Senate bill has no DC fee disclosure, less carried-interest tax hit

The Senate's version of a tax and jobs bill unveiled Tuesday doesn't include enhanced defined contribution fee disclosure provisions that were part of a similar bill approved by the House last month.

The Senate version of the American Jobs and Closing Tax Loopholes Act of 2010 also would ease a House-approved increase in taxes that investment partners would have to pay on carried interest.

The bill, which now goes to the Senate floor, does include provisions in the House bill approved May 28 that would allow defined benefit plan sponsors to stretch out amortization periods for investment losses for two of the years between 2008 and 2011, over a period of either nine or 15 years, at the option of the plan sponsor. Current law requires plans to amortize their investment losses over seven years.

Mutual fund executives slammed the fee-disclosure provision in the House version of the tax and jobs bill, saying it could derail the Department of Labor's long-pending efforts to set final fee-disclosure regulations for DC plans.

In an e-mail response to questions, Rep. George Miller, D-Calif., a proponent of the fee-disclosure provisions, said: “It is unacceptable for the Senate (to) eliminate this key consumer protection for 50 million Americans who have 401(k) plans. We are going to continue to fight to put back these key reforms in this bill. Once again, this just shows how the heavy hand of Wall Street trumps the concerns of hardworking Americans. At a time when America's middle class have already lost their retirement savings because of the financial scandals, they shouldn't also be losing out because of excessive or hidden fees.”

Also under the House bill, investment partners would have had to treat 75% of carried interest that is not due to a return on capital as ordinary income — which is taxed at a rate of up to 35%. Carried interest in investment partnerships is currently taxed as a capital gain at 15%.

The Senate version would require investment partners to treat 65% of carried interest that is not due to a return on capital as ordinary income. Under an exception to the 65% rule, only 55% of the carried interest attributable to the sale of assets held for at least seven years would have to be treated as ordinary income, according to a summary released Tuesday by the Senate Finance Committee. The House bill doesn't include a similar exception.

“At first glance, this proposal is clearly moving in the right direction as it relates to the carried-interest provision and seems to begin to recognize a meaningful differential for long-term investment,” said Emily Mendell, a spokeswoman for the National Venture Capital Association, in an e-mail response to questions. “It is not clear that this is the final Senate proposal and we are withholding final comment until we are certain that all options have been presented.”

A Private Equity Council study released Tuesday contends that doubling the tax rate on carried interest as indicated in the House bill would reduce private equity investment in the U.S. by $7 billion a year to a total of $27 billion, “with an accompanying loss of thousands of jobs,” according to a council news release.

“We're still continuing to work this issue very hard,” added Robert Stewart, a council spokesman, in an interview.