November 5, 2004
BB 04—113

Congress May Address Uniform Definition of Dependent Issues During Lameduck Session

The American Benefits Council has learned that Congressional committee staff are working with the U.S. Treasury Department to prepare a technical corrections bill to fix some of the problems arising from the change of the definition of "dependent" in Section 152 of the Internal Revenue Code. The change, included in the recently enacted Working Families Tax Relief Act of 2004 (H.R. 1308), was intended to make the definition more uniform. However, because many other Code sections and regulations reference Code Section 152, the change in definition has broad implications for health, dependent care spending arrangements, hardship distributions from 401(k) plans, and unforeseeable emergency distributions from 457 plans and non-qualified deferred compensation plans. (For more details, see the October 19, 2004 Benefits Byte, or Council President James Klein's October 19 letter to the Treasury Department summarizing the situation.)

The Council has specifically learned that the technical corrections bill may attempt to fix problems associated with Section 129 (dependent care plans) and Section 223 (Health Savings Accounts). The goal is to consider the bill during the lame-duck session that begins on November 16, 2004, however, it is unclear if the effort will be successful since much of the focus of Congress that week will be on finishing the appropriations process and approving an Intelligence reform measure.

The Treasury Department is expected to separately issue guidance on Section 106 (allowing employers to make contributions to premiums on a plan participant's behalf on a tax-free basis to the individual) and 401(k) issues shortly. The guidance is expected to make the definition of dependent under Code Section 106 conform to the definition established by the Working Families Tax Relief Act for Code Section 105 (allowing benefits received under health plans to be tax free for plan participants). With this conforming change, individuals will be able to qualify as a dependent under a health plan either by meeting the age limitation requirements of a Qualifying Child or the standards for a Qualifying Relative, without regard to the individual's gross income.

The Treasury Department is also expected to address regulatory problems for 401(k) hardship distributions in the final 401(k) regulations. The current regulations governing hardship distributions from 401(k) plans incorporate Section 152 by reference. This causes problems, for example, for plans that want to allow hardship distributions for the medical expenses of the same-sex partner of an employee. Treasury will likely eliminate the income limitation from the definition of dependent for purposes of the hardship distribution portion of the 401(k) regulations.

The Council is drafting a letter to send to the Senate Finance Committee, House Ways & Means Committee and House and Senate leadership urging them to consider the technical corrections bill during the week of November 16 and will be asking other employer organizations to join us in sending this letter. For more information, please contact Susan Relland, Council health policy legal counsel, or Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

FASB Broadens Cash Balance Accounting Treatment to DB Plans with Lump Sum Feature
For defined benefit plans that permit lump sum distributions, the Financial Accounting Standards Board (FASB) recently reached a tentative agreement that the value of a defined benefit plan's liabilities must be at least as large as the lump sum participants could receive if they left employment on the measurement date. FASB had limited its previous discussions of a potential rule interpreting FASB Statement No. 87 (FAS 87, "Employers' Accounting for Pensions") to cash balance plans that provide for a variable interest rate credit. According to a recent article on FASB activities, prepared by Mercer Human Resource Consulting, the latest proposal will apply to cash balance plans and even traditional final average pay plans, and could lead to significant increases in pension liabilities.

FASB has not determined a schedule for the formal issuance and adoption of the new proposal. The Council will keep you informed with any developments. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

Californians Narrowly Vote to Repeal Employer Mandate for Health Insurance Law
Opponents of the California pay-or-play health care law prevailed on November 2 when Proposition 72 was narrowly approved by California voters. The law (S.B. 2), which was signed by former Governor Gray Davis (D), would have required companies with 50 or more California employees to either provide their employees (and dependents, in the case of large employers) with health insurance or pay into the State Health Purchasing Program. Californians Against Government Run Health Care started collecting signatures to challenge the new health care mandate almost immediately after S.B. 2 was signed into law in the fall of 2003. California Governor Arnold Schwarzenneger (R) opposed SB 2, saying it would "reverse California's recovery and trigger an exodus of jobs from the state." For more information, contact Maria Ghazal, Council director, health 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.