WASHINGTON -- This might be the year employers finally get help from the IRS on cash-balance plan account calculations.
Employers have for years sought to give employees who quit just the amount of money built up in their accounts under these hybrid plans. But the Internal Revenue Service has required them to calculate the present value of retirement benefits they would give employees at 65, using interest rates that could result in former employees collecting more money than they have accrued in their accounts.
"A lot of us would argue there is no purpose to the calculations," said Kyle N. Brown, retirement counsel at Watson Wyatt Worldwide in Washington.
This is among a laundry list of items the IRS has earmarked for guidance this year.
As required under 1996 tax law changes, the IRS also is planning to give employers guidance on using electronic and interactive technologies in pension plans.
This guidance would tell employers, for example, whether account change requests employees make through interactive telephone systems, are valid, he said.
"This is an area where the IRS needs to catch up with the rest of American business, and this is their opportunity," he said.
The IRS also is preparing to give employers help with setting up safe harbors for 401(k) plans.
The Small Business Job Protection Act of 1996, which becomes effective next year, included the provision, under which employers do not have to conduct onerous tests to prove their pension plans don't favor highly paid employees if they:
* Give all employees 3% of pay, whether or not they contribute to their 401(k) plans; or
* Match dollar for dollar the amount employees put into their retirement plans up to 3% of pay, and contribute 50 cents on the dollar for what they put in for the next 3% of pay.
However, employers still have to conduct the tests if they allow employees to contribute after-tax money to their retirement plans.
Moreover, the IRS is expected to finalize rules telling employers how to calculate payroll taxes for deferred compensation plans, which do not set aside money in tax-favored plans but pay out promised benefits when employees retire.
The question, Mr. Brown said, was whether employers could delay paying Social Security and Medicare payroll taxes on the promised benefits until employees actually receive them at retirement.
Because some employees might never be able to collect those benefits, taxing them upfront would be unfair, he said. The IRS proposed rules in 1996 that would let employers choose not to pay the payroll taxes until the employees retire.
The IRS also wants companies to remember they can deduct IRA contributions directly from their employees' paychecks under current law. Many employers are not aware they can set up such arrangements, said a senior Clinton administration official who did not wish to be identified.
Many others are reluctant to set up such arrangements, fearing they might be considered employer-sponsored plans, and might inadvertently be held responsible if the investments in which employees pour money sour.
Missing from this year's topics on which the IRS intends to give guidance to employers are three items dealing with nonqualified deferred compensation arrangements, and foreign pension plans for U.S. companies. Specifically, giving employers help on figuring out the conditions under which the IRS would tax the income of foreign pension plans, even if those plans are funded with foreign trusts.
The Clinton administration official said those items on the back burner for now.
