Tax And Benefit Reform Proposals

1. Tax And Benefit Reform Proposals Marcia S. Wagner, Esq.

2. Tax Reform v. Pension System Structural Reform

3. Tax Cost of Retirement Plans • Impact of Pan Contributions on Federal Deficit • $70.2 Billion Annually • $361 Billion 2011 – 2015 • Tax Reform • Pension System Reform

4. Tax Reform • 2013 Plan Limitations that Can Be Reduced to Limit Deficit: • Annual Additions from All Sources - $51,000. • Elective Deferrals - $17,500. • Plan Sponsor Deduction - 25% Participant Compensation. • Limit on Compensation Base to Determine Benefits/Contributions - $255,000. • Obama FY 2014 proposed $3 million cap on aggregate lifetime contributions. − Cap to vary based on age. − Double tax if prohibited amount not withdrawn.

5. Tax Reform (cont’d) •  National Commission on Fiscal Responsibility. • 20/20 Cap: Limits Contributions to Lesser of $20,000 or 20% Compensation. • Brookings Institution. • Tax All Employer and Employee Contributions. • Refundable Tax Credit Deposited to Retirement Savings Account. • Obama Administration proposals to raise revenue. • 11.6% tax on employer & employee plan contributions. • High earners only. • Basis adjustment for extra tax. • Repeal of dividends paid deduction for ESOP sponsors. • $25 billion in PBGC premium increases.

6. Pension System Reform: State-Sponsored Initiatives • Secure Plan Proposal by National Conference on Public Employee Retirement Systems • State sponsored cash balance plans for private-sector ° 6% annual credits ° Minimum 3% interest credits • Participation voluntary but withdrawal liability assessed on terminating employers • Seeks to benefit from economies of scale • Funding shortfall would be state responsibility

7. Pension System Reform: State-Sponsored Initiatives (cont’d) • California Secure Choice Retirement Savings Program − Mandatory payroll deduction auto-IRA program ° Auto enrollment at 3% unless employee opts out ° Required for enterprises with 5 or more workers if no current plan ° State chooses investment managers ° Guaranteed rate of return − Signed by governor but implementation subject to IRS and DOL approval • Other State Initiatives − Massachusetts enactment of defined contribution multiple employer plan for non-profits − At least 11 other states said to be considering plans for private-sector employees.

8. Pension System Reform: Automatic IRAs • Legislative History • Auto IRAs proposal appears to be partisan. • But had bi-partisan support in prior years. • Increasing retirement plan coverage is shared policy goal. • Three Key Features • Default contribution rate set at 3%. • Post-tax Roth IRA would be default, but employee could choose pre-tax Traditional IRA. • Multiple alternatives available for selecting Auto IRA provider.

9. Pension System Reform: Automatic IRAs(cont’d) • Objections to Auto IRAs • Burdensome mandate for small businesses with more than ten employees. • Federal government control overs assets. • Role of private sector. • Partisan politics will continue in short term. • But bipartisanship support typically emerges on retirement issues.

10. Pension System Reform: Proposals at Federal Level • USA Retirement Funds proposed by Sen. Tom Harkin • Sen. Harkin issues “report” in July 2012 that proposes new retirement system: - Automatic and universal enrollment required by employers with no plan. - Regular stream of income starting at retirement age. - No lump sum withdrawals. - Financed by employee contributions through payroll & government credits • Privately managed investment by new entities called “USA Retirement Funds”. - Limited employer involvement and no fiduciary responsibility. - Unspecified level of required employer contributions. - Employees can increase/decrease contributions or opt out. • Similarities to proposals for state-covered pensions of private-sector workers. • Would include enhancements to Social Security. • Text of bill expected in 2013.

11. Pension System Reform: Proposals at Federal Level • SAFE Retirement Act proposed by Sen. Orrin Hatch • Starter 401(k) Plans • Up to $8,000 participant contributions annually • Reduced administration and no discrimination testing • Auto deferrals from 3% to 5% • Government sponsors may adopt SAFE Retirement Plan • Annual purchase of fixed annuities for participants • Insurers to be selected by bidding process • Improve funding and security but pays smaller benefits • Restores jurisdiction over prohibited transactions to IRS

12. Systemic Reform - Other Proposals • Unitary Defined Contribution System espoused by John Bogle, Vanguard founder • Consolidation of all retirement savings programs • Federal Retirement Board controls system °Limit distributions and loans to prevent system leakage °Limit number of investment options concentrating on low- cost funds • ERISA fiduciary standards extended to service providers / money managers

13. Systemic Reform – Other Proposals (cont’d) • Proposals by Academics • Teresa Ghilarducci (The New School) - eliminate current tax breaks and use savings to make 5% contribution to all employees - mandatory contributions and guaranteed investment return equating to defined benefit approach, supplementing Social Security - participants in existing plans could continue in such plans if contributions are 5%, no early withdrawals, mandatory conversion to annuity on retirement - people not in employer plans would be mandated into Guaranteed Retirement Accounts (“GRAs”) with mandatory 2.5% employer and employee contributions; investments pooled and professionally managed to reduce fees. • Meir Statman (Santa Clara University) − defined contribution approach similar to Australian and British systems. – mandatory employer and employee contributions. − investment controlled by account owner.

14. Systemic Reform – Other Proposals (cont’d) • Center for American Progress – Liberal Think Tank • Secure, Accessible, Flexible, Efficient (“SAFE”) • Dismantle and replace existing voluntary private pension system governed by ERISA • Create new collective defined contribution plan • Every employer will make automatic payroll deductions on behalf of each employee; each employee can opt out • Money from payroll deductions funneled to non-profit organizations run by independent boards to professionally invest • No self-direction • Pay out is annuity form only.

15. Summing Up • Significant Transformation of Private Retirement System Possible. • Tax Reform. • Reducing tax incentives will shrink system. ° Lower contributions at all income levels result if tax exclusions cut back. • Obama proposal for general limit on benefit from tax exclusions. °Does not focus directly on 401(k) contributions. ° Provides political cover. ° Same effect on contributions as direct cutback on excludible amount

16. Summing Up (cont’d) − Systemic Changes • Intended to create access for low-wage employees • Government will replace private employers in system °Mandated benefits °Guaranteed benefits and/or investment results °Creation of new interest group to lobby for expansion of benefits °Government influence in choosing investment managers or control of investments could drive many out of the retirement industry. • State-level programs may cause breakdown in uniformity of pension laws, effective since enactment of ERISA • Inflection Point regarding the types of Retirement Schemes Nation wants and needs • Interesting Times ……

17. Tax And Benefit Reform Proposals Marcia S. Wagner, Esq. 99 Summer Street, 13th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A102632