WITCO OPPOSES TECHNICAL CORRECTION THAT WOULD PRECLUDE A COMPANY FROM TERMINATING ITS TAX CREDIT ESOP FOR SEVEN YEARS OR LONGER.

We are writing to express the deep concern of Buck Consultants and its clients about the proposed amendments in the Technical Corrections bill (H.R. 2636, S. 1350) to Section 1174 of the Tax Reform Act of 1986 (TRA '86) and an interpretation being given to these amendments that retroactively would effectively preclude a company from terminating its Tax-Credit ESOP for seven or more years. This interpretation is apparently being seriously discussed in Washington.

Buck Consultants, Inc., a leading employee benefits consulting firm, has many clients that maintain Tax-Credit ESOPs. They would be adversely affected if these amendments are adopted and regulations on these amendments adopt this interpretation and preclude termination of these plans for seven or more years. This would be an extreme breach of faith -- based on the understanding of employers and Congress when TRA '86 was enacted.

CONGRESSIONAL INTENT

As originally enacted, TRA '86 amended Code Section 490(d)(1) to allow companies to terminate their Tax-Credit ESOPs and distribute securities held by these plans without being in violation of the 84- month holding period rule contained in Code Section 409(d). Generally, a violation of the 84-month holding period rule would result in a recapture of tax credits previously taken by a company with respect to securities held by its Tax-Credit ESOP that are subject to the 84-month holding period rule, and would subject the company to other significant penalties.

Also, TRA '86 amended Section 72 of the Code to provide a 10% additional tax on early payments from a qualified plan, but under Section 72(t) of the Code, as amended, employees receiving distributions from ESOPs (including Tax-Credit ESOPs, according to statements in the TRA '86 Blue Book and the statutory language in the Technical Corrections bill) would generally be able to avoid the imposition of the 10% additional tax on early payments if the distribution occurs before 1990. The clear understanding of congress and employers when TRA '86 was passed (and payroll tax credits eliminated) was that employers that established Tax-Credit ESOPs for the benefit of their employees would not be required to maintain these plans for years when tax credits for company contributions to the plans would not be available to the companies. This relief was made available since Congress recognized that these plans are costly to administer, and that many employers would not have established them in the first place if a tax credit were not available.

Our experience supports Congress' conclusion that these plans, whether or not self-administered, are costly to administer for most companies. In providing this relief to companies and employees, Congress also recognized that an employee receiving a lump sum distribution from a terminated plan could roll over the taxable portion of the distribution into an IRA or another qualified plan (if that plan accepts rollovers) on a tax-free basis. Thus, with the rules discussed above in place, the concerns of both employers and employees in this area were satisfied when TRA '86 was enacted.

Many employers have relied on these TRA '86 rules, which are clear, unequivocal and coherent, and have already terminated their Tax-Credit ESOPs and have distributed account balances to employees or at an employee's direction have transferred the employee's account balance to the employer's profit sharing plan. These direct transfers are specifically authorized by the TRA '86 Blue Book.

Other employers have terminated their Tax-Credit ESOPs, but have not yet distributed ESOP account balances to employees. Many employers have decided to terminate their Tax-Credit ESOPs and have announced their decision to employees, but have not yet taken formal action to terminate the plan. Other employers are planning to terminate their Tax-Credit ESOPs in the near future. Some employers are of course, still considering what steps to take and have made no decisions.

THE PROPOSED AMENDMENTS

With this as background, we now note that the Technical Corrections bill, which was introduced in Congress on June 10, 1987, would once again amend Code Section 409(d)(1). These latest amendments to Code Section 409(d)(1) would provide relief from the 84- month holding period rule, but only if a Tax-Credit ESOP is terminated without the establishment of a successor plan and the amount distributed from the terminated Tax-Credit ESOP is a lump sum distribution within the meaning of Code Section 401(k)(10). This code Section would be added to the Code by the Technical Corrections bill. Since employers do not generally contemplate establishing successor plans for their Tax-Credit ESOPs and the payments of an employee's account would be made in a single lump sum anyway, these amendments would not appear to be a major concern.

However, at a recent meeting a legislative attorney on the staff of the Joint Committee on Taxation indicated that one definition of a successor plan being seriously considered would include any qualified defined contribution plan maintained by the employer without regard to when that plan was adopted. If the language in the Technical Corrections bill is interpreted in this manner, it would effectively mean that very few, if any, employers could terminate their Tax- Credit ESOPs before the 84-month holding period rule, applicable to the securities in the plan, expires -- since virtually all of the employers with Tax-credit ESOPs also maintain other qualified defined contribution plans. Clearly, this cannot be Congressional intent.

Furthermore, it appears these amendment changes to Code Section 409(d)(1) would be retroactive to the effective date of TRA '86. we believe that any amendment that changes the original TRA '86 provisions pertaining to Tax-Credit ESOPs would be outrageous and a breach of faith by Congress with the employers and organizations representing employers through this nation.

Again, as previously mentioned, Tax-Credit ESOPs, whether or not self-administered, as often expensive for companies to administer. This added expense will be even more significant when one considers that there no longer is any reason for the establishment and continuation of the plan since the tax credit available for contributions to the plan has expired. we frankly believe that Congress understood these concerns and in TRA '86 specifically allowed employers to terminate their Tax-Credit ESOPs -- without being subject to the 84-month rule -- and allowed employees significant flexibility in their handling of Tax-Credit ESOP distributions (e.g., to make tax-free rollovers of taxable monies to an IRA or to direct transfers of these amounts to other plans of the employer).

CONCLUSION

As we see it, there is absolutely no reason to change the rules at this time. Many employers have already terminated their Tax-Credit ESOPs and distributed account balances to employees or at the employee's direction transferred account balances to the employer's profit sharing plan. Others have taken formal action to terminate their Tax-Credit ESOPs, but have yet to distribute account balances. Neither these employers nor other employers that plan to terminate their Tax-Credit ESOPs in the future should be adversely affected. This was clearly the concept approved by Congress in TRA '86 and there is no reason to change it.

Thus, we strongly urge that the Technical Corrections changes to Code Section 409(d)(1) of TRA '86 should be dropped, or, in the alternative, the phrase "successor plan" should be defined to refer only to an ESOP newly established by an employer. In any event, no conditions should be imposed on the transfer of an employee's existing balance -- at the employee's direction -- under a terminated Tax-Credit ESOP to another qualified plan of the employer. In light of the penalties involved, other results would be punitive.

Clearly, at the very least, no employer who has already taken action with regard to terminating its Tax-Credit ESOP (e.g., the employer has already sent out employee announcements concerning the termination) should be adversely affected.

Finally, we note that, since it is standard procedure to distribute funds to terminated employees (without a 10% tax on early withdrawals) the proposed interpretation will become an incentive for certain employees to terminate in order to withdraw their funds from an otherwise inactive program.

Very truly yours,