In this current outlook we review retirement benefits-related proposals in the Administration’s fiscal year 2013 budget; the introduction in the House of a concurrent resolution affirming the importance of tax incentives for retirement savings; DB funding “relief” included in the Senate Highway Bill; and (very briefly) the re-introduction of Auto IRA legislation in the House.
Retirement benefits-related proposals in the Administration’s budget
The Administration’s fiscal year 2013 budget includes several retirement benefits-related proposals. Although, in the context of legislative gridlock, most acknowledge that the proposals included in the budget are generally not likely to become law this year, they are a useful indication of Administration thinking on these issues and an indication of some positions likely to be taken in anticipated 2013 debates over the budget, the deficit and tax reform.
Limitation on retirement savings tax incentives. The budget calls for a reduction in the value of itemized deductions and other tax preferences to 28% for joint filers with income over $250,000 (at 2009 levels) and single taxpayers with income over $200,000. Among other things, this limit would apply to retirement contributions. This can be viewed as staking out critical ground in the coming debate over comprehensive tax reform — that tax preferences (including those for retirement savings) for higher income taxpayers should be reduced.
PBGC premium increase. As with the Administration’s last budget, the fiscal 2013 budget calls for “giving the PBGC Board the authority to adjust premiums to better account for the risk the agency is insuring. This proposal consists of two parts: a gradual increase in the single-employer flat-rate premium that will raise approximately $4 billion by 2022; and PBGC Board discretion to increase the single-employer variable-rate premium to raise $12 billion by 2022.” We have discussed the issues with respect to PBGC premiums in detail in our article Possible PBGC premium increase.
Auto IRA and increase in pension plan start-up credit. The budget “proposes a system of automatic workplace pensions [under which] employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. Employees may opt-out if they choose.” (Auto IRA legislation has been re-introduced in the House — see below.) It would also increase the maximum tax credit available for small employers establishing or administering a new retirement plan from $500 to $1,000 per year.
Eliminate minimum required distribution (MRD) requirements for IRA/plan balances of $75,000 or less. The budget includes a proposal to “simplify tax compliance for retirees of modest means by exempting an individual from the MRD re-quirements if the aggregate value of the individual’s IRA and tax-favored retirement plan accumulations does not exceed $75,000 …”
Allow all inherited plan and IRA accounts to be rolled over within 60 days. The budget includes a proposal “to permit rollovers of distributions to all designated beneficiaries of inherited IRA and plan accounts, subject to inherited IRA treatment, under the same rules that apply to other IRA accounts, beginning January 1, 2013.” This proposal would allow 60-day rollover treatment for inherited IRAs of non-spouse beneficiaries.
Bipartisan joint resolution in support of tax incentives for retirement savings introduced in the House of Representatives
On February 17, 2012, Representatives Neal Gerlach (R-PA) and Richard Neal (D-MA) introduced a concurrent resolution generally supporting the retention of tax incentives in any “reformed and simplified Tax Code.” The resolution has 106 co-sponsors.
The resolution comes up in the context of a widely anticipated effort by Congress to comprehensively revise the Tax Code, either this year or, more likely, in 2013. We have published several articles discussing: (1) retirement savings tax incentives generally and their priority on a list of tax provisions to be addressed in any comprehensive tax reform effort; (2) criticisms of the current system by certain groups; and (3) suggestions for reform. Our latest article is Tax reform and retirement savings.
Here is the key provision of the resolution:
[I]t is the sense of the Congress that —
(1) tax incentives for retirement savings play an important role in encouraging employers to sponsor and maintain retirement plans and encouraging participants to contribute to such plans;
(2) existing tax incentives have increased the number of Americans who are covered by a retirement plan; and
(3) a reformed and simplified Tax Code should include properly structured tax incentives to maintain and contribute to such plans and to strengthen retirement security for all Americans.
A concurrent resolution is a resolution adopted by both the House and the Senate; it is non-binding and does not have to be signed by the President.
It will be interesting to see how much additional support the resolution gets. But, even if the resolution passed and were binding, it would not foreclose a significant reduction in, e.g., 401(k) contribution limits, as some have proposed.
DB funding “relief” in the Senate Highway Bill
The Senate Highway Bill (S. 1813) includes a section titled “Pension Funding Stabilization” providing that, beginning in 2012, interest rates used to value DB plan liabilities must be within 15% of the average of rates for the 10-year period preceding the current year.
We’re going to go into a little detail here in order to make clear exactly how the proposal would work. Under current law, generally, DB liabilities are, for plan funding purposes, valued using three (short-, medium- and long-term) “segment rates” derived from a yield curve for corporate bond rates averaged over two years. Many have questioned the appropriateness of this approach in view of the Federal Reserve’s explicit policy of “keeping interest rates low” — low rates = bigger liabilities = bigger funding costs.
As a solution to what some have called “artificially low” interest rates, some have proposed using a corridor to limit “outlier” interest rates, and the proposal in the Senate Highway Bill takes that approach. Under that proposal:
If a segment rate … with respect to any applicable month … is less than 85%, or more than 115%, of the average of the segment rates … for years in the 10-year period ending with [the preceding plan year], then [that] segment rate … shall be equal to 85% or 115% of such average, whichever is closest.
Perhaps it’s easier to think of this not as a “corridor” but as a “collar” on valuation interest rates, equal to 85%-115% of a trailing 10-year average.
Obviously, this proposal would “cut both ways” — that is, five years from now, if interest rates have gone back up, then this collar (which will reflect the current historically low interest rates) will operate to lower interest rates. Indeed, some are suggesting that the way the Senate proposal is constructed — using only a 10-year average and an 85%-115% collar — will actually drive funding costs up over the long term while providing little or no relief in the short term.
The sponsors of this provision estimate it will raise $7 billion over 10 years — higher interest rates = lower liability valuations = lower funding = smaller deductions = more revenues. As noted, the provision is included in the Highway Bill because it raises revenues.
Auto IRA legislation re-introduced in House
Automatic IRA legislation (H.R. 4049) has been re-introduced in the House, by Representatives Neal (D-MA) and Blumenauer (D-OR). We have discussed similar legislation — generally providing that employers who do not maintain a qualified plan must provide for a payroll deduction IRA arrangement — in prior articles. Concerns about the budget and deficits are likely to prevent passage (or even consideration) of this bill this year. Some sort of Auto IRA proposal could, however, be part of the discussion of comprehensive tax reform. If and when an Auto IRA proposal gains significant legislative traction, we will provide more comprehensive coverage.
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We will continue to update you on these issues as they develop.