlying the analysis, and (2)
if the analysis concludes that the premium levels are
insufficient to meet these obligations (or are in excess of the
levels sufficient to meet these obligations), a proposed
schedule of revised premiums sufficient to meet (but not
exceed) these obligations.\205\
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\205\ This report is required in addition to any report required
under ERISA section 4022A.
---------------------------------------------------------------------------
Effective Date
The provision is effective for plan years beginning after
December 31, 2014.
D. Remediation Measures for Deeply Troubled Plans (sec. 201 of the Act,
sec. 432 of the Code and sec. 305 of ERISA)
Present Law
Anti-cutback requirements
In general, a plan amendment may not reduce an employee's
accrued benefit, eliminate an optional form of benefit (such as
a lump-sum form), or eliminate or reduce early retirement
benefits or retirement-type subsidies with respect to the
employee's accrued benefit.\206\ These restrictions are
referred to as the anti-cutback requirements. Amendments
generally are permitted only to reduce future rates of accrual,
or, in the case of optional forms of benefits, early retirement
benefits and retirement-type subsidies, eliminate or reduce
them only with respect to benefits that accrue after the
amendment. However, as discussed below, certain benefits may be
reduced or eliminated in the case of an underfunded
multiemployer defined benefit plan. In addition, Treasury
regulations may provide exceptions to the prohibition on
eliminating an optional form of benefit.
---------------------------------------------------------------------------
\206\ Sec. 411(d)(6) and ERISA sec. 204(g).
---------------------------------------------------------------------------
Exceptions to anti-cutback protection for multiemployer plan benefits
Multiemployer plans in critical status
Not later than the 90th day of each plan year, the actuary
for any multiemployer plan must certify to the Secretary and to
the plan sponsor whether or not the plan is in endangered or
critical status for the plan year. If a plan is certified as
being in endangered or critical status, notice of endangered or
critical status must be provided within 30 days after the date
of certification to plan participants and beneficiaries, the
bargaining parties, the PBGC and the Secretary of Labor. If a
plan is in critical status, the notice of critical status must
include an explanation of the possibility that adjustable
benefits may be reduced (as discussed below) for participants
and beneficiaries whose benefit commencement date is on or
after the date the notice is provided for the first plan year
for which the plan is in critical status.
In the case of a multiemployer plan in critical status,
notwithstanding the anti-cutback rules, certain distributions
may not be made as of the date notice of critical status is
sent to participants and beneficiaries; thus, those forms of
distribution may be eliminated. Specifically, payments in
excess of a single life annuity (plus any social security
supplement, if applicable) may not be made to a participant or
beneficiary who begins receiving benefits after the notice is
sent.
In addition, subject to providing advance notice,
notwithstanding the anti-cutback rules, the plan sponsor of a
plan in critical status may make certain reductions to
adjustable benefits that the plan sponsor deems
appropriate.\207\ However, benefits generally may not be
reduced for a participant or beneficiary who began to receive
benefits before receiving notice of the multiemployer plan's
critical status.
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\207\ In some circumstances, reductions in adjustable benefits may
be required in order to enable a multiemployer plan to meet the
requirements of its rehabilitation plan, as described in Part A.3.
---------------------------------------------------------------------------
Adjustable benefits means (1) benefits, rights, and
features under the plan, including post-retirement death
benefits, 60-month guarantees, disability benefits not yet in
pay status, and similar benefits; (2) any early retirement
benefit or retirement-type subsidy and any benefit payment
option (other than the qualified joint-and-survivor annuity);
and (3) benefit increases that would not be eligible for PBGC
guarantee on the first day of the initial critical year because
the increases were adopted (or, if later, took effect) less
than 60 months before such first day. Adjustable benefits that
are otherwise protected under the anti-cutback rules, such as
early retirement benefits, retirement-type subsidies and
optional forms of benefit, may be reduced notwithstanding the
anti-cutback rules. However, the level of a participant's
accrued benefit payable at normal retirement age may not be
reduced.
No adjustable benefits may be reduced unless 30 days
advance notice is given to plan participants and beneficiaries,
any employer that has an obligation to contribute to the plan,
and any employee organization that, in collective bargaining,
represents plan participants employed by a contributing
employer. The notice must contain sufficient information to
enable participants and beneficiaries to understand the effect
of any reduction of their benefits, including an estimate (on
an annual or monthly basis) of any affected adjustable benefit
that a participant or beneficiary would otherwise have been
eligible for, and information as to the rights and remedies of
plan participants and beneficiaries as well as how to contact
DOL for further information and assistance where appropriate.
The required notice must be provided in a form and manner
prescribed by the Secretary in consultation with the Secretary
of Labor, must be written in a manner so as to be understood by
the average plan participant, and may be provided in written,
electronic, or other appropriate form to the extent such form
is reasonably accessible to persons to whom the notice is
required to be provided. The Secretary is to establish a model
notice that a plan sponsor may use to meet the notice
requirements.
Multiemployer plans in reorganization or insolvency
Subject to certain requirements (including notice to
participants and beneficiaries, any employee organization
representing participants, and contributing employers),
notwithstanding the anti-cutback rules, a multiemployer plan in
reorganization may be amended to reduce or eliminate benefits
or benefit increases that have been in effect for less than 60
months and are not guaranteed by the PBGC.\208\ Active and
inactive participants generally must be treated similarly with
respect to benefit reductions made under a plan in
reorganization.
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\208\ Sec. 418D and ERISA sec. 4244A. As discussed in Part A.8,
section 108 of the Act repeals the reorganization rules.
---------------------------------------------------------------------------
Benefits under a multiemployer plan may be reduced (or
suspended) if the plan is insolvent.\209\ A multiemployer plan
is insolvent when its available resources in a plan year are
not sufficient to pay the plan benefits for that plan year, or
when the sponsor of a plan in reorganization reasonably
determines, taking into account the plan's recent and
anticipated financial experience, that the plan's available
resources will not be sufficient to pay benefits that come due
in the next plan year. Notwithstanding the anti-cutback rules,
an insolvent plan is required to reduce benefits to the level
that can be covered by the plan's assets.\210\ However,
benefits cannot be reduced below the level guaranteed by the
PBGC. If a multiemployer plan is insolvent, the PBGC guarantee
is provided in the form of unsecured loans to the plan
(referred to as financial assistance), regardless of the plan's
ability to repay the loan. However, if a plan were later to
recover from insolvency status, loans from the PBGC would have
to be repaid.
---------------------------------------------------------------------------
\209\ Sec. 418E and ERISA sec. 4245.
\210\ If a multiemployer plan is in reorganization, the plan
sponsor is required periodically to compare assets and liabilities to
determine whether the plan will become insolvent within a certain
period. If the plan sponsor determines that the plan may become
insolvent, the plan sponsor must provide notice to the Secretary, the
PBGC, participants and beneficiaries, any employee organization
representing participants, and contributing employers. The plan sponsor
must also inform participants and beneficiaries, any employee
organization representing participants, and contributing employers
that, if insolvency occurs, benefits will be reduced, but not below the
PBGC guarantee level. For any plan year in which a plan is insolvent,
the plan sponsor must notify the Secretary, the PBGC, participants and
beneficiaries, any employee organization representing participants, and
contributing employers of the level of benefits that will be paid for
that year.
---------------------------------------------------------------------------
Annual funding notice requirement
The plan administrator of a multiemployer defined benefit
plan must provide an annual funding notice to each participant
and beneficiary, each labor organization representing such
participants or beneficiaries, each employer obligated to
contribute to the plan, and the PBGC.\211\ In addition to the
other information required to be provided, in the case of a
multiemployer plan, the notice must include (1) whether the
plan was in critical or endangered status for the plan year,
and if so, (2) information on how a person may obtain a copy of
the multiemployer plan's funding improvement or rehabilitation
plan, as appropriate, and the actuarial and financial data that
demonstrate any action taken toward fiscal improvement, and (3)
a summary of the funding improvement plan, rehabilitation plan,
or modification thereof adopted during the plan year.
---------------------------------------------------------------------------
\211\ ERISA sec. 101(f). Annual funding notice requirements, with
some differences, apply also to single-employer and multiple-employer
plans.
---------------------------------------------------------------------------
PBGC guarantee of multiemployer plan benefits
The PBGC benefit guarantee level for multiemployer plans is
the sum of 100 percent of the first $11 of vested monthly
benefits and 75 percent of the next $33 of vested monthly
benefits, multiplied by the participant's number of years of
service. Thus, the guarantee level for a particular participant
depends on the participant's years of service. For example, if
a participant has 20 years of service under a multiemployer
plan, the maximum monthly benefit covered by the guarantee is
$35.75 per month [(100% $11) + (75% $33)]
20 = $715, or a yearly benefit of $8,580 ($715
12).
Withdrawal liability
An employer that withdraws from a multiemployer plan in a
complete or partial withdrawal is generally liable to the plan
in the amount determined to be the employer's withdrawal
liability.\212\ In general, a ``complete withdrawal'' means the
employer has permanently ceased operations under the plan or
has permanently ceased to have an obligation to contribute. A
``partial withdrawal'' generally occurs if, on the last day of
a plan year, there is a 70-percent contribution decline for
such plan year or there is a partial cessation of the
employer's contribution obligation.
---------------------------------------------------------------------------
\212\ ERISA secs. 4201-4225. Under ERISA section 4219(d), the
prohibited transaction restrictions under ERISA section 406(a) do not
apply to any action permitted or required under the withdrawal
liability rules.
---------------------------------------------------------------------------
When an employer withdraws from a multiemployer plan, the
plan sponsor is required to determine the amount of the
employer's withdrawal liability, notify the employer of the
amount of the withdrawal liability, and collect the amount of
the withdrawal liability from the employer. In order to
determine an employer's withdrawal liability, a portion of the
plan's unfunded vested benefits is first allocated to the
employer, generally in proportion to the employer's share of
plan contributions for a previous period.\213\ The amount of
unfunded vested benefits allocable to the employer is then
subject to various reductions and adjustments. An employer's
withdrawal liability is generally payable, with interest, in
level annual installments. However, the amount of the annual
installments is limited, based on the amount of the employer's
previous contributions to the plan, and the period over which
installments are paid is limited to 20 years. An employer's
withdrawal is the amount determined after application of these
limits. In addition, the plan sponsor and the employer may
agree to settle an employer's withdrawal liability obligation
for a different amount.
---------------------------------------------------------------------------
\213\ Under 29 C.F.R. sec. 4211.2, for this purpose, unfunded
vested benefits is the amount by which the value of vested benefits
under the plan exceeds the value of plan assets.
---------------------------------------------------------------------------
In the case of a multiemployer plan in critical status, the
elimination of any prohibited forms of distribution and
reductions in adjustable benefits are disregarded in
determining a plan's unfunded vested benefits for purposes of
determining an employer's withdrawal liability.
ERISA remedies
ERISA imposes fiduciary responsibility on a plan sponsor
and other plan fiduciaries.\214\ Under ERISA, a plan
participant or beneficiary may bring a civil action in Federal
court (1) to recover benefits due him under the terms of the
plan, to enforce his rights under the terms of the plan, or to
clarify his rights to future benefits under the terms of the
plan, (2) for appropriate relief in the case of a breach of
fiduciary duty, (3) to enjoin any act or practice that violates
ERISA or the terms of the plan, or (4) to obtain other
appropriate equitable relief to redress a violation of ERISA or
the terms of the plan or to enforce any provisions of ERISA or
the terms of the plan.\215\
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\214\ ERISA secs. 404 and 409.
\215\ ERISA sec. 502.
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ERISA also allows certain persons adversely affected by an
action of the PBGC to bring a civil action in Federal court
against the PBGC for appropriate equitable relief (except with
respect to withdrawal liability disputes).\216\ Persons who may
bring an action against the PBGC include a fiduciary, employer,
contributing sponsor, member of a contributing sponsor's
controlled group, plan participant or beneficiary, or an
employee organization representing a plan participant or
beneficiary.
---------------------------------------------------------------------------
\216\ ERISA sec. 4003(f).
---------------------------------------------------------------------------
Explanation of Provision
Suspension of benefits under multiemployer plans in critical and
declining status
In general
Under the provision, subject to certain conditions,
limitations and procedural requirements, including approval by
the Secretary of Treasury as described below, in the case of a
multiemployer plan in critical and declining status,
notwithstanding the anti-cutback rules, the plan sponsor may
amend the plan to suspend benefits that the plan sponsor deems
appropriate. In that case, the plan is not liable for any
benefit payments not made as a result of a suspension of
benefits.
For this purpose, a plan is in critical and declining
status if the plan (1) otherwise meets one of the definitions
of critical status and (2) is projected to become insolvent
during the current plan year or any of the 14 succeeding plan
years. In applying (2), 19 succeeding plan years is substituted
for 14 if either the ratio of inactive plan participants to
active plan participants is more than two to one or the plan's
funded percentage is less than 80 percent.
In the annual certification of whether a multiemployer plan
is in endangered or critical status for a plan year, the plan
actuary must also certify whether the plan is or will be in
critical and declining status for the plan year. In making a
determination with respect to critical and declining status, in
addition to the rules generally applicable with respect to
status determinations, the plan actuary must (1) if reasonable,
assume that each contributing employer in compliance with the
multiemployer plan's rehabilitation plan continues to comply
through the end of the rehabilitation period (or such later
time as may be applicable to the plan) with the terms of the
rehabilitation plan that correspond to the applicable schedule
of contribution and benefit rates, and (2) take into account
any benefit suspensions adopted in a prior plan year that are
still in effect.
The provision does not specifically require that the notice
of critical status provided to plan participants and
beneficiaries, the bargaining parties, the PBGC and the
Secretary of Labor include the information that the plan is in
critical and declining status. However, the provision amends
the information that must be provided in an annual funding
notice with respect to a multiemployer plan. The annual funding
notice must include (1) whether the plan was in critical and
declining status for the plan year and if so, (2) the projected
date of insolvency, (3) a clear statement that such insolvency
may result in benefit reductions, and (4) a statement
describing whether the plan sponsor has taken legally permitted
actions to prevent insolvency.
Under the provision, suspension of benefits means the
temporary or permanent reduction of any current or future
payment obligation of the plan to any plan participant or
beneficiary, whether or not the participant or beneficiary is
in pay status at the time of the suspension.\217\ Any
suspension of benefits made under the provision will remain in
effect until the earlier of when the plan sponsor provides
benefit improvements in accordance with the provision or when
the suspension expires by its own terms. Thus, unless the terms
of the suspension of benefits provide for the suspension to
expire (and for benefits to return to the same level as before
the suspension), a suspension of benefits may result in a
permanent benefit reduction.
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\217\ Any references in the provision to suspensions of benefits,
increases in benefits, or resumptions of suspended benefits with
respect to participants apply also with respect to benefits of
beneficiaries or alternative payees of participants. Under section
414(p)(8) and ERISA section 206(d)(3)(K), an alternate payee is a
spouse, former spouse, child or other dependent of a participant who is
recognized by a domestic relations order as having a right to receive
all, or a portion of, the benefits payable under a plan with respect to
the participant.
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Conditions for suspensions
In addition to the procedural requirements described below,
the provision requires two conditions to be met in order for
the plan sponsor of a multiemployer plan in critical and
declining status for a plan year to suspend benefits:
1. Taking into account the proposed suspensions of benefits
(and, if applicable, a proposed partition of the plan under
ERISA \218\), the plan actuary certifies that the plan is
projected to avoid insolvency, assuming the suspensions of
benefits continue until the suspensions expire by their own
terms or, if no specific expiration date is set by the terms,
indefinitely, and
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\218\ ERISA sec. 4233. As discussed in Part B.2., section 122 of
the Act amends the partition rules.
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2. The plan sponsor determines, in a written record to be
maintained throughout the period of the suspension of benefits,
that, although all reasonable measures to avoid insolvency have
been taken (and continue to be taken during the period of the
benefit suspensions), the plan is still projected to become
insolvent unless benefits are suspended.
In making the determination described above, the plan
sponsor may take into account factors including the following:
current and past contribution levels,
levels of benefit accruals, including any
prior reductions in the rate of benefit accruals,
prior reductions of adjustable benefits, if
any,
prior suspensions of benefits, if any,
the impact on plan solvency of the subsidies
and ancillary benefits available to active
participants,
compensation levels of active participants
relative to employees in the participants' industry
generally,
competitive and other economic factors
facing contributing employers,
the impact of benefit and contribution
levels on retaining active participants and bargaining
groups under the plan,
the impact of past and anticipated
contribution increases under the plan on employer
attrition and retention levels, and
measures undertaken by the plan sponsor to
retain or attract contributing employers.
Application of and limitations on suspensions
In general, any suspensions of benefits under the provision
are to be equitably distributed across the plan participant and
beneficiary population, taking into account factors (with
respect to the participants and beneficiaries and their
benefits) that may include one or more of the following:
age and life expectancy,
length of time in pay status,
amount of benefit,
type of benefit, such as survivor, normal
retirement, early retirement,
the extent to which a participant or
beneficiary is receiving a subsidized benefit,
the extent to which a participant or
beneficiary has received post-retirement benefit
increases,
any history of benefit increases and
reductions,
the number of years to retirement for active
employees,
any discrepancies between active and retiree
benefits,
the extent to which active participants are
reasonably likely to withdraw support for the plan,
accelerating employer withdrawals from the plan and
increasing the risk of additional benefit reductions
for participants in and not in pay status, and
the extent to which benefits are
attributable to service with an employer that failed to
pay its full withdrawal liability.
In addition to these factors, any suspensions of benefits
under the provision are subject to an aggregate limit and
several limits at the individual level. Specifically, in the
aggregate (considered, if applicable, in combination with a
partition of the plan), any suspensions of benefits must be at
the level reasonably estimated to achieve, but not materially
exceed, the level that is necessary to avoid insolvency.\219\
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\219\ If suspensions of benefits under a plan are made in
combination with a partition of the plan, the suspensions may not take
effect before the effective date of the partition.
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At the individual level, no benefits based on disability
(as defined under the plan) may be suspended. In addition, the
monthly benefit of any participant or beneficiary may not be
reduced below 110 percent of the monthly PBGC guarantee level,
as determined (as under present law) for that participant or
beneficiary.
In the case of a participant or beneficiary who is age 75
or over as of the effective date of the benefit suspension, the
amount of the benefit suspension is phased out ratably over the
number of months until age 80, with the result that no benefit
suspension applies to a participant or beneficiary who, as of
the effective date of the benefit suspension, is age 80 or
older. Specifically, for a participant or beneficiary who is
between age 75 and 80 as of the effective date of the benefit
suspension, not more than the applicable percentage of the
participant's or beneficiary's maximum suspendable benefits may
be suspended. For this purpose, the applicable percentage for a
participant or beneficiary is obtained by dividing (1) the
number of months during the period beginning with the month
after the month containing the effective date of the suspension
and ending with the month in which the participant or
beneficiary attains the age of 80, by (2) 60 months. Thus, the
applicable percentage is determined on the basis of a
participant's or beneficiary's age as of the effective date of
the benefit suspension and does not change as the participant
or beneficiary gets older. A participant's or beneficiary's
maximum suspendable benefits is the portion of the
participant's or beneficiary's benefits that would otherwise be
suspended if the applicable percentage limitation did not
apply.\220\ For example, if a participant is exactly age 77
(that is, age 77 and zero months) as of the effective date of
the benefit suspension, with a period of 36 months until
attainment of age 80, the participant's applicable percentage
is 36/60 or 60 percent, and the amount of the suspension of
benefits applied to the participant is 60 percent of the
portion of the participant's benefits that would otherwise be
suspended.
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\220\ The maximum suspendable benefits does not mean a
participant's or beneficiary's entire benefit, but only the portion of
the benefit that that would otherwise be suspended under the proposed
suspensions of benefits, taking into account the other rules applicable
to benefit suspensions. For example, in determining the portion of a
participant's or beneficiary's benefit that that would otherwise be
suspended, the prohibition on reducing benefits below 110 percent of
the PBGC guarantee level is taken into account.
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Besides these limitations, an ordering rule applies if
benefits under a multiemployer plan include benefits that are
directly attributable to a participant's service with an
employer that, before the date of enactment of the provision,
(1) withdrew from the plan in a complete withdrawal and paid
the full amount of its withdrawal liability,\221\ and (2)
pursuant to a collective bargaining agreement, assumed
liability for providing benefits to plan participants and
beneficiaries under a separate, single-employer plan sponsored
by the employer, in the amount by which those participants' and
beneficiaries' benefits under the multiemployer plan are
reduced as a result of the financial status of the
multiemployer plan.\222\ In that case, suspensions of benefits
are applied: first, to the maximum extent permissible, to
benefits attributable to service with an employer that withdrew
from the plan and failed to pay (or is delinquent in paying)
the full amount of its withdrawal liability; second, to all
other benefits that may be suspended, other than those in the
following (third) category; and third, to benefits directly
attributable to service with an employer described in the
preceding sentence.
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\221\ For purposes of the ordering rule, the full amount of an
employer's withdrawal liability with respect to a plan is determined
under the withdrawal liability rules under ERISA or an agreement with
the plan sponsor, whichever is applicable.
\222\ The ordering rule does not apply if benefits under a
multiemployer plan do not include benefits directly attributable to
service with such an employer.
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Benefit improvements
The provision contains several requirements with respect to
benefit improvements under a multiemployer plan while a
suspension of benefits under the plan is in effect. For this
purpose, a benefit improvement means a resumption of suspended
benefits, an increase in benefits, an increase in the rate at
which benefits accrue under the plan, or an increase in the
rate at which benefits vest under the plan. Except for
resumptions of suspended benefits as discussed below, any limit
on benefit improvements while a suspension of benefits is in
effect is in addition to any other applicable limits imposed on
a plan with respect to benefit increases.
Subject to certain conditions, the plan sponsor may, in its
sole discretion, provide benefit improvements while any
suspension of benefits remains in effect. However, the plan
sponsor may not increase the liabilities of the plan by reason
of a benefit improvement for any participant or beneficiary who
is not in pay status by the first day of the plan year for
which the benefit improvement takes effect (referred to herein
as the ``benefit improvement year'') unless (1) the benefit
improvement is accompanied by equitable benefit improvements
(as described below) for all participants and beneficiaries who
are in pay status before the first day of the benefit
improvement year, and (2) the plan actuary certifies that,
after taking any benefit improvements into account, the plan is
projected to avoid insolvency indefinitely.
In order to satisfy (1) above, the projected value of the
total liabilities attributable to benefit improvements for
participants and beneficiaries who are not in pay status by the
first day of the benefit improvement year (with this projected
value determined as of that day) may not exceed the projected
value of the liabilities attributable to benefit improvements
for participants and beneficiaries who are in pay status before
the first day of the benefit improvement year (with this
projected value also determined as of that day). In addition,
with respect to the required benefit improvements for
participants and beneficiaries who are in pay status before the
first day of the benefit improvement year, the plan sponsor
must equitably distribute any increase in total liabilities
attributable to the benefit improvements to some or all of
those participants and beneficiaries, taking into account the
factors relevant in equitably distributing benefit suspensions
among participants and beneficiaries (as described above) and
the extent to which the benefits of the participants and
beneficiaries were suspended.
The provision allows benefit improvements only for
participants and beneficiaries in pay status. However, a plan
sponsor may increase plan liabilities through a resumption of
benefits for participants and beneficiaries in pay status only
if the plan sponsor equitably distributes the value of resumed
benefits to some or all of the participants and beneficiaries
in pay status, taking into account the factors relevant in
equitably distributing benefit suspensions among participants
and beneficiaries (as described above).
Finally, the requirements under the provision with respect
to benefit improvements do not apply to a resumption of
suspended benefits or a plan amendment that increases
liabilities with respect to participants and beneficiaries not
in pay status by the first day of the benefit improvement year
that (1) the Secretary (in consultation with the PBGC and the
Secretary of Labor) determines to be reasonable and that
provides for only de minimis increases in plan liabilities, or
(2) is required as a condition of qualified retirement plan
status under the Code or to comply with other applicable law,
as determined by the Secretary.
Effect on withdrawal liability
Under the provision, suspensions of benefits made under a
multiemployer plan in critical and declining status are
disregarded in determining the plan's unfunded vested benefits
for purposes of determining an employer's withdrawal liability
unless the withdrawal occurs more than ten years after the
effective date of the benefit suspension.\223\
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\223\ Under the provision, the prohibited transaction restrictions
under ERISA section 406(a) do not apply to any arrangement relating to
withdrawal liability involving the plan.
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Procedural requirements for suspension of benefits
The provision specifies a series of procedural steps that
must be taken and approvals that must be obtained before any
proposed suspension of benefits under a multiemployer plan in
critical and declining status may be implemented by the plan
sponsor. Below is a summary of these procedural steps and
approvals. The approval procedures for a proposed suspension of
benefits are administered by the Secretary of Treasury
(``Treasury''). However, every step of the process requiring
action by Treasury is required to be done in consultation with
the Pension Benefit Guaranty Corporation (``PBGC'') and the
Department of Labor (``DOL''). Thus, all references below to
Treasury with respect to these procedures include this required
consultation with the PBGC and DOL (including references to
information to be provided in required notices).
Not less than 60 days before submitting an
application to Treasury for approval of proposed
benefit suspensions, the plan sponsor must appoint a
retiree representative if the plan has more than 10,000
participants.
Plan sponsor submits an application to
Treasury for approval of the proposed benefit
suspensions. Concurrently with submitting the
application, the plan sponsor must provide certain
parties (which include plan participants) notice of the
application and the proposed benefit suspensions.
Within 30 days after receipt of the
application, Treasury must publish the application on
the Treasury Website and publish notice requesting
comments on the application in the Federal Register
Within 225 days after receipt of the
application, Treasury must approve or disapprove the
application, or the application is deemed to be
approved in the absence of an affirmative decision. If
the application is denied by Treasury at this step,
then the suspension of benefits cannot be implemented
and the process does not continue.
Within 30 days after the approval, if the
application is approved, or deemed approved, by
Treasury, Treasury must administer a participant and
beneficiary vote on the proposed benefit suspension.
Within 7 days after the vote, unless a
majority of participants and beneficiaries vote to
reject the proposed benefit suspensions (``negative
vote''), Treasury must issue a final authorization to
allow implementation of the benefit suspensions.
Within 14 days after a negative vote,
Treasury must determine whether the plan is
systemically important. In the event of a negative
vote, the benefits suspensions cannot be implemented
unless the plan is systemically important.
Within 90 days after a negative vote with
respect to a plan determined to be systemically
important, Treasury must issue a final authorization
permitting benefit suspensions to be implemented by the
plan sponsor and in sufficient time to allow
implementation before the end of this 90 day period,
but can impose modifications to the proposed
suspensions.
Appointment of retiree representative
If a multiemployer plan has 10,000 or more participants,
the plan sponsor is required to appoint a participant of the
plan in pay status to act as a retiree representative to
advocate for the interests of the retired and deferred vested
participants and beneficiaries of the plan throughout the
suspension approval process.\224\ The appointment must be made
no later than 60 days before the plan sponsor submits an
application to Treasury for approval of proposed benefit
suspensions. The plan is required to provide for reasonable
expenses by the retiree representative, including reasonable
legal and actuarial support, commensurate with the plan's size
and funded status. Duties performed by the retiree
representative under this provision are not subject to
prohibited transaction rules under the Code and the fiduciary
responsibility requirements under ERISA.\225\ However, this
relief from fiduciary responsibility does not apply to those
duties associated with an application to suspend benefits that
are performed by a retiree representative who is also a plan
trustee.
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\224\ A deferred vested participant is a participant who has a
vested benefit under the plan, is no longer accruing benefits under the
plan, and has not yet begun receiving benefits.
\225\ Sec. 4975 and ERISA sec. 404(a).
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Plan sponsor notice of application for Treasury approval of
proposed suspension
The first step in satisfying the procedural requirements
for being allowed to implement proposed benefit suspensions
(after appointing a retiree representative if applicable) is
applying to Treasury for approval of the proposed suspensions,
as described below. Concurrently with submitting that
application, the plan sponsor must provide a notice to plan
participants and beneficiaries, employers with an obligation to
contribute to the plan and any employee organization
representing participants employed by the employers. The notice
must contain the following information:
sufficient information to enable
participants and beneficiaries to understand the effect
of any suspensions of benefits, including an
individualized estimate (on an annual or monthly basis)
of such effect on each participant or beneficiary,
a description of the factors considered by
the plan sponsor in designing the benefit suspensions,
a statement that the application for
approval of any suspension of benefits will be
available on the Treasury website and that comments on
the application will be accepted,
information as to the rights and remedies of
plan participants and beneficiaries,
if applicable, a statement describing the
appointment of a retiree representative, the date of
appointment of the representative, identifying
information about the retiree representative (including
whether the representative is a plan trustee), and how
to contact the representative, and
information on how to contact Treasury for
further information and assistance where appropriate.
The notice must be provided in a form and manner prescribed
in guidance by Treasury. It must be written in a manner so as
to be understood by the average plan participant. It may be
provided in written, electronic, or other appropriate form to
the extent such form is reasonably accessible to persons to
whom the notice is required to be provided. The notice fulfills
the requirement for providing notice of a significant reduction
in the future rate of benefit accrual.\226\ Treasury is
directed to publish a model notice that a plan sponsor may use
to meet these requirements.
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\226\ Section 4980F of the Code and section 204(h) of ERISA require
notice of any amendment to significantly reduce the rate of future
benefit accrual under a pension plan to be provided to affected plan
participants and alternate payees (and employee organizations
representing these participants and alternate payees and participating
employers) within a reasonable time before the amendment is effective.
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The provision further specifies that, in addition to
providing this notice, it is the sense of the Congress that,
depending on the size and resources of the plan and geographic
distribution of the plan's participants and beneficiaries, the
plan sponsor should take such steps as may be necessary to
inform participants and beneficiaries about proposed benefit
suspensions through in-person meetings, telephone or internet-
based communications, mailed information, or by other means.
Public notice of the application by Treasury
The application for approval of the suspension of benefits
must be published on the Treasury website. In addition, not
later than 30 days after receipt of the application, Treasury
must publish a notice in the Federal Register soliciting
comments from contributing employers, employee organizations,
and participants and beneficiaries of the plan for which an
application was made.
Approval procedures by Treasury
Under the provision, Treasury must approve the plan
sponsor's application for a suspension of benefits upon finding
that the plan is eligible for the suspensions and has satisfied
the criteria, as previously described, for suspending benefits,
limitations on suspensions, and benefit improvements (if any)
during suspension and has provided the required notice of the
proposed suspensions.
In general, in evaluating an application, Treasury is to
accept a plan sponsor's determinations unless Treasury
concludes that the plan sponsor's determinations were clearly
erroneous. As previously discussed, as a condition for benefit
suspensions, the plan sponsor must determine that, although all
reasonable measures to avoid insolvency have been taken (and
continue to be taken during the period of the benefit
suspensions), the plan is still projected to become insolvent
unless benefits are suspended. The plan sponsor may take
various factors into account in making this determination. In
evaluating whether the plan sponsor has met the criteria for
its required determination, Treasury must review the plan
sponsor's consideration of relevant factors.
Treasury is directed to approve or deny the application
within 225 days of the submission by the plan sponsor, and the
application for suspension of benefits is deemed approved
unless, within such 225 days, Treasury notifies the plan
sponsor that it has failed to satisfy one or more of the
criteria for approval.
If Treasury rejects a plan sponsor's application, Treasury
must provide notice to the plan sponsor detailing the specific
reasons for the rejection, including reference to the specific
requirement not satisfied.
Participant vote to ratify or reject the proposed
suspensions
Not later than 30 days after Treasury approves the proposed
benefit suspension, Treasury must administer a vote of plan
participants and beneficiaries. No suspension of benefits may
take effect pursuant to this provision prior to a vote of the
plan participants and beneficiaries with respect to the
proposed benefit suspension.
The plan sponsor is required to provide a ballot for the
vote (subject to approval by Treasury) that includes the
following statements:
from the plan sponsor in support of the
suspension,
in opposition to the suspension compiled
from comments received pursuant to the Notice published
in the Federal Register (as described above),
that the suspension has been approved by
Treasury,
that the plan sponsor has determined that
the plan will become insolvent unless the suspension
takes effect,
that insolvency of the plan could result in
benefits lower than benefits paid under the suspension,
and
that insolvency of the PBGC would result in
benefits lower than benefits paid in the case of plan
insolvency.
A negative vote occurs only if a majority of all plan
participants and beneficiaries vote to reject the proposed
benefit suspensions (``negative vote'').\227\ The suspension
goes into effect following the vote if the result is not a
negative vote. In that case, not later than seven days after
the vote, Treasury must issue a final authorization of the
suspension.
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\227\ Thus, a participant's or beneficiary's failure to vote has
the effect of a vote in favor of the benefit suspension.
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If the result is a negative vote, the plan sponsor may not
implement the benefit suspension unless the plan is
systemically important. However, after a negative vote with
respect to a plan that is not systemically important, the plan
sponsor may start the process again by developing different
proposed benefit suspensions, subject to the conditions
applicable under the provision, and submitting a new
application for approval to Treasury.
Systemically important plan
Not later than 14 days after a negative vote, Treasury must
determine whether the plan is a systemically important plan. A
systemically important plan is a plan with respect to which the
PBGC projects that, if suspensions are not implemented, the
present value of projected financial assistance payments
exceeds $1 billion (indexed).\228\ Not later than 30 days after
a determination by Treasury that the plan is systemically
important, if applicable, the Participant and Plan Sponsor
Advocate (``Advocate'') \229\ may submit recommendations to
Treasury with respect to the proposed benefit suspensions or
any revisions to the proposed suspensions.
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\228\ This determination is expected to be made using the
assumptions that PBGC generally uses in evaluating the financial
position of its multiemployer program. For calendar years beginning
after 2015, the $1 billion is indexed by reference to the change in the
wage base applicable for purposes of Social Security taxes and benefits
since 2014. If the amount otherwise determined under this calculation
is not a multiple of $1 million, the amount is rounded to the next
lowest multiple of $1 million.
\229\ The Advocate is selected under section 4004 of ERISA.
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If Treasury determines that the plan is a systemically
important plan, not later than the end of the 90-day period
beginning on the date the results of the vote are certified,
Treasury must, notwithstanding the negative vote, issue a final
authorization either:
permitting the implementation of the benefit
suspensions proposed by the plan sponsor; or
permitting the implementation of a
modification by Treasury of the benefit suspensions
(giving consideration to any recommendations submitted
by the Advocate), provided that the plan is projected
to avoid insolvency under the modification.
However, the provision also requires that Treasury issue
the final authorization at a time sufficient to allow
implementation of the benefit suspension before the end of the
90-day period. Thus, the deadline for issuance of the final
authorization of the suspension is actually earlier than the
end of the 90-day period.
Appeal of decisions
For purposes of judicial review of agency action, approval
or denial by Treasury of an application is treated as a final
agency action.\230\
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\230\ Rules for judicial review of agency action are provided at 5
U.S.C. chap. 7 (part of the Administrative Procedure Act). The
provision does not specifically make these rules applicable to
Treasury's approval or denial of an application for benefit
suspensions. However, under 5 U.S.C. sec. 701, these rules apply except
to the extent that statutes preclude judicial review or agency action
is committed to agency discretion by law. Pursuant to 5 U.S.C sec. 704,
agency action made reviewable by statute and final agency action for
which there is no other adequate remedy in a court are subject to
judicial review under these rules.
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An action by a plan sponsor challenging the denial of an
application for suspension of benefits by Treasury may only be
brought following the denial. An action challenging a
suspension of benefits may only be brought following a final
authorization to suspend by Treasury. A participant or
beneficiary affected by a benefit suspension does not have a
cause of action under the Code or Title I of ERISA.\231\ No
action challenging a suspension of benefits following the final
authorization to suspend or the denial of an application for
suspension of benefits may be brought after one year after the
earliest date on which the plaintiff acquired or should have
acquired actual knowledge of the existence of the cause of
action.
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\231\ A participant or beneficiary might otherwise have a cause of
action against the plan sponsor under ERISA section 502 with respect to
the benefit suspension.
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A court review of an action challenging a suspension of
benefits is to be done in accordance with the rules for
judicial review of agency actions.\232\ A court reviewing an
action challenging a suspension of benefits may not grant a
temporary injunction with respect to the suspension unless the
court finds a clear and convincing likelihood that the
plaintiff will prevail on the merits of the case.
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\232\ In reviewing an agency action, under 5 U.S.C. sec. 706, the
reviewing court is to decide all relevant questions of law, interpret
constitutional and statutory provisions, and determine the meaning or
applicability of the terms of an agency action. The reviewing court is
to set aside agency action in certain circumstances, such as when found
to be arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law. In making its determinations, the court is to
review the whole record, or those parts of it cited by a party, and due
account is to be taken of the rule of prejudicial error.
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Under the provision, a plan sponsor is added to the list of
persons who may bring action against the PBGC for appropriate
equitable relief in Federal court.\233\
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\233\ As under present law, this right to bring an action does not
apply with respect to withdrawal liability disputes.
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Guidance
The Secretary of the Treasury, in consultation with the
PBGC and the Secretary of Labor, is directed to publish, not
later than 180 days after enactment, appropriate guidance to
implement the provision.
Effective Date
The provision is effective on the date of enactment
(December 16, 2014).
DIVISION P--OTHER RETIREMENT-RELATED MODIFICATIONS
A. Substantial Cessation of Operations (sec. 1 of the Act and sec.
4062(e) of ERISA)
Present Law
Funding rules for single-employer defined benefit plans and PBGC
insurance program
Employer contributions to private defined benefit plans are
generally subject to minimum funding requirements under the
Code and ERISA.\234\ Unless a funding waiver is obtained from
the Secretary of the Treasury (``Secretary''), an employer may
be subject to a two-tier excise tax if the funding requirements
are not met.\235\
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\234\ Secs. 412 and 430-433 and ERISA secs. 301-306.
\235\ Sec. 4971.
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The minimum required contribution for a plan year for a
single-employer defined benefit plan generally depends on a
comparison of the value of the plan's assets, reduced by any
prefunding balance or funding standard carryover balance (``net
value of plan assets''),\236\ with the plan's funding target
and target normal cost. The plan's funding target for a plan
year is the present value of all benefits accrued or earned as
of the beginning of the plan year. A plan's target normal cost
for a plan year is generally the present value of benefits
expected to accrue or to be earned during the plan year.
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\236\ The value of plan assets is generally reduced by any
prefunding balance or funding standard carryover balance in determining
minimum required contributions. A prefunding balance results from plan
contributions that exceed the minimum required contributions. A funding
standard carryover balance results from a positive balance in the
funding standard account that applied under the funding requirements in
effect before PPA. Subject to certain conditions, a prefunding balance
or funding standard carryover balance may be credited against the
minimum required contribution for a year, reducing the amount that must
be contributed.
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If the net value of plan assets is less than the plan's
funding target, so that the plan has a funding shortfall
(discussed further below), the minimum required contribution is
the sum of the plan's target normal cost and the shortfall
amortization charge for the plan year (determined as described
below).\237\ If the net value of plan assets is equal to or
exceeds the plan's funding target, the minimum required
contribution is the plan's target normal cost, reduced by the
amount, if any, by which the net value of plan assets exceeds
the plan's funding target.
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\237\ If the plan has obtained a waiver of the minimum required
contribution (a funding waiver) within the past five years, the minimum
required contribution also includes the related waiver amortization
charge, that is, the annual installment needed to amortize the waived
amount in level installments over the five years following the year of
the waiver.
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Restrictions on benefit increases, certain types of
benefits and benefit accruals (collectively referred to as
benefit restrictions) may apply to a plan if the plan is funded
below a certain level.\238\ In some cases, an employer may make
an additional plan contribution to avoid a benefit restriction.
In such a case, the additional contribution does not result in
a prefunding balance.
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\238\ Sec. 436 and ERISA sec. 206(g).
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The Pension Benefit Guaranty Corporation (``PBGC'')
provides a mandatory insurance program for benefits under most
defined benefit plans maintained by private employers. If the
assets of a single-employer plan are not sufficient to pay
benefits due under the plan and the plan terminates in a
distress termination (for example, in a bankruptcy proceeding
of the employer maintaining the plan), the plan becomes the
responsibility of the PBGC. The PBGC becomes the trustee of the
plan, takes control of any plan assets, and assumes
responsibility for benefits that cannot be provided from plan
assets, subject to certain limits.
Substantial cessation of operations
Certain additional funding-related requirements apply if a
substantial cessation of operations occurs in connection with a
single-employer defined benefit plan.\239\ For this purpose, a
substantial cessation of operations occurs if the employer
maintaining the plan ceases operations at a facility, for
example, closes a plant, and, as a result, more than 20 percent
of the total active participants in the plan are separated from
employment.
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\239\ ERISA sec. 4062(e), under which the rules of ERISA section
4063 (which generally deal with the withdrawal of an employer from a
multiple-employer plan) apply.
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If a substantial cessation of operations occurs, the
employer is required to notify the PBGC and pay to the PBGC a
portion of the unfunded benefit liabilities under the plan
(determined in the same manner as if the plan were
terminating), which the PBGC then holds in escrow.
Alternatively, the employer can provide a bond for 150 percent
of the amount it would otherwise have to pay to the PBGC.
The escrow or bond is released after five years if the
defined benefit plan is not terminated during that time. If the
plan is terminated within five years, the escrow or bond
proceeds are used to fund the plan as needed to pay all
benefits due under the plan, with any remaining amounts
returned to the employer.
The PBGC also has authority to enter into an alternative
arrangement with an employer on a voluntary basis, rather than
requiring the payment to the PBGC or the bond.
On July 8, 2014, the PBGC announced a moratorium, until
December 31, 2014, on enforcement action with respect to
substantial cessations of operations.\240\
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\240\ PBGC Issues Moratorium on 4062(e) Enforcement, available at
http://www.pbgc.gov/news/press/releases/pr14-09.html.
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Explanation of Provision
In general
The provision amends the rules relating to a substantial
cessation of operations by providing a new definition of a
substantial cessation of operations, exceptions to the
application of the substantial cessation of operations
requirements, and an alternative method for an employer to
satisfy its liability with respect to a substantial cessation
of operations.\241\
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\241\ Sec. 109 of Division G of the Act provides that none of the
funds made available by the Act may be used by the PBGC to take any
action in connection with any asserted liability under ERISA section
4062(e), provided that section 109 ceases to apply on the enactment of
any bill that amends section 4062(e). Thus, section 109 ceases to apply
as a result of enactment of the provision.
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Under the provision, a substantial cessation of operations
means a permanent cessation of an employer's operations at a
facility that results in a workforce reduction of a number of
eligible employees at the facility that is more than 15 percent
of the number of all of the employer's eligible employees. For
this purpose, an eligible employee is any employee who is
eligible to participate in a defined benefit or a defined
contribution plan established and maintained by the employer.
Thus, whether a substantial cessation of operations has
occurred is not determined only by reference to the active
participants in the defined benefit plan affected by the
cessation.
For purposes of whether a substantial cessation of
operations has occurred, the number of all of the employer's
eligible employees is generally determined immediately before
the date of the employer's decision to implement the cessation
of operations. However, under a special rule, previous
employees previously separated from employment may be required
to be taken into account. That is, the workforce reduction with
respect to a cessation of operations is determined by taking
into account the separation from employment of any eligible
employee at the facility that is related to the permanent
cessation of the employer's operations at the facility and
occurs during the 3-year period preceding the cessation. In
that case, the number of all of the employer's eligible
employees is determined immediately before the earliest date on
which any of the eligible employees was separated from
employment.
In general, a workforce reduction at a facility means the
number of eligible employees at the facility who are separated
from employment by reason of the permanent cessation of
operations at the facility. However, in the case of relocation
of a workforce or disposition of a facility, certain eligible
employees separated from employment at a facility (``separated
employees'') are not taken into account in computing a
workforce reduction.
A separated employee is not taken into account in computing
a workforce reduction in the case of a relocation of a
workforce if, within a reasonable period of time, the employer
replaces the employee, at the same or another facility located
in the United States, with an employee who is a citizen or
resident of the United States.
In addition, a separated employee is not taken into account
in computing a workforce reduction in the case of certain
dispositions related to operation of a facility. If an employer
(``transferee employer''), other than the employer that
maintains a plan in connection with operations at a facility
and experiences the substantial cessation of operations
(``transferor employer''), conducts any portion of the
operations (whether by reason of a sale or other disposition of
the assets or stock of the transferor employer, or any member
of the same controlled group), then a separated employee is not
taken into account if, within a reasonable period of time, (1)
the transferee employer replaces the employee with an employee
who is a citizen or resident of the United States, and (2) in
the case of a separated employee who is a participant in a
single-employer plan maintained by the transferor employer, the
transferee employer maintains a single-employer plan that
includes the assets and liabilities attributable to the accrued
benefit of the separated employee at the time of separation
from employment with the transferor employer. In the case of a
separated employee who continues to be employed at the facility
by the transferee employer, the employee is not taken into
account in computing a workforce reduction if (1) the employee
is not a participant in a single-employer plan maintained by
the transferor employer, or (2) within a reasonable period of
time, the transferee employer maintains a single-employer plan
that includes the assets and liabilities attributable to the
accrued benefit of the employee at the time of separation from
employment with the transferor employer.
Exceptions
Under the provision, the substantial cessation of
operations rules do not apply with respect to a defined benefit
plan if, for the plan year preceding the plan year in which the
cessation occurs, (1) there were fewer than 100 participants
with accrued benefits under the plan, or (2) the ratio of the
fair market value of the plan's assets to the plan's funding
target was 90 percent or greater.
In addition, an employer is not treated as ceasing
operations at a qualified lodging facility if the operations
are continued by an eligible independent contractor pursuant to
an agreement with the employer. For this purpose, the terms
qualified lodging facility and eligible independent contractor
are defined by reference to the real estate investment trust
(``REIT'') rules under the Code.\242\
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\242\ Sec. 856(d)(9)(D) and (A), respectively. A qualified lodging
facility is generally any lodging facility (such as a hotel or motel)
unless wagering activities are conducted at or in connection with the
facility by any person engaged in the business of accepting wagers and
legally authorized to engage in that business at or in connection with
the facility. An independent contractor with respect to a qualified
lodging facility means any independent contractor if, at the time the
contractor enters into a management agreement or other similar service
contract with a taxable REIT subsidiary to operate the qualified
lodging facility, the contractor (or any related person) is actively
engaged in the trade or business of operating qualified lodging
facilities for a person who is not a related person with respect to the
taxable REIT subsidiary or the REIT of which it is a subsidiary.
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Alternative of additional contributions to satisfy liability
In general
The provision allows an employer to elect to satisfy its
liability with respect to a substantial cessation of operations
by making certain additional contributions to the defined
benefit plan for the seven plan years beginning with the plan
year in which the cessation occurs. The additional contribution
for any plan year is in addition to any minimum required
contribution under the funding rules and, like additional
contributions made to avoid a benefit restriction, does not
result in a prefunding balance. Any additional contribution for
a year must be paid by the earlier of (1) the due date for the
minimum required contribution for the year, or (2) in the case
of the first contribution, one year after the date the employer
notifies the PBGC of the substantial cessation of operations or
the date the PBGC determines a substantial cessation of
operations has occurred, and in the case of subsequent
contributions, the same date in each succeeding year.
Subject to the limit described below, the amount of an
additional contribution is (1) one-seventh of the amount of the
unfunded vested benefits under the plan, as determined for the
plan year preceding the plan year in which the cessation
occurred, multiplied by (2) the reduction fraction. Unfunded
vested benefits under a plan is the amount by which the present
value of all vested benefits accrued or earned as of the
beginning of the plan year exceeds the fair market value of the
plan's assets for the year. The reduction fraction is (1) the
number of participants with accrued benefits under the plan who
were taken into account in computing the workforce reduction
resulting from the cessation of operations, divided by (2) the
number of eligible employees with accrued benefits in the plan
(determined as of the same date used in determining the number
of all of the employer's eligible employees for purposes of
whether a substantial cessation of operations occurred).
The additional contribution for any plan year is limited to
the excess, if any, of (1) 25 percent of the difference between
the fair market value of the plan's assets and the plan's
funding target for the preceding plan year, over (2) the
minimum required contribution for the plan year, determined
without regard to the additional contribution. In addition, an
employer's obligation to make additional contributions does not
apply to the first plan year (beginning on or after the first
day of the plan year in which the cessation occurs) for which
the ratio of the fair market value of the plan's assets to the
plan's funding target is 90 percent or greater or any
subsequent year.
If the Secretary issues a funding waiver with respect to
the plan for any plan year for which an additional contribution
is due, the additional contribution for that plan year is
permanently waived. If a funding waiver has been issued with
respect to a plan or a request for a funding waiver is pending,
the employer maintaining the plan is required to provide notice
to the Secretary of the substantial cessation of operations in
the form and at the time as provided by the Secretary.
Enforcement
An employer electing to make additional contributions must
provide notice to the PBGC, in accordance with rules prescribed
by the PBGC, of--
the election, not later than 30 days after
the earlier of the date the employer notifies the PBGC
of the substantial cessation of operations or the date
the PBGC determines a substantial cessation of
operations has occurred,
the payment of each additional contribution,
not later than 10 days after the payment,
any failure to pay an additional
contribution in the full amount for any of the seven
years for which additional payments are due, not later
than 10 days after the due date for such payment,
any funding waiver that waives the
obligation to make an additional contribution for any
year, not later than 30 days after the funding waiver
is granted, and
the cessation of any obligation to make
additional contributions because the ratio of the fair
market value of the plan's assets to the plan's funding
target is 90 percent or greater, not later than 10 days
after the due date for payment of the additional
contribution for the first plan year to which such
cessation applies.
If an employer fails to pay an additional contribution for
any year in the full amount by the due date for the payment, as
of that date, the employer is liable to the plan for the
remaining unpaid balance of the aggregate additional
contributions required for the seven plan years. The PBGC may
waive or settle this liability at its discretion. The PBGC may
also bring a civil action in Federal district courts to compel
an employer that elects to make additional contributions to pay
the additional contributions required.
Effective Date
The provision is generally effective for a cessation of
operations or other event at a facility occurring on or after
the date of enactment (December 16, 2014).
Under a transition rule, an employer that had a cessation
of operations before the date of enactment (as determined under
the substantial cessation of operations rules in effect before
the date of enactment), but did not, before the date of
enactment, enter into an arrangement with the PBGC to satisfy
the requirements of those rules, may elect to make additional
contributions under the provision to satisfy its liability as
if the cessation occurred on the date of enactment. The
election must be made not later than 30 days after the PBGC
issues, on or after the date of enactment, a final
administrative determination that a substantial cessation of
operations has occurred.
In addition, the PBGC must not take any enforcement,
administrative, or other action with respect to a substantial
cessation of operations, or in connection with an agreement
settling liability arising with respect to a substantial
cessation of operations, that is inconsistent with the
amendments made by the provision, regardless of whether the
action relates to a cessation or other event that occurs
before, on, or after the date of enactment, unless the action
is in connection with a settlement agreement in place before
June 1, 2014. The PBGC also must not initiate a new enforcement
action with respect to a substantial cessation of operations
that is inconsistent with its enforcement policy in effect on
June 1, 2014.
B. Clarification of the Normal Retirement Age (sec. 2 of the Act, sec.
411 of the Code, and sec. 204 of ERISA)
Present Law
Rules relating to normal retirement age
Normal retirement age is relevant for various purposes
under the requirements relating to qualified defined benefit
plans.\243\ Normal retirement age is generally the age
specified for normal retirement under the plan, but may not be
later than age 65 or, if later, the fifth anniversary of the
time a participant commences participation in the plan.\244\
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\243\ See, for example, the vesting and accrual requirements under
sections 401(a)(7) and 411. Similar requirements apply under sections
203 and 204 of the Employee Retirement Income Security Act of 1974
(``ERISA''). These requirements (and ERISA) generally do not apply to
governmental plans or church plans.
\244\ Sec. 411(a)(8) of the Code and sec. 3(24) of ERISA.
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Under the vesting rules, a participant's right to employer-
provided benefits he or she has earned or ``accrued'' under a
plan (``accrued benefit'') generally must become nonforfeitable
after a specified period of service. In addition, a
participant's right to the benefit under the plan commencing at
normal retirement age (the ``normal retirement benefit'') must
become nonforfeitable on attainment of normal retirement age.
In the case of a defined benefit plan, a participant's accrued
benefit at any given time is generally the portion of the
normal retirement benefit that the participant has earned as of
that time. That is, if a participant terminates employment
before reaching normal retirement age, the benefit to which the
participant is entitled to receive on reaching normal
retirement age is the accrued benefit.
Under the accrual rules (also referred to as the ``anti-
backloading'' rules), the pattern in which a participant's
normal retirement benefit is earned over his or her period of
service to normal retirement age must satisfy one of three
options (``accrual methods'').\245\ This serves as a backstop
to the vesting rules by requiring a participant's normal
retirement benefit to be earned relatively smoothly over his or
her service, rather than having a disproportionate amount
earned only at a later age or completion of longer service
(that is, ``backloaded'').
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\245\ Sec. 411(b) of the Code and sec. 204 of ERISA.
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A defined benefit plan is permitted to provide a wide
variety of optional forms of distribution with respect to the
accrued benefit, but each form must be at least the actuarial
equivalent of the accrued benefit.\246\ A defined benefit plan
may provide for a subsidized early retirement benefit or other
retirement-type subsidies, the right to which is not required
to vest or accrue in accordance with the vesting and accrual
requirements. For example, a plan with a normal retirement age
of 65 might provide for payment of a participant's accrued
benefit on retirement at age 55 without actuarial reduction for
early commencement, but conditioned on the participant having
at least 30 years of service.
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\246\ The assumptions for determining actuarial equivalence
(interest rate and mortality) must be specified in the plan in a manner
that precludes employer discretion. In the case of certain forms of
benefit, including lump sums, specific actuarial assumptions must be
used.
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Defined benefit plans generally may not provide for
distributions to a participant during employment (referred to
as ``in-service'' distributions) unless the participant has
attained normal retirement age (or age 62, if earlier) or in
the case of plan termination.\247\ Under final Treasury
regulations issued in 2007, the normal retirement age under a
plan must be an age that is not earlier than the earliest age
that is reasonably representative of the typical retirement age
for the industry in which the covered workforce is
employed.\248\ Under the regulations, a normal retirement age
of age 62 or later is deemed not to be earlier than the
earliest age that is reasonably representative of the typical
retirement age for the industry in which the covered workforce
is employed.
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\247\ Sec. 401(a)(36); Treas. Reg. secs. 1.401-1(b)(1)(i) and
1.401(a)-1(b)(1)(i).
\248\ Treas. Reg. sec. 1.401(a)-1(b)(2). These regulations apply to
all qualified defined benefit plans, including governmental plans and
church plans.
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Normal retirement ages with a service component
Some defined benefit plans have defined normal retirement
age as the earlier of a fixed age (such as age 62) or the
completion of a specified period of service (for example, 30
years) and have permitted participants to receive in-service
distributions of their full normal retirement benefits (that
is, without an actuarial reduction for early commencement)
after completion of the period of service.
The IRS has indicated that a plan under which a
participant's normal retirement age changes to an earlier date
upon completion of a stated number of years of service
typically will not satisfy the vesting and accrual rules.\249\
An unreduced early retirement benefit is permitted to be
conditioned on completion of a stated number of years of
service (such as 30 years of service); however, an early
retirement benefit is generally permitted to be paid only after
termination of employment.
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\249\ Notice 2007-69, 2007-2 C.B. 468.
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Nondiscrimination requirements
Qualified retirement plans may not discriminate in favor of
highly compensated employees with respect to contributions or
benefits.\250\ In the case of a defined benefit plan, whether
benefits are discriminatory is generally based on the benefits
provided at a uniform normal retirement age.\251\
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\250\ Sec. 401(a)(4). For this purpose, highly compensated
employees are generally five-percent owners and employees with
compensation above a certain level for the preceding year. For 2014,
the compensation level is $115,000.
\251\ Treas. Reg. secs. 1.401(a)(4)-3 and -12.
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Explanation of Provision
Under the provision, a defined benefit plan meeting certain
requirements (an ``applicable'' plan) is not treated as failing
any qualification requirement or any requirement under ERISA,
or as failing to have a uniform normal retirement age for these
purposes, solely because the plan provides a normal retirement
age of the earlier of (1) an age otherwise permitted under the
definition of normal retirement age in the Code and ERISA, or
(2) the age at which a participant completes the number of
years (not less than 30) of service specified by the plan. An
applicable plan is a defined benefit plan the terms of which,
on or before December 8, 2014, provided for such a normal
retirement age. A plan is generally an applicable plan only
with respect to an individual who (1) is a participant in the
plan on or before January 1, 2017, or (2) is an employee at any
time on or before January 1, 2017, of any employer maintaining
the plan and who becomes a participant in the plan after
January 1, 2017.
A plan does not fail to be an applicable plan solely
because, as of December 8, 2014, the normal retirement age
described above applied only to certain plan participants or,
in the case of a plan maintained by more than one employer,
only to employees of certain employers. In addition, subject to
the limitation described above relating to participation or
employment on or before January 1, 2017, if application of this
normal retirement age is expanded after December 8, 2014, to
additional participants or employees of additional employers,
the plan will be treated as an applicable plan with respect to
those participants and employees.
Effective Date
The provision applies to all periods before, on, and after
the date of enactment (December 16, 2014).
C. Application of Cooperative and Small Employer Charity Pension Plan
Rules to Certain Charitable Employers Whose Primary Exempt Purpose is
Providing Services with Respect to Children (sec. 3 of the Act, sec.
414(y) of the Code, and sec. 210(f) of ERISA)
Present Law
Defined benefit plans maintained by private employers are
generally subject to minimum funding requirements.\252\
Different minimum funding rules apply to (1) single-employer
plans and most multiple-employer plans, (2) multiple-employer
plans that are CSEC (cooperative and small employer charity)
plans, and (3) multiemployer plans.\253\ For this purpose,
businesses and organizations that are members of a controlled
group, a group under common control, or an affiliated service
group are treated as one employer (referred to as
``aggregation'').\254\
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\252\ Secs. 412 and 430-433 and ERISA secs. 301-306. Unless a
funding waiver is obtained, an employer may be subject to a two-tier
excise tax under section 4971 if the funding requirements are not met.
\253\ See Part Six and Part Nine, Division O, above, for
descriptions of these plans and the funding rules applicable to each
type.
\254\ Secs. 414(b), (c), (m) and (o).
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Funding rules for CSEC plans were enacted by the
Cooperative and Small Employer Charity Pension Flexibility
Act.\255\ For this purpose, a CSEC plan is a defined benefit
plan (other than a multiemployer plan) (1) that is an eligible
cooperative plan to which a delayed effective date for funding
rules enacted under the Pension Protection Act of 2006
(``PPA'') applies (without regard to the January 1, 2017, end
of the delayed effective date),\256\ or (2) that, as of June
25, 2010, was maintained by more than one employer (taking into
account the aggregation rules for controlled groups and groups
under common control) and all of the employers were tax-exempt
charitable organizations.\257\
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\255\ Pub. L. No. 113 197, discussed in Part Six.
\256\ This delayed effective date is provided under section 104 of
PPA, Pub. L. No. 109-280.
\257\ June 25, 2010 is the date of enactment of the Preservation of
Access to Care for Medicare Beneficiaries and Pension Relief Act of
2010 (``PRA 2010''), Pub. L. No. 111-192, which expanded the
applicability of the delayed effective date. A tax-exempt charitable
organization is an organization exempt from tax under section
501(c)(3).
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Explanation of Provision
The provision amends the definition of CSEC plan to include
a plan that, as of June 25, 2010, was maintained by an employer
(1) that is a tax-exempt charitable organization and a
Federally-chartered patriotic organization,\258\ (2) that has
employees in at least 40 States, and (3) the primary exempt
purpose of which is to provide services with respect to
children. For purposes of determining the employer maintaining
the plan, the aggregation rules for controlled groups and
groups under common control employers apply.
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\258\ A Federally-chartered patriotic organization is an
organization chartered under part B of subtitle II of title 36, United
States Code.
---------------------------------------------------------------------------
Effective Date
The provision is effective as if included in the
Cooperative and Small Employer Charity Pension Flexibility Act.
As a result, the provision is effective for plan years
beginning after December 31, 2013.
PART TEN: AN ACT TO AMEND CERTAIN PROVISIONS OF THE FAA MODERNIZATION
AND REFORM ACT OF 2012 (PUBLIC LAW 113-243) \259\
A. Rollover of Amounts Received in Airline Carrier Bankruptcy (sec. 1
of the Act and sec. 1106 of the FAA Modernization and Reform Act of
2012)
Present Law
Individual retirement arrangements
The Code provides for two types of individual retirement
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\260\
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\259\ H.R. 2591. The House passed H.R. 2591 on December 11, 2014.
The Senate passed the bill without amendment on December 13, 2014. The
President signed the bill on December 18, 2014.
\260\ Traditional IRAs are described in section 408, and Roth IRAs
are described in section 408A.
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Contributions to a traditional IRA may be deductible from
gross income, or nondeductible contributions may be made, which
result in ``basis.'' Distributions from a traditional IRA are
includible in gross income to the extent not treated as a
return of basis (that is, if attributable to deductible
contributions or earnings).
Contributions to a Roth IRA are not deductible (and result
in basis), and qualified distributions from a Roth IRA are
excludable from gross income. Distributions from a Roth IRA
that are not qualified distributions are includible in gross
income to the extent not treated as a return of basis (that is,
if attributable to earnings). In general, a qualified
distribution from a Roth IRA is a distribution that (1) is made
after the five taxable year period beginning with the first
taxable year for which the individual first made a contribution
to a Roth IRA, and (2) is made on or after the individual
attains age 59\1/2\, death, or disability or which is a
qualified special purpose distribution.
The total amount that an individual may contribute to one
or more IRAs for a year (other than a rollover contribution,
discussed below) is generally limited to the lesser of: (1) a
dollar amount ($5,500 for 2014); or (2) the amount of the
individual's compensation that is includible in gross income
for the year.\261\ In the case of married individuals filing a
joint return, a contribution up to the dollar limit for each
spouse may be made, provided the combined compensation of the
spouses is at least equal to the contributed amount.
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\261\ The maximum contribution amount is increased by $1,000 for
individuals 50 years of age or older.
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Subject to certain requirements, an individual may roll a
distribution from an IRA over to an IRA of the same type on a
nontaxable basis (that is, without income inclusion). In
addition, an individual generally may convert a traditional IRA
to a Roth IRA. In that case, the amount converted is includible
in income as if a distribution from the traditional IRA had
been made.
Rollover of airline payments to traditional IRAs
Under the FAA Modernization and Reform Act of 2012 (``2012
FAA Act''), if a qualified airline employee contributes any
portion of an airline payment amount to a traditional IRA
within 180 days of receipt of the amount (or, if later, within
180 days of February 14, 2012, the date of enactment of the
2012 FAA Act), the amount contributed is treated as a rollover
contribution to the IRA.\262\ A qualified airline employee
making such a rollover contribution may exclude the contributed
amount from gross income for the taxable year in which the
airline payment amount was paid to the qualified airline
employee.
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\262\ Sec. 1106 of Pub. L. No. 112-95. Under section 125 of the
Worker, Retiree, and Employer Recovery Act of 2008 (``WRERA''), Pub. L.
No. 110-458, a qualified airline employee is permitted to contribute
any portion of an airline payment amount to a Roth IRA within 180 days
of receipt of such amount (or, if later, within 180 days of December
23, 2008, the date of enactment of WRERA), and the amount contributed
is treated as a rollover contribution to the Roth IRA. The 2012 FAA Act
permitted an employee who had previously made a rollover contribution
of an airline payment amount to a Roth IRA to recharacterize all or a
portion of the rollover contribution as a rollover contribution to a
traditional IRA and to exclude the recharacterized amount from income.
---------------------------------------------------------------------------
For this purpose, a qualified airline employee is an
employee or former employee of a commercial passenger airline
carrier who was a participant in a qualified defined benefit
plan maintained by the carrier that was terminated or that
became subject to the benefit accrual and other restrictions
applicable to certain plans under the Pension Protection Act of
2006 (``PPA'').\263\ If a qualified airline employee dies after
receiving an airline payment amount, or if an airline payment
amount is paid to a surviving spouse of a qualified airline
employee, the surviving spouse may receive the same rollover
contribution treatment (and the related exclusion from income)
as the employee could have received.
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\263\ Pub. L. No. 109-280. Section 402 of PPA provides funding
relief with respect to certain defined benefit plans maintained by
commercial passenger airlines, subject to meeting the benefit accrual
and other restrictions under PPA section 402(b)(2) and (3).
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An airline payment amount is any payment of any money or
other property payable by a commercial passenger airline to a
qualified airline employee: (1) under the approval of an order
of a Federal bankruptcy court in a case filed after September
11, 2001, and before January 1, 2007, and (2) in respect of the
qualified airline employee's interest in a bankruptcy claim
against the airline carrier, any note of the carrier (or amount
paid in lieu of a note being issued), or any other fixed
obligation of the carrier to pay a lump sum amount. An airline
payment amount does not include any amount payable on the basis
of the carrier's future earnings or profits. The amount of any
airline payment amount is determined without regard to the
withholding of the employee's share of taxes under the Federal
Insurance Contributions Act (``FICA'') or income tax.\264\
Thus, for purposes of the rollover provision and the related
exclusion from income, the gross amount of the airline payment
amount (before withholding) applies.
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\264\ Secs. 3102 and 3402. An airline payment amount that is
excluded from income under the 2012 FAA Act continues to be wages for
FICA and Social Security earnings purposes.
---------------------------------------------------------------------------
The ability to contribute airline payment amounts to a
traditional IRA as a rollover contribution (and the related
exclusion from income) is subject to limitations. First, a
qualified airline employee is not permitted to contribute an
airline payment amount to a traditional IRA for a taxable year
if, at any time during the taxable year or a preceding taxable
year, the employee was a ``covered employee,'' that is, the
principal executive officer (or an individual acting in such
capacity) within the meaning of the Securities Exchange Act of
1934 or among the three most highly compensated officers for
the taxable year (other than the principal executive officer),
of the commercial passenger airline carrier making the airline
payment amount.\265\ Second, in the case of a qualified airline
employee who was not at any time a covered employee, the amount
that may be contributed to a traditional IRA for a taxable year
cannot exceed the excess (if any) of (1) 90 percent of the
aggregate airline payment amounts received during the taxable
year and all preceding taxable years, over (2) the aggregate
amount contributed to a traditional IRA (and excluded from
income) for all preceding taxable years (``90 percent
limitation'').
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\265\ Covered employee status is defined by reference to section
162(m) (limiting deductions for compensation of covered employees),
which defines a covered employee as (1) the chief executive officer of
the corporation (or an individual acting in such capacity) as of the
close of the taxable year, and (2) the four most highly compensated
officers for the taxable year (other than the chief executive officer),
whose compensation is required to be reported to shareholders under the
Securities Exchange Act of 1934. Treas. Reg. sec. 1.162-27(c)(2)
provides that whether an employee is the chief executive officer or
among the four most highly compensated officers is determined pursuant
to the executive compensation disclosure rules promulgated under the
Securities Exchange Act of 1934. To reflect 2006 changes made to the
disclosure rules by the Securities and Exchange Commission, Notice
2007-49, 2007-25 I.R.B. 1429, provides that ``covered employee'' means
any employee who is (1) the principal executive officer (or an
individual acting in such capacity) within the meaning of the amended
disclosure rules, or (2) among the three most highly compensated
officers for the taxable year (other than the principal executive
officer).
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Under the 2012 FAA Act, a qualified airline employee who
excludes from income an airline payment amount contributed to a
traditional IRA may file a claim for a refund until the later
of: (1) the usual period of limitation (generally, three years
from the time the return was filed or two years from the time
the tax was paid, whichever period expires later),\266\ or (2)
April 15, 2013.
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\266\ Sec. 6511(a).
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Explanation of Provision
The provision amends the definition of qualified airline
employee under the 2012 FAA Act to include an employee or
former employee of a commercial passenger airline carrier who
was a participant in a qualified defined benefit plan
maintained by the carrier that was frozen (that is, under which
all benefit accruals ceased) as of November 1, 2012. The
provision also amends the definition of airline payment amount
under the 2012 FAA Act to include any payment of any money or
other property payable by a commercial passenger airline (but
not any amount payable on the basis of the carrier's future
earnings or profits) to a qualified airline employee: (1) under
the approval of an order of a Federal bankruptcy court in a
case filed on November 29, 2011, and (2) in respect of the
qualified airline employee's interest in a bankruptcy claim
against the airline carrier, any note of the carrier (or amount
paid in lieu of a note being issued), or any other fixed
obligation of the carrier to pay a lump sum amount. Thus, as a
result of the provision, if a qualified airline employee (other
than a covered employee as described above) under a qualified
defined benefit plan that was frozen as of November 1, 2012,
receives an airline payment amount under a Federal bankruptcy
order in a case filed on November 29, 2011, and, subject to the
90 percent limitation described above, contributes any portion
of the airline payment amount to a traditional IRA within 180
days of receipt of the amount,\267\ the amount contributed is
treated as a rollover contribution to the traditional IRA and
may be excluded from gross income for the taxable year in which
the airline payment amount was paid to the qualified airline
employee.\268\
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\267\ Rollover contribution treatment (and the related exclusion
from income) applies to an airline payment amount (or portion thereof)
contributed to a traditional IRA within 180 days. A legislative change
may be needed for the provision to apply with respect to airline
payment amounts received more than 180 days before enactment.
\268\ As permitted under present law, after the contribution, an
individual may convert the traditional IRA to a Roth IRA.
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Under the provision, a qualified airline employee who
excludes from income an airline payment amount contributed to a
traditional IRA may file a claim for a refund until the later
of (1) the usual period of limitation (generally, three years
from the time the return was filed or two years from the time
the tax was paid, whichever period expires later), or (2) April
15, 2015.
Effective Date
The provision is effective on the date of enactment
(December 18, 2014).
PART ELEVEN: GRAND PORTAGE BAND PER CAPITA ADJUSTMENT ACT (PUBLIC LAW
113-290) \269\
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\269\ H.R. 3608. The House Committee on Natural Resources reported
H.R. 3608 on November 17, 2014 (H.R. Rep. 113-625 (Part 1)). The House
passed the bill on November 17, 2014. The Senate passed the bill
without amendment on December 16, 2014. The President signed the bill
on December 19, 2014.
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A. Equal Treatment of Certain Per Capita Income For Purposes of Federal
Assistance (sec. 2 of the Act)
Present Law
Section 1407 of Title 25 of the United States Code
(Indians) exempts certain per capita payments from Federal and
State income taxes and from treatment as income for purposes of
determining eligibility for Social Security and Federal
assistance programs.
Section 7873 of the Internal Revenue Code provides that no
income or employment tax is imposed on income derived by
Indians from a fishing rights-related activity. The IRS has
found that ``income derived from a fishing rights-related
activity'' includes per capita payments to tribal members from
a tribe's settlement of an action for declaratory judgment
prohibiting State regulation of fishing on treaty waters.\270\
The IRS's rationale was that the amount of the settlement
payment to the tribe was intended to approximate the loss of
potential fishing income that would result from the State
regulation imposed by the settlement agreement.
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\270\ Technical Advice Memorandum 9747004, July 25, 1997.
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Explanation of Provision
The provision amends section 1407 of Title 25 of the United
States Code to include certain payments made by the State of
Minnesota to the Grand Portage Band of Lake Superior Chippewa
Indians (the ``Tribe''). These payments result from a
settlement under which the Tribe agreed to restrict their
members from exercising their fishing rights.
Effective Date
The provision is effective on the date of enactment
(December 19, 2014).
PART TWELVE: TAX INCREASE PREVENTION ACT OF 2014 AND THE STEPHEN BECK,
JR., ACHIEVING A BETTER LIFE EXPERIENCE ACT OF 2014 (PUBLIC LAW 113-
295) \271\
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\271\ H.R. 5771. The Senate Committee on Finance reported S. 2260
(``EXPIRE Act of 2014'') on April 28, 2014 (S. Rep. No. 113-154) and S.
2261 (``Tax Technical Corrections Act of 2014'') on April 28, 2014 (S.
Rep. No. 113-155). The EXPIRE Act generally extended expiring
provisions through 2015 with some modifications. The House Committee on
Ways and Means reported H.R. 647 (``Achieving a Better Life Experience
Act of 2014'') on November 12, 2014 (H.R. Rep. No. 113-614 (Part 1)).
The House passed H.R. 5771 (``Tax Increase Prevention Act of 2014'')
and H.R. 647 on December 3, 2014. In the engrossment of H.R. 5771, the
text of H.R. 647 was added as Division B. The Senate passed the bill
without amendment on December 16, 2014. The President signed the bill
on December 19, 2014.
The House Ways and Means Committee reported the following bills
relating to the modification and making permanent or extending certain
expiring provisions: H.R. 4453 (``S Corporation Permanent Tax Relief
Act of 2014'') on May 2, 2014 (H.R. Rep. No. 113-429), H.R. 4454
(``Permanent S Corporation Charitable Contributions Act of 2014'') on
May 2, 2014 (H.R. Rep. No. 113-430), H.R. 4438 (``American Research and
Competitiveness Act of 2014'') on May 2, 2014 (H.R. Rep. No. 113-431),
H.R. 4457 (``America's Small Business Tax Relief Act of 2014'') on May
2, 2014 (H.R. Rep. No. 113-432), H.R. 4719 (``America Gives More Act of
2014'') on June 26, 2014 (H.R. Rep. 113-498), H.R. 2807 (``Conservation
Easement Incentive Act of 2014'') on June 26, 2014 (H. Rep. No. 113-
494), H.R. 4619 (``Permanent IRA Charitable Contribution Act of 2014'')
on June 26, 2014 (H.R. Rep. No. 113-496), and H.R. 4718 (A bill to
amend the Internal Revenue Code of 1986 to modify and make permanent
bonus depreciation) on July 3, 2014 (H.R. Rep. No. 113-509). Each of
the bills passed the House, either separately or in a bill combining
certain of the provisions.
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DIVISION A--TAX INCREASE PREVENTION ACT OF 2014
TITLE I--CERTAIN EXPIRING PROVISIONS
A. Subtitle A--Individual Tax Extenders
1. Extension of deduction for certain expenses of elementary and
secondary school teachers (sec. 101 of the Act and sec.
62(a)(2)(D) of the Code)
Present Law
In general, ordinary and necessary business expenses are
deductible. However, unreimbursed employee business expenses
generally are deductible only as an itemized deduction and only
to the extent that the individual's total miscellaneous
deductions (including employee business expenses) exceed two
percent of adjusted gross income. For taxable years beginning
after 2012, an individual's otherwise allowable itemized
deductions may be further limited by the overall limitation on
itemized deductions, which reduces itemized deductions for
taxpayers with adjusted gross income in excess of a threshold
amount. In addition, miscellaneous itemized deductions are not
allowable under the alternative minimum tax.
Certain expenses of eligible educators are allowed as an
above-the-line deduction. Specifically, for taxable years
beginning prior to January 1, 2014, an above-the-line deduction
is allowed for up to $250 annually of expenses paid or incurred
by an eligible educator for books, supplies (other than
nonathletic supplies for courses of instruction in health or
physical education), computer equipment (including related
software and services) and other equipment, and supplementary
materials used by the eligible educator in the classroom.\272\
To be eligible for this deduction, the expenses must be
otherwise deductible under section 162 as a trade or business
expense. A deduction is allowed only to the extent the amount
of expenses exceeds the amount excludable from income under
section 135 (relating to education savings bonds), 529(c)(1)
(relating to qualified tuition programs), and section 530(d)(2)
(relating to Coverdell education savings accounts).
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\272\ Sec. 62(a)(2)(D).
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An eligible educator is a kindergarten through grade twelve
teacher, instructor, counselor, principal, or aide in a school
for at least 900 hours during a school year. A school means any
school that provides elementary education or secondary
education (kindergarten through grade 12), as determined under
State law.
The above-the-line deduction for eligible educators is not
allowed for taxable years beginning after December 31, 2013.
Explanation of Provision
The provision extends the deduction for eligible educator
expenses for one year, through December 31, 2014.
Effective Date
The provision applies to taxable years beginning after
December 31, 2013.
2. Extension of exclusion from gross income of discharges of
acquisition indebtedness on principal residences (sec. 102 of
the Act and sec. 108 of the Code)
Present Law
In general
Gross income includes income that is realized by a debtor
from the discharge of indebtedness, subject to certain
exceptions for debtors in Title 11 bankruptcy cases, insolvent
debtors, certain student loans, certain farm indebtedness, and
certain real property business indebtedness (secs. 61(a)(12)
and 108).\273\ In cases involving discharges of indebtedness
that are excluded from gross income under the exceptions to the
general rule, taxpayers generally reduce certain tax
attributes, including basis in property, by the amount of the
discharge of indebtedness.
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\273\ A debt cancellation which constitutes a gift or bequest is
not treated as income to the donee debtor (sec. 102).
---------------------------------------------------------------------------
The amount of discharge of indebtedness excluded from
income by an insolvent debtor not in a Title 11 bankruptcy case
cannot exceed the amount by which the debtor is insolvent. In
the case of a discharge in bankruptcy or where the debtor is
insolvent, any reduction in basis may not exceed the excess of
the aggregate bases of properties held by the taxpayer
immediately after the discharge over the aggregate of the
liabilities of the taxpayer immediately after the discharge
(sec. 1017).
For all taxpayers, the amount of discharge of indebtedness
generally is equal to the difference between the adjusted issue
price of the debt being cancelled and the amount used to
satisfy the debt. These rules generally apply to the exchange
of an old obligation for a new obligation, including a
modification of indebtedness that is treated as an exchange (a
debt-for-debt exchange).
Qualified principal residence indebtedness
An exclusion from gross income is provided for any
discharge of indebtedness income by reason of a discharge (in
whole or in part) of qualified principal residence
indebtedness. Qualified principal residence indebtedness means
acquisition indebtedness (within the meaning of section
163(h)(3)(B), except that the dollar limitation is $2 million)
with respect to the taxpayer's principal residence. Acquisition
indebtedness with respect to a principal residence generally
means indebtedness which is incurred in the acquisition,
construction, or substantial improvement of the principal
residence of the individual and is secured by the residence. It
also includes refinancing of such indebtedness to the extent
the amount of the indebtedness resulting from such refinancing
does not exceed the amount of the refinanced indebtedness. For
these purposes, the term ``principal residence'' has the same
meaning as under section 121 of the Code.
If, immediately before the discharge, only a portion of a
discharged indebtedness is qualified principal residence
indebtedness, the exclusion applies only to so much of the
amount discharged as exceeds the portion of the debt which is
not qualified principal residence indebtedness. Thus, assume
that a principal residence is secured by an indebtedness of $1
million, of which $800,000 is qualified principal residence
indebtedness. If the residence is sold for $700,000 and
$300,000 debt is discharged, then only $100,000 of the amount
discharged may be excluded from gross income under the
qualified principal residence indebtedness exclusion.
The basis of the individual's principal residence is
reduced by the amount excluded from income under the provision.
The qualified principal residence indebtedness exclusion
does not apply to a taxpayer in a Title 11 case; instead the
general exclusion rules apply. In the case of an insolvent
taxpayer not in a Title 11 case, the qualified principal
residence indebtedness exclusion applies unless the taxpayer
elects to have the general exclusion rules apply instead.
The exclusion does not apply to the discharge of a loan if
the discharge is on account of services performed for the
lender or any other factor not directly related to a decline in
the value of the residence or to the financial condition of the
taxpayer.
The exclusion for qualified principal residence
indebtedness is effective for discharges of indebtedness before
January 1, 2014.
Explanation of Provision
The provision extends for one year (through December 31,
2014) the exclusion from gross income for discharges of
qualified principal residence indebtedness.
Effective Date
The provision applies to discharges of indebtedness on or
after January 1, 2014.
3. Extension of parity for employer-provided mass transit and parking
benefits (sec. 103 of the Act and 132(f) of the Code)
Present Law
Qualified transportation fringes
Qualified transportation fringe benefits provided by an
employer are excluded from an employee's gross income for
income tax purposes and from an employee's wages for employment
tax purposes.\274\ Qualified transportation fringe benefits
include parking, transit passes, vanpool benefits, and
qualified bicycle commuting reimbursements.
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\274\ Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16)
and 3401(a)(19).
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No amount is includible in the income of an employee merely
because the employer offers the employee a choice between cash
and qualified transportation fringe benefits (other than a
qualified bicycle commuting reimbursement).
Qualified transportation fringe benefits also include a
cash reimbursement (under a bona fide reimbursement
arrangement) by an employer to an employee for parking, transit
passes, or vanpooling. In the case of transit passes, however,
a cash reimbursement is considered a qualified transportation
fringe benefit only if a voucher or similar item that may be
exchanged only for a transit pass is not readily available for
direct distribution by the employer to the employee.
Mass transit parity
Before February 17, 2009, the amount that could be excluded
as qualified transportation fringe benefits was limited to $100
per month in combined transit pass and vanpool benefits and
$175 per month in qualified parking benefits. These limits are
adjusted annually for inflation, using 1998 as the base year;
for 2014, the limits are $130 and $250, respectively. Effective
for months beginning on or after February 17, 2009,\275\ and
before January 1, 2014, parity in qualified transportation
fringe benefits is provided by temporarily increasing the
monthly exclusion for combined employer-provided transit pass
and vanpool benefits to the same level as the exclusion for
employer-provided parking.
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\275\ Parity was originally provided by the American Recovery and
Reinvestment Act of 2009 (``ARRA''), Pub. L. No. 111-5, effective for
months beginning on or after February 17, 2009, the date of enactment
of ARRA.
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Effective January 1, 2014, the amount that can be excluded
as qualified transportation fringe benefits is limited to $130
per month in combined transit pass and vanpool benefits and
$250 per month in qualified parking benefits. These amounts
apply also for 2015.
Explanation of Provision
The provision extends parity in the exclusion for combined
employer-provided transit pass and vanpool benefits and for
employer-provided parking benefits for one year, through months
beginning before January 1, 2015. Thus, for 2014, the monthly
limit on the exclusion for combined transit pass and vanpool
benefits is $250, the same as the monthly limit on the
exclusion for qualified parking benefits.
In order for the extension to be effective retroactive to
January 1, 2014, expenses incurred during 2014 by an employee
for employer-provided transit and vanpool benefits may be
reimbursed (under a bona fide reimbursement arrangement) by
employers on a tax-free basis to the extent they exceed $130
per month and are no more than $250 per month. The Congress
intends that the rule that an employer reimbursement is
excludible only if vouchers are not available to provide the
benefit continues to apply, except in the case of
reimbursements for transit or vanpool benefits between $130 and
$250 for months during 2014. Further, the Congress intends that
reimbursements for expenses incurred for months during 2014 may
be made in addition to the provision of excludible benefits or
reimbursements for expenses incurred during 2015.
Effective Date
The provision is effective for months after December 31,
2013.
4. Extension of mortgage insurance premiums treated as qualified
residence interest (sec. 104 of the Act and sec. 163 of the Code)
Present Law
In general
Present law provides that qualified residence interest is
deductible notwithstanding the general rule that personal
interest is nondeductible.\276\
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\276\ Sec. 163(h).
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Acquisition indebtedness and home equity indebtedness
Qualified residence interest is interest on acquisition
indebtedness and home equity indebtedness with respect to a
principal and a second residence of the taxpayer. The maximum
amount of home equity indebtedness is $100,000. The maximum
amount of acquisition indebtedness is $1 million. Acquisition
indebtedness means debt that is incurred in acquiring,
constructing, or substantially improving a qualified residence
of the taxpayer, and that is secured by the residence. Home
equity indebtedness is debt (other than acquisition
indebtedness) that is secured by the taxpayer's principal or
second residence, to the extent the aggregate amount of such
debt does not exceed the difference between the total
acquisition indebtedness with respect to the residence, and the
fair market value of the residence.
Qualified mortgage insurance
Certain premiums paid or accrued for qualified mortgage
insurance by a taxpayer during the taxable year in connection
with acquisition indebtedness on a qualified residence of the
taxpayer are treated as interest that is qualified residence
interest and thus deductible. The amount allowable as a
deduction is phased out ratably by 10 percent for each $1,000
(or fraction thereof) by which the taxpayer's adjusted gross
income exceeds $100,000 ($500 and $50,000, respectively, in the
case of a married individual filing a separate return). Thus,
the deduction is not allowed if the taxpayer's adjusted gross
income exceeds $109,000 ($54,000 in the case of married
individual filing a separate return).
For this purpose, qualified mortgage insurance means
mortgage insurance provided by the Department of Veterans
Affairs, the Federal Housing Administration, or the Rural
Housing Service, and private mortgage insurance (defined in
section two of the Homeowners Protection Act of 1998 as in
effect on the date of enactment of the provision).
Amounts paid for qualified mortgage insurance that are
properly allocable to periods after the close of the taxable
year are treated as paid in the period to which they are
allocated. No deduction is allowed for the unamortized balance
if the mortgage is paid before its term (except in the case of
qualified mortgage insurance provided by the Department of
Veterans Affairs or Rural Housing Service).
The provision does not apply with respect to any mortgage
insurance contract issued before January 1, 2007. The provision
terminates for any amount paid or accrued after December 31,
2013, or properly allocable to any period after that date.
Reporting rules apply under the provision.
Explanation of Provision
The provision extends the deduction for qualified mortgage
insurance premiums for one year (with respect to contracts
entered into after December 31, 2006). Thus, the provision
applies to amounts paid or accrued in 2014 (and not properly
allocable to any period after 2014).
Effective Date
The provision applies to amounts paid or accrued after
December 31, 2013.
5. Extension of deduction for State and local general sales taxes (sec.
105 of the Act and sec. 164 of the Code)
Present Law
For purposes of determining regular tax liability, an
itemized deduction is permitted for certain State and local
taxes paid, including individual income taxes, real property
taxes, and personal property taxes. The itemized deduction is
not permitted for purposes of determining a taxpayer's
alternative minimum taxable income. For taxable years beginning
before January 1, 2014, at the election of the taxpayer, an
itemized deduction may be taken for State and local general
sales taxes in lieu of the itemized deduction provided under
present law for State and local income taxes. As is the case
for State and local income taxes, the itemized deduction for
State and local general sales taxes is not permitted for
purposes of determining a taxpayer's alternative minimum
taxable income. Taxpayers have two options with respect to the
determination of the sales tax deduction amount. Taxpayers may
deduct the total amount of general State and local sales taxes
paid by accumulating receipts showing general sales taxes paid.
Alternatively, taxpayers may use tables created by the
Secretary that show the allowable deduction. The tables are
based on average consumption by taxpayers on a State-by-State
basis taking into account number of dependents, modified
adjusted gross income and rates of State and local general
sales taxation. Taxpayers who live in more than one
jurisdiction during the tax year are required to pro-rate the
table amounts based on the time they live in each jurisdiction.
Taxpayers who use the tables created by the Secretary may, in
addition to the table amounts, deduct eligible general sales
taxes paid with respect to the purchase of motor vehicles,
boats, and other items specified by the Secretary. Sales taxes
for items that may be added to the tables are not reflected in
the tables themselves.
A general sales tax is a tax imposed at one rate with
respect to the sale at retail of a broad range of classes of
items.\277\ No deduction is allowed for any general sales tax
imposed with respect to an item at a rate other than the
general rate of tax. However, in the case of food, clothing,
medical supplies, and motor vehicles, the above rules are
relaxed in two ways. First, if the tax does not apply with
respect to some or all of such items, a tax that applies to
other such items can still be considered a general sales tax.
Second, the rate of tax applicable with respect to some or all
of these items may be lower than the general rate. However, in
the case of motor vehicles, if the rate of tax exceeds the
general rate, such excess is disregarded and the general rate
is treated as the rate of tax.
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\277\ Sec. 164(b)(5)(B).
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A compensating use tax with respect to an item is treated
as a general sales tax, provided such tax is complementary to a
general sales tax and a deduction for sales taxes is allowable
with respect to items sold at retail in the taxing jurisdiction
that are similar to such item.
Explanation of Provision
The provision extends the provision allowing taxpayers to
elect to deduct State and local sales taxes in lieu of State
and local income taxes for one year, through December 31, 2014.
Effective Date
The provision applies to taxable years beginning after
December 31, 2013.
6. Extension of special rule for contributions of capital gain real
property made for conservation purposes (sec. 106 of the Act and sec.
170(b) of the Code)
Present Law
Charitable contributions generally
In general, a deduction is permitted for charitable
contributions, subject to certain limitations that depend on
the type of taxpayer, the property contributed, and the donee
organization. The amount of deduction generally equals the fair
market value of the contributed property on the date of the
contribution. Charitable deductions are provided for income,
estate, and gift tax purposes.\278\
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\278\ Secs. 170, 2055, and 2522, respectively.
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In general, in any taxable year, charitable contributions
by a corporation are not deductible to the extent the aggregate
contributions exceed 10 percent of the corporation's taxable
income computed without regard to net operating or capital loss
carrybacks. Total deductible contributions of an individual
taxpayer to public charities, private operating foundations,
and certain types of private nonoperating foundations generally
may not exceed 50 percent of the taxpayer's contribution base,
which is the taxpayer's adjusted gross income for a taxable
year (disregarding any net operating loss carryback). To the
extent a taxpayer has not exceeded the 50-percent limitation,
(1) contributions of capital gain property to public charities
generally may be deducted up to 30 percent of the taxpayer's
contribution base, (2) contributions of cash to most private
nonoperating foundations and certain other charitable
organizations generally may be deducted up to 30 percent of the
taxpayer's contribution base, and (3) contributions of capital
gain property to private foundations and certain other
charitable organizations generally may be deducted up to 20
percent of the taxpayer's contribution base.
Contributions in excess of the applicable percentage limits
generally may be carried over and deducted over the next five
taxable years, subject to the relevant percentage limitations
on the deduction in each of those years.
Capital gain property
Capital gain property means any capital asset or property
used in the taxpayer's trade or business the sale of which at
its fair market value, at the time of contribution, would have
resulted in gain that would have been long-term capital gain.
Contributions of capital gain property to a qualified charity
are deductible at fair market value within certain limitations.
Contributions of capital gain property to charitable
organizations described in section 170(b)(1)(A) (e.g., public
charities, private foundations other than private non-operating
foundations, and certain governmental units) generally are
deductible up to 30 percent of the taxpayer's contribution
base. An individual may elect, however, to bring all these
contributions of capital gain property for a taxable year
within the 50-percent limitation category by reducing the
amount of the contribution deduction by the amount of the
appreciation in the capital gain property. Contributions of
capital gain property to charitable organizations described in
section 170(b)(1)(B) (e.g., private non-operating foundations)
are deductible up to 20 percent of the taxpayer's contribution
base.
For purposes of determining whether a taxpayer's aggregate
charitable contributions in a taxable year exceed the
applicable percentage limitation, contributions of capital gain
property are taken into account after other charitable
contributions.
Qualified conservation contributions
Qualified conservation contributions are one exception to
the ``partial interest'' rule, which generally bars deductions
for charitable contributions of partial interests in
property.\279\ A qualified conservation contribution is a
contribution of a qualified real property interest to a
qualified organization exclusively for conservation purposes. A
qualified real property interest is defined as: (1) the entire
interest of the donor other than a qualified mineral interest;
(2) a remainder interest; or (3) a restriction (granted in
perpetuity) on the use that may be made of the real property.
Qualified organizations include certain governmental units,
public charities that meet certain public support tests, and
certain supporting organizations. Conservation purposes
include: (1) the preservation of land areas for outdoor
recreation by, or for the education of, the general public; (2)
the protection of a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem; (3) the preservation
of open space (including farmland and forest land) where such
preservation will yield a significant public benefit and is
either for the scenic enjoyment of the general public or
pursuant to a clearly delineated Federal, State, or local
governmental conservation policy; and (4) the preservation of
an historically important land area or a certified historic
structure.
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\279\ Secs. 170(f)(3)(B)(iii) and 170(h).
---------------------------------------------------------------------------
Qualified conservation contributions of capital gain
property are subject to the same limitations and carryover
rules as other charitable contributions of capital gain
property.
Temporary rules regarding contributions of capital gain real property
for conservation purposes
In general
Under a temporary provision \280\ the 30-percent
contribution base limitation on contributions of capital gain
property by individuals does not apply to qualified
conservation contributions (as defined under present law).
Instead, individuals may deduct the fair market value of any
qualified conservation contribution to the extent of the excess
of 50 percent of the contribution base over the amount of all
other allowable charitable contributions. These contributions
are not taken into account in determining the amount of other
allowable charitable contributions.
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\280\ Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
Individuals are allowed to carry over any qualified
conservation contributions that exceed the 50-percent
limitation for up to 15 years.
For example, assume an individual with a contribution base
of $100 makes a qualified conservation contribution of property
with a fair market value of $80 and makes other charitable
contributions subject to the 50-percent limitation of $60. The
individual is allowed a deduction of $50 in the current taxable
year for the non-conservation contributions (50 percent of the
$100 contribution base) and is allowed to carry over the excess
$10 for up to 5 years. No current deduction is allowed for the
qualified conservation contribution, but the entire $80
qualified conservation contribution may be carried forward for
up to 15 years.
Farmers and ranchers
In the case of an individual who is a qualified farmer or
rancher for the taxable year in which the contribution is made,
a qualified conservation contribution is allowable up to 100
percent of the excess of the taxpayer's contribution base over
the amount of all other allowable charitable contributions.
In the above example, if the individual is a qualified
farmer or rancher, in addition to the $50 deduction for non-
conservation contributions, an additional $50 for the qualified
conservation contribution is allowed and $30 may be carried
forward for up to 15 years as a contribution subject to the
100-percent limitation.
In the case of a corporation (other than a publicly traded
corporation) that is a qualified farmer or rancher for the
taxable year in which the contribution is made, any qualified
conservation contribution is allowable up to 100 percent of the
excess of the corporation's taxable income (as computed under
section 170(b)(2)) over the amount of all other allowable
charitable contributions. Any excess may be carried forward for
up to 15 years as a contribution subject to the 100-percent
limitation.\281\
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\281\ Sec. 170(b)(2)(B).
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As an additional condition of eligibility for the 100
percent limitation, with respect to any contribution of
property in agriculture or livestock production, or that is
available for such production, by a qualified farmer or
rancher, the qualified real property interest must include a
restriction that the property remain generally available for
such production. (There is no requirement as to any specific
use in agriculture or farming, or necessarily that the property
be used for such purposes, merely that the property remain
available for such purposes.)
A qualified farmer or rancher means a taxpayer whose gross
income from the trade or business of farming (within the
meaning of section 2032A(e)(5)) is greater than 50 percent of
the taxpayer's gross income for the taxable year.
Termination
The temporary rules regarding contributions of capital gain
real property for conservation purposes do not apply to
contributions made in taxable years beginning after December
31, 2013.\282\
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\282\ Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
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Explanation of Provision
The provision extends the increased percentage limits and
extended carryforward period for contributions of capital gain
real property for conservation purposes for one year, i.e., for
contributions made in taxable years beginning before January 1,
2015.
Effective Date
The provision is effective for contributions made in
taxable years beginning after December 31, 2103.
7. Extension of above-the-line deduction for qualified tuition and
related expenses (sec. 107 of the Act and sec. 222 of the Code)
Present Law
An individual is allowed a deduction for qualified tuition
and related expenses for higher education paid by the
individual during the taxable year.\283\ The deduction is
allowed in computing adjusted gross income. The term qualified
tuition and related expenses is defined in the same manner as
for the Hope and Lifetime Learning credits, and includes
tuition and fees required for the enrollment or attendance of
the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer with respect to whom the taxpayer may claim a personal
exemption, at an eligible institution of higher education for
courses of instruction of such individual at such
institution.\284\ The expenses must be in connection with
enrollment at an institution of higher education during the
taxable year, or with an academic period beginning during the
taxable year or during the first three months of the next
taxable year. The deduction is not available for tuition and
related expenses paid for elementary or secondary education.
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\283\ Sec. 222.
\284\ The deduction generally is not available for expenses with
respect to a course or education involving sports, games, or hobbies,
and is not available for student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an individual's
academic course of instruction.
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The maximum deduction is $4,000 for an individual whose
adjusted gross income for the taxable year does not exceed
$65,000 ($130,000 in the case of a joint return), or $2,000 for
other individuals whose adjusted gross income does not exceed
$80,000 ($160,000 in the case of a joint return). No deduction
is allowed for an individual whose adjusted gross income
exceeds the relevant adjusted gross income limitations, for a
married individual who does not file a joint return, or for an
individual with respect to whom a personal exemption deduction
may be claimed by another taxpayer for the taxable year. The
deduction is not available for taxable years beginning after
December 31, 2013.
The amount of qualified tuition and related expenses must
be reduced by certain scholarships, educational assistance
allowances, and other amounts paid for the benefit of such
individual,\285\ and by the amount of such expenses taken into
account for purposes of determining any exclusion from gross
income of: (1) income from certain U.S. savings bonds used to
pay higher education tuition and fees; and (2) income from a
Coverdell education savings account.\286\ Additionally, such
expenses must be reduced by the earnings portion (but not the
return of principal) of distributions from a qualified tuition
program if an exclusion under section 529 is claimed with
respect to expenses eligible for the qualified tuition
deduction. No deduction is allowed for any expense for which a
deduction is otherwise allowed or with respect to an individual
for whom a Hope or Lifetime Learning credit is elected for such
taxable year.
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\285\ Secs. 222(d)(1) and 25A(g)(2).
\286\ Sec. 222(c). These reductions are the same as those that
apply to the Hope and Lifetime Learning credits.
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Explanation of Provision
The provision extends the qualified tuition deduction for
one year, through 2014.
Effective Date
The provision applies to taxable years beginning after
December 31, 2013.
8. Extension of tax-free distributions from individual retirement plans
for charitable purposes (sec. 108 of the Act and sec. 408(d)(8)
of the Code)
Present Law
In general
If an amount withdrawn from a traditional individual
retirement arrangement (``IRA'') or a Roth IRA is donated to a
charitable organization, the rules relating to the tax
treatment of withdrawals from IRAs apply to the amount
withdrawn and the charitable contribution is subject to the
normally applicable limitations on deductibility of such
contributions. An exception applies in the case of a qualified
charitable distribution.
Charitable contributions
In computing taxable income, an individual taxpayer who
itemizes deductions generally is allowed to deduct the amount
of cash and up to the fair market value of property contributed
to the following entities: (1) a charity described in section
170(c)(2); (2) certain veterans' organizations, fraternal
societies, and cemetery companies; \287\ and (3) a Federal,
State, or local governmental entity, but only if the
contribution is made for exclusively public purposes.\288\ The
deduction also is allowed for purposes of calculating
alternative minimum taxable income.
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\287\ Secs. 170(c)(3)-(5).
\288\ Sec. 170(c)(1).
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The amount of the deduction allowable for a taxable year
with respect to a charitable contribution of property may be
reduced depending on the type of property contributed, the type
of charitable organization to which the property is
contributed, and the income of the taxpayer.\289\
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\289\ Secs. 170(b) and (e).
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A taxpayer who takes the standard deduction (i.e., who does
not itemize deductions) may not take a separate deduction for
charitable contributions.\290\
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\290\ Sec. 170(a).
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A payment to a charity (regardless of whether it is termed
a ``contribution'') in exchange for which the donor receives an
economic benefit is not deductible, except to the extent that
the donor can demonstrate, among other things, that the payment
exceeds the fair market value of the benefit received from the
charity. To facilitate distinguishing charitable contributions
from purchases of goods or services from charities, present law
provides that no charitable contribution deduction is allowed
for a separate contribution of $250 or more unless the donor
obtains a contemporaneous written acknowledgement of the
contribution from the charity indicating whether the charity
provided any good or service (and an estimate of the value of
any such good or service provided) to the taxpayer in
consideration for the contribution.\291\ In addition, present
law requires that any charity that receives a contribution
exceeding $75 made partly as a gift and partly as consideration
for goods or services furnished by the charity (a ``quid pro
quo'' contribution) is required to inform the contributor in
writing of an estimate of the value of the goods or services
furnished by the charity and that only the portion exceeding
the value of the goods or services may be deductible as a
charitable contribution.\292\
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\291\ Sec. 170(f)(8). For any contribution of a cash, check, or
other monetary gift, no deduction is allowed unless the donor maintains
as a record of such contribution a bank record or written communication
from the donee charity showing the name of the donee organization, the
date of the contribution, and the amount of the contribution. Sec.
170(f)(17).
\292\ Sec. 6115.
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Under present law, total deductible contributions of an
individual taxpayer to public charities, private operating
foundations, and certain types of private nonoperating
foundations generally may not exceed 50 percent of the
taxpayer's contribution base, which is the taxpayer's adjusted
gross income for a taxable year (disregarding any net operating
loss carryback). To the extent a taxpayer has not exceeded the
50-percent limitation, (1) contributions of capital gain
property to public charities generally may be deducted up to 30
percent of the taxpayer's contribution base, (2) contributions
of cash to most private nonoperating foundations and certain
other charitable organizations generally may be deducted up to
30 percent of the taxpayer's contribution base, and (3)
contributions of capital gain property to private foundations
and certain other charitable organizations generally may be
deducted up to 20 percent of the taxpayer's contribution base.
Contributions by individuals in excess of the 50-percent,
30-percent, and 20-percent limits generally may be carried over
and deducted over the next five taxable years, subject to the
relevant percentage limitations on the deduction in each of
those years.
In general, a charitable deduction is not allowed for
income, estate, or gift tax purposes if the donor transfers an
interest in property to a charity (e.g., a remainder) while
also either retaining an interest in that property (e.g., an
income interest) or transferring an interest in that property
to a noncharity for less than full and adequate
consideration.\293\ Exceptions to this general rule are
provided for, among other interests, remainder interests in
charitable remainder annuity trusts, charitable remainder
unitrusts, and pooled income funds, and present interests in
the form of a guaranteed annuity or a fixed percentage of the
annual value of the property.\294\ For such interests, a
charitable deduction is allowed to the extent of the present
value of the interest designated for a charitable organization.
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\293\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
\294\ Sec. 170(f)(2).
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IRA rules
Within limits, individuals may make deductible and
nondeductible contributions to a traditional IRA. Amounts in a
traditional IRA are includible in income when withdrawn (except
to the extent the withdrawal represents a return of
nondeductible contributions). Certain individuals also may make
nondeductible contributions to a Roth IRA (deductible
contributions cannot be made to Roth IRAs). Qualified
withdrawals from a Roth IRA are excludable from gross income.
Withdrawals from a Roth IRA that are not qualified withdrawals
are includible in gross income to the extent attributable to
earnings. Includible amounts withdrawn from a traditional IRA
or a Roth IRA before attainment of age 59\1/2\ are subject to
an additional 10-percent early withdrawal tax, unless an
exception applies. Under present law, minimum distributions are
required to be made from tax-favored retirement arrangements,
including IRAs. Minimum required distributions from a
traditional IRA must generally begin by April 1 of the calendar
year following the year in which the IRA owner attains age
70\1/2\.\295\
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\295\ Minimum distribution rules also apply in the case of
distributions after the death of a traditional or Roth IRA owner.
---------------------------------------------------------------------------
If an individual has made nondeductible contributions to a
traditional IRA, a portion of each distribution from an IRA is
nontaxable until the total amount of nondeductible
contributions has been received. In general, the amount of a
distribution that is nontaxable is determined by multiplying
the amount of the distribution by the ratio of the IRA's
nondeductible contributions to the IRA's account balance. In
making the calculation, all traditional IRAs of an individual
are treated as a single IRA, all distributions during any
taxable year are treated as a single distribution, and, in
general, the value of the account, income on the account, and
investment in the contract (basis) are computed as of the close
of the calendar year.
In the case of a distribution from a Roth IRA that is not a
qualified distribution, in determining the portion of the
distribution attributable to earnings, contributions and
distributions are deemed to be distributed in the following
order: (1) regular Roth IRA contributions; (2) taxable
conversion contributions; \296\ (3) nontaxable conversion
contributions; and (4) earnings. In determining the amount of
taxable distributions from a Roth IRA, all Roth IRA
distributions in the same taxable year are treated as a single
distribution, all regular Roth IRA contributions for a year are
treated as a single contribution, and all conversion
contributions during the year are treated as a single
contribution.
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\296\ Conversion contributions refer to conversions of amounts in a
traditional IRA to a Roth IRA.
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Taxable distributions from an IRA are generally subject to
withholding unless the individual elects not to have
withholding apply.\297\ Elections not to have withholding apply
are to be made in the time and manner prescribed by the
Secretary.
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\297\ Sec. 3405.
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Qualified charitable distributions
Otherwise taxable IRA distributions from a traditional or
Roth IRA are excluded from gross income to the extent they are
qualified charitable distributions.\298\ The amount excluded
may not exceed $100,000 per taxpayer per taxable year. Special
rules apply in determining the amount of an IRA distribution
that is otherwise taxable. The otherwise applicable rules
regarding taxation of IRA distributions and the deduction of
charitable contributions continue to apply to distributions
from an IRA that are not qualified charitable distributions. A
qualified charitable distribution is taken into account for
purposes of the minimum distribution rules applicable to
traditional IRAs to the same extent the distribution would have
been taken into account under such rules had the distribution
not been directly distributed under the qualified charitable
distribution provision. An IRA does not fail to qualify as an
IRA as a result of qualified charitable distributions being
made from the IRA.
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\298\ Sec. 408(d)(8). The exclusion does not apply to distributions
from employer-sponsored retirement plans, including SIMPLE IRAs and
simplified employee pensions (``SEPs'').
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A qualified charitable distribution is any distribution
from an IRA directly by the IRA trustee to an organization
described in section 170(b)(1)(A) (other than an organization
described in section 509(a)(3) or a donor advised fund (as
defined in section 4966(d)(2)). Distributions are eligible for
the exclusion only if made on or after the date the IRA owner
attains age 70\1/2\ and only to the extent the distribution
would be includible in gross income (without regard to this
provision).
The exclusion applies only if a charitable contribution
deduction for the entire distribution otherwise would be
allowable (under present law), determined without regard to the
generally applicable percentage limitations. Thus, for example,
if the deductible amount is reduced because of a benefit
received in exchange, or if a deduction is not allowable
because the donor did not obtain sufficient substantiation, the
exclusion is not available with respect to any part of the IRA
distribution.
If the IRA owner has any IRA that includes nondeductible
contributions, a special rule applies in determining the
portion of a distribution that is includible in gross income
(but for the qualified charitable distribution provision) and
thus is eligible for qualified charitable distribution
treatment. Under the special rule, the distribution is treated
as consisting of income first, up to the aggregate amount that
would be includible in gross income (but for the qualified
charitable distribution provision) if the aggregate balance of
all IRAs having the same owner were distributed during the same
year. In determining the amount of subsequent IRA distributions
includible in income, proper adjustments are to be made to
reflect the amount treated as a qualified charitable
distribution under the special rule.
Distributions that are excluded from gross income by reason
of the qualified charitable distribution provision are not
taken into account in determining the deduction for charitable
contributions under section 170.
Under present law, the exclusion does not apply to
distributions made in taxable years beginning after December
31, 2013.
Explanation of Provision
The provision extends the exclusion from gross income for
qualified charitable distributions from an IRA for one year,
i.e., for distributions made in taxable years beginning before
January 1, 2015.
Effective Date
The provision is effective for distributions made in
taxable years beginning after December 31, 2013.
B. Subtitle B--Business Tax Extenders
1. Extension of research credit (sec. 111 of the Act and sec. 41 of the
Code)
Present Law
General rule
For general research expenditures, a taxpayer may claim a
research credit equal to 20 percent of the amount by which the
taxpayer's qualified research expenses for a taxable year
exceed its base amount for that year.\299\ Thus, the research
credit is generally available with respect to incremental
increases in qualified research. An alternative simplified
research credit (with a 14 percent rate and a different base
amount) may be claimed in lieu of this credit.\300\
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\299\ Sec. 41(a)(1).
\300\ Sec. 41(c)(5).
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A 20-percent research tax credit also is available with
respect to the excess of (1) 100 percent of corporate cash
expenses (including grants or contributions) paid for basic
research conducted by universities (and certain nonprofit
scientific research organizations) over (2) the sum of (a) the
greater of two minimum basic research floors plus (b) an amount
reflecting any decrease in nonresearch giving to universities
by the corporation as compared to such giving during a fixed-
base period, as adjusted for inflation.\301\ This separate
credit computation commonly is referred to as the basic
research credit.
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\301\ Secs. 41(a)(2) and 41(e). The base period for the basic
research credit generally extends from 1981 through 1983.
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Finally, a research credit is available for a taxpayer's
expenditures on research undertaken by an energy research
consortium.\302\ This separate credit computation commonly is
referred to as the energy research credit. Unlike the other
research credits, the energy research credit applies to all
qualified expenditures, not just those in excess of a base
amount.
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\302\ Sec. 41(a)(3).
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The research credit, including the basic research credit
and the energy research credit, expires for amounts paid or
incurred after December 31, 2013.\303\
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\303\ Sec. 41(h).
---------------------------------------------------------------------------
Computation of general research credit
The general research tax credit applies only to the extent
that the taxpayer's qualified research expenses for the current
taxable year exceed its base amount. The base amount for the
current year generally is computed by multiplying the
taxpayer's fixed-base percentage by the average amount of the
taxpayer's gross receipts for the four preceding years. If a
taxpayer both incurred qualified research expenses and had
gross receipts during each of at least three years from 1984
through 1988, then its fixed-base percentage is the ratio that
its total qualified research expenses for the 1984-1988 period
bears to its total gross receipts for that period (subject to a
maximum fixed-base percentage of 16 percent). Special rules
apply to all other taxpayers (so called start-up firms).\304\
In computing the research credit, a taxpayer's base amount
cannot be less than 50 percent of its current-year qualified
research expenses.
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\304\ The Small Business Job Protection Act of 1996 expanded the
definition of start-up firms under section 41(c)(3)(B)(i) to include
any firm if the first taxable year in which such firm had both gross
receipts and qualified research expenses began after 1983. A special
rule (enacted in 1993) is designed to gradually recompute a start-up
firm's fixed-base percentage based on its actual research experience.
Under this special rule, a start-up firm is assigned a fixed-base
percentage of three percent for each of its first five taxable years
after 1993 in which it incurs qualified research expenses. A start-up
firm's fixed-base percentage for its sixth through tenth taxable years
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all
subsequent taxable years, the taxpayer's fixed-base percentage is its
actual ratio of qualified research expenses to gross receipts for any
five years selected by the taxpayer from its fifth through tenth
taxable years after 1993. Sec. 41(c)(3)(B).
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Alternative simplified credit
The alternative simplified research credit is equal to 14
percent of qualified research expenses that exceed 50 percent
of the average qualified research expenses for the three
preceding taxable years.\305\ The rate is reduced to six
percent if a taxpayer has no qualified research expenses in any
one of the three preceding taxable years.\306\ An election to
use the alternative simplified credit applies to all succeeding
taxable years unless revoked with the consent of the
Secretary.\307\
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\305\ Sec. 41(c)(5)(A).
\306\ Sec. 41(c)(5)(B).
\307\ Sec. 41(c)(5)(C).
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Eligible expenses
Qualified research expenses eligible for the research tax
credit consist of: (1) in-house expenses of the taxpayer for
wages and supplies attributable to qualified research; (2)
certain time-sharing costs for computer use in qualified
research; and (3) 65 percent of amounts paid or incurred by the
taxpayer to certain other persons for qualified research
conducted on the taxpayer's behalf (so-called contract research
expenses).\308\ Notwithstanding the limitation for contract
research expenses, qualified research expenses include 100
percent of amounts paid or incurred by the taxpayer to an
eligible small business, university, or Federal laboratory for
qualified energy research.
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\308\ Under a special rule, 75 percent of amounts paid to a
research consortium for qualified research are treated as qualified
research expenses eligible for the research credit (rather than 65
percent under the general rule under section 41(b)(3) governing
contract research expenses) if (1) such research consortium is a tax-
exempt organization that is described in section 501(c)(3) (other than
a private foundation) or section 501(c)(6) and is organized and
operated primarily to conduct scientific research, and (2) such
qualified research is conducted by the consortium on behalf of the
taxpayer and one or more persons not related to the taxpayer. Sec.
41(b)(3)(C).
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To be eligible for the credit, the research not only has to
satisfy the requirements of section 174, but also must be
undertaken for the purpose of discovering information that is
technological in nature, the application of which is intended
to be useful in the development of a new or improved business
component of the taxpayer, and substantially all of the
activities of which constitute elements of a process of
experimentation for functional aspects, performance,
reliability, or quality of a business component. Research does
not qualify for the credit if substantially all of the
activities relate to style, taste, cosmetic, or seasonal design
factors.\309\ In addition, research does not qualify for the
credit if: (1) conducted after the beginning of commercial
production of the business component; (2) related to the
adaptation of an existing business component to a particular
customer's requirements; (3) related to the duplication of an
existing business component from a physical examination of the
component itself or certain other information; (4) related to
certain efficiency surveys, management function or technique,
market research, market testing, or market development, routine
data collection or routine quality control; (5) related to
software developed primarily for internal use by the taxpayer;
(6) conducted outside the United States, Puerto Rico, or any
U.S. possession; (7) in the social sciences, arts, or
humanities; or (8) funded by any grant, contract, or otherwise
by another person (or government entity).\310\
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\309\ Sec. 41(d)(3).
\310\ Sec. 41(d)(4).
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Relation to deduction
Deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year.\311\ Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed.\312\
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\311\ Sec. 280C(c).
\312\ Sec. 280C(c)(3).
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Explanation of Provision
The provision extends the present law credit for one year,
for qualified research expenses paid or incurred before January
1, 2015.
Effective Date
The provision is effective for amounts paid or incurred
after December 31, 2013.
2. Extension of temporary minimum low-income housing tax credit rate
for non-Federally subsidized buildings (sec. 112 of the Act and
sec. 42 of the Code)
Present Law
In general
The low-income housing credit may be claimed over a 10-year
credit period after each low-income building is placed-in-
service. The amount of the credit for any taxable year in the
credit period is the applicable percentage of the qualified
basis of each qualified low-income building.
Present value credit
The calculation of the applicable percentage is designed to
produce a credit equal to: (1) 70 percent of the present value
of the building's qualified basis in the case of newly
constructed or substantially rehabilitated housing that is not
Federally subsidized (the ``70-percent credit''); or (2) 30
percent of the present value of the building's qualified basis
in the case of newly constructed or substantially rehabilitated
housing that is Federally subsidized and existing housing that
is substantially rehabilitated (the ``30-percent credit'').
Where existing housing is substantially rehabilitated, the
existing housing is eligible for the 30-percent credit and the
qualified rehabilitation expenses (if not Federally subsidized)
are eligible for the 70-percent credit.
Calculation of the applicable percentage
In general
The credit percentage for a low-income building is set for
the earlier of: (1) the month the building is placed in
service; or (2) at the election of the taxpayer, (a) the month
the taxpayer and the housing credit agency enter into a binding
agreement with respect to such building for a credit
allocation, or (b) in the case of a tax-exempt bond-financed
project for which no credit allocation is required, the month
in which the tax-exempt bonds are issued.
These credit percentages (used for the 70-percent credit
and 30-percent credit) are adjusted monthly by the IRS on a
discounted after-tax basis (assuming a 28-percent tax rate)
based on the average of the Applicable Federal Rates for mid-
term and long-term obligations for the month the building is
placed in service. The discounting formula assumes that each
credit is received on the last day of each year and that the
present value is computed on the last day of the first year. In
a project consisting of two or more buildings placed in service
in different months, a separate credit percentage may apply to
each building.
Special rule
Under this rule the applicable percentage is set at a
minimum of 9 percent for newly constructed non-Federally
subsidized buildings placed in service after July 30, 2008, and
before January 1, 2014.
Explanation of Provision
The provision extends the temporary minimum applicable
percentage of 9 percent for newly constructed non-Federally
subsidized buildings with respect to which credit allocations
are made before January 1, 2015.
Effective Date
The provision is effective on January 1, 2014.
3. Extension of military housing allowance exclusion for determining
whether a tenant in certain counties is low-income (sec. 113 of
the Act and secs. 42 and 142 of the Code)
Present Law
In general
In order to be eligible for the low-income housing credit,
a qualified low-income building must be part of a qualified
low-income housing project. In general, a qualified low-income
housing project is defined as a project that satisfies one of
two tests at the election of the taxpayer. The first test is
met if 20 percent or more of the residential units in the
project are both rent-restricted, and occupied by individuals
whose income is 50 percent or less of area median gross income
(the ``20-50 test''). The second test is met if 40 percent or
more of the residential units in such project are both rent-
restricted, and occupied by individuals whose income is 60
percent or less of area median gross income (the ``40-60
test''). These income figures are adjusted for family size.
Rule for income determinations before July 30, 2008 and on or after
January 1, 2014
The recipients of the military basic housing allowance must
include these amounts for purposes of low-income credit
eligibility income test, as described above.
Special rule for income determination before January 1, 2014
Under the provision the basic housing allowance (i.e.,
payments under 37 U.S.C. sec. 403) is not included in income
for the low-income credit income eligibility rules. The
provision is limited in application to qualified buildings. A
qualified building is defined as any building located in:
1. any county which contains a qualified military
installation to which the number of members of the Armed Forces
assigned to units based out of such qualified military
installation has increased by 20 percent or more as of June 1,
2008, over the personnel level on December 31, 2005; and
2. any counties adjacent to a county described in (1),
above.
For these purposes, a qualified military installation is
any military installation or facility with at least 1000
members of the Armed Forces assigned to it.
The provision applies to income determinations: (1) made
after July 30, 2008, and before January 1, 2014, in the case of
qualified buildings which received credit allocations on or
before July 30, 2008, or qualified buildings placed in service
on or before July 30, 2008, to the extent a credit allocation
was not required with respect to such building by reason of
42(h)(4) (i.e., such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
before July 30, 2008; and (2) made after July 30, 2008, in the
case of qualified buildings which received credit allocations
after July 30, 2008 and before January 1, 2014, or qualified
buildings placed in service after July 30, 2008, and before
January 1, 2014, to the extent a credit allocation was not
required with respect to such qualified building by reason of
42(h)(4) (i.e., such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
after July 30, 2008, and before January 1, 2014.
Explanation of Provision
The provision extends the special rule one year (through
December 31, 2014).
Effective Date
The provision is effective as if included in the enactment
of section 3005 of the Housing Assistance Tax Act of 2008.
4. Extension of Indian employment tax credit (sec. 114 of the Act and
sec. 45A of the Code)
Present Law
In general, a credit against income tax liability is
allowed to employers for the first $20,000 of qualified wages
and qualified employee health insurance costs paid or incurred
by the employer with respect to certain employees.\313\ The
credit is equal to 20 percent of the excess of eligible
employee qualified wages and health insurance costs during the
current year over the amount of such wages and costs incurred
by the employer during 1993. The credit is an incremental
credit, such that an employer's current-year qualified wages
and qualified employee health insurance costs (up to $20,000
per employee) are eligible for the credit only to the extent
that the sum of such costs exceeds the sum of comparable costs
paid during 1993. No deduction is allowed for the portion of
the wages equal to the amount of the credit.
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\313\ Sec. 45A.
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Qualified wages means wages paid or incurred by an employer
for services performed by a qualified employee. A qualified
employee means any employee who is an enrolled member of an
Indian tribe or the spouse of an enrolled member of an Indian
tribe, who performs substantially all of the services within an
Indian reservation, and whose principal place of abode while
performing such services is on or near the reservation in which
the services are performed. An ``Indian reservation'' is a
reservation as defined in section 3(d) of the Indian Financing
Act of 1974 \314\ or section 4(10) of the Indian Child Welfare
Act of 1978.\315\ For purposes of the preceding sentence,
section 3(d) is applied by treating ``former Indian
reservations in Oklahoma'' as including only lands that are (1)
within the jurisdictional area of an Oklahoma Indian tribe as
determined by the Secretary of the Interior, and (2) recognized
by such Secretary as an area eligible for trust land status
under 25 C.F.R. Part 151 (as in effect on August 5, 1997).
---------------------------------------------------------------------------
\314\ Pub. L. No. 93-262.
\315\ Pub. L. No. 95-608.
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An employee is not treated as a qualified employee for any
taxable year of the employer if the total amount of wages paid
or incurred by the employer with respect to such employee
during the taxable year exceeds an amount determined at an
annual rate of $30,000 (which after adjusted for inflation is
$45,000 for 2013). In addition, an employee will not be treated
as a qualified employee under certain specific circumstances,
such as where the employee is related to the employer (in the
case of an individual employer) or to one of the employer's
shareholders, partners, or grantors. Similarly, an employee
will not be treated as a qualified employee where the employee
has more than a five percent ownership interest in the
employer. Finally, an employee will not be considered a
qualified employee to the extent the employee's services relate
to gaming activities or are performed in a building housing
such activities.
The wage credit is available for wages paid or incurred in
taxable years that begin on or before December 31, 2013.
Explanation of Provision
The provision extends for one year the present-law
employment credit provision (through taxable years beginning on
or before December 31, 2014).
Effective Date
The provision is effective for taxable years beginning
after December 31, 2013.
5. Extension of new markets tax credit (sec. 115 of the Act and sec.
45D of the Code)
Present Law
Section 45D provides a new markets tax credit for qualified
equity investments made to acquire stock in a corporation, or a
capital interest in a partnership, that is a qualified
community development entity (``CDE'').\316\ The amount of the
credit allowable to the investor (either the original purchaser
or a subsequent holder) is (1) a five-percent credit for the
year in which the equity interest is purchased from the CDE and
for each of the following two years, and (2) a six-percent
credit for each of the following four years.\317\ The credit is
determined by applying the applicable percentage (five or six
percent) to the amount paid to the CDE for the investment at
its original issue, and is available to the taxpayer who holds
the qualified equity investment on the date of the initial
investment or on the respective anniversary date that occurs
during the taxable year.\318\ The credit is recaptured if at
any time during the seven-year period that begins on the date
of the original issue of the investment the entity (1) ceases
to be a qualified CDE, (2) the proceeds of the investment cease
to be used as required, or (3) the equity investment is
redeemed.\319\
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\316\ Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
\317\ Sec. 45D(a)(2).
\318\ Sec. 45D(a)(3).
\319\ Sec. 45D(g).
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A qualified CDE is any domestic corporation or partnership:
(1) whose primary mission is serving or providing investment
capital for low-income communities or low-income persons; (2)
that maintains accountability to residents of low-income
communities by their representation on any governing board of
or any advisory board to the CDE; and (3) that is certified by
the Secretary as being a qualified CDE.\320\ A qualified equity
investment means stock (other than nonqualified preferred
stock) in a corporation or a capital interest in a partnership
that is acquired at its original issue directly (or through an
underwriter) from a CDE for cash, and includes an investment of
a subsequent purchaser if such investment was a qualified
equity investment in the hands of the prior holder.
Substantially all of the investment proceeds must be used by
the CDE to make qualified low-income community investments and
the investment must be designated as a qualified equity
investment by the CDE. For this purpose, qualified low-income
community investments include: (1) capital or equity
investments in, or loans to, qualified active low-income
community businesses; (2) certain financial counseling and
other services to businesses and residents in low-income
communities; (3) the purchase from another CDE of any loan made
by such entity that is a qualified low-income community
investment; or (4) an equity investment in, or loan to, another
CDE.\321\
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\320\ Sec. 45D(c).
\321\ Sec. 45D(d).
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A ``low-income community'' is a population census tract
with either (1) a poverty rate of at least 20 percent or (2)
median family income which does not exceed 80 percent of the
greater of metropolitan area median family income or statewide
median family income (for a non-metropolitan census tract, does
not exceed 80 percent of statewide median family income). In
the case of a population census tract located within a high
migration rural county, low-income is defined by reference to
85 percent (as opposed to 80 percent) of statewide median
family income.\322\ For this purpose, a high migration rural
county is any county that, during the 20-year period ending
with the year in which the most recent census was conducted,
has a net out-migration of inhabitants from the county of at
least 10 percent of the population of the county at the
beginning of such period.
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\322\ Sec. 45D(e).
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The Secretary is authorized to designate ``targeted
populations'' as low-income communities for purposes of the new
markets tax credit.\323\ For this purpose, a ``targeted
population'' is defined by reference to section 103(20) of the
Riegle Community Development and Regulatory Improvement Act of
1994 \324\ (the ``Act'') to mean individuals, or an
identifiable group of individuals, including an Indian tribe,
who are low-income persons or otherwise lack adequate access to
loans or equity investments. Section 103(17) of the Act
provides that ``low-income'' means (1) for a targeted
population within a metropolitan area, less than 80 percent of
the area median family income; and (2) for a targeted
population within a non-metropolitan area, less than the
greater of--80 percent of the area median family income, or 80
percent of the statewide non-metropolitan area median family
income.\325\ A targeted population is not required to be within
any census tract. In addition, a population census tract with a
population of less than 2,000 is treated as a low-income
community for purposes of the credit if such tract is within an
empowerment zone, the designation of which is in effect under
section 1391 of the Code, and is contiguous to one or more low-
income communities.
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\323\ Sec. 45D(e)(2).
\324\ Pub. L. No. 103-325.
\325\ Pub. L. No. 103-325.
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A qualified active low-income community business is defined
as a business that satisfies, with respect to a taxable year,
the following requirements: (1) at least 50 percent of the
total gross income of the business is derived from the active
conduct of trade or business activities in any low-income
community; (2) a substantial portion of the tangible property
of the business is used in a low-income community; (3) a
substantial portion of the services performed for the business
by its employees is performed in a low-income community; and
(4) less than five percent of the average of the aggregate
unadjusted bases of the property of the business is
attributable to certain financial property or to certain
collectibles.\326\
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\326\ Sec. 45D(d)(2).
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The maximum annual amount of qualified equity investments
was $3.5 billion for calendar years 2010, 2011, 2012, and 2013.
The new markets tax credit expired on December 31, 2013. No
amount of unused allocation limitation may be carried to any
calendar year after 2018.
Explanation of Provision
The provision extends the new markets tax credit for one
year, through 2014, permitting up to $3.5 billion in qualified
equity investments for the 2014 calendar year. The provision
also extends for one year, through 2019, the carryover period
for unused new markets tax credits.
Effective Date
The provision applies to calendar years beginning after
December 31, 2013.
6. Extension of railroad track maintenance credit (sec. 116 of the Act
and sec. 45G of the Code)
Present Law
Present law provides a 50-percent business tax credit for
qualified railroad track maintenance expenditures paid or
incurred by an eligible taxpayer during taxable years beginning
before January 1, 2014.\327\ The credit is limited to the
product of $3,500 times the number of miles of railroad track
(1) owned or leased by an eligible taxpayer as of the close of
its taxable year, and (2) assigned to the eligible taxpayer by
a Class II or Class III railroad that owns or leases such track
at the close of the taxable year.\328\ Each mile of railroad
track may be taken into account only once, either by the owner
of such mile or by the owner's assignee, in computing the per-
mile limitation. The credit also may reduce a taxpayer's tax
liability below its tentative minimum tax.\329\ Basis of the
railroad track must be reduced (but not below zero) by an
amount equal to 100 percent of the taxpayer's qualified
railroad track maintenance tax credit determined for the
taxable year.\330\
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\327\ Sec. 45G(a) and (f).
\328\ Sec. 45G(b)(1).
\329\ Sec. 38(c)(4).
\330\ Sec. 45G(e)(3).
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Qualified railroad track maintenance expenditures are
defined as gross expenditures (whether or not otherwise
chargeable to capital account) for maintaining railroad track
(including roadbed, bridges, and related track structures)
owned or leased as of January 1, 2005, by a Class II or Class
III railroad (determined without regard to any consideration
for such expenditure given by the Class II or Class III
railroad which made the assignment of such track).\331\
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\331\ Sec. 45G(d).
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An eligible taxpayer means any Class II or Class III
railroad, and any person who transports property using the rail
facilities of a Class II or Class III railroad or who furnishes
railroad-related property or services to a Class II or Class
III railroad, but only with respect to miles of railroad track
assigned to such person by such railroad under the
provision.\332\
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\332\ Sec. 45G(c).
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The terms Class II or Class III railroad have the meanings
given by the Surface Transportation Board.\333\
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\333\ Sec. 45G(e)(1).
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Explanation of Provision
The provision extends the present law credit for one year,
for qualified railroad track maintenance expenditures paid or
incurred in taxable years beginning after December 31, 2013,
and before January 1, 2015.
Effective Date
The provision is effective for expenditures paid or
incurred in taxable years beginning after December 31, 2013.
7. Extension of mine rescue team training credit (sec. 117 of the Act
and sec. 45N of the Code)
Present Law
An eligible employer may claim a general business credit
against income tax with respect to each qualified mine rescue
team employee equal to the lesser of: (1) 20 percent of the
amount paid or incurred by the taxpayer during the taxable year
with respect to the training program costs of the qualified
mine rescue team employee (including the wages of the employee
while attending the program); or (2) $10,000.\334\ A qualified
mine rescue team employee is any full-time employee of the
taxpayer who is a miner eligible for more than six months of a
taxable year to serve as a mine rescue team member by virtue of
either having completed the initial 20 hour course of
instruction prescribed by the Mine Safety and Health
Administration's Office of Educational Policy and Development,
or receiving at least 40 hours of refresher training in such
instruction.\335\
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\334\ Sec. 45N(a).
\335\ Sec. 45N(b).
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An eligible employer is any taxpayer which employs
individuals as miners in underground mines in the United
States.\336\ The term ``wages'' has the meaning given to such
term by section 3306(b) \337\ (determined without regard to any
dollar limitation contained in that section).\338\
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\336\ Sec. 45N(c).
\337\ Section 3306(b) defines wages for purposes of Federal
Unemployment Tax.
\338\ Sec. 45N(d).
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No deduction is allowed for the portion of the expenses
otherwise deductible that is equal to the amount of the
credit.\339\ The credit does not apply to taxable years
beginning after December 31, 2013.\340\ Additionally, the
credit is not allowable for purposes of computing the
alternative minimum tax.\341\
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\339\ Sec. 280C(e).
\340\ Sec. 45N(e).
\341\ Sec. 38(c).
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Explanation of Provision
The provision extends the credit for one year through
taxable years beginning on or before December 31, 2014.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2013.
8. Extension of employer wage credit for employees who are active duty
members of the uniformed services (sec. 118 of the Act and sec.
45P of the Code)
Present Law
Differential pay
In general, compensation paid by an employer to an employee
is deductible by the employer unless the expense must be
capitalized.\342\ In the case of an employee who is called to
active duty with respect to the armed forces of the United
States, some employers voluntarily pay the employee the
difference between the compensation that the employer would
have paid to the employee during the period of military service
less the amount of pay received by the employee from the
military. This payment by the employer is often referred to as
``differential pay.''
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\342\ Sec. 162(a)(1).
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Wage credit for differential pay
If an employer qualifies as an eligible small business
employer, the employer is allowed a credit against its income
tax liability for a taxable year in an amount equal to 20
percent of the sum of the eligible differential wage payments
for each of the employer's qualified employees during the year.
An eligible small business employer means, with respect to
a taxable year, an employer that (1) employed on average less
than 50 employees on business days during the taxable year, and
(2) under a written plan of the taxpayer, provides eligible
differential wage payments to every qualified employee. For
this purpose, members of controlled groups, groups under common
control, and affiliated service groups are treated as a single
employer.\343\ The credit is not available with respect to an
employer that has failed to comply with the employment and
reemployment rights of members of the uniformed services.\344\
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\343\ Sec. 414(b), (c), (m) and (o).
\344\ Chapter 43 of Title 38 of the United States Code deals with
these rights.
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Differential wage payment means any payment that (1) is
made by an employer to an individual with respect to any period
during which the individual is performing service in the
uniformed services of the United States while on active duty
for a period of more than 30 days, and (2) represents all or a
portion of the wages that the individual would have received
from the employer if the individual were performing services
for the employer.\345\ Eligible differential wage payments are
so much of the differential wage payments paid to a qualified
employee as does not exceed $20,000. A qualified employee is an
individual who has been an employee of the employer for the 91-
day period immediately preceding the period for which any
differential wage payment is made.
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\345\ Sec. 3401(h)(2).
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No deduction may be taken for that portion of compensation
that is equal to the credit.\346\ In addition, the amount of
any other income tax credit otherwise allowable with respect to
compensation paid to an employee must be reduced by the
differential wage payment credit allowed with respect to the
employee. The credit is not allowable against a taxpayer's
alternative minimum tax liability. Certain rules applicable to
the work opportunity tax credit in the case of tax-exempt
organizations, estates and trusts, and regulated investment
companies, real estate investment trusts and certain
cooperatives apply also to the differential wage payment
credit.\347\
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\346\ Sec. 280C(a).
\347\ Sec. 52(c), (d), (e).
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The credit is available with respect to amounts paid after
June 17, 2008,\348\ and before January 1, 2014.
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\348\ The credit was originally provided by the Heroes Earnings
Assistance and Relief Tax Act of 2008 (``HEART Act''), Pub. L. No. 110-
245, effective for amounts paid after June 17, 2008, the date of
enactment of the HEART Act.
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Explanation of Provision
The provision extends the availability of the differential
wage payment credit for one year to amounts paid before January
1, 2015.
Effective Date
The provision applies to payments made after December 31,
2013.
9. Extension of work opportunity tax credit (sec. 119 of the Act and
secs. 51 and 52 of the Code)
Present Law
In general
The work opportunity tax credit is available on an elective
basis for employers hiring individuals from one or more of nine
targeted groups. The amount of the credit available to an
employer is determined by the amount of qualified wages paid by
the employer. Generally, qualified wages consist of wages
attributable to service rendered by a member of a targeted
group during the one-year period beginning with the day the
individual begins work for the employer (two years in the case
of an individual in the long-term family assistance recipient
category).
Targeted groups eligible for the credit
Generally, an employer is eligible for the credit only for
qualified wages paid to members of a targeted group.
(1) Families receiving TANF
An eligible recipient is an individual certified by a
designated local employment agency (e.g., a State employment
agency) as being a member of a family eligible to receive
benefits under the Temporary Assistance for Needy Families
Program (``TANF'') for a period of at least nine months part of
which is during the 18-month period ending on the hiring date.
For these purposes, members of the family are defined to
include only those individuals taken into account for purposes
of determining eligibility for the TANF.
(2) Qualified veteran
Prior to enactment of the ``VOW to Hire Heroes Act of
2011'' (the ``VOW Act''),\349\ there were two subcategories of
qualified veterans to whom wages paid by an employer were
eligible for the credit. Employers who hired veterans who were
eligible to receive assistance under a supplemental nutritional
assistance program were entitled to a maximum credit of 40
percent of $6,000 of qualified first-year wages paid to such
individual.\350\ Employers who hired veterans who were entitled
to compensation for a service-connected disability were
entitled to a maximum wage credit of 40 percent of $12,000 of
qualified first-year wages paid to such individual.\351\
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\349\ Pub. L. No. 112-56 (Nov. 21, 2011).
\350\ For these purposes, a qualified veteran must be certified by
the designated local agency as a member of a family receiving
assistance under a supplemental nutrition assistance program under the
Food and Nutrition Act of 2008 for a period of at least three months
part of which is during the 12-month period ending on the hiring date.
For these purposes, members of a family are defined to include only
those individuals taken into account for purposes of determining
eligibility for a supplemental nutrition assistance program under the
Food and Nutrition Act of 2008.
\351\ The qualified veteran must be certified as entitled to
compensation for a service-connected disability and (1) have a hiring
date which is not more than one year after having been discharged or
released from active duty in the Armed Forces of the United States; or
(2) have been unemployed for six months or more (whether or not
consecutive) during the one-year period ending on the date of hiring.
For these purposes, being entitled to compensation for a service-
connected disability is defined with reference to section 101 of Title
38, U.S. Code, which means having a disability rating of 10 percent or
higher for service connected injuries.
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The VOW Act modified the work opportunity credit with
respect to qualified veterans, by adding additional
subcategories. There are now five subcategories of qualified
veterans: (1) in the case of veterans who were eligible to
receive assistance under a supplemental nutritional assistance
program (for at least a three month period during the year
prior to the hiring date) the employer is entitled to a maximum
credit of 40 percent of $6,000 of qualified first-year wages;
(2) in the case of a qualified veteran who is entitled to
compensation for a service connected disability, who is hired
within one year of discharge, the employer is entitled to a
maximum credit of 40 percent of $12,000 of qualified first-year
wages; (3) in the case of a qualified veteran who is entitled
to compensation for a service connected disability, and who has
been unemployed for an aggregate of at least six months during
the one year period ending on the hiring date, the employer is
entitled to a maximum credit of 40 percent of $24,000 of
qualified first-year wages; (4) in the case of a qualified
veteran unemployed for at least four weeks but less than six
months (whether or not consecutive) during the one-year period
ending on the date of hiring, the maximum credit equals 40
percent of $6,000 of qualified first-year wages; and (5) in the
case of a qualified veteran unemployed for at least six months
(whether or not consecutive) during the one-year period ending
on the date of hiring, the maximum credit equals 40 percent of
$14,000 of qualified first-year wages.
A veteran is an individual who has served on active duty
(other than for training) in the Armed Forces for more than 180
days or who has been discharged or released from active duty in
the Armed Forces for a service-connected disability. However,
any individual who has served for a period of more than 90 days
during which the individual was on active duty (other than for
training) is not a qualified veteran if any of this active duty
occurred during the 60-day period ending on the date the
individual was hired by the employer. This latter rule is
intended to prevent employers who hire current members of the
armed services (or those departed from service within the last
60 days) from receiving the credit.
(3) Qualified ex-felon
A qualified ex-felon is an individual certified as: (1)
having been convicted of a felony under any State or Federal
law; and (2) having a hiring date within one year of release
from prison or the date of conviction.
(4) Designated community resident
A designated community resident is an individual certified
as being at least age 18 but not yet age 40 on the hiring date
and as having a principal place of abode within an empowerment
zone, enterprise community, renewal community or a rural
renewal community. For these purposes, a rural renewal county
is a county outside a metropolitan statistical area (as defined
by the Office of Management and Budget) which had a net
population loss during the five-year periods 1990-1994 and
1995-1999. Qualified wages do not include wages paid or
incurred for services performed after the individual moves
outside an empowerment zone, enterprise community, renewal
community or a rural renewal community.
(5) Vocational rehabilitation referral
A vocational rehabilitation referral is an individual who
is certified by a designated local agency as an individual who
has a physical or mental disability that constitutes a
substantial handicap to employment and who has been referred to
the employer while receiving, or after completing: (a)
vocational rehabilitation services under an individualized,
written plan for employment under a State plan approved under
the Rehabilitation Act of 1973; (b) under a rehabilitation plan
for veterans carried out under Chapter 31 of Title 38, U.S.
Code; or (c) an individual work plan developed and implemented
by an employment network pursuant to subsection (g) of section
1148 of the Social Security Act. Certification will be provided
by the designated local employment agency upon assurances from
the vocational rehabilitation agency that the employee has met
the above conditions.
(6) Qualified summer youth employee
A qualified summer youth employee is an individual: (1) who
performs services during any 90-day period between May 1 and
September 15; (2) who is certified by the designated local
agency as being 16 or 17 years of age on the hiring date; (3)
who has not been an employee of that employer before; and (4)
who is certified by the designated local agency as having a
principal place of abode within an empowerment zone, enterprise
community, or renewal community. As with designated community
residents, no credit is available on wages paid or incurred for
service performed after the qualified summer youth moves
outside of an empowerment zone, enterprise community, or
renewal community. If, after the end of the 90-day period, the
employer continues to employ a youth who was certified during
the 90-day period as a member of another targeted group, the
limit on qualified first-year wages will take into account
wages paid to the youth while a qualified summer youth
employee.
(7) Qualified supplemental nutrition assistance program
benefits recipient
A qualified supplemental nutrition assistance program
benefits recipient is an individual at least age 18 but not yet
age 40 certified by a designated local employment agency as
being a member of a family receiving assistance under a food
and nutrition program under the Food and Nutrition Act of 2008
for a period of at least six months ending on the hiring date.
In the case of families that cease to be eligible for food and
nutrition assistance under section 6(o) of the Food and
Nutrition Act of 2008, the six-month requirement is replaced
with a requirement that the family has been receiving food and
nutrition assistance for at least three of the five months
ending on the date of hire. For these purposes, members of the
family are defined to include only those individuals taken into
account for purposes of determining eligibility for a food and
nutrition assistance program under the Food and Nutrition Act
of 2008.
(8) Qualified SSI recipient
A qualified SSI recipient is an individual designated by a
local agency as receiving supplemental security income
(``SSI'') benefits under Title XVI of the Social Security Act
for any month ending within the 60-day period ending on the
hiring date.
(9) Long-term family assistance recipient
A qualified long-term family assistance recipient is an
individual certified by a designated local agency as being: (1)
a member of a family that has received family assistance for at
least 18 consecutive months ending on the hiring date; (2) a
member of a family that has received such family assistance for
a total of at least 18 months (whether or not consecutive)
after August 5, 1997 (the date of enactment of the welfare-to-
work tax credit) if the individual is hired within two years
after the date that the 18-month total is reached; or (3) a
member of a family who is no longer eligible for family
assistance because of either Federal or State time limits, if
the individual is hired within two years after the Federal or
State time limits made the family ineligible for family
assistance.
Qualified wages
Generally, qualified wages are defined as cash wages paid
by the employer to a member of a targeted group. The employer's
deduction for wages is reduced by the amount of the credit.
For purposes of the credit, generally, wages are defined by
reference to the FUTA definition of wages contained in sec.
3306(b) (without regard to the dollar limitation therein
contained). Special rules apply in the case of certain
agricultural labor and certain railroad labor.
Calculation of the credit
The credit available to an employer for qualified wages
paid to members of all targeted groups except for long-term
family assistance recipients equals 40 percent (25 percent for
employment of 400 hours or less) of qualified first-year wages.
Generally, qualified first-year wages are qualified wages (not
in excess of $6,000) attributable to service rendered by a
member of a targeted group during the one-year period beginning
with the day the individual began work for the employer.
Therefore, the maximum credit per employee is $2,400 (40
percent of the first $6,000 of qualified first-year wages).
With respect to qualified summer youth employees, the maximum
credit is $1,200 (40 percent of the first $3,000 of qualified
first-year wages). Except for long-term family assistance
recipients, no credit is allowed for second-year wages.
In the case of long-term family assistance recipients, the
credit equals 40 percent (25 percent for employment of 400
hours or less) of $10,000 for qualified first-year wages and 50
percent of the first $10,000 of qualified second-year wages.
Generally, qualified second-year wages are qualified wages (not
in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the
one-year period beginning on the day after the one-year period
beginning with the day the individual began work for the
employer. Therefore, the maximum credit per employee is $9,000
(40 percent of the first $10,000 of qualified first-year wages
plus 50 percent of the first $10,000 of qualified second-year
wages).
For calculation of the credit with respect to qualified
veterans, see the description of ``qualified veteran'' above.
Certification rules
Generally, an individual is not treated as a member of a
targeted group unless: (1) on or before the day on which an
individual begins work for an employer, the employer has
received a certification from a designated local agency that
such individual is a member of a targeted group; or (2) on or
before the day an individual is offered employment with the
employer, a pre-screening notice is completed by the employer
with respect to such individual, and not later than the 28th
day after the individual begins work for the employer, the
employer submits such notice, signed by the employer and the
individual under penalties of perjury, to the designated local
agency as part of a written request for certification. For
these purposes, a pre-screening notice is a document (in such
form as the Secretary may prescribe) which contains information
provided by the individual on the basis of which the employer
believes that the individual is a member of a targeted group.
An otherwise qualified unemployed veteran is treated as
certified by the designated local agency as having aggregate
periods of unemployment (whichever is applicable under the
qualified veterans rules described above) if such veteran is
certified by such agency as being in receipt of unemployment
compensation under a State or Federal law for such applicable
periods. The Secretary of the Treasury is authorized to provide
alternative methods of certification for unemployed veterans.
Minimum employment period
No credit is allowed for qualified wages paid to employees
who work less than 120 hours in the first year of employment.
Qualified tax-exempt organizations employing qualified veterans
The credit is not available to qualified tax-exempt
organizations other than those employing qualified veterans.
The special rules, described below, were enacted in the VOW
Act.
If a qualified tax-exempt organization employs a qualified
veteran (as described above) a tax credit against the FICA
taxes of the organization is allowed on the wages of the
qualified veteran which are paid for the veteran's services in
furtherance of the activities related to the function or
purpose constituting the basis of the organization's exemption
under section 501.
The credit available to such tax-exempt employer for
qualified wages paid to a qualified veteran equals 26 percent
(16.25 percent for employment of 400 hours or less) of
qualified first-year wages. The amount of qualified first-year
wages eligible for the credit is the same as those for non-tax-
exempt employers (i.e., $6,000, $12,000, $14,000 or $24,000,
depending on the category of qualified veteran).
A qualified tax-exempt organization means an employer that
is described in section 501(c) and exempt from tax under
section 501(a).
The Social Security Trust Funds are held harmless from the
effects of this provision by a transfer from the Treasury
General Fund.
Treatment of possessions
The VOW Act provided a reimbursement mechanism for the U.S.
possessions (American Samoa, Guam, the Commonwealth of the
Northern Mariana Islands, the Commonwealth of Puerto Rico, and
the United States Virgin Islands). The Treasury Secretary is to
pay to each mirror code possession (Guam, the Commonwealth of
the Northern Mariana Islands, and the United States Virgin
Islands) an amount equal to the loss to that possession as a
result of the VOW Act changes to the qualified veterans rules.
Similarly, the Treasury Secretary is to pay to each non-mirror
Code possession (American Samoa and the Commonwealth of Puerto
Rico) the amount that the Secretary estimates as being equal to
the loss to that possession that would have occurred as a
result of the VOW Act changes if a mirror code tax system had
been in effect in that possession. The Secretary will make this
payment to a non-mirror Code possession only if that possession
establishes to the satisfaction of the Secretary that the
possession has implemented (or, at the discretion of the
Secretary, will implement) an income tax benefit that is
substantially equivalent to the qualified veterans credit
allowed under the VOW Act modifications.
An employer that is allowed a credit against U.S. tax under
the VOW Act with respect to a qualified veteran must reduce the
amount of the credit claimed by the amount of any credit (or,
in the case of a non-mirror Code possession, another tax
benefit) that the employer claims against its possession income
tax.
Other rules
The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. No credit is
allowed for wages paid to an individual who is a more than
fifty-percent owner of the entity. Similarly, wages paid to
replacement workers during a strike or lockout are not eligible
for the work opportunity tax credit. Wages paid to any employee
during any period for which the employer received on-the-job
training program payments with respect to that employee are not
eligible for the work opportunity tax credit. The work
opportunity tax credit generally is not allowed for wages paid
to individuals who had previously been employed by the
employer. In addition, many other technical rules apply.
Expiration
The work opportunity tax credit is not available for
individuals who begin work for an employer after December 31,
2013.
Explanation of Provision
The provision extends for one year the present-law
employment credit provision (for individuals who begin work for
the employer on or before December 31, 2014).
Effective Date
The provision is effective for individuals who begin work
for the employer after December 31, 2013.
10. Extension of qualified zone academy bonds (sec. 120 of the Act and
sec. 54E of the Code)
Present Law
Tax-exempt bonds
Interest on State and local governmental bonds generally is
excluded from gross income for Federal income tax purposes if
the proceeds of the bonds are used to finance direct activities
of these governmental units or if the bonds are repaid with
revenues of the governmental units. These can include tax-
exempt bonds which finance public schools.\352\ An issuer must
file with the Internal Revenue Service certain information
about the bonds issued in order for that bond issue to be tax-
exempt.\353\ Generally, this information return is required to
be filed no later than the 15th day of the second month after
the close of the calendar quarter in which the bonds were
issued.
---------------------------------------------------------------------------
\352\ Sec. 103.
\353\ Sec. 149(e).
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The tax exemption for State and local bonds does not apply
to any arbitrage bond.\354\ An arbitrage bond is defined as any
bond that is part of an issue if any proceeds of the issue are
reasonably expected to be used (or intentionally are used) to
acquire higher yielding investments or to replace funds that
are used to acquire higher yielding investments.\355\ In
general, arbitrage profits may be earned only during specified
periods (e.g., defined ``temporary periods'') before funds are
needed for the purpose of the borrowing or on specified types
of investments (e.g., ``reasonably required reserve or
replacement funds''). Subject to limited exceptions, investment
profits that are earned during these periods or on such
investments must be rebated to the Federal Government.
---------------------------------------------------------------------------
\354\ Sec. 103(a) and (b)(2).
\355\ Sec. 148.
---------------------------------------------------------------------------
Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, States
and local governments were given the authority to issue
``qualified zone academy bonds.'' \356\ A total of $400 million
of qualified zone academy bonds is authorized to be issued
annually in calendar years 1998 through 2008, $1,400 million in
2009 and 2010, and $400 million in 2011, 2012 and 2013. Each
calendar year's bond limitation is allocated to the States
according to their respective populations of individuals below
the poverty line. Each State, in turn, allocates the bond
authority to qualified zone academies within such State.
---------------------------------------------------------------------------
\356\ See secs. 54E and 1397E.
---------------------------------------------------------------------------
A taxpayer holding a qualified zone academy bond on the
credit allowance date is entitled to a credit. The credit is
includible in gross income (as if it were a taxable interest
payment on the bond), and may be claimed against regular income
tax and alternative minimum tax liability.
Qualified zone academy bonds are a type of qualified tax
credit bond and subject to the general rules applicable to
qualified tax credit bonds.\357\ The Treasury Department sets
the credit rate at a rate estimated to allow issuance of
qualified zone academy bonds without discount and without
interest cost to the issuer.\358\ The Secretary determines
credit rates for tax credit bonds based on general assumptions
about credit quality of the class of potential eligible issuers
and such other factors as the Secretary deems appropriate. The
Secretary may determine credit rates based on general credit
market yield indexes and credit ratings. The maximum term of
the bond is determined by the Treasury Department, so that the
present value of the obligation to repay the principal on the
bond is 50 percent of the face value of the bond.
---------------------------------------------------------------------------
\357\ Sec. 54A.
\358\ Given the differences in credit quality and other
characteristics of individual issuers, the Secretary cannot set credit
rates in a manner that will allow each issuer to issue tax credit bonds
at par.
---------------------------------------------------------------------------
``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that (1) at
least 100 percent of the available project proceeds are used
for the purpose of renovating, providing equipment to,
developing course materials for use at, or training teachers
and other school personnel in a ``qualified zone academy'' and
(2) private entities have promised to contribute to the
qualified zone academy certain equipment, technical assistance
or training, employee services, or other property or services
with a value equal to at least 10 percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment zone or
enterprise community designated under the Code, or (b) it is
reasonably expected that at least 35 percent of the students at
the school will be eligible for free or reduced-cost lunches
under the school lunch program established under the National
School Lunch Act.
Under section 6431 of the Code, an issuer of specified tax
credit bonds, may elect to receive a payment in lieu of a
credit being allowed to the holder of the bond (``direct-pay
bonds''). The Code provides that section 6431 is not available
for qualified zone academy bond allocations from the 2011
national limitation or any carry forward of the 2011
allocation.\359\
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\359\ Sec. 6431(f)(3)(A)(iii). Section 202(d) of the Act (described
infra) contains a technical correction to provide that section 6431 is
not available for any allocations from national limitation or
carryforward for years 2011 and thereafter.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the qualified zone academy bond
program for one year. The provision authorizes issuance of up
to $400 million of qualified zone academy bonds for 2014. The
option to issue direct-pay bonds is not available for the 2014
bond limitation.
Effective Date
The provision generally applies to obligations issued after
December 31, 2013.
11. Extension of classification of certain race horses as three-year
property (sec. 121 of the Act and sec. 168 of the Code)
Present Law
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or
amortization.\360\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\361\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\362\ In particular, the statute assigns a
three-year recovery period for any race horse (1) that is
placed in service after December 31, 2008 and before January 1,
2014 \363\ and (2) that is placed in service after December 31,
2013 and that is more than two years old at such time it is
placed in service by the purchaser.\364\ A seven-year recovery
period is assigned to any race horse that is placed in service
after December 31, 2013 and that is two years old or younger at
the time it is placed in service.\365\
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\360\ See secs. 263(a) and 167.
\361\ The applicable recovery period for an asset is determined in
part by statute and in part by historic Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Rev. Proc. 87-56,
1987-2 C.B. 674, laying out the framework of recovery periods for
enumerated classes of assets. The Secretary clarified and modified the
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November
1988, Congress revoked the Secretary's authority to modify the class
lives of depreciable property. Rev. Proc. 87-56, as modified, remains
in effect except to the extent that the Congress has, since 1988,
statutorily modified the recovery period for certain depreciable
assets, effectively superseding any administrative guidance with regard
to such property.
\362\ Sec. 168.
\363\ Sec. 168(e)(3)(A)(i)(I), as in effect after amendment by the
Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246, sec.
15344(b).
\364\ Sec. 168(e)(3)(A)(i)(II). A horse is more than 2 years old
after the day that is 24 months after its actual birthdate. Rev. Proc.
87-56, 1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22,
1988-1 C.B. 785.
\365\ Rev. Proc. 87-56, 1987-2 C.B. 674, asset class 01.225.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present-law three-year recovery
period for race horses for one year to apply to any race horse
(regardless of age when placed in service) which is placed in
service before January 1, 2015. Subsequently, the three-year
recovery period for race horses will only apply to those which
are more than two years old when placed in service by the
purchaser after December 31, 2014.
Effective Date
The provision applies to property placed in service after
December 31, 2013.
12. Extension of 15-year straight-line cost recovery for qualified
leasehold improvements, qualified restaurant buildings and
improvements, and qualified retail improvements (sec. 122 of
the Act and sec. 168 of the Code)
Present Law
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or amortization.
Tangible property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of
various types of depreciable property.\366\ The cost of
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years.
Nonresidential real property is subject to the mid-month
placed-in-service convention. Under the mid-month convention,
the depreciation allowance for the first year in which property
is placed in service is based on the number of months the
property was in service, and property placed in service at any
time during a month is treated as having been placed in service
in the middle of the month.
---------------------------------------------------------------------------
\366\ Sec. 168.
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Depreciation of leasehold improvements
Generally, depreciation allowances for improvements made on
leased property are determined under MACRS, even if the MACRS
recovery period assigned to the property is longer than the
term of the lease. This rule applies regardless of whether the
lessor or the lessee places the leasehold improvements in
service. If a leasehold improvement constitutes an addition or
improvement to nonresidential real property already placed in
service, the improvement generally is depreciated using the
straight-line method over a 39-year recovery period, beginning
in the month the addition or improvement was placed in service.
However, exceptions exist for certain qualified leasehold
improvements, qualified restaurant property, and qualified
retail improvement property.
Qualified leasehold improvement property
Section 168(e)(3)(E)(iv) provides a statutory 15-year
recovery period for qualified leasehold improvement property
placed in service before January 1, 2014. Qualified leasehold
improvement property is any improvement to an interior portion
of a building that is nonresidential real property, provided
certain requirements are met.\367\ The improvement must be made
under or pursuant to a lease either by the lessee (or
sublessee), or by the lessor, of that portion of the building
to be occupied exclusively by the lessee (or sublessee). The
improvement must be placed in service more than three years
after the date the building was first placed in service.
Qualified leasehold improvement property does not include any
improvement for which the expenditure is attributable to the
enlargement of the building, any elevator or escalator, any
structural component benefiting a common area, or the internal
structural framework of the building.\368\ If a lessor makes an
improvement that qualifies as qualified leasehold improvement
property, such improvement does not qualify as qualified
leasehold improvement property to any subsequent owner of such
improvement.\369\ An exception to the rule applies in the case
of death and certain transfers of property that qualify for
non-recognition treatment.\370\
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\367\ Sec. 168(e)(6).
\368\ Sec. 168(e)(6) and (k)(3).
\369\ Sec. 168(e)(6)(A).
\370\ Sec. 168(e)(6)(B).
---------------------------------------------------------------------------
Qualified leasehold improvement property is generally
recovered using the straight-line method and a half-year
convention.\371\ Qualified leasehold improvement property
placed in service after December 31, 2013 is subject to the
general rules described above.
---------------------------------------------------------------------------
\371\ Sec. 168(b)(3)(G) and (d).
---------------------------------------------------------------------------
Qualified restaurant property
Section 168(e)(3)(E)(v) provides a statutory 15-year
recovery period for qualified restaurant property placed in
service before January 1, 2014. Qualified restaurant property
is any section 1250 property that is a building or an
improvement to a building, if more than 50 percent of the
building's square footage is devoted to the preparation of, and
seating for on-premises consumption of, prepared meals.\372\
Qualified restaurant property is recovered using the straight-
line method and a half-year convention.\373\ Additionally,
qualified restaurant property is not eligible for bonus
depreciation.\374\ Qualified restaurant property placed in
service after December 31, 2013 is subject to the general rules
described above.
---------------------------------------------------------------------------
\372\ Sec. 168(e)(7).
\373\ Sec. 168(b)(3)(H) and (d).
\374\ Sec. 168(e)(7)(B). Property that satisfies the definition of
both qualified leasehold improvement property and qualified restaurant
property is eligible for bonus depreciation. Sec. 3.03(3) of Rev. Proc.
2011-26, 2011-16 I.R.B. 664, 2011.
---------------------------------------------------------------------------
Qualified retail improvement property
Section 168(e)(3)(E)(ix) provides a statutory 15-year
recovery period for qualified retail improvement property
placed in service before January 1, 2014. Qualified retail
improvement property is any improvement to an interior portion
of a building which is nonresidential real property if such
portion is open to the general public \375\ and is used in the
retail trade or business of selling tangible personal property
to the general public, and such improvement is placed in
service more than three years after the date the building was
first placed in service.\376\ Qualified retail improvement
property does not include any improvement for which the
expenditure is attributable to the enlargement of the building,
any elevator or escalator, any structural component benefiting
a common area, or the internal structural framework of the
building.\377\ In the case of an improvement made by the owner
of such improvement, the improvement is a qualified retail
improvement only so long as the improvement is held by such
owner.\378\
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\375\ Improvements to portions of a building not open to the
general public (e.g., stock room in back of retail space) do not
qualify under the provision.
\376\ Sec. 168(e)(8).
\377\ Sec. 168(e)(8)(C).
\378\ Sec. 168(e)(8)(B).
---------------------------------------------------------------------------
Retail establishments that qualify for the 15-year recovery
period include those primarily engaged in the sale of goods.
Examples of these retail establishments include, but are not
limited to, grocery stores, clothing stores, hardware stores,
and convenience stores. Establishments primarily engaged in
providing services, such as professional services, financial
services, personal services, health services, and
entertainment, do not qualify. Generally, it is intended that
businesses defined as a store retailer under the current North
American Industry Classification System (industry sub-sectors
441 through 453) qualify while those in other industry classes
do not qualify.
Qualified retail improvement property is recovered using
the straight-line method and a half-year convention.\379\
Additionally, qualified retail improvement property is not
eligible for bonus depreciation.\380\ Qualified retail
improvement property placed in service after December 31, 2013
is subject to the general rules described above.
---------------------------------------------------------------------------
\379\ Sec. 168(b)(3)(I) and (d).
\380\ Sec. 168(e)(8)(D). Property that satisfies the definition of
both qualified leasehold improvement property and qualified retail
improvement property is eligible for bonus depreciation. Sec. 3.03(3)
of Rev. Proc. 2011-26, 2011-16 I.R.B. 664, 2011.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present-law provisions for
qualified leasehold improvement property, qualified restaurant
property, and qualified retail improvement property for one
year to apply to property placed in service before January 1,
2015.
Effective Date
The provision is effective for property placed in service
after December 31, 2013.
13. Extension of seven-year recovery period for motorsports
entertainment complexes (sec. 123 of the Act and sec. 168 of
the Code)
Present Law
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or
amortization.\381\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\382\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\383\ The cost of nonresidential real
property is recovered using the straight-line method of
depreciation and a recovery period of 39 years.\384\
Nonresidential real property is subject to the mid-month
convention, which treats all property placed in service during
any month (or disposed of during any month) as placed in
service (or disposed of) on the mid-point of such month.\385\
All other property generally is subject to the half-year
convention, which treats all property placed in service during
any taxable year (or disposed of during any taxable year) as
placed in service (or disposed of) on the mid-point of such
taxable year.\386\ Land improvements (such as roads and fences)
are recovered using the 150-percent declining balance method
and a recovery period of 15-years.\387\ An exception exists for
the theme and amusement park industry, whose assets are
assigned a recovery period of seven years.\388\ Additionally, a
motorsports entertainment complex placed in service on or
before December 31, 2013 is assigned a recovery period of seven
years.\389\ For these purposes, a motorsports entertainment
complex means a racing track facility which is permanently
situated on land and which during the 36-month period following
its placed-in-service date hosts a racing event.\390\ The term
motorsports entertainment complex also includes ancillary
facilities, land improvements (e.g., parking lots, sidewalks,
fences), support facilities (e.g., food and beverage retailing,
souvenir vending), and appurtenances associated with such
facilities (e.g., ticket booths, grandstands).
---------------------------------------------------------------------------
\381\ See secs. 263(a) and 167.
\382\ The applicable recovery period for an asset is determined in
part by statute and in part by historic Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Rev. Proc. 87-56,
1987-2 C.B. 674, laying out the framework of recovery periods for
enumerated classes of assets. The Secretary clarified and modified the
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November
1988, Congress revoked the Secretary's authority to modify the class
lives of depreciable property. Rev. Proc. 87-56, as modified, remains
in effect except to the extent that the Congress has, since 1988,
statutorily modified the recovery period for certain depreciable
assets, effectively superseding any administrative guidance with regard
to such property.
\383\ Sec. 168.
\384\ Sec. 168(b)(3)(A) and 168(c).
\385\ Sec. 168(d)(2)(A) and (d)(4)(B).
\386\ Sec. 168(d)(1) and (d)(4)(A). However, if substantial
property is placed in service during the last three months of a taxable
year, a special rule requires use of the mid-quarter convention, which
treats all property placed in service (or disposed of) during any
quarter as placed in service (or disposed of) on the mid-point of such
quarter. Secs. 168(d)(3) and (d)(4)(C).
\387\ Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87-56,
1987-2 C.B. 674, 1987. Under the 150-percent declining balance method,
the depreciation rate is determined by dividing 150-percent by the
appropriate recovery period, switching to the straight-line method for
the first taxable year where using the straight-line method with
respect to the adjusted basis as of the beginning of that year will
yield a larger depreciation allowance. Sec. 168(b)(2) and (b)(1)(B).
\388\ Asset class 80.0 of Rev. Proc. 87-56, 1987-2 C.B. 674, 1987.
\389\ Sec. 168(e)(3)(C)(ii).
\390\ Sec. 168(i)(15).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present-law seven-year recovery
period for motorsports entertainment complexes for one year to
apply to property placed in service on or before December 31,
2014.
Effective Date
The provision is effective for property placed in service
after December 31, 2013.
14. Extension of accelerated depreciation for business property on an
Indian reservation (sec. 124 of the Act and sec. 168(j) of the
Code)
Present Law
With respect to certain property used in connection with
the conduct of a trade or business within an Indian
reservation, depreciation deductions under section 168(j) are
determined using the following recovery periods:
3-year property......................................... 2 years
5-year property......................................... 3 years
7-year property......................................... 4 years
10-year property........................................ 6 years
15-year property........................................ 9 years
20-year property........................................ 12 years
Nonresidential real property............................ 22 years \391\
``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property described in the
table above which is: (1) used by the taxpayer predominantly in
the active conduct of a trade or business within an Indian
reservation; (2) not used or located outside the reservation on
a regular basis; (3) not acquired (directly or indirectly) by
the taxpayer from a person who is related to the taxpayer;
\392\ and (4) is not property placed in service for purposes of
conducting gaming activities.\393\ Certain ``qualified
infrastructure property'' may be eligible for the accelerated
depreciation even if located outside an Indian reservation,
provided that the purpose of such property is to connect with
qualified infrastructure property located within the
reservation (e.g., roads, power lines, water systems, railroad
spurs, and communications facilities).\394\
---------------------------------------------------------------------------
\391\ Section 168(j)(2) does not provide shorter recovery periods
for water utility property, residential rental property, or railroad
grading and tunnel bores.
\392\ For these purposes, the term ``related persons'' is defined
in section 465(b)(3)(C).
\393\ Sec. 168(j)(4)(A).
\394\ Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
An ``Indian reservation'' means a reservation as defined in
section 3(d) of the Indian Financing Act of 1974 (25 U.S.C.
1452(d)) \395\ or section 4(10) of the Indian Child Welfare Act
of 1978 (25 U.S.C. 1903(10)).\396\ For purposes of the
preceding sentence, section 3(d) is applied by treating
``former Indian reservations in Oklahoma'' as including only
lands that are (1) within the jurisdictional area of an
Oklahoma Indian tribe as determined by the Secretary of the
Interior, and (2) recognized by such Secretary as an area
eligible for trust land status under 25 C.F.R. Part 151 (as in
effect on August 5, 1997).\397\
---------------------------------------------------------------------------
\395\ Pub. L. No. 93-262.
\396\ Pub. L. No. 95-608.
\397\ Sec. 168(j)(6).
---------------------------------------------------------------------------
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum
tax.\398\ The accelerated depreciation for qualified Indian
reservation property is available with respect to property
placed in service on or before December 31, 2013.\399\
---------------------------------------------------------------------------
\398\ Sec. 168(j)(3).
\399\ Sec. 168(j)(8).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for one year the present-law
accelerated depreciation for qualified Indian reservation
property to apply to property placed in service on or before
December 31, 2014.
Effective Date
The provision is effective for property placed in service
after December 31, 2013.
15. Extension of bonus depreciation (sec. 125 of the Act and sec.
168(k) of the Code)
Present Law
In general
An additional first-year depreciation deduction is allowed
equal to 50 percent of the adjusted basis of qualified property
acquired and placed in service after December 31, 2007 and
before January 1, 2014 (January 1, 2015 for certain longer-
lived and transportation property).\400\
---------------------------------------------------------------------------
\400\ Sec. 168(k). The additional first-year depreciation deduction
is subject to the general rules regarding whether an item must be
capitalized under section 263A. An additional first-year depreciation
deduction is allowed equal to 100 percent of the adjusted basis of
qualified original-use property if it meets the requirements for the
additional first-year depreciation and the taxpayer acquired and placed
the property in service after September 8, 2010 and before January 1,
2012 (January 1, 2013 for certain longer-lived and transportation
property). Sec. 168(k)(5). See also Rev. Proc. 2011-26, 2011-16 I.R.B.
664, 2011.
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The additional first-year depreciation deduction is allowed
for both the regular tax and the alternative minimum tax
(``AMT''),\401\ but is not allowed in computing earnings and
profits.\402\ The basis of the property and the depreciation
allowances in the year of purchase and later years are
appropriately adjusted to reflect the additional first-year
depreciation deduction.\403\ The amount of the additional
first-year depreciation deduction is not affected by a short
taxable year.\404\ The taxpayer may elect out of additional
first-year depreciation for any class of property for any
taxable year.\405\
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\401\ Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
\402\ Treas. Reg. sec. 1.168(k)-1(f)(7).
\403\ Sec. 168(k)(1)(B).
\404\ Ibid.
\405\ Sec. 168(k)(2)(D)(iii). For the definition of a class of
property, see Treas. Reg. sec. 1.168(k)-1(e)(2).
---------------------------------------------------------------------------
The interaction of the additional first-year depreciation
allowance with the otherwise applicable depreciation allowance
may be illustrated as follows. Assume that in 2013, a taxpayer
purchased new depreciable property and placed it in
service.\406\ The property's cost is $1,000, and it is five-
year property subject to the 200 percent declining balance
method and half-year convention. The amount of additional
first-year depreciation allowed is $500. The remaining $500 of
the cost of the property is depreciable under the rules
applicable to five-year property. Thus $100 \407\ also is
allowed as a depreciation deduction in 2013. The total
depreciation deduction with respect to the property for 2013 is
$600. The remaining $400 adjusted basis of the property
generally is recovered through otherwise applicable
depreciation rules.
---------------------------------------------------------------------------
\406\ Assume that the cost of the property is not eligible for
expensing under section 179.
\407\ $100 results from the application of the half-year convention
and the 200 percent declining balance method to the remaining $500.
---------------------------------------------------------------------------
Property qualifying for the additional first-year
depreciation deduction must meet all of the following
requirements. First, the property must be (1) property to which
the modified accelerated cost recovery system (``MACRS'')
applies with an applicable recovery period of 20 years or less;
(2) water utility property (as defined in section 168(e)(5));
(3) computer software other than computer software covered by
section 197; or (4) qualified leasehold improvement property
(as defined in section 168(k)(3)).\408\ Second, the original
use \409\ of the property must commence with the taxpayer after
December 31, 2007.\410\ Third, the taxpayer must acquire the
property within the applicable time period (as described
below). Finally, the property must be placed in service before
January 1, 2014. An extension of the placed-in-service date of
one year (i.e., before January 1, 2015) is provided for certain
property with a recovery period of 10 years or longer and
certain transportation property.\411\
---------------------------------------------------------------------------
\408\ The additional first-year depreciation deduction is not
available for any property that is required to be depreciated under the
alternative depreciation system of MACRS. Sec. 168(k)(2)(D)(i). The
additional first-year depreciation deduction also is not available for
qualified New York Liberty Zone leasehold improvement property as
defined in section 1400L(c)(2). Sec. 168(k)(2)(D)(ii).
\409\ The term ``original use'' means the first use to which the
property is put, whether or not such use corresponds to the use of such
property by the taxpayer. If in the normal course of its business a
taxpayer sells fractional interests in property to unrelated third
parties, then the original use of such property begins with the first
user of each fractional interest (i.e., each fractional owner is
considered the original user of its proportionate share of the
property). Treas. Reg. sec. 1.168(k)-1(b)(3).
\410\ A special rule applies in the case of certain leased
property. In the case of any property that is originally placed in
service by a person and that is sold to the taxpayer and leased back to
such person by the taxpayer within three months after the date that the
property was placed in service, the property would be treated as
originally placed in service by the taxpayer not earlier than the date
that the property is used under the leaseback. If property is
originally placed in service by a lessor, such property is sold within
three months after the date that the property was placed in service,
and the user of such property does not change, then the property is
treated as originally placed in service by the taxpayer not earlier
than the date of such sale. Sec. 168(k)(2)(E)(ii).
\411\ Property qualifying for the extended placed-in-service date
must have an estimated production period exceeding one year and a cost
exceeding $1 million. Transportation property generally is defined as
tangible personal property used in the trade or business of
transporting persons or property. Certain aircraft which is not
transportation property, other than for agricultural or firefighting
uses, also qualifies for the extended placed-in-service-date, if at the
time of the contract for purchase, the purchaser made a nonrefundable
deposit of the lesser of 10 percent of the cost or $100,000, and which
has an estimated production period exceeding four months and a cost
exceeding $200,000.
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To qualify, property must be acquired (1) after December
31, 2007, and before January 1, 2014, but only if no binding
written contract for the acquisition is in effect before
January 1, 2008, or (2) pursuant to a binding written contract
which was entered into after December 31, 2007, and before
January 1, 2014.\412\ With respect to property that is
manufactured, constructed, or produced by the taxpayer for use
by the taxpayer, the taxpayer must begin the manufacture,
construction, or production of the property after December 31,
2007, and before January 1, 2014.\413\ Property that is
manufactured, constructed, or produced for the taxpayer by
another person under a contract that is entered into prior to
the manufacture, construction, or production of the property is
considered to be manufactured, constructed, or produced by the
taxpayer.\414\ For property eligible for the extended placed-
in-service date, a special rule limits the amount of costs
eligible for the additional first-year depreciation. With
respect to such property, only the portion of the basis that is
properly attributable to the costs incurred before January 1,
2014 (``progress expenditures'') is eligible for the additional
first-year depreciation deduction.\415\
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\412\ In the case of a binding written contract to acquire one or
more components of a larger self-constructed asset, the larger self-
constructed asset will not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire
one or more components of such property was in effect prior to January
1, 2008. See Treas. Reg. sec. 1.168(k)-1(b)(4)(iii)(C). See also,
Treas. Reg. sec. 1.168(k)-1(b)(4)(v), Examples 6 and 7.
\413\ Sec. 168(k)(2)(E)(i).
\414\ Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
\415\ Sec. 168(k)(2)(B)(ii). For purposes of determining the amount
of eligible progress expenditures, rules similar to section 46(d)(3) as
in effect prior to the Tax Reform Act of 1986 apply.
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Property does not qualify for the additional first-year
depreciation deduction when the user of such property (or a
related party) would not have been eligible for the additional
first-year depreciation deduction if the user (or a related
party) were treated as the owner.\416\ For example, if a
taxpayer sells to a related party property that was under
construction prior to January 1, 2008, the property does not
qualify for the additional first-year depreciation deduction.
Similarly, if a taxpayer sells to a related party property that
was subject to a binding written contract prior to January 1,
2008, the property does not qualify for the additional first-
year depreciation deduction. As a further example, if a
taxpayer (the lessee) sells property in a sale-leaseback
arrangement, and the property otherwise would not have
qualified for the additional first-year depreciation deduction
if it were owned by the taxpayer-lessee, then the lessor is not
entitled to the additional first-year depreciation deduction.
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\416\ Sec. 168(k)(2)(E)(iv).
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The limitation under section 280F on the amount of
depreciation deductions allowed with respect to certain
passenger automobiles is increased in the first year by $8,000
for automobiles that qualify (and for which the taxpayer does
not elect out of the additional first-year deduction).\417\ The
$8,000 amount is not indexed for inflation.
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\417\ Sec. 168(k)(2)(F).
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Special rule for long-term contracts
In general, in the case of a long-term contract, the
taxable income from the contract is determined under the
percentage-of-completion method.\418\ Solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of seven years or less is taken into account as
a cost allocated to the contract as if bonus depreciation had
not been enacted for property placed in service (1) after
December 31, 2009 and before January 1, 2011 (January 1, 2012
in the case of certain longer-lived and transportation
property) or (2) after December 31, 2012 and before January 1,
2014 (January 1, 2015 in the case of certain longer-lived and
transportation property).\419\ Bonus depreciation generally is
taken into account in determining taxable income under the
percentage-of-completion method for property placed in service
after December 31, 2010 and before January 1, 2013.
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\418\ See sec. 460.
\419\ Sec. 460(c)(6).
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Election to accelerate AMT credits in lieu of bonus depreciation
A corporation otherwise eligible for additional first-year
depreciation may elect to claim additional AMT credits in lieu
of claiming additional depreciation with respect to ``eligible
qualified property.'' \420\ In the case of a corporation making
this election, the straight line method is used for the regular
tax and the AMT with respect to eligible qualified
property.\421\
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\420\ Sec. 168(k)(4). Eligible qualified property means qualified
property eligible for bonus depreciation with minor effective date
differences having little (if any) remaining significance.
\421\ Sec. 168(k)(4)(A).
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Generally, an election under this provision for a taxable
year applies to subsequent taxable years. However, each time
the provision has been extended, a corporation which has
previously made an election has been allowed to elect not to
claim additional minimum tax credits, or, if no election had
previously been made, to make an election to claim additional
credits with respect to property subject to the extension.\422\
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\422\ Secs. 168(k)(4)(H), (I), and (J).
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A corporation making an election increases the tax
liability limitation under section 53(c) on the use of minimum
tax credits by the bonus depreciation amount.\423\ The
aggregate increase in credits allowable by reason of the
increased limitation is treated as refundable.\424\
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\423\ Sec. 168(k)(4)(B)(ii).
\424\ Sec. 168(k)(4)(F).
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The bonus depreciation amount generally is equal to 20
percent of bonus depreciation \425\ for eligible qualified
property that could be claimed as a deduction absent an
election under this provision. As originally enacted, the bonus
depreciation amount for all taxable years was limited to the
lesser of (1) $30 million, or (2) six percent of the minimum
tax credits allocable to the adjusted net minimum tax imposed
for taxable years beginning before January 1, 2006.\426\
However, extensions of this provision have provided that this
limitation applies separately to property subject to each
extension.
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\425\ For this purpose, bonus depreciation is the difference
between (i) the aggregate amount of depreciation determined if section
168(k)(1) applied to all eligible qualified property placed in service
during the taxable year and (ii) the amount of depreciation that would
be so determined if section 168(k)(1) did not so apply. This
determination is made using the most accelerated depreciation method
and the shortest life otherwise allowable for each property. Sec.
168(k)(4)(C).
\426\ Sec. 168(k)(4)(C)(iii).
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All corporations treated as a single employer under section
52(a) are treated as one taxpayer for purposes of the
limitation, as well as for electing the application of this
provision.\427\
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\427\ Sec. 168(k)(4)(C)(iv).
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In the case of a corporation making an election which is a
partner in a partnership, for purposes of determining the
electing partner's distributive share of partnership items,
bonus depreciation does not apply to any eligible qualified
property and the straight line method is used with respect to
that property.\428\
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\428\ Sec. 168(k)(4)(G)(ii).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the 50-percent additional first-year
depreciation deduction for one year, generally through 2014
(through 2015 for certain longer-lived and transportation
property).
The provision provides that solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of seven years or less which is placed in
service after December 31, 2012 and before January 1, 2015
(January 1, 2016, in the case of certain longer-lived and
transportation property) is taken into account as a cost
allocated to the contract as if bonus depreciation had not been
enacted.
The provision also extends the election to increase the AMT
credit limitation in lieu of bonus depreciation for one year to
property placed in service before January 1, 2015 (January 1,
2016, in the case of certain longer-lived property and
transportation property). A bonus depreciation amount, maximum
amount, and maximum increase amount is computed separately with
respect to property to which the extension of additional first-
year depreciation applies (``round 4 extension
property'').\429\
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\429\ An election with respect to round 4 extension property is
binding for all property that is eligible qualified property solely by
reason of the extension of the 50-percent additional first-year
depreciation deduction.
---------------------------------------------------------------------------
Under the provision, a corporation that has an election in
effect with respect to round 3 extension property to claim
minimum tax credits in lieu of bonus depreciation is treated as
having an election in effect for round 4 extension property,
unless the corporation elects otherwise. The provision also
allows a corporation that does not have an election in effect
with respect to round 3 extension property to elect to claim
minimum tax credits in lieu of bonus depreciation for round 4
extension property. A separate bonus depreciation amount,
maximum amount, and maximum increase amount is computed and
applied to round 4 extension property.\430\
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\430\ In computing the maximum amount, the maximum increase amount
for round 4 extension property is reduced by bonus depreciation amounts
for preceding taxable years only with respect to round 4 extension
property.
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Effective Date
The provision is effective for property placed in service
after December 31, 2013, in taxable years ending after such
date.
16. Extension of enhanced charitable deduction for contributions of
food inventory (sec. 126 of the Act and sec. 170 of the Code)
Present Law
Charitable contributions in general
In general, an income tax deduction is permitted for
charitable contributions, subject to certain limitations that
depend on the type of taxpayer, the property contributed, and
the donee organization.\431\
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\431\ Sec. 170.
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Charitable contributions of cash are deductible in the
amount contributed. In general, contributions of capital gain
property are deductible at fair market value with certain
exceptions. Capital gain property means any capital asset or
property used in the taxpayer's trade or business the sale of
which at its fair market value, at the time of contribution,
would have resulted in gain that would have been long-term
capital gain. Contributions of other appreciated property
generally are deductible at the donor's basis in the property.
Contributions of depreciated property generally are deductible
at the fair market value of the property.
General rules regarding contributions of inventory
Under present law, a taxpayer's deduction for charitable
contributions of inventory generally is limited to the
taxpayer's basis (typically, cost) in the inventory, or if less
the fair market value of the inventory.
For certain contributions of inventory, C corporations may
claim an enhanced deduction equal to the lesser of (1) basis
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times
basis.\432\ In general, a C corporation's charitable
contribution deductions for a year may not exceed 10 percent of
the corporation's taxable income.\433\ To be eligible for the
enhanced deduction, the contributed property generally must be
inventory of the taxpayer and must be contributed to a
charitable organization described in section 501(c)(3) (except
for private nonoperating foundations), and the donee must (1)
use the property consistent with the donee's exempt purpose
solely for the care of the ill, the needy, or infants; (2) not
transfer the property in exchange for money, other property, or
services; and (3) provide the taxpayer a written statement that
the donee's use of the property will be consistent with such
requirements.\434\ In the case of contributed property subject
to the Federal Food, Drug, and Cosmetic Act, as amended, the
property must satisfy the applicable requirements of such Act
on the date of transfer and for 180 days prior to the
transfer.\435\
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\432\ Sec. 170(e)(3).
\433\ Sec. 170(b)(2).
\434\ Sec. 170(e)(3)(A)(i)-(iii).
\435\ Sec. 170(e)(3)(A)(iv).
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A donor making a charitable contribution of inventory must
make a corresponding adjustment to the cost of goods sold by
decreasing the cost of goods sold by the lesser of the fair
market value of the property or the donor's basis with respect
to the inventory.\436\
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\436\ Treas. Reg. sec. 1.170A-4A(c)(3).
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To use the enhanced deduction, the taxpayer must establish
that the fair market value of the donated item exceeds basis.
The valuation of food inventory has been the subject of
disputes between taxpayers and the IRS.\437\
---------------------------------------------------------------------------
\437\ Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995)
(holding that the value of surplus bread inventory donated to charity
was the full retail price of the bread rather than half the retail
price, as the IRS asserted).
---------------------------------------------------------------------------
Temporary rule expanding and modifying the enhanced deduction for
contributions of food inventory
Under a temporary provision, any taxpayer engaged in a
trade or business, whether or not a C corporation, is eligible
to claim the enhanced deduction for donations of food
inventory.\438\ For taxpayers other than C corporations, the
total deduction for donations of food inventory in a taxable
year generally may not exceed 10 percent of the taxpayer's net
income for such taxable year from all sole proprietorships, S
corporations, or partnerships (or other non C corporations)
from which contributions of apparently wholesome food are made.
For example, if a taxpayer is a sole proprietor, a shareholder
in an S corporation, and a partner in a partnership, and each
business makes charitable contributions of food inventory, the
taxpayer's deduction for donations of food inventory is limited
to 10 percent of the taxpayer's net income from the sole
proprietorship and the taxpayer's interests in the S
corporation and partnership. However, if only the sole
proprietorship and the S corporation made charitable
contributions of food inventory, the taxpayer's deduction would
be limited to 10 percent of the net income from the trade or
business of the sole proprietorship and the taxpayer's interest
in the S corporation, but not the taxpayer's interest in the
partnership.\439\
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\438\ Sec. 170(e)(3)(C).
\439\ The 10 percent limitation does not affect the application of
the generally applicable percentage limitations. For example, if 10
percent of a sole proprietor's net income from the proprietor's trade
or business was greater than 50 percent of the proprietor's
contribution base, the available deduction for the taxable year (with
respect to contributions to public charities) would be 50 percent of
the proprietor's contribution base. Consistent with present law, such
contributions may be carried forward because they exceed the 50 percent
limitation. Contributions of food inventory by a taxpayer that is not a
C corporation that exceed the 10 percent limitation but not the 50
percent limitation could not be carried forward.
---------------------------------------------------------------------------
Under the temporary provision, the enhanced deduction for
food is available only for food that qualifies as ``apparently
wholesome food.'' Apparently wholesome food is defined as food
intended for human consumption that meets all quality and
labeling standards imposed by Federal, State, and local laws
and regulations even though the food may not be readily
marketable due to appearance, age, freshness, grade, size,
surplus, or other conditions.
The provision does not apply to contributions made after
December 31, 2013.
Explanation of Provision
The provision extends the special rule for charitable
contributions of food inventory to contributions made before
January 1, 2015.
Effective Date
The provision is effective for contributions made after
December 31, 2013.
17. Extension of increased expensing limitations and treatment of
certain real property as section 179 property (sec. 127 of the
Act and sec. 179 of the Code)
Present Law
A taxpayer may elect under section 179 to deduct (or
``expense'') the cost of qualifying property, rather than to
recover such costs through depreciation deductions, subject to
limitation.\440\ For taxable years beginning in 2013, the
maximum amount a taxpayer may expense is $500,000 of the cost
of qualifying property placed in service for the taxable
year.\441\ The $500,000 amount is reduced (but not below zero)
by the amount by which the cost of qualifying property placed
in service during the taxable year exceeds $2,000,000.\442\ The
$500,000 and $2,000,000 amounts are not indexed for inflation.
In general, qualifying property is defined as depreciable
tangible personal property that is purchased for use in the
active conduct of a trade or business.\443\ For taxable years
beginning before 2014, qualifying property also includes off-
the-shelf computer software and qualified real property (i.e.,
qualified leasehold improvement property, qualified restaurant
property, and qualified retail improvement property).\444\ Of
the $500,000 expense amount available under section 179, the
maximum amount available with respect to qualified real
property is $250,000 for each taxable year.\445\
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\440\ Additional section 179 incentives have been provided with
respect to qualified property meeting applicable requirements that is
used by a business in an enterprise zone (sec. 1397A), a renewal
community (sec. 1400J), the New York Liberty Zone (sec. 1400L(f)), or
the Gulf Opportunity Zone (sec. 1400N(e)). In addition, section 179(e)
provides for an enhanced section 179 deduction for qualified disaster
assistance property.
\441\ For the years 2003 through 2006, the relevant dollar amount
is $100,000 (indexed for inflation); in 2007, the dollar limitation is
$125,000; for the 2008 and 2009 years, the relevant dollar amount is
$250,000; and for 2010, 2011, and 2012, the relevant dollar limitation
is $500,000. Sec. 179(b)(1).
\442\ For the years 2003 through 2006, the relevant dollar amount
is $400,000 (indexed for inflation); in 2007, the dollar limitation is
$500,000; for the 2008 and 2009 years, the relevant dollar amount is
$800,000; and for 2010, 2011, and 2012, the relevant dollar limitation
is $2,000,000. Sec. 179(b)(2).
\443\ Qualifying property does not include any property described
in section 50(b), air conditioning units, or heating units. Sec.
179(d)(1). Passenger automobiles subject to the section 280F limitation
are eligible for section 179 expensing only to the extent of the dollar
limitations in section 280F. For sport utility vehicles above the 6,000
pound weight rating, which are not subject to the limitation under
section 280F, the maximum cost that may be expensed for any taxable
year under section 179 is $25,000. Sec. 179(b)(5).
\444\ Secs. 179(d)(1)(A)(ii) and (f).
\445\ Sec. 179(f)(3).
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For taxable years beginning in 2014 and thereafter, a
taxpayer may elect to deduct up to $25,000 of the cost of
qualifying property placed in service for the taxable year,
subject to limitation. The $25,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$200,000. The $25,000 and $200,000 amounts are not indexed for
inflation. In general, qualifying property is defined as
depreciable tangible personal property (not including off-the-
shelf computer software or qualified real property) that is
purchased for use in the active conduct of a trade or business.
The amount eligible to be expensed for a taxable year may
not exceed the taxable income for such taxable year that is
derived from the active conduct of a trade or business
(determined without regard to this provision).\446\ Any amount
that is not allowed as a deduction because of the taxable
income limitation may be carried forward to succeeding taxable
years (subject to limitations). However, amounts attributable
to qualified real property that are disallowed under the trade
or business income limitation may only be carried over to
taxable years in which the definition of eligible section 179
property includes qualified real property.\447\ Thus, if a
taxpayer's section 179 deduction for 2012 with respect to
qualified real property is limited by the taxpayer's active
trade or business income, such disallowed amount may be carried
over to 2013. Any such carryover amounts that are not used in
2013 are treated as property placed in service in 2013 for
purposes of computing depreciation. That is, the unused
carryover amount from 2012 is considered placed in service on
the first day of the 2013 taxable year.\448\
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\446\ Sec. 179(b)(3).
\447\ Section 179(f)(4) details the special rules that apply to
disallowed amounts.
\448\ For example, assume that during 2012, a company's only asset
purchases are section 179-eligible equipment costing $100,000 and
qualifying leasehold improvements costing $200,000. Assume the company
has no other asset purchases during 2012, and has a taxable income
limitation of $150,000. The maximum section 179 deduction the company
can claim for 2012 is $150,000, which is allocated pro rata between the
properties, such that the carryover to 2013 is allocated $100,000 to
the qualified leasehold improvements and $50,000 to the equipment.
Assume further that in 2013, the company had no asset purchases and
had no taxable income. The $100,000 carryover from 2012 attributable to
qualified leasehold improvements is treated as placed in service as of
the first day of the company's 2013 taxable year. The $50,000 carryover
allocated to equipment is carried over to 2013 under section
179(b)(3)(B).
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No general business credit under section 38 is allowed with
respect to any amount for which a deduction is allowed under
section 179.\449\ If a corporation makes an election under
section 179 to deduct expenditures, the full amount of the
deduction does not reduce earnings and profits. Rather, the
expenditures that are deducted reduce corporate earnings and
profits ratably over a five-year period.\450\
---------------------------------------------------------------------------
\449\ Sec. 179(d)(9).
\450\ Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
An expensing election is made under rules prescribed by the
Secretary.\451\ In general, any election or specification made
with respect to any property may not be revoked except with the
consent of the Commissioner. However, an election or
specification under section 179 may be revoked by the taxpayer
without consent of the Commissioner for taxable years beginning
after 2002 and before 2014.\452\
---------------------------------------------------------------------------
\451\ Sec. 179(c)(1).
\452\ Sec. 179(c)(2).
---------------------------------------------------------------------------
Explanation of Provision
The provision provides that the maximum amount a taxpayer
may expense, for taxable years beginning in 2014, is $500,000
of the cost of qualifying property placed in service for the
taxable year. The $500,000 amount is reduced (but not below
zero) by the amount by which the cost of qualifying property
placed in service during the taxable year exceeds $2,000,000.
In addition, the provision extends, for taxable years
beginning in 2014, the treatment of off-the-shelf computer
software as qualifying property. The provision also extends the
treatment of qualified real property as eligible section 179
property for taxable years beginning in 2014, including the
limitation on carryovers and the maximum amount available with
respect to qualified real property of $250,000 for each taxable
year. For taxable years beginning in 2014, the provision
continues to permit a taxpayer to amend or irrevocably revoke
an election for a taxable year under section 179 without the
consent of the Commissioner.
Effective Date
The provision applies to taxable years beginning after
December 31, 2013.
18. Extension of election to expense mine safety equipment (sec. 128 of
the Act and sec. 179E of the Code)
Present Law
A taxpayer may elect to treat 50 percent of the cost of any
qualified advanced mine safety equipment property as an expense
in the taxable year in which the equipment is placed in
service.\453\ ``Qualified advanced mine safety equipment
property'' means any advanced mine safety equipment property
for use in any underground mine located in the United States
the original use of which commences with the taxpayer and which
is placed in service after December 20, 2006, and before
January 1, 2014.\454\
---------------------------------------------------------------------------
\453\ Sec. 179E(a).
\454\ Secs. 179E(c) and (g).
---------------------------------------------------------------------------
Advanced mine safety equipment property means any of the
following: (1) emergency communication technology or devices
used to allow a miner to maintain constant communication with
an individual who is not in the mine; (2) electronic
identification and location devices that allow individuals not
in the mine to track at all times the movements and location of
miners working in or at the mine; (3) emergency oxygen-
generating, self-rescue devices that provide oxygen for at
least 90 minutes; (4) pre-positioned supplies of oxygen
providing each miner on a shift the ability to survive for at
least 48 hours; and (5) comprehensive atmospheric monitoring
systems that monitor the levels of carbon monoxide, methane,
and oxygen that are present in all areas of the mine and that
can detect smoke in the case of a fire in a mine.\455\
---------------------------------------------------------------------------
\455\ Sec. 179E(d).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for one year (through December 31,
2014) the present-law placed-in-service date allowing a
taxpayer to expense 50 percent of the cost of any qualified
advanced mine safety equipment property.
Effective Date
The provision applies to property placed in service after
December 31, 2013.
19. Extension of special expensing rules for certain film and
television productions (sec. 129 of the Act and sec. 181 of the
Code)
Present Law
Under section 181, a taxpayer may elect \456\ to deduct the
cost of any qualifying film and television production,
commencing prior to January 1, 2014, in the year the
expenditure is incurred in lieu of capitalizing the cost and
recovering it through depreciation allowances.\457\ A taxpayer
may elect to deduct up to $15 million of the aggregate cost of
the film or television production under this section.\458\ The
threshold is increased to $20 million if a significant amount
of the production expenditures are incurred in areas eligible
for designation as a low-income community or eligible for
designation by the Delta Regional Authority as a distressed
county or isolated area of distress.\459\
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\456\ See Treas. Reg. section 1.181-2 for rules on making an
election under this section.
\457\ For this purpose, a production is treated as commencing on
the first date of principal photography.
\458\ Sec. 181(a)(2)(A).
\459\ Sec. 181(a)(2)(B).
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A qualified film or television production means any
production of a motion picture (whether released theatrically
or directly to video cassette or any other format) or
television program if at least 75 percent of the total
compensation expended on the production is for services
performed in the United States by actors, directors, producers,
and other relevant production personnel.\460\ The term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\461\ Each episode of a
television series is treated as a separate production, and only
the first 44 episodes of a particular series qualify under the
provision.\462\ Qualified productions do not include sexually
explicit productions as referenced by section 2257 of title 18
of the U.S. Code.\463\
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\460\ Sec. 181(d)(3)(A).
\461\ Sec. 181(d)(3)(B).
\462\ Sec. 181(d)(2)(B).
\463\ Sec. 181(d)(2)(C).
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For purposes of recapture under section 1245, any deduction
allowed under section 181 is treated as if it were a deduction
allowable for amortization.\464\
---------------------------------------------------------------------------
\464\ Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the special treatment for film and
television productions under section 181 for one year to
qualified film and television productions commencing prior to
January 1, 2015.
Effective Date
The provision applies to productions commencing after
December 31, 2013.
20. Extension of deduction allowable with respect to income
attributable to domestic production activities in Puerto Rico
(sec. 130 of the Act and sec. 199 of the Code)
Present Law
General
Present law generally provides a deduction from taxable
income (or, in the case of an individual, adjusted gross
income) that is equal to nine percent of the lesser of the
taxpayer's qualified production activities income or taxable
income for the taxable year. For taxpayers subject to the 35-
percent corporate income tax rate, the nine-percent deduction
effectively reduces the corporate income tax rate to slightly
less than 32 percent on qualified production activities income.
In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the costs of goods sold that are allocable to those
receipts; and (2) other expenses, losses, or deductions which
are properly allocable to those receipts.
Domestic production gross receipts generally are gross
receipts of a taxpayer that are derived from: (1) any sale,
exchange, or other disposition, or any lease, rental, or
license, of qualifying production property \465\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States; (2) any
sale, exchange, or other disposition, or any lease, rental, or
license, of qualified film \466\ produced by the taxpayer; (3)
any lease, rental, license, sale, exchange, or other
disposition of electricity, natural gas, or potable water
produced by the taxpayer in the United States; (4) construction
of real property performed in the United States by a taxpayer
in the ordinary course of a construction trade or business; or
(5) engineering or architectural services performed in the
United States for the construction of real property located in
the United States.
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\465\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
\466\ Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers.
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The amount of the deduction for a taxable year is limited
to 50 percent of the wages paid by the taxpayer, and properly
allocable to domestic production gross receipts, during the
calendar year that ends in such taxable year.\467\ Wages paid
to bona fide residents of Puerto Rico generally are not
included in the definition of wages for purposes of computing
the wage limitation amount.\468\
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\467\ For purposes of the provision, ``wages'' include the sum of
the amounts of wages as defined in section 3401(a) and elective
deferrals that the taxpayer properly reports to the Social Security
Administration with respect to the employment of employees of the
taxpayer during the calendar year ending during the taxpayer's taxable
year.
\468\ Section 3401(a)(8)(C) excludes wages paid to United States
citizens who are bona fide residents of Puerto Rico from the term wages
for purposes of income tax withholding.
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Rules for Puerto Rico
When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the
District of Columbia.\469\ A special rule for determining
domestic production gross receipts, however, provides that in
the case of any taxpayer with gross receipts from sources
within the Commonwealth of Puerto Rico, the term ``United
States'' includes the Commonwealth of Puerto Rico, but only if
all of the taxpayer's Puerto Rico-sourced gross receipts are
taxable under the Federal income tax for individuals or
corporations.\470\ In computing the 50-percent wage limitation,
the taxpayer is permitted to take into account wages paid to
bona fide residents of Puerto Rico for services performed in
Puerto Rico.\471\
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\469\ Sec. 7701(a)(9).
\470\ Sec. 199(d)(8)(A).
\471\ Sec. 199(d)(8)(B).
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The special rules for Puerto Rico apply only with respect
to the first eight taxable years of a taxpayer beginning after
December 31, 2005 and before January 1, 2014.
Explanation of Provision
The provision extends the special domestic production
activities rules for Puerto Rico to apply for the first nine
taxable years of a taxpayer beginning after December 31, 2005
and before January 1, 2015.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2013.
21. Extension of modification of tax treatment of certain payments to
controlling exempt organizations (sec. 131 of the Act and sec.
512 of the Code)
Present Law
In general, organizations exempt from Federal income tax
are subject to the unrelated business income tax on income
derived from a trade or business regularly carried on by the
organization that is not substantially related to the
performance of the organization's tax-exempt functions.\472\ In
general, interest, rents, royalties, and annuities are excluded
from the unrelated business income of tax-exempt
organizations.\473\
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\472\ Sec. 511.
\473\ Sec. 512(b).
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Section 512(b)(13) provides rules regarding income derived
by an exempt organization from a controlled subsidiary. In
general, section 512(b)(13) treats otherwise excluded rent,
royalty, annuity, and interest income as unrelated business
taxable income if such income is received from a taxable or
tax-exempt subsidiary that is 50-percent controlled by the
parent tax-exempt organization to the extent the payment
reduces the net unrelated income (or increases any net
unrelated loss) of the controlled entity (determined as if the
entity were tax exempt).
In the case of a stock subsidiary, ``control'' means
ownership by vote or value of more than 50 percent of the
stock. In the case of a partnership or other entity,
``control'' means ownership of more than 50 percent of the
profits, capital, or beneficial interests. In addition, present
law applies the constructive ownership rules of section 318 for
purposes of section 512(b)(13). Thus, a parent exempt
organization is deemed to control any subsidiary in which it
holds more than 50 percent of the voting power or value,
directly (as in the case of a first-tier subsidiary) or
indirectly (as in the case of a second-tier subsidiary).
For payments made pursuant to a binding written contract in
effect on August 17, 2006 (or renewal of such a contract on
substantially similar terms), the general rule of section
512(b)(13) applies only to the portion of payments received or
accrued in a taxable year that exceeds the amount of the
payment that would have been paid or accrued if the amount of
such payment had been determined under the principles of
section 482 (i.e., at arm's length).\474\ A 20-percent penalty
is imposed on the larger of such excess determined without
regard to any amendment or supplement to a return of tax, or
such excess determined with regard to all such amendments and
supplements. This special rule does not apply to payments
received or accrued after December 31, 2013.
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\474\ Sec. 512(b)(13)(E).
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Explanation of Provision
The provision extends the special rule for one year to
payments received or accrued before January 1, 2015.
Accordingly, under the provision, payments of rent, royalties,
annuities, or interest by a controlled organization to a
controlling organization pursuant to a binding written contract
in effect on August 17, 2006 (or renewal of such a contract on
substantially similar terms), may be includible in the
unrelated business taxable income of the controlling
organization only to the extent the payment exceeds the amount
of the payment determined under the principles of section 482
(i.e., at arm's length). Any such excess is subject to a 20-
percent penalty on the larger of such excess determined without
regard to any amendment or supplement to a return of tax, or
such excess determined with regard to all such amendments and
supplements.
Effective Date
The provision is effective for payments received or accrued
after December 31, 2013.
22. Extension of treatment of certain dividends of regulated investment
companies (sec. 132 of the Act and sec. 871(k) of the Code)
Present Law
In general
A regulated investment company (``RIC'') is an entity that
meets certain requirements (including a requirement that its
income generally be derived from passive investments such as
dividends and interest and a requirement that it distribute at
least 90 percent of its income) and that elects to be taxed
under a special tax regime. Unlike an ordinary corporation, an
entity that is taxed as a RIC can deduct amounts paid to its
shareholders as dividends. In this manner, tax on RIC income is
generally not paid by the RIC but rather by its shareholders.
Income of a RIC distributed to shareholders as dividends is
generally treated as an ordinary income dividend by those
shareholders, unless other special rules apply. Dividends
received by foreign persons from a RIC are generally subject to
gross-basis tax under sections 871(a) or 881, and the RIC payor
of such dividends is obligated to withhold such tax under
sections 1441 and 1442.
Under a temporary provision of prior law, a RIC that earned
certain interest income that generally would not be subject to
U.S. tax if earned by a foreign person directly could, to the
extent of such net interest income, designate a dividend it
paid as derived from such interest income for purposes of the
treatment of a foreign RIC shareholder. A foreign person who is
a shareholder in the RIC generally could treat such a
designated dividend as exempt from gross-basis U.S. tax. Also,
subject to certain requirements, the RIC was exempt from
withholding the gross-basis tax on such dividends. Similar
rules applied with respect to the designation of certain short-
term capital gain dividends. However, these provisions relating
to dividends with respect to interest income and short-term
capital gain of the RIC have expired, and therefore do not
apply to dividends with respect to any taxable year of a RIC
beginning after December 31, 2013.\475\
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\475\ Secs. 871(k), 881(e), 1441(c)(12), 1441(a), and 1442.
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Explanation of Provision
The provision extends the rules exempting from gross-basis
tax and from withholding of such tax the interest-related
dividends and short-term capital gain dividends received from a
RIC, to dividends with respect to taxable years of a RIC
beginning before January 1, 2015.
Effective Date
The provision applies to dividends paid with respect to any
taxable year of a RIC beginning after December 31, 2013.
23. Extension of RIC qualified investment entity treatment under FIRPTA
(sec. 133 of the Act and secs. 897 and 1445 of the Code)
Present Law
Special U.S. tax rules apply to capital gains of foreign
persons that are attributable to dispositions of interests in
U.S. real property. In general, although a foreign person (a
foreign corporation or a nonresident alien individual) is not
generally taxed on U.S. source capital gains unless certain
personal presence or active business requirements are met, a
foreign person who sells a U.S. real property interest
(``USRPI'') is subject to tax at the same rates as a U.S.
person, under the Foreign Investment in Real Property Tax Act
(``FIRPTA'') provisions codified in section 897 of the Code.
Withholding tax is also imposed under section 1445.
A USRPI includes stock or a beneficial interest in any
domestic corporation unless such corporation has not been a
U.S. real property holding corporation (as defined) during the
testing period. A USRPI does not include an interest in a
domestically controlled ``qualified investment entity.'' A
distribution from a ``qualified investment entity'' that is
attributable to the sale of a USRPI is also subject to tax
under FIRPTA unless the distribution is with respect to an
interest that is regularly traded on an established securities
market located in the United States and the recipient foreign
corporation or nonresident alien individual did not hold more
than five percent of that class of stock or beneficial interest
within the one-year period ending on the date of
distribution.\476\ Special rules apply to situations involving
tiers of qualified investment entities.
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\476\ Sections 857(b)(3)(F), 852(b)(3)(E), and 871(k)(2)(E) require
dividend treatment, rather than capital gain treatment, for certain
distributions to which FIRPTA does not apply by reason of this
exception. See also section 881(e)(2).
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The term ``qualified investment entity'' includes a real
estate investment trust (``REIT'') and also includes a
regulated investment company (``RIC'') that meets certain
requirements, although the inclusion of a RIC in that
definition does not apply for certain purposes after December
31, 2013.\477\
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\477\ Section 897(h).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the inclusion of a RIC within the
definition of a ``qualified investment entity'' under section
897 through December 31, 2014, for those situations in which
that inclusion would otherwise have expired after December 31,
2013.
Effective Date
The provision is generally effective on January 1, 2014.
The provision does not apply with respect to the
withholding requirement under section 1445 for any payment made
before the date of enactment (December 19, 2014), but a RIC
that withheld and remitted tax under section 1445 on
distributions made after December 31, 2013 and before the date
of enactment is not liable to the distributee with respect to
such withheld and remitted amounts.
24. Extension of subpart F exception for active financing income (sec.
134 of the Act and secs. 953 and 954 of the Code)
Present Law
Under the subpart F rules,\478\ 10-percent-or-greater U.S.
shareholders of a controlled foreign corporation (``CFC'') are
subject to U.S. tax currently on certain income earned by the
CFC, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the
subpart F rules includes, among other things, insurance income
and foreign base company income. Foreign base company income
includes, among other things, foreign personal holding company
income and foreign base company services income (i.e., income
derived from services performed for or on behalf of a related
person outside the country in which the CFC is organized).
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\478\ Secs. 951-964.
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Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents,
and annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and real estate mortgage investment
conduits (``REMICs''); (3) net gains from commodities
transactions; (4) net gains from certain foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; (7) payments in lieu
of dividends; and (8) amounts received under personal service
contracts.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income.\479\
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\479\ Prop. Treas. Reg. sec. 1.953-1(a).
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Temporary exceptions from foreign personal holding company
income, foreign base company services income, and insurance
income apply for subpart F purposes for certain income that is
derived in the active conduct of a banking, financing, or
similar business, as a securities dealer, or in the conduct of
an insurance business (so-called ``active financing income'').
With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business to qualify
for the active financing exceptions. In addition, certain nexus
requirements apply, which provide that income derived by a CFC
or a qualified business unit (``QBU'') of a CFC from
transactions with customers is eligible for the exceptions if,
among other things, substantially all of the activities in
connection with such transactions are conducted directly by the
CFC or QBU in its home country, and such income is treated as
earned by the CFC or QBU in its home country for purposes of
such country's tax laws. Moreover, the exceptions apply to
income derived from certain cross border transactions, provided
that certain requirements are met. Additional exceptions from
foreign personal holding company income apply for certain
income derived by a securities dealer within the meaning of
section 475 and for gain from the sale of active financing
assets.
In the case of a securities dealer, the temporary exception
from foreign personal holding company income applies to certain
income. The income covered by the exception is any interest or
dividend (or certain equivalent amounts) from any transaction,
including a hedging transaction or a transaction consisting of
a deposit of collateral or margin, entered into in the ordinary
course of the dealer's trade or business as a dealer in
securities within the meaning of section 475. In the case of a
QBU of the dealer, the income is required to be attributable to
activities of the QBU in the country of incorporation, or to a
QBU in the country in which the QBU both maintains its
principal office and conducts substantial business activity. A
coordination rule provides that this exception generally takes
precedence over the exception for income of a banking,
financing or similar business, in the case of a securities
dealer.
In the case of insurance, a temporary exception from
foreign personal holding company income applies for certain
income of a qualifying insurance company with respect to risks
located within the CFC's country of creation or organization.
In the case of insurance, temporary exceptions from insurance
income and from foreign personal holding company income also
apply for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met. In the case of a life insurance or
annuity contract, reserves for such contracts are determined
under rules specific to the temporary exceptions. Present law
also permits a taxpayer in certain circumstances, subject to
approval by the IRS through the ruling process or in published
guidance, to establish that the reserve of a life insurance
company for life insurance and annuity contracts is the amount
taken into account in determining the foreign statement reserve
for the contract (reduced by catastrophe, equalization, or
deficiency reserve or any similar reserve). IRS approval is to
be based on whether the method, the interest rate, the
mortality and morbidity assumptions, and any other factors
taken into account in determining foreign statement reserves
(taken together or separately) provide an appropriate means of
measuring income for Federal income tax purposes.
The temporary exceptions apply for taxable years of foreign
corporations beginning after December 31, 1998 and before
January 1, 2014, and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporations end.
Explanation of Provision
The provision extends for one year (for taxable years
beginning before January 1, 2015) the temporary exceptions from
subpart F foreign personal holding company income, foreign base
company services income, and insurance income for certain
income that is derived in the active conduct of a banking,
financing, or similar business, as a securities dealer, or in
the conduct of an insurance business.
Effective Date
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2013, and for taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.
25. Extension of look-thru treatment of payments between related
controlled foreign corporations under foreign personal holding
company rules (sec. 135 of the Act and sec. 954(c)(6) of the
Code)
Present Law
In general
The rules of subpart F \480\ require U.S. shareholders with
a 10-percent or greater interest in a controlled foreign
corporation (``CFC'') to include certain income of the CFC
(referred to as ``subpart F income'') on a current basis for
U.S. tax purposes, regardless of whether the income is
distributed to the shareholders.
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\480\ Secs. 951-964.
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Subpart F income includes foreign base company income. One
category of foreign base company income is foreign personal
holding company income. For subpart F purposes, foreign
personal holding company income generally includes dividends,
interest, rents, and royalties, among other types of income.
There are several exceptions to these rules. For example,
foreign personal holding company income does not include
dividends and interest received by a CFC from a related
corporation organized and operating in the same foreign country
in which the CFC is organized, or rents and royalties received
by a CFC from a related corporation for the use of property
within the country in which the CFC is organized. Interest,
rent, and royalty payments do not qualify for this exclusion to
the extent that such payments reduce the subpart F income of
the payor. In addition, subpart F income of a CFC does not
include any item of income from sources within the United
States that is effectively connected with the conduct by such
CFC of a trade or business within the United States (``ECI'')
unless such item is exempt from taxation (or is subject to a
reduced rate of tax) pursuant to a tax treaty.
The ``look-thru rule''
Under the ``look-thru rule'' (sec. 954(c)(6)), dividends,
interest (including factoring income that is treated as
equivalent to interest under section 954(c)(1)(E)), rents, and
royalties received or accrued by one CFC from a related CFC are
not treated as foreign personal holding company income to the
extent attributable or properly allocable to income of the
payor that is neither subpart F income nor treated as ECI. For
this purpose, a related CFC is a CFC that controls or is
controlled by the other CFC, or a CFC that is controlled by the
same person or persons that control the other CFC. Ownership of
more than 50 percent of the CFC's stock (by vote or value)
constitutes control for these purposes.
The Secretary is authorized to prescribe regulations that
are necessary or appropriate to carry out the look-thru rule,
including such regulations as are necessary or appropriate to
prevent the abuse of the purposes of such rule.
The look-thru rule applies to taxable years of foreign
corporations beginning after December 31, 2005 and before
January 1, 2014, and to taxable years of U.S. shareholders with
or within which such taxable years of foreign corporations end.
Explanation of Provision
The provision extends for one year the application of the
look-thru rule, to taxable years of foreign corporations
beginning before January 1, 2015, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
Effective Date
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2013, and for taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
26. Extension of exclusion of 100 percent of gain on certain small
business stock (sec. 136 of the Act and sec. 1202 of the Code)
Present Law
In general
A taxpayer other than a corporation may exclude 50 percent
(60 percent for certain empowerment zone businesses) of the
gain from the sale of certain small business stock acquired at
original issue and held for at least five years.\481\ The
amount of gain eligible for the exclusion by an individual with
respect to the stock of any corporation is the greater of (1)
ten times the taxpayer's basis in the stock or (2) $10 million
(reduced by the amount of gain eligible for exclusion in prior
years). To qualify as a small business, when the stock is
issued, the aggregate gross assets (i.e., cash plus aggregate
adjusted basis of other property) held by the corporation may
not exceed $50 million. The corporation also must meet certain
active trade or business requirements.
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\481\ Sec. 1202.
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The portion of the gain includible in taxable income is
taxed at a maximum rate of 28 percent under the regular
tax.\482\ Seven percent of the excluded gain is an alternative
minimum tax preference.\483\
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\482\ Sec. 1(h).
\483\ Sec. 57(a)(7).
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Special rules for stock acquired after February 17, 2009, and before
January 1, 2014
For stock acquired after February 17, 2009, and before
September 28, 2010, the percentage exclusion for qualified
small business stock sold by an individual is increased to 75
percent.
For stock acquired after September 27, 2010, and before
January 1, 2014, the percentage exclusion for qualified small
business stock sold by an individual is increased to 100
percent and the minimum tax preference does not apply.
Explanation of Provision
The provision extends the 100-percent exclusion and the
exception from minimum tax preference treatment for one year
(for stock acquired before January 1, 2015).
Effective Date
The provision is effective for stock acquired after
December 31, 2013.
27. Extension of basis adjustment to stock of S corporations making
charitable contributions of property (sec. 137 of the Act and sec. 1367
of the Code)
Present Law
Under present law, if an S corporation contributes money or
other property to a charity, each shareholder takes into
account the shareholder's pro rata share of the contribution in
determining its own income tax liability.\484\ A shareholder of
an S corporation reduces the basis in the stock of the S
corporation by the amount of the charitable contribution that
flows through to the shareholder.\485\
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\484\ Sec. 1366(a)(1)(A).
\485\ Sec. 1367(a)(2)(B).
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In the case of charitable contributions made in taxable
years beginning before January 1, 2014, the amount of a
shareholder's basis reduction in the stock of an S corporation
by reason of a charitable contribution made by the corporation
is equal to the shareholder's pro rata share of the adjusted
basis of the contributed property. For contributions made in
taxable years beginning after December 31, 2013, the amount of
the reduction is the shareholder's pro rata share of the fair
market value of the contributed property.
Explanation of Provision
The provision extends the rule relating to the basis
reduction on account of charitable contributions of property
for one year to contributions made in taxable years beginning
before January 1, 2015.
Effective Date
The provision applies to charitable contributions made in
taxable years beginning after December 31, 2013.
28. Extension of reduction in S corporation recognition period for
built-in gains tax (sec. 138 of the Act and sec. 1374 of the Code)
Present Law
In general
A ``small business corporation'' (as defined in section
1361(b)) may elect to be treated as an S corporation. Unlike C
corporations, S corporations generally pay no corporate-level
tax. Instead, items of income and loss of an S corporation pass
through to its shareholders. Each shareholder takes into
account separately its share of these items on its own income
tax return.\486\
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\486\ Sec. 1366.
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Under section 1374, a corporate level built-in gains tax,
at the highest marginal rate applicable to corporations
(currently 35 percent), is imposed on an S corporation's net
recognized built-in gain \487\ that arose prior to the
conversion of the C corporation to an S corporation and is
recognized by the S corporation during the recognition period,
i.e., the 10-year period beginning with the first day of the
first taxable year for which the S election is in effect.\488\
If the taxable income of the S corporation is less than the
amount of net recognized built-in gain in the year such built-
in gain is recognized (for example, because of post-conversion
losses), no tax under section 1374 is imposed on the excess of
such built-in gain over taxable income for that year. However,
the untaxed excess of net recognized built-in gain over taxable
income for that year is treated as recognized built-in gain in
the succeeding taxable year.\489\ Treasury regulations provide
that if a corporation sells an asset before or during the
recognition period and reports the income from the sale using
the installment method under section 453 during or after the
recognition period, that income is subject to tax under section
1374.\490\
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\487\ Certain built-in income items are treated as recognized
built-in gain for this purpose. Sec. 1374(d)(5).
\488\ Sec. 1374(d)(7)(A). The 10-year period refers to ten calendar
years from the first day of the first taxable year for which the
corporation was an S corporation. Treas. Reg. sec. 1.1374-1(d). A
regulated investment company (RIC) or a real estate investment trust
(REIT) that was formerly a C corporation (or that acquired assets from
a C corporation) generally is subject to the rules of section 1374 as
if the RIC or REIT were an S corporation, unless the relevant C
corporation elects ``deemed sale'' treatment. Treas. Reg. secs.
1.337(d)-7(b)(1) and (c)(1).
\489\ Sec. 1374(d)(2).
\490\ Treas. Reg. sec. 1.1374-4(h).
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The built-in gains tax also applies to net recognized
built-in gain attributable to any asset received by an S
corporation from a C corporation in a transaction in which the
S corporation's basis in the asset is determined (in whole or
in part) by reference to the basis of such asset (or other
property) in the hands of the C corporation.\491\ In the case
of such a transaction, the recognition period for any asset
transferred by the C corporation starts on the date the asset
was acquired by the S corporation in lieu of the beginning of
the first taxable year for which the corporation was an S
corporation.\492\
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\491\ Sec. 1374(d)(8).
\492\ Sec. 1374(d)(8)(B).
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The amount of the built-in gains tax under section 1374 is
treated as a loss by each of the S corporation shareholders in
computing its own income tax.\493\
---------------------------------------------------------------------------
\493\ Sec. 1366(f)(2). Shareholders continue to take into account
all items of gain and loss under section 1366.
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Special rules for 2009, 2010, and 2011
For any taxable year beginning in 2009 and 2010, no tax was
imposed on the net recognized built-in gain of an S corporation
under section 1374 if the seventh taxable year in the
corporation's recognition period preceded such taxable
year.\494\ Thus, with respect to gain that arose prior to the
conversion of a C corporation to an S corporation, no tax was
imposed under section 1374 if the seventh taxable year that the
S corporation election was in effect preceded the taxable year
beginning in 2009 or 2010.
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\494\ Sec. 1374(d)(7)(B).
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For any taxable year beginning in 2011, no tax was imposed
on the net recognized built-in gain of an S corporation under
section 1374 if the fifth year in the corporation's recognition
period preceded such taxable year.\495\ Thus, with respect to
gain that arose prior to the conversion of a C corporation to
an S corporation, no tax was imposed under section 1374 if the
S corporation election was in effect for five years preceding
the taxable year beginning in 2011.
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\495\ Sec. 1374(d)(7)(C).
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Special rules for 2012 and 2013
For taxable years beginning in 2012 and 2013, the term
``recognition period'' in section 1374, for purposes of
determining the net recognized built-in gain, is applied by
substituting a five-year period for the otherwise applicable
10-year period. Thus, for such taxable years, the recognition
period is the five-year period beginning with the first day of
the first taxable year for which the corporation was an S
corporation (or beginning with the date of acquisition of
assets if the rules applicable to assets acquired from a C
corporation apply). If an S corporation with assets subject to
section 1374 disposes of such assets in a taxable year
beginning in 2012 or 2013 and the disposition occurs more than
five years after the first day of the relevant recognition
period, gain or loss on the disposition will not be taken into
account in determining the net recognized built-in gain.
The rule requiring the excess of net recognized built-in
gain over taxable income for a taxable year to be carried over
and treated as recognized built-in gain in the succeeding
taxable year applies only to gain recognized within the
recognition period. Thus, for example, built-in gain recognized
in a taxable year beginning in 2013, from a disposition in that
year that occurs beyond the end of the temporary 5-year
recognition period, will not be carried forward under the
income limitation rule and treated as recognized built-in gain
in the taxable year beginning in 2014 (after the temporary
provision has expired and the recognition period is again 10
years).\496\
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\496\ Sec. 1374(d)(2)(B).
---------------------------------------------------------------------------
If an S corporation subject to section 1374 sells a built-
in gain asset and reports the income from the sale using the
installment method under section 453, the treatment of all
payments received will be governed by the provisions of section
1374(d)(7) applicable to the taxable year in which the sale was
made. Thus, for example, if an S corporation sold a built-in
gain asset in 2008 in a sale occurring before or during the
recognition period in effect at that time, and reported the
gain using the installment method under section 453, gain
recognized under that method in 2012 or 2013 (including, for
example, any gain under section 453B from a disposition of the
installment obligation in those years) \497\ is subject to tax
under section 1374. On the other hand, if a corporation sold an
asset in a taxable year beginning in 2012 or 2013, and the sale
occurred beyond the end of the then-effective 5-year
recognition period (but not beyond the end of the otherwise
applicable 10-year recognition period), then gain reported
using the installment method under section 453 in a taxable
year beginning in 2014 (after the temporary provision expires)
is not subject to tax under section 1374, because the sale was
made after the end of the recognition period applicable to that
sale. As a third example, if an S corporation sold an asset in
a taxable year beginning in 2011, and no tax would have been
imposed on the net recognized built-in gain from the sale under
section 1374(d)(7)(B)(ii) because the fifth taxable year in the
recognition period preceded such taxable year, then gain from
such sale reported using the installment method under section
453 in a taxable year beginning in 2014 is not subject to tax
under section 1374.\498\
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\497\ Section 453B requires gain or loss to be recognized on
disposition of an installment obligation and treated as gain or loss
resulting from the sale or exchange of the property in respect of which
the installment obligation was received.
\498\ Report of the Senate Committee on Finance to Accompany S.
3521, the Family and Business Tax Cut Certainty Act of 2012, S. Rep.
112-208, August 28, 2012, pp 69-72.
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Explanation of Provision
The provision extends for one year, to taxable years
beginning in 2014, the special rules that applied to taxable
years beginning in 2012 and 2013.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2013.
29. Extension of empowerment zone tax incentives (sec. 139 of the Act
and sec. 1391 of the Code)
Present Law
The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'')
\499\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas \500\
designated by the Secretaries of the Department of Housing and
Urban Development (``HUD'') and the U.S. Department of
Agriculture (``USDA''). The first empowerment zones were
established in large rural areas and large cities. OBRA 93 also
authorized the designation of 95 enterprise communities, which
were located in smaller rural areas and cities. For tax
purposes, the areas designated as enterprise communities
continued as such for the ten-year period starting in the
beginning of 1995 and ending at the end of 2004.
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\499\ Pub. L. No. 103-66.
\500\ The targeted areas are those that have pervasive poverty,
high unemployment, and general economic distress, and that satisfy
certain eligibility criteria, including specified poverty rates and
population and geographic size limitations.
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The Taxpayer Relief Act of 1997 \501\ authorized the
designation of two additional Round I urban empowerment zones,
and 20 additional empowerment zones (``Round II empowerment
zones''). The Community Renewal Tax Relief Act of 2000 (``2000
Community Renewal Act'') \502\ authorized a total of ten new
empowerment zones (``Round III empowerment zones''), bringing
the total number of authorized empowerment zones to 40.\503\ In
addition, the 2000 Community Renewal Act conformed the tax
incentives that are available to businesses in the Round I,
Round II, and Round III empowerment zones, and extended the
empowerment zone incentives through December 31, 2009.\504\ The
Tax Relief, Unemployment Insurance Reauthorization and Job
Creation Act of 2010 (``TRUIRJCA'') extended for two years,
through December 31, 2011, the period for which the designation
of an empowerment zone was in effect, thus extending for two
years the empowerment zone tax incentives discussed below.\505\
The American Taxpayer Relief Act of 2012 (``ATRA'') extended
the designation period and tax incentives for two additional
years, through December 31, 2013.\506\
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\501\ Pub. L. No. 105-34.
\502\ Pub. L. No. 106-554.
\503\ The urban part of the program is administered by HUD and the
rural part of the program is administered by the USDA. The eight Round
I urban empowerment zones are Atlanta, GA; Baltimore, MD; Chicago, IL;
Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; and
Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment zone
designation in Round III. The three Round I rural empowerment zones are
Kentucky Highlands, KY; Mid-Delta, MI; and Rio Grande Valley, TX. The
15 Round II urban empowerment zones are Boston, MA; Cincinnati, OH;
Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; Gary/
Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, TN;
Miami/Dade County, FL; Minneapolis, MN; New Haven, CT; Norfolk/
Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis,
IL. The five Round II rural empowerment zones are Desert Communities,
CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois
Delta, IL; and Southwest Georgia United, GA. The eight Round III urban
empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK;
Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; and
Yonkers, NY. The two Round III rural empowerment zones are Aroostook
County, ME; and Futuro, TX.
\504\ If an empowerment zone designation were terminated prior to
December 31, 2009, the tax incentives would cease to be available as of
the termination date.
\505\ Pub. L. No. 111-312, sec. 753 (2010). In the case of a
designation of an empowerment zone the nomination for which included a
termination date which is December 31, 2009, termination shall not
apply with respect to such designation if the entity which made such
nomination amends the nomination to provide for a new termination date
in such manner as the Secretary may provide.
\506\ Pub. L. No. 112-240, sec. 327 (2013).
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The tax incentives available within the designated
empowerment zones include a Federal income tax credit for
employers who hire qualifying employees (the ``wage credit''),
accelerated depreciation deductions on qualifying equipment,
tax-exempt bond financing, deferral of capital gains tax on
sale of qualified assets sold and replaced, and partial
exclusion of capital gains tax on certain sales of qualified
small business stock.
The following is a description of the tax incentives:
Wage credit
A 20-percent wage credit is available to employers for the
first $15,000 of qualified wages paid to each employee (i.e., a
maximum credit of $3,000 with respect to each qualified
employee) who (1) is a resident of the empowerment zone, and
(2) performs substantially all employment services within the
empowerment zone in a trade or business of the employer.\507\
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\507\ Sec. 1396. The $15,000 limit is annual, not cumulative such
that the limit is the first $15,000 of wages paid in a calendar year
which ends with or within the taxable year.
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The wage credit rate applies to qualifying wages paid
before January 1, 2012. Wages paid to a qualified employee who
earns more than $15,000 are eligible for the wage credit
(although only the first $15,000 of wages is eligible for the
credit). The wage credit is available with respect to a
qualified full-time or part-time employee (employed for at
least 90 days), regardless of the number of other employees who
work for the employer. In general, any taxable business
carrying out activities in the empowerment zone may claim the
wage credit, regardless of whether the employer meets the
definition of an ``enterprise zone business.'' \508\
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\508\ Secs. 1397C(b) and 1397C(c). However, the wage credit is not
available for wages paid in connection with certain business activities
described in section 144(c)(6)(B), including a golf course, country
club, massage parlor, hot tub facility, suntan facility, racetrack, or
liquor store, or certain farming activities. In addition, wages are not
eligible for the wage credit if paid to: (1) a person who owns more
than five percent of the stock (or capital or profits interests) of the
employer, (2) certain relatives of the employer, or (3) if the employer
is a corporation or partnership, certain relatives of a person who owns
more than 50 percent of the business.
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An employer's deduction otherwise allowed for wages paid is
reduced by the amount of wage credit claimed for that taxable
year.\509\ Wages are not to be taken into account for purposes
of the wage credit if taken into account in determining the
employer's work opportunity tax credit under section 51 or the
welfare-to-work credit under section 51A.\510\ In addition, the
$15,000 cap is reduced by any wages taken into account in
computing the work opportunity tax credit or the welfare-to-
work credit.\511\ The wage credit may be used to offset up to
25 percent of alternative minimum tax liability.\512\
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\509\ Sec. 280C(a).
\510\ Secs. 1396(c)(3)(A) and 51A(d)(2).
\511\ Secs. 1396(c)(3)(B) and 51A(d)(2).
\512\ Sec. 38(c)(2).
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Increased section 179 expensing limitation
An enterprise zone business is allowed an additional
$35,000 of section 179 expensing (for a total of up to $535,000
in 2010 and 2011) \513\ for qualified zone property placed in
service before January 1, 2012.\514\ The section 179 expensing
allowed to a taxpayer is phased out by the amount by which 50
percent of the cost of qualified zone property placed in
service during the year by the taxpayer exceeds
$2,000,000.\515\ The term ``qualified zone property'' is
defined as depreciable tangible property (including buildings)
provided that (i) the property is acquired by the taxpayer
(from an unrelated party) after the designation took effect,
(ii) the original use of the property in an empowerment zone
commences with the taxpayer, and (iii) substantially all of the
use of the property is in an empowerment zone in the active
conduct of a trade or business by the taxpayer. Special rules
are provided in the case of property that is substantially
renovated by the taxpayer.
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\513\ The Small Business Jobs Act of 2010, Pub. L. No. 111-240,
sec. 2021.
\514\ Secs. 1397A, 1397D.
\515\ Sec. 1397A(a)(2), 179(b)(2). For 2012 the limit is $500,000.
For taxable years beginning after 2012, the limit is $200,000.
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An enterprise zone business means any qualified business
entity and any qualified proprietorship. A qualified business
entity means, any corporation or partnership if for such year:
(1) every trade or business of such entity is the active
conduct of a qualified business within an empowerment zone; (2)
at least 50 percent of the total gross income of such entity is
derived from the active conduct of such business; (3) a
substantial portion of the use of the tangible property of such
entity (whether owned or leased) is within an empowerment zone;
(4) a substantial portion of the intangible property of such
entity is used in the active conduct of any such business; (5)
a substantial portion of the services performed for such entity
by its employees are performed in an empowerment zone; (6) at
least 35 percent of its employees are residents of an
empowerment zone; (7) less than five percent of the average of
the aggregate unadjusted bases of the property of such entity
is attributable to collectibles other than collectibles that
are held primarily for sale to customers in the ordinary course
of such business; and (8) less than five percent of the average
of the aggregate unadjusted bases of the property of such
entity is attributable to nonqualified financial property.\516\
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\516\ Sec. 1397C(b).
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A qualified proprietorship is any qualified business
carried on by an individual as a proprietorship if for such
year: (1) at least 50 percent of the total gross income of such
individual from such business is derived from the active
conduct of such business in an empowerment zone; (2) a
substantial portion of the use of the tangible property of such
individual in such business (whether owned or leased) is within
an empowerment zone; (3) a substantial portion of the
intangible property of such business is used in the active
conduct of such business; (4) a substantial portion of the
services performed for such individual in such business by
employees of such business are performed in an empowerment
zone; (5) at least 35 percent of such employees are residents
of an empowerment zone; (6) less than five percent of the
average of the aggregate unadjusted bases of the property of
such individual which is used in such business is attributable
to collectibles other than collectibles that are held primarily
for sale to customers in the ordinary course of such business;
and (7) less than five percent of the average of the aggregate
unadjusted bases of the property of such individual which is
used in such business is attributable to nonqualified financial
property.\517\
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\517\ Sec. 1397C(c).
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A qualified business is defined as any trade or business
other than a trade or business that consists predominantly of
the development or holding of intangibles for sale or license
or any business prohibited in connection with the employment
credit.\518\ In addition, the leasing of real property that is
located within the empowerment zone is treated as a qualified
business only if (1) the leased property is not residential
property, and (2) at least 50 percent of the gross rental
income from the real property is from enterprise zone
businesses. The rental of tangible personal property is not a
qualified business unless at least 50 percent of the rental of
such property is by enterprise zone businesses or by residents
of an empowerment zone.
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\518\ Sec. 1397C(d). Excluded businesses include any private or
commercial golf course, country club, massage parlor, hot tub facility,
sun tan facility, racetrack, or other facility used for gambling or any
store the principal business of which is the sale of alcoholic
beverages for off-premises consumption. Sec. 144(c)(6).
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Expanded tax-exempt financing for certain zone facilities
States or local governments can issue enterprise zone
facility bonds to raise funds to provide an enterprise zone
business with qualified zone property.\519\ These bonds can be
used in areas designated enterprise communities as well as
areas designated empowerment zones. To qualify, 95 percent (or
more) of the net proceeds from the bond issue must be used to
finance: (1) qualified zone property whose principal user is an
enterprise zone business, and (2) certain land functionally
related and subordinate to such property.
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\519\ Sec. 1394.
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The term enterprise zone business is the same as that used
for purposes of the increased section 179 deduction limitation
(discussed above) with certain modifications for start-up
businesses. First, a business will be treated as an enterprise
zone business during a start-up period if (1) at the beginning
of the period, it is reasonable to expect the business to be an
enterprise zone business by the end of the start-up period, and
(2) the business makes bona fide efforts to be an enterprise
zone business. The start-up period is the period that ends with
the start of the first tax year beginning more than two years
after the later of (1) the issue date of the bond issue
financing the qualified zone property, and (2) the date this
property is first placed in service (or, if earlier, the date
that is three years after the issue date).\520\
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\520\ Sec. 1394(b)(3).
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Second, a business that qualifies as an enterprise zone
business at the end of the start-up period must continue to
qualify during a testing period that ends three tax years after
the start-up period ends. After the three-year testing period,
a business will continue to be treated as an enterprise zone
business as long as 35 percent of its employees are residents
of an empowerment zone or enterprise community.
The face amount of the bonds may not exceed $60 million for
an empowerment zone in a rural area, $130 million for an
empowerment zone in an urban area with zone population of less
than 100,000, and $230 million for an empowerment zone in an
urban area with zone population of at least 100,000.
Elective rollover of capital gain from the sale or exchange of any
qualified empowerment zone asset
Taxpayers can elect to defer recognition of gain on the
sale of a qualified empowerment zone asset \521\ held for more
than one year and replaced within 60 days by another qualified
empowerment zone asset in the same zone.\522\ The deferral is
accomplished by reducing the basis of the replacement asset by
the amount of the gain recognized on the sale of the asset.
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\521\ The term ``qualified empowerment zone asset'' means any
property which would be a qualified community asset (as defined in
section 1400F, relating to certain tax benefits for renewal
communities) if in section 1400F: (i) references to empowerment zones
were substituted for references to renewal communities, (ii) references
to enterprise zone businesses (as defined in section 1397C) were
substituted for references to renewal community businesses, and (iii)
the date of the enactment of this paragraph were substituted for
``December 31, 2001'' each place it appears. Sec. 1397B(b)(1)(A).
A ``qualified community asset'' includes: (1) qualified community
stock (meaning original-issue stock purchased for cash in an enterprise
zone business), (2) a qualified community partnership interest (meaning
a partnership interest acquired for cash in an enterprise zone
business), and (3) qualified community business property (meaning
tangible property originally used in an enterprise zone business by the
taxpayer) that is purchased or substantially improved after the date of
the enactment of this paragraph.
\522\ Sec. 1397B.
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Partial exclusion of capital gains on certain small business stock
Generally, individuals may exclude a percentage of gain
from the sale of certain small business stock acquired at
original issue and held at least five years.\523\ For stock
acquired prior to February 18, 2009, or after December 31,
2013, the percentage is generally 50 percent, except that for
empowerment zone stock the percentage is 60 percent for gain
attributable to periods before January 1, 2019. For stock
acquired after February 17, 2009, and before January 1, 2014, a
higher percentage (either 75-percent or 100-percent) applies to
all small business stock with no additional percentage for
empowerment zone stock.\524\
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\523\ Sec. 1202.
\524\ Section 136 of the Act extends the 100-percent exclusion to
small business stock acquired during 2014.
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Other tax incentives
Other incentives not specific to empowerment zones but
beneficial to these areas include the work opportunity tax
credit for employers based on the first year of employment of
certain targeted groups, including empowerment zone residents
(up to $2,400 per employee), and qualified zone academy bonds
for certain public schools located in an empowerment zone, or
expected (as of the date of bond issuance) to have at least 35
percent of its students receiving free or reduced lunches.
Explanation of Provision
The provision extends for one year, through December 31,
2014, the period for which the designation of an empowerment
zone is in effect, thus extending for one year the empowerment
zone tax incentives, including the wage credit, increased
section 179 expensing for qualifying equipment, tax-exempt bond
financing, and deferral of capital gains tax on sale of
qualified assets replaced with other qualified assets. In the
case of a designation of an empowerment zone the nomination for
which included a termination date which is December 31, 2013,
termination shall not apply with respect to such designation if
the entity which made such nomination amends the nomination to
provide for a new termination date in such manner as the
Secretary may provide.
Effective Date
The provision applies to periods after December 31, 2013.
30. Extension of temporary increase in limit on cover over of rum
excise taxes to Puerto Rico and the Virgin Islands (sec. 140 of
the Act and sec. 7652(f) of the Code)
Present Law
A $13.50 per proof gallon \525\ excise tax is imposed on
distilled spirits produced in or imported into the United
States.\526\ The excise tax does not apply to distilled spirits
that are exported from the United States, including exports to
U.S. possessions (e.g., Puerto Rico and the Virgin
Islands).\527\
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\525\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10) and (11).
\526\ Sec. 5001(a)(1).
\527\ Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c). See also
Treas. Reg. Sec. 48.0-2(a)(11) for the definition of ``possession of
the United States'' for purposes of the manufacturers and retailers
excise tax regulations.
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The Code provides for cover over (payment) to Puerto Rico
and the Virgin Islands of the excise tax imposed on rum
imported (or brought) into the United States, without regard to
the country of origin.\528\ The amount of the cover over is
limited under Code section 7652(f) to $10.50 per proof gallon
($13.25 per proof gallon after June 30, 1999, and before
January 1, 2014).
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\528\ Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the
amount of excise tax collected from imports into the United States of
articles produced in the Virgin Islands is retained by the United
States under section 7652(b)(3).
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Tax amounts attributable to shipments to the United States
of rum produced in Puerto Rico are covered over to Puerto Rico.
Tax amounts attributable to shipments to the United States of
rum produced in the Virgin Islands are covered over to the
Virgin Islands. Tax amounts attributable to shipments to the
United States of rum produced in neither Puerto Rico nor the
Virgin Islands are divided and covered over to the two
possessions under a formula.\529\ Amounts covered over to
Puerto Rico and the Virgin Islands are deposited into the
treasuries of the two possessions for use as those possessions
determine.\530\ All of the amounts covered over are subject to
the limitation.
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\529\ Sec. 7652(e)(2).
\530\ Secs. 7652(a)(3), (b)(3), and (e)(1).
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Explanation of Provision
The provision suspends for one year the $10.50 per proof
gallon limitation on the amount of excise taxes on rum covered
over to Puerto Rico and the Virgin Islands. Under the
provision, the cover over limitation of $13.25 per proof gallon
is extended for rum brought into the United States after
December 31, 2013 and before January 1, 2015. After December
31, 2014, the cover over amount reverts to $10.50 per proof
gallon.
Effective Date
The provision is effective for articles brought into the
United States after December 31, 2013.
31. Extension of American Samoa Economic Development Credit (sec. 141
of the Act and sec. 119 of Pub. L. No. 109-432)
Present Law
A domestic corporation that was an existing credit claimant
with respect to American Samoa and that elected the application
of section 936 for its last taxable year beginning before
January 1, 2006 is allowed a credit based on the corporation's
economic activity-based limitation with respect to American
Samoa. The credit is not part of the Code but is computed based
on the rules of sections 30A and 936. The credit is allowed for
the first eight taxable years of a corporation that begin after
December 31, 2005, and before January 1, 2014.
A corporation was an existing credit claimant with respect
to American Samoa if (1) the corporation was engaged in the
active conduct of a trade or business within American Samoa on
October 13, 1995, and (2) the corporation elected the benefits
of the possession tax credit \531\ in an election in effect for
its taxable year that included October 13, 1995.\532\ A
corporation that added a substantial new line of business
(other than in a qualifying acquisition of all the assets of a
trade or business of an existing credit claimant) ceased to be
an existing credit claimant as of the close of the taxable year
ending before the date on which that new line of business was
added.
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\531\ For taxable years beginning before January 1, 2006, certain
domestic corporations with business operations in the U.S. possessions
were eligible for the possession tax credit. Secs. 27(b), 936. This
credit offset the U.S. tax imposed on certain income related to
operations in the U.S. possessions. Subject to certain limitations, the
amount of the possession tax credit allowed to any domestic corporation
equaled the portion of that corporation's U.S. tax that was
attributable to the corporation's non-U.S. source taxable income from
(1) the active conduct of a trade or business within a U.S. possession,
(2) the sale or exchange of substantially all of the assets that were
used in such a trade or business, or (3) certain possessions
investment. No deduction or foreign tax credit was allowed for any
possessions or foreign tax paid or accrued with respect to taxable
income that was taken into account in computing the credit under
section 936. Under the economic activity-based limit, the amount of the
credit could not exceed an amount equal to the sum of (1) 60 percent of
the taxpayer's qualified possession wages and allocable employee fringe
benefit expenses, (2) 15 percent of depreciation allowances with
respect to short-life qualified tangible property, plus 40 percent of
depreciation allowances with respect to medium-life qualified tangible
property, plus 65 percent of depreciation allowances with respect to
long-life qualified tangible property, and (3) in certain cases, a
portion of the taxpayer's possession income taxes. A taxpayer could
elect, instead of the economic activity-based limit, a limit equal to
the applicable percentage of the credit that otherwise would have been
allowable with respect to possession business income, beginning in
1998, the applicable percentage was 40 percent.
To qualify for the possession tax credit for a taxable year, a
domestic corporation was required to satisfy two conditions. First, the
corporation was required to derive at least 80 percent of its gross
income for the three-year period immediately preceding the close of the
taxable year from sources within a possession. Second, the corporation
was required to derive at least 75 percent of its gross income for that
same period from the active conduct of a possession business. Sec.
936(a)(2). The section 936 credit generally expired for taxable years
beginning after December 31, 2005.
\532\ A corporation will qualify as an existing credit claimant if
it acquired all the assets of a trade or business of a corporation that
(1) actively conducted that trade or business in a possession on
October 13, 1995, and (2) had elected the benefits of the possession
tax credit in an election in effect for the taxable year that included
October 13, 1995.
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The amount of the credit allowed to a qualifying domestic
corporation under the provision is equal to the sum of the
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no
credit is allowed for the amount of any American Samoa income
taxes. Thus, for any qualifying corporation the amount of the
credit equals the sum of (1) 60 percent of the corporation's
qualified American Samoa wages and allocable employee fringe
benefit expenses and (2) 15 percent of the corporation's
depreciation allowances with respect to short-life qualified
American Samoa tangible property, plus 40 percent of the
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65
percent of the corporation's depreciation allowances with
respect to long-life qualified American Samoa tangible
property.
The section 936(c) rule denying a credit or deduction for
any possessions or foreign tax paid with respect to taxable
income taken into account in computing the credit under section
936 does not apply with respect to the credit allowed by the
provision.
For taxable years beginning after December 31, 2011 the
credit rules are modified in two ways. First, domestic
corporations with operations in American Samoa are allowed the
credit even if those corporations are not existing credit
claimants. Second, the credit is available to a domestic
corporation (either an existing credit claimant or a new credit
claimant) only if, in addition to satisfying all the present
law requirements for claiming the credit, the corporation also
has qualified production activities income (as defined in
section 199(c) by substituting ``American Samoa'' for ``the
United States'' in each place that latter term appears).
In the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, the credit applies to the first eight
taxable years of the corporation which begin after December 31,
2005, and before January 1, 2014. For any other corporation,
the credit applies to the first two taxable years of that
corporation which begin after December 31, 2011 and before
January 1, 2014.
Explanation of Provision
The provision extends the credit for one year to apply (a)
in the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, to the first nine taxable years of the
corporation which begin after December 31, 2005, and before
January 1, 2015, and (b) in the case of any other corporation,
to the first three taxable years of the corporation which begin
after December 31, 2011 and before January 1, 2015.
Effective Date
The provision applies to taxable years beginning after
December 31, 2013.
C. Subtitle C--Energy Tax Extenders
1. Extension of credit for nonbusiness energy property (sec. 151 of the
Act and sec. 25C of the Code)
Present Law
Present law provides a 10-percent credit for the purchase
of qualified energy efficiency improvements to existing
homes.\533\ A qualified energy efficiency improvement is any
energy efficiency building envelope component (1) that meets or
exceeds the prescriptive criteria for such a component
established by the 2009 International Energy Conservation Code
as such Code (including supplements) is in effect on the date
of the enactment of the American Recovery and Reinvestment Tax
Act of 2009 \534\ (or, in the case of windows, skylights and
doors, and metal roofs with appropriate pigmented coatings or
asphalt roofs with appropriate cooling granules, meets the
Energy Star program requirements); (2) that is installed in or
on a dwelling located in the United States and owned and used
by the taxpayer as the taxpayer's principal residence; (3) the
original use of which commences with the taxpayer; and (4) that
reasonably can be expected to remain in use for at least five
years. The credit is nonrefundable.
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\533\ Sec. 25C.
\534\ Pub. L. No. 111-5, February 17, 2009.
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Building envelope components are: (1) insulation materials
or systems which are specifically and primarily designed to
reduce the heat loss or gain for a dwelling and which meet the
prescriptive criteria for such material or system established
by the 2009 International Energy Conservation Code, as such
Code (including supplements) is in effect on the date of the
enactment of the American Recovery and Reinvestment Tax Act of
2009; \535\ (2) exterior windows (including skylights) and
doors; and (3) metal or asphalt roofs with appropriate
pigmented coatings or cooling granules that are specifically
and primarily designed to reduce the heat gain for a dwelling.
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\535\ Ibid.
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Additionally, present law provides specified credits for
the purchase of specific energy efficient property originally
placed in service by the taxpayer during the taxable year. The
allowable credit for the purchase of certain property is (1)
$50 for each advanced main air circulating fan, (2) $150 for
each qualified natural gas, propane, or oil furnace or hot
water boiler, and (3) $300 for each item of energy efficient
building property.
An advanced main air circulating fan is a fan used in a
natural gas, propane, or oil furnace and which has an annual
electricity use of no more than two percent of the total annual
energy use of the furnace (as determined in the standard
Department of Energy test procedures).
A qualified natural gas, propane, or oil furnace or hot
water boiler is a natural gas, propane, or oil furnace or hot
water boiler with an annual fuel utilization efficiency rate of
at least 95.
Energy-efficient building property is: (1) an electric heat
pump water heater which yields an energy factor of at least 2.0
in the standard Department of Energy test procedure, (2) an
electric heat pump which achieves the highest efficiency tier
established by the Consortium for Energy Efficiency, as in
effect on January 1, 2009,\536\ (3) a central air conditioner
which achieves the highest efficiency tier established by the
Consortium for Energy Efficiency as in effect on January 1,
2009,\537\ (4) a natural gas, propane, or oil water heater
which has an energy factor of at least 0.82 or thermal
efficiency of at least 90 percent, and (5) biomass fuel
property.
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\536\ These standards are a seasonal energy efficiency ratio
(``SEER'') greater than or equal to 15, an energy efficiency ratio
(``EER'') greater than or equal to 12.5, and heating seasonal
performance factor (``HSPF'') greater than or equal to 8.5 for split
heat pumps, and SEER greater than or equal to 14, EER greater than or
equal to 12, and HSPF greater than or equal to 8.0 for packaged heat
pumps.
\537\ These standards are a SEER greater than or equal to 16 and
EER greater than or equal to 13 for split systems, and SEER greater
than or equal to 14 and EER greater than or equal to 12 for packaged
systems.
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Biomass fuel property is a stove that burns biomass fuel to
heat a dwelling unit located in the United States and used as a
principal residence by the taxpayer, or to heat water for such
dwelling unit, and that has a thermal efficiency rating of at
least 75 percent. Biomass fuel is any plant-derived fuel
available on a renewable or recurring basis, including
agricultural crops and trees, wood and wood waste and residues
(including wood pellets), plants (including aquatic plants),
grasses, residues, and fibers.
The credit is available for property placed in service
prior to January 1, 2014. The maximum credit for a taxpayer for
all taxable years is $500, and no more than $200 of such credit
may be attributable to expenditures on windows.
The taxpayer's basis in the property is reduced by the
amount of the credit. Special proration rules apply in the case
of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. If less than
80 percent of the property is used for nonbusiness purposes,
only that portion of expenditures that is used for nonbusiness
purposes is taken into account.
For purposes of determining the amount of expenditures made
by any individual with respect to any dwelling unit,
expenditures which are made from subsidized energy financing
are not taken into account. The term ``subsidized energy
financing'' means financing provided under a Federal, State, or
local program a principal purpose of which is to provide
subsidized financing for projects designed to conserve or
produce energy.
Explanation of Provision
The provision extends the credit for one year, through
December 31, 2014.
Effective Date
The provision is effective for property placed in service
after December 31, 2013.
2. Extension of second generation biofuel producer credit (sec. 152 of
the Act and sec. 40(b)(6) of the Code)
Present Law
The second generation biofuel producer credit is a
nonrefundable income tax credit for each gallon of qualified
second generation biofuel fuel production of the producer for
the taxable year. The amount of the credit per gallon is $1.01.
The provision does not apply to fuel sold or used after
December 31, 2013.
``Qualified second generation biofuel production'' is any
second generation biofuel which is produced by the taxpayer and
which, during the taxable year, is: (1) sold by the taxpayer to
another person (a) for use by such other person in the
production of a qualified second generation biofuel mixture in
such person's trade or business (other than casual off-farm
production), (b) for use by such other person as a fuel in a
trade or business, or (c) who sells such second generation
biofuel at retail to another person and places such cellulosic
biofuel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (1)(a), (b), or
(c).\538\ Special rules apply for fuel derived from algae.
---------------------------------------------------------------------------
\538\ In addition, for fuels derived from algae, cyanobacterial or
lemna, a special rule provides that qualified second generation biofuel
includes fuel that is sold by the taxpayer to another person for
refining by such other person into a fuel that meets the registration
requirements for fuels and fuel additives under section 211 of the
Clean Air Act.
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``Second generation biofuel'' means any liquid fuel that
(1) is produced in the United States and used as fuel in the
United States, (2) is derived by or from qualified feedstocks
and (3) meets the registration requirements for fuels and fuel
additives established by the Environmental Protection Agency
(``EPA'') under section 211 of the Clean Air Act. ``Qualified
feedstock'' means any lignocellulosic or hemicellulosic matter
that is available on a renewable or recurring basis, and any
cultivated algae, cyanobacteria or lemna. Second generation
biofuel does not include fuels that (1) are more than four
percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25 (``unprocessed or excluded fuels''). It also does not
include any alcohol with a proof of less than 150.
The second generation biofuel producer credit cannot be
claimed unless the taxpayer is registered by the Internal
Revenue Service (``IRS'') as a producer of second generation
biofuel. Second generation biofuel eligible for the section 40
credit is precluded from qualifying as biodiesel, renewable
diesel, or alternative fuel for purposes of the applicable
income tax credit, excise tax credit, or payment provisions
relating to those fuels.
Because it is a credit under section 40(a), the second
generation biofuel producer credit is part of the general
business credits in section 38. However, the credit can only be
carried forward three taxable years after the termination of
the credit. The credit is also allowable against the
alternative minimum tax. Under section 87, the credit is
included in gross income.
Explanation of Provision
The provision extends the credit for one year, through
December 31, 2014.
Effective Date
The provision is effective for qualified second generation
biofuel production after December 31, 2013.
3. Extension of incentives for biodiesel and renewable diesel (secs.
153 of the Act and secs. 40A, 6426 and 6427(e) of the Code)
Present Law
Biodiesel
Present law provides an income tax credit for biodiesel
fuels (the ``biodiesel fuels credit'').\539\ The biodiesel
fuels credit is the sum of three credits: (1) the biodiesel
mixture credit, (2) the biodiesel credit, and (3) the small
agri-biodiesel producer credit. The biodiesel fuels credit is
treated as a general business credit. The amount of the
biodiesel fuels credit is includible in gross income. The
biodiesel fuels credit is coordinated to take into account
benefits from the biodiesel excise tax credit and payment
provisions discussed below. The credit does not apply to fuel
sold or used after December 31, 2013.
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\539\ Sec. 40A.
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Biodiesel is monoalkyl esters of long chain fatty acids
derived from plant or animal matter that meet (1) the
registration requirements established by the EPA under section
211 of the Clean Air Act (42 U.S.C. sec. 7545) and (2) the
requirements of the American Society of Testing and Materials
(``ASTM'') D6751. Agri-biodiesel is biodiesel derived solely
from virgin oils including oils from corn, soybeans, sunflower
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers,
flaxseeds, rice bran, mustard seeds, camelina, or animal fats.
Biodiesel may be taken into account for purposes of the
credit only if the taxpayer obtains a certification (in such
form and manner as prescribed by the Secretary) from the
producer or importer of the biodiesel that identifies the
product produced and the percentage of biodiesel and agri-
biodiesel in the product.
Biodiesel mixture credit
The biodiesel mixture credit is $1.00 for each gallon of
biodiesel (including agri-biodiesel) used by the taxpayer in
the production of a qualified biodiesel mixture. A qualified
biodiesel mixture is a mixture of biodiesel and diesel fuel
that is (1) sold by the taxpayer producing such mixture to any
person for use as a fuel, or (2) used as a fuel by the taxpayer
producing such mixture. The sale or use must be in the trade or
business of the taxpayer and is to be taken into account for
the taxable year in which such sale or use occurs. No credit is
allowed with respect to any casual off-farm production of a
qualified biodiesel mixture.
Per IRS guidance a mixture need only contain 1/10th of one
percent of diesel fuel to be a qualified mixture.\540\ Thus, a
qualified biodiesel mixture can contain 99.9 percent biodiesel
and 0.1 percent diesel fuel.
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\540\ Notice 2005-62, I.R.B. 2005-35, 443 (2005). ``A biodiesel
mixture is a mixture of biodiesel and diesel fuel containing at least
0.1 percent (by volume) of diesel fuel. Thus, for example, a mixture of
999 gallons of biodiesel and 1 gallon of diesel fuel is a biodiesel
mixture.''
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Biodiesel credit (B-100)
The biodiesel credit is $1.00 for each gallon of biodiesel
that is not in a mixture with diesel fuel (100 percent
biodiesel or B-100) and which during the taxable year is (1)
used by the taxpayer as a fuel in a trade or business or (2)
sold by the taxpayer at retail to a person and placed in the
fuel tank of such person's vehicle.
Small agri-biodiesel producer credit
The Code provides a small agri-biodiesel producer income
tax credit, in addition to the biodiesel and biodiesel mixture
credits. The credit is 10 cents per gallon for up to 15 million
gallons of agri-biodiesel produced by small producers, defined
generally as persons whose agri-biodiesel production capacity
does not exceed 60 million gallons per year. The agri-biodiesel
must (1) be sold by such producer to another person (a) for use
by such other person in the production of a qualified biodiesel
mixture in such person's trade or business (other than casual
off-farm production), (b) for use by such other person as a
fuel in a trade or business, or, (c) who sells such agri-
biodiesel at retail to another person and places such agri-
biodiesel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (a), (b), or (c).
Biodiesel mixture excise tax credit
The Code also provides an excise tax credit for biodiesel
mixtures.\541\ The credit is $1.00 for each gallon of biodiesel
used by the taxpayer in producing a biodiesel mixture for sale
or use in a trade or business of the taxpayer. A biodiesel
mixture is a mixture of biodiesel and diesel fuel that (1) is
sold by the taxpayer producing such mixture to any person for
use as a fuel or (2) is used as a fuel by the taxpayer
producing such mixture. No credit is allowed unless the
taxpayer obtains a certification (in such form and manner as
prescribed by the Secretary) from the producer of the biodiesel
that identifies the product produced and the percentage of
biodiesel and agri-biodiesel in the product.\542\
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\541\ Sec. 6426(c).
\542\ Sec. 6426(c)(4).
---------------------------------------------------------------------------
The credit is not available for any sale or use for any
period after December 31, 2013. This excise tax credit is
coordinated with the income tax credit for biodiesel such that
credit for the same biodiesel cannot be claimed for both income
and excise tax purposes.
Payments with respect to biodiesel fuel mixtures
If any person produces a biodiesel fuel mixture in such
person's trade or business, the Secretary is to pay such person
an amount equal to the biodiesel mixture credit.\543\ The
biodiesel fuel mixture credit must first be taken against tax
liability for taxable fuels. To the extent the biodiesel fuel
mixture credit exceeds such tax liability, the excess may be
received as a payment. Thus, if the person has no section 4081
liability, the credit is refundable. The Secretary is not
required to make payments with respect to biodiesel fuel
mixtures sold or used after December 31, 2013.
---------------------------------------------------------------------------
\543\ Sec. 6427(e).
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Renewable diesel
``Renewable diesel'' is liquid fuel that (1) is derived
from biomass (as defined in section 45K(c)(3)), (2) meets the
registration requirements for fuels and fuel additives
established by the EPA under section 211 of the Clean Air Act,
and (3) meets the requirements of the ASTM D975 or D396, or
equivalent standard established by the Secretary. ASTM D975
provides standards for diesel fuel suitable for use in diesel
engines. ASTM D396 provides standards for fuel oil intended for
use in fuel-oil burning equipment, such as furnaces. Renewable
diesel also includes fuel derived from biomass that meets the
requirements of a Department of Defense specification for
military jet fuel or an ASTM specification for aviation turbine
fuel.
For purposes of the Code, renewable diesel is generally
treated the same as biodiesel. In the case of renewable diesel
that is aviation fuel, kerosene is treated as though it were
diesel fuel for purposes of a qualified renewable diesel
mixture. Like biodiesel, the incentive may be taken as an
income tax credit, an excise tax credit, or as a payment from
the Secretary.\544\ The incentive for renewable diesel is $1.00
per gallon. There is no small producer credit for renewable
diesel. The incentives for renewable diesel expired after
December 31, 2013.
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\544\ Secs. 40A(f), 6426(c), and 6427(e).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the income tax credit, excise tax
credit and payment provisions for biodiesel and renewable
diesel for one year, through December 31, 2014.
In light of the retroactive nature of the provision, as it
relates to fuel sold or used in 2014, the provision creates a
special rule to address claims regarding excise credits and
claims for payment associated with periods occurring during
2014. In particular the provision directs the Secretary to
issue guidance within 30 days of the date of enactment. Such
guidance is to provide for a one-time submission of claims
covering periods occurring during 2014. The guidance is to
provide for a 180-day period for the submission of such claims
(in such manner as prescribed by the Secretary) to begin no
later than 30 days after such guidance is issued.\545\ Such
claims shall be paid by the Secretary of the Treasury not later
than 60 days after receipt. If the claim is not paid within 60
days of the date of the filing, the claim shall be paid with
interest from such date determined by using the overpayment
rate and method under section 6621 of the Code.
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\545\ This guidance is provided by Notice 2015-3, 2015-6 I.R.B 583.
---------------------------------------------------------------------------
Effective Date
The provision is effective for fuel sold or used after
December 31, 2013.
4. Extension of credit for the production of Indian coal facilities
placed in service before 2009 (sec. 154 of the Act and sec.
45(e)(10) of the Code)
Present Law
A credit is available for the production of Indian coal
sold to an unrelated third party from a qualified facility for
a seven-year period beginning January 1, 2006, and ending
December 31, 2013. The amount of the credit for Indian coal is
$1.50 per ton for the first four years of the seven-year period
and $2.00 per ton for the last three years of the seven-year
period. Beginning in calendar years after 2006, the credit
amounts are indexed annually for inflation using 2005 as the
base year. The credit amount for 2014 is $2.317 per ton.
A qualified Indian coal facility is a facility placed in
service before January 1, 2009, that produces coal from
reserves that on June 14, 2005, were owned by a Federally
recognized tribe of Indians or were held in trust by the United
States for a tribe or its members.
The credit is a component of the general business
credit,\546\ allowing excess credits to be carried back one
year and forward up to 20 years. The credit is also subject to
the alternative minimum tax.
---------------------------------------------------------------------------
\546\ Sec. 38(b)(8).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for the production of
Indian coal for one year (through December 31, 2014).
Effective Date
The provision is effective for Indian coal produced after
December 31, 2013.
5. Extension of credits with respect to facilities producing energy
from certain renewable resources (sec. 155 of the Act and secs.
45 and 48 of the Code)
Present Law
Renewable electricity production credit
An income tax credit is allowed for the production of
electricity from qualified energy resources at qualified
facilities (the ``renewable electricity production
credit'').\547\ Qualified energy resources comprise wind,
closed-loop biomass, open-loop biomass, geothermal energy,
solar energy, small irrigation power, municipal solid waste,
qualified hydropower production, and marine and hydrokinetic
renewable energy. Qualified facilities are, generally,
facilities that generate electricity using qualified energy
resources. To be eligible for the credit, electricity produced
from qualified energy resources at qualified facilities must be
sold by the taxpayer to an unrelated person.
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\547\ Sec. 45. In addition to the renewable electricity production
credit, section 45 also provides income tax credits for the production
of Indian coal and refined coal at qualified facilities.
SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
RESOURCES
------------------------------------------------------------------------
Credit amount
Eligible electricity for 2014 \1\
production activity (sec. 45) (cents per Expiration \2\
kilowatt-hour)
------------------------------------------------------------------------
Wind......................... 2.3 December 31, 2013
Closed-loop biomass.......... 2.3 December 31, 2013
Open-loop biomass (including 1.1 December 31, 2013
agricultural livestock waste
nutrient facilities).
Geothermal................... 2.3 December 31, 2013
Solar (pre-2006 facilities 2.3 December 31, 2005
only).
Small irrigation power....... 1.1 December 31, 2013
Municipal solid waste 1.1 December 31, 2013
(including landfill gas
facilities and trash
combustion facilities).
Qualified hydropower......... 1.1 December 31, 2013
Marine and hydrokinetic...... 1.1 December 31, 2013
------------------------------------------------------------------------
\1\ In general, the credit is available for electricity produced during
the first 10 years after a facility has been placed in service.
\2\ Expires for property the construction of which begins after this
date.
Election to claim energy credit in lieu of renewable electricity
production credit
A taxpayer may make an irrevocable election to have certain
property which is part of a qualified renewable electricity
production facility be treated as energy property eligible for
a 30 percent investment credit under section 48. For this
purpose, qualified facilities are facilities otherwise eligible
for the renewable electricity production credit with respect to
which no credit under section 45 has been allowed. A taxpayer
electing to treat a facility as energy property may not claim
the renewable electricity production credit. The eligible basis
for the investment credit for taxpayers making this election is
the basis of the depreciable (or amortizable) property that is
part of a facility capable of generating electricity eligible
for the renewable electricity production credit.
Explanation of Provision
The provision extends the renewable electricity production
credit and the election to claim the energy credit in lieu of
the electricity production credit for one year, through
December 31, 2014.
Effective Date
The provision is effective on January 1, 2014.
6. Extension of credit for energy-efficient new homes (sec. 156 of the
Act and sec. 45L of the Code)
Present Law
Present law provides a credit to an eligible contractor for
each qualified new energy-efficient home that is constructed by
the eligible contractor and acquired by a person from such
eligible contractor for use as a residence during the taxable
year. To qualify as a new energy-efficient home, the home must
be: (1) a dwelling located in the United States, (2)
substantially completed after August 8, 2005, and (3) certified
in accordance with guidance prescribed by the Secretary to have
a projected level of annual heating and cooling energy
consumption that meets the standards for either a 30-percent or
50-percent reduction in energy usage, compared to a comparable
dwelling constructed in accordance with the standards of
chapter 4 of the 2006 International Energy Conservation Code as
in effect (including supplements) on January 1, 2006, and any
applicable Federal minimum efficiency standards for equipment.
With respect to homes that meet the 30-percent standard, one-
third of such 30-percent savings must come from the building
envelope, and with respect to homes that meet the 50-percent
standard, one-fifth of such 50-percent savings must come from
the building envelope.
Manufactured homes that conform to Federal manufactured
home construction and safety standards are eligible for the
credit provided all the criteria for the credit are met. The
eligible contractor is the person who constructed the home, or
in the case of a manufactured home, the producer of such home.
The credit equals $1,000 in the case of a new home that
meets the 30-percent standard and $2,000 in the case of a new
home that meets the 50-percent standard. Only manufactured
homes are eligible for the $1,000 credit.
In lieu of meeting the standards of chapter 4 of the 2006
International Energy Conservation Code, manufactured homes
certified by a method prescribed by the Administrator of the
Environmental Protection Agency under the Energy Star Labeled
Homes program are eligible for the $1,000 credit provided
criteria (1) and (2), above, are met.
The credit applies to homes that are acquired prior to
January 1, 2014. The credit is part of the general business
credit.
Explanation of Provision
The provision extends the credit for one year for homes
that are acquired prior to January 1, 2015.
Effective Date
The provision is effective for homes acquired after
December 31, 2013.
7. Extension of special allowance for second generation biofuel plant
property (sec. 157 of the Act and sec. 168(l) of the Code)
Present Law
Present law \548\ allows an additional first-year
depreciation deduction equal to 50 percent of the adjusted
basis of qualified second generation biofuel plant property. In
order to qualify, the property generally must be placed in
service before January 1, 2014.\549\
---------------------------------------------------------------------------
\548\ Sec. 168(l).
\549\ Sec. 168(l)(2)(D).
---------------------------------------------------------------------------
Qualified second generation biofuel plant property means
depreciable property used in the U.S. solely to produce any
liquid fuel that (1) is derived from qualified feedstocks, and
(2) meets the registration requirements for fuels and fuel
additives established by the Environmental Protection Agency
(``EPA'') under section 211 of the Clean Air Act.\550\
Qualified feedstocks means any lignocellulosic or
hemicellulosic matter that is available on a renewable or
recurring basis \551\ and any cultivated algae, cyanobacteria,
or lemna.\552\ Second generation biofuel does not include any
alcohol with a proof of less than 150 or certain unprocessed
fuel.\553\ Unprocessed fuels are fuels that (1) are more than
four percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25.\554\
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\550\ Secs. 168(l)(2)(A) and 40(b)(6)(E).
\551\ For example, lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis includes bagasse (from
sugar cane), corn stalks, and switchgrass.
\552\ Sec. 40(b)(6)(F).
\553\ Sec. 40(b)(6)(E)(ii) and (iii).
\554\ Sec. 40(b)(6)(E)(iii).
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The additional first-year depreciation deduction is allowed
for both regular tax and alternative minimum tax purposes for
the taxable year in which the property is placed in
service.\555\ The additional first-year depreciation deduction
is subject to the general rules regarding whether an item is
subject to capitalization under section 263A. The basis of the
property and the depreciation allowances in the year of
purchase and later years are appropriately adjusted to reflect
the additional first-year depreciation deduction.\556\ In
addition, there is no adjustment to the allowable amount of
depreciation for purposes of computing a taxpayer's alternative
minimum taxable income with respect to property to which the
provision applies.\557\ A taxpayer is allowed to elect out of
the additional first-year depreciation for any class of
property for any taxable year.\558\
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\555\ Sec. 168(l)(5).
\556\ Sec. 168(l)(1)(B).
\557\ Sec. 168(l)(5) and 168(k)(2)(G).
\558\ Sec. 168(l)(3)(D).
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In order for property to qualify for the additional first-
year depreciation deduction, it must meet the following
requirements: (1) the original use of the property must
commence with the taxpayer on or after December 20, 2006; and
(2) the property must be (i) acquired by purchase (as defined
under section 179(d)) by the taxpayer after December 20, 2006,
and (ii) placed in service before January 1, 2014.\559\
Property does not qualify if a binding written contract for the
acquisition of such property was in effect on or before
December 20, 2006.
---------------------------------------------------------------------------
\559\ Sec. 168(l)(2).
---------------------------------------------------------------------------
Property that is manufactured, constructed, or produced by
the taxpayer for use by the taxpayer qualifies if the taxpayer
begins the manufacture, construction, or production of the
property after December 20, 2006, and the property is placed in
service before January 1, 2014 (and all other requirements are
met).\560\ Property that is manufactured, constructed, or
produced for the taxpayer by another person under a contract
that is entered into prior to the manufacture, construction, or
production of the property is considered to be manufactured,
constructed, or produced by the taxpayer.
---------------------------------------------------------------------------
\560\ Sec. 168(l)(4) and 168(k)(2)(E).
---------------------------------------------------------------------------
Property any portion of which is financed with the proceeds
of a tax-exempt obligation under section 103 is not eligible
for the additional first-year depreciation deduction.\561\
Recapture rules apply if the property ceases to be qualified
second generation biofuel plant property.\562\
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\561\ Sec. 168(l)(3)(C).
\562\ Sec. 168(l)(6).
---------------------------------------------------------------------------
Property with respect to which the taxpayer has elected 50
percent expensing under section 179C is not eligible for the
additional first-year depreciation deduction.\563\
---------------------------------------------------------------------------
\563\ Sec. 168(l)(7).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present law special depreciation
allowance for one year, to qualified second generation biofuel
plant property placed in service prior to January 1, 2015.
Effective Date
The provision applies to property placed in service after
December 31, 2013.
8. Extension of energy efficient commercial buildings deduction (sec.
158 of the Act and sec. 179D of the Code)
Present Law
In general
Code section 179D provides an election under which a
taxpayer may take an immediate deduction equal to energy-
efficient commercial building property expenditures made by the
taxpayer. Energy-efficient commercial building property is
defined as property (1) which is installed on or in any
building located in the United States that is within the scope
of Standard 90.1-2001 of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) which is installed as part of (i) the interior
lighting systems, (ii) the heating, cooling, ventilation, and
hot water systems, or (iii) the building envelope, and (3)
which is certified as being installed as part of a plan
designed to reduce the total annual energy and power costs with
respect to the interior lighting systems, heating, cooling,
ventilation, and hot water systems of the building by 50
percent or more in comparison to a reference building which
meets the minimum requirements of Standard 90.1-2001 (as in
effect on April 2, 2003). The deduction is limited to an amount
equal to $1.80 per square foot of the property for which such
expenditures are made. The deduction is allowed in the year in
which the property is placed in service.
Certain certification requirements must be met in order to
qualify for the deduction. The Secretary, in consultation with
the Secretary of Energy, will promulgate regulations that
describe methods of calculating and verifying energy and power
costs using qualified computer software based on the provisions
of the 2005 California Nonresidential Alternative Calculation
Method Approval Manual or, in the case of residential property,
the 2005 California Residential Alternative Calculation Method
Approval Manual.
The Secretary is granted authority to prescribe procedures
for the inspection and testing for compliance of buildings that
are comparable, given the difference between commercial and
residential buildings, to the requirements in the Mortgage
Industry National Accreditation Procedures for Home Energy
Rating Systems.\564\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
\564\ See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS
2008-40, 2008-14 I.R.B. 725 March 11, 2008.
---------------------------------------------------------------------------
For energy-efficient commercial building property
expenditures made by a public entity, such as public schools,
the deduction may be allocated to the person primarily
responsible for designing the property in lieu of the public
entity.
If a deduction is allowed under this section, the basis of
the property is reduced by the amount of the deduction.
The deduction is effective for property placed in service
prior to January 1, 2014.
Partial allowance of deduction
System-specific deductions
In the case of a building that does not meet the overall
building requirement of 50-percent energy savings, a partial
deduction is allowed with respect to each separate building
system that comprises energy efficient property and which is
certified by a qualified professional as meeting or exceeding
the applicable system-specific savings targets established by
the Secretary. The applicable system-specific savings targets
to be established by the Secretary are those that would result
in a total annual energy savings with respect to the whole
building of 50 percent, if each of the separate systems met the
system specific target. The separate building systems are (1)
the interior lighting system, (2) the heating, cooling,
ventilation and hot water systems, and (3) the building
envelope. The maximum allowable deduction is $0.60 per square
foot for each separate system.
Interim rules for lighting systems
In general, in the case of system-specific partial
deductions, no deduction is allowed until the Secretary
establishes system-specific targets.\565\ However, in the case
of lighting system retrofits, until such time as the Secretary
issues final regulations, the system-specific energy savings
target for the lighting system is deemed to be met by a
reduction in lighting power density of 40 percent (50 percent
in the case of a warehouse) of the minimum requirements in
Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
2001. Also, in the case of a lighting system that reduces
lighting power density by 25 percent, a partial deduction of 30
cents per square foot is allowed. A pro-rated partial deduction
is allowed in the case of a lighting system that reduces
lighting power density between 25 percent and 40 percent.
Certain lighting level and lighting control requirements must
also be met in order to qualify for the partial lighting
deductions under the interim rule.
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\565\ IRS Notice 2008-40, supra, set a target of a 10-percent
reduction in total energy and power costs with respect to the building
envelope, and 20 percent each with respect to the interior lighting
system and the heating, cooling, ventilation and hot water systems. IRS
Notice 2012-26 (2012-17 I.R.B. 847 April 23, 2012) established new
targets of 10-percent reduction in total energy and power costs with
respect to the building envelope, 25 percent with respect to the
interior lighting system and 15 percent with respect to the heating,
cooling, ventilation and hot water syhstems, effective beginning March
12, 2012. The targets from Notice 2008-40 may continue to be used until
December 31, 2013, but only the new targets of Notice 2012-26 will be
available under any extension of section 179D beyond December 31, 2013.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the deduction for one year, through
December 31, 2014.
Effective Date
The provision applies to property placed in service after
December 31, 2013.
9. Extension of special rule for sales or dispositions to implement
FERC or State electric restructuring policy for qualified
electric utilities (sec. 159 of the Act and sec. 451(i) of the
Code)
Present Law
A taxpayer selling property generally realizes gain to the
extent the sales price (and any other consideration received)
exceeds the taxpayer's basis in the property.\566\ The realized
gain is subject to current income tax \567\ unless the
recognition of the gain is deferred or excluded from income
under a special tax provision.\568\
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\566\ See sec. 1001.
\567\ See secs. 61 and 451.
\568\ See, e.g., secs. 453, 1031 and 1033.
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One such special tax provision permits taxpayers to elect
to recognize gain from qualifying electric transmission
transactions ratably over an eight-year period beginning in the
year of sale if the amount realized from such sale is used to
purchase exempt utility property within the applicable period
\569\ (the ``reinvestment property'').\570\ If the amount
realized exceeds the amount used to purchase reinvestment
property, any realized gain is recognized to the extent of such
excess in the year of the qualifying electric transmission
transaction.
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\569\ The applicable period for a taxpayer to reinvest the proceeds
is four years after the close of the taxable year in which the
qualifying electric transmission transaction occurs.
\570\ Sec. 451(i).
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A qualifying electric transmission transaction is the sale
or other disposition of property used by a qualified electric
utility to an independent transmission company prior to January
1, 2014.\571\ A qualified electric utility is defined as an
electric utility, which as of the date of the qualifying
electric transmission transaction, is vertically integrated in
that it is both (1) a transmitting utility (as defined in the
Federal Power Act) \572\ with respect to the transmission
facilities to which the election applies, and (2) an electric
utility (as defined in the Federal Power Act \573\).\574\
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\571\ Sec. 451(i)(3).
\572\ Sec. 3(23), 16 U.S.C. sec. 796, defines ``transmitting
utility'' as any electric utility, qualifying cogeneration facility,
qualifying small power production facility, or Federal power marketing
agency that owns or operates electric power transmission facilities
that are used for the sale of electric energy at wholesale.
\573\ Sec. 3(22), 16 U.S.C. sec. 796, defines ``electric utility''
as any person or State agency (including any municipality) that sells
electric energy; such term includes the Tennessee Valley Authority, but
does not include any Federal power marketing agency.
\574\ Sec. 451(i)(6).
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In general, an independent transmission company is defined
as: (1) an independent transmission provider \575\ approved by
the Federal Energy Regulatory Commission (``FERC''); (2) a
person (i) who the FERC determines under section 203 of the
Federal Power Act \576\ (or by declaratory order) is not a
``market participant'' and (ii) whose transmission facilities
are placed under the operational control of a FERC-approved
independent transmission provider no later than four years
after the close of the taxable year in which the transaction
occurs; or (3) in the case of facilities subject to the
jurisdiction of the Public Utility Commission of Texas, (i) a
person which is approved by that Commission as consistent with
Texas State law regarding an independent transmission
organization, or (ii) a political subdivision, or affiliate
thereof, whose transmission facilities are under the
operational control of an organization described in (i).\577\
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\575\ For example, a regional transmission organization, an
independent system operator, or an independent transmission company.
\576\ 16 U.S.C. sec. 824b.
\577\ Sec. 451(i)(4).
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Exempt utility property is defined as: (1) property used in
the trade or business of (i) generating, transmitting,
distributing, or selling electricity or (ii) producing,
transmitting, distributing, or selling natural gas; or (2)
stock in a controlled corporation whose principal trade or
business consists of the activities described in (1).\578\
Exempt utility property does not include any property that is
located outside of the United States.\579\
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\578\ Sec. 451(i)(5).
\579\ Sec. 451(i)(5)(C).
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If a taxpayer is a member of an affiliated group of
corporations filing a consolidated return, the reinvestment
property may be purchased by any member of the affiliated group
(in lieu of the taxpayer).\580\
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\580\ Sec. 451(i)(7).
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Explanation of Provision
The provision extends for one year the treatment under the
present-law deferral provision to sales or dispositions by a
qualified electric utility that occur prior to January 1, 2015.
Effective Date
The provision applies to dispositions after December 31,
2013.
10. Extension of excise tax credits relating to certain fuels (sec. 160
of the Act and sec. 6426 and 6427(e) of the Code)
Present Law
Fuel excise taxes
Fuel excise taxes are imposed on taxable fuel (gasoline,
diesel fuel or kerosene) under section 4081. In general, these
fuels are taxed when removed from a refinery, terminal rack,
upon entry into the United States, or upon sale to an
unregistered person. A back-up tax under section 4041 is
imposed on previously untaxed fuel and alternative fuel used or
sold for use as fuel in a motor vehicle or motorboat to the
supply tank of a highway vehicle. In general, the rates of tax
are 18.3 cents per gallon (or in the case of compressed natural
gas 18.3 cents per gasoline gallon equivalent), and in the case
of liquefied natural gas, and liquid fuel derived from coal or
biomass, 24.3 cents per gallon.
Alternative fuel and alternative fuel mixture credits and payments
The Code provides two per-gallon excise tax credits with
respect to alternative fuel: the alternative fuel credit, and
the alternative fuel mixture credit. For this purpose, the term
``alternative fuel'' means liquefied petroleum gas, P Series
fuels (as defined by the Secretary of Energy under 42 U.S.C.
sec. 13211(2)), compressed or liquefied natural gas, liquefied
hydrogen, liquid fuel derived from coal through the Fischer-
Tropsch process (``coal-to-liquids''), compressed or liquefied
gas derived from biomass, or liquid fuel derived from biomass.
Such term does not include ethanol, methanol, or biodiesel.
For coal-to-liquids produced after December 30, 2009, the
fuel must be certified as having been derived from coal
produced at a gasification facility that separates and
sequesters 75 percent of such facility's total carbon dioxide
emissions.
The alternative fuel credit is allowed against section 4041
liability, and the alternative fuel mixture credit is allowed
against section 4081 liability. Neither credit is allowed
unless the taxpayer is registered with the Secretary. The
alternative fuel credit is 50 cents per gallon of alternative
fuel or gasoline gallon equivalents \581\ of nonliquid
alternative fuel sold by the taxpayer for use as a motor fuel
in a motor vehicle or motorboat, sold for use in aviation or so
used by the taxpayer.
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\581\ ``Gasoline gallon equivalent'' means, with respect to any
nonliquid alternative fuel (for example, compressed natural gas), the
amount of such fuel having a Btu (British thermal unit) content of
124,800 (higher heating value).
---------------------------------------------------------------------------
The alternative fuel mixture credit is 50 cents per gallon
of alternative fuel used in producing an alternative fuel
mixture for sale or use in a trade or business of the taxpayer.
An ``alternative fuel mixture'' is a mixture of alternative
fuel and taxable fuel (gasoline, diesel fuel or kerosene) that
contains at least 1/10 of one percent taxable fuel. The mixture
must be sold by the taxpayer producing such mixture to any
person for use as a fuel, or used by the taxpayer producing the
mixture as a fuel. The credits expired after December 31, 2013
(September 30, 2014 for liquefied hydrogen).
A person may file a claim for payment equal to the amount
of the alternative fuel credit (but not the alternative fuel
mixture credit). The alternative fuel credit must first be
applied to the applicable excise tax liability under section
4041 or 4081, and any excess credit may be taken as a payment.
These payment provisions generally also expire after December
31, 2013. With respect to liquefied hydrogen, the payment
provisions expire after September 30, 2014.
For purposes of the alternative fuel credit, alternative
fuel mixture credit and related payment provisions,
``alternative fuel'' does not include fuel (including lignin,
wood residues, or spent pulping liquors) derived from the
production of paper or pulp.
Explanation of Provision
The provision extends the alternative fuel credit and
related payment provisions, and the alternative fuel mixture
credit through December 31, 2014 (including those related to
liquefied hydrogen).
In light of the retroactive nature of the provision, as it
relates to alternative fuel sold or used in 2014, the provision
creates a special rule to address claims regarding excise
credits and claims for payment associated with periods
occurring during 2014. In particular the provision directs the
Secretary to issue guidance within 30 days of the date of
enactment. Such guidance is to provide for a one-time
submission of claims covering periods occurring during 2014.
The guidance is to provide for a 180-day period for the
submission of such claims (in such manner as prescribed by the
Secretary) to begin no later than 30 days after such guidance
is issued.\582\ Such claims shall be paid by the Secretary of
the Treasury not later than 60 days after receipt. If the claim
is not paid within 60 days of the date of the filing, the claim
shall be paid with interest from such date determined by using
the overpayment rate and method under section 6621 of such
Code.
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\582\ This guidance is provided by Notice 2015-3, 2015-6 I.R.B 583.
---------------------------------------------------------------------------
The provision, as it relates to biodiesel and renewable
diesel, is described above in connection with section 153 of
the Act ``Incentives for Biodiesel and Renewable Diesel.''
Effective Date
The provision is generally effective for fuel sold or used
after December 31, 2013. As it relates to liquefied hydrogen,
the provision is effective for fuels sold or used after
September 30, 2014.
11. Extension of credit for alternative fuel vehicle refueling property
(sec. 161 of the Act and sec. 30C of the Code)
Present Law
Taxpayers may claim a 30-percent credit for the cost of
installing qualified clean-fuel vehicle refueling property to
be used in a trade or business of the taxpayer or installed at
the principal residence of the taxpayer.\583\ The credit may
not exceed $30,000 per taxable year per location, in the case
of qualified refueling property used in a trade or business and
$1,000 per taxable year per location, in the case of qualified
refueling property installed on property which is used as a
principal residence.
---------------------------------------------------------------------------
\583\ Sec. 30C.
---------------------------------------------------------------------------
Qualified refueling property is property (not including a
building or its structural components) for the storage or
dispensing of a clean-burning fuel or electricity into the fuel
tank or battery of a motor vehicle propelled by such fuel or
electricity, but only if the storage or dispensing of the fuel
or electricity is at the point of delivery into the fuel tank
or battery of the motor vehicle. The original use of such
property must begin with the taxpayer.
Clean-burning fuels are any fuel at least 85 percent of the
volume of which consists of ethanol, natural gas, compressed
natural gas, liquefied natural gas, liquefied petroleum gas, or
hydrogen. In addition, any mixture of biodiesel and diesel
fuel, determined without regard to any use of kerosene and
containing at least 20 percent biodiesel, qualifies as a clean
fuel.
Credits for qualified refueling property used in a trade or
business are part of the general business credit and may be
carried back for one year and forward for 20 years. Credits for
residential qualified refueling property cannot exceed for any
taxable year the difference between the taxpayer's regular tax
(reduced by certain other credits) and the taxpayer's tentative
minimum tax. Generally, in the case of qualified refueling
property sold to a tax-exempt entity, the taxpayer selling the
property may claim the credit.
A taxpayer's basis in qualified refueling property is
reduced by the amount of the credit. In addition, no credit is
available for property used outside the United States or for
which an election to expense has been made under section 179.
The credit is available for property placed in service
after December 31, 2005, and (except in the case of hydrogen
refueling property) before January 1, 2014. In the case of
hydrogen refueling property, the property must be placed in
service before January 1, 2015.
Explanation of Provision
The provision extends the 30-percent credit for alternative
fuel refueling property (other than hydrogen refueling property
which presently expires December 31, 2014) for one year,
through December 31, 2014.
Effective Date
The provision is effective for property placed in service
after December 31, 2013.
D. Subtitle D--Extenders Relating to Multiemployer Defined Benefit
Pension Plans
1. Multiemployer defined benefit plans (secs. 171-172 of the Act and
sec. 221(c) of the Pension Protection Act of 2006, secs. 431-
432 of the Code, and secs. 304-305 of ERISA)
Certain provisions under the Pension Protection Act of 2006
relating to the funding rules for multiemployer defined benefit
plans were scheduled to expire as of December 31, 2014
(``temporary multiemployer plan provisions''). The expiration
dates for the temporary multiemployer plan provisions were
repealed by the Multiemployer Pension Reform Act of 2014, thus
making the multiemployer plan provisions permanent.\584\
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\584\ Sec. 101 of Division O of Pub. L. No. 113-235. The temporary
multiemployer plan provisions and expiration dates, and repeal of the
expiration dates, are described in Part Nine, Division O.A.1.
---------------------------------------------------------------------------
Provisions of the Tax Increase Prevention Act of 2014
extended the expiration dates for the temporary multiemployer
plan provisions for one year. However, because the expiration
dates were earlier repealed by the Multiemployer Pension Reform
Act of 2014, these provisions have no effect.
TITLE II--TECHNICAL CORRECTIONS
A. Tax Technical Corrections
(secs. 201-220 of the Act)
The Act includes technical corrections to recently enacted
tax legislation. Except as otherwise provided, the amendments
made by the technical corrections contained in the Act take
effect as if included in the original legislation to which each
amendment relates.
Amendments to the American Taxpayer Relief Act of 2012 (Pub. L. No.
112-240)
Phaseout of personal exemption amount for qualified
disability trusts (Act sec. 101(b)).--The provision corrects an
obsolete statutory reference to the computation of the
exemption amount for a qualified disability trust.
Capital gain rate for certain high-income individuals (Act
sec. 102).--The provision contains a conforming amendment to
the computation of the foreign earned income exclusion.
Permanent alternative minimum tax relief for individuals
(Act sec. 104).--The provision clarifies that, as adjusted for
inflation, the exemption amount for married individuals filing
a separate return is one-half the exemption amount for married
individuals filing a joint return. The provision also clarifies
that the exemption amount for individuals filing a joint
return, as adjusted for inflation, is rounded to the nearest
$100.
Qualified zone academy bonds (Act sec. 310).--The provision
conforms the Code to Congressional intent that qualified zone
academy bonds cannot be issued as direct-pay bonds using
national limitation allocations from years after 2010 or
carryforwards of such allocations.
Election to accelerate the AMT credit in lieu of bonus
depreciation (Act sec. 331).--The provision clarifies the
taxable year for which an election under section 168(k)(4) is
made.
Amendment to the Middle Class Tax Relief and Job Creation Act of 2012
(Pub. L. No. 112-96)
Repeal of certain shifts in the timing of corporate
estimated tax payments (Act sec. 7001).--The provision corrects
a reference to the repeal of certain shifts in the timing of
estimated corporate taxes with respect to the Corporate
Estimated Tax Shift Act of 2009 (Pub. L. No. 111-42).
Amendment to the FAA Modernization and Reform Act of 2012 (Pub. L. No.
112-95)
Small aircraft on nonestablished lines (Act sec. 1107).--
Under Code section 4281, small aircraft (excluding jet
aircraft) that are operated on nonestablished lines (e.g., for
sightseeing) are exempt from the taxes imposed on the
transportation of persons and property by air. The provision
clarifies that rotorcraft (i.e., helicopters) and propeller
aircraft are not ``jet aircraft'' for purposes of section 4281.
Amendments to the Regulated Investment Company Modernization Act of
2010 (Pub. L. No. 111-325)
Capital loss carryovers (Act sec. 101).--The Regulated
Investment Company Modernization Act of 2010 provides capital
loss carryover treatment for a regulated investment company
(``RIC'') similar to the net capital loss carryovers applicable
to individuals, effective for taxable years beginning after
December 22, 2010. The Internal Revenue Service ruled that this
provision is effective for purposes of the excise tax under
section 4982 for calendar years after 2010.\585\ Thus, this
provision applies to 1-year periods beginning after October 31,
2010, which are taken into account in computing the excise tax
for calendar years beginning after 2010.
---------------------------------------------------------------------------
\585\ Rev. Rul. 2012-29, 2012-42 I. R. B. 475.
---------------------------------------------------------------------------
The Act also provides that capital loss carryovers for
taxable years beginning after December 22, 2010, are used prior
to capital losses carryovers under the provisions of prior law.
As a result of the interaction of these two provisions of the
Act, there are situations where capital loss carryovers may
expire for purposes of the excise tax but not for purposes of
determining investment company taxable income.
The provision allows a RIC to elect to delay the new
capital loss carryover provisions for purposes of section 4982
for one calendar year. For an electing RIC, the provision will
apply to 1-year periods beginning after October 31, 2011, which
are taken into account in computing the excise tax for calendar
years beginning after 2011. The provision also provides that
the capital loss carryovers of a RIC will not prevent the RIC
from having sufficient earnings and profits to make the
required distribution of its capital gain net income under
section 4982 (as provided in section 852(c)(2)).
Spillover dividends (Act sec. 304).--The Act provides that
a spillover dividend must be declared before the later of the
15th day of the 9th month following the close of the taxable
year or the extended due date for filing the return for the
taxable year. The provision provides the declaration may be
made on or before the relevant date.
Certain late year losses (Act sec. 308).--Under the law in
effect both before and after enactment the Act, the amount
which may be treated as a capital gain dividend for a taxable
year of a RIC is determined without regard to the post-October
capital loss for the year, and the post-October capital loss is
treated as arising on the first day of the next taxable year.
Under the law in effect before enactment of the Act, the term
``post-October capital loss'' was defined as any net capital
loss attributable to the portion of the taxable year after
October 31, or if there was no net capital loss, any net-long
term capital loss attributable to the portion of the taxable
year after that date.\586\ Under the Act, the term ``post-
October capital loss'' is the greatest of (i) the net capital
loss attributable to the portion of the taxable year after
October 31, (ii) the net-long term capital loss attributable to
the portion of the taxable year after that date, or (iii) the
net-short term capital loss attributable to the portion of the
taxable year after that date.
---------------------------------------------------------------------------
\586\ Treas. Reg. sec. 1.852-11. Also, Notice 97-64, 1997-2 C.B.
323, provides guidance on the application of the multiple tax rates
under section 1(h) to capital gain dividends of RICs.
---------------------------------------------------------------------------
Under the provision, the term ``post-October capital loss''
is the net capital loss attributable to the portion of the
taxable year after October 31, or if there is no net capital
loss, any net long-term capital loss or any net short-term
capital loss attributable to the portion of the taxable year
after that date.
Under the law in effect before enactment of the Act, to the
extent provided in regulations, a RIC could elect to push the
post-October net foreign currency losses and the net reduction
in the value of stock in a PFIC (passive foreign investment
company) with respect to which an election is in effect under
section 1296(k) forward to the next taxable year. Regulations
had been issued allowing RICs to elect to defer all or part of
any post-October net foreign currency losses for the portion of
the taxable year after October 31 to the first day of the
succeeding taxable year. The Act expanded this rule to provide
that any late-year ordinary loss may be deferred.
The provision corrects the definition of late-year ordinary
loss by defining the loss to be the sum of the post-October
specified loss (if any) and the post-December ordinary loss (if
any).
In the case of an election by a RIC with respect to a
taxable year beginning before the date of enactment of this
Act, the RIC may treat the amendments made by this provision as
not applying with respect to any such election.
Deferral of certain gains and losses for excise tax
purposes (Act sec. 402).--For purposes of the section 4982
excise tax, the Act applies the mark to market provisions of
the Code and regulations thereunder as if the taxable year
ended on October 31. Also, the Act allows a taxable year RIC,
except as provided in regulations, to elect to ``push'' any net
ordinary loss (determined without regard to ordinary gains and
losses that are automatically ``pushed'' to the next calendar
year) attributable to the portion of the calendar year after
the beginning of the taxable year that begins in the calendar
year to the first day of the next calendar year.
The provision provides that any rule that determines income
by reference to the value of an item on the last day of the
taxable year is treated as a mark to market provision for which
value will be determined on October 31 for purposes of the
excise tax.
The provision allows a RIC to elect to push any portion of
a net ordinary loss to the next calendar year in determining
its ordinary income or net ordinary loss for a calendar year.
Amendments to the Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010 (Pub. L. No. 111-312)
Indexing of amount of reduction of marriage penalty for
earned income credit (Act sec. 103).--The earned income tax
credit in section 32 of the Code is clarified to provide that
the $5,000 amount, by which the phase-out thresholds for
married couples filing jointly are increased, is indexed for
inflation for all taxable years after 2009, not just taxable
years beginning in 2010.
Nonrecognition of gain on rollover of empowerment zone
investments (Act sec. 753).--Code section 1397B provides that
taxpayers can elect to defer recognition of gain on the sale of
a qualified empowerment zone asset held for more than one year
and replaced within 60 days by another qualified empowerment
zone asset in the same zone. The provision clarifies that Code
section 1397B applies to qualified empowerment zone assets
acquired during the period the empowerment zone designation is
in effect.
Amendments to the Creating Small Business Jobs Act of 2010 (Pub. L. No.
111-240)
Failure to furnish correct payee statements (Act sec.
2102).--The provision clarifies that the effective date for the
amendments to both Code sections 6721 and 6722 applies with
respect to both information returns required to be filed and
payee statements required to be furnished on or after January
1, 2011.
Amendments to the American Recovery and Reinvestment Act of
2009, Division B (Pub. L. No. 111-5)
Refundable portion of child credit for certain taxable
years (Act sec. 1003).--The child tax credit in section 24 of
the Code is clarified regarding the determination of the
refundable credit in any taxable years beginning after 2008 and
before 2018. The provision provides that, to the extent that
the child credit exceeds the taxpayer's tax liability, the
taxpayer is eligible for a refundable credit equal to 15
percent of earned income in excess of $3,000 not indexed for
inflation (in lieu of $10,000 indexed for inflation). The
present-law alternative formula for families with three or more
children is unchanged.
American Opportunity Tax Credit (Act sec. 1004).--The Act
includes a reference to ``tuition, fees, and course
materials.'' The reference to course materials was intended to
apply to the Hope credit, but not to the Lifetime learning
credit. The provision corrects this reference to the inclusion
of course materials so that it applies only to the Hope credit
and not to the Lifetime learning credit.
Deduction for State sales tax and excise tax on the
purchase of certain motor vehicles (Act sec. 1008).--The Act
provides an itemized deduction and increased standard deduction
for qualified motor vehicle taxes. The provision strikes Code
section 164(b)(6)(E) (which refers to the last sentence of
section 164(a)) as inoperative, because the taxes referred to
in that last sentence do not include qualified motor vehicle
taxes.
Coordination with renewable energy grants (Act sec.
1104).--The provision provides that grants in lieu of energy
credits under section 1603 of the Act are not includible in
alternative minimum taxable income (including adjusted current
earnings of a corporation). This treatment is consistent with
the treatment of energy credits.
Credits for certain vehicles and refueling property (Act
secs. 1141 and 1142, and secs. 1341 and 1342 of the Energy Tax
Incentives Act of 2005 (Pub. L. No. 109-58)).--The provisions
conform the rules relating to the amount of basis reduction, as
well as the reduction of other credits and deductions, on
account of the credits for certain vehicles and refueling
property under sections 30, 30B, 30C, and 30D of the Code.
Qualifying advanced energy project credit (Act sec.
1302).--The provision restores missing words, clarifying that
the amount subject to the limitation in Code section 48C(b)(3)
is the amount that is treated as the qualified investment.
Regulated investment companies allowed to pass through tax
credit bond credits (Act sec. 1541).--The provision clarifies
that a regulated investment company electing to pass through
credits on tax credit bonds, and its shareholders, are treated
in a manner similar to that which would occur if the company
distributed to its shareholders an amount of money equal to the
amount of the credits passed through.
Special credit for certain government retirees (Act sec.
2202).--The provision clarifies the credit with respect to
treatment of the U.S. possessions. The provision is intended to
operate in a manner similar to the operation of the Making Work
Pay Credit with respect to the U.S. possessions (see H.R. Rep.
111-16, February 12, 2009, at 516-517).
Amendments to the Emergency Economic Stabilization Act of 2008 (Pub. L.
No 110-343)
Division B, the Energy Improvement and Extension Act of
2008
Credit for steel industry fuel (Act Div. B sec. 108).--The
provision clarifies that coke and coke gas produced using fuel
qualifying for a steel industry fuel credit is not eligible for
the credit under present-law section 45K(g).
Temporary increase in coal excise tax; funding of Black
Lung Disability Trust Fund (Act Div. B sec. 113).--The
provision clarifies that the term ``trust fund'' means the
Black Lung Disability Trust Fund.
Accelerated recovery period for depreciation of smart
meters and smart grid systems (Act Div. B sec. 306).--The
provision clarifies that the accelerated recovery period for
smart meters and smart grid systems does not apply to property
with a class life of less than 16 years.
Special depreciation allowance for certain reuse and
recycling property (Act Div. B sec. 308).--Consistent with the
intent of the Act, the provision clarifies that a taxpayer does
not qualify for the special depreciation allowance under this
provision if it elects out of bonus depreciation under Code
section 168(k)(4), which permits a taxpayer to accelerate the
recognition of AMT and research credits in lieu of claiming
bonus depreciation. This conforms to the parallel rule in
section 168(n)(2)(B)(i)(I) (excluding such property from the
definition of qualified disaster assistance property) under the
qualified disaster assistance property provisions.
Special rules in case of foreign oil and gas income (Act
Div. B sec. 402).--The Act expands the foreign oil and gas
extraction income (``FOGEI'') rules to apply to all foreign
income from production and other activity related to the sale
of oil and gas product (the sum of prior-law foreign oil-
related income (``FORI'') and FOGEI). A transition rule in the
Act unintentionally fails to properly apply pre-effective date
law to pre-2009 credit carryforwards. The provision clarifies
that pre-2009 credits carried forward to post-2008 years
continue to be governed by prior law for purposes of
determining the amount of carryforward credits eligible to be
claimed in a post-2008 year.
Broker reporting of customer's basis in securities
transactions (Act Div. B sec. 403).--The provision makes
conforming changes necessitated by the deletion of the defined
term ``open-end fund,'' so that the provision refers to
regulated investment companies rather than open-end funds.
The Act provides a definition of a dividend reinvestment
plan (``DRP''), and also permits use of average cost basis for
stock acquired after December 31, 2010 in connection with a
DRP. The Act further provides that stock acquired before 2012
for which an average basis method is permissible is treated as
a separate account from any such stock acquired after 2011, and
provides an election for a regulated investment company to
treat as a single account all stock held by a customer without
regard to the date of acquisition of the stock. For stock for
which an average basis method is permissible, the Act's basis
reporting requirements apply to stock acquired after December
31, 2011. The provision conforms the effective date for the
availability of an average basis method for DRP stock to the
effective date for the basis reporting requirement for stock
for which an average basis method is permissible by making the
former rule applicable to DRP stock acquired after December 31,
2011 (rather than December 31, 2010). The provision makes a
conforming change to the effective date provision applicable to
required basis reporting related to DRP stock. Under this
change, unless a broker elects otherwise, basis reporting for
DRP stock remains mandatory, as under the Act, only for stock
acquired on or after January 1, 2012.
The provision also clarifies that if an election is made to
treat as a single account all stock acquired in connection with
a DRP, the average basis method is permissible with respect to
all such stock without regard to the date of acquisition of the
stock.
Division C, Tax Extenders and Alternative Minimum Tax
Relief Act of 2008
Qualified investment entities (Act Div. C sec. 208).--The
Act generally extends the inclusion of a RIC within the
definition of a ``qualified investment entity'' under the
FIRPTA rules of section 897 through December 31, 2009. The Act
imposes withholding tax on certain RIC distributions to foreign
shareholders; however, distributions may have been made after
the provision had expired on December 31, 2007, but before the
extension was enacted. The provision clarifies that no
withholding is required for distributions that were made on or
before the date of enactment (October 4, 2008). The provision
also clarifies that a RIC is not liable to a foreign
shareholder to whom a distribution was made before October 4,
2008, for amounts that were withheld from such a distribution
and paid over to the Secretary.
Extension of 15-year straight-line cost recovery for
qualified leasehold improvements and qualified restaurant
improvements; 15-year straight-line cost recovery for certain
improvements to retail space (Act Div. C sec. 305).--The Act
expands the application of the 15-year MACRS recovery period to
restaurant property, for property placed in service after
December 31, 2008, and to a new category of retail improvement
property, also for property placed in service after December
31, 2008. Both of these rules provide that bonus depreciation
generally is not available for such property. The provision
clarifies, however, that assets that qualify as both qualified
leasehold improvement property and either qualified restaurant
property or qualified retail improvement property qualify for
bonus depreciation, consistent with the legislative intent with
respect to assets that overlap in this manner.
Amendments to the Heroes Earnings Assistance and Relief Tax Act of
2008 (Pub. L. No. 110-245)
Special period of limitation when uniformed services
retired pay is reduced as result of award of disability
compensation (Act sec. 106).--The provision clarifies that the
date of enactment, June 17, 2008, applies for purposes of the
portion of the transition rule specifying what date should be
substituted for the date of the determination.
Disposition of unused health benefits in flexible spending
accounts (Act sec. 114).--The Act provides that a plan does not
fail to be treated as a cafeteria plan or health FSA merely
because the plan provides for qualified reservist
distributions. The provision clarifies that a plan does not
fail to be treated as an accident or health plan under Code
section 105 merely because it provides for qualified reservist
distributions.
Amendments to the Economic Stimulus Act of 2008 (Pub. L. No. 110-185)
2008 recovery rebates for individuals (Act sec. 101).--The
provision clarifies that summary assessment procedures can
apply with respect to the omission of any correct valid
identification number that is required.
Amendments to the Tax Technical Corrections Act of 2007 (Pub. L. No.
110-172)
Act section 4(c).--The provision reinstates a part of Code
section 911, relating to the netting of disallowed deductions
against excluded income that was inadvertently deleted by the
Act.
Amendments to the Tax Relief and Health Care Act of 2006 (Pub. L. No.
109-432)
WOTC and Indian employment credit (Act sec. 105).--Code
section 45A(b)(1)(B) coordinates the Indian employment credit
with WOTC. It provides that wages are not taken into account
during the one-year period beginning on the date the individual
begins work for the employer if wages are taken into account
under WOTC. In 2006, a second year was added to WOTC for long-
term family assistance recipients (section 51(e)). The
provision clarifies that the two-year period is taken into
account for purposes of section 45A(b)(1)(B) if any portion of
wages are taken into account under subsection (e)(1)(A) of
section 51.
Amendments to the Safe, Accountable, Flexible, Efficient Transportation
Equity Act of 2005: A Legacy for Users (SAFETY-LU) (Pub. L. No.
109-59)
Transfer to Highway Trust Fund of amounts equivalent to
certain taxes and penalties (Act sec. 11161).--The taxes on
aviation fuel and aviation gasoline, imposed on removal from a
terminal directly into the fuel tank of an aircraft, are
credited to the Airport and Airways Trust Fund (sec.
9502(b)(1)(D)). The provision makes a technical amendment to
section 9503(b)(1)(D) to clarify that the Highway Trust Fund is
not credited with these same amounts.
Amendments to the American Jobs Creation Act of 2004 (Pub. L. No. 108-
357)
ETI and Code section 199 circularity (Act sec. 101).--The
provision incorporates an ordering rule for purposes of section
114 of the Code that requires the computation of the section
114 extraterritorial income (``ETI'') exclusion without regard
to the section 199 deduction. Under this ordering rule, a
taxpayer must first compute the amount of the section 114
exclusion, determined without regard to the section 199
deduction, before the taxpayer computes its section 199
deduction. As under present law, any amount excluded from gross
income pursuant to section 114 continues to be taken into
account in determining qualified production activities income
(``QPAI''). The provision is consistent with technical
corrections previously made to provide ordering rules to avoid
circular calculations resulting from the interaction between
the computations under section 199 and sections 163(j), 170,
and 613A.
Section 199 W-2 wages (Act sec. 102).--Section 199(b)(2)(A)
provides that the amounts included as W-2 wages are only those
amounts paid during the calendar year ending during the taxable
year of a taxpayer. In some instances, this results in taxable
years in which no W-2 wages are included (e.g., short years
that do not include December 31). Consequently, in such
instances, the taxpayer may be precluded from claiming a
section 199 deduction due to the W-2 wage limitation. Although
section 199(b)(3) provides the Secretary with authority to
address cases in which there may be a short taxable year as a
result of a taxpayer's acquisition or disposition of a trade or
business (or a major portion of a separate unit of a trade or
business), it does not provide explicit authority to address
other circumstances that result in a short taxable year (e.g.,
change in accounting period).
The provision provides the Secretary the authority to issue
guidance for short taxable years (outside of the context of an
acquisition or disposition) permitting the allocation of W-2
wages to a short taxable year that does not include the end of
a calendar year. For example, the Secretary may issue guidance
that permits a taxpayer to allocate a portion of the annual W-2
wages to a short taxable year that does not include the end of
the calendar year and the full amount of such W-2 wages to the
subsequent 12-month taxable year that includes such calendar
year end.
Clerical corrections
The Act makes clerical and typographical corrections.
B. Deadwood Provisions (sec. 221 of the Act)
A number of provisions in the Internal Revenue Code are not
used in computing current taxes and thus are obsolete. These
provisions are referred to as ``deadwood.'' The Act repeals 16
sections of the Code and repeals or amends portions of more
than 100 other sections of the Code to remove deadwood. The Act
does not change substantive law.
The amendments relating to deadwood made by the Act are
effective on the date of enactment (December 19, 2014). The Act
includes savings provisions to mitigate the effects of
repealing the deadwood items in the event those items have any
remaining applicability to past transactions. For example, if a
transfer of property took place before the date of enactment,
the basis of the property is not changed by reason of any
provision of the Act that amends a Code section relating to the
determination of basis.
TITLE III--JOINT COMMITTEE ON TAXATION
A. Increased Refund and Credit Threshold for Joint Committee on
Taxation Review of C Corporation Return (sec. 301 of the Act and sec.
6405 of the Code)
Present Law
No refund or credit in excess of a specified dollar
threshold of any income tax, estate or gift tax, or certain
other specified taxes, may be made until 30 days after the date
a report on the refund is provided to the Joint Committee on
Taxation.\587\ The specified dollar threshold for review is
$2,000,000. A report is also required in the case of certain
tentative refunds. Additionally, the staff of the Joint
Committee on Taxation conducts post-audit reviews of large
deficiency cases and other select issues.
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\587\ Sec. 6405.
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Explanation of Provision
The provision increases the threshold above which refunds
must be submitted to the Joint Committee on Taxation for review
from $2,000,000 to $5,000,000 in the case of a C
corporation.\588\ The staff of the Joint Committee on Taxation
continues to be authorized to conduct a program of expanded
post-audit reviews of large deficiency cases and other select
issues.
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\588\ A C corporation is a corporation which is not an S
corporation for the taxable year (sec. 1361(a)(2)).
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Effective Date
The provision is effective on the date of enactment
(December 19, 2014), except that the higher threshold does not
apply to a refund or credit with respect to which a report was
made before the date of enactment.
DIVISION B--STEPHEN BECK, JR., ACHIEVING A BETTER LIFE EXPERIENCE ACT
OF 2014 OR THE STEPHEN BECK, JR., ABLE OF ACT 2014
TITLE I--QUALIFIED ABLE PROGRAMS
A. Qualified Able Programs (secs. 101-105 of the Act and section 529
and new section 529A of the Code)
Present Law
In general
Although present law does not contain tax-advantaged
savings vehicles specifically targeted to persons with
disabilities, present law does contain other tax-advantaged
savings vehicles, as well as a trust and estates provision
intended for those with disabilities. Below is a description of
one such savings vehicle and that trust and estates provision.
Section 529 qualified tuition programs
A qualified tuition program is a program established and
maintained by a State or agency or instrumentality thereof, or
by one or more eligible educational institutions, which
satisfies certain requirements and under which a person may
purchase tuition credits or certificates on behalf of a
designated beneficiary that entitle the beneficiary to the
waiver or payment of qualified higher education expenses of the
beneficiary (a ``prepaid tuition program''). In the case of a
program established and maintained by a State or agency or
instrumentality thereof, a qualified tuition program also
includes a program under which a person may make contributions
to an account that is established for the purpose of satisfying
the qualified higher education expenses of the designated
beneficiary of the account, provided it satisfies certain
specified requirements (a ``savings account program''). Under
both types of qualified tuition programs, a contributor
establishes an account for the benefit of a particular
designated beneficiary to provide for that beneficiary's higher
education expenses. Section 529 provides specified income tax
and transfer tax rules for the treatment of accounts and
contracts established under qualified tuition programs.\589\
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\589\ For purposes of this description, the term ``account'' is
used interchangeably to refer to a prepaid tuition benefit contract or
a tuition savings account established pursuant to a qualified tuition
program.
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For this purpose, qualified higher education expenses means
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an
eligible educational institution, and expenses for special
needs services in the case of a special needs beneficiary that
are incurred in connection with such enrollment or attendance.
Qualified higher education expenses generally also include room
and board for students who are enrolled at least half-time.
Contributions to a qualified tuition program must be made
in cash. Section 529 does not impose a specific dollar limit on
the amount of contributions, account balances, or prepaid
tuition benefits relating to a qualified tuition account;
however, the program is required to have adequate safeguards to
prevent contributions in excess of amounts necessary to provide
for the beneficiary's qualified higher education expenses.
Contributions generally are treated as a completed gift
eligible for the gift tax annual exclusion. Contributions are
not tax deductible for Federal income tax purposes, although
they may be deductible for State income tax purposes. Amounts
in the account accumulate on a tax-deferred basis (i.e., income
on accounts under the program is not subject to current income
tax).
A qualified tuition program may not permit any contributor
to, or designated beneficiary under, the program to direct
(directly or indirectly) the investment of any contributions
(or earnings thereon) and must provide separate accounting for
each designated beneficiary.\590\ A qualified tuition program
may not allow any interest in an account or contract (or any
portion thereof) to be used as security for a loan.
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\590\ However, see IRS Notice 2001-55, 2001-2 C.B. 299, which
provides that a program does not violate the investment restriction
under section 529(b)(4) if it permits a change in the investment
strategy selected for a section 529 account once per calendar year, and
upon a change in the designated beneficiary of the account.
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Distributions from a qualified tuition program are
excludable from the distributee's gross income to the extent
that the total distribution does not exceed the qualified
higher education expenses incurred for the beneficiary. If a
distribution from a qualified tuition program exceeds the
qualified higher education expenses incurred for the
beneficiary, the portion of the excess that is treated as
earnings generally is subject to income tax and an additional
10-percent tax. Amounts in a qualified tuition program may be
rolled over without income tax liability to another qualified
tuition program for the same beneficiary or for a member of the
family of that beneficiary.
In general, prepaid tuition contracts and tuition savings
accounts established under a qualified tuition program involve
prepayments or contributions made by one or more individuals
for the benefit of a designated beneficiary. Decisions with
respect to the contract or account are made by an individual
who is not the designated beneficiary. Qualified tuition
accounts or contracts generally require the designation of a
person (generally referred to as an ``account owner'') \591\
whom the program administrator (oftentimes a third party
administrator retained by the State or by the educational
institution that established the program) may look to for
decisions, recordkeeping, and reporting with respect to the
account established for a designated beneficiary. The person or
persons who make the contributions to the account need not be
the same person who is regarded as the account owner for
purposes of administering the account. Under many qualified
tuition programs, the account owner generally has control over
the account or contract, including the ability to change
designated beneficiaries and to withdraw funds at any time and
for any purpose. Thus, in practice, qualified tuition accounts
or contracts generally involve a contributor, a designated
beneficiary, an account owner (who oftentimes is not the
contributor or the designated beneficiary), and an
administrator of the account or contract.
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\591\ Section 529 refers to contributors and designated
beneficiaries, but does not define or otherwise refer to the term
``account owner,'' which is a commonly used term among qualified
tuition programs.
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Treatment of savings accounts under Federal programs \592\
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\592\ The description in this paragraph was prepared by the staff
of the Ways and Means Human Resources Subcommittee.
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Means-tested programs typically include income and
resources limits designed to properly target benefits to
individuals with limited income and other financial resources
on which to depend for support. Income is the money an
individual receives in a month from wages and other sources
while resources are savings and other items of significant
value that individuals may own, such as a home or vehicle.
Income and resources limits vary from program to program and
sometimes from State to State for State-administered programs
such as Medicaid. The Supplemental Security Income (``SSI'')
program is Federally-administered and has a $2,000 resource
limit for individuals. In most States, SSI receipt confers
Medicaid eligibility. When SSI recipients have income and
resources over the limit, their SSI benefits are suspended but
they remain eligible for Medicaid.
Use of a trust to provide for the needs of a disabled person
In general
A specially designed trust, sometimes referred to as
special needs trusts or supplemental needs trust, may be used
to provide financial assistance to a disabled person (the trust
beneficiary) without disqualifying the beneficiary for certain
government benefits, such as Medicaid. The trust may be
established using the disabled person's own funds (a self-
settled trust) or the funds of a third party who does not have
a legal obligation to support the trust beneficiary (a third-
party trust).
The assets of a carefully drafted third-party trust
generally are not counted when determining the beneficiary's
eligibility for Medicaid. Assets held in a self-settled trust,
however, generally are counted when determining Medicaid
eligibility unless, for example, the trust is described in
section 1917(d)(4)(A) of the Social Security Act. That section
describes a trust: (1) containing the assets of an individual
who is disabled (within the meaning of section 1614(a)(3) of
the Social Security Act); (2) which is established for the
benefit of the individual by a parent, grandparent, legal
guardian, or a court; and (3) pursuant to the terms of which
the State will be reimbursed upon the individual's death for
the total amount of medical assistance paid on behalf of the
individual under the State's Medicaid plan, up to the amount of
the assets remaining in the trust upon the death of the
individual.
Income tax deduction for qualified disability trusts
Under present law, a qualified disability trust is allowed
a deduction for a personal exemption equal to that of an
unmarried individual (for 2014, $3,900 subject to phaseout if
adjusted gross income exceeds $254,200)).\593\
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\593\ Sec. 642(b)(2)(C). The exemption amount of a trust generally
is either $100 or $300 (if required to distribute all its income
currently).
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In addition, amounts distributed to a child who is a
beneficiary of a qualified disability trust are treated as
earned income for purposes of the ``kiddie'' tax and thus are
not taxed at parents' tax rates.\594\
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\594\ Sec. 1(g)(4)(C).
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For these purposes a qualified disability trust means a
disability trust described in section 1917(c)(2)(B)(iv) of the
Social Security Act \595\ all the beneficiaries of which are
determined to be disabled (within the meaning of section
1614(a)(3) of that Act).
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\595\ Section 1917(c)(2)(B)(iv) of the Social Security Act
describes trusts, including disability trusts described in section
1917(d)(4) of that Act, established solely for the benefit of an
individual under 65 years of age who is disabled (within the meaning of
section 1614(a)(3) of that Act).
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Reasons for Change
The Congress recognized the special financial burdens borne
by families raising children with disabilities and the fact
that increased financial needs generally continue throughout
the child's lifetime. Present law provided for various types of
tax-advantaged savings arrangements; however, none of these
arrangements adequately served the goal of promoting saving for
these financial needs. The creation of qualified ABLE programs
with tax-favored treatment of ABLE accounts for eligible
beneficiaries will assist families and disabled individuals in
meeting their financial needs.
Explanation of Provision
In general
The provision provides rules for a new type of tax-favored
savings program, qualified ABLE programs. A qualified ABLE
program is a program established and maintained by a State or
agency or instrumentality thereof. A qualified ABLE program
must meet the following conditions: (1) under the provisions of
the program, contributions may be made to an account (an ``ABLE
account''), established for the purpose of meeting the
qualified disability expenses of the designated beneficiary of
the account; (2) the program must limit a designated
beneficiary to one ABLE account; (3) the program must allow for
the establishment of ABLE accounts only for a designated
beneficiary who is either a resident of the State maintaining
such ABLE program or a resident of a State that has not
established an ABLE program (a ``contracting State'') which has
entered into a contract with such State to provide the
contracting State's residents with access to the State's ABLE
program; and (4) the program must meet certain other
requirements discussed below. A qualified ABLE program is
generally exempt from income tax, but is otherwise subject to
the taxes imposed on the unrelated business income of tax-
exempt organizations.
A designated beneficiary of an ABLE account is the owner of
the ABLE account. A designated beneficiary must be an eligible
individual (defined below) who established the ABLE account and
who is designated at the commencement of participation in the
qualified ABLE program as the beneficiary of amounts paid (or
to be paid) into and from the program.
Contributions to an ABLE account must be made in cash and
are not deductible for Federal income tax purposes. Under the
provision, except in the case of a rollover contribution from
another ABLE account, an ABLE account must provide that it may
not receive aggregate contributions during a taxable year in
excess of the amount under section 2503(b) of the Code (the
annual gift tax exemption). For 2014, this is $14,000.\596\
Additionally, a qualified ABLE program must provide adequate
safeguards to ensure that ABLE account contributions do not
exceed the limit imposed on accounts under the qualified
tuition program\597\ of the State maintaining the qualified
ABLE program. Amounts in the account accumulate on a tax-
deferred basis (i.e., income on accounts under the program is
not subject to current income tax).
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\596\ This amount is indexed for inflation. In the case that
contributions to an ABLE account exceed the annual limit, an excise tax
in the amount of six percent of the excess contribution to such account
is imposed on the designated beneficiary. Such tax does not apply in
the event that the trustee of such account makes a corrective
distribution of such excess amounts by the due date (including
extensions) of the individual's tax return for the taxable year in
which the contribution was made.
\597\ As described in Present Law, rules for qualified tuition
programs are contained in section 529.
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A qualified ABLE program may permit a designated
beneficiary to direct (directly or indirectly) the investment
of any contributions (or earnings thereon) no more than two
times in any calendar year and must provide separate accounting
for each designated beneficiary. A qualified ABLE program may
not allow any interest in the program (or any portion thereof)
to be used as security for a loan.
Distributions from an ABLE account are generally includible
in the distributee's income to the extent consisting of
earnings on the account.\598\ Distributions from an ABLE
account are excludable from income to the extent that the total
distribution does not exceed the qualified disability expenses
of the designated beneficiary during the taxable year. If a
distribution from an ABLE account exceeds the qualified
disability expenses of the designated beneficiary, a pro rata
portion of the distribution is excludable from income. The
portion of any distribution that is includible in income is
subject to an additional 10-percent tax unless the distribution
is made after the death of the beneficiary. Amounts in an ABLE
account may be rolled over without income tax liability to
another ABLE account for the same beneficiary\599\ or another
ABLE account for the designated beneficiary's brother, sister,
stepbrother or stepsister who is also an eligible individual.
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\598\ The rules of section 72 apply in determining the portion of a
distribution that consists of earnings.
\599\ For instance, if a designated beneficiary were to relocate to
a different State.
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Under the provision, except in the case of an ABLE account
established in a different ABLE program for purposes of
transferring ABLE accounts,\600\ no more than one ABLE account
may be established by a designated beneficiary. Thus, once an
ABLE account has been established by a designated beneficiary,
no account subsequently established by such beneficiary shall
be treated as an ABLE account. The provision provides the
Secretary of the Treasury (``Secretary'') with the authority to
prescribe regulations to enforce the one ABLE account
limitation.
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\600\ In which case the contributor ABLE account must be closed 60
days after the transfer to the new ABLE account is made.
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Under the provision, a contribution to an ABLE account is
treated as a completed gift of a present interest to the
designated beneficiary of the account. Such contributions
qualify for the per-donee annual gift tax exclusion ($14,000
for 2014) and, to the extent of such exclusion, are exempt from
the generation skipping transfer (``GST'') tax. A distribution
from an ABLE account generally is not subject to gift tax or
GST tax.
Eligible individuals
As described above, under the provision a qualified ABLE
program may provide for the establishment of ABLE accounts only
if those accounts are established and owned by an eligible
individual, such owner referred to as a designated beneficiary.
For these purposes, an eligible individual is an individual
either (1) for whom a disability certification has been filed
with the Secretary for the taxable year, or (2) who is entitled
to Social Security Disability Insurance benefits or SSI
benefits\601\ based on blindness or disability, and such
blindness or disability occurred before the individual attained
age 26.
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\601\ These are benefits, respectively, under Title II or Title XVI
of the Social Security Act.
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A disability certification means a certification to the
satisfaction of the Secretary, made by the eligible individual
or the parent or guardian of the eligible individual, that the
individual has a medically determinable physical or mental
impairment, which results in marked and severe functional
limitations, and which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than 12 months, or is blind (within the
meaning of section 1614(a)(2) of the Social Security Act). Such
blindness or disability must have occurred before the date the
individual attained age 26. Such certification must include a
copy of the diagnosis of the individual's impairment and be
signed by a licensed physician.\602\
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\602\ No inference may be drawn from a disability certification for
purposes of eligibility for Social Security, SSI or Medicaid benefits.
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As discussed further below, the provision provides that,
not later than six months after the date of enactment, the
Secretary shall develop regulations or other guidance on
certain aspects of the proposal. Among these aspects are
regulations, to be developed in consultation with the
Commissioner of Social Security, relating to disability
certifications and determinations of disability including those
conditions which are deemed to have occurred prior to age 26.
It is intended that individuals with those conditions shall be
required to present only limited (or no) evidence demonstrating
that the condition occurred prior to age 26. This list of
conditions should operate in a manner similar to the SSA's
Compassionate Allowances, which targets the most obviously
disabled individuals for allowances based on objective medical
information that can be obtained quickly. Compassionate
Allowances are selected using information received at public
outreach hearings, comments received from the Social Security
and Disability Determination Services communities, the counsel
of medical and scientific experts, and research conducted by
the National Institutes of Health.
Qualified disability expenses
As described above, the earnings on distributions from an
ABLE account are excluded from income only to the extent total
distributions do not exceed the qualified disability expenses
of the designated beneficiary. For this purpose, qualified
disability expenses are any expenses related to the eligible
individual's blindness or disability which are made for the
benefit of the designated beneficiary. Such expenses include
the following expenses: education, housing, transportation,
employment training and support, assistive technology and
personal support services, health, prevention and wellness,
financial management and administrative services, legal fees,
expenses for oversight and monitoring, funeral and burial
expenses, and other expenses, which are approved by the
Secretary under regulations and consistent with the purposes of
the provision.
Reporting requirements
Under the provision, each officer or employee having
control of the qualified ABLE program (or their designee) is
required to make reports to the Secretary and to the designated
beneficiaries of ABLE accounts. Such reports must provide
information with respect to contributions, distributions, the
return of excess contributions, and other matters as required
by the Secretary.
The provision also requires that a qualified ABLE program
submit a notice to the Secretary upon the establishment of the
ABLE account. Such notice shall contain the name and State of
residence of the beneficiary, and other such information as the
Secretary may require.
These reports and notices must be filed at such time and in
such manner as required by the Secretary. A penalty of $50 may
apply with respect to any failure to provide a required report
or notice.
For purposes of the rules relating to eligibility for SSI
(discussed below), officers and employees having control of a
qualified ABLE program must submit statements on account
balances and distributions from all ABLE accounts to the
Commissioner of the Social Security Administration. The
statements must be submitted electronically on at least a
monthly basis in the manner specified by the Commissioner of
the Social Security Administration.
In addition, for research purposes, the Secretary shall
make available to the public reports containing aggregate
information, by diagnosis and other relevant characteristics,
on contributions and distributions to and from qualified ABLE
programs. However, an item of information may not be made
publicly available if it can be associated with, or otherwise
identify, directly or indirectly, a particular individual.
Transfer to State
Under the provision, in the event that the designated
beneficiary dies, subject to any outstanding payments due for
qualified disability expenses incurred by the designated
beneficiary, all amounts remaining in the deceased designated
beneficiary's ABLE account not in excess of the amount equal to
the total medical assistance paid such individual under any
State Medicaid plan established under title XIX of the Social
Security Act shall be distributed to such State upon filing of
a claim for payment by such State. Such repaid amounts shall be
net of any premiums paid from the account or by or on behalf of
the beneficiary to the State's Medicaid Buy-In program.
Regulations
The Secretary is directed to issue regulations or other
guidance as the Secretary determines is necessary or
appropriate to carry out the purposes of the qualified ABLE
program rules, including regulations (1) to enforce the one
ABLE account per eligible individual limit; (2) providing for
the information required to be presented to open an ABLE
account; (3) to generally define disability expenses; (4)
relating to disability certifications and determinations of
disability, to be developed in consultation with the
Commissioner of Social Security, as discussed above; (5) to
prevent fraud and abuse with respect to amounts claimed as
qualified disability expenses; (6) under the estate tax, gift
tax, and generation-skipping transfer tax provisions of the
Code; and (7) to allow for transfers from one ABLE account to
another ABLE account. The Secretary is directed to issue such
regulations or other guidance no later than six months after
the date of enactment.
Treatment of ABLE accounts under Federal programs
Under the provision, any amounts in an ABLE account, and
any distribution for qualified disability expenses, shall be
disregarded for purposes of determining eligibility to receive,
or the amount of, any assistance or benefit authorized by any
Federal means-tested program. However, in the case of the SSI
program, a distribution for housing expenses is not
disregarded, nor are amounts in an ABLE account in excess of
$100,000. In the case that an individual's ABLE account balance
exceeds $100,000, such individual's SSI benefits shall not be
terminated, but instead shall be suspended until such time as
the individual's resources fall below $100,000. However, such
suspension shall not apply for purposes of Medicaid
eligibility.
Treatment of ABLE accounts in bankruptcy
Property of a bankruptcy estate may not include certain
amounts contributed to an ABLE account, if the designated
beneficiary of such account was a child, stepchild, grandchild
or stepgrandchild of the debtor during the taxable year in
which funds were placed in the account. Such funds shall be
excluded from the bankruptcy estate only to the extent that
they were contributed to an ABLE account at least 365 days
prior to the filing of the title 11 petition, are not pledged
or promised to any entity in connection with any extension of
credit, and are not excess contributions as defined in new
section 4973(h). In the case of funds contributed to an ABLE
account that are contributed not earlier than 720 days (and not
later than 365 days) prior to the filing of the petition, only
up to $6,225 may be excluded.
Investment direction for qualified tuition programs
The provision includes a modification of the present-law
restriction on investment direction for qualified tuition
programs. The provision permits a contributor to, or designated
beneficiary of, a qualified tuition program, to direct the
investment of any contributions to the program (or any earnings
thereon), directly or indirectly, no more than two times in any
calendar year. This rule is consistent with the rule provided
for designated beneficiaries under new Code section 529A.
Effective Date
The amendments made by the provision relating to the
establishment of ABLE programs are effective for taxable years
beginning after December 31, 2014. The directive that the
Secretary issue regulations within six months and the disregard
of ABLE accounts and distributions from such accounts in the
case of certain means-tested Federal programs are effective on
the date of enactment (December 19, 2014).
TITLE II--OFFSETS \603\
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\603\ The offsets described herein are revenue provisions.
Provisions included in the Act that reduce Federal spending (sections
201-205 of the Act) are not discussed.
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A. Modification Relating to Inland Waterways Trust Fund Financing Rate
(sec. 205 of the Act and sec. 4042 of the Code)
Present Law
The Code imposes a tax of 20 cents per gallon on fuel used
in a vessel in commercial waterway transportation to fund the
Inland Waterways Trust Fund. Commercial waterway transportation
means any use of a vessel on any inland or intracoastal
waterway of the United States in the business of transporting
property for compensation or hire, or in transporting property
in the business of the owner, lessee, or operator of the vessel
(other than fish or other aquatic animal life caught on the
voyage).
The Code provides several exemptions from the tax. The tax
does not apply to fuel for vessels primarily used for passenger
transportation. Nor does it apply to fuel used in deep-draft
ocean-going vessels. Additional exemptions are provided for
fuels used by State and local governments in transporting
property in governmental business and for fuels used by tugs
moving LASH (lighter-aboard-ships) and seabee oceangoing barges
released by their oceangoing carriers solely to pick up or
deliver international cargoes.
The Army Corps of Engineers is responsible for the
construction, operation and maintenance of inland waterway
infrastructure. Present law allows up to 50 percent of the cost
of construction projects to be funded by the Inland Waterway
Trust Fund, the remainder to be funded from general revenues.
Explanation of Provision
The provision changes the rate of tax on fuel used in a
vessel in commercial waterway transportation from 20 cents per
gallon to 29 cents per gallon.
Effective Date
The provision is effective for fuel used after March 31,
2015.
B. Certified Professional Employer Organizations (sec. 206 of the Act
and new secs. 3511, 6652(n), and 7705 of the Code)
Present Law
Background on professional employer organizations
``Professional employer organization'' is a term used for a
firm that provides employees to perform services in the
businesses of the professional employer organization's
customers, often small and medium-sized businesses.\604\ In
many cases, before the professional employer organization
arrangement is entered into, the employees already work in the
customer's business as employees of the customer. The terms of
a professional employer organization arrangement typically
provide that the professional employer organization is the
employer of the employees and is responsible for paying the
employees and for the related employment tax compliance. The
customer typically pays the professional employer organization
a fee based on payroll costs plus an additional amount.\605\
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\604\ ``Professional employer organization'' (or ``PEO'') is not a
legal term with a specific definition. The term ``employee leasing
company'' is also sometimes used and is also not a legal term with a
specific definition. When used, these terms can refer to any of a
variety of arrangements.
\605\ A professional employer organization may also provide
employees with employee benefit coverage, such as under a retirement
plan or a health plan, even if the customer does not maintain such a
plan. In that case, the fee paid by the customer also covers employee
benefit costs.
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In some cases, the employees provided to work in the
customer's business are legally the employees of the customer,
and the customer is legally responsible for employment tax
compliance. Nonetheless, customers generally rely on the
professional employer organization for employment tax
compliance (without designating the professional employer
organization as a reporting agent, as discussed below) and
treat the employees as employees of the professional employer
organization.
Employment taxes
Employment taxes generally consist of the taxes under the
Federal Insurance Contributions Act (``FICA''), the taxes under
the Railroad Retirement Tax Act (``RRTA''), the tax under the
Federal Unemployment Tax Act (``FUTA''), and income taxes
required to be withheld by employers from wages paid to
employees (``income tax withholding'').\606\
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\606\ Secs. 3101-3128 (FICA), 3201-3241 (RRTA), 3301-3311 (FUTA),
and 3401-3404 (income tax withholding). Sections 3501-3510 provide
additional rules.
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FICA tax consists of two parts: (1) old age, survivor, and
disability insurance (``OASDI''), which correlates to the
Social Security program that provides monthly benefits after
retirement, disability, or death; and (2) Medicare hospital
insurance (``HI''). The OASDI tax rate is 6.2 percent on both
the employee and employer (for a total rate of 12.4 percent).
The OASDI tax rate applies to remuneration up to the OASDI wage
base for the calendar year ($117,000 for 2014). The HI tax rate
is 1.45 percent on both the employee and the employer (for a
total rate of 2.9 percent). Unlike the OASDI tax, the HI tax is
not limited by a wage base; all remuneration that otherwise
meets the definition of wages for FICA purposes is subject to
HI tax.\607\
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\607\ Beginning 2013, the employee portion of the HI tax under FICA
(not the employer portion) is increased by an additional tax of 0.9
percent on wages received in excess of a threshold amount. The
threshold amount is $250,000 in the case of a joint return, $125,000 in
the case of a married individual filing a separate return, and $200,000
in any other case.
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RRTA taxes consist of tier 1 taxes and tier 2 taxes. Tier 1
taxes parallel the OASDI and HI taxes applicable to employers
and employees. Tier 2 taxes consist of employer and employee
taxes on railroad compensation up to the tier 2 wage base for
the calendar year ($87,000 for 2014).
Under FUTA, employers must pay a tax of six percent of
wages up to the FUTA wage base of $7,000. An employer may take
a credit against its FUTA tax liability for its contributions
to a State unemployment fund and, in certain cases, an
additional credit for contributions that would have been
required if the employer had been subject to a higher
contribution rate under State law. For purposes of the credit,
the term ``contributions'' means payments required by State law
to be made by an employer into an unemployment fund, to the
extent the payments are made by the employer without being
deducted or deductible from employees' remuneration.
Employers are required to withhold income taxes from wages
paid to employees. Withholding rates vary depending on the
amount of wages paid, the length of the payroll period, and the
number of withholding allowances claimed by the employee.
Wages paid to employees, and FICA, RRTA, and income taxes
withheld from the wages, are required to be reported on
employment tax returns, generally on a quarterly basis, and on
Form W-2.\608\ Employment taxes are required to be deposited
(that is, paid to the IRS) within a certain period after
liability for the taxes arises (that is, after wages are
paid).\609\ The period within which employment taxes must be
deposited depends on the amount of liability for a preceding 12
month period.
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\608\ Secs. 6011 and 6051.
\609\ Sec. 6656.
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Employment taxes generally apply to all remuneration paid
by an employer to an employee. In addition, various exclusions
apply to certain types of remuneration or certain types of
services, which may depend on the type of employer for whom an
employee performs services.\610\ For example, remuneration
(subject to a dollar limit) paid to an employee by a tax-exempt
organization is excluded from wages for FICA purposes, and
services performed in the employ of certain tax-exempt
organizations are excluded from employment for FUTA
purposes.\611\ In addition, various definitions and special
rules apply to certain types of employers.\612\
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\610\ See, for example, secs. 3121(a) and (b), 3231(e), 3306(b) and
(c), and 3401(a).
\611\ Secs. 3121(a)(16) and 3306(c)(8).
\612\ See, for example, secs. 3121, 3122, 3125, 3126, 3127, 3231,
3306, 3308, 3309, 3401(a), 3404, 3506, and 3510.
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Similarly, as indicated above, remuneration with respect to
employment with a particular employer for a year is excepted
from OASDI, RRTA tier 1 or tier 2, or FUTA taxes to the extent
it exceeds the applicable OASDI, RRTA tier 1 or tier 2, or FUTA
wage base.\613\ In contrast, if an employee works for multiple
employers during a year, a separate wage base generally applies
in determining each employer's tax liability with respect to
remuneration for employment with each employer.\614\ However, a
single wage base applies in certain cases in which an employer
(a ``successor'' employer) takes over the business of another
employer (the ``predecessor'' employer) and employs the
employees of the predecessor employer.
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\613\ An employee is subject to OASDI or RRTA tax only with respect
to remuneration up to the applicable wage base for a year, regardless
of whether the employee works for only one employer or for more than
one employer during the year. If, as a result of working for more than
one employer, OASDI or RRTA tax is withheld with respect to
remuneration above the applicable wage base, the employee is allowed a
credit under section 31(b).
\614\ A single wage base applies with respect to remuneration for
employment with a particular employer for a year, regardless of whether
the remuneration for that employment is paid solely by the employer or
is paid in part (or instead) by another person who is not an employer
of the employee. In a case in which (1) an employee works for an
employer that, during a year, enters into an arrangement with a
professional employer organization as a customer of the professional
employer organization and (2) the employee continues to perform
services for the customer pursuant to the arrangement, whether a single
wage base applies with respect to remuneration already paid for the
year by the customer and remuneration paid by the professional employer
organization depends on whether the professional employer organization
is an employer of the employee. See IRS Chief Counsel Advice 200017041,
March 3, 2000, for a discussion of this issue.
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Responsibility for employment tax compliance
Employment tax responsibility generally rests with the
person who is the employer of an employee under a common-law
test that has been incorporated into Treasury regulations.\615\
Under the regulations, an employer-employee relationship
generally exists if the person for whom services are performed
has the right to control and direct the individual who performs
the services, not only as to the result to be accomplished by
the work, but also as to the details and means by which that
result is accomplished. That is, an employee is subject to the
will and control of the employer, not only as to what is to be
done, but also as to how it is to be done. It is not necessary
that the employer actually control the manner in which the
services are performed, rather it is sufficient that the
employer have a right to control. Whether the requisite control
exists is determined on the basis of all the relevant facts and
circumstances. The test of whether an employer-employee
relationship exists often arises in determining whether a
worker is an employee or an independent contractor. However,
the same test applies in determining whether a worker is an
employee of one person or another.
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\615\ Treas. Reg. secs. 31.3121(d)-1(c)(1), 31.3306(i)-1(a), and
31.3401(c)-1. A similar concept applies for RRTA purposes under Treas.
Reg. sec. 31.3231(b)-1(a)(1)(i).
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In some cases, a person other than the common-law employer
(a ``third party'') may be liable for employment taxes. For
example, if wages are paid to an employee by a third party and
the third party, rather than the employer, has control of the
payment of the wages, the third party is the statutory employer
responsible for complying with applicable employment tax
requirements.\616\ In addition, an employer may designate an
agent to be responsible for FICA tax and income tax withholding
compliance,\617\ including filing employment tax returns and
issuing Forms W-2 to employees.\618\ In that case, the agent
and the employer are jointly and severally liable for
compliance.\619\
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\616\ Sec. 3401(d)(1) (for purposes of income tax withholding, if
the employer does not have control of the payment of wages, the person
having control of the payment of such wages is treated as the
employer); Otte v. United States, 419 U.S. 43 (1974) (the person who
has the control of the payment of wages is treated as the employer for
purposes of withholding the employee's share of FICA from wages); In re
Armadillo Corporation, 561 F.2d 1382 (10th Cir. 1977), and In re The
Laub Baking Company v. United States, 642 F.2d 196 (6th Cir. 1981) (the
person who has control of the payment of wages is the employer for
purposes of the employer's share of FICA and FUTA). The mere fact that
wages are paid by a person other than the employer does not necessarily
mean that the payor has control of the payment of the wages. Rather,
control depends on the facts and circumstances. See, for example,
Consolidated Flooring Services v. United States, 38 Fed. Cl. 450
(1997), and Winstead v. United States, 109 F. 2d 989 (4th Cir. 1997).
\617\ The designated reporting agent rules generally do not apply
for purposes of FUTA compliance.
\618\ Sec. 3504. Treas. Reg. sec. 31.3504-1 provides rules for the
explicit designation of an agent by application to the IRS. Form 2678
is used for this purpose. In addition, under Treas. Reg. sec. 31.3504-
2, designation of an agent may result from the payment of wages or
compensation by a payor to an individual performing services for a
client of the payor pursuant to a service agreement meeting certain
criteria. The rules for designating an agent for FICA and income tax
withholding purposes is a departure from the general principle that a
taxpayer has a nondelegable duty with respect to tax obligations. See
United States v. Boyle, 469 U.S. 241 (1985).
\619\ Designation of an agent under section 3504 differs from an
employer's use of a payroll service to handle payroll and employment
tax filings on its behalf. In that case, the employer, not the payroll
service, continues to be legally responsible for employment tax
compliance.
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Income tax credits based on wages for employment tax purposes
The Code provides various income tax credits to employers
under which the amount of the credit is determined by reference
to the amount of wages for employment tax purposes. For
example, the amount of an employer's work opportunity credit is
based on a portion of FUTA wages paid by the employer to
employees who are members of certain targeted groups.\620\ In
addition, the credit for employer FICA tax paid on tips is
based on the employer's share of FICA tax paid by the employer
with respect to certain tips treated as wages for FICA
purposes.\621\
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\620\ Sec. 51(c)(1).
\621\ Sec. 45B(b)(1).
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Reporting by large food and beverage establishments
Certain reporting requirements relating to tips apply to
large food or beverage establishments.\622\ In the case of such
an establishment, an employer is generally required to report
the following information to the IRS each calendar year: (1)
the gross receipts of the establishment from the provision of
food and beverages, (2) the aggregate amount of charge
receipts, (3) the aggregate amount of charged tips on the
charge receipts, (4) the sum of the aggregate amount of tips
reported to the employer by employees and certain amounts
required to be reported by the employer on employees' Forms W-
2, and (5) with respect to each employee, the amount of tips
allocated to the employee based on the receipts of the
establishment. The employer must also provide employees with
written statements showing certain information each calendar
year, including the amount of tips allocated to the employee
for the year.
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\622\ Sec. 6053(c).
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Certain tax administration provisions
Taxpayer bonds
In certain situations, the Code provides for a taxpayer to
provide a bond to assure payment of a tax liability.\623\
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\623\ See, for example, sections 6165 (furnishing of bond in
connection with an extension of time to pay a tax or deficiency) and
6325(b) (release of a tax lien on furnishing of a bond). See sections
7101-7103 and Internal Revenue Manual Part 5.6.1, Collateral Agreements
and Security Type Collateral (in particular, Part 5.6.1.2.1) and Part
5.6.2, Maintenance (in particular Part 5.6.2.6.1 and 5.6.2.7.1) for
procedures relating to bonds provided by a taxpayer to assure payment
of a tax liability.
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Confidentiality and public disclosure of tax information
Returns (including information returns) and return
information received by the IRS are generally subject to
confidentiality protections and cannot be disclosed unless
specifically authorized.\624\ The prohibition on disclosure
does not apply with respect to Code provisions that
specifically require the public disclosure of certain
information.\625\
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\624\ Sec. 6103.
\625\ See, for example, section 6104, requiring the public
disclosure of certain information relating to tax-exempt organizations
and tax-favored retirement savings arrangements.
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User fees
User fees apply to requests to the IRS for ruling letters,
opinion letters, determination letters, and similar
requests.\626\ The user fees that apply are determined by the
IRS and are generally required to be determined after taking
into account the average time and difficulty involved in a
request.
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\626\ Sec. 7528.
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Explanation of Provision
Treatment of certified professional employer organization as employer
for employment tax purposes
Under the provision, if certain requirements are met, for
purposes of employment taxes and other obligations under the
employment tax rules, a certified professional employer
organization is treated as the employer of any work site
employee performing services for any customer of the certified
professional employer organization, but only with respect to
remuneration remitted to the work site employee by the
certified professional employer organization. In addition, no
other person is treated as the employer for employment tax
purposes with respect to remuneration remitted by the certified
professional employer organization to a work site employee.
Under the provision, exceptions, exclusions, definitions,
and other rules that are based on type of employer and that
would apply if the certified professional employer organization
were not treated as the employer under the provision continue
to apply. Thus, for example, if services performed in the
employ of a customer that is a tax-exempt organization would be
excluded from employment for FUTA purposes, the fact that a
certified professional employer organization is treated as the
employer for employment tax purposes does not affect the
application of the exclusion.
The provision contains rules under which, on entering into
a service contract with a customer with respect to a work site
employee, a certified professional employer organization is
treated as a successor employer and the customer is treated as
the predecessor employer. Similarly, on termination of a
service contract with respect to a worksite employee, the
customer is treated as a successor employer and the certified
professional employer organization is treated as a predecessor
employer. Thus, remuneration paid by the customer and
remuneration paid by the certified professional employer
organization to a work site employee during a calendar year are
both subject to a single OASDI, RRTA tier 1 or tier 2, or FUTA
wage base.\627\
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\627\ Under this provision, a single wage base applies with respect
to remuneration paid to a work site employee by the customer and the
certified professional employer organization, regardless of whether the
certified professional employer organization is an employer of the
employee.
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The provision does not apply in the case of a customer who
is related to the certified professional employer
organization.\628\ In addition, an individual with net earnings
from self-employment derived from a customer's trade or
business (that is, a self-employed individual), including a
customer who is a sole proprietor or a partner of a customer
that is a partnership, is not a work site employee for
employment tax purposes with respect to remuneration paid by a
certified professional employer organization.
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\628\ Whether a customer and a certified professional employer
organization are related is determined under the rules of section
267(b) (relating to transactions between related taxpayers) or 707(b)
(relating to transactions between a partner and partnership). However,
rules based on more than 50 percent ownership are applied by
substituting 10 percent for 50 percent.
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As discussed more fully below, a work site employee is an
individual who performs services (1) for a customer pursuant to
a contract between the customer and the certified professional
employer organization that meets certain requirements and (2)
at a work site that meets certain requirements. Thus, if the
contract or work site fails to meet these requirements, the
individual is not a work site employee. The provision applies
also in the case of an individual (other than a self-employed
individual) who is not a work site employee, but who performs
services under a contract that meets the specified
requirements. In this case, solely for purposes of a certified
professional employer organization's liability for employment
taxes and other obligations under the employment tax rules, a
certified professional employer organization is treated as the
employer of such an individual, but only with respect to
remuneration remitted to the individual by the certified
professional employer organization.\629\ With respect to such
an individual, exceptions, exclusions, definitions, and other
rules that are based on the type of employer and that would
apply if the certified professional employer organization were
not treated as the employer under the provision continue to
apply.
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\629\ In this case, the provision does not preclude another person
from being treated as the employer, in addition to the certified
professional employer organization, and potentially also bearing
employment tax and related liability with respect to remuneration
remitted by the certified professional employer organization.
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A certified professional employer organization is eligible
for the FUTA credit for contributions made to a State
unemployment fund by the certified professional employer
organization or a customer with respect to wages paid to a work
site employee. An additional FUTA credit may be claimed by a
certified professional employer organization if, under State
law, a certified professional employer organization is
permitted to collect and remit contributions with respect to a
work site employee to the State unemployment fund.
Except to the extent necessary for purposes of the
provision treating a certified professional employer
organization as the employer for employment tax purposes,
nothing in the provision is to be construed to affect the
determination of who is an employee or employer for purposes of
the Code.
Certified professional employer organization
A certified professional employer organization is a person
(``applicant'') who applies to the Secretary of the Treasury
(``Secretary'') to be treated as a certified professional
employer organization for purposes of the provision and has
been certified by the Secretary as meeting certain
requirements. These requirements are met if the applicant--
demonstrates that the applicant (and any
owner, officer, and other persons as may be specified
in regulations) meets requirements established by the
Secretary, including requirements with respect to tax
status, background, experience, business location, and
annual financial audits,
agrees to satisfy the bond and independent
financial review requirements (described below) on an
ongoing basis,
agrees to satisfy any reporting obligations
imposed by the Secretary,
computes its taxable income using an accrual
method of accounting unless the Secretary approves
another method,
agrees to verify on a periodic basis as
prescribed by the Secretary that it continues to meet
the requirements for certification, and
agrees to notify the Secretary in writing
within the time prescribed by the Secretary of any
change that materially affects the continuing accuracy
of any agreement or information that was previously
made or provided.
As described above, the provision includes a nonexhaustive
list of requirements that an applicant, as well as any owner,
officer, or other person as may be specified in regulations,
must demonstrate are met in order to be certified. To the
extent considered appropriate by the Secretary, regulations
could include requirements such as the following for
certification:
proven history of tax compliance in any
applicable tax areas, such as income, employment and
excise taxes,
favorable credit and criminal background
checks,
adequate experience with respect to Federal
and State employment tax and related requirements,
handling of and accounting for funds on behalf of
others, effective record-keeping systems, and retention
of qualified personnel and legal advisors as needed,
existence of an established business
location within the United States at which significant
operations regularly take place, and
expected continuity of business existence,
regardless of change in ownership.
Under the bond requirement, a certified professional
employer organization must post a bond for the payment of
employment taxes in a minimum amount and in a form acceptable
to the Secretary. The minimum amount is determined for the
period April 1 of any calendar year through March 31 of the
following calendar year and is the greater of (1) five percent
of the employment taxes for which the certified professional
employer organization is liable under the provision during the
preceding calendar year (but not to exceed $1,000,000), or (2)
$50,000.
Under the independent financial review requirements, a
certified professional employer organization must (1) as of the
most recent audit date (that is, six months after the
completion of the certified professional employer
organization's fiscal year), have caused to be prepared and
provided to the Secretary an opinion of an independent
certified public accountant as to whether the certified
professional employer organization's financial statements are
presented fairly in accordance with generally accepted
accounting principles, and (2) not later than the last day of
the second month beginning after the end of each calendar
quarter, provide the Secretary with an assertion regarding
Federal employment tax payments and an examination level
attestation on the assertion from an independent certified
public accountant. The assertion must state that the certified
professional employer organization has withheld and made
deposits of all required FICA, RRTA, and withheld income taxes
for the calendar quarter, and the attestation must state that
the assertion is fairly stated in all material respects. If a
certified professional employer organization fails to file the
required assertion and attestation for any calendar quarter,
the independent financial review requirements are treated as
not satisfied for the period beginning on the due date for the
attestation.
For purposes of the bond and independent financial review
requirements, all professional employer organizations that are
members of a controlled group of corporations or under common
control are treated as a single organization.\630\
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\630\ Whether entities are members of a controlled group of
corporations or under common control is determined under the rules of
section 414(b) and (c).
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The Secretary may suspend or revoke the certification of a
person's certified professional employer organization status if
the Secretary determines that the person does not satisfy the
agreements or other requirements for certification or fails to
satisfy the applicable accounting, reporting, payment, or
deposit requirements.
Work site employee
A work site employee is an individual who (1) performs
services for a customer of a certified professional employer
organization pursuant to a contract between the customer and
the certified professional employer organization that meets
certain requirements, described below (referred to herein as a
``qualifying service contract'') and (2) performs services at a
work site meeting certain requirements, described below.\631\
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\631\ As discussed above, a self-employed individual is not a work
site employee.
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In order to be a qualifying service contract, the contract
between the customer and the certified professional employer
organization must be in writing and, with respect to an
individual performing services for the customer, must provide
that the certified professional employer organization will--
assume responsibility for payment of wages
to the individual, without regard to the receipt or
adequacy of payment from the customer,
assume responsibility for reporting,
withholding, and paying any employment taxes with
respect to the individual's wages, without regard to
the receipt or adequacy of payment from the customer,
assume responsibility for any employee
benefits that the contract may require the certified
professional employer organization to provide, without
regard to the receipt or adequacy of payment from the
customer,
assume responsibility for recruiting, hiring
and firing workers in addition to the customer's
responsibility for recruiting, hiring and firing
workers,
maintain employee records relating to the
individual, and
agree to be treated as a certified
professional employer organization for employment tax
purposes with respect to such individual.
For purposes of whether an individual is a work site
employee, the work site where the individual performs services
meets the applicable requirements if at least 85 percent of the
individuals performing services for the customer at the work
site are subject to one or more qualifying service contracts
with the certified professional employer organization.\632\
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\632\ For this purpose, excluded employees under section 414(q)(5),
such as employees who are under age 21 or have not completed six months
of service, are not taken into account.
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Income tax credits based on wages for employment tax purposes
Under the provision, for purposes of various income tax
credits under which the amount of the credit is determined by
reference to the amount of employment tax wages or employment
taxes (``specified'' credits), (1) the credit with respect to a
worksite employee performing services for a customer applies to
the customer, not to the certified professional employer
organization, (2) the customer, and not the certified
professional employer organization, is to take into account
wages and employment taxes paid by the certified professional
employer organization with respect to the worksite employee and
for which the certified professional employer organization
receives payment from the customer, and (3) the certified
professional employer organization is required to furnish the
customer and the Secretary with any information necessary for
the customer to claim the credit.\633\
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\633\ Section 199 provides a deduction from taxable income (or, in
the case of an individual, adjusted gross income) for a portion of the
taxpayer's qualified production activities income or taxable income.
The amount of the deduction for a taxable year is limited to 50 percent
of the Form W-2 wages paid by the taxpayer, and properly allocable to
domestic production gross receipts, during the calendar year that ends
in the calendar year. For this purpose, Form W-2 wages means wages
subject to income tax withholding, as well as elective deferrals and
certain other amounts, that the taxpayer properly reports on Forms W-2
for the calendar year. Under regulations dealing with wages paid by an
entity other than the common-law employer, a taxpayer may take into
account wages paid by another entity and reported by the other entity
on Form W-2 (with the other entity listed as the employer on the Form
W-2), provided that the wages were paid to employees of the taxpayer
for employment by the taxpayer. Treas. Reg. sec. 1.199-2(a)(2). The
provision does not affect the application of these rules.
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For this purpose, specified credits include the credit for
research expenses, the Indian employment credit, the credit for
employer FICA tax paid on tips, the credit for certain clinical
drug testing expenses, the credit for employee health insurance
expenses of small employers, the work opportunity credit, the
empowerment zone employment credit, and any credit specified by
the Secretary.\634\
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\634\ These credits are provided, respectively, under sections 41,
45A, 45B, 45C, 45R, 51, and 1396.
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Reporting by large food and beverage establishments
Under the provision, if a certified professional employer
organization is treated for employment tax purposes as the
employer of a work site employee, the customer for whom the
work site employee performs services is the employer for
purposes of the reporting required with respect to a large food
or beverage establishment. The certified professional employer
organization is required to furnish the customer and the
Secretary with any information the Secretary prescribes as
necessary to complete the required reporting. The certified
professional employer organization is required to furnish the
required information no later than the time the Secretary
prescribes.
Regulations and reporting and record-keeping requirements
The Secretary is directed to prescribe regulations as may
be necessary or appropriate to carry out the purposes of the
provision.
In addition, the Secretary is directed to develop reporting
and record-keeping rules, regulations and procedures as the
Secretary determines necessary or appropriate to ensure tax
compliance by certified professional employer organizations or
persons that have been so certified. These rules are to include
(1) notification of the Secretary, in the manner prescribed by
the Secretary, of the commencement or termination of a
qualifying service contract with a customer and the employer
identification number of the customer, (2) information the
Secretary determines necessary for the customer to claim
specified credits and the manner in which the information is to
be provided, and (3) other information as the Secretary
determines is essential to promote compliance with respect to
specified credits and FUTA credits. In the case of a failure to
make a report containing the required information by the time
required, a penalty of $50 may apply ($100 in the case of a
failure due to negligence or intentional disregard).
The rules, regulations and procedures are to be designed in
a manner that streamlines, to the extent possible, the
application of the requirements of the provision, the exchange
of information between a certified professional employer
organization and its customers, and the reporting and
recordkeeping obligations of the certified professional
employer organization.
Other rules
Disclosure
The provision directs the Secretary to make available to
the public the name and address of each person certified as a
professional employer organization and each person whose
certification as a professional employer organization is
suspended or revoked.
User fees
Under the provision, the user fee charged under the program
for certifying a professional employer organization is an
annual fee and may not exceed $1,000.
No inference as to effect of provision
Nothing contained in the provision or the amendments made
by the provision is to be construed to create any inference
with respect to the determination of who is an employee or
employer (1) for Federal tax purposes (other than the purposes
set forth in the amendments made by the provision), or (2) for
purposes of any other provision of law.
Effective Date
The provision is effective with respect to wages paid for
services performed on or after January 1 of the first calendar
year beginning more than 12 months after the date of enactment
of the provision (December 19, 2014). The Secretary is directed
to establish the certification program for professional
employer organizations not later than six months before the
provision becomes effective.
C. Exclusion of Dividends From Controlled Foreign Corporations From the
Definition of Personal Holding Company Income for Purposes of the
Personal Holding Company Rules (sec. 207 of the Act and sec. 543 of the
Code)
Present Law
Personal holding company tax
In addition to the regular corporate tax, an additional tax
is imposed on a corporation that is a personal holding company.
The tax is an amount equal to the maximum rate of tax on
qualified dividends of individuals (currently 20 percent),
multiplied by the corporation's undistributed personal holding
company income above a dollar threshold.\635\ A personal
holding company is a closely held corporation at least 60
percent of the adjusted ordinary gross income (as defined) of
which is personal holding company income.\636\ Personal holding
company income includes dividends, interest, certain rents, and
other generally passive investment income.\637\
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\635\ Sec. 541.
\636\ Sec. 542.
\637\ Sec. 543.
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Controlled foreign corporations
In general, the U.S. does not impose tax on the income of a
foreign corporation unless and until that income is distributed
to U.S. shareholders. However, the rules of subpart F \638\
provide an exception for certain passive or readily movable
income of a foreign corporation that, for a period of at least
30 days during the taxable year, is more than 50-percent owned
(by voting power or value) by U.S. shareholders each of which
owns at least 10 percent of the voting power of the corporate
stock after applying attribution rules (a controlled foreign
corporation). The pro rata share of such corporate earnings is
currently included as income of the 10-percent (or greater)
shareholders (by voting power) that hold their stock on the
last day of the taxable year. Except as otherwise provided for
specific purposes of the Code, the inclusions are not treated
as dividends. When the earnings are distributed to the U.S.
shareholders, they are not again subject to tax.\639\
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\638\ Secs. 951-965.
\639\ Sec. 959. A separate set of rules applies to income of a
foreign corporation that is a passive foreign investment corporation,
generally defined as a foreign corporation 75 percent or more of the
gross income of which is passive income, or 50 percent or more of the
assets of which produce or are held for the production of passive
income (sec. 1297). Such income is either subject to the highest rate
of tax for ordinary income applicable to individuals and an interest
charge for deferral when it is ultimately distributed to a U.S.
shareholder, or an election can be made to include income currently
even if not distributed (secs. 1291-1298). A corporation is not treated
as a passive foreign investment corporation with respect to any U.S.
shareholder during the period such corporation is a controlled foreign
corporation of which the shareholder is a 10-percent or greater owner
(by voting power) under the rules relating to controlled foreign
corporations (sec. 1297(d)).
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When a controlled foreign corporation distributes money or
other property to a U.S. shareholder out of its earnings and
profits not previously included in the income of the
shareholder under the rules of subpart F, the amount of money
or fair market value of the property is included in gross
income as a dividend.\640\
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\640\ A 10-percent corporate shareholder may be allowed a foreign
tax credit for the foreign income taxes paid on the earnings and
profits distributed as a dividend (sec. 902). Also, a dividends-
received deduction is allowed to a corporate shareholder to the extent
the dividend is attributable to certain U.S. source income, and no
foreign tax credit is allowed with respect to any such amount. (sec.
245). A dividend received by an individual is a qualified dividend,
eligible for the maximum 20-percent tax rates, if the dividend is from
a qualified foreign corporation (generally, a corporation (i) that is
eligible for certain treaty benefits or is incorporated in a U.S.
possession, or (ii) the stock of which with respect to which the
dividend is paid is readily tradable on a U.S. securities market; and
that in either case is not a passive foreign investment company (sec.
1(h)(11)(C)).
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Reasons for Change
The Congress believed that dividends paid by a controlled
foreign corporation to a 10-percent U.S. shareholder, out of
the controlled foreign corporation's earnings and profits that
were not treated as passive or readily movable income
inclusions to the shareholder under the rules of subpart F, are
attributable to active business income of the controlled
foreign corporation. Accordingly, it was appropriate to exclude
these dividends from personal holding company income of the
shareholder.
The Congress also believed that the personal holding
company tax currently deters the repatriation of earnings that
would be repatriated if the U.S. corporate tax alone (but not
the personal holding company tax) were applicable to the
repatriated earnings.
Explanation of Provision
Under the provision, dividends received by a 10-percent
U.S. shareholder (as defined in section 951(b)) from a
controlled foreign corporation (as defined in section 957(a))
are excluded from the definition of personal holding company
income for purposes of the personal holding company tax.
Effective Date
The provision applies to taxable years ending on or after
the date of enactment (December 19, 2014).
D. Inflation Adjustment for Certain Civil Penalties Under the Internal
Revenue Code (sec. 208 of the Act and secs. 6651, 6652(c),
6695, 6698, 6699, 6721, and 6722 of the Code)
Present Law
The Code provides for both civil and criminal penalties to
ensure complete and accurate reporting of tax liability and to
discourage fraudulent attempts to defeat or evade tax. Civil
and criminal penalties are applied separately. Thus, a taxpayer
convicted of a criminal tax offense may be subject to both
criminal and civil penalties, and a taxpayer acquitted of a
criminal tax offense may nonetheless be subject to civil tax
penalties. In cases involving both criminal and civil
penalties, the IRS generally does not pursue both
simultaneously, but delays pursuit of civil penalties until the
criminal proceedings have concluded.
Civil penalties are provided in Chapter 68 of the
Code.\641\ Civil penalties are categorized into two types:
additions to the tax and additional amounts (herein ``additions
to tax''), and assessable penalties. The additions to tax are
generally subject to deficiency proceedings, and some may be
waived under certain circumstances, including a showing of
reasonable cause.\642\ Assessable penalties can be assessed
without restrictions (such as the opportunity for preassessment
judicial review) applicable in deficiency cases.\643\
Assessable penalties may also be waived under certain
circumstances, including a showing of reasonable cause.\644\
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\641\ Secs. 6651-6751.
\642\ Secs. 6651-6663; Sec. 6664.
\643\ Secs. 6671-6725.
\644\ Sec. 6724.
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Some penalties are calculated by reference to the tax
liability, while others are fixed dollar amounts. Penalties
with a fixed dollar amount include penalties in the case of (i)
failure to file a tax return or to pay tax,\645\ (ii) failure
to file certain information returns, registration statements,
and certain other statements,\646\ (iii) failure to furnish a
copy of the tax return to the taxpayer, failure to sign the
return, failure to furnish an identifying number, failure to
retain a completed copy of the tax return or retain on a list
the name and taxpayer identification number of the taxpayer for
whom the return was prepared, failure to file correct
information returns, negotiation of a taxpayer's check by the
tax return preparer, and failure to be diligent in determining
eligibility for the earned income credit,\647\ (iv) failure of
a partnership to file a return,\648\ (v) failure of an S
corporation to file a return,\649\ (vi) failure to file correct
information returns,\650\ and (vii) failure to file correct
payee statements.\651\
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\645\ Sec. 6651(a).
\646\ Sec. 6652(c).
\647\ Sec. 6695.
\648\ Sec. 6698.
\649\ Sec. 6699.
\650\ Sec. 6721.
\651\ Sec. 6722.
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The penalty provisions generally contain no automatic
mechanism to adjust the amount of the penalty for inflation.
However, the penalty provisions relating to the failure to file
correct information returns and the failure to furnish correct
payee statements are adjusted for inflation every five years
and provide a rounding rule.
Reasons for Change
The Congress believed that indexing these fixed-dollar
penalties would encourage compliance with the tax law. By
correlating increases in the amounts to increases in other
types of dollar amounts in the economy generally, the penalties
can continue to serve as a meaningful economic deterrent to
non-compliant behavior.
Explanation of Provision
The provision indexes the fixed-dollar civil tax penalties
in the case of: (i) failure to file a tax return),\652\ (ii)
failure to file or disclose information return by exempt
organizations and certain trusts),\653\ (iii) preparation of
tax returns of other persons,\654\ (iv) failure to file
partnership return,\655\ (v) failure to file S corporation
returns,\656\ (vi) failure to file correct information
return),\657\ and (vii) failure to furnish correct payee
statements.\658\ The provision rounds penalty amounts down to
the nearest multiple of five dollars if less than $5,000,
otherwise the provision rounds penalty amounts down to the
nearest multiple of $500. The provision does not modify the
present-law rounding rules relating to the failure to file
correct information returns and the failure to furnish correct
payee statements.
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\652\ Sec. 6651(a).
\653\ Sec. 6652(c).
\654\ Sec. 6695.
\655\ Sec. 6698.
\656\ Sec. 6699.
\657\ Sec. 6721.
\658\ Sec. 6722.
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Effective Date
The provision is generally effective for returns required
to be filed after December 31, 2014. The amendment relating to
the failure to file or disclose information returns by exempt
organizations and certain trusts is effective for failures
relating to returns required to be filed or disclosed after
that date.. The amendment relating to the preparation of tax
returns of other persons is effective for failures relating to
returns or claims for refund filed after that date (or, in the
case of the penalty relating to the negotiation of checks, to
checks negotiated after that date). The amendment relating to
the failure to furnish correct payee statements is effective
for statements required to be furnished after that date.
E. Increase Continuous Levy Authority on Payments to Medicare Providers
and Suppliers (sec. 209 of the Act and sec. 6331 of the Code)
Present Law
In general
Levy is the administrative authority of the IRS to seize a
taxpayer's property, or rights to property, to pay the
taxpayer's tax liability.\659\ Generally, the IRS is entitled
to seize a taxpayer's property by levy if a Federal tax lien
has attached to such property,\660\ the property is not exempt
from levy, \661\ and the IRS has provided both notice of
intention to levy\662\ and notice of the right to an
administrative hearing (the notice is referred to as a
``collections due process notice'' or ``CDP notice'' and the
hearing is referred to as the ``CDP hearing'') \663\ at least
30 days before the levy is made. A levy on salary or wages
generally is continuously in effect until released.\664\ A
Federal tax lien arises automatically when: (1) a tax
assessment has been made; (2) the taxpayer has been given
notice of the assessment stating the amount and demanding
payment; and (3) the taxpayer has failed to pay the amount
assessed within 10 days after the notice and demand.\665\
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\659\ Sec. 6331(a). Levy specifically refers to the legal process
by which the IRS orders a third party to turn over property in its
possession that belongs to the delinquent taxpayer named in a notice of
levy.
\660\ Ibid.
\661\ Sec. 6334.
\662\ Sec. 6331(d).
\663\ Sec. 6330. The notice and the hearing are referred to
collectively as the CDP requirements.
\664\ Secs. 6331(e) and 6343.
\665\ Sec. 6321.
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The notice of intent to levy is not required if the
Secretary finds that collection would be jeopardized by delay.
The standard for determining whether jeopardy exists is similar
to the standard applicable when determining whether assessment
of tax without following the normal deficiency procedures is
permitted.\666\
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\666\ Secs. 6331(d)(3), 6861.
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The CDP notice (and pre-levy CDP hearing) is not required
if: (1) the Secretary finds that collection would be
jeopardized by delay; (2) the Secretary has served a levy on a
State to collect a Federal tax liability from a State tax
refund; (3) the taxpayer subject to the levy requested a CDP
hearing with respect to unpaid employment taxes arising in the
two-year period before the beginning of the taxable period with
respect to which the employment tax levy is served; or (4) the
Secretary has served a Federal contractor levy. In each of
these four cases, however, the taxpayer is provided an
opportunity for a hearing within a reasonable period of time
after the levy.\667\
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\667\ Sec. 6330(f).
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Federal payment levy program
To help the IRS collect taxes more effectively, the
Taxpayer Relief Act of 1997 \668\ authorized the establishment
of the Federal Payment Levy Program (``FPLP''), which allows
the IRS to continuously levy up to 15 percent of certain
``specified payments'' by the Federal government if the payees
are delinquent on their tax obligations. With respect to
payments to vendors of goods, services, or property sold or
leased to the Federal government, the continuous levy may be up
to 100 percent of each payment.\669\ For payments to Medicare
providers and suppliers, the levy is up to 15 percent. The levy
(either up to 15 percent or up to 100 percent) generally
continues in effect until the liability is paid or the IRS
releases the levy.
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\668\ Pub. L. No. 105-34.
\669\ Sec. 6331(h)(3).
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Under FPLP, the IRS matches its accounts receivable records
with Federal payment records maintained by Treasury's Bureau of
Fiscal Service (``BFS''), such as certain Social Security
benefit and Federal wage records. When these records match, the
delinquent taxpayer is provided both the notice of intention to
levy and the CDP notice. If the taxpayer does not respond after
30 days, the IRS can instruct BFS to levy the taxpayer's
Federal payments. Subsequent payments are continuously levied
until such time that the tax debt is paid or the IRS releases
the levy.
Reasons for Change
It has been reported that many thousands of Medicare
providers and suppliers have outstanding Federal employment and
income tax liability.\670\ Consequently, the Congress believed
that it was appropriate to increase the permissible percentage
of payments to a Medicare provider subject to levy.
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\670\ Government Accountability Office, Medicare: Thousands of
Medicare Providers Abuse the Federal Tax System (GAO-08-618), June 13,
2008.
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Explanation of Provision
The provision allows the Secretary to levy up to 30 percent
of a payment to Medicare providers and suppliers to collect
unpaid taxes.
Effective Date
The provision is effective for payments made after 180 days
after the date of enactment (December 19, 2014).
APPENDIX: ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN THE
113TH CONGRESS
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