Emergency Economic Stabilization Bill Becomes Law

October 6, 2008

The House of Representatives on Friday, October 3, 2008 gave final approval to the $700 billion Emergency Economic Stabilization Act on a vote of 263 to 171. The legislation was signed into law shortly after by President Bush.

Final action on the bill came two days after the Senate approved the measure by a vote of 74 to 25 after increasing the FDIC deposit insurance cap to $250,000 from $100,000 per account holder. The increase remains in effect through December 31, 2009. The Senate also added a number of tax provisions including its tax extenders/energy incentives/disaster relief/AMT package that extends the IRA charitable rollover provision for 2008 and 2009.

The legislation contains safeguards such as establishing an oversight board to monitor the program and allowing the Treasury Department to obtain equity in the firms as a way to share in any upside if the firms later prosper. It also places limits on executive compensation for participating corporations.

Retirement security. The bill instructs the Secretary of Treasury to consider when exercising his authority under the Act that he is "providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security". It further instructs him to consider "protecting the retirement security of Americans by purchasing troubled assets held by or on behalf of all eligible tax-preferred retirement plans."

Distribution penalty waivers. Also included in the law are three provisions that provide retirement plan savings tax relief in 10 states hit by severe storms between May and August of this year. Under the provisions, the 10 percent penalty tax is waived on a distribution from an individual retirement account (IRA) or tax favored retirement plan for a qualified Disaster Recovery Assistance distribution.

The law also allows distributions for home purchases that were made from 401(k) or 403(b) plans or IRAs under certain conditions. And it effectively doubles the limitation on loans from a 401(k), 403(b), or 457(b) plans. In addition, outstanding loan payments due on or after the applicable declaration date and before January 1, 2010 may be deferred an additional 12 months, with adjustments for interest.

IRA Rollovers. The law also includes an extension of the IRA Rollover provision. The Pension Protection Act of 2006 (PPA) created a provision allowing taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations. This tax benefit expired on December 31, 2007. The provision is now extended through 2009 and effective for distributions after December 31, 2007.

Overview of the bill

While the broad parameters of the Administration's $700 billion proposal to purchase failed financial assets remain in tact, House Congressional leaders made changes to the proposal and worked out concessions that include:

1. Installment Plan: Congress created an installment plan for the "troubled asset relief fund" that provides Treasury with an immediate $250 billion, a second installment of $100 billion available after that, and the final $350 billion available providing Congress does not object to the request.
2. Executive Compensation: restricts executive compensation for companies with assets purchased by Treasury. For direct purchases of assets firm executives would not be allowed "golden parachutes" as long as the Treasury has ownership; companies that have assets purchased by Treasury at auction will also have limits on pay; firms that sell more than $300 million of assets to Treasury will not be allowed to provide new golden-parachute payments to senior executives; and, compensation above $500,000 will be allowed limited tax-deductions.
3. Government Equity: Treasury will receive warrants in companies that have assets purchased directly by the Treasury (and possibly a majority stake in the company) and nominal amounts of nonvoting warrants for those purchased at auction.
4. Insurance: Treasury will set up an insurance program for mortgage-backed securities that financial institutions can participate in by paying a fee to the government to obtain insurance against future losses.
5. Taxpayer Protection: After five years the program will be evaluated on its net win/loss. If there is a loss, Congress will be required to pass legislation to obtain reimbursement from the financial institutions that have participated in the program.
6. Oversight: A congressional bipartisan commission will receive monthly reports from Treasury on the "Troubled Assets Relief Fund" and be overseen by a board comprising the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission, the Housing and Urban Development Department and the Federal Housing Finance Agency. Treasury will provide Congress with a written status report on the financial regulatory system and its effectiveness and make recommendations for improvements to the system no later than April 30, 2009.
7. Homeowners Package: Requires financial firms backed by the Treasury to encourage issuers of underlying residential real estate mortgages to minimize foreclosures. It further requires Treasury to identify ways to modify or restructure loans that are close to foreclosure.

Additional Information

• Emergency Economic Stabilization Act of 2008
• Section-by-Section Analysis of the Legislation
• Tax Proposals in Troubled Asset Relief Program (TARP)
• Senate Finance Committee Summary Amendment to the Substitute Amendment to H.R. 6049
• Technical Explanation of H.R. 7060, the "Renewable Energy and Job Creation Tax Act of 2008," as Scheduled for Consideration by the House of Representatives on September 25, 2008