Month: September 2004

According to a New York Times article–“Weighing the Risks in a Health Savings Account“, health savings accounts (“HSAs’) are starting “to shake up the group insurance market for small businesses.” The article notes how “[a]lmost half of small businesses with 50 or fewer employees do not offer health insurance to their workers” and that HSAs are providing a way for small businesses to provide at least some insurance for employees, whereas before they were not offering any health insurance. The article provides an interesting example of a small business that has opted for the HSA for its employees:

Currently, the management consulting firm started last year by Rich Phillips, an entrepreneur in Austin, Tex., falls into that group [of a small business without health insurance for employees.] But Mr. Phillips said that he planned to add coverage next year for his five employees and their families, using health savings accounts.

Mr. Phillips has purchased an individual H.S.A.-eligible policy for his family, which costs $380 a month and has an annual deductible of $3,250; a traditional policy would have run $900 to $1,100 monthly. For a single person, an H.S.A.-eligible policy can cost as little as $100 a month or less, compared with $400 or $500 for a traditional plan.

The article goes on to quote the business owner as saying that while he couldn’t afford to pay $1,000 a month per employee for coverage, he could afford the $300 or $400 that an HSA plan costs, and that being able to pay 100 percent of the premiums for employees and their families is very attractive to employees and “rare” for small businesses in an era when health insurance costs can be prohibitive for the small business owner.

The TaxGuru has a great cartoon here. The implications of the cartoon and this other cartoon here are that baby boomers (Americans born between 1946 and 1964) are headed for a rude awakening due to a lack of savings, more and more employers cutting back on pensions and other retirement programs, and the bleak forecast for Social Security. However, on the other hand, with demographics indicating that many boomers may be leaving the workforce, taking their skills and experience with them, employers may be the ones encouraging boomers to continue working–albeit on a semi-retired basis. That brings up the topic of phased retirement and the fact that, in order for employers to be able to offer phased retirement on a larger scale, many legal barriers to phased retirement will need to be addressed by Congress and governmental agencies. This article from the National Association of State Retirement Administrators (NASRA)–“Phased Retirement Overview:Summary of Research and Practices” by Keith Brainard (October, 2002)–describes in detail many of the legal barriers, but also lists some of the reasons both employers and employees may want to eliminate such legal barriers soon:

The chief advantages of phased retirement programs for employers are:

• retention of trained and qualified personnel, especially for positions that are difficult to fill;
• reduced costs associated with training new employees to replace retiring employees;
• reduced costs achieved through lower salary and benefits expenses, made possible by employees shifting from full-time to part-time status.

The chief advantages of phased retirement programs for employees are:

• flexible work arrangements;
• the opportunity to gradually transition into retirement rather than making a sudden, abrupt shift;
• the opportunity to supplement retirement income or to increase future retirement benefits by deferring current retirement income.

More items on the topic of phased retirement:

(1) Statutory Reforms Needed to Allow Phased Retirement by Baby Boomers from the Urban Institute.
(2) Comments from The Working Group Report on Phased Retirement submitted to the Advisory Council on Employee Welfare and Pension Plans, known as the ERISA Advisory Council, on November 14, 2000.
(3) American Academy of Actuaries Comments to the IRS regarding Phased Retirement Issues (December 30, 2002)

As many of you know, there has been talk of overhauling the current tax system and producing a “fairer, simpler, and more pro-growth” tax system than the current “complicated mess.” (See previous post here.) Thanks to the TaxProfBlog for the pointer to this blog which posts a document from Pam F. Olson to former Secretary Paul O’Neill (dated November 7, 2002) providing proposals for possible avenues of tax reform that might be utilized in trying to achieve a “fairer” system. The document provides some insight into how retirement plans and other benefits might be affected in such proposal. Here is a rundown of the different proposals and what the document says about the effect they would have on retirement plans and other benefits (you can read the document further for a detailed description of what each proposal would entail):

(1) Flat Consumption Tax:

Excerpts:

“Many of the special deductions, exemptions and credits allowed under the current tax system are intended to promote widely held social goals, e.g., health care, home ownership and charitable giving. The Flat Tax would eliminate these tax incentives without providing substitute programs.”

“To some extent existing pension plans and other tax favored savings plans increase retirement savings because of institutional factors – such as payroll deduction, withdrawal penalties, and persuasive advertising – rather than simply encouraging savings by increasing the after-tax rate of return. Because the proposal exempts all capital income from the individual level tax, it would remove the relative tax advantage currently enjoyed by qualified retirement saving plans, and it is likely that such plans would be less prevalent than under existing law. Compared to current law, this could reduce retirement saving by those for whom institutional factors had been a primary determinant of retirement saving.”

(2) Flat Income Tax:

Excerpts:

“Many of the special deductions, exemption and credits allowed under the current tax system are intended to promote widely held social goals, e.g., health care, home ownership and charitable giving. The Flat Tax would eliminate these tax incentives without providing substitute programs.”

“To some extent existing pension plans and other tax favored savings plans increase retirement savings because of institutional factors – such as payroll deduction, withdrawal penalties, and persuasive advertising – rather than simply encouraging savings by increasing the after-tax rate of return. Because the proposal exempts all capital income from the individual level tax, it would remove the relative tax advantage currently enjoyed by qualified retirement saving plans, and it is likely that such plans would be less prevalent than under existing law. Compared to current law, this could reduce retirement saving by those for whom institutional factors had been a primary determinant of retirement saving.”

(3) Add-On Value Added Tax and Reformed Income Tax

Excerpts:

“Some incentive for employer-provided pension and health fringe benefits would be retained, as both would be deducted from corporate income and excluded from compensation.”

“To some extent existing pension plans and other tax favored savings plans increase retirement savings because of institutional factors – such as payroll deduction, withdrawal penalties, and persuasive advertising – rather than simply encouraging savings by increasing the after-tax rate of return. Because most low- and moderate-income taxpayers would never face a tax on capital income at the individual level, for these taxpayers, the proposal removes the relative tax advantage currently enjoyed by qualified retirement saving plans. To the extent that the removal of the relative tax advantage leads to lower participation rates in qualified retirement savings plans, the proposal could reduce the provision for retirement by certain low- and moderate-income taxpayers for whom institutional factors had been a primary determinant of retirement saving.”

(4) Income Value Added Tax and Reformed Income Tax with Social Security Revenue Replacement

Excerpt:

“To some extent existing pension plans and other tax favored savings plans increase retirement savings because of institutional factors – such as payroll deduction, withdrawal penalties, and persuasive advertising – rather than simply encouraging savings by increasing the after-tax rate of return. Because most low- and moderate-income taxpayers would never face a tax on capital income at the individual level, for these taxpayers, the proposal removes the relative tax advantage currently enjoyed by qualified retirement saving plans. To the extent that the removal of the relative tax advantage leads to lower participation rates in qualified retirement savings plans, the proposal could reduce the provision for retirement by certain low- and moderate-income taxpayers for whom institutional factors had been a primary determinant of retirement saving.”

(5) Reform the Current Income Tax

Excerpts:

“The current menu of retirement, education, and medical savings accounts would be consolidated into two programs, LSAs and RSAs. Contributions to these accounts would be taxed, but earnings would accumulate tax-free and distributions would not be included in income. Withdrawals from LSAs would be allowed at any time for any reason. Withdrawals from RSAs would be penalty-free beginning at age 58. Neither account would have required minimum distributions. All individuals, regardless of income or earnings would be eligible to contribution 45,000 a year to an LSA and $5,000 (or earnings, if less) to an RSA.”

“Various employer-based defined contribution plans, such as 401(k), 403(b), and 457 plans, would be consolidated, qualification rules would be simplified, and required minimum distributions would be simplified.”

The Associated Press (via Reuters.com) is reporting that yesterday the House approved legislation aimed at preventing frivolous lawsuits. According to the report, the House of Representatives passed a bill “to punish lawyers who file lawsuits deemed meritless by a judge, and bar them from shopping around for a sympathetic court.” The measure, passed 229-174, calls for mandatory fines on lawyers responsible for frivolous lawsuits.

BusinessWeek Online has an interesting article discussing what major tax reform might look like if President Bush is re-elected and pushes for tax reform, as he has indicated he will: “What A “Fairer” Tax Code Might Look Like: A reelected Bush may rework the existing system — or try for a consumption tax.”

You can view Hurricane Ivan at this link. Many prayers for those in its path (including Ernie the Attorney who is blogging about the experience.)

What’s going on in the House regarding cash balance plans and pension plans in general?

(1) Rep. Bernie Sanders (I-Vt.) has introduced more amendments directed at cash balance plans this time trying to tie the hands of the Treasury in assisting in the appeal of the IBM cash balance plan case (you can read all about the cash balance plan controversy in previous posts which you can access here and here.) The American Benefits Council has posted the Amendment on their website as well as a discussion as to why the Amendment is flawed and “harmful to employees’ retirement security.” The discussion piece includes comments by University of Chicago Professor of Law Richard Epstein who is quoted as saying, “[The amendment] itself is contrary to the constitutional principle of separation of powers. The provision prevents the President from faithfully executing the laws and manipulates the appellate process to deny the judiciary access to the views of the Treasury Department, which normally receives deference in interpreting complex statutory provisions.” Professor Epstein further states, “The Executive Branch is effectively handcuffed in its ability to articulate its position in regulations or litigation, and the courts are deprived of an important source of information that allows them to decide an important case.”

(2) Regarding pensions in general, Rep. John A. Boehner (R-Ohio), chairman of the House Education and the Workforce Committee has made remarks regarding his plans for pension reform. You can access his “Six Principles for Fixing America’s Outdated Pension Laws ” here. Regarding cash balance plans, he states that the “continuous threat of legal liability for employers offering cash balance plans is creating ongoing uncertainty and undermining the retirement security of American workers” and that “Congress should consider solutions to ensure cash balance pension plans remain a viable part of the defined benefit system and a positive retirement security option for workers and employers.”

(Thanks to Benefitslink.com for alerting readers to these developments.)

The Wall Street Journal today had an article (which you can now access through SFGate.com) entitled “As returns sag, employers turn up heat on 401(k) fees” which provides details of how some employers have negotiated lower fees in their 401(k) plans. An excerpt from the article:

Employees with money in . . . [401(k)] plans are paying steep and largely invisible fees that are eating into their quarterly returns and their eventual retirement payout.

By law, employers are supposed to make sure their retirement plans don’t overcharge employees. But until recently, few employers took this responsibility seriously. That has changed in the wake of mutual fund scandals, government pressure and the three-year bear market that has eroded many retirement accounts. A growing number of employers are demanding — and very often winning — lower management fees.

Also, another article from the Wall Street Journal today–“How You can Tell If Your 401(k) Fees are Too High“–focuses on how employees can get involved in understanding the fees being paid:

It’s all about the fees. In the late 1990s, the big worry for 401(k) participants was whether their plan had the latest technology fund to top the performance charts. Now, the concern is that the companies that manage the plans are charging too much. . . . For employees, it’s an opportunity to ask for information that will help them determine whether they’re overpaying and help them ask for changes in their plans.

Read more about 401(k) plan fees in this previous post here.

IRS Notice 2004-50 has been issued, correcting and revising Notice 2004-2 as follows:

The second sentence of A-2 is changed to read: An “eligible individual” means … (3) is not enrolled in Medicare … .”

The last sentence in the first paragraph of A-12 is changed to read: “In addition to the maximum contribution amount, catch-up contributions, as described in [Notice 2004-2] A-14, may be made by or on behalf of individuals age 55 and older, who are not enrolled in Medicare.”

The first sentence of A-14 is changed to read: “For individuals (and their spouses covered under the HDHP) who have attained 55 and are also not enrolled in Medicare … .”

Basically, the main correction has to do with Q/A-14 of Notice 2004-2 which originally stated: “After an individual has attained age 65 (the Medicare eligibility age), contributions, including catch-up contributions, cannot be made to an individual’s HSA.” However, as corrected, the sentence now reads: “After an individual has attained age 65 and becomes enrolled in Medicare benefits, contributions, including catch-up contributions, cannot be made to an individual’s HSA.”

Also, PlanSponsor.com is reporting that the IRS has issued final versions of two model health savings account (HSA) forms–IRS Form 5305-B (“Health Savings Trust Account”) and IRS Form 5305-C (“Health Savings Custodial Account”). The forms can be utilized by HSA trustees and custodians, respectively, to allow individuals to establish HSAs.