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.

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.