WASHINGTON – Three lines in the more than 900-page Pension Protection Act that President George W. Bush is expected to sign into law as early as Aug. 18 will fly against tribal self-determination and force tribes to reconsider their pension plans, according to Indian-issue advocates in Washington and a West Coast non-attorney tribal pension specialist.
The lines amend the U.S. Internal Revenue Code to state that all participants in an Indian tribal government pension plan must be employed “in the performance of essential government functions but not in the performance of commercial activities (whether or not an essential government function).” Though heavy going for any non-specialist, the language clearly means that funds contributed to tribal government pension plans could be taxed at disbursement if the Internal Revenue Service is not satisfied that they derived from tax-exempt essential government functions, according to tax specialists consulted for this article.
The West Coast pension specialist, speaking for the record but not for attribution, said the IRS has indicated it has no desire to jeopardize retirement savings. But in the last analysis, she added, the IRS has no choice but to implement congressional law. To be responsible, tribes may have to review their pension programs, a process that could include sweeping document review; engage in per-person, per-position third-party testing of jobs for essential government, as opposed to commercial, function; and hire experts on so-called 401(k) retirement programs.
In brief, if the law stands as of Jan. 1, 2007, tribes may have to define all employees not engaged in direct government services as commercial business employees – that is, tribal commercial interest pension plans may have to become private-employer compliant. Otherwise, going forward from Jan. 1, tribal employee earnings invested in tax-exempt retirement accounts run the risk of being found ineligible for tax-exempt treatment, meaning they could be taxed at the time of disbursement.
State and local governments do not face the essential government function test for their pension plans. The employees of state lottery operations, for example, are eligible for the state’s pension program. In the past, the IRS has treated the earnings of tribal casino employees as similarly eligible for tax-free pension plans; but under the new law, those earnings would be treated as taxable because the tribal job is newly defined as commercial, not governmental.
Kathleen Nilles, a tax attorney with the Washington lobbying firm of Holland & Knight, said the regulatory burden of complying with the new law will be considerable. The West Coast pension specialist said some tribes simply won’t try to comply because of the expense. Still other tribes are taking the practical view that at least tribal government pension plans are protected from taxation under the new law; they had not been before, though the IRS had been interpreting them as tax-free.
The inclusion of the new rule for tribes in the national pension bill blindsided tribes and their advocates. In 2005, the Senate passed a pension bill simply stating that all tribal retirement plans are tribal government plans. Tribes themselves had asked Congress to protect tribal pension plans by statute, rather than entrusting their tax-free status to IRS interpretation; and the Senate provision met with their approval.
But to become law, bills must pass both the Senate and the House of Representatives in identical form. When different versions of a bill pass both chambers, the leadership in each appoints a “conference committee” to iron out differences. If the differences can be bridged “in conference,” as the saying goes, the now-identical law goes back to each chamber for final passage. Any changes in either chamber at that stage, especially late on Congress’ legislative calendar, may doom the bill because it must then go back again to the House or Senate (depending on which introduced the latest change) for a further vote as, again, bills must pass both chambers in identical form in order to become law.
Few if any observers expected the House, in 2006, to transform the Senate provision from 2005 on tribal government pension plans, especially given that it represented zero cost to tribes or the public. The expectation was that the House Ways and Means Committee conferees would drop it, leaving the Senate to argue for its restoration. “We were assuming that either we would get what was in the Senate bill or we would get nothing at all,” Nilles said, a result that would have reinstated the status quo of entrusting tribal pension programs to favorable IRS interpretation.
Instead, the conference committee turned out to be highly unusual as House Republicans boycotted a July 27 meeting over non-Indian national issues. Late on the night of July 28, a Friday, the House passed its version of the Pension Protection Act, a new bill engineered to accommodate pension provisions that would have been part of the conference report, if one had been issued after the boycott.
The House measure canceled the Senate language on tribal pension programs and replaced it with the three lines so pregnant with trouble for Indian country. Immediately thereafter, the House recessed for all of August. The Senate was still in session. Though technically it could have left the pension bill until later in the legislative year, it is an election year and incumbents increasingly fear the national chorus against a “do-nothing Congress.” Desperate for a legislative accomplishment to show voters, and knowing that any change to the bill would doom it by sending it back to the House again under the doctrine of identical final bills in both chambers, the Senate passed the House version of the Pension Protection Act.
“It’s just such a disappointment that this provision came out of the conference,” Nilles said.
Given the minority of Indian constituents in most congressional districts, the Senate could not be moved to sink more than 900 pages of legislation over three lines of Indian-specific text.
Through the National Congress of American Indians, tribes are trying to redact the offensive few lines during technical “cleanup” of the bill in September.
Tom Rodgers, a lobbyist brought in to consult on a tribal response, said the best strategic plan for tribes is to wait until the lay of the landscape in Congress is more understanding of the role of tribal governments. “We need politically to turn back this continual assault on tribal governments.” Next year in the 110th Congress, Rodgers added, “We’re going to try to unwind what occurred in the conference ... and we will.”
Support for Indian issues in the Senate is solid, he said, but the House’s aggressive push-back on the pension language is becoming familiar. “Conferences with the House on Native issues have not been productive.”
The turn of events led some observers to speculate on the reasons for it. The West Coast specialist quoted above said that as tribes branch out from casinos into other commercial activities, from hotels to resorts, golf courses and other enterprises, business competitors are getting to some congressional members with the idea that tax exemptions for tribes are an unfair advantage.