Given its two-year fuse and its decidedly unsexy nature, Section 89 was slow to sink into the corporate consciousness. But by late 1988, as accountants and benefit planners started explaining the new rules to their clients, pockets of outrage began to develop around the country. This time Congress had gone too far.
The new law so puzzled the Internal Revenue Service -- the actual enforcer -- that by the New Year's Day start date, regulations were nowhere in sight. Companies trying to comply staggered through a nearly unsolvable maze. When regs finally did appear in March, they filled scores of pages of the Federal Register with small print, in language so dense and turgid that only a masochistic lawyer could love it. All told, the IRS announced, Section 89 would pile on the nation's employers some 9 million hours of paperwork -- congressional analysts believe the IRS estimate should be at least five times higher, or about 22,000 worker-years -- just so they could prove what most of them already knew: that their benefit plans did not discriminate against non-highly compensated employees.
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Months earlier, complaints had begun pouring into the office of Rep. John J. LaFalce, a New York Democrat and chairman of the House Small Business Committee. LaFalce has fought hard for small business causes. Stunned by the ferocious reaction to the new law, he searched for an explanation. "I have talked to members of Congress," he says. "I said, 'Well, who authored Section 89?' It's a mystery. No one will claim responsibility for authoring Section 89."
In fact, few had even heard of it. Even those close to the health-insurance issue professed ignorance. Consider Sen. Dave Durenberger, a Minnesota Republican. He had been chairman of the Health Subcommittee of the Senate Finance Committee when the Tax Reform Act was written. He was unaware of the crushing impact of Section 89, he admitted to one lobbyist, until he ran for reelection in 1988. Then he got an earful from enraged constituents.
Kent Mason insists that one man who knew about it was Rep. Dan Rostenkowski (D-Ill.), the blustery chairman of Ways and Means. "I can't say he memorized every single provision," Mason says, "but he certainly was aware of the general concepts."
It was in the little provisions of the statute, however, that the real damage lay. For instance, if a company that fails the qualification tests for its health plan pays out $100,000 on behalf of an employee with a catastrophic illness, that money could become taxable income for the employee. Plans could even fail the employee-participation rules and become subject to heavy tax liability if too many workers refuse coverage. "Whoever wrote the thing certainly had no understanding of small business, the complexities of benefits, or the health-insurance industry," Alice B. Griffin, president of Griffin Pension Services Inc., in Hamilton, Mass., complains.
The more LaFalce learned, the more atrocious Section 89 looked. "Some individuals have said it's like throwing an atomic bomb at a suspect anthill," he observes, "and missing the anthill." And so early last January, LaFalce began making noises about remedial action. There was, however, one giant obstacle: Rostenkowski. One of the most powerful members of Congress, "Rosty" was known to want no part of tampering with the Tax Reform Act. It had involved too much delicate compromise. Controversy surrounding it had been so extreme that Rostenkowski, Packwood, and other Hill power brokers had cobbled the thing together behind closed doors. It was inviolate as well as fragile. Pulling any thread could unravel the whole thing.
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By the government's original estimate, Section 89 would bring in only $150 million a year -- an amount so puny as to be almost ludicrous by congressional standards. And who knew what compliance would cost? Some estimates, remember, pegged it as high as $5 billion in deductible expense. It might be a net revenue loser. Still, the $150 million was an integral part of the tax-reform whole. If La-Falce messed with Section 89, Rostenkowski reportedly warned, he might reopen the entire issue of tax reform.
There are few committee chairs who would dare challenge Rostenkowski. And certainly the Small Business Committee is small potatoes compared with Ways and Means. But LaFalce was not easily intimidated. He had voted his conscience before against party pressure. So he pressed on, introducing a repeal bill on January 24.
Perhaps LaFalce was emboldened by the fast-rising support. His bill had 45 cosponsors right off the bat, and the effort had plenty of reinforcements elsewhere. The National Federation of Independent Business launched a repeal drive of its own and quickly enlisted 70 other organizations, representing millions of small businesses. They issued Mayday alerts to their forces across the land. Within two weeks, as irate company owners pressured their legislators, the bill had 112 cosponsors. More signed on as LaFalce paraded witnesses before the House Small Business Committee. They told one horror story after another.
Earlyn Church, co-owner of Superior Technical Ceramics Corp., in St. Albans, Vt., has fewer than 100 employees. But Section 89, she testified, had already cost her company $23,250 for legal and accounting fees, software, and analysis. In addition, she'd been forced to hire a personnel manager at $28,000 a year, plus 40% for fringes, to shoulder the ongoing compliance requirement. Another witness cited a company with 50 employees that paid $60,000 to a consultant to see if its plans met the guidelines. The upshot? The company was advised to impute an additional $4,000 worth of income to its higher-paid people.
The repeal bill passed a milestone on March 17, when it garnered its 218th cosponsor, giving it a majority of the House, enough for passage if it reached the floor. But since the bill affected taxes, it would first have to clear Ways and Means, and Rostenkowski was holding firm. Lobbyists began exploring various mechanisms to spring the bill out of committee. There was talk of a discharge petition, a rare maneuver that would amount to a declaration of war against Rostenkowski.
