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Observers Pessimistic About Fiscal Policy, Effects of Year-End 'Train Wreck' on Benefits

Thursday, May 10, 2012
Report on IFEBP Washington Legislative Update

Key Topic: Tax-favored treatment of employee benefits will bear some of the brunt from year-end fiscal crisis.

Key Takeaway: A solution to the crisis may require limiting the tax-favored treatment of defined benefit plan contributions.

By Florence Olsen

Policy observers gave a pessimistic assessment of fiscal policy May 7 by predicting a year-end fiscal “train wreck” that almost certainly will have an impact on employee benefit policy.

Whatever happens after the November presidential elections and lame-duck Congress that follows will determine whether favorable tax treatment of contributions to defined contribution plans will continue at current levels, Randy G. DeFrehn, executive director at the National Coordinating Committee for Multiemployer Plans, said at a conference sponsored by the International Foundation of Employee Benefit Plans.

20/20 Rule.
Speaking at IFEBP's Washington Legislative Update, DeFrehn said the National Commission on Fiscal Responsibility and Reform, or Simpson-Bowles Commission, laid out various ideas, such as a 20/20 rule, that would limit the tax-favored treatment of defined contribution plan contributions to the lesser of 20 percent of income or $20,000. Congress, under pressure to deal with a variety of year-end tax and spending cuts, will consider the 20/20 rule, he said.

On Dec. 1, 2010, the commission issued a blueprint for reducing the federal deficit by nearly $4 trillion through 2020; modifying Social Security; and simplifying the tax code by eliminating or trimming many tax-exclusions and deferrals, including those for health and welfare benefits and retirement plans (229 PBD, 12/2/10; 37 BPR 2617, 12/7/10).

Another idea that Congress will consider is whether to phase out the tax-favored treatment of employer-sponsored health benefits “by freezing current limits at the 75th percentile for family coverage for four years,” followed by phasing out tax breaks for health insurance coverage during the next 20 years, DeFrehn said.

“Those are elements that will be part of the debate and, as we go forward, have to be part of the solution,” DeFrehn said.

A major uncertainty for employers that offer employee benefits centers on what might happen if the Supreme Court strikes down the individual mandate portion of the 2010 health care reform law but not its guaranteed issue provision, DeFrehn said.

The law's guaranteed issue provision prohibits insurance companies from denying coverage to individuals on the basis of their health status.

Individual Mandate.
Some members of the Obama administration have said that, if the Supreme Court finds the law's individual mandate unconstitutional, administration officials would like to see the law's guaranteed issue provision struck down as well, DeFrehn said.

“If you had guaranteed issue but not insurance, why would you buy insurance? The pieces are tied together,” he said.

A larger question is what the Supreme Court might do with the Patient Protection and Affordable Care Act (Pub. L. No. 111-148) if it strikes down the individual mandate, DeFrehn said. “Do they send it back to Congress, or does it die on the vine?”

'Train Wreck.'
Charles M. Loveless, director of federal government affairs at the American Federation of State, County and Municipal Employees, said he foresees Congress being unable to pass any alternative health care legislation because it has become impossible to get 60 votes in the Senate on any substantive legislation.

“Sixty is the new 50,” Loveless said. Under Senate rules, more than a third of the votes taken during the past session required 60 votes, he said. “It's a sad statement,” he added.

Among its year-end fiscal challenges, Congress must again raise the debt ceiling, DeFrehn said. “Think about what we went through the last time we had to raise the debt ceiling. This is the train wreck that is coming,” he said.

By Florence Olsen

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