Changes in Insurance Rule Sought : Business Leaders Lobbying Against Tax Reform Provision

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), trying to deflect pressure from small business to repeal a widely reviled tax provision affecting company health insurance benefits, has agreed to introduce a bill to “streamline” the rule, aides said Thursday.

The rule, known as Section 89 for its place in the 1986 tax reform law, requires every firm that offers fringe benefits to demonstrate that its health and life insurance plans do not exclude or discriminate against lower-paid workers.

Small business leaders are up in arms over the immense record-keeping requirements of the law. And if a company fails the complex nondiscrimination tests, as do hundreds of thousands of small firms that offer such benefits only to top managers, it is required to collect taxes from those employees on the value of any excess benefits.

Companies were supposed to begin complying with the provision at the start of this year, and many large firms, with their legions of personnel and benefit specialists, have gone along without much difficulty. But small business is another story. The Internal Revenue Service agreed this month to postpone putting the provision into effect until July 1 and has promised business that it will not get tough until next year.

But business lobbying groups, which have inundated Congress with an avalanche of protests from enraged small business owners, insist that they will not be satisfied until Section 89 is wiped from the books.

“We’re still going for repeal,” said Terry Hall, a spokesman for the National Federation of Independent Business, which is spearheading the effort. “It is not possible to straighten out this mess.”

Small business groups are counting on overwhelming lawmakers with complaints when the legislators return home during the Easter congressional recess next week. “It’s been a long time since we’ve seen an issue that has galvanized the small business owners this way,” an NFIB lobbyist told reporters earlier this year.

Led by House Small Business Committee Chairman John J. LaFalce (D-N.Y.), sponsors of legislation to repeal Section 89 have already gathered 264 backers in the House, more than half of the members. But they still have to get past Rostenkowski, whose position as head of the tax-writing committee gives him virtual veto power over any tax changes.

“We don’t want a confrontation with Rostenkowski,” acknowledged Gary Luczak, a spokesman for LaFalce. “We don’t want just a partial solution, but any move to revisit the law is a step in the right direction.”

It is not clear how far Rostenkowski is prepared to go to satisfy advocates of repeal. Earlier, he had vowed to resist efforts to eliminate the law. But aides said the proposed changes, while ostensibly designed to reduce burdensome paper work requirements, could end up effectively gutting the rule.

They also conceded that the law apparently will fall far short of its goal of prodding small businesses into making health insurance more widely available to the roughly 35 million Americans who are not covered by insurance. Instead of complying, many firms say the rules are so complex that they will cut back on benefit plans or just pay the extra taxes for their top employees.

Section 89 was largely unnoticed until well after the massive tax revision bill was enacted. While the goal of the law was to discourage employers from leaving rank-and-file workers out of their benefit programs, it does not forbid discrimination against them. But it requires firms to treat much of their employees’ fringe benefits as taxable income if their plans fail to meet the test of the law.

Even small business owners that do provide fringe benefits to all employees complain that it is next to impossible for them to figure out the rules they have to follow and that Section 89 will add immensely to business costs. The IRS estimated that the provision would add 9 million hours to the annual paper work burden of business, a number that Howard Weizmann, executive director of the Assn. of Public and Private Welfare Plans, called “an underestimate by a wide margin.”