President Obama proposes 2014 fiscal year budget

Transcription

1 President Obama proposes 2014 fiscal year budget On April 10, 2013, President Barack Obama revealed his proposed 2014 fiscal year budget. While there is no chance that the entire proposal will be enacted, parts may survive in some form. The proposal represents President Obama s plan to address key issues about job creation, deficit reduction, and growth of the US economy. To help pay for those initiatives, the President has recommended limits to certain employee benefit tax breaks. For example, several of the proposals are aimed at the retirement and health benefits of the wealthy and would likely be implemented at the individual, rather than at the plan level. Employers could face increased information reporting and administrative chores, and some may find the shift in tax breaks reason to re-think plan design. In this article: Cap on combined value of retirement plans Cap on value of itemized deductions Auto IRAs Required minimum distribution relief for small accounts Faster non-spouse beneficiary distributions Change in calculation of COLAs Allow PBGC to set rates Expand electronic filing rules Limit COLI tax arbitrage Limits for ESOP dividends Medicare benefits and prescription drugs Additional funding for employmentrelated initiatives and enforcement activities In closing Cap on combined value of retirement plans Currently, the proposed budget provision drawing the most attention in HR circles is a new individual cap on retirement savings. Individual taxpayers would not be permitted to accumulate more than $3.4 million in all their various retirement plans and accounts defined benefit, defined contribution (including funded 457(b) arrangements of governmental entities and 403(b) accounts), and IRAs combined. The $3.4 million figure represents the value of the maximum annuity ($205,000 payable in a joint and 100% survivor annuity commencing at age 62) payable from a taxqualified defined benefit plan. Once at the cap, the individual would be prohibited from receiving additional accruals or making additional contributions. Any excess contribution or accrual would be treated in a manner similar to the current approach for an excess deferral to a 401(k) plan. The $3.4 million cap is based on current low interest rates. As interest rates rise, the cap would be reduced. The proposal would be effective for plan years beginning on or after January 1, 2014, and is expected to raise $9 billion over 10 years. Buck Comment. The cap may have a chilling effect on small employer plans because business owners might be motivated to discontinue plans for their workers once they meet the cap. For individuals in general,. 1

2 depending on the ultimate details, the cap may spur greater interest in Roth contributions because they are net of tax. Cap on the value of itemized deductions President Obama s budget proposal would limit the value of select itemized deductions and above-the-line adjustments to 28% for families and individuals with incomes in the highest tax brackets. Under this proposal, taxpayers would pay tax based on their marginal rate less 28% on tax preferences such as contributions to HSAs, employer contributions for medical coverage (including employee pretax contributions), and employee contributions to defined contribution retirement plans and IRAs. To avoid double taxation, the proposal would allow the creation of after-tax basis for retirement account values that had been taxed under this rule. This would address the complaint about previous proposals along this line that the individual pays current tax on the excess deferral over the 28% deduction level and then later, when the funds are withdrawn, pays tax at the individual s tax rate at that time. Presumably, individual taxpayers would be responsible for retaining data to support their future claim of basis. The cap would affect married couples with taxable incomes in excess of $223,050 and individuals with taxable income exceeding $183,250, and is expected to raise an estimated $529 billion over 10 years. Buck Comment. As with the first cap described above, this restriction may also inspire high-income individuals to utilize Roth contributions to avoid having to track whatever adjustment is offered for avoiding double taxation. According to a summary from the Office of Management and Budget, this limitation would only affect about 2% of families in However, implementation promises to be challenging and may involve new reporting requirements for employers. Auto IRAs for employees with no access to retirement plans President Obama s budget proposal would again propose Auto IRAs. Employers with more than 10 employees that do not currently offer a retirement plan would be required to automatically enroll employees in an IRA on a direct deposit basis. Consistent with auto enrollment features in a qualified plan, employees would be permitted to elect to opt out. The approach would insulate employers from responsibility for selecting investments, compliance, and liability for the IRAs. Buck Comment. Employers who currently have a retirement plan but exclude certain groups such as a subsidiary or division would need to make arrangements to auto enroll these employees into the Auto IRA. Employees under age 18 and those excluded due to waiting periods, nonresident alien status, or collective bargaining would not be affected. As an incentive to offer a new retirement plan, an array of nonrefundable tax credits would be available to small employers (100 or fewer employees) for implementing the Auto IRA or setting up a qualified plan, SEP, or SIMPLE. Required minimum distribution relief for small accounts As a simplification, and because most taxpayers with relatively small account balances usually do not defer distributions as an estate-planning strategy, the proposal would eliminate the minimum distribution requirements for individuals with an aggregate of $75,000 or less in IRAs and tax-favored retirement plans. The individual s total combined accumulations would include Roth balances but exclude benefits that are already in pay status in a qualified defined benefit plan. The accumulation would initially be measured as of the first day of the calendar year in 2

3 which the participant attains age 70½. Subsequent measurements would only occur in years when additional contributions are made or transferred into the account. Fluctuations in account value based on gains and losses would not impact the ability to defer distributions. The provision would be effective for account holders who attain age 70½ on or after December 31, Buck Comment. The proposal does not explain how plan administration would be affected. To administer distributions from an employer s plan holding a small account for a plan participant, it is not clear what effort will be required on the part of the plan administrator to gather information about other accounts or whether the plan is obligated to consider those other accounts in determining distribution requirements. Faster non-spouse beneficiary distributions Minimum distribution rules also apply to balances remaining after a plan participant or IRA owner has died. These rules vary based on the relationship of the beneficiary to the deceased and whether or not the required minimum distributions had started. Currently, non-spouse beneficiaries can take distributions based on their actuarial life expectancy provided the distributions begin no later than the December 31 of the year following the death of the participant or IRA account holder. The President s budget proposal would require that all non-spouse beneficiaries take distributions over no more than five years. Exceptions would apply to any beneficiary who is disabled, chronically ill, not less than 10 years younger than the participant or IRA owner, or a child who has not reached the age of majority (18 in most US states). For these beneficiaries, distributions may be made over the life of the beneficiary beginning in the year after the death of the participant or IRA owner. In the case of a child, the distributions must be completed no later than five years after reaching the age of majority. The proposal would apply to distributions made with respect to a participant or IRA owner who dies after December 31, Change in calculation of COLAs President Obama s budget proposal would substitute chained CPI (C-CPI-U) for cost-of-living adjustments (COLA) in lieu of the current CPI-U and CPI-W. As prices change, the chained CPI, unlike the CPI-U or CPI-W, takes into account buying decisions. It is viewed as a more accurate measure of how consumers substitute one item for another when faced with a price increase and would result in lower COLAs over time. Using the chained CPI would impact Social Security beneficiaries and federal retirees whose pension would be based on this index. The President has stated that any change would need to protect the most vulnerable and has included provisions to protect the elderly and those who have relied on Social Security for long periods of time. In addition to the impact on benefit payments, the chained CPI would be used to adjust various COLAs in the tax code such as income thresholds for individual income tax rates, standard deductions, and personal exemptions. The change would flow through to the limits in the benefits world such as defined benefit pension, annual addition, elective deferral, compensation, and health savings account limitations. The move to the chained CPI is projected to reduce the deficit by $230 billion over the next decade. Allow the Pension Benefit Guaranty Corporation to set rates For the third year in a row, President Obama is including a budget provision that would give the PBGC Board the authority to adjust premiums and consider the credit worthiness of the plan sponsor. The Administration argues that 3

4 PBGC receives no taxpayer funds and its premiums are currently lower than those a private financial institution would charge for insuring the same level of risk. The Administration asserts that this change may encourage companies to fully fund their pension benefits and will help ensure the continued financial security of the PBGC. Industry groups fear that the risk of unpredictable premiums may cause an increase in the termination or freezing of defined benefit plans. In response to these concerns, the provision would not be effective until 2015, and the budget would require a year of study and public comment before the implementation of any rate changes. Any increase in premiums would be phased in gradually. This proposal is estimated to save $25 billion over the next decade largely because there is a $25 billion cap on the authorized increase in premiums. Expand electronic filing rules for plan reports Currently, the DOL has the authority to require electronic filing of plan information but the IRS does not. As a result, when the agencies moved to the Form 5500 EFAST system, IRS-only information was stripped out of the form. For example, the schedule summarizing coverage data (former Schedule T) was eliminated, and the Form SSA was delinked from the Form 5500 and replaced by the separate Form 8955-SSA. President Obama s budget proposal would provide the IRS with the authority to require relevant tax information to be filed electronically on the Form In addition, IRS would have the authority to require electronic filing of the Form 8955-SSA. Buck Comment. Plan sponsors might welcome the electronic SSA filing requirement, especially if it leads to the ability to electronically examine and correct data currently on file. Limit COLI tax arbitrage The budget proposal would repeal the exception from the pro rata interest expense disallowance rule for corporate owned life insurance (COLI) for all but 20% owners of a business that is owner or beneficiary of the insurance. The change would bar deductions for interest expenses when funded with tax-exempt or tax-deferred income under life insurance, endowment, or annuity contracts. Continuing the deduction for the 20% owner would benefit small businesses that depend heavily on the services of the owner. Buck Comment. This would have a negative impact on COLI and has been included in previous budget proposals. When originally proposed, it drew substantial attention from the life insurance industry and major corporations. While current budget negotiations may result in surprises, the life insurance lobby has proven to be very effective at communicating that the existing rules adopted in the Pension Protection Act of 2006 to regulate the taxation of COLI work, and that further COLI restrictions are not advisable. Limits for ESOP dividends C Corporations are permitted to take a tax deduction for dividends paid on employer stock held in an Employee Stock Ownership Plan (ESOP) provided certain conditions are met. Because that same deduction does not exist for dividend payments to stockholders outside a qualified plan, there is concern that this favorable treatment encourages employees to invest in employer stock through ESOPs. In larger plans, there is concern that the risk to retirement savings associated with investing in employer securities, particularly if there are large balances, may not be commensurate with the associated returns. However, in the case of smaller companies, the inclusion of an ESOP 4

5 may have a productivity incentive effect. The President s budget proposes to eliminate the deduction for dividends paid on or after the date of enactment for companies with annual receipts of more than $5 million. Medicare benefits and prescription drugs Notably, the budget proposal does not recommend increasing the Medicare eligibility age. It retains the ACA Medicare provisions and also includes a number of changes to Medicare provisions generally, some of which would impact employer-sponsored plans for Medicare retirees: Administration supports the ACA The budget proposal expresses continued support of the ACA, The Part D coverage gap (donut hole) for brand drugs would be closed including the health insurance in 2015 by increasing the 50% brand name drug discount to 75%. exchanges. It also promotes (Currently the Part D coverage gap for brand drugs is set to be closed by state flexibility in developing 2020 through a combination of a 50% manufacturer discount for brand coverage offered through those name drugs and enhanced Part D standard benefits.) exchanges. Payments made to employer group waiver plans (EGWPs) would be aligned with average individual Medicare Advantage bids beginning in 2015, reducing average payments. The Medicare Part B and D income-related premiums would increase from the current 35% of per capita costs to 40% at the lowest income levels, and from 80% to 90% of the per capita costs at the highest income levels in A 15% surcharge would apply to Part B premiums starting in 2017 for new beneficiaries who purchase a Medigap policy with particularly low cost-sharing requirements. The Part B deductible would increase for new beneficiaries by $25 in 2017, 2019, and A new $100 copayment would apply for some home health services for new beneficiaries starting in The budget proposal also includes several provisions that are intended to help reduce drug prices for all consumers: Pay for delay agreements between brand and generic drug manufacturers would be prohibited. (Under these agreements, generic manufacturers agree to keep a generic drug off the market for a period of time after the expiration of the brand drug s patent.) The period of exclusivity for brand name biologic drugs would be reduced from 12 to 7 years. Additional periods of exclusivity for brand name biologic drugs due to minor changes in the product formulations would be prohibited. Additional funding for employment-related initiatives and enforcement activities President Obama s budget proposal boosts funding for a number of employment initiatives and enforcement activities. For example, the EEOC would receive additional funding to pursue its strategic plan for fiscal years One of the EEOC s priorities continues to be litigating systemic cases. The increase in the DOL s budget is largely intended to strengthen enforcement of wage and hour, whistleblower, and worker safety laws. The budget for the DOL s Office of Federal Contract Compliance Programs (OFCCP) would be strengthened to focus on pay equality, particularly on narrowing the pay gap between men and women. The recent census study 5

6 shows that women earn only 77 cents for every dollar earned by men. Other OFCCP priorities include strengthening community outreach and ensuring that federal contractors recruit and hire veterans and individuals with disabilities. The Wage and Hour Division (WHD) budget would be increased to enhance enforcement under the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). Funds would also be set aside to develop an enforcement and case management system to capture data to analyze trends in labor law violations, allowing the DOL to better target investigations, ensure future compliance, and deter violations by other employers. Notably, the budget also allocates funds to encourage the establishment of state-paid family leave laws. A State Paid Leave Fund would provide support and technical assistance to states that are considering such programs. The WHD budget would also be expanded to step up efforts to investigate and combat the misclassification of workers as independent contractors, which can result in lost benefits and protections for workers and lost revenue for the Treasury, Unemployment, Social Security, Medicare, and state programs. Additional budget funds would be set aside in grants to help states recover unpaid taxes. Buck Comment. Correcting worker misclassifications affects benefit plans as well as employment taxes and employer withholding obligations. Reclassifying an independent contractor as an employee can mean additional benefit obligations or nondiscrimination issues, and now under the ACA, employer shared responsibility penalties. The budget for the Occupational Safety and Health Administration (OSHA) would be enhanced to accommodate hiring additional investigators to inspect hazardous workplaces and to enforce safety issues. OSHA would also receive a budget increase for enforcing 22 separate whistleblower statutes. The budget proposal would also provide a 10% income tax credit (capped at $500,000 per employer) for small businesses that hire new employees or increase wages. The credit would be limited to employers with less than $20 million in Old Age Survivors and Disability Insurance (OASDI) wages in For these purposes, members of the same controlled group would be treated as a single employer. In closing The President s budget proposal, aimed at cutting the deficit by $1.8 trillion over the next ten years, has drawn criticism from both sides of the aisle and is not expected to pass in its current form. The President s proposals, along with House (Republican) and Senate (Democrat) budget proposals will, however, set the stage for negotiation. In addition to the benefit plan changes described above, the proposal includes mechanisms intended to discourage outsourcing and improve the educational level and job prospects of our citizenry. It would raise the minimum hourly wage from $7.25 to $9 and increase spending on roads and bridges, non-defense research and development, and early childhood education. Whether cuts in retirement savings, Medicare, and other benefits to pay for this spending and deficit reduction will survive budget negotiations remains to be seen. Reference: This Legislate highlights key benefit plan proposals that may impact employers if enacted as described in the Fiscal Year 2014 Budget of the US Government and the Department of Treasury s General Explanations of the Administrations Fiscal Year 2014 Revenue Proposals. 6

7 Authors Lisa Ann Scalia, CPC, QPFC, QKA, QPA Richard Stover, FSA, MAAA Nancy Vary, JD Produced by the Knowledge Resource Center of Buck Consultants at Xerox The Knowledge Resource Center is responsible for national multi-practice compliance consulting, analysis and publications, government relations, research, surveys, training, and knowledge management. For more information, please contact your account executive or You are welcome to distribute Legislate publications in their entireties. To manage your subscriptions, or to sign up to receive our mailings, visit our Subscription Center. This publication is for information only and does not constitute legal advice; consult with legal, tax and other advisors before applying this information to your specific situation Xerox Corporation and Buck Consultants, LLC. All rights reserved. Xerox and Xerox and Design are trademarks of Xerox Corporation in the United States and/or other countries. Buck Consultants is a registered trademark of Buck Consultants, LLC in the United States and/or other countries. 7