The Election Happened, Now What?

As the politicians like to say, the people have spoken. Now what?

There are lots of things I could say here about the policies of either side and what I think is right, wrong, or beyond comprehension, but that would be as worthless as much of the blather that occurs inside the Beltway.

What we have now is the same President that we have had for the past four years, roughly the same makeup of the Senate, albeit very slightly more left-leaning it appears and the same House of Representatives although perhaps slightly more right-leaning in its ideology. What we also have is an Administration which no longer needs to be in campaign mode. This means that policies and regulatory agendas which perhaps were on hold for political or non-political reasons may move forward.

Before moving forward, I caution you that what I am about to write is nobody's opinion but my own and that it is only my opinion on the morning of November 7, 2012. It may be different this afternoon, tomorrow, or some other day, but I hope that it doesn't change too much.

PPACA (health care reform or ObamaCare if you prefer) remains the law and it will remain. Whether they like the law or not, companies must prepare for 2014 when many of the key provisions of the law will take full effect. As an American, I hope that most employers do not make the decision to convert many employees from full-time to less than 30 hours for the sole purpose of excluding those employees from semi-mandatory coverage, but that is a decision that some will make.

The President is a strong believer in nationalized benefits programs (see, for example, ObamaCare). Look for his Administration to put forth a proposal for mandatory employer-provided retirement coverage with the option being contributing to a national retirement exchange. Retirement plans will look much more portable in this proposal. And, more coverage means more tax expenditures which must be paid for. Look for them to be paid for with tax savings generated from reductions in 415 limits and 402(g) limits. In other words, the highest earners will not be able to save as large a percentage of their incomes for retirement.

Historically, the Democrat Party has favored defined benefit (DB) plans more than the Republican Party. Republicans as a group have viewed that such plans are not representative of individuals taking responsibility for themselves. However, unless Congress really seeks the assistance of outside experts, do not look for any sort of resurgence in the DB world. Every effort from Washington to promote DB plans has been fraught with agency intrusion that moves employers away from DB.

At the same time, look for the President to leave Ben Bernanke in charge of the Federal Reserve and Tim Geithner in charge of Treasury. This will likely mean continuing low interest rates in an effort to spur the economy. The pension funding stabilization provisions of MAP-21 have, in the short run, allowed companies to not have exorbitant expenditures to fund their DB liabilities, but accounting disclosure often attached to loan covenants and credit-worthiness of companies that sponsor the plans will be unaffected by funding rules. In fact, companies that choose to make the MAP-21 minimum required contributions will have their accounting disclosures look worse.

President Obama has made it clear that he plans to raise taxes on high earners. We've previously written here about the FICA tax increases under ObamaCare as well as the 2013 combination of tax increases sometimes referred to as Taxmageddon. When marginal tax rates increase, deferred compensation becomes more valuable. Look for more companies to focus on nonqualified deferred compensation plans for their executives.

Similarly, the estate tax, or death tax, if you prefer, is due to return with a 55% top rate. Individuals who have accumulated significant wealth will be looking for ways to transfer that wealth to their heirs. Privately-owned companies will frequently look to ESOPs perhaps through so-called 1042 exchanges to plan for wealth succession.

Executive compensation is going to be a huge issue. As tax rates increase and the limitations in qualified plans likely decrease, deferred compensation will be become a bigger issue. With increases in deferred compensation come larger risks both for the executive and the employer. Funding such plans has become increasingly difficult while failure to fund them leaves unmitigated risk for both parties.

Dodd-Frank was one of the hallmark laws of the first Obama Administration. Seven key executive compensation provisions remain unregulated, but look for all of them to be regulated soon. Particularly critical among them are:

• Policy on erroneously awarded compensation
• Disclosure of pay versus performance
• Pay ratio disclosure

Look for the Administration to consider policies that would cut the million dollar pay limit under Code Section 162(m). While the original 162(m) codification probably backfired, most Americans would not consider it particularly controversial to limit the amount of compensation that is not performance-based that top executives receive.

Finally, in all areas, look for increases in required disclosures. Thus far, regulatory guidance in this arena has gone to levels under the Obama Administration not seen before. For employers, this means additional administrative burden. For employees, unless disclosures can be more useful, this will mean more stacks of paper for the trash bin.

And, look for gridlock once again as each side blames the other. Who will blink first? I'll report on the first blinkage here.

9 9 9 or Nein Nein Nein

If you haven't been under a rock, you have at least heard an inkling about Herman Cain's "9 9 9 Plan." If you like, you can read about it on his website (hermancain.com) or you can get the whole plan hear in just a few bullet points:

• Eliminate the Internal Revenue Code (the Tax Code or the Code)
• Impose a flat 9% personal income tax on all income, apparently excluding bonafide charitable contributions
• Impose a flat business income tax at a rate of 9%, eliminating all deductions (the media and the activists on both sides and in the center usually call these loopholes)
• Impose a 9% sales tax on, as I understand it, the purchase of all new (not pre-owned) end products

Mr. Cain says that it is revenue neutral, or better. I have not had a chance to review either his math or his assumptions, so I can't vouch for him, or dispute his claims.

I have to give credit to Jay Leno for the second part of my blog post title. Mr. Cain was a guest on the Tonight Show the other night and Leno talked about Republican Presidential candidates being fluent in foreign languages: Romney in French, Huntsman in Mandarin and Cain in German as nein, nein, nein translates to no, no, no.

But, back to the point of the post, look at that first bullet. Eliminate the Internal Revenue Code. If you are an average American, or even a not so average American, you probably think that's great. But, there are complications. And, if we are pointing them out here, they probably relate somehow to benefits or compensation.

Do you participate in a 401(k) plan? You do, now there's a shocker. The fact is that the large majority of working Americans either participate in a 401(k) plan, or are at least eligible to. And, why is it called a 401(k) plan? Well, duh, it's sanctioned by Section 401(k) of the Internal Revenue Code. That's why you as a participant have the opportunity to make deferrals on a pre-tax basis and not pay any tax on the money until you take a distribution. And, there are rules in the Code related to those distributions. Those would all go away. When would your distribution be taxed? Well, I don't know. Since the build-up in your account is exempt from taxes under Code Section 501(a) until you take the money, would it no longer be exempt from taxes if there ceased to be a Section 501(a) of the Code? I don't know.

Suppose you made Roth contributions. That means the money was taxed in the year that you contributed it, but would not be taxed upon distribution. So, it's already been taxed, but with no tax exemption, would it be taxed again? I don't know. 

How about life insurance that you may be the beneficiary of? Suppose your parent took out a $1 million policy on their own life and made you the beneficiary. Currently, if that parent were to die, that $1 million would be exempt from income taxation (it would be subject to estate taxation) because the Code exempts it.  What would happen under 9 9 9? I don't know.

And, you were one of those parents who chose to save for your child's college education using a 529 Savings Plan. Why is it called a 529 plan? It's sanctioned under Section 529 of the Internal Revenue Code. Would it lose its tax effectiveness? I don't know.

You would think that Donald Rumsfeld was my role model.

With regard to 9 9 9, you may like it or you may not. But, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.

I don't know, do you?

GOP-Obama Compromise Would Lower 2011 Employee Portion of FICA Taxes

Have you been hiding under a rock? If you are reading this, I'm guessing not. In that case, you know that (surprise, surprise) the President and Congressional Republicans reached a compromise yesterday.

The well-publicized items were that:

• The so-called Bush tax cuts (enacted through EGTRRA in 2001) will become permanent for incomes less than $200,000 (for singles) and $250,000 (for married)
• For higher earners, those cuts will delay their scheduled sunset until the end of 2012 presumably setting up more Congressional warfare after the 2012 elections
• Renew jobless benefits for the long-term unemployed

Not publicized, but perhaps more important to many were these:

• A 2% of pay reduction in the employee-provided portion of FICA (Social Security) taxes for 2011 only. What this means is that workers will get an effective pay increase for 2011 of 2% on the first $106,800 of pay. This may not seem like much, but more US workers than not pay more in FICA taxes than they do in federal income taxes
• Estates would be taxed at a 35% rate for amounts in excess of $5 million

Beware! This is not law yet. House Democrats will need to support this in order to pass it in December. And, whether an associated bill comes to the Senate floor during the lame-duck session of this Congress or during the next Congress, a meaningful number of Senate Democrats would have to support passage in order to make it law.

We'll continue to cover this here.