Monday, November 28, 2016

Saving for Retirement in a President Trump World

I know this sounds like a politically charged topic, but it's not intended to be. I just want to pose the situation to let readers know a few things. While the Trump platform didn't particularly address retirement issues, how will retirement be affected?

In order to understand this, let's consider a few key non-retirement items that both the Republican-controlled Congress and President-Elect Trump have weighed in on to one extent or another:

  • Repeal of the Affordable Care Act (ACA)
  • Replace the ACA with a framework that is expected to feature competition across state lines, high-deductible health plans (HDHPs) with Health Savings Accounts (HSAs), and a la carte shopping for health plans (you insure what you want to insure to the extent that such coverage is available)
  • Simplified (somewhat) Tax Code with lower marginal tax rates for most taxpayers
  • Elimination of the Head of Household status for filing taxes
As I've remarked many times, our current retirement system for American workers is not what it was, for example, 30 years ago. It's no longer the norm to have the solid three-legged stool of
  • the defined benefit (DB) pension plan from the company you spent most of your career with
  • your personal savings in a high-return savings or money market account (you probably even had your choice of a free toaster or alarm clock when you opened the account)
  • Social Security
Recall that 401(k) plans were in their infancy and even employees who had them didn't tend to make heavy use of them. 

Under the new [proposed] regime, personal responsibility will be king. Out of your higher after-tax income (not significantly higher for most Americans unless the economy booms to where employers are inclined to offer higher compensation to their employees), you'll need to save for retirement and make HSA deductions to accumulate a rainy-day fund just in case you have a high-cost medical expense. Is that practical?

Under the ACA, $10,000 annual health care deductibles are not all that uncommon. So, you'll want to build up your HSA account to ensure that you're not bankrupted by a large medical expense or even by one that you choose to not purchase coverage for. Let's say you choose to defer the family limit for 2017 -- $6,750. Further, since you've been reading about it online, you need to defer, say, 10% of your family income of $75,000 per year (or $6,250 per month) (well above the national median of about $52,000) or $7,500 to your 401(k). Let's add to that your $2,000 per month house payments (including escrow) and your $750 per month car payments (including insurance) and see where you are before basics like utilities, food, and clothing.

We start with $75,000 and let's pull out 22% of that for federal, state, and FICA taxes bringing you down to $58,500. Let's take out another $4,000 per year for health care through your employer (we'll assume they are subsidizing it) and you're down to $54,500. Now subtract your HSA, 401(k), house payments, and car payments and you're down to $7,750. That's $650 per month to pay for food, clothing, gasoline, and to build up a rainy day account, and you haven't even had a chance to buy anything because you just wanted it.

As they said in the movie, something's gotta give. What's it going to be? My guess is that the first thing you cut back on is your retirement savings. You'll worry about that in some future year. Or, will you? Recent history suggests you won't. 

People who retired 30 years ago tended to be much more prepared for retirement despite their lack of 401(k) plans. They were intended to be merely supplemental to employer-provided pension benefits. Is it possible that the Trump Administration should consider the benefits of incentives to get us back into a DB-biased world? Just asking.

Thursday, November 3, 2016

A Modest Retirement Benefits Proposal With Apologies to Jonathan Swift

If you were to ask an employee what are their most important employee benefits, they might tell you that they are their health coverage and their retirement benefits. And, for the last several years, with the passage of the ACA (ObamaCare if you prefer), their health care benefits are fairly well mandated.

Yes, employers have an option -- they can play (provide at least minimum essential coverage) or pay (a penalty for not providing such coverage. And employees not covered by their employers have an option -- they can get coverage (play) outside of their employer either privately or through a federal or state exchange or they can pay a penalty as part of their Shared Responsibility.

To a large extent, the Affordable Care Act came about because of what was viewed (perhaps rightfully) as a health care crisis in the US. Cost of care was increasing rapidly. The number of uninsured was growing. Insurers were perceived to be denying treatment to their insured, not because the medical option being pursued was not the best medical option, but because it was a better business decision for the insurer (the cost of care might include the savings related to the decreased cost of future care). So, for better, for worse, or for some combination, the federal government has largely told us what our health coverage should look like. Depending on your personal situation, you might choose to be the judge of how well that works for you.

Suppose that applied to retirement benefits as well. After all, many would tell us that we are in a retirement crisis as well. Yesterday, I saw some data that while I happen to not believe it said that 50% of Americans over the age of 50 have less than $5,000 in retirement savings. Frankly, if that is remotely close to the truth, we do have a retirement crisis.

Suppose we modeled a retirement benefit system after the ACA. And, suppose this was in addition to Social Security. What would be minimum essential coverage under the Affordable Retirement Act? Let's take a shot at it.

  • Everyone has an account balance into which their employer makes a mandatory contribution and the employee also makes a mandatory contribution. 
  • To the extent that the employee contributes more than that up to a point, their employer must match it. That match is to be more generous for the lowest-paid employees and phases out altogether for employees earning at least $250,000.
  • Withdrawals from the account will not be allowed before retirement.
  • When you do retire, your benefit will be distributed in the form of an annuity with death benefit protection much like a Joint and Survivor Annuity and will have annual cost-of-living adjustments.
  • Those annuities will be provided by insurance companies participating in retirement exchanges. The insurers will not be able to collect data on the participants to whom they are providing annuities, so they will likely not be able to understand the risk they are taking on.
  • Insurers will be limited in the cumulative profit they can earn on these annuities.
  • Employers and or employees who do not participate will have to pay into the system on behalf of others.
How does all that sound? Can you make it work for you?

Special note: there may be as little as nothing in this post that anyone agrees with including its author.

Wednesday, November 2, 2016

Interpretive Guidance Issued, But Pay Ratio Determination Still Difficult

Staff at the SEC recently issued interpretive guidance on the pay ratio rules under Section 953(b) of Dodd-Frank. Regular readers will know that I have written on the pay ratio many times. What many regular readers (those who are used to dealing with benefits issues, for example) may be less familiar with is that the interpretive guidance of staff carries full weight. That is, it's not just a suggestion.

Before digging into the guidance, let's recall what the pay ratio disclosure is. Generally, companies that issue definitive proxies in the US must, beginning with fiscal years starting in 2017, disclose the ratio of CEO compensation to that of the median-compensated employee in the company. And, for those purposes, compensation is that used in the Summary Compensation Table of the proxy. So, it includes (oversimplifying a bit), for example, the value of equity, deferred compensation, and qualified retirement plans provided by the employer.

The employee population for this purpose is not limited to full-time workers or to US workers. So, companies with lots of international employees who are compensated in a variety of different ways may have difficulty with this determination.

If you need a refresher on what the final rule said and how you might handle it, there is useful material here.

Back to the interpretive guidance.

As you may recall, you may determine who your median employee is by using simplified definitions of annual total compensation so long as your facts and circumstances support it. For example, if it's clear that compensation for the median employee will resemble W2 pay, then you can use information from tax or payroll records to determine who the median-compensated employee is. But, if you provide pensions or equity compensation broadly, this may be inappropriate to your situation. In fact, for many companies, determination of who their median-compensated employee is will be the most difficult part of the process.

What staff made clear is that rate of pay (hourly rates or salary) is not reasonable to use as a consistently applied compensation measure (CACM). Staff gave examples where those rates could be part of the process, but in order to make the measure reasonable, companies would need to know how many hours each hourly-paid worker actually worked and for what portion of the year salaried workers were employed.

The interpretive guidance makes clear that in determining the median employee, the population may be evaluated using any date within 3 months of the end of its fiscal year. Once the population as of that date is selected, the employer can go through this process:

  • Identify the median employee using either annual total compensation or a CACM ... by
  • Selecting a period over which to determine that CACM (the period need not include the selected date so long as based on the facts and circumstances indicate that there will be no significant changes (undefined term, of course) between compensation used and actual compensation for the fiscal year)
It is up to employers to determine, again based on all the facts and circumstances whether furloughed employees should be considered in the population. Employees who were hired during the year or who worked less than the full year due to a leave of absence may have their pay annualized. But, part-time and seasonal employees may not have their pay annualized.

And, finally, the staff weighed in on how to determine who might be or not be an employee for purposes of the pay ratio. Essentially, the determination of whether a worker who is not a common-law employee of the employer should be considered an employee for these purposes is based on, you guessed it, all the underlying facts and circumstances. Primarily, the employer should look to whether it sets the compensation of, for example, contract workers, or if that pay is set by someone else.

So, for example, if the company advertises that it will pay contract telephone callers $15 per hour, then they would be employees for these purposes even if they are not employees for tax purposes. On the other hand, a worker who is brought on board through a temporary staffing agency or for a specific contract is likely not a worker.

Well, this clears it up for you, doesn't it? Okay, I thought not. Continue to follow me here for more updates as they come rolling in. Or, let me know if you have questions.