Section 89: beyond repair - employee-benefits law

Section 89: Beyond Repair

The Internal Revenue Service's assurances that newly released rules would ease employer concerns about complying with the employee-benefits law known as Section 89 have failed to blunt increasing pressures for repeal of the massively complex legislation.

The business argument that the law is beyond repair was buttressed by the fact that the IRS needed 154 pages to list rules that it clamed would relieve employer worries about regulatory overkill. (See the following interview with a Section 89 expert for details of the regulations.)

Section 89, which took effect Jan. 1, was designed to deter favoritism toward highly paid employees in health and other benefits; discrimination in coverage can incur heavy tax penalties.

Business argues that the law not only has imposed a crushing paperwork burden on employers but also is more likely to restrict, rather than expand, coverage for lower-paid workers. And the new regulations do not alter that outlook, business experts say.

Karen Berg, manager of human resources for the U.S. Chamber of Commerce, said of the regulations: "No matter how artfully drafted or whatever improvements they contain, they cannot cure this fundamentally flawed statute.... The regulations make it obvious that Section 89 will not meet its purported goals of assuring fair distribution of health benefits and expanding health-insurance coverage."

The IRS estimated that the law will add 9 million hours to the annual paper-work burden of the nation's employers. That figure "greatly underestimates" the amount of work involved, said Berg. Howard Weizmann, executive director of the Association of Public and Private Welfare Plans, said, "I want to underscore that that's 9 million billable hours." (Billable hours are those for which an employer is paying a lawyer, consultant, or other outside source of assistance required to deal with the complexities of Section 89.) Weizmann called the regulations "simply unworkable."

In a related development, House Ways and Means Committee Chairman Dan Rostenkowski, D-Ill., faced with mounting business and congressional pressure for repeal of the law, conceded that he would at least agree to simplificiation, which he has resisted strongly. "We need to find some recommendations from both the public and private sectors on how to simplify" the maze of nondiscrimination tests imposed on employers by the law, Rostenkowski told a meeting of the National Council of State Housing Agencies on March 2.

At the same time, the powerful chairman of the House tax-writing committee not only reiterated his steadfast opposition to the Section 89 repeal effort now under way on Capitol Hill but also issued what business considers a threat--a declaration that he will counterattack the repeal effort by raising the question of taxing all fringe benefits.

A repeal measure introduced by Rep. John J. LaFalce, D-N.Y., chairman of the House Small Business Committee, now has more than 175 cosponsors. An aide to the congressman predicted that a majority of the House's 435 members would sign on as supporters of the repeal bill within a few weeks.

The reasons for the regulations' failure to dampen repeal sentiment were evident in remarks by James J. McGovern, IRS assistant chief counsel, in announcing the rules at a news conference. He said in presenting the 154-page document on implementation that the agency has no plans to issue booklets or other materials to help businesses comply with the complex benefits law. Nor are there any plans to establish a telephone hot line to answer questions.

Moreover, the regulations do not deal with some of the most difficult compliance issues created by the statute: leased employees, multiemployer plans, separate lines of business, and group term life insurance.

Section 89, enacted as part of the Tax Reform Act of 1986, creates a bewildering set of nondiscrimination rules that employers must meet when they give their employees health and other benefits, such as group term life insurance. In the event that these requirements are not met by the employer, highly paid employees will be taxed on the so-called discriminatory portion of their benefits.

In addition to the nondiscrimination tests, the law creates certain qualification rules that must be met if the plan is to receive tax-favored status. Failure to satisfy these rules will result in employees being taxed on portions of benefit reimbursements provided under their plans.

In writing the antidiscrimination features of Section 89, Congress wanted to ensure that tax-favored employee benefits are not provided in a discriminatory manner to executives and managers, to increase the amount of health insurance provided to rank-and-file employees, andto extend benefits to some of the workers not covered by health insurance.

Employers argue that the law is, in effect, a back-door effort to tax employee benefits and that it will have little or no impact on expanding benefits to the rank-and-file. The experience of consultants who are helping business clients comply with the law seems to bear this out.

Glen Armand, vice president of the Hauck Companies in McLean, Va., says he has conducted Section 89 compliance tests for about 100 companies. Of those, all but two failed the nondiscrimination tests. In no instance did an employer opt to expand benefits to lower-paid employees to rectify the problem. Rather, they chose to report the "discriminatory excess" as taxable income to the highly paid or, in some cases, to cut benefits to the highly paid. "I'm not sure that law is doing nonhighly compensated employees any good," says Armand.

COPYRIGHT 1989 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group