WASHINGTON - The U.S. House of Representatives passed a long-awaited pension simplification bill that would impose a tax on certain pension fund earnings on foreign investments, but many experts are unsure what will happen, now that the bill is in the Senate's hands.
"We're cautious," said Jim Kaitz, vice president of government relations for the Financial Executives Institute, Washington. "We're not sure where it's going, but we're not complacent enough to think it's not going anywhere."
The Tax Simplification and Technical Corrections Act of 1993, H.R. 3419, simplifies about 100 tax provisions, some of which pertain to pension funds. But it also slaps a first-time tax - as unrelated business income - on pension funds and other tax-exempt organizations with investment income from foreign corporations if the funds own at least 10% of the outstanding shares. The tax also would apply to income that tax-exempt organizations get from investment pools and limited partnerships that own at least 10% of a foreign company.
It's unclear how many funds would be affected by the bill immediately. But the real concern is not so much the funds it would affect now, but how the tax would hurt foreign investments in the future, Mr. Kaitz said.
"Clearly companies are globalizing their investments," Mr. Kaitz said. "That's where it could affect future investment opportunities. This is precedent-setting."
The UBIT was included, along with three other revenue-raising provisions, to help raise $467 million over five years.
But Marjorie Kulash, a consultant who follows legislative affairs at The Wyatt Co., Washington, said she didn't expect the bill to move past the Senate Finance Committee this session, where it currently sits.
"I don't think it's an imminent issue at this point," she said. "It might have been if it had come up before health care reform."
When the bill was first introduced, Rep. Dan Rostenkowski, D-Ill., stressed the need to push the legislation through Congress without other tax provisions latched to the bill. When the bill passed the House in May, Mr. Rostenkowski said he would still "stringently oppose any efforts to turn the bill into a Christmas tree decorated with special interest and members' amendments."
At the same time, he bent his position a bit to allow for changes in the revenue-raising section.
"If the Senate amends the four revenue-raising provisions contained in H.R. 3419, and does so in a reasonable manner, then I will be willing to review such amendments in conference," Mr. Rostenkowski said.
Several experts, including Mr. Kaitz and Sam Murray of the Profit Sharing Council of America, Washington, said they would like to see the Senate strip the UBIT provision from the bill and pass the rest of the provisions.
Some of these provisions include:
Simplifying 401(k) non-discrimination testing rules;
Allowing non-government tax-exempt employers such as trade associations to sponsor 401(k) plans;
Eliminating five-year averaging for lump-sum distributions from qualified plans;
Allowing government and other public pension funds to exceed contribution limits set by Section 415 of the Internal Revenue Code; and
Simplifying the definition of highly compensated employees for non-discrimination testing to those who own at least 5% of the company or earn at least $66,000 annually, to be increased each year with inflation and to be rounded to the nearest $1,000.