Revenue generation for the U.S. Treasury is driving congressional efforts to enact both pension funding relief and a carried interest tax on hedge funds and other alternative investments.
Both would be included in a compromise tax package now being considered by House and Senate leaders to help make up for a long list of tax-draining legislative provisions that lawmakers want to approve before Memorial Day.
The funding relief provision would allow defined benefit plans to stretch out amortization periods for investment losses for two of the years between 2008 and 2011, among other things. That would result in savings of $2.1 billion for the U.S. Treasury over the next 10 years, according to a March 10 estimate by Congress' Joint Committee on Taxation.
An additional $24.6 billion would be added to Treasury coffers over the next decade if investment partnerships — including hedge funds, real estate partnerships, private equity and venture capital firms — paid ordinary income tax on carried interest instead of using the capital gains rate, according to a House Ways and Means Committee estimate.
The compromise tax package could go to the House for a vote as soon as May 18, and then to the Senate floor soon after, industry officials said.
Matthew Beck, a spokesman for the House Ways and Means Committee, wrote in an e-mail response to questions that both proposals are under consideration. A Senate Finance Committee aide who requested anonymity, confirmed Mr. Beck's assessment.
“Nothing is sure until it's sure, but all our indications are that it (DB funding relief) will be in the final package,” added Aliya Wong, executive director of retirement policy, U.S. Chamber of Commerce, Washington, who has been helping lead the lobbying charge for DB funding relief on Capitol Hill.
The funding relief being considered is similar to the relief package provided in the American Workers, State and Business Relief Act of 2010, which was approved by the Senate on March 10. That legislation would have allowed pension plans to stretch out the amortization periods for their investment losses, over a period of either 15 years or nine years. That bill is now the basis for this compromise. Current law requires plans to amortize their investment losses over seven years.
A key provision would also require employers that extend their amortization periods to make additional pension contributions if they pay any individual employee in excess of $1 million a year, pay out extraordinary dividends to shareholders or redeem in excess of 10% of the market capitalization of their stock.
Plan sponsors that opt for the extended nine-year amortization period would be obliged to make the additional plan funding contributions for only three years. Employers that opt for the 15-year amortization would be obliged to make the additional payments for five years.
While the final wording has not been made public, those provisions are supposed to be in the compromise being considered.
Key details of the legislation remained under discussion at press time, including whether to attach provisions backed by House Education and Labor Committee Chairman George Miller, D-Calif., that would enhance the fee and compensation disclosure requirements of service providers to defined contribution plan executives and that plans must provide to participants.
Also under discussion is whether to include a controversial provision backed by Mr. Miller that would require DC plans to offer at least one index fund, according to pension industry officials.
“We're hopeful that the House and Senate come to an agreement on this very important funding relief,” said Kathryn Ricard, senior vice president of retirement policy at the ERISA Industry Committee, Washington.
“It's a win-win,” Ms. Ricard continued. “Companies would be able to spend freed-up cash on job retention and capital investment.”
Added Jason Hammersla, a spokesman for the American Benefits Council, Washington: “We support the immediate enactment of pension funding relief, provided it is designed without onerous conditions so that companies can actually use the relief to save jobs. We have urged congressional leaders to include a clean funding relief measure as part of the tax extenders package.”