Tuesday, April 12, 2011

Stirring the Pot - Washington D.C........ugh

In case you weren't paying attention to what's happening in Washington these days as pertains to the Pension industry, I thought I'd post some information from my sources and some thoughts on it.

1.)Chairman Ryan’s proposed Budget Resolution On April 5, 2011 Chairman Paul Ryan (R-WI) introduced his 2012 budget resolution. The House Budget Committee’s Fiscal Year 2012 Budget Resolution as drafted is controversial to say the least. The resolution would privatize Medicare, turn Medicaid into block grants to states, repeal the health reform bill passed by the last Congress and cut $6.2 trillion in government spending over 10 years.

The budget resolution was passed out of the House Budget Committee on a party line vote last Wednesday after a marathon markup, and is scheduled to hit the floor of the House on Thursday of this week. A budget resolution is not a bill and will never be law. It is designed to be an outline or roadmap of what priorities and policies the author(s) want to further. This resolution is void of details on tax reform, although Ryan’s more detailed ‘Path to Prosperity” plan that underlies his budget proposal fills in some details. Most importantly for Retirement Plan practitioners, Ryan’s plan would eliminate capital gains taxes, perhaps unintentionally encouraging employers to invest outside of a 401(k) plan rather than incur the limits, cost and heavy regulations attached to qualified plans.

2.)Tax Reform Bill Introduced On April 7th, Senators Wyden (D-OR), Coats (R-IN) & Begich (R-AK) introduced the first official senate tax reform bill of the 112th Congress. The bill is a re-make of last year’s bill by Wyden and Senator Judd Gregg (R-NH), who has since retired, and includes RSA’s (with the current $5,000 IRA limit on contributions) and a $2,000 per year LSA-type account, plus a modest reduction in tax rates. The bill, S.727, also proposes to eliminate a number of tax expenditures including exclusion of benefits under cafeteria plans, fringe benefits, meals and lodging but none directly related to the employer provided retirement plans. Senator Wyden is on the Senate Finance Committee, but the Republican cosponsors are not, and so it is not expected that the Finance Committee will take up this specific proposal.

3.)Tax Reform, Aging and Retirement Plans Both Senate Finance and the Senate Special Committee on Aging held hearings in the last month on issues related to tax reform and retirement plans. On March 30th the Senate Finance Committee held a hearing titled “How Do Complexity, Uncertainty, and other Factors Impact Responses to Tax Incentives.” The hearing took a long distance look at the complexity of the entire tax code, saving more detailed examination of specific issues, such as retirement savings for a later date. The Aging Committee looked at the potential danger of securities lending of retirement investments, their lack of any reporting or oversight requirements and the fact that participants are not informed of this practice in a hearing titled “Securities Lending in Retirement Plans.”

Upcoming hearings include an April 12th hearing in the Senate to discuss what foreign tax codes might offer as examples as America changes its own code. Two hearings are scheduled for April 13th: A Senate Finance hearing titled “Perspectives on Deficit Reduction” and a House Ways and Means Committee hearing on the tax codes’ impact on individuals and families titled “How the Tax Code’s Burdens on Individuals and Families Demonstrate the Need for Comprehensive Tax Reform.”


Some thoughts on the above govt. initiatives. Firstly, it is clear that this congress (like many before it) is highly focused on tax issues, balancing the budget and long term improvements in the tax system. Obviously, practicing retirement plan consultants, like myself, are intimately aware that Retirement Plans have a huge cost in current tax revenue for the U.S. Govt. In recent years, with a spotlight on the shortcomings of the system, Retirement Plans have become fertile ground for proposals to improve the system, some reasonable, some not-so-much (even a serious proposal to eliminate 401(k)s altogether). In this new batch of information, there are some potentially extreme and industry-damaging proposals including eliminating retirement plan deductions completely and/or limiting contributions to a $20k max from both employer and employee sources as well as the revitalized argument against Cross-testing (New Comparability) in Qualified Plans.

This author is against anything that would reduce benefits to participants or damage an industry that is continuously working hard to improve the services delivered and has written to his local congressman expressing opinions as to the usefulness of plan design features such as New Comparability. Further, as an American, I believe that the marketplace dictates what services/costs are necessary and reasonable, and am generally against anything that repeals benefits that are clearly good for working Americans even if they are being used as efficiently as they could be.

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