**DESCRIPTION OF REVENUE ANDSOCIAL SECURITY PROVISIONSINCLUDED IN THE CHAIRMAN'S AMENDMENTIN THE NATURE OF A SUBSTITUTE TO H.R. 3249, THE "FEDERAL RETIREMENTCOVERAGE CORRECTIONS ACT"**
Scheduled for Markup
by the

HOUSE COMMITTEE ON WAYS AND MEANS

on

June 25, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

June 24, 1998

JCX-52-98
**CONTENTS**
INTRODUCTION 		

I.	LEGISLATIVE BACKGROUND OF H.R. 3249		

II.	DESCRIPTION OF REVENUE PROVISIONS IN THE CHAIRMAN'S AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 3249		

III.	DESCRIPTION OF SOCIAL SECURITY PROVISIONS IN THE CHAIRMAN'S AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 3249		

APPENDIX.	ESTIMATED REVENUE EFFECTS OF AN AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 3249		

**INTRODUCTION**

	This document,(1) prepared by the staff of the Joint Committee on Taxation, provideslegislative background on H.R. 3249, the "Federal Retirement Coverage Corrections Act", and adescription of revenue and social security provisions contained in a Chairman's amendment inthe nature of a substitute to H.R. 3249, scheduled for markup by the House Committee on Waysand Means ("Ways and Means") on June 25, 1998.

	The Appendix provides the estimated revenue effects of the proposed amendment in thenature of a substitute to H.R. 3249.

**I.  LEGISLATIVE BACKGROUND OF H.R. 3249**

	H.R. 3249 was ordered reported by the House Committee on Government Reform andOversight on March 5, 1998.(2)  The legislation before the Committee on Ways and Means is aChairman's amendment in the nature of a substitute to H.R. 3249.

	H.R. 3249 was proposed to correct errors in misclassification of Federal employees whichresulted in thousands of Federal employees being erroneously placed in the wrong Federalretirement systems. These retirement systems include: (1) the Civil Service Retirement System("CSRS"); (2) the Federal Employees Retirement System ("FERS"); (3) the Civil ServiceRetirement System Social Security Offset Plan ("CSRS Offset"); or (4) Social Security only.H.R. 3249 applies to all Federal employees, including former employees, annuitants andsurvivors. The bill extends the same correction options to employees of the foreign service andintelligence agencies.

	H.R. 3249 provides a comprehensive solution to these retirement coverage errors. Ingeneral, employees may choose between the retirement system they were mistakenly placed in orthe system they should have been placed in retroactive to the date of the error. Two exceptionsapply to this general rule. The first exception does not permit an employee who was erroneouslyplaced in the CSRS to elect to remain in it; the employee may elect instead to be enrolled in theCSRS Offset system. The second exception applies to employees who should have been enrolledin Social Security only. Unless such employees are vested in the system in which they weremistakenly placed, they may not elect to remain in such system.

	H.R. 3249 requires the employing agencies to take certain steps to make the employeewhole with respect to retirement plan benefits under the correct plan.  Depending on the precisecircumstances of the individual, these steps may include: (1) make-up contributions to the planby the employing agency (including contributions to the Thrift Savings Plan ("TSP") in lieu ofelective deferrals the employee would have been eligible to make had the employee beenproperly enrolled); (2) intra-fund or intra-Governmental transfers of funds; and (3) certain make-up contributions by the employing agency for social security taxes. The employing agencies willmake all necessary payments from appropriated funds. Employees who were mistakenlypermitted to contribute to the TSP would be able to maintain their elective deferrals (plusearnings) in the TSP subject to the rules generally applicable to such plan.  In some cases,employees could forfeit benefits previously accrued (e.g., matching contributions made to anindividual mistakenly enrolled in FERS).  H.R. 3249 amends the Social Security Act so CSRS-eligible employees who choose FERS or Social Security coverage may receive Social Securitybenefits.

**II.  DESCRIPTION OF REVENUE PROVISIONS IN THE CHAIRMAN'S AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 3249**

**Present Law
	Under present law, Federal employees generally participate in one of four retirementplans: CSRS, FERS, CSRS Offset, or Social Security only.  Participants in CSRS, CSRS Offset,and FERS may participate in the Federal Thrift Savings Plan ("TSP"), which is a qualified cashor deferred arrangement under section 401(k) of the Internal Revenue Code.  The Federalretirement plan in which any person participates depends on a number of factors, including theindividual's employment status and date of hire.  The rules governing participation in the TSPvary depending on the Federal retirement plan (i.e., CSRS, CSRS Offset, or FERS) under whichthe individual is covered. The Federal retirement plans are generally subject to the same rulesapplicable to tax-qualified retirement plans maintained by private sector-employers. These rulesinclude limits on the amount of elective deferrals that may be made on behalf of an employee ina tax year under a section 401(k) plan, such as the TSP, and an overall limitation on contributionsand benefits that may be provided to an employee under the plan.

	The limit on the amount of elective deferrals that an employee may make to a section401(k) plan for 1998 is $10,000. The overall limit on contributions and benefits for an employeefor a year is different for defined benefit plans and defined contributions plans. The limitation foran annual benefit under a defined benefit plan is the lesser of (1) $130,000 (for 1998), or (2) 100percent of the participant's average compensation for his high three years. The limitation forannual contributions and other additions under a defined contribution plan is the lesser of (1)$30,000, or (2) 25 percent of the participant's compensation.

**Description of Amendment**

	H.R. 3249 would provide for the correction of certain retirement coverage errors affectingFederal employees, by addressing situations in which Federal employees have been mistakenlyenrolled in the wrong Federal retirement plan.

	The amendment would provide that the Federal retirement plans will not fail to be treatedas qualified retirement plans under the Internal Revenue Code by reason of any action takenpursuant to the bill.  Thus, for example, the amendment would permit an employing agency tomake up contributions on behalf of an employee, or former employee, who was entitled to suchcontributions in prior years without violating the applicable overall contribution and benefitlimitations (sec. 415) for the year in which the make-up contribution is made.  However, theamount contributed may not violate the section 415 limit for the year for which the contributionis made.

	The amendment would provide that no amount is includible in the income of anyindividual for Federal tax purposes by reason of fund transfers or government contributions madepursuant to the bill. In addition, the amendment would provide that no amount transferred wouldbe subject to employment taxes under Subtitle C of the Code.

**Effective Date**

	The revenue provisions of the amendment would be effective on the date of enactment.

**III.  DESCRIPTION OF SOCIAL SECURITY PROVISIONS CONTAINED IN THE CHAIRMAN'S AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 3249**

**Present Law**

	Under present law, as mentioned previously, federal employees participate in one of fourretirement systems, CSRS, CSRS Offset, Social Security only, and FERS.  Individuals who areeligible for CSRS Offset, Social Security only, or FERS receive Social Security coverage. Individuals who are eligible for CSRS do not receive Social Security coverage.  Under theCSRS, CSRS Offset and FERS retirement systems, both the employee and the employing agencymake contributions to the Civil Service Retirement and Disability Fund (CSRDF).

	For those employees enrolled in one of the retirement systems with Social Securitycoverage, Social Security taxes are paid into the general fund of the Treasury and transferred tothe Social Security Trust Funds.  If Social Security taxes should have been, but were not paidwith respect to an individual's employment, the taxes may be assessed subject to the statute oflimitations of three years.  Similarly, improperly paid Social Security taxes may be refunded forthe period within the statute of limitations.

	Previously unrecorded earnings may be added to an individual's Social Security earningsrecord at any time.  Improperly recorded earnings may only be removed from an individual'searnings record for the period within the statute of limitations.

**Description of Amendment**

	The amendment provides when an individual who was incorrectly enrolled in CSRSchanges to one of the retirement systems that provides for Social Security coverage, that theindividual will receive credit on his or her Social Security earnings record for earningsretroactive to the date of the retirement coverage error.  Under the amendment, the SocialSecurity Trust Funds are made whole for any contributions that should have been made on behalfof the employee.

	The amendment provides that all of the amounts that should have been paid into theSocial Security Trust Funds from the time of the incorrect enrollment shall be transferred to theTrust Funds.  The amounts will be transferred to the Trust Funds from the employee's account inCSRDF and, if that amount is not sufficient, from the appropriated accounts of the agency.  Theamendment provides conforming changes to the coverage provisions of the Social Security Actand the Internal Revenue Code if an individual elects to remain in the retirement system to whichhe or she was incorrectly enrolled.

	If an individual who was incorrectly enrolled in a retirement system that has SocialSecurity coverage elects to become enrolled in CSRS, then, as under present law, Social Securitytaxes paid on behalf of the individual for the period subject to the statute of limitation (i.e.,within the last 3 years) would be refunded to the agency and to the employee.  The amendmentprovides that the agency shall deposit in the CSRDF an amount equal to the shortfall in CSRScontributions that should have been made on behalf of the employee and that the employee shallreimburse the agency for such deposits up to the amount of the Social Security taxes refundableto the employee.  As under present law, earnings on the employee's Social Security earningsrecord for the period subject to the statute of limitations would be deleted, but earnings for priorperiods would not.

	The amendment also provides authority for the Commissioner of Social Security toobtain necessary information from agencies, to notify the Secretary of the Treasury to transferinto the Social Security Trust Funds those Social Security taxes paid as a result of electionsunder the bill, and to correct earnings records.

**Effective Date**

	The Social Security provisions of the amendment would be effective on the date ofenactment.**