March 6, 2015
- Senate, House Leaders Introduce Employer Wellness Programs Bill; Council Voices Support
- Senate Finance Committee Examines Tax 'Fairness' in Latest Hearing
- Tax 'Loopholes' Report Takes Aim at Executive Compensation
- Congress Announces New Retirement Security Caucuses
Senate, House Leaders Introduce Employer Wellness Programs Bill; Council Voices Support
On March 2, Republican committee chairmen from the U.S. Senate and the U.S. House of Representatives introduced legislation designed to provide legal certainty to employers offering wellness programs. The Council served as a resource to the authors of the legislation and has written letters of support to the bills’ sponsors.
The Preserving Employee Wellness Programs Act was introduced in the Senate as S. 620 by Senator Lamar Alexander (R-TN) and in the House as H.R. 1189 by Representative John Kline (R-MN). The legislation was introduced largely in response to recent litigation by the U.S. Equal Employment Opportunity Commission (EEOC) challenging employer-sponsored wellness programs.
According to an accompanying press release, “A bipartisan provision in PPACAallowed employers to discount health insurance premiums by up to 30 percent -- or 50 percent if approved by the Departments of Treasury, Labor, and Health and Human Services -- for healthy lifestyle choices like quitting smoking or maintaining a healthy cholesterol level.”
The EEOC has pursued litigation against wellness plans without issuing guidance, which has created uncertainty for employers who offer these programs. As we reported in the November 3, 2014, Benefits Byte, the EEOC filed a request in the U.S. District Court for the District of Minnesota for a temporary restraining order and preliminary injunction against Honeywell International Inc.’s wellness program, alleging that it violated the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) by imposing penalties on employees who decline participation in the company’s biometric screening program. The district court denied the EEOC’s request, based on a finding that the program does not meet the legal standard that its continuation poses “irreparable harm” to participants. The court did not decide the issue of whether Honeywell’s wellness plan design violated the ADA.
The EEOC continues to pursue a lawsuit challenging a wellness plan sponsored by Flambeau, Inc. (a Wisconsin-based manufacturer with 1,600 employees) as well as a similar suit against Orion Energy Systems (see the October 7, 2014, Benefits Byte).
The EEOC announced in its most recent semi-annual regulatory agenda that it intends to issue regulations this year addressing wellness programs under the ADA and GINA. However, the actual timetable for the issuance of such guidance is uncertain.
Under The Preserving Employee Wellness Programs Act:
- Plans that comply with the wellness provisions of the Health Insurance Portability and Accountability Act (HIPAA) that were amended by the Patient Protection and Affordable Care Act (PPACA) (included in section 2705(j) of the Public Health Service Act) shall not violate the ADA or GINA by offering rewards in compliance with PHSA 2705(j). In general, this protection extends to health contingent wellness programs, including activity-only and outcome-based programs.
- Participatory programs shall receive the same protection if the reward is less than or equal to the maximum reward amounts applicable to health contingent wellness programs.
- The collection of information about the “manifested disease or disorder of a family member shall not be considered an unlawful acquisition of genetic information with respect to another family member participating in workplace wellness programs” and shall not violate GINA.
- The legislation also includes two provisions to clarify the bill’s applicability. The first states that nothing should be construed to limit the continued application of the bona fide benefit plan exception to wellness programs. The second states that nothing “shall be construed to prevent an employer that is offering a wellness program from establishing a deadline of up to 180 days for employees to request and complete a reasonable alternative standard.”
- The legislation shall take effect as if enacted on March 23, 2010 (the date the Patient Protection and Affordable Care Act was signed into law), and shall apply to the ADA and GINA, including amendments made under those laws.
During a Senate Health, Education, Labor and Pensions (HELP) hearing last autumn on EEOC nominations, members of the committee discussed the recent lawsuits relating to employer wellness programs, with some senators criticizing the agency for pursuing litigation before publishing guidance. Senator Alexander, who now serves as chairman of the committee, stated that the EEOC places too much emphasis on high-profile lawsuits and too little on resolving claims, and that there is a lack of transparency on how the EEOC issues guidance to the public and on its activities, generally. He voiced his concerns about lawsuits filed against employer wellness programs despite the lack of guidance from the EEOC (see the November 17, 2014, Benefits Byte).
The Council also testified before the HELP committee in a January 29 hearing on employer wellness programs and the impact of the EEOC’s actions. Dr. Catherine Baase, Chief Medical Officer for The Dow Chemical Company, provided testimony on behalf of her company and the Council that highlights the Council’s strategic plan, A 2020 Vision recommendation that a critical component of encouraging employers to offer meaningful wellness programs is consistent federal policy that promotes the health of Americans and is aligned across multiple agencies and Congress. Dr. Baase stated “I can understand why some employers are concerned with the legal uncertainty that exists with respect to the application of both GINA and the ADA to employer wellness programs. Employers should not have to face this confusion. We encourage Congress and the EEOC to work within the existing legislative and regulatory framework to provide certainty to employers.”
Senate Finance Committee Examines Tax 'Fairness' in Latest Hearing
On March 3, the U.S. Senate Finance Committee heard testimony on how to incorporate “fairness” into the tax code in conjunction with possible tax reform. The hearing, Fairness in Taxation, highlighted the differences in the way “fairness” is defined and looked to resolve the tension between “growth” and “fairness.”
A concern for a fair tax code has often been the basis for criticism of certain tax incentives that are viewed as being “regressive,” i.e., giving highly-paid individuals a greater tax benefit than lower-paid individuals. This argument has been applied in raising objections to the income tax exclusion for employer-sponsored health plans as well as the income tax deferral on employer-sponsored retirement plan contributions. Based upon the method used for calculating “tax expenditures” the health and retirement benefit tax incentives represent the two largest sources of foregone federal tax revenue.
With regard to the expenditure for employer-sponsored health coverage in particular, the Council has consistently pointed out that the expenditure is actually quite progressive because the value of the “health benefit” it provides is more significant for lower-income individuals – for whom it would be a greater financial burden to purchase coverage absent an employer-sponsored plan. And with regard to the expenditure for retirement plans, the “lost” revenue is largely a matter of timing, given the deferral of tax until benefits are paid.
In his opening statement, Chairman Orrin Hatch (R-UT) quoted President Kennedy as saying that “a rising tide lifts all boats,” but noted that – due to the marginal tax rates, even for low- and modest-income people – “not all boats are currently being lifted.” He said fairness means that similarly situated taxpayers should be treated similarly and acknowledged that while some may disagree on what constitutes fairness, he hoped the hearing would help in reaching conclusions.
Ranking Democratic member Ron Wyden (D-OR) emphasized that the tax code needed to be restructured in a bipartisan way to help the middle class. He also announced the release of a report prepared by the committee’s Democratic staff on “tax loopholes” (see related story) and emphasized that tax reform needs to emulate the Tax Reform Act of 1986 by cracking down on loopholes, as well as treating equally income from earned wages and from investments.
The committee heard testimony from the following witnesses:
- Lawrence B. Lindsey, president and chief executive officer of The Lindsey Group, (and a former member of the Federal Reserve Board, as well as an economic policy official in the George W. Bush administration) emphasized that growth is key to improving the economy. He recommended focusing on simplification and growth more than fairness, as over the long-term, both will do more to solve income inequality than additional complexity in the tax system.
- Deroy Murdock, Fox News contributor and senior fellow with the Atlas Network, made several suggestions for tax reform, including: gearing the tax code toward “dynamic, robust economic growth,” replacing the current system with a flat tax and significantly lowering the U.S. corporate tax rate, or cutting it altogether. He also suggested helping disadvantaged Americans not through the tax system but through higher education standards, charter schools and additional education initiatives such as the Harlem Educational Activities Fund.
- Heather Boushey, executive director and chief economist at the Washington Center for Equitable Growth, noted that as income inequality has increased, the tax code has not kept pace toreduce inequality. She also said that despite the common perception that efforts to reduce inequality are in tension with economic growth, new research shows that “steps taken to reduce inequality do not significantly hinder economic growth.” Her testimony included some policy proposals, including reducing retirement tax incentives, which she asserted would make the tax code more progressive.
- Steven Rattner, chairman of Willett Advisors LLC, (and a former economic policy official in the Obama administration) recommended that income earned by investments should be treated the same as other forms of income and also noted the importance of maintaining adequate revenue, especially with the growing retirement and health care costs for the aging baby boomer population. Rattner cited the inherent inequities of capital gains taxation in particular. He also alluded to isolated cases where individuals have amassed tens of millions of dollars in retirement accounts.
During the question-and-answer session, the witnesses offered different opinions of what defines a “fair” tax code. Lindsey said that due to the issues involved in defining “income,” it would be prudent to move away from an income-based tax code and toward a “cash-flow”-based tax system (similar to a consumption tax), which he said would be fairer and encourage growth. Murdock stated that a 10 percent flat tax would create the same amount of revenue as the current complex system. Boushey noted the importance of maintaining the revenue needed to properly invest in the economy and said that the current system is not promoting investments that benefit the economy. Rattner said that the basic structure of the current system has served the country well for decades, but loopholes and exemptions should be reduced or eliminated to make the tax code fair.
Senator Ben Cardin (D-MD) asked about the viability of a progressive consumption tax, noting that it would simplify the tax system as well as create fairness. The witnesses responded with varying degrees of optimism but expressed concerns about the additional administrative burden imposed on sellers of goods and services.
As the Senate committee with jurisdiction over the tax code, the Finance Committee has signaled a strong interest in tax reform, which could have meaningful implications for the tax incentives related to employer-sponsored benefit plans. The committee has held a series of hearings on tax reform, with the most recent hearing focusing on ways to reform the tax code to promote growth in wages, jobs and the economy (see the February 24 Benefits Byte).
The committee also recently announced the launch of five bipartisan tax working groups in an effort to facilitate congressional consideration of comprehensive tax reform, including a “Savings and Investment” working group.(See the January 15 Benefits Byte). It is important to note that the tax incentives for retirement savings will be evaluated in this working group alongside other investment issues such as capital gains taxation.
The Finance Committee’s next hearing, on Tax Complexity, Compliance, and Administration: The Merits of Simplification in Tax Reform, is scheduled for March 10. For more information, contact Diann Howland, vice president, legislative affairs, at (202) 289-6700.
Tax 'Loopholes' Report Takes Aim at Executive Compensation
In a report prepared by the Democratic staff of the Senate Finance Committee and unveiled at the Fairness in Taxation hearing on March 3, certain nonqualified deferred compensation (NQDC) practices are characterized as “tax loopholes” that should be revisited in the context of comprehensive tax reform.
The report, How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions, identifies “tax avoidance strategies” as described by the Joint Committee on Taxation (JCT) and outside independent experts. The Finance Committee’s Democratic staff analysis states that “reforms to rein-in some of these strategies could reduce the amount of taxes avoided by tens of billions of dollars over the next decade while making the tax code fairer and simpler overall.”
A persistent theme throughout the report is the criticism of NQDC arrangements that are commonly used by employers to reward executives. Because the tax code limits the deferral of income through qualified plans, the report suggests that nonqualified deferred compensation also be capped.
The report notes that NQDC arrangements can be used to circumvent the Internal Revenue Code Section 162(m) deduction limit in the tax code, under which annual compensation paid to certain senior executives in excess of $1 million is typically nondeductible by the employer, unless it meets certain conditions. However, if an employee’s compensation is deferred until retirement when the employee is no longer a senior executive, the compensation will not be subject to the $1 million cap. This is because 162(m) only applies to compensation paid during a year if the employee is a senior executive on the last day of the year. “Policymakers also should explore closing this abusive loophole,” the report says. The Patient Protection and Affordable Care Act and the federal government’s Troubled Asset Relief Program have already imposed targeted limits on Section 162(m).
Other tax avoidance strategies identified by the report include:
- Using “collars” to avoid paying capital gains taxes.
- Using “wash sales” to time the recognition of capital income.
- Using derivatives to convert ordinary income to capital gains or convert capital losses to ordinary losses.
- Using derivatives to avoid constructive ownership rules for partnership interests.
- Using “basket options” to convert short-term gains into long-term gains.
(These terms and financial instruments are fully described in the report.)
In the prior Congress, then-House of Representatives Ways and Means Committee Chairman Dave Camp introduced the Tax Reform Act of 2014, which would have imposed a number of new limits on NQDC arrangements, including:
- Taxation of NQDC when there is no substantial risk of forfeiture.
- Repeal of the commission and performance-based compensation exception to the $1 million deduction limit, applicable to the CEO, CFO and three other highest paid employees.
- Expansion of the coverage of code Section 162(m) by providing that if an individual was considered a covered employee after 2013, the deduction limits will continue to apply to all of their compensation in the future, providing that the deduction limit applies even if the income is paid to someone else (including a beneficiary upon the covered employee’s death).
- Imposing a 25 percent excise tax for payments in excess of the $1 million deduction limit.
Notably, although the Democratic staff report takes aim at NQDC, it does not identify qualified retirement plans as “loopholes” requiring legislative reform. A recent White House fact sheet on the president's tax proposals said that “tax loopholes have allowed some high-income Americans to accumulate tens of millions of dollars in tax-preferred accounts that were intended to help workers save for a secure retirement, not to provide tax shelters for the wealthiest few.”
Congress Announces New Retirement Security Caucuses
On March 2, the U.S. House of Representatives and the U.S. Senate announced the creation of new bipartisan Retirement Security Caucuses in each house of Congress. A congressional caucus is a group of Congressional members that join together to pursue common legislative objectives.
The House Retirement Security Caucus is being co-chaired by Representatives Mike Kelly (R-PA) and Richard Neal (D-MA) and the Senate caucus is being co-chaired by Senators Rob Portman (R-OH) and Ben Cardin (D-MD).
A press release from Kelly stated that the “primary mission of the House Retirement Security Caucus is to educate policy makers and the public about how national retirement policies can encourage Americans to save more money and plan more responsibly for their retirement,” as financial security in retirement persists as a top concern among American workers.
Portman and Cardin, co-chairs of the Senate Retirement Security Caucus, have a long history of leadership in retirement legislation. As House members in 2001, they were the authors of legislation to expand and improve retirement plans (ultimately included in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)) as well as numerous other retirement-related measures. The legislation in EGTRRA raised plan savings limits, allowed so-called “catch-up contributions” for workers age 50 and over, added the “Saver’s Credit,” facilitated plan-to-plan portability and made many other changes to ERISA and the Internal Revenue Code to support employer-sponsored retirement plans.
Likewise, Neal has a history of leadership on retirement policy. He is a supporter of the Automatic Individual Retirement Account proposal, has sought to expand access to retirement plans through easing participation rules, enhancing automatic enrollment and automatic escalation, and has proposed many other changes to the Internal Revenue Code and ERISA that would improve and simplify plan administration. Kelly is in his third term in Congress and has shown interest and leadership in retirement plan policy matters.