compensation of $20,000 per year. Next, assume that the employer maintains a medical expense reimbursement plan under which each employee is entitled to reimbursement for up to 5 percent of his compensation. The result is that the owner-executive is entitled to $2,500 of medical expense reimbursements per year and each of the other employees is entitled to an average of $1,000.

To bring the plan into compliance with section 366 of the 1978 Act will require the employer to promise benefits to each employee of up to $2,500 per year-the same as that promised the owner-executive. This means that the employer is exposed to an additional cost for maintainng the medical expense reimbursement plan of $15,000 (an added $1,500 multiplied by 10 employees). An employer with even a rudimentary understanding of arithmetic can quickly note that it is cheaper to either abandon the plan entirely and award a $5,000 bonus to the executiveresulting in after-tax income of $2,500 to pay medical expenses or to keep the existing plan and bonus the executive enough to pay the tax on the excess of his benefits over those supplied to the other employees.

Thus, regardless of how well motivated the legislation was, it will simply not achieve its stated objectives of spreading benefits to more employees. The more likely result is to have small business employees dropping plans and thereby providing less benefits for employees.

When one plugs into this picture the added legal and accounting costs of attempting to understand and comply with the new law, the savings through dropping the old plan become even more dramatic. Particularly is this so when it is realized that it may be years before there are final interpretations of the new law.

A distinguished Cleveland attorney, Dean Hopkins, has aptly described the certain results of letting section 366 of the Revenue Act of 1978 become effective as reminiscent of Walter Lippman's political tragedy titled, "The Murder of a Beautiful Theory By a Gang of Brutal Facts".

THE NEW LAW IS DISCRIMINATORY AGAINST SMALL BUSINESSES

The new law is applicable only to plans not involving insurance company products. Thus, any employer willing and able to spend the money to buy insurance company products to provide benefits can completely avoid the rules of the section. In my opinion, this legislation will, if it becomes operable, seriously discriminate against the employees of small businesses. Large businesses, with their superior resources and bargaining power, can enter into custom-made contracts with insurance companies providing for medical expense reimbursements for employees which, if not supplied through an insurance company, would be violative of section 366 of the 1978 Revenue Act. Small businesses do not possess the power to enter into such contracts with insurance companies. Accordingly, they opt for the economy and simplicity which goes with self-insured medical expense reimbursement plans.

Big businesses are more likely to have finely drawn employee benefit plans which in many cases are in part dictated by the terms of collective bargaining agreements. Small business can ill afford the inside or outside legal and accounting help necessary to understand and hope to comply with complex laws. Accordingly, small businesses are more and more finding that they can't cope with the ever-rising ride of federal regulations. The natural result is that more and more small businesses are abandoning fringe benefit programs because they can't afford the "hassle factor". One has only to look at the experiences with abandonment of small company pension plans following the enactment of ERISA to foretell what is going to happen in the small business community if section 366 of the 1978 Revenue Act becomes effective. Employers in the small business community are going to abandon their plans for reimbursing employees for medical expenses.

To say that this law does not discriminate against small business is closely akin to the observation that the French laws against sleeping under bridges, begging in the streets and stealing bread were not discriminatory against the poor because they applied to the rich and poor alike.

As indicated earlier in this statement, the Treasury has still not published any proposed regulations about this new section and it's unlikely that regulations will be available in time for employers to attempt compliance on the effective date. This will add further confusion to the picture and give small businesses another reason to abandon plans rather than go through the uncertainty and expense of adopting new plans and then later amending and reamending them to attempt to bring them into compliance with ever-changing Treasury interpretations of the law. Once plans of this type are abandoned, it's unlikely they will be reinstated when the dust settles several years from now.

CONCLUSION

I respectfully urge that if the Subcommittee is not prepared at this time to recommend the repeal of section 366 of the Revenue Act of 1978, that it at least defer the effective date to give Congress the opportunity to consider the implications of section 366 of the Revenue Act of 1978.

APPENDIX TO STATEMENT OF CONVERSE MURDOCH

SAMPLES OF TECHNICAL PROBLEMS UNDER SECTION 366 OF THE REVENUE ACT OF

1978

1. Will employers be required to submit information returns reporting taxable benefits? The original legislation is silent regarding the employment tax and withholding duties under section 366. The Conference Report says there is no social security tax or withholding associated with the provision. Under section 103(a)(10)(A) of the Technical Corrections Act of 1979, payments excludable under section 105 of the Code will be free of withholding. No mention is there made of social security taxes. As drafted, the provision of the bill says nothing about payments which are not excluded under Code section 105-i.e., benefits made taxable by virtue of section 366 of the 1978 Act.

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* *

The Ways and Means Committee report of the pending bill (H.R. 2797) states that withholding will not be required "if it is reasonable to believe that the employee will be allowed to exclude the payment [under the medical benefit plan] from gross income 'That statement is difficult to reconcile with the Conference Committee Report on the 1978 Act which flatly stated that payments under plans "would not be subject to withholding tax It is impossible to reconcile with the Joint Committee Staff description of the pending bill where it is stated (at page 18 of the Staff description): "The bill [H.R. 2797] would clarify present law by continuing the withholding tax exclusion for reimbursements under a self-insured medical reimbursement plan, whether or not the plan is discriminatory [emphasis supplied]." 2. Will government plans for government officers and employees be covered? 3. What will constitute "insurance"? For example, can a single employer or a small group of employers own the insurance company which provides the benefits? What if premiums for "insurance" are tied directly to the benefits paid?

4. In attempting to comply with sex anti-discrimination rules, can an employer end up violating section 366 of the 1978 Act? For example-what if the members of the prohibited group are women and the other employees are men and the plan pays maternity benefits?

5. How will the rules be applied when an employer has an interest in a second (or third) business in another locale where certain medical care benefits are not feasible?

6. How can one determine whether a particular employee is one of the highest paid 25% when there are less than four employees?

7. May the employer reimburse all employees for health care insurance premiums based on levels of compensation? Is such a plan "self-insured"?

8. Will Treasury go along with Conference Committee definitions of part time and seasonal employees?

9. Under a plan which requires three years of service-what breaks in service will require the commencement of a new three year employment period?

10. Does making an employee an officer late in the plan year retroactively disqualify the plan?

11. What is the definition of an "officer"? For example, is a clerical employee designated an Assistant Treasurer solely to enable that person to sign state unemployment tax return forms an "officer"?"

12. Will the Treasury agree with (and can it effectively and fairly administer) the suggestion in the Conference Committee Report that plans should not be retroactively disqualified if "the plan has made reasonable efforts to comply with tax discrimination rules"?

13. Will the Treasury agree that section 366 as written permits integration with plans of other employers?

14. How will "plan" be defined in the regulations? Assume a clearly non-discriminatory written plan and late in the year the employer, without amending the plan pays substantial hospital bills for the terminally ill wife of a junior executive. Is such a payment part of the plan and therefore is the whole plan retroactively disqualified?

15. Is the typical Blue Cross or Blue Shield plan insurance? Cf., the Finance Committee report on the 1978 Act where it was stated that insured plans means

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those in which benefits are "provided by a licensed insurance company", Sen. Rep. 95-1263, p. 186. What of a plan utilizing a section 501(c)(9) organization (i.e., on exempt employees' beneficiary associations)?

16. How does one apply the part time employee exclusion rule? Assume the same employee works part time for some of the year, but full time during other periods (e.g., 10 hours per week while attending school, but 40 hours per week during school vacation periods)? Does the employee shuttle between being covered and not covered? What if the employee becomes ill during a period of part time service, but incurs reimburaeable expenses while in full time status?

17. Must an employer pay benefits for an employee who is terminated? For an employee on leave of absence? For an employee on terminal leave?

18. Can there be a "plan" which promises nothing but permits the employer at the end of each year to retroactively reimburse for expenses on a non-discriminatory basis after seeing the extent of exposure?

[Note these are but samples of the problems. Every day more problems surface. When the section becomes fully effective, the flood of problems will accelerate.]

SUPPLEMENTAL STATEMENT SUBMITTED BY CONVERSE MURDOCH, ESQ.

On November 7, 1979, I, on behalf of the Small Business Council of America, Inc., submitted a statement to the Subcommittee regarding H.R. 2797 (the Bill).

I appeared as a witness at the hearings on November 7, 1979. At that time I learned for the first time that the Treasury Department had prepared a long statement setting forth additional proposed technical corrections to be included in H.R. 2797. Senator Byrd, who was presiding at the hearing, stated that in view of the fact that the public had not been informed in advance about this supplemental submission by the Treasury, he was going to hold the record open for another two weeks to permit representatives of the public to comment on the Treasury's supplemental submissions.

The purpose of this supplemental statement is to comment on the parts of the supplemental submission of the Treasury having to do with § 366 of the Revenue Act of 1978 (PL 95-600) (the “Act”).

THE TREASURY IN ITS SUPPLEMENTAL SUBMISSION PROPOSES TWO ADDITIONAL CHANGES WITH RESPECT TO SECTION 366 OF THE ACT-HAVING TO DO WITH SELF-INSURED MEDICAL EXPENSE REIMBURSEMENT PLANS

The first proposal of the Treasury is to change the Act and the Bill to exclude payments under self-insured medical expense reimbursement plans from withholding whether or not the particular plan complies with the provisions of § 366 of the Act. The second proposal of the Treasury has to do with clarification of the effect of pre-1980 reimbursements on the qualification of the plan for post-1979 periods. Small Business Council of America, Inc. favors both of the changes suggested in the Treasury's supplemental submission.

The first (i.e., the exemption from withholding) takes care of one of the many technical problems pointed up by the Small Business Council of America, Inc. in its previous submissions to this and other committees. The second supplemental proposal by the Treasury is also approved by the Small Business Council of America, Inc. although the technical problem covered by the second proposal is not one which our organization believes was of substantial import.

THE SUPPLEMENTAL SUBMISSIONS BY THE TREASURY DEMONSTRATE ANEW THE NEED FOR A DEFERRAL OF THE EFFECTIVE DATE OF SECTION 366 OF THE ACT In the November 7, 1979 submission by Small Business Council of America, Inc. to the Committee, there were a great many technical problems with § 366 of the Act listed there. Eighteen of these technical problems were listed in an Appendix to the original statement. One of the Treasury's supplemental submissions takes care of a part of one of the eighteen technical problems pointed up by our organization. This development is all to the good. However, the mere fact that the Treasury at this late date has seen fit to make a supplemental proposal to take care of one of eighteen presently known technical problems dramatically demonstrates why the effective date of § 366 of the Act should be postponed.

By virtue of this supplemental submission by the Treasury Department, I'm convinced that if given a reasonable period of time, those concerned with the tax treatment of medical expense reimbursement plans could come up with recommendations to the Committees of Congress, which would minimize the technical problems and hopefully achieve some of the goals of the sponsors of § 366 without sacrificing worthwhile medical expense reimbursement plans.

I believe that open discussions between representatives of the Treasury, the tax writing Committees of Congress and affected employers and employees could lead to worthwhile legislation.

CONCLUSION

Small Business Council of America respectfully urges the Committee to give those concerned with self-insured, medical expense reimbursement plans a fair chance to work on elimination of technical and policy problems associated with the enactment of § 366 of the 1978 Act.

Senator BYRD. Is Mr. Thomas W. Power present?

Mr. POWER. Yes, Mr. Chairman, right here.

Senator BYRD. Are you proposing a technical correction?

Mr. POWER. A technical correction, at least we think as we construe it to be a technical correction. I have a prepared statement but I would like to submit it in full for the record and then just make a brief summary if I may of the statement as submitted. Senator BYRD. That is satisfactory.

STATEMENT OF THOMAS W. POWER, GENERAL COUNSEL, FOODSERVICE AND LODGING INSTITUTE

Mr. POWER. My name is Thomas Power and I am general counsel of the Foodservice and Lodging Institute, a Washington-based trade industry group of 35 of the Nation's largest multiunit and multiState food and lodging companies. Collectively, these companies own, operate, or have franchise agreements with more than 38,000 individual establishments, have annual gross sales in excess of $21 billion and employ in excess of 2.5 million persons. This employment figure represents almost 25 percent of the total employment force in the entire restaurant industry.

Let me say at the outset, Mr. Chairman, the targeted jobs tax credit is a good law. It recognizes the problems of acute unemployment within these groups, and it is the first real positive step taken by the Federal Government to enlist business and industry in the massive fight to reduce unemployment within specific hardto-employ sectors of the population.

We are here today to respectfully request that this committee include in the Technical Corrections Act of 1979 a clarification indicating that 19-year-olds are covered under the work study category in the targeted jobs tax credit.

As we understand it, the proposed Technical Corrections Act of 1979 currently contains four provisions to clarify the targeted jobs tax credit which was enacted by Congress in 1978 as part of the 1978 Revenue Act: (1) Correction of the expiration date of the credit; (2) clarification of the effective date for election of the credit; (3) clarification of the effective date for newly targeted groups under the credit; and (4) clarification of the transitional rule for fiscal year taxpayers claiming the credit.

The Technical Corrections Act should also include a clarification indicating that 19-year-olds in cooperative education programs are covered under the legislation.

As I am sure all of you are aware, one of the targeted groups for which the TJTC can be claimed are 16- to 18-year-old youths who are participants in qualified cooperative education programs. In order to restrict use of this category to students who normally progress through high school, and are developing initial job skills,

the maximum age was established at 18, the traditional age of a high school graduate. Unfortunately, this 16- to 18-year-old grouping does not reflect the normal age makeup of persons in these high school programs.

The 16-19 grouping also more clearly recognizes the demography of the work-study program. It is not in the traditional high school mold. Many students in these programs simply do not graduate from high school at the age of 18 or earlier because of the social, academic, or economic environment in which they have been raised. A typical work-study student is from a low income family. For example, a 1975 survey of post high-school work study students indicated that 77.7 percent of the students were from families with income levels below $12,000 yearly. A 1976 survey in eight Southern States indicated that 65 percent of the high school work study students were from families with income of $10,000 or less. Moreover, many work-study students are dropouts who have been persuaded to return to school. Clarifying the targeted age bracket of students to include 19 will further encourage dropouts to return to school and will encourage employment of these dropouts.

The effectiveness of the targeted jobs credit will be evaluated by both the Government and outside agencies. The Department of Labor uses, and outside agencies widely accept, 16 to 19 as a natural grouping in its analysis of youth employment. Evaluations of the jobs tax credit and ease of administration in the required reporting by the Secretaries of Labor and Treasury would be facilitated by a grouping of 16 to 19 for work study students.

Furthermore, during a recent hearing before the Select Revenue Subcommittee of the House Ways and Means Committee, the U.S. Treasury stated that it does not oppose much a minor adjustment and the revenue cost of this clarification is minimal.

The 16 to 19 grouping more effectively stimulates employment, recognizes the demography of the work study program, would encourage the return to school and employment of dropouts, and is not expensive.

This is a logical clarification and one that will benefit employers and employees alike. We believe that of all seven specific targeted categories, our most reliable and trainable workers come from the work-study group. This is probably because these young men and women have demonstrated their desire to work while continuing their much-needed education. Several companies have pointed out to me that some of these young persons from the work-study category are now entering or have completed management training programs. Several, who started as crew workers and kitchen help, are now assistant managers and will some day manage their own operation.

In summary, Senator, Congress intended to include all students who normally progress through high school and are in work-study programs when it developed this legislation in 1978. A 16- to 19year-old grouping clarifies this congressional intent by recognizing the unique nature of the work-study student body. At the same time, Congress will be providing thousands more young men and women with improved opportunities to secure meaningful employment.

Thank you.