**DESCRIPTION OF REVENUE PROVISIONS INCLUDED IN THEUNITED STATES-CARIBBEAN BASIN TRADE ENHANCEMENT ACT**

Scheduled for Markup

By the

SENATE COMMITTEE ON FINANCE

on June 22, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

June 18, 1999

JCX-31-99

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**CONTENTS**

**INTRODUCTION**

**DESCRIPTION OF REVENUE PROVISIONS**

A.  Impose Limitation on Prefunding of Certain Employee Benefits

B.  Temporary Increase in Amount of Rum Excise Tax that is Covered Over to Puerto Rico and the U.S. Virgin Islands

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**INTRODUCTION**

	This document,(1) prepared by the staff of the Joint Committee on Taxation, provides adescription of revenue provisions included in the "United States-Caribbean Basin TradeEnhancement Act."  The Act is an original bill to be considered by the Senate Committee onFinance on June 22, 1999.

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**DESCRIPTION OF REVENUE PROVISIONS**

	The following revenue provisions would be included in the "United States-CaribbeanBasin Trade Enhancement Act."

**A.  Impose Limitation on Prefunding of Certain Employee Benefits**

**Present Law**

	Under present law, contributions to a welfare benefit fund generally are deductible whenpaid, but only to the extent permitted under the rules of Code sections 419 and 419A.  Theamount of an employer's deduction in any year for contributions to a welfare benefit fund cannotexceed the fund's qualified cost for the year.  The term qualified cost means the sum of (1) theamount that would be deductible for benefits provided during the year if the employer paid themdirectly and was on the cash method of accounting, and (2) within limits, the amount of anyaddition to a qualified asset account for the year.  A qualified asset account includes any accountconsisting of assets set aside for the payment of disability benefits, medical benefits,supplemental unemployment compensation or severance pay benefits, or life insurance benefits.The account limit for a qualified asset account for a taxable year is generally the amountreasonably and actuarially necessary to fund claims incurred but unpaid (as of the close of thetaxable year) for benefits with respect to which the account is maintained and the administrativecosts incurred with respect to those claims. Specific additional reserves are allowed for futureprovision of post-retirement medical and life insurance benefits.

	The present-law deduction limits for contributions to welfare benefit funds do not applyin the case of certain 10-or-more employer plans.  A plan is a 10-or-more employer plan if (1)more than one employer contributes to it, (2) no employer is normally required to contributemore than 10 percent of the total contributions under the plan by all employers, and (3) the plandoes not maintain experience-rating arrangements with respect to individual employers.

	If any portion of a welfare benefit fund reverts to the benefit of an employer thatmaintains the fund, an excise tax equal to 100 percent of the reversion is imposed on theemployer.

**Description of Proposal**

	Under the proposal, the present-law exception to the deduction limit for 10-or-moreemployer plans would be limited to plans that provide only medical benefits, disability benefitsand group-term life insurance benefits which do not provide for any cash surrender value or othermoney that can be paid, assigned, borrowed or pledged for collateral for a loan.  The exceptionwould no longer be available with respect to plans that provide supplemental unemploymentcompensation, severance pay and life insurance (other than group-term life) benefits.  Thus, thegenerally applicable deduction limits (secs. 419 and 419A) would apply to plans providing thesebenefits.

	In addition, if any portion of a welfare benefit fund attributable to contributions that aredeductible pursuant to the 10-or-more employer exception (and earnings thereon) is used for apurpose other than that for which the contributions were made (including cash payments toemployees upon termination of the fund), such portion would be treated as reverting to thebenefit of the employers maintaining the fund and would be subject to the imposition of the 100-percent excise tax.

	No inference would be intended with respect to the validity of any 10-or-more employerarrangement under the provisions of present law.

**Effective Date**

	The proposal would be effective with respect to contributions paid or accrued on or afterJune 9, 1999, in taxable years ending after such date.

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**B. Temporary Increase in Amount of Rum Excise Tax that is Covered Over to Puerto Rico and the U.S. Virgin Islands**

**Present Law**

	A $13.50 per proof gallon(2) excise tax is imposed on distilled spirits produced in orimported (or brought) into the United States (sec. 5001). The excise tax does not apply todistilled spirits that are exported from the United States or to distilled spirits that are consumed inU.S. possessions (e.g., Puerto Rico and the Virgin Islands).

	The Code provides for coverover (payment) of $10.50 per proof gallon of the excise taximposed on rum imported (or brought) into the United States (without regard to the country oforigin) to Puerto Rico and the Virgin Islands (sec. 7652). During the 5-year period ending onSeptember 30, 1998, the amount covered over was $11.30 per proof gallon. This temporaryincrease was enacted in 1993 as transitional relief accompanying a reduction in certain taxbenefits for corporations operating in Puerto Rico and the Virgin Islands (sec. 936).

	Amounts covered over to Puerto Rico and the Virgin Islands are deposited in thetreasuries of the two possessions for use as those possessions determine.

**Description of Proposal**

	The proposal would increase from $10.50 to $13.50 per proof gallon the amount of excisetaxes collected on rum brought into the United States that is covered over to Puerto Rico and theU.S. Virgin Islands.

	The proposal further would provide that $0.50 per proof gallon of the amount coveredover to Puerto Rico will be transferred to the Puerto Rico Conservation Trust, a private, non-profit section 501(c)(3) organization operating in Puerto Rico.

**Effective Date**

	The proposal would be effective for excise taxes collected on rum imported or broughtinto the United States from July 1, 1999, through September 30, 1999.

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****FOOTNOTES****

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1.   This document may be cited as follows:  Joint Committee on Taxation, *Description ofRevenue Provisions Included in the United States-Caribbean Basin Trade Enhancement Act*(JCX-31-99), June 18, 1999.
2.   A proof gallon is a liquid gallon consisting of 50 percent alcohol.