**DESCRIPTION OF REVENUE ANDSOCIAL SECURITY PROVISIONSINCLUDED IN H.R. 416, THE "FEDERAL RETIREMENTCOVERAGE CORRECTIONS ACT"**

Scheduled for Markup

by the

HOUSE COMMITTEE ON WAYS AND MEANS

on

February 11, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

February 11, 1999

JCX-5-99R

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**CONTENTS
INTRODUCTION		

I. LEGISLATIVE BACKGROUND OF H.R. 416	

II. DESCRIPTION OF REVENUE PROVISIONS IN H.R. 416	

III. DESCRIPTION OF SOCIAL SECURITY PROVISIONS IN H.R. 416	

**INTRODUCTION**

	This document,(1) prepared by the staff of the Joint Committee on Taxation, provideslegislative background on H.R. 416, the "Federal Retirement Coverage Corrections Act", and adescription of revenue and social security provisions contained in H.R. 416, scheduled formarkup by the House Committee on Ways and Means ("Ways and Means") on February 11,1999.
**I. LEGISLATIVE BACKGROUND OF H.R. 416**
	H.R. 416 was ordered reported by the House Committee on Government Reform andOversight on February 3, 1999.(2)

	H.R. 416 was proposed to correct errors in mis-classification of Federal employees whichresulted in thousands of Federal employees being erroneously placed in the wrong Federalretirement systems. These retirement systems include: (1) the Civil Service Retirement System("CSRS"); (2) the Federal Employees Retirement System ("FERS"); (3) the Civil ServiceRetirement System Social Security Offset Plan ("CSRS Offset"); or (4) Social Security only.H.R. 416 applies to all Federal employees, including former employees, annuitants andsurvivors. The bill extends the same correction options to employees of the foreign service andintelligence agencies.

	H.R. 416 provides a comprehensive solution to these retirement coverage errors. Ingeneral, employees may choose between the retirement system they were mistakenly placed in orthe system they should have been placed in retroactive to the date of the error. Two exceptionsapply to this general rule. The first exception does not permit an employee who was erroneouslyplaced in the CSRS to elect to remain in it; the employee may elect instead to be enrolled in theCSRS Offset system. The second exception applies to employees who should have been enrolledin Social Security only. Unless such employees are vested in the system in which they weremistakenly placed, they may not elect to remain in such system.

	H.R. 416 requires the employing agencies to take certain steps to make the employeewhole with respect to retirement plan benefits under the correct plan. Depending on the precisecircumstances of the individual, these steps may include: (1) make-up contributions to the planby the employing agency (including contributions to the Thrift Savings Plan ("TSP") in lieu ofelective deferrals the employee would have been eligible to make had the employee beenproperly enrolled); (2) intra-fund or intra-Governmental transfers of funds; and (3) certainmake-up contributions by the employing agency for social security taxes. The employingagencies will make all necessary payments from appropriated funds. Employees who weremistakenly 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 anindividual mistakenly enrolled in FERS). H.R. 416 amends the Social Security Act soCSRS-eligible employees who choose FERS or Social Security coverage may receive SocialSecurity benefits.
**II. DESCRIPTION OF REVENUE PROVISIONS IN H.R. 416**
**Present Law**

	Under present law, Federal employees generally participate in one of four retirementplans: 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 cashor deferred arrangement under section 401(k) of the Internal Revenue Code. The Federalretirement plan in which any person participates depends on a number of factors, including theindividual's employment status and date of hire. The rules governing participation in the TSPvary depending on the Federal retirement plan (i.e., CSRS, CSRS Offset, or FERS) under whichthe individual is covered. The Federal retirement plans are generally subject to the same rulesapplicable to tax-qualified retirement plans maintained by private sector-employers. These rulesinclude limits on the amount of elective deferrals that may be made on behalf of an employee ina tax year under a section 401(k) plan, such as the TSP, and an overall limitation on contributionsand 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 section401(k) plan for 1999 is $10,000. The overall limit on contributions and benefits for an employeefor a year is different for defined benefit plans and defined contributions plans. The limitation foran annual benefit under a defined benefit plan is the lesser of (1) $130,000 (for 1999), or (2) 100percent of the participant's average compensation for his high three years. The limitation forannual 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 the Bill**

	H.R. 416 would provide for the correction of certain retirement coverage errors affectingFederal employees, by addressing situations in which Federal employees have been mistakenlyenrolled in the wrong Federal retirement plan.

	The bill would provide that the Federal retirement plans will not fail to be treated asqualified retirement plans under the Internal Revenue Code by reason of any action takenpursuant to the bill. Thus, for example, the bill would permit an employing agency to make upcontributions on behalf of an employee, or former employee, who was entitled to suchcontributions in prior years without violating the applicable overall contribution and benefitlimitations (sec. 415) for the year in which the make-up contribution is made. However, theamount contributed may not violate the section 415 limit for the year for which the contributionis made.

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

**Effective Date**

	The revenue provisions would be effective on the date of enactment.
**III. DESCRIPTION OF SOCIAL SECURITY PROVISIONS CONTAINED IN H.R. 416**
**Present Law**

	Under present law, as mentioned previously, federal employees participate in one of fourretirement systems, CSRS, CSRS Offset, Social Security only, and FERS. Individuals who areeligible 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 makecontributions to the Civil Service Retirement and Disability Fund (CSRDF).

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

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

**Description of the Bill**

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

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

	If an individual who was incorrectly enrolled in a retirement system that has SocialSecurity coverage elects to become enrolled in CSRS, then, as under present law, Social Securitytaxes 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 bill providesthat the agency shall deposit in the CSRDF an amount equal to the shortfall in CSRScontributions that should have been made on behalf of the employee and that the employee shallreimburse the agency for such deposits up to the amount of the Social Security taxes refundableto the employee. As under present law, earnings on the employee's Social Security earningsrecord for the period subject to the statute of limitations would be deleted, but earnings for priorperiods would not.

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

**Effective Date**

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

1.   This document may be cited as follows: Joint Committee on Taxation, *Description of Revenueand Social Security Provisions Included in H.R. 416, the "Federal Retirement Coverage Corrections Act"*(JCX-5-99R), February 11, 1999.
2.  H.R. 416, as introduced, was referred jointly to the Committee on Government Reform andOversight and the Committee on Ways and Means.**