1 See Institute Memoranda to Tax Members No. 6-98 and International Members No. 4-98, dated February 9,
1998; and to Pension Committee No. 3-98, dated February 6, 1998.
[9756]
March 13, 1998
TO: TAX COMMITTEE No. 9-98
PENSION COMMITTEE No. 14-98
INTERNATIONAL COMMITTEE No. 12-98
TRANSFER AGENT ADVISORY COMMITTEE No. 17-98
RE: INSTITUTE STATEMENT ON ADMINISTRATION'S TAX/PENSION
PROPOSALS
______________________________________________________________________________
The Institute has submitted to the House Ways and Means Committee the attached written
statement on the tax and pension provisions contained in the Clinton Administration’s Fiscal Year 1998
budget proposal.1
I. Withholding Tax Exemption for Certain Bond Fund Distributions. The Administration has
proposed to exempt from U.S. withholding tax distributions made to foreign investors by U.S.
funds investing primarily in bonds. The Institute urges enactment of this proposal as an important
first step toward eliminating all U.S. tax incentives for foreign investors to prefer foreign funds over
U.S. funds.
II. Retirement Security Initiatives
A. Small Employer Retirement Plan Coverage. As Administration proposals recognize, small
employer retirement plan coverage is a matter of serious public concern. Under 20 percent of
small employers sponsor retirement plans. The following small employer initiatives should be
considered:
1. Improve the Savings Incentive Match Plan for Employees (SIMPLE ) program for small
employers by permitting employees in SIMPLE plans to defer annually up to the $10,000
limit applied to 401(k) plans.
2. Reduce the cost of maintaining retirement plans by eliminating or modifying the top-
heavy rule, which retards small employer plan formation and, as the Administration
proposes, consider a tax incentive to induce small employers to establish plans.
3. Assure that any new programs for small employers, such as the Administration’s
proposals to enhance the payroll deduction IRA program and create a simplified defined
benefit plan program, provide effective incentives for employers and do not undermine
currently successful programs, such as the SIMPLE program.
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B. Retirement Account Portability. Congress should consider a broader approach to portability
than the Administration’s proposal to accelerate vesting, and consider legislation to enable
individuals in any type of individual account program (including 401(k), 403(b), 457 and IRAs)
to move assets among these programs as they move from employer to employer over the
course of their careers.
C. Variable Annuities. Administration proposals relating to variable annuities would tax many
individuals who save for retirement in these investment vehicles.
III. Conversions of Large C Corporations to S Corporations. The Administration has proposed to
require current gain recognition on the conversion of a large C corporation to an S corporation.
The Institute recommends that, should this proposal be enacted, the legislative history to the
proposal include a statement making it clear that the proposal would not impact an IRS Notice (No.
88-96) that provides regulated investment companies (“RICs”) with a safe harbor from recognition
of built-in gains in situation in which a RIC temporarily fails to qualify under Subchapter M.
IV. Increased Penalties for Failure to File Correct Information Returns. The Administration has
proposed to increase the maximum penalty for failure to file correct information returns -- currently
set at $50 per return -- to the greater of $50 per return or 5 percent of the aggregate amount
required to be reported correctly (subject, in general, to a $250,000 cap). The Institute opposes this
proposal; the industry maintains a high level of information reporting compliance and the current
penalty structure provides powerful incentives for RICs to correct promptly any errors made.
Keith D. Lawson Russell G. Galer
Senior Counsel Senior Counsel
Attachments