BENEFITS BYTE

July 21, 2004
BB 04—82

House Passes Stock Option Expensing Bill

On July 21, the full House of Representatives approved the Stock Option Accounting Reform Act (H. R. 3574) by a vote of 312-111 (with 198 Republicans and 114 Democrats voting for passage). H.R. 3574 would require expensing for the top five executives of a company but not for stock options provided to other employees. The bill would also block a proposal by the Financial Accounting Standards Board (FASB) to require companies to expense all stock options and require a study of the economic impact of expensing.

Prior to final passage, the House approved a manager's amendment offered by Financial Services Committee Chairman Michael Oxley (R-OH) that clarifies the original intent of the bill to ensure that companies that want to expense stock options may do so. Several members of the House Energy and Commerce Subcommittee on Commerce, Trade, and Consumer Protection raised this issue during the Subcommittee's July 8 hearing on H. R. 3574.

During debate, the House rejected the following amendments:

  • An amendment by Representative Brad Sherman (D-CA) that would have eliminated the assumption that the underlying stock would have zero volatility;
  • An amendment by Representative Carolyn Maloney (D-NY) intended to preserve the SEC's authority to establish accounting principles on its own initiatives as it deems necessary; and
  • An amendment in the nature of a substitute by Representatives Paul Kanjorski (D-NY) and Michael Castle (R-DE) that included a series of findings regarding FASB's independence and stating that FASB and the SEC should be permitted to adopt accounting standards without interference from Congress. This amendment also required the FASB and the SEC to take into account comments received from all interested parties when making decisions.

These amendments were previously offered, and defeated, during the House Financial Services Committee's review of the bill.

The bill now faces considerable opposition in the Senate, including opposition from Richard Shelby (R-AL), Senate Banking, Housing and Urban Affairs Committee Chairman. Shelby's committee has jurisdiction over the issue in the Senate and the House bill would be referred to his committee. Shelby has voiced strong opposition to the bill which he characterizes as an attempt to undermine the independence of FASB. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

Differential Pay for Reservists Called to Active Duty Raises Questions for Employers

The Council is currently monitoring the debate over the applicability of payroll taxes to "differential pay." When an employee volunteers or is called to active duty, some employers will pay the employee the difference between the employee's former pay and what the employee is paid for the military service; this difference is commonly known as “differential pay.� Under a 1969 Revenue Ruling, differential pay is not subject to employment taxes. A number of employers have, however, taken the position that the individuals on active duty continue to be employees. Accordingly, those employers treat the differential pay as subject to employment taxes and continue the employees' participation in the qualified plans. Because of a recent magazine article, many employees on active duty have complained to their former employers, saying that the former employer should not be subjecting the differential pay to employment taxes.

Treasury Department representatives have indicated that the Treasury has made a definite decision that under current law, if an individual is not receiving wages for employment tax purposes (because the employment relationship has terminated for that purpose), then the employee cannot participate in the employer's qualified plans. Accordingly, if the employer reverses its employment tax position, technically it would need to remove the employees from the qualified plans. Even if the employer does not reverse its employment tax position, there would be an argument that the employer's position is incorrect from both an employment tax and qualified plan perspective — at least in the in Treasury Department's view.

The Administration would very likely support legislation to clarify that employers could keep these individuals in their qualified plans. In addition, House and Senate staff have indicated there would likely be support on Capitol Hill for such legislation. In the interim, it would seem unlikely that employers' plans would be at significant qualification risk. If your company is interested in seeing legislation to address this problem, or to discuss this issue further, contact Diann Howland, Council vice president, retirement policy or Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.