The world of employee benefits will soon get a wallop.
The wallop, known as "Section 89," is a new law that has been looming ever closer since its passage as part of the Tax Reform Act of 1986. It is about to become reality."Mom and pop grocery stores are going to tear their hair out when they hear about this," said Clifford W. Ritt, principal at Mercer Meidinger Hansen, a benefits consulting firm with offices in Baltimore.
Section 89, named for its placement in the Internal Revenue Code, requires all companies - for-profit and non-profit, small and large - to measure the relative monetary value of a wide range of their employee benefits. Once valued, the plans are scrutinized for how fairly they are distributed among employees, and if they are found to be discriminatory, the benefits are considered part of taxable income.
It sounds simple, but benefits managers and consultants agree that it is difficult to overstate the initial impact of the law, which takes effect Jan. 1. It is, they predict, likely to heap a nightmare of regulations onto an already complex pile of benefits programs.
Accountants, tax attorneys and benefits consultants are urging employers to begin studying the new law as soon as possible. Seminars and slide shows are planned, newsletters are being written and computer software programs are being sold to help educate benefits managers and solicit business.
As originally stated, the law was partly intended to ensure that all employees receive equitable benefits by penalizing, in the form of new taxes, extra perks received by top executives. It was also expected to increase tax revenue to the government by $494 million during its first four years.
Many industry experts fear, however, that the law might do more harm than good if companies move to make their benefits more fair by cutting programs rather than adding to them. In other cases, they said, employers would likely reshape their benefits for executives or merely pay the additional taxes as a means of buffering their top employees against the impact of the new law.
While most large companies were aware of the upcoming law and have been preparing for months, many of the smaller companies interviewed had only recently been notified about it by consultants and others. Neither group said they knew exactly what the impact would be or what companies needed to do to meet the law's standards.
The potential effect on employees is also unknown.
"Ask me again in six months or a year," said Laura K. Bos, a spokeswoman for the Employee Benefit Research Institute in Washington.
To make matters worse, employers are grappling not merely with the complex language of the new law but also with the lack of regulations from the Internal Revenue Service.
Without the IRS guidelines, benefits managers are attempting to comply with the law on a "best efforts" basis.
Failure to abide by the myriad regulations could result in employees paying taxes on many of the benefits they now take for granted. And companies could face stiff penalty taxes if the guidelines are not followed. As a result, companies are beginning to collect the data needed to conduct tests of the companies' benefit programs against the new law.
For large employers with dozens of subsidiaries, thousands of employees and many locations around the country, hundreds of separate tests are likely to be required at a cost that could reach tens of thousands of dollars, according to some consultants.
But even small and mid-sized companies are feeling the pinch.
Consultants also warn that the method to be used in determining the worth of the specific benefit is far from clear. Consultants disagree, for example, whether the dollar amount that a company contributes toward paying an employee's insurance premium would be taxable or whether the amount actually paid to cover medical costs during the year would also be taxed.
Roughly outlined, the law is divided into two areas.
The first contains five standards that must be met by a company if employees are to be spared paying taxes on the entire value of their benefits.
According to Yaffe & Co., the plans must meet five standards:
1. The plan must be in writing;
2. Employees must receive reasonable notice of the benefits available;
3. The employer must intend to continue the plan indefinitely;
4. The plan must be maintained for the exclusive benefit of employees; and,
5. The employee's rights under the plan must be legally enforceable.
If the employer meets each of these conditions, its benefits plans are then subject to so-called discrimination tests that are intended to gauge whether the company's highly compensated employees are receiving significantly more benefits than less-compensated employees.
If any of the plans fail these tests, the value of the excess benefits received by executives will be included in those individuals' gross income.
Among those considered highly compensated employees are those who, during the current or previous year, owned 5 percent of the company or earned more than $75,000.