January 30, 1992
TO: BOARD OF GOVERNORS NO. 8-92
TAX COMMITTEE NO. 3-92
ACCOUNTING/TREASURERS COMMITTEE NO. 6-92
PENSION COMMITTEE NO. 8-92
OPERATIONS COMMITTEE NO. 3-92
CLOSED-END FUND COMMITTEE NO. 2-92
UNIT INVESTMENT TRUST COMMITTEE NO. 7-92
RE: ADMINISTRATION'S TAX PROPOSALS
__________________________________________________________
The Administration has included several tax proposals
significant to the investment company industry in its Fiscal Year
1993 budget. This memorandum describes the proposals and
attaches relevant portions of the Treasury Department's General
Explanation of Proposals.
I. Capital Gains Tax Rate Reduction
The Administration's capital gains tax proposal would
permit individuals (but not corporations) to exclude from income,
effective February 1, 1992, a percentage of capital gain realized
upon the disposition of certain capital assets (such as
securities) that would vary based upon the length of time the
assets were held. This "sliding-scale" or "tiered" capital gains
exclusion would be 45 percent for assets held for more than three
years, 30 percent for assets held for more than two years and 15
percent for assets held for more than one year. Special
transition rules would phase in these new holding period
requirements during 1992 and 1993.
II. Flexible Individual Retirement Accounts
The Administration's proposal would add to the Internal
Revenue Code a new provision for the establishment of flexible
individual retirement accounts ("FIRAs"). Married couples with
income of $120,000 or less could make FIRA contributions of up to
$5,000 per year ($2,500 to each of two FIRA accounts). Single
taxpayers with income of $60,000 or less could contribute up to
$2,500 to a FIRA. Eligible FIRA investments would be the same as
for current individual retirement accounts ("IRAs").
- 2 -
Contributions to FIRAs would not be deductible, but both
the contributions and earnings thereon could be withdrawn tax-
free if the contribution remained in the FIRA for at least seven
years. If amounts were withdrawn prior to the expiration of
seven years from the date of the contribution to which they were
applicable, the earnings would be taxable as ordinary income in
the year of the withdrawal. Earnings attributable to
contributions held for less than three years would be subject to
an additional 10 percent excise tax.
Amounts in existing IRAs (other than IRAs including
rollovers from qualified pension or profit sharing plans) could
be converted to a FIRA if the conversion is made between February
1, 1992 and December 31, 1992. These amounts would be included
in income ratably over a four-year period.
III. Withdrawals from IRAs for Medical and Educational Expenses
and for First Time Home Purchases
The Administration's proposal also would permit IRA owners
to make certain withdrawals from an IRA on or after February 1,
1992 on a penalty-free basis. No penalty would be imposed on any
IRA withdrawal for medical expenses of the IRA owner, the owner's
spouse and the owner's dependents. In addition, penalty-free
withdrawals could be made for higher education and post-secondary
vocational education expenses of the IRA owner, the owner's
spouse and the owner's children. No limit would be imposed on
the amount of the withdrawals for qualifying medical or
educational expenses. Individuals could also withdraw up to
$10,000 from their IRAs on a penalty-free basis for first time
home purchases.
IV. Pension Simplification
A. Small Business Model Retirement Plan
The Administration proposal would "generally replace" the
Salary Reduction Simplified Employee Plan ("SARSEP") with a Small
Business Model Retirement Plan. Availability of this new plan
would be limited to businesses that normally employ less than 100
persons throughout the year and that have no other pension plans.
Sponsoring employers generally would be required to contribute
one percent of pay for each employee. Employees could contribute
up to $3,000 per year on a salary deferral basis and employers
would be required to make matching contributions equal to the
first 3 percent of compensation that an employee elects to defer
plus 50 percent of the employee's elective deferrals that
represent between 3 and 5 percent.
B. Other Pension Simplification Proposals
The Administration's proposal would also amend the section
401(k) nondiscrimination rules to allow testing for each plan
- 3 -
year on the basis of the non-highly compensated employee
- 4 -
deferrals for the previous plan year. In addition, most of the
current restrictions on the types of pre-retirement distributions
eligible for IRA rollover treatment would be eliminated and plans
would be required to give employees the option of having
distributions transferred directly to an IRA or another qualified
plan. Further, the proposal would make section 401(k) plans
available to tax-exempt employers. Finally, the proposal would
require the IRS to define the duties of sponsors of master and
prototype and other model plans, especially with respect to
insuring that adequate administrative services (including timely
amendments) are provided with respect to the plan.
We will keep you informed of developments.
Keith D. Lawson
Associate Counsel - Tax
Attachment
KDL:bmb