Small Business Advisory Task Force

May 16, 2001 Meeting Minutes

Participants

Task Force:  Bob Bilbrough, Chairman – Qualcon
                   David Chisum -- A Novo Broadband
                   Heather Beshears -- Duraswitch
                   Cody Graves -- Automated Energy, Inc.
                   Dick Dadamo -- Dense-Pac Microsystems

AeA Staff:    Matt Page -- D.C. Office

New Business

New Task Force members

Three new members have joined the Small Business Advisory Task Force since the last call in March. They include Dick Dadamo of Dense-Pac Microsystems in Garden Grove, CA (Orange County Council); Cody Graves of Automated Energy Inc. in Oklahoma City, OK (Texas Council); and Michael Hamill of Digital Planet in Culver City, CA (Los Angeles Council). All three new members represent Councils that had been previously without representation.

Pension Plan Reform

Legislation that will have a profound affect on the way Americans save for their retirement is steadfastly moving through Congress. Both Democrats and Republicans strongly support pension plan reform, and President Bush is sure to sign the legislation once it reaches his desk. In light of the fact that Social Security reform is unlikely to become law soon, lawmakers in Washington are eager to create new saving opportunities and increase contribution limits to make retirement plans more attractive.

Background

Seventy million Americans (about half the workforce) do not have a 401(k)-type plan or any kind of pension. The problem is worse among small businesses; less than 20 percent of small businesses with 25 or fewer employees offer any kind of pension coverage today. In addition, contribution limitations on pensions and IRAs are stuck at 1980s levels. The $2,000 IRA contributions limit has not been changed since 1981. Moreover, workers could set more aside in a 401(k) plan in 1986 than they can today. These cutbacks hurt the workers who need the most help in saving for retirement– particularly those at lower and middle-incomes. Since 1990, pension coverage has actually declined from 40 percent to 33 percent among workers making less than $20,000 per year. Additionally, many women face financial hardship later in life because they live longer, may have been out of the work force to raise children, and do not have access to a quality pension. Pension laws need to be updated to address the unique work patterns and life situations experienced by women.

While the discussion of pension reform is not necessarily an exciting topic, the impact of these changes will be profound. The proposed legislation will make retirement security available to millions of workers by expanding small business retirement plans, allowing workers to save more for retirement, addressing the needs of an increasingly mobile workforce through portability and other changes, making pensions more secure, and cutting the red tape that has hamstrung employers who want to establish pension plans for their employees.

Summary of Legislation

On May 2, 2001, the House of Representatives overwhelmingly approved by a 407-24 vote the Comprehensive Retirement Security and Pension Reform Act of 2001 (H.R. 10). This vote marks the second time the House has passed pension reform legislation. A similar bill cleared the House last year by a nearly identical vote margin.

Key provisions of the House passed legislation include:

• The current-law $2,000 IRA contribution limit would be increased to $5,000 ($3,000 in 2002, $4,000 in 2003, and $5,000 in 2004), and indexed thereafter.
• Taxpayers age 50 and above would be permitted to contribute $5,000 to an IRA immediately beginning in 2002 (no phase-in would apply). These "catch-up" contributions would enable older taxpayers to more fully prepare for retirement.
• Increased contribution, benefit, and deduction limits in tax-favored retirement plans (including phasing in an increase in the limit on salary reduction contributions to 401(k)-type plans from $10,500 to $15,000),
• $5,000 "catch-up" contributions to 401(k)-type plans for workers age 50 and above;
• Shortened vesting requirements for employer matching contributions,
• Increased portability of retirement plan assets making it easier for employees to roll over assets when they change jobs,
• Modification of Top-Heavy Rules to create a simplified pension system that encourages small businesses to offer pension plans, and
• Dividends to be retained in Employee Stock Ownership Plans (ESOPs) without loss of the dividend deduction.

The Senate is also considering pension reform legislation, and is currently part of the President’s larger tax cut bill. On May 15, 2001, the Senate Finance Committee approved the President’s $1.35 trillion tax cut plan. Many of the same provisions contained in the House legislation are also found in the Senate package. The Senate is attempting to pass the tax bill before the Memorial Day recess.

Task Force Member Plans

Prior to the call, Task Force members were asked to provide information regarding what type of pension plan, if any, they offer their employees. Based on the survey, the apparent plan of choice among Task Force members is the 401(k). Additionally, many offer their employees some type of matching contribution as part of their 401(k) plan.

Another type of plan offered by Task Force members is the SIMPLE IRA plan. SIMPLE IRAs were created in 1997 and are, because of their simplicity to maintain, attractive to small businesses with 100 or fewer employees.

When asked what percentage of their employees participate in the pension plan, the answers ranged from a low of 20% to nearly 90%, or full-participation.

Because of the negative impact, Task Force members expressed a need for the modification of Top-Heavy rules. Generally speaking, the Task Force would welcome simplifying pension paper work requirements.

Assuming the legislation before Congress is enacted into law, the Task Force supports the idea of AeA helping to educate members regarding the various changes in pension regulations.

From a retirement savings policy perspective, AeA has taken the position of stopping the IRS from requiring employment tax withholding on qualified stock option plans. In January 2001, the Treasury issued IRS Notice 2001-14 that places a moratorium until 2003 on employment tax withholding from qualified stock option plans. This important ruling will benefit all high-tech companies and employees who offer and participate in these plans.

Old Business

During the March conference call, Task Force Chairman Bob Bilbrough asked the Task Force what were the member’s views on tax legislation. To spur discussion, Bob referred to an article in the Atlanta Business Chronicle called, "Small Business tax cuts ‘compliment’ Bush Plan." Bob wanted to know if AeA’s tax policy priorities of Internet tax simplification, Permanent Extension of the R&D Tax Credit, and Qualified Stock Option Plan Withholding were are on target with priorities of members of the Task Force.

Since that call, two pieces of small business tax cut legislation have emerged in Congress. The Chairmen of the Small Business Committees in the both the House and Senate have offered a package of tax provisions (H.R. 1037 and        S. 189) aimed at helping smaller companies. Items of particular interest to the high-tech community in these bills are the provisions that would: increase Section 179 expensing limits to $50,000 annually (including computer software); a reduction in depreciation schedules for computers, peripherals, and software to two years from the currently unrealistic schedule of five years; and the permanent extension of the R&D tax credit.

AeA has been asked to participate in a coalition called the Alliance for Small Business Investment, which supports the bills H.R. 1037 and S. 189. The composition of the coalition includes high-tech and small business representatives.

There is a strong possibility the small business tax cut legislation will be merged with proposals to increase the minimum wage.

Task Force members expressed strong support for the passage of the small business tax cut package and stated an increase in the minimum wage would have little or no impact on their business.

A few Task Force members also asked about AeA’s position on elimination of the so-called "Death Tax." It was explained to the Task Force that Death Tax legislation has again moved through both houses of Congress and is strongly supported by the President. The current proposals would eventually phase-out the estate tax over 10 years, while increasing the unified credit during the process. Upon completion of the phase-out, step-up in basis would be switched with carry-over basis for calculating capital gains.

Historically, AeA has not lobbied in favor of eliminating the estate tax because the issue has not generated enough interest during AeA "town-hall meetings," where members are surveyed for their top business issues.

Next Meetings

Demonstration of AeA’s new Online Networking service
Date: Wednesday, May 23, 2001
Time: 4:30 p.m. EST/1:30 p.m. PST
Call-in #: 800-588-3167
Passcode: 8008#

Next regularly scheduled meeting
Date: Wednesday, July 18, 2001
Time: 4:30 p.m. EST/1:30 p.m. PST

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