Republicans gained a majority in the Senate and expanded their majority in the House in the November 2014 elections. Republican control of both chambers reshapes the legislative landscape for benefit legislation. President Obama holds the veto pen, however, and can stop major changes to the Patient Protection and Affordable Care Act (PPACA), tax reforms he views as favoring business over individuals and other legislation he opposes. In addition, the administration will continue regulatory projects affecting health care, retirement and compensation.
The environment on Capitol Hill could lead to legislative compromise or deepen the gridlock, depending on how congressional leaders, rank-and-file lawmakers and the administration approach the next two years. Some lawmakers want their leaders to demonstrate their ability to govern by passing bills President Obama will sign — or those with enough votes to override a veto. Others are pushing their leaders to stand firm against the administration and reject compromise.
Curtailments to health care reform
The 114th Congress will likely vote to repeal the PPACA, but the law will surely stand while President Obama holds veto power. (While Congress can override a presidential veto, it requires a two-thirds majority in both the House and Senate.) However, targeted curtailments are more likely to be enacted within the next two years than at any time since the PPACA’s enactment in 2010. In the past, Senate Democrats were able to block many of the House’s efforts to pare back the PPACA, but Republican dominance in the Senate ends their control.
Changes to health care reform with bipartisan support could see action in early 2015, including defining full-time employment as 40 hours and repealing the medical device excise tax. The employer community will also seek modifications to the law, including repeal of the automatic enrollment requirement and changes to the excise tax on high-cost health plans.
Some lawmakers have raised the possibility of using budget reconciliation as a vehicle to weaken PPACA provisions, especially those that are tax related, such as the employer mandate, individual mandate, premium tax credits and revenue-raising excise taxes. Budget reconciliation could pave the way for controversial bills to pass the Senate with 51 votes rather than the 60 usually needed (it was part of the strategy used to enact the PPACA). In media interviews following the November elections, Senate Majority Leader Mitch McConnell (R-Ky.) played down the idea of using budget reconciliation to unwind the PPACA, but some lawmakers continue to discuss the strategy.
Congress could also use its traditional budget and appropriations process to scale back or defund parts of the law. For example, the omnibus appropriations package enacted in December 2014 requires new disclosures about some implementation costs, and limits funds for the risk corridors and the Independent Payment Advisory Board.
The Supreme Court will hear King v. Burwell in March to settle an issue crucial to the law’s continued functioning: whether premium tax credits can be offered through federally facilitated health insurance exchanges. The government maintains that the PPACA intended subsidies to be available in both state and federally facilitated exchanges, while the challengers claim the intent was to restrict subsidies to state exchanges. A decision is expected in June or July.
If the Supreme Court’s decision limits PPACA subsidies to state-based exchanges, many people who obtained coverage in the federally facilitated exchanges could find themselves unable to afford their health coverage — and possibly even required to repay their subsidies. While Congress could modify the law, it is not clear that it would do so. Lawmakers are following the litigation closely.
Congress is also expected to increase its oversight of the administration’s continuing implementation of the PPACA, including regulations and guidance, the operation of federally facilitated exchanges and the use of federal funds.
Congress must address Medicare’s physician payment formula very soon. Current payment levels expire on March 31, and doctors who treat Medicare patients will receive significantly lower payments unless Congress acts.
During the 113th Congress, lawmakers negotiated a payment system to replace the current, flawed Sustainable Growth Rate (SGR) formula but could not agree on a way to pay for the proposal. It seems unlikely that lawmakers will attempt permanent payment reform so early in the new congressional session, but even a short-term Medicare “doc fix” will require substantial revenue. The need for revenue offsets could focus congressional attention on health care or retirement.
Deficit reduction may come under discussion, especially when lawmakers debate increasing the debt ceiling in March, which could attract attention to Medicare’s benefits and premiums. New House Ways and Means Committee Chair Paul Ryan (R-Wis.) proposed significant Medicare reforms when he chaired the House Budget Committee. Under his proposal, Medicare beneficiaries would receive premium support vouchers, which they would use to purchase private health coverage or traditional Medicare coverage through a Medicare exchange.
Congress often looks to retirement legislation to provide revenue for other priorities. During the 113th Congress, lawmakers changed the rules for pension funding to help pay for the highway trust fund. They also considered other revenue raisers, such as allowing plan sponsors to prepay flat-rate Pension Benefit Guaranty Corporation (PBGC) premiums and requiring beneficiaries to accelerate the distribution of inheritances from retirement plans.
The 114th Congress must tackle several expensive legislative items early in 2015. The debt ceiling must be increased in March; the current Medicare doc fix expires on March 31, and funding for the highway trust fund expires in May. These must-pass items will need revenue offsets, and Congress may look again to retirement-based revenue offsets.
Retirement security was discussed during last year’s debate on tax reform, and taxes are already under discussion by the 114th Congress, although the prospects for action remain uncertain. The tax incentives for retirement programs and other employee benefits will continue receiving attention, although the debate will likely shift with the new majority-Republican Senate. Proposals to target tax incentives to lower-income workers or limit retirement plan accumulations are less likely to gain traction.
In fact, in a speech to the Financial Services Roundtable in January, new Senate Finance Committee Chair Orrin Hatch (R-Utah) said that reducing the contribution limits for 401(k) plans and individual retirement accounts (IRAs) would be “both short-sighted and foolish.” He also said Congress should encourage more employers to sponsor retirement plans through starter 401(k)s, establish multiple employer plans and encourage retirees to annuitize their retirement savings.
The 113th Congress also enacted other retirement bills, including legislation addressing cooperative and small employer charity (CSEC) plans, multiemployer pension funding and substantial cessation of operations under ERISA Section 4062(e). Legislation addressing nondiscrimination testing failures faced by some closed defined benefit plans was introduced last year but was not enacted. Pension sponsors with closed plans are hoping for a resolution in 2015.
Tax reform 2015
Reforming the Internal Revenue Code has received significant attention as the 114th Congress commences. In a speech on the Senate floor on December 16, 2014, Senator Hatch stated that “tax reform is essential” and outlined seven principles for reform: promote economic growth, be fair, simplify the tax code, be permanent, provide competitiveness, promote savings and investment, and be revenue neutral. Senator Hatch also released an analysis, “Comprehensive Tax Reform for 2015 and Beyond,” which outlines the history of the income tax system, reform proposals that have been under discussion and the issues involved.
In a Wall Street Journal piece published on July 8, 2014, Representative Ryan also advocated for tax reform and said “[t]rue tax reform would both broaden the base and lower the rates, so small businesses would have room to grow and job creators would come back to our shores.” And in budget proposals he released as chair of the House Budget Committee, he called for tax reform that simplifies the tax code, lowers tax rates and reduces the number of tax brackets.
Health care and retirement benefits have been part of the ongoing tax reform debate. New leaders in the House and Senate tax-writing committees might shift the priorities for tax reform, but the tax preferences associated with employer-sponsored health coverage, retirement plans and other employee benefit programs will likely come under discussion, especially as lawmakers seek to balance tax incentives with lower tax rates.
House and Senate Republicans want to demonstrate their ability to govern by enacting legislation — but it is too soon to know whether they will accomplish their goals or the partisan gridlock that marked the 113th Congress will continue. President Obama has veto power and therefore the ability to avert major changes to his key priorities, but some lawmakers want to force the President to wield the veto. If that occurs, early ambitions for a productive 114th Congress will come to naught.
Employers should remain prepared for changes ahead, however, because this Congress seems interested in scaling back the health care reform law and is also focused on retirement, compensation and other benefit-related issues. Both health care and retirement offer the potential for bipartisan legislation, and some new laws seem likely.