Legislative Update: Year-End Review of Legal Changes Affecting Benefits Plans

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Legislative Update Year-End Review ofLegal
Changes Affecting Benefits Plans

• Marcia S. Wagner, Esq.

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Tax Reform v. Pension System Structural Reform
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Tax Cost of Retirement Plans

• Impact of Pan Contributions on Federal Deficit
• 70.2 Billion Annually
• 361 Billion 2011 2015
• Tax Reform
• Pension System Reform

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Tax Reform

• 2014 Plan Limitations that Can Be Reduced
  to Limit Deficit
• Annual Additions from All Sources - 52,000.
• Elective Deferrals - 17,500.
• Plan Sponsor Deduction - 25 Participant
  Compensation.
• Limit on Compensation Base to Determine
  Benefits/Contributions - 260,000.
• Obama FY 2014 proposed 3 million cap on
  aggregate lifetime contributions.
• - Cap to vary based on age.
• - Double tax if prohibited amount not
  withdrawn.

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Tax Reform (contd)

•  National Commission on Fiscal Responsibility.
• 20/20 Cap Limits Contributions to Lesser of
  20,000 or 20 Compensation.
• Brookings Institution.
• Tax All Employer and Employee Contributions.
• Refundable Tax Credit Deposited to Retirement
  Savings Account.
• Obama Administration proposals to raise revenue.
  
• 11.6 tax on employer employee plan
  contributions.
• High earners only.
• Basis adjustment for extra tax.
• Repeal of dividends paid deduction for ESOP
  sponsors.
• 25 billion in PBGC premium increases.

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Pension System Reform State-Sponsored
Initiatives

• Secure Plan Proposal by National Conference on
  Public Employee Retirement Systems
• State sponsored cash balance plans for
  private-sector
• 6 annual credits
• Minimum 3 interest credits
• Participation voluntary but withdrawal
  liability assessed on terminating employers
• Seeks to benefit from economies of
  scale
• Funding shortfall would be state
  responsibility

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Pension System Reform State-Sponsored
Initiatives (contd)

• California Secure Choice Retirement Savings
  Program
• - Mandatory payroll deduction auto-IRA
  program
• Auto enrollment at 3 unless employee opts
  out
• Required for enterprises with 5 or more
  workers if no current plan
• State chooses investment managers
• Guaranteed rate of return
• - Signed by governor but implementation subject
  to IRS and DOL approval
•  
• Other State Initiatives
• - Massachusetts enactment of defined
  contribution multiple employer plan for
• non-profits
• - At least 11 other states said to be
  considering plans for private-sector
• employees.

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Pension System Reform Automatic IRAs

• Legislative History
• Auto IRAs proposal appears to be partisan.
• But had bi-partisan support in prior years.
• Increasing retirement plan coverage is shared
  policy goal.
• Three Key Features
• Default contribution rate set at 3.
• Post-tax Roth IRA would be default, but employee
  could choose pre-tax Traditional IRA.
• Multiple alternatives available for selecting
  Auto IRA provider.

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Pension System Reform Automatic IRAs(contd)

• Objections to Auto IRAs
• Burdensome mandate for small businesses with more
  than ten employees.
• Federal government control overs assets.
• Role of private sector.
• Partisan politics will continue in short term.
• But bipartisanship support typically emerges on
  retirement issues.

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Pension System Reform Proposals at Federal Level

• USA Retirement Funds proposed by Sen. Tom
  Harkin
• Sen. Harkin issues report in July 2012 that
  proposes new retirement system
• - Automatic and universal enrollment required
  by employers with no plan.
• - Regular stream of income starting at retirement
  age.
• - No lump sum withdrawals.
• - Financed by employee contributions through
  payroll government credits
• Privately managed investment by new entities
  called USA Retirement
• Funds.
• - Limited employer involvement and no fiduciary
  responsibility.
• - Unspecified level of required
  employer contributions.
• - Employees can increase/decrease
  contributions or opt out.
• Similarities to proposals for state-covered
  pensions of private-sector workers.
• Would include enhancements to Social
  Security.
• Text of bill expected in 2013.

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Pension System Reform Proposals at Federal
Level

• SAFE Retirement Act proposed by Sen. Orrin Hatch
• Starter 401(k) Plans
• Up to 8,000 participant contributions annually
• Reduced administration and no discrimination
  testing
• Auto deferrals from 3 to 5
•  
• Government sponsors may adopt SAFE Retirement
  Plan
• Annual purchase of fixed annuities for
  participants
• Insurers to be selected by bidding process
• Improve funding and security but pays smaller
  benefits
• Restores jurisdiction over prohibited
  transactions to IRS

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Systemic Reform - Other Proposals

• Unitary Defined Contribution System espoused by
  John Bogle, Vanguard founder
• Consolidation of all retirement savings programs
• Federal Retirement Board controls system
• Limit distributions and loans to prevent
  system leakage
• Limit number of investment options
  concentrating on low-
• cost funds
• ERISA fiduciary standards extended
  to service providers / money managers

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Systemic Reform Other Proposals (contd)

• Proposals by Academics
• Teresa Ghilarducci (The New School)
• - eliminate current tax breaks and
  use savings to make 5 contribution to all
• employees
• - mandatory contributions and guaranteed
  investment return equating to defined
• benefit approach, supplementing Social
  Security
• - participants in existing plans could
  continue in such plans if contributions are 5,
• no early withdrawals, mandatory conversion
  to annuity on retirement
• - people not in employer plans would be
  mandated into Guaranteed Retirement
• Accounts (GRAs) with mandatory 2.5
  employer and employee contributions
• investments pooled and professionally
  managed to reduce fees.
• Meir Statman (Santa Clara University)
• - defined contribution approach similar to
  Australian and British systems.
• mandatory employer and employee contributions.
• - investment controlled by account owner.

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Systemic Reform Other Proposals (contd)

• Center for American Progress Liberal Think Tank
• Secure, Accessible, Flexible, Efficient (SAFE)
• Dismantle and replace existing voluntary private
  pension system governed by ERISA
• Create new collective defined contribution plan
• Every employer will make automatic payroll
  deductions on behalf of each employee each
  employee can opt out
• Money from payroll deductions funneled to
  non-profit organizations run by independent
  boards to professionally invest
• No self-direction
• Pay out is annuity form only.

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Summing Up

• Significant Transformation of Private Retirement
  System Possible.
• Tax Reform.
• Reducing tax incentives will shrink
  system.
• Lower contributions at all income levels
  result if tax exclusions cut back.
• Obama proposal for general limit on benefit
  from tax exclusions.
• Does not focus directly on 401(k)
  contributions.
• Provides political cover.
• Same effect on contributions as direct
  cutback on excludible amount

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Summing Up (contd)

• - Systemic Changes
• Intended to create access for low-wage
  employees
• Government will replace private employers
  in system
• Mandated benefits
• Guaranteed benefits and/or
  investment results
• Creation of new interest group
  to lobby for expansion of benefits
• Government influence in choosing investment
  managers or control of
• investments could drive many out of the
  retirement industry.
• State-level programs may cause breakdown
  in uniformity of pension laws,
• effective since enactment of ERISA
• Inflection Point regarding the types of
  Retirement Schemes Nation wants
• and needs
• Interesting Times

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Legislative Update Year-End Review ofLegal
Changes Affecting Benefits Plans

• Marcia S. Wagner, Esq.
• 99 Summer Street, 13th Floor
• Boston, MA 02110
• Tel [phone] Fax [phone]
• Website www.wagnerlawgroup.com
• marcia_at_wagnerlawgroup.com
• A105676