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CCH Analysis: With House Passage, Now Up to Senate to Move on Pension Reform

Estate Tax, Minimum Wage and Tax Break Extensions All Get Nod from House, but Senate Expected to Resist

(RIVERWOODS, ILL., August 2, 2006) – With passage of the Pension Protection Act of 2006 in the House of Representatives on July 28, it’s now up to the Senate to move the bill beyond nearly five years of legislative wrangling into actual law. According to CCH, a Wolters Kluwer business and leading provider of tax, pension and benefit law information, the hope is that the Senate will be able to agree on the bill and send it to the President for signing into law before the Senate adjourns for summer recess on August 5 (CCHGroup.com).

“With so much back and forth on pension reform over the years – and particularly in the last week – now behind us, it’s time to really look at what’s survived the debate and is potentially going to be enacted into law, affecting the retirements of more than 44 million people who are relying on pension plans, as well as far more individuals who are saving for retirement through IRAs, 401(k)s and other defined contribution plans,” said CCH Senior Pension Law Analyst Nicholas Kaster, JD.

In a somewhat unconventional move, the House stripped out a trailer to the pension bill that would have extended favorable tax breaks and attached this to the Estate Tax and Extension of Tax Relief Act of 2006, also passed over the weekend, calling for changes to estate tax and minimum wage.

“It’s a patchwork approach to lawmaking that may end up unraveling once it hits the Senate floor,” said CCH Principal Tax Analyst Mark Luscombe, JD. “There’s something in it for everyone. Whether that’s enough to get both sides to tolerate all that’s in there that they don’t want will make for an interesting week and perhaps an interesting September if no decisions are made before the Senate goes to recess.”

Following, CCH pension and tax law analysts take a closer look at the legislation. Should either of the bills pass in the Senate, CCH will produce a CCH Tax Briefing Special Report, Law, Explanation & Analysis book and audio conference detailing the implications of the proposed law changes for pension, accounting and legal professionals advising clients on taxation, retirement and financial planning.

Bolstering Pension Plans

The pension reform bill contains a variety of provisions to strengthen the funding rules for defined benefit pension plans. By tightening funding requirements, the bill seeks to ensure that employers make greater contributions to their pension funds, securing their solvency, and avoiding a potential multi-billion dollar taxpayer bailout of the Pension Benefit Guaranty Corporation (PBGC).

Under the bill, most company pension plans will have to be 100-percent funded (vs. the current 90 percent) and, if not, will be required to be fully funded within seven years. Separate rules apply to airlines: those with frozen plans (generally airlines in bankruptcy) would be allowed 17 years to fully fund their pension plans, while the other airlines would have 10 years to come into compliance. Defense contractors also get an additional three years over most companies to fully fund their plans.

For employers not in compliance, the bill places restrictions on how they can fund their plans and other programs that can be offered to certain employees. Companies that are below 80-percent funded are prohibited from using credit balances for funding or making any new promises of benefits, for example, giving shorter vesting schedules, higher benefit accrual, or adding early retirement or lump-sum enrichments where they didn’t exist.

Plans that are less than 60-percent funded also will be subject to restrictions on offering any lump-sum benefit payments. New accruals are frozen in plans that are less than 60-percent funded and they are prohibited from providing shutdown benefits.

The bill also addresses a sore point for many pension holders concerned about the future of their plans by prohibiting companies from offering special pensions to executives if their general employee pension plan is at risk or the company is in bankruptcy. It also provides added assurance to taxpayers that they won’t be left responsible for paying pension promises by instituting a termination premium of $1,250 per participant if a plan sponsor terminates an unfunded pension plan. In the event of bankruptcy, the former plan sponsor must pay this after the company emerges from bankruptcy.

Cash balance plans, a type of hybrid pension, have been the subject of much litigation in recent years. The House bill would provide greater legal certainty to such plans, including the provision of a safe harbor rule for testing these types of plans for age discrimination.

Extending Reach of Defined Contribution Plans

While new rules for defined benefit plans account for the bulk of the Pension Protection Act, it also addresses retirement savings held in IRAs, 401(k) and other defined contribution plans. Here, the bill hopes to encourage workers to save by allowing companies to automatically enroll employees into a company 401(k) plan as well as broadens the rules under which mutual fund companies can offer workers advice on 401(k) and IRA investment options.

Contribution limits for defined contribution plans and IRAs that were set to sunset after 2010 are made permanent under the bill.

One Bill Fits All: Estate Tax and Extension of Tax Relief Act of 2006

It is questionable whether the pension bill will get through the Senate given the current Congressional rancor. In greater jeopardy is the bill covering estate tax, minimum wage and extenders that the House passed on the heels of the pension bill.

But if the Estate Tax and Extension of Tax Relief Act of 2006 does move forward, it will accomplish several things: continue to chip away at estate taxes for the wealthy; provide the first raise in federal minimum wage in nearly 10 years; and provide a hodge-podge of extensions to tax breaks enjoyed by the middle class.

The bill calls for all estates worth as much as $5 million ($10 million for couples filing jointly) to be exempt from estate tax. A 15-percent tax rate will apply to estates valued to $25 million and estates exceeding $25 million will be taxed at a 30-percent rate. Currently, estate tax law is governed by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which calls for the complete repeal of the estate tax in 2010, before returning to pre-EGTTRA levels in 2011, which would place a 55-percent tax rate on estates over $3 million (effectively 60 percent for estates in excess of $10 million but less than $17,184,000).

The bill also has the federal minimum wage increasing from $5.15 to $7.25 an hour, phased in over three years.

Also covered in the bill are the extension of $38 billion worth of popular tax breaks such as the deduction for college tuition and the opportunity for itemizers to deduct sales tax instead of state income tax, as well as a host of business deductions and credits.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax and accounting law information, software and services. It has served tax, accounting and business professionals and their clients since 1913.

Wolters Kluwer is a leading multinational publisher and information services company. The Company’s core markets are health, corporate services, financial services, tax, accounting, legal, regulation, and education. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, see www.wolterskluwer.com.

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