Task forces established by House Speaker Paul Ryan (R-Wis.) have released far-reaching recommendations that would change employee benefits and compensation. The proposals would repeal the Affordable Care Act (ACA), cap the employee tax exclusion for employer health benefits, reject the recent fiduciary advice rule,1 repeal the CEO pay ratio disclosure requirement, allow open multiple employer plans (MEPs), expand electronic disclosures, strengthen congressional oversight of the executive branch and more. Proposed changes to the tax code, health care system and regulatory process would also affect compensation and benefits.
While few of the recommendations are expected to see legislative action this year, significant changes for health, retirement and other employee benefits could be on the table in 2017.
Overview of the task forces
In February, Speaker Ryan appointed six task forces to develop an agenda that could influence the November elections and the 2017 legislative session:
- Poverty. Retirement security was one of the task force’s goals, and its recommendations would affect defined benefit and defined contribution plans.
- Economy. The task force set out to reduce regulatory burdens that it believes are inhibiting job growth and small business formation. According to the report, retirement security should be strengthened through the private retirement system.
- Tax reform. The task force proposed to make the tax code simpler and fairer, and remove “special interest carve-outs.” It recommended eliminating all tax preferences for employer-provided benefits except the reformed retirement and health care benefits outlined in the proposals.
- Health care reform. The task force was charged with replacing the ACA, and its replacement plan would cap the employee tax exclusion for employer-provided health benefits, reform Medicare and Medicaid, and more.
- Constitution. This task force focused on the balance of powers between the branches of government and called for stricter oversight of regulatory agencies and the administrative branch. Its recommendations include reforms to the regulatory and legislative drafting processes.
- National security. The task force developed recommendations for military operations and national security strategy.
Retirement security recommendations from the poverty, economy and tax reform task forces
Three of the task forces issued recommendations that would affect employer-sponsored retirement programs: poverty, economy and tax reform. Critics of the recent fiduciary regulation from the Department of Labor (DOL) claimed that the rule limits employee access to retirement advice. Several task forces recommended open MEPs and regulatory revisions to promote electronic disclosure. Some proposals also addressed plan administration, defined benefit plan funding and the Pension Benefit Guaranty Corporation (PBGC).
Task force on poverty
The poverty task force — the first to issue recommendations — addressed defined benefit and defined contribution plans. Its report states that the PBGC is severely underfunded and the multiemployer program will be insolvent by 2025, thus posing a “grave risk” to taxpayers and undermining retirement security for workers and retirees. According to the report, defined contribution plans “better reflect the realities of today’s workplaces and empower working families to control their own financial futures.” Its recommendations would:
- Set PBGC premiums according to the agency’s financial needs. The task force rejected an Obama administration proposal to allow the PBGC board to set premiums.
- Establish plan funding requirements that secure employees’ pension benefits without discouraging employers from offering plans. The government’s need for revenue should not drive changes to the funding rules.
- Reject the fiduciary rule’s “flawed approach” and ensure access to affordable retirement advice.
- Allow employers to pool together to sponsor open MEPs, which may be structured as 401(k) or other defined contribution plans.
- Encourage electronic communication and disclosures by modernizing and streamlining the rules.
Task force on the economy
According to the report from the task force on the economy, Congress should strengthen retirement security by advocating “for policies that ensure workers and retirees have access to savings options that are voluntary, portable and secure.” The task force also criticized the fiduciary rule and believes that Congress should update the disclosure rules to encourage electronic communications.
Task force on tax reform
The tax reform task force outlined broad changes to the Internal Revenue Code. It proposed to continue “current tax incentives for savings” but called for potentially significant changes to retirement savings programs. The Ways and Means Committee would be charged with examining existing tax incentives for employer-based retirement plans and developing options for a more effective and efficient approach. It would also consolidate and reform the multiple retirement savings provisions in the tax code.
The Ways and Means Committee would also explore all-purpose savings vehicles, such as Universal Savings Accounts, which allow tax-free earnings on contributions and tax-free distributions to be taken at any time and for any purpose. The report cites the Universal Savings Account Act (H.R. 4094) introduced by Representative Dave Brat (R-Va.), which would establish the accounts and set an annual contribution limit of $5,500 (to be indexed annually for inflation). A companion measure (S. 2320) was introduced by Senator Jeff Flake (R-Ariz.), and similar accounts have been proposed in the past, including “lifetime savings accounts” under former President George W. Bush. Some fear that these accounts would discourage employee contributions to dedicated retirement savings accounts, which typically offer less flexibility and penalize early withdrawals.
Health care reform task force proposes replacement for ACA
The health care reform task force would replace the ACA with a new approach, which would reform the tax treatment of employer-provided health coverage, provide a universal tax credit for those without an employer- or government-sponsored plan, expand health savings accounts (HSAs), maintain some ACA market reforms, reform Medicaid and Medicare, and make other changes.
The advanceable, refundable, age-adjusted tax credit would help those without access to an employer-sponsored plan, Medicare, Medicaid or other government-sponsored coverage. People could use the credits to purchase coverage through “multiple portals,” including private insurance exchanges. Unlike the ACA tax credits, these would not be based on coverage cost, and if the coverage costs less than the credit, the balance would be deposited into an “HSA-like account” that could be used for other health care expenses.
The proposal would also cap the employee tax exclusion for employer-provided health coverage. According to the report: “[b]ringing more tax parity to the group and individual health markets does not have to disrupt the way Americans currently receive their coverage,” and the task force proposed to “cap the exclusion at a level that would ensure job-based coverage continues unchanged for the vast majority of plans.” The report does not specify the thresholds for tax-excludable coverage or how the value of the coverage would be calculated. However, it states that pretax employee contributions to HSAs would not count toward the cost of coverage for purposes of the cap.
The proposal would expand HSAs by:
- Permitting both spouses to make catch-up contributions to the same account
- Allowing reimbursement of HSA-eligible expenses from accounts established up to 60 days after the expense was incurred
- Increasing allowable contributions (up to the maximum combined and allowed annual deductible and out-of-pocket expense limits)
- Expanding eligibility to additional groups, such as veterans who are eligible for Tricare and those eligible for benefits through the Indian Health Service
The proposal would also allow health reimbursement accounts to reimburse premiums, including premiums for coverage purchased on the individual insurance market.
Under the proposal, financial wellness incentives would not violate the Americans with Disabilities Act (ADA).2 Although not stated outright, it appears the report intends for the ADA rules to be aligned with the current rules and incentive limits under the Health Insurance Portability and Accountability Act (HIPAA) and the ACA. In addition, voluntary collection of medical information from an employee’s family member under a wellness program would not violate the Genetic Information Nondiscrimination Act.
While the proposal would repeal the ACA, it would reinstate several of its market reforms, some with modifications. Group health plans would still be required to allow children to remain on their parent’s plan until age 26. The ban on rescissions — retroactive cancellations of coverage for reasons other than fraud or material misrepresentation — would continue. The proposal would provide protections for those with preexisting conditions and “support changes that end the practice of lifetime limits.” Plans could not fail to renew coverage because of a participant’s health status. Premiums for older participants could be five times higher than those for younger ones, compared with the ACA’s 3:1 age rating requirement, but states could narrow or expand the ratio.
“Continuous coverage protections” would be offered, meaning that as long as coverage did not lapse, participants would be ensured access to coverage and protected from premium discrimination based on health status. Everyone, regardless of health status, could enroll during a one-time open enrollment period. People who failed to enroll at that time could buy coverage later but would not have the continuous coverage protections.
The proposal would encourage interstate compacts so health coverage could be sold across state lines. High-risk pools would be supported through federal funding. The Republican plan would expand pooling opportunities for small business through Association Health Plans (AHPs) and for individuals through individual health pools (IHPs).
The task force proposed significant reforms to Medicare, including a voucher program — referred to as premium support — that would begin in 2024. This proposal was a key feature of budget proposals from Speaker Ryan when he chaired the House Budget Committee. The Medicare eligibility age would be matched to the Social Security normal retirement age, so it would gradually increase to 67. The proposal would combine Medicare Parts A and B, and limit Medigap plans to ensure that all beneficiaries pay some costs out-of-pocket.
The proposal would also reform Medicaid to give more flexibility to the states, which could choose between block grants or per-capita allotments. Both options would eliminate funding for the ACA Medicaid expansion. The per-capita allotment approach would gradually phase out enhanced funding for states that expanded their Medicaid programs and prohibit other states from adopting the expansion. The block grant amounts would assume that those covered under the ACA Medicaid expansion had been transitioned to other coverage.
Other task force proposals
Other proposals have direct or indirect implications for employer-provided benefits. The tax reform proposal would apparently eliminate current-law tax preferences for anything other than health care or retirement benefits. The economy and Constitution task forces outlined regulatory and oversight reforms that could affect plan administration and compliance.
Tax reform and employee benefits
The proposal outlines the task force’s vision for a sufficiently simple tax code to allow individuals and families to file their tax returns on a postcard. The task force would reduce the number of tax benefits, increase the standard deduction and child tax credit, and eliminate most itemized deductions and tax preferences.
A central component of the reform would be a new, broader definition of taxable income. The task force proposed using the “…same definition for taxable compensation of employees as it does for compensation employers may deduct.” As a result, except for health coverage (as capped under the proposed replacement plan) and retirement savings, all compensation related to employment or self-employment would be taxable. This appears to eliminate tax exclusions for employer-provided dependent care assistance, qualified transportation benefits, adoption assistance and several other employer-provided benefits.
There would be three tax brackets: 12% (replacing the current 10% and 15% brackets); 25% (replacing the 25% and 28% brackets); and 33% (replacing the 33%, 35% and 39.6% brackets). The plan would replace current family tax benefits (basic standard deduction, additional standard deduction, personal exemption for taxpayer and spouse, child tax credit, and personal exemption for children and dependents) with a larger standard deduction, and a larger child and dependent tax credit. Taxpayers could deduct 50% of their capital gains, dividends and interest income. The proposal would eliminate the estate tax, alternative minimum tax, and all deductions except for mortgage interest and charitable contributions.
Regulatory reforms target compensation and benefit provisions and hold broader implications
The task force for the economy focused on legal and regulatory issues the Republicans believe are hampering business expansion and job growth. The report recommends repealing or reforming specific laws and regulations, and also suggests reforms to the regulatory process. The report criticizes the DOL’s overtime rule3 as well as the rule implementing the executive order requiring federal contractors to provide paid leave.4 The proposal also expresses support for the Burdensome Data Collection Relief Act (H.R. 414), which would repeal the Dodd-Frank requirement for companies to disclose their CEO pay ratio (the ratio of CEO pay to worker pay). It also favors the Capital Markets Improvement Act (H.R. 1675), which would allow small companies to expand employee stock ownership without being treated like a public company.
According to the report, federal agencies should regulate only after identifying a failure of markets, a policy that requires intervention or a problem of national scope that cannot be addressed by the states. Federal agencies should pursue non-regulatory approaches, such as incentive programs, when possible. Agencies should establish a regulatory budget that identifies all costs of rulemaking and takes the cumulative impact of regulations into account. Congress should review statutes to identify programs for repeal or reform, and agencies should allow adequate periods for public comments and limit sub-regulatory guidance.
The task force on the Constitution also focused on the regulatory process, with an emphasis on the balance of powers between the three branches of government and congressional oversight of rulemaking. It called for best-drafting practices to limit ambiguity and enforce congressional intent in legislation. Such best practices would include an “unambiguous statement” that agencies cannot issue regulations or other implementation guidance unless called for by the law. Where rulemaking is authorized in the legislation, regulators should consult with congressional committees before acting, and Congress should have an up-or-down vote on major regulations. The task force also proposed to end “excessive” judicial deference to regulatory agencies.
According to the report, Congress should pass annual appropriations bills and overhaul the Congressional Budget Act to reinforce Congress’ “power of the purse” and strengthen oversight of the executive branch.
In addition to their direct effects, these proposals could have broad implications for a range of benefit programs by affecting how — or even whether — federal agencies issue regulations and guidance. In some cases, the recommendations would offer relief and flexibility for plan sponsors; in other cases, employers might be left without the direction they need to implement legislative requirements.
Some proposals were drawn from pending legislation and may receive some attention this year. For example, the House recently approved legislation allowing people covered under the Indian Health Service to contribute to HSAs, and Congress has considered legislation to repeal the CEO pay ratio disclosure requirement. For the most part, however, the proposals are intended for the campaign trail this fall and will form the basis for House Republicans’ legislative agenda in 2017.