January 30, 1995
ERISA - a 20 Year Retrospective
"Margaret Milner Richardson"
I really appreciate the opportunity to be here today to
reflect on over 20 years of administering two unique and challenging areas. Both -- employee plans and exempt organizations -- enrich the lives of millions of Americans and play a vital role in our society.
1974 was a turbulent time for America. For the first and only time in our history, neither our President nor Vice President had been elected to those offices. Long lines at the gas pumps finally eased as the oil embargo was lifted. And Patty Hearst was kidnapped.
All you might remember from 1974 is that Hank Aaron broke Babe Ruth's home run record or that the Miami Dolphins won the Super Bowl for the second year in a row. You may not remember the other events taking place that would change history. That very year, many American workers attempted to draw their pensions and discovered a horrible truth -- the
money was not there!
You also may not remember the Studebaker Car Company. Studebaker had a good pension plan for its employees. But fate was not kind to Studebaker, nor its employees. When they tried to draw their pensions, they were horrified to discover that there was nothing left for them.
But Studebaker was not to blame. It had not broken any laws. Unfortunately for the employees, no laws were there to protect them. People were shocked to hear about one employee who worked for ten straight years. After a short break in service, he worked another ten years. But guess what? His years working for the company did not satisfy its
20 year service requirement -his service had to be consecutive. And the employee got nothing. So many stories like this forced Congress to act.
On Labor Day, the Employee Retirement Income Security Act of 1974 became law. ERISA, as many of us refer to it, imposed funding rules and vesting requirements on pension plans so that retired workers would get the benefits they earned.
(Some of you may remember that many people thought the acronym -- ERISA -- really stood for "every ridiculous idea since Adam." Little did we know, the prediction that ERISA contained every ridiculous idea was a bit premature.)
Congress recognized that the job of protecting workers' pensions was so big that it not only created a new agency, the Pension Benefit Guaranty Corporation, but vested dual responsibility for administering ERISA with the IRS and the Labor Department.
The job was so big, that Congress also created a separate IRS organization, headed by an Assistant Commissioner, to oversee the administration of employee plans. Congress gave that Assistant Commissioner the added responsibility for exempt organizations.
Now some of you may wonder why Congress combined the responsibility for employee plans and exempt organizations. At first blush, these two areas don't seem to have much in common. A closer look, however, reveals some method to this apparent madness.
While neither exempt organizations nor employee benefit plans are revenue raisers in the traditional sense, what they contribute to the fabric of American life cannot be counted in dollars and cents.
Just to give you some idea of their magnitude, in 1994 alone, an estimated $85 billion of federal tax expenditures were related to employee plans and exempt organizations.
By 1990, 77 million workers participated in almost 900,000 private retirement plans with assets of $1.7 trillion. When you add public plans of Federal, state and local governments, pension assets total almost $3 trillion -- 25 percent of the combined value of the New York, American and NASDAQ stock exchanges.
The tax exempt organization numbers are just as impressive. At the beginning of 1994, over 1.1 million tax-exempt organizations had combined assets exceeding $1.4 trillion. Total receipts, including contributions, reached $721 billion. Exempt organizations represent approximately 11 percent of the Gross Domestic Product.
The unified supervision of employee plans and exempt organizations has assured that, while not producing revenue per se, both receive the highest priority at IRS.
I don't want to bore you with the "gory" details of ERISA -although I know some of you ERISA lawyers, Tom, would like nothing better. Fortunately, I don't need to go into details because I understand your packets include copies of a part of the law and its legislative history.
In administering ERISA, the sensitive challenges we at the IRS face, are the tension between enforcement of sanctions on a plan sponsor for Code violations and the need to protect and preserve employees' retirement benefits. This tension exists because the party that violates the law is often the plan sponsor or employer, but it is the workers, depending on these plans to fund their retirements, who suffer most when a plan is
Because of this tension, practitioners, including many of you, have helped us develop creative solutions that foster both compliance with the Code and protection of employee benefits. For example, our Voluntary Compliance Resolution Program -- or VCR -- encourages conscientious employers to monitor their plans and correct defects voluntarily. Since this
program began in 1992, over 1300 plans have participated helping to protect the benefits of almost 3 million participants.
The VCR program reflects our Service-wide commitment to find creative and less costly solutions to compliance issues. Other examples of alternative dispute resolution programs are the Advanced Pricing Agreement program in the international area and the Large Case Advanced Issue Resolution program. The Service, along with the Treasury Department, has an
active guidance program in the employee plans area. Just since I became Commissioner, we have issued over 70 employee plan publications, including 11 sets of regulations and 26 revenue rulings and procedures.
On its 20th anniversary, I don't think it is too soon to declare ERISA a success. In 20 years, the number of plan participants and beneficiaries has nearly doubled, from 45 million to almost 80 million. Of those employees who are covered, 86 percent have vested benefits as opposed to only 35 percent 20 years ago. And the time periods required for vesting have been progressively shortened. More good news -- about 75 percent of employers
have prototype plans. These plans offer small businesses an inexpensive way to provide pension coverage for their workers.
I think it's safe to say that ERISA's vision -- to provide widely-based pension coverage -- has become a reality.
While protection for employees retirement funds is relatively recent, special treatment for charitable endeavors has a long and rich past. History tells us that taxation and accompanying exemptions are old acquaintances.
The first modern income tax system, introduced in England in 1799, included an exemption for charitable organizations. Ninety-two years later, Lord M'Naghten wrote one of his famous opinions defining common law charitable purposes in an income tax refund suit, Commissioners v. Pemsel. [Many of you may remember him better for M'Naghten's rule, something that is not an accepted defense in tax cases.
Our own income tax laws, going back even before the Sixteenth Amendment, have their roots in this British system -charitable exemptions included.
With the current push to reduce government spending, private charity will play an increasingly critical role in ensuring our Nation's well being. Not unlike employee plans, overseeing exempt organizations provides unique and significant challenges. For example, we must assure that the privilege of tax exemption goes to only qualified organizations. All while trying to keep government involvement in these organizations to a minimum.
Those of you who have heard me speak know by now that the IRS is reinventing itself. Not left out of our reinvention efforts is our exempt organization function.
And the result is more good news. Thirty eight states have agreed to let the IRS Form 990 satisfy state financial reporting requirements. This is a remarkable joint federal and state effort that has saved charities and other exempt organizations hundreds of millions of dollars in filing and return preparation costs.
This Fed/State initiative is an example our Service-wide efforts to work with the states to reduce filing burdens and serve our customers better.
In another effort to make things work better for all involved, we are upgrading our exempt organization master file. This upgrade will provide more timely information, enhancing public and governmental understanding of tax exempt organizations. We have only begun our modernization effort in the exempt organizations area. Our next effort is to make the electronic filing of exempt organization returns a reality.
We are also changing the way we issue determination letters. Currently, determination letters are issued by our seven key districts. Today, I want to announce that we have chosen Cincinnati as the place to centralize our employee plan's and exempt organization's determination letter program. Centralization will enable us to better ensure the quality and consistency of the determination letter program.
Not only are doing what we can administratively to improve the system for everyone, but along with our colleagues at Treasury, we are working for major law changes to improve tax administration for exempt organizations. One example you may be familiar with is the so-called intermediate sanctions legislation. At the present time, in abusive situations,
the Service is faced with the Hobson's choice of ignoring violations of the law or revoking an organization's exemption. The intermediate sanctions legislation, if enacted, would allow a wider array of options.
The tax world is a strange one because it is a world where the regulated generally cry out for more regulations, not fewer. In the current atmosphere of regulatory reform it is interesting to note that it is not typically the presence of regulations interpreting the tax laws that creates burden on taxpayers, often it is their absence that does so. Exempt organizations are no exception to this rule. From what I hear from those of you who work
in this area, exempt organizations, if anything, is an area where more is definitely better!
To increase exempt organization guidance, Jim McGovern, our Assistant Commissioner for Employee Plans and Exempt Organizations issued a challenge to Celia Roady's Exempt Organizations Committee to work with him to identify areas where guidance is needed. I would like to thank you and your Committee, Celia, for its impressive submission which is included in your packet. With your continued support, I anticipate that during 1995, we
will publish more exempt organization guidance.
The employee plans and exempt organizations area is and will continue to be a major crossroads for issues of tax administration and public policy. And, I suspect, as in the past, there will be no shortage of public controversy.
The journey over the last 20 years has been an eventful one. There is no reason to believe that the next 20 years will be any less trying, demanding, or challenging.
I began this afternoon noting the historic events of 1974. ERISA addressed one of the most compelling issues of that time -ensuring that workers had money when they retired.
Events we are experiencing today are no less historic. The last time I addressed this august body, I challenged each of you to rise above being mere technical specialists and take on more of the characteristics of generalists, capable of exercising sound judgment in the advice you offer your clients.
Today, I would like to issue you yet another challenge. I encourage each of you to become engaged in the compelling issues of our time, and think creatively about how we address these difficult issues. After all, what we are engaged in today may become another ERISA that shapes the next twenty years.
Thank you again for the opportunity to join you today, and I hope you all enjoy your time here in Los Angeles.
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