Wednesday, March 25, 2015

Qualified Retirement Plans Are Not a Congressional Toy

I was at the Southern Employee Benefits Conference Annual Educational event yesterday. One of the speakers had just returned from a conference in Washington where there were a number of presenters who are staffers on The (Capitol) Hill. Reports are that staffers from both parties strongly implied that tax-favored status of 401(k) and other qualified retirement plans may be in jeopardy.

In short, this is bad -- really bad.

The eventual ability of many Americans to retire in the recently traditional sense is already in jeopardy. Various surveys that I have seen say that the majority of Americans in the workforce have no savings outside of their qualified retirement plans and for most, those are 401(k) plans only. If Congress were to eliminate some or all of the tax breaks associated with them, I fear that those savings would disappear as well for many people. All but those who had the ability and foresight to save and invest on their own would be left to find sources of income until they reached their deathbeds.

That is bad -- really bad.

I don't think I have ranted too much for a while, but this topic is always good for one.

When Congress looks at issues that have tax effects, they break them into two categories -- tax revenues and tax expenditures. Anything that causes the government to collect less money in taxes is a tax expenditure.

Therein lies the rub. Most things that Congress can do for the country cost money. If Congress chooses to send a bill to the President that provides for some improvement that was not previously planned, it needs to pay for those costs. It often chooses to do so through reductions in tax expenditures.

According to IRS publications, the two largest current tax expenditures are for employer-provided health insurance and for employer-provided retirement plans. Health insurance is a sacred cow. It's not going away unless or until we have a single-payer system. Retirement does not appear to be so sacred.

And, retirement always seems to be a good revenue raiser, at least the way that the Congressional Budget Office (CBO) scores bills. The CBO looks at 10-year costs or revenues. So, Congress needs money to pay for a highway bill -- they reduce required contributions to defined benefit plans. That cuts tax expenditures ... in the short run.

As I have said many times, Congress should not intermingle tax policy and public policy. Ever!

Sadly, Congress does not listen to me. All of my readers know that Congress should listen to me, at least on these issues, but alas, they are not so wise.

So, we are left with a Congress that makes changes to employee benefit plans in the most interesting places. Here are a few that will either refresh your memory or leave you scratching your head or both:

  • The Uruguay Round Agreements that led to the formation of the World Trade Organization
  • HATFA, the 2014 highway funding bill
  • Several defense appropriations acts
  • Any number of omnibus budget reconciliation acts (OBRAs)
  • KETRA, the Katrina Emergency Tax Relief Act of 2005
  • SBJPA, the Small Business Jobs Protection Act
If Congress wants to eliminate the tax breaks for qualified plans, it should do so by eliminating the federal income tax. If Congress chooses not to do that, don't mess with them.

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