Treatment of Seafood Processors for Employment Tax Purposes Present Law Under present law, an employer is required, with respect to its employees, to (1) withhold the employees' share of the Federal Insurance Contributions Act (FICA) tax (sec. 3102), (2) pay its share of the FICA tax (sec. 3111), (3) pay the Federal Unemployment Tax Act (FUTA) tax (sec. 3301), and (4) withhold Federal income taxes (sec. 3402). In general, employees are exempt from the tax on selfemployment income (sec. 1401) because they are subject to FICA taxes (sec. 1402(c)). In taxable years beginning in 1988 and 1989, the rate of tax on self-employment income is 13.02 percent; in taxable years beginning after 1989, the rate is 15.3 percent. The comparable FICA rates (total of employer and employee shares) for the same periods are 15.02 percent and 15.3 percent, respectively. Certain other adjustments apply to the tax on self-employment income that generally are intended to equalize the burden of the FICA taxes and the tax on self-employment income for taxable years beginning after 1989. The FUTA tax only applies with respect to employees. The minimum net FUTA tax imposed on employees is 0.8 percent (0.6 percent in calendar years after 1990) of the first $7,000 of wages paid to each employee during the year. Federal income tax withholding only applies with respect to employees. Explanation of the Bill Under the bill, certain seafood processors are excluded from the definition of employees for purposes of the FICA tax, FUTA tax, and Federal income tax withholding and thus are exempt from such provisions; instead, such seafood processors are subject to the tax on self-employment income. For this purpose, the term seafood processor means an individual whose remuneration is based on the quantity of fish or shellfish the individual peels, picks, heads, shucks, fillets, or otherwise processes. Effective Date The provisions with respect to FICA and FUTA taxes apply to services performed after December 31, 1987. The provisions with respect to income tax withholding and the tax on self-employment income apply to taxable years ending after December 31, 1987. 86-801 88-2 3. S. 2078-Senator Armstrong Majority Vote Requirement for ESOPS Present Law An employee stock ownership plan (ESOP) is a type of qualified pension plan. An ESOP must be designed to invest primarily in securities of the employer maintaining the plan. An ESOP is either a qualified stock bonus plan or a combination of a stock bonus and a money purchase pension plan under which employer securities are held for the benefit of employees participating in the plan and their beneficiaries. ESOPs are subject to special requirements in addition to the rules generally applicable to all qualified plans. ESOPS receive the same favorable tax treatment available with respect to all qualified plans. Thus, an employer maintaining an ESOP receives a current tax deduction for contributions to the ESOP, and plan participants are not taxed on benefits provided by the ESOP until the benefits are actually distributed. In addition, the deduction and contribution limits applicable to ESOPS are generally higher than those applicable to similar types of qualified plans. For purposes of the ESOP rules, the term employer securities means common stock of the employer (or a member of the controlled group of the employer) that is readily tradable on an established securities market. If there is no such stock, then the term employer securities means common stock issued by the employer (or controlled group member) having a combination of voting power and dividend rights equal to or greater than the class of common stock of the employer (or controlled group member) having the greatest voting power, and that class of common stock of the employer (or controlled group member) having the greatest dividend rights. Employer securities also include certain convertible preferred stock. As long as the stock meets these requirements, an ESOP may hold a special class of stock designed for the ESOP, which is not held by any other shareholder. Under present law, the decision whether to establish an ESOP or another type of qualified plan is within the discretion of the employer, except in the case of a collectively bargained plan. Present law permits the employer to terminate another qualified plan and replace it with an ESOP. For example, under present law, an employer may terminate a defined benefit plan, and transfer any reversion (i.e., excess assets remaining after satisfaction of all liabilities to employees upon plan termination) to an ESOP. Present law facilitates such transactions by providing that, to the extent the reversion is transferred to an ESOP, it is not includible in the gross income of the employer or subject to the 10-percent excise tax on employer reversions (sec. 4980). (10) Under present law, ESOPs are subject to certain voting requirements with respect to the stock allocated to the accounts of plan participants and beneficiaries. The particular requirements depend on whether the employer has a registration-type class of securities. In general, a registration-type class of securities is a class of securities that is required to be registered under the Securities Exchange Act of 1934. An ESOP that is maintained by an employer that has a registration-type class of securities is required to provide that each participant and beneficiary is entitled to direct the trustee how to vote shares allocated to the participant's or beneficiary's account. Thus, in such cases, each participant and beneficiary is entitled to direct voting with respect to every issue on which there is a vote by shareholders. More limited voting requirements apply if the employer does not have a registration-type class of securities. In such cases, an ESOP is required to provide that plan participants and beneficiaries are entitled to direct the trustee how to vote shares allocated to the participant's or beneficiary's account only with respect to certain enumerated issues. These issues are the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all the assets of a trade or business, or such similar transactions as the Treasury Department may prescribe. In general Explanation of the Bill In general, the bill would provide that (1) a plan will not be qualified as an ESOP unless the establishment of the plan is approved by a majority of the employees of the employer establishing the plan, and (2) the Treasury Department may require that the voting requirements applicable to ESOPs are not satisfied unless the voting rights under the plan are substantially similar to the voting rights of other persons who hold the same class of securities or substantially similar securities. Majority vote requirement The bill would provide that a plan is not qualified as an ESOP unless a majority of the employees of the employer establishing the plan approve the establishment of the plan pursuant to an election conducted by secret ballot. The employer would be required to notify employees of all material facts concerning the plan, including whether assets will be transferred to the plan from any other plan and whether the plan will replace such other plan, the terms of the plan, and the terms of the plan (if any) from which the assets are being transferred. The election would be required within a reasonable period after the required notice is provided. Voting requirements Under the bill, the Treasury Department would be authorized to provide that the voting requirements applicable to ESOPs are not met if the voting rights of any participant or beneficiary in securities allocated to the account of such participant or beneficiary are not substantially similar to the voting rights of other persons who hold the same class of securities or substantially similar securities. Effective Date The provision relating to a majority vote of employees on establishment of an ESOP would be effective with respect to plans established after the date of enactment of the bill. The provision relating to the voting requirements applicable to an ESOP would be effective with respect to employer securities acquired after the date of enactment of the bill. Designation of Overpayments and Contributions on Tax Return for the Organ Transplant Trust Fund Present Law Under present law, individual taxpayers may elect to allocate $1 ($2 on a joint return) of their tax liability to the Presidential Election Campaign Fund, a fund established to provide financing to the campaigns of presidential and vice-presidential candidates (Code sec. 6096). The election is made on the first page of the taxpayer's return. An election to make an allocation to the fund neither increases nor decreases the taxpayer's liability, but merely determines whether the allocated amount will be used by the Federal Government for campaign funding. No other provisions of Federal tax law permit taxpayers to designate for what purpose the amount of tax owed is to be used by the Government. Present law does not permit taxpayers to make contributions for charitable or other purposes through their Federal income tax return. The Commissioner of Internal Revenue, in the instructions to Form 1040, has encouraged taxpayers to include with their tax return voluntary contributions to reduce the public debt. Taxpayers wishing to do so must enclose a separate check payable to the Bureau of Public Debt. Explanation of the Bill Designation of amounts for Organ Transplant Trust Fund Under the bill, taxpayers" entitled to an income tax refund could irrevocably designate all or any portion of the refund as a contribution to the National Organ Transplant Trust Fund, a trust fund to be established by the bill within the United States Treasury. The bill would require that the designation appear on the first page of the return. Taxpayers not entitled to a refund, or who wished to make a contribution to the Fund in excess of their refund, could include an additional amount with their return and designate this as a contribution to the Fund. The designation would not increase or decrease the tax liability of a taxpayer for the year covered by the return. Disposition of amounts in Trust Fund Under the bill, each State would establish a program to receive payments from the Fund and to provide financial assistance to individuals with a medical condition for which an organ transplant • It is intended that this provision apply only to individual taxpayers. |