American Benefits Council
Benefits Byte


December 1, 2014

The Benefits Byte is the American Benefits Council’s regular e-mail and online newsletter for members only, providing timely reports on legislative, regulatory and judicial developments, along with updates on the Council’s activities in support of employer-sponsored benefit plans.

The Benefits Byte is published by the American Benefits Council, based on staff reports and edited by Jason Hammersla, Council director of communications. Contact information for Council staff related to specific topics can be found at the end of each story.

Click here to read past issues on the Benefits Byte Archive page.

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List of Upcoming Council Webinars - Save the Dates!

The extraordinary period of activity surrounding employer-sponsored benefit plans looks to continue through 2014 and into 2015. While the legislative branch is in transition, regulatory agencies continue to work on regulations regarding the administration and compliance of employer-sponsored benefit plans. In addition, international issues continue to be an area of increasing activity. As always, Council staff and policy experts are on hand to describe the latest legislative, regulatory and legal developments and answer your questions.

The following is a list of webinar programs coming soon. Please note that registration is required to attend and participate in Council webinars.

Benefits Briefing: Hybrid Pension Plan Regulations
Wednesday, December 3, 2 p.m. ET

Benefits Briefing: Expected Retirement Regulations
Thursday, December 4, 2 p.m. ET

Benefits Passport Webinar: Panel Discussion on Flexibility in Global Benefits
Monday, December 8, 11 a.m. ET

Benefits Briefing: Wellness Programs, EEOC and ADA
Tuesday, December 9, 2 p.m. ET

As a reminder, Council webinars may now be used toward continuing education/renewal requirements for many professional accreditation programs, but only by means of self-certification. Please retain your registration confirmation for your verification records.

Descriptions and materials from prior webinars are listed on the Council's Webinar Archive page.

Digital replays of recent programs are generally available upon request. To request a recording, or for more information on the Council's webinar programs (including technical assistance), contact Jason Hammersla, director, communications.

If you need assistance with registering for a webinar or verification of prior sessions attended, please contact Deanna Johnson, director, membership; Sondra Williams, membership services coordinator; or Mary Lindsay, receptionist. All can be reached by phone at (202) 289-6700.

Outlook on Potential Defined Contribution, IRA Changes in Conjunction with Tax Reform; Incoming Finance Chairman Defends Existing Incentives

While legislative activity in the current lame-duck session is focused on a limited number of urgent short-term measures, including defined benefit plan matters (see the November 25 Benefits Byte story), lawmakers are already looking to 2015 and the possibility of more comprehensive tax reform. Several proposals now circulating on Capitol Hill include provisions that could substantially alter the long-standing tax incentives supporting retirement savings, although the effects of the midterm elections and resulting Republican leadership in both chambers could change the outlook for tax reform.

The U.S. Senate Finance Committee has recently been active in examining retirement security and the value of retirement tax incentives in the context of possible comprehensive tax reform. Chairman Ron Wyden (D-OR) has expressed concerns that the current tax incentives are skewed to benefit those who don’t need them, while Ranking Member Orrin Hatch (R-UT), who will be sworn in as committee chairman in the next Congress, recently defended the current retirement tax incentives as promoting retirement security at all income levels.

The tax incentives for retirement savings – which the Council has argued provide a strong and effective incentive for individuals across all income levels to save for a secure retirement – have recently been cited by reports from the White House’s Office of Management and Budget (OMB) and the Joint Committee on Taxation (JCT) as the second largest projected federal “tax expenditure” over the next five years. Both analyses estimate that the combined retirement tax incentives of the collective tax deductibility and deferral on defined contribution plans and defined benefit plans would cost nearly $650 billion from 2015-2019.

“Tax expenditures” constitute foregone revenue the government estimates it does not collect. The Council has consistently argued in our advocacy that such estimates (1) undervalue the tax revenue realized from retirement assets when benefits are paid and (2) ignore the reduced government spending attributable to lesser reliance on government retirement systems and other social safety net programs. In a September 16 statement to the U.S. Senate Finance Committee, the Council urged lawmakers to remember that pre-tax contributions made to defined contribution plans and IRAs – and the earnings on these contributions – do not escape taxation but rather are taxed when withdrawn.

However, some lawmakers continue to express concern that the tax incentives are skewed towards higher-income earners, resulting in tax-favored accumulation of balances exceeding what is needed for retirement. Wyden has been critical of the existing system, saying at a recent hearing on retirement security that “the incentives for savings in the American tax code are not getting to those who need it” (see the September 16 Benefits Byte).

Following the hearing, Wyden commissioned a report from the Government Accountability Office (GAO) on Individual Retirement Account (IRA) balances and how the Internal Revenue Service (IRS) enforces the IRA tax laws. The GAO’s report, which was released on November 19, found a discrepancy in IRA balances, with the vast majority of taxpayers with IRA balances below $1 million and a fraction of IRA holders with balances larger than $25 million. The report concluded that the large account balances in some of the IRAs was due to “investing in assets unavailable to most investors – initially valued very low and offering disproportionately high potential investment returns if successful. Investors who invest in these assets using certain types of IRAs can escape taxation on investment gains.” 

In response to the report, Wyden wrote a letter to the U.S. Treasury Secretary and the IRS Commissioner urging the adoption of the report’s recommendations on ensuring enforcement of IRA tax laws. He also wrote a letter to the GAO Comptroller, commissioning another report to examine self-directed IRAs (which allow the account owner to direct the account trustee to make a broader range of investments than other IRAs), including the risks involved for taxpayers, the roles and responsibilities of the U.S. Department of Labor (DOL) and the IRS have in overseeing self-directed IRAs and what exemptions exist for prohibited transactions involving IRAs.

However, with Hatch taking over as chairman in 2015, the Finance Committee could begin looking to other areas to ensure retirement security. Hatch has repeatedly refuted the idea that the tax incentives are skewed towards the wealthy and that lower annual contribution limits should be placed on IRAs and 401(k)-type plans. He responded to Wyden’s concerns in a September 30 letter to the Chairman, where he emphasized the GAO’s testimony that “it is not possible for a taxpayer to accumulate such a large IRA account balance solely by making the maximum annual contribution permitted by the tax code and earning average investment returns. … Rather, IRA account balances that great must be the result of other factors, such as extraordinary investment success on the part of the taxpayer.” Hatch also noted the bipartisan repeal of an excise tax on “excess” retirement accumulations, saying that it inappropriately penalized favorable investment returns and could deter individuals from saving.

During the September 16 hearing, Hatch had also refuted assertions that retirement savings tax incentives are “upside down.” Hatch stressed the importance of a bipartisan approach to retirement policy and urged support for his Secure Annuities for Employee (SAFE) Retirement Act (S. 1270) [official summary], which includes provisions facilitating greater use of electronic communication and automatic enrollment. (The Council expressed support for S. 1270 in a July 2013 letter to Hatch.)

Outside of Congress, the Obama Administration has also looked to curtail certain retirement tax benefits for budgetary reasons. President Obama’s recent budget proposals have included provisions to limit retirement tax benefits, such as a cap on aggregate retirement account balances and accruals in a taxpayer's IRAs and employer-based plans (including defined benefit plans and 401(k) plans) and most notably, as in the prior year's budget proposal, the FY 2015 budget proposes reductions in the value of itemized deductions and other tax preferences (including employer-sponsored health insurance and employee retirement contributions) to 28 percent for high-income earners(see the March 5 Benefits Byte for more information). A new budget proposal will be issued by the president within the first few months of the new year.

The Council is actively educating congressional members and their key staff about the value of the current tax incentives for employer-sponsored retirement plans including more than 200 Capitol Hill visits in 2014. Key issues emerging from those meetings include policymakers’ interest in expanding access to retirement plans for all workers, employment-based or not, and consideration of the most effective allocation of tax benefits for retirement. There also continues to be interest in elements of the comprehensive tax reform draft developed by Representative Dave Camp (R-MI), the retiring chairman of the House Ways and Means Committee, including proposals to limit the pre-tax contributions for higher paid employees and freezing the cost of living adjustments for 10 years. The Council anticipates a renewed effort in early 2015 focused on educating new members of Congress.

As we continue to engage policymakers on tax reform and the potential ramifications of dramatic changes in the retirement plan tax incentives, we welcome your participation and input. For more information, contact Diann Howland, vice president, legislative affairs, at (202) 289-6700.

The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.

Notice: the information contained herein is general in nature. It is not, and should not be construed as, accounting, consulting, legal or tax advice or opinion provided by the American Benefits Council or any of its employees. As required by the IRS, we inform you that any information contained herein was not intended or written to be used or referred to, and cannot be used or referred to (i) for the purpose of avoiding penalties under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party any transaction or matter addressed herein (and any attachment).