February 2, 2015
- Obama FY 2016 Budget Analysis: Summary of Retirement and Health Plan Proposals
- A Bit About Your Benefits: Associate Membership
Obama FY 2016 Budget Analysis: Summary of Retirement and Health Plan Proposals
President Obama’s Fiscal Year 2016 federal budget proposal, released on February 2 by the White House Office of Management and Budget (OMB), includes a number of provisions that would substantially affect employer-sponsored benefit plans.
To some extent, especially when the Congress and White House are controlled by different parties – the president’s budget is largely a political and philosophical statement. The budget is not solely focused on proposing how much money should be spent on various governmental programs and activities. It also articulates new policy ideas. Given the significant differences on many matters between Republicans and Democrats, most bold new policy ideas are likely to meet resistance from the GOP-controlled Congress. However, several items in the budget could ultimately be considered separately as federal revenue offsets for separate legislation or as stand-alone measures.
The president is requesting just over $4 trillion for the operation of the government in Fiscal Year 2016, which begins October 1, 2015. Consistent with prior years, the President’s proposal suggests an approach to tax reform largely aimed at eliminating “loopholes” and minimizing deductions for high-income individuals.
Most notably, as in the past, the FY 2016 budget proposes reductions in the value of itemized deductions and other tax preferences to 28 percent for high-income earners. This limit would apply to all itemized deductions as well as other tax benefits, such as tax exclusions for retirement contributions and employer-sponsored health insurance.
In addition, the proposal would increase the capital gains and dividend rate to 28 percent (inclusive of the net investment income tax) and implement the “Buffett Rule,” requiring wealthy millionaires pay at least 30 percent of their income (after charitable giving) in taxes.
The budget also specifically addresses a number of other retirement and health benefit initiatives. It is worth noting that the OMB’s Analytical Perspectives supplement to the budget proposal identifies the “exclusion of employer contributions for medical insurance premiums and medical care” as the largest income tax expenditure in the federal budget (nearly $2.67 trillion over 10 years). If we combine the tax deferrals for 401(k) plans and the tax exclusion for employer-provided pension contributions and earnings, the total foregone tax ($1.53 trillion over ten years), would be No. 2 on the list. The significant revenue effects of these tax preferences makes the tax incentives for employer-sponsored benefits a lucrative target for tax reform as part of a larger budget or deficit reduction deal.
The Council is actively engaged with policymakers in opposition to provisions that would destabilize or impose additional administrative burdens on employer-sponsored health and retirement benefits; and advocating in favor of proposals that will strengthen the system.
- As previewed in a January 17 Fact Sheet (see the January 27 Benefits Byte), the president’s proposal would limit the total accumulation of benefits in tax-preferred retirement plans and IRAs. Contributions to, and accruals of additional benefits in, tax-preferred retirement plans and IRAs would – according to the Obama Administration – be capped at “about $3.4 million, enough to provide an annual income of $210,000 in retirement,” under the rationale that “While tax-preferred retirement plans are intended to help middle class workers prepare for retirement, loopholes in the tax system have let some wealthy individuals convert these accounts into tax shelters.” The budget lists this line item under the heading “Proposals to address high-income tax avoidance” and estimates a ten-year revenue gain of $26 billion over ten years. This proposal is described in more detail on Page 168 of the U.S. Treasury Department’s “Green Book” Summary document.
The Council released a statement on January 19 expressing serious concerns about this proposal and calling the $3.4 million figure “misleading.” The Council noted that the proposal actually limits total retirement assets to the amount required to purchase an annuity, at age 62, of $210,000 per year. Of course, for people younger than 62, or in a higher interest rate environment, the figure would be much lower than $3.4 million. Using the historical interest rates the government uses for pension calculations, the allowable account balance for a 35-year old worker to about $300,000.
- The centerpiece of the president’s agenda for “Strengthening Retirement Security” is once again the mandatory automatic enrollment of workers without access to a workplace retirement plan in an Individual Retirement Account (IRA). Employers that have been in business for at least two years and have more than 10 employees, and do not currently offer a retirement plan, would be required to automatically enroll employees in an IRA. This proposal is described in more detail on Page 135 of the Treasury “Green Book”.
- To support this effort, the proposal also provides tax credits for auto-IRA adoption, as well as for small businesses that choose to offer employer plans or switch to auto-enrollment. Employers with 100 or fewer employees could claim a temporary non-refundable tax credit of up to $1,000 per year for three years, with an additional non-refundable credit of $25 per enrolled employee up to $250 per year for six years. Additionally, the current “start-up” credit would be increased to $1,500 per year for three years (and up to a fourth year under certain circumstances). Small employers who already offer a plan and add auto-enrollment would be eligible for an additional a $1,500 tax credit.
- To increase employee access to workplace retirement plans, the proposal would require employers who offer retirement plans to allow employees who have worked at least 500 hours per year for three years or more to make voluntary contributions to the plan. Employers would not be required to offer matching contributions.
- The proposal sets aside $6.5 million for the U.S. Department of Labor (DOL) to support “State Retirement Savings Initiatives,” like those in which states have created automatic retirement accounts for workers in the private sector who do not otherwise have access. Noting that “concerns about potential conflicts with the Federal law that governs employee benefit plans have slowed those efforts,” the budget also gives DOL waiver authority to allow a limited number of states to implement their own programs.
- The president’s budget proposes to generate $19 billion over ten years through measures to “Improve Pension Benefit Guaranty Corporation (PBGC) solvency.” The proposal itself is not specific about such measures, although the official PBGC budget request “proposes to give the PBGC Board the authority to adjust premiums in both its single-employer and multiemployer programs and directs PBGC to take into account the risks that different sponsors pose. … Premium increases would be split between the single-employer and multiemployer programs proportionately based on the size of the deficit in each program after making adjustments for the expected long-term effects of the law Congress passed in December 2014 to shore-up the multi-employer system.
The Council has called additional PBGC premiums “unacceptable.” In June 2014, as a response to the Obama Administration's annual budget proposals and the persistent speculation that premium increases could be used to pay for unrelated spending measures, the Council released the report Further PBGC Premium Increases Pose Greatest Threat to Pension System. “PBGC premium increases threaten the long-term viability of the defined benefit pension system and PBGC's plan termination insurance program by driving away employers that present no risk to the system,” the report said.
- The proposal prohibits so-called “stretch IRAs,” meaning that non-spouse beneficiaries of deceased IRA owners and retirement plan participants (that do not meet certain conditions) would be required to take inherited distributions over no more than five years. In meetings on Capitol Hill the Council has noted that such a prohibition could unintentionally raise certain problems, particularly for defined benefit plans.
- The budget proposal includes a host of changes to the minimum required distribution (MRD) rules, which generally require participants in tax-favored retirement plans to begin receiving distributions shortly after attaining age 70½. The budget proposal provides circumstances under which an individual would be exempt from the MRD rules (namely, those with account balances of $100,000 or lower). The proposal would also harmonize the application of the MRD rules for holders of designated Roth accounts and of Roth IRAs by generally treating Roth IRAs in the same manner as all other tax-favored retirement accounts. Individuals would not be permitted to make additional contributions to Roth IRAs after they reach age 70½.
- Non-spouse beneficiaries of IRAs and qualified plans would be allowed to roll their distributions over within 60 days. This treatment would be available only if the beneficiary informs the new IRA provider that the IRA is being established as an inherited IRA.
- The proposal would expand the exception from the 10-percent additional tax to cover more distributions to long-term unemployed individuals from an IRA (in excess of the premiums paid for health insurance) and to include distributions to long-term unemployed individuals from a 401(k) or other tax-qualified defined contribution plan.
- The budget proposal repeals – for publicly traded companies only – the deduction companies can currently take for employer stock dividends paid to the plan. Rules allowing for immediate payment of an applicable dividend would continue as would rules permitting the use of an applicable dividend to repay a loan used to purchase the stock of the publicly traded corporation.
- The budget proposal seeks to give the Internal Revenue Service (IRS) new authority to require electronic filing of information that is relevant only to employee benefit plan tax requirements, so that it can be electronically filed with the Form 5500 that is filed with the DOL. The Council has been broadly supportive of increased flexibility with regard to electronic filing and our long-term public policy strategic plan calls for measures that better embrace emerging technology.
- The budget proposal establishes reciprocal reporting under the Foreign Account Tax Compliance Act (FATCA), expanding accounting and reporting requirements by certain financial institutions.
- The budget proposal provides resources to continue supporting implementation of the Patient Protection and Affordable Care Act (PPACA), including the Health Insurance Marketplace, premium tax credit and cost-sharing assistance, and increasing federal support to states expanding Medicaid coverage for newly eligible low-income adults.
Under a specific provision of the budget proposal, the IRS will ramp up enforcement efforts to “address noncompliance,” including oversight of various fees, tax credits and the individual and employer responsibility provisions of PPACA. According to the Treasury Department’s Budget in Brief, this initiative includes a $60.8 million initial investment in traditional revenue-producing activities that are expected to annually produce additional enforcement revenue of $181.7 million.
Also, under an information technology (IT) initiative in the budget, the Internal Revenue Service (IRS) will implement PPACA’s refundable tax credit for investment in enhanced technology infrastructure and applications support.
- As in prior years, the proposal calls upon Congress to “strengthen the Medicare and Medicaid programs through reforms that expand health coverage in Medicaid, encourage high-quality and efficient care, and continue the progress of reducing cost growth.” This is accompanied by a “delivery system reform agenda” to: (1) modify health care payment structures to reward providers for optimal care, (2) support practice redesign and create better capacity to improve care delivery; and (3) improve access to information to encourage data-driven decision-making by consumers, providers, and businesses. The Obama Administration has set a 2016 goal of making 30 percent of Medicare payments through alternative payment models.
- The budget retains a modified version of last year’s proposal for income-related Medicare premiums. Specifically, the proposal would impose premium increases for beneficiaries in Medicare Parts B and D and impose a surcharge on Part B premiums for new beneficiaries and those that purchase near or full first-dollar Medigap coverage.
- The budget proposes a program to align employer group waiver plan payments with average Medicare Advantage plan bids.
- The proposal would modify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance. Specifically, the proposal would expand the group of employers who are eligible for the credit to include employers with up to 50 full-time equivalent employees and would begin the phase-out at 20 full-time equivalent employees.
- The budget includes $30 million for an “Effective Health Insurance Initiative” to develop evidence about how changes in health insurance benefit packages affect health care utilization, costs, and outcomes. This project, which the Obama Administration promotes as an example of its commitment to incorporating evidence and evaluation into policy solutions, will use a randomized controlled trial study to examine how modern health insurance plans can be redesigned to maximize health status and quality, while minimizing unnecessary costs.
- As in the previous year’s budget proposal, the president recommends a program to “increase certainty with respect to employer classification.” The proposal would permit the IRS to require prospective reclassification of workers who are currently misclassified as “independent contractors” and whose reclassification has been prohibited under current law. The reduced employment tax liabilities for misclassification provided under current law would be retained, except that lower penalties would apply only if the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency and if the service recipient had filed in a timely manner all required information reporting the payments to the misclassified workers. (Under certain circumstances, penalties would be waived.) The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards.
- With regard to family leave issues, the budget also establishes a $35 million “State Paid Leave Fund” within DOL to provide competitive grants that would help states cover the start-up costs of launching paid-leave programs. The proposal also offers support to as many as five states that wish to launch paid leave programs, under which states would be able to apply for competitive grants to cover startup and ongoing administrative costs as well as 50 percent of benefit costs for three years. The grants could be used to cover family, parental, and medical leave programs that provide up to 12 weeks of benefits.
Republicans responded to the president’s budget with opposition, as Speaker of the House of Representatives John Boehner (R-OH) said it “contains no solutions” and House Ways and Means Committee Chairman Paul Ryan (R-WI) calling the president’s approach “simply unacceptable.”
Over the next several weeks, Congressional committees will hold a series of hearings to discuss the president’s proposal. The Council will closely monitor those hearings for further explanation of these policy recommendations and, where appropriate, weigh in with our perspectives.
For more information on the retirement savings elements of the budget, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Jan Jacobson, senior counsel, retirement policy. For more information on the health care elements of the budget, contact Katy Spangler, senior vice president, health policy, or Kathryn Wilber, senior counsel, health policy. For questions on either issue area, you may also contact Diann Howland, vice president, legislative affairs, or Jill Randolph, director, legislative and political affairs. All can be reached at (202) 289-6700.
A Bit About Your Benefits: Associate Membership
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