October 6, 2004
BB 04—104

In this issue:

  • Tax Bill Conferees Reach Agreement
  • Military Differential Pay Bill Introduced
  • IRS Clarifies Instruction for Schedule B of Form 5500

Tax Bill Conferees Reach Agreement; Deferred Compensation Items Included

Conferees for the tax bill (H.R. 4520/S. 1637), which contains a number of deferred compensation provisions among the proposed revenue-raising measures, have reportedly reached an agreement on a compromise bill that could be taken up by the full Senate and the House of Representatives by the end of the week.

The language of the compromise measure is not yet available, and although an agreement has been reached on the broad outlines of the bill, the Council is still working with conferees to address several outstanding issues such as the exclusion of stock appreciation rights (SARs) from the definition of deferred compensation and an exception for the distribution election relating to supplemental pension plans (SERPs) from the timing of election rules. These changes, and other technical changes the Council is also attempting to address, would have to be made in report language accompanying the bill. One technical matter that is being sought would clarify when a "deferral" occurs for purposes of the grandfather and transition rules as well as on a going-forward basis.

The bill could be the target of a filibuster in the Senate, where there is opposition to the absence of certain tobacco regulations. We will continue to update you as information becomes available. For more information, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.

Military Differential Pay Bill Introduced

On September 28, Representatives Michael Turner (R-OH) and John Kline (R-MN) introduced the Uniformed Services Differential Pay Protection Act (H.R. 5154), which would clarify that military personnel who receive differential pay from their employers can continue to participate in the employers' retirement plans. Differential pay is money paid by the individual's employer (the employer immediately prior to the military service) for any period during which the individual is performing services for the uniformed services while on active duty for more than 30 days. A common arrangement is for the employer to make up the difference between the employee's pay from the military and the employee's normal rate of pay from the employer.

In addition to allowing participation in the former employer's plan, H.R. 5154 would clarify that:

  • differential pay is subject to income tax withholding,
  • contributions from differential pay will not cause a plan to fail nondiscrimination rules, so long as the employer generally treats all similarly situated individuals in the same manner (same eligibility for differential pay and plan contributions)
  • individuals would be allowed to receive certain distributions from the plan even if they have not yet terminated their employment (treats the individuals as having terminated employment for purposes of eligibility to receive certain distributions)
  • employees who take a distribution would not be allowed to make contributions for six months, and
  • differential pay would be counted as compensation for purposes of the IRA rules.

The bill, as introduced, would apply to payments made and plan years beginning after December 31, 2004. This prospective effective date could cause some issues for employers that have already allowed employees in the military to continue making contributions to their plans (See discussion of this issue in the Council's July 21 Benefits Byte). In addition, the bill does not make any reference to whether employers should withhold for employment taxes such as Social Security (FICA). This omission is presumably intended to leave a 1969 IRS ruling intact which indicated that employers should not withhold employment taxes on these payments. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

IRS Clarifies Instruction for Schedule B of Form 5500

On September 28, the Internal Revenue Service (IRS) issued Announcement 2004-80 which provides additional guidance for plan administrators struggling to provide "average cash balance account data" for cash balance and other hybrid plans in response to a question on Schedule B of form 5500. Line 8c of the 2003 Schedule B requires cash balance and other hybrid plans reporting 1,000 or more active participants to provide "average cash balance account data."

The new instructions indicate that, in general, for each age/service bin, the data should include (1) the number of active participants in the age/service bin, (2) the average compensation of the active participants in the age/service bin, and (3) the average cash balance account of the active participant in the age/service bin, using $0 for anyone who has no cash balance account-based benefit. The guidance provides a couple of alternative methods of providing the data and indicates that the average balances should include only the cash balance component of a benefit. The announcement replaces the previous instructions in order to clarify and simplify the method for reporting data. If plans have already filed under published instructions prior to the issuance of the announcement, they are not required to file again.

For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.


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.