By April 13, with the list of cosponsors approaching 300 and its momentum seemingly unstoppable, Rostenkowski had seen enough. He came forward with a bill that amounted to de facto repeal of Section 89 -- stripping it of all benefits except health care and making compliance easier, understandable, and relatively inexpensive.
But not painless. In fact, it was the various components of Rostenkowski's proposal that drew such intense small-business interest at those Ways and Means hearings in early May. Would it include part-timers? Would it cap employee-paid portions of health insurance at too low a threshold? Would it take into account the fine points of cafeteria plans? The complexities seemed endless as one witness after another stepped up to the microphone.
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Those questions remain unresolved. By and large, Rostenkowski and Senate Finance Committee chairman Lloyd Bentsen will determine the fate of the new Section 89 in conference this summer. The final version will likely become law as part of budget-reconciliation legislation, probably by September. Total repeal, meanwhile, remains a possibility. In any case, Treasury Secretary Nicholas F. Brady has delayed IRS implementation of Section 89 until October.
So small-business advocates are celebrating -- and for good reason. The Rostenkowski retreat is as improbable an outcome as one can imagine. "If you had said last year that Section 89 would be radically changed, you'd have been laughed out of town," lobbyist Allen Neece told about 200 NSBU leaders in April, as they rallied in Washington for their onslaught. "Rostenkowski has been brought up short. And it was your pressure on Congress that made all the difference. The lobbyists were making no headway until the constituents became enraged."
Yet even as the specific problems created by Section 89 are being addressed, questions about how it originated in the first place won't disappear so readily. Consider the number of players involved in the legislative process in Washington. There are some 19,000 congressional staffers; most have, at best, a dim understanding of business realities. "I worry about the increasing complexity and micromanagement of the economy by Congress," says Frank Swain, chief counsel for advocacy at the Small Business Administration. "The mushrooming of staff is a major factor. They'll say they're just carrying out the wishes of their bosses, but they're doing so with much greater specificity and exactitude than 20 years ago. It reached the level of a science with Section 89."
Finally, we return to Kent Mason, the man who touched off the storm. In October 1988 Mason left the government to join a private Washington law firm. Until the Rostenkowski reversal, he was doing a land-office business in -- you guessed it -- helping businesses cope with Section 89.
SECTION 89: NEW AND IMPROVED?
The proposed revision of Section 89 of the tax code is a far cry from the original
THE ORIGINAL SECTION 89
1. Applies to all benefits except pensions.
2. Covers anyone working more than 17.5 hours per week or six months per year.
3. For a simple plan, there is a simple test. If a plan benefits 80% of lower-paid workers, it does not discriminate. Eligibility is not enough, however; 80% must be actually enrolled. If an employer has one plan for single persons and another for families, those are considered separate plans. Benefit plans that can't pass this test must pass three other tests to be in compliance. Otherwise, highly compensated employees (HCEs) must pay tax on the discriminatory portion of the premium.
The 50% test. For each benefit offered, lower-paid workers must comprise at least 50% of all employees eligible to participate. Companies with more higher-paid than low-paid employees pass the test if all workers are eligible for each benefit. The intent: to shut down executive-only plans.
The 90%-50% test. At least 90% of a company's lower-paid workers must be eligible for benefits at least half as valuable as those available to its most highly compensated employees.
The average-value test. Lower-paid workers' benefits must equal at least 75% of the average value of benefits if they are provided to HCEs.
4. Five general rules apply to all benefits: the plan must be in writing; it must be legally enforceable; employees must be notified of plan benefits; plans must be for the exclusive benefit of workers; and employers must intend to maintain them indefinitely. Otherwise, employees are taxed on the value of actual benefits received.
5. All current employees must be tested together with potential exceptions for separate lines of business.
6. At least the highest-paid officer is automatically considered highly compensated regardless of salary, as are officers who own more than 5% of the company's stock.
7. Compliance must be continuously monitored and reaffirmed annually.
REP. DAN ROSTENKOWSKI'S PROPOSAL
1. Applies to health benefits only.
2. Covers anyone working more than 25 hours per week.
3. A plan will pass muster if it is not discriminatory "on its face" and if it is available to at least 90% of a company's lower-paid workers at a weekly cost to employees of no more than $10 for single-person coverage or $25 for family coverage, indexed for inflation. Highly compensated employees must count their benefits as taxable income if their company-paid premiums were greater than 133% of premiums paid for most lower-paid workers.
4. The same general rules apply, with different penalties. If the company fails to comply with any of the qualification rules, it must pay a 34% excise tax on company-paid premiums.
5. Union employees may be tested separately.
6. HCEs are defined as they are in the current Section 89, but officers are not automatically considered highly compensated as long as they earn less than $45,000 per year.
7. Compliance may be reaffirmed annually.
