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

Tax Reform v. Pension System Structural Reform

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

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 − Double tax if prohibited amount not withdrawn.

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.

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

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.

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.

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.

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.

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

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

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.

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.

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

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 ……

Tax And Benefit Reform Proposals Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA Tel: (617) Fax: (617) Website: A102632