WASHINGTON – The insurance industry found President Barack Obama’s 2016 budget proposal a mixed bag.
The $4 trillion budget proposal submitted to Congress calls for several provisions, some old and some new, designed to give a retirement savings opportunity to those who do not have access to an employer-sponsored retirement plan.
One provision sets aside $6.5 million at the Department of Labor, along with waiver authority, to allow a limited number of states to implement state-based automatic enrollment individual retirement accounts (IRAs) or 401(k)-type programs. This stems from the number of states’ decisions to explore options for creating automatic retirement accounts for private-sector workers who do not otherwise have access to a workplace retirement plan.
Cathy Weatherford, president and CEO of the Insured Retirement Institute, applauded the decision to include the provisions aimed at broadening the number of people who can take advantage of programs aimed at preparing them for retirement.
“President Obama’s budget proposal contains sensible solutions for expanding access to retirement plans, such as auto-IRAs, for American workers who do not have a workplace plan available to them,” Weatherford said.
She said that automatic features are “powerful tools” in steering Americans toward secure retirements, and we would encourage all policymakers to explore additional measures to increase their effectiveness. She said this would include expanding auto-enrollment and auto-escalation so that Americans can make more meaningful contributions to their retirement savings.
“Advancing these practical policies is among the top priorities for IRI in 2015,” Weatherford said.
These policies include expanding retirement savings options for long-term, part-time workers. The budget document noted that, under current law, just 37 percent of part-time workers have access to a retirement plan, as compared to 74 percent of full-time private-sector workers, in part because employers are permitted to exclude part-time workers from a retirement plan they provide for full-time workers.
The proposed budget would make employees who have worked for an employer at least 500 hours per year for at least three years eligible to participate in the employer’s existing plan. Employers would not be required to offer matching contributions. This proposal would provide approximately one million individuals with access to retirement plan coverage.
Another provision Weatherford alluded to would automatically enroll workers without access to employer-based retirement plans in IRAs through payroll deposit contributions at their workplace (with an option to opt out).
This budget proposal would give 30 million more workers access to a workplace saving opportunity, the administration estimated. The budget also proposes to expand the tax credits available to small businesses who set up automatic enrollment IRAs, set up 401(k)s or other employer plans, or start automatically enrolling workers in their existing retirement plans.
At the same time, the proposed budget takes up a suggestion made by the Government Accountability Office (GA) in November that would limit the ability of wealthy individuals to convert these accounts into tax shelters. The proposed budget would prohibit contributions to and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances are about $3.4 million, enough to provide an annual income of $210,000 in retirement.
Because there is no total limit on IRA accumulations, the government is forgoing millions in tax revenue, the GAO said in its November report.
Moreover, the GAO said, the accumulation of these large IRA balances by a small number of investors “stands in contrast to Congress’s aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement.”
But several budget provisions concern the industry. One would impose a special tax on financial institutions with assets of $50 billion or more. This is designed to help pay back the government for bailing out troubled institutions, including smaller banks that have received government aid but have not paid it back. The American Council of Life Insurers (ACLI) estimates that it would impact more than 30 insurance companies.
“The basis for the tax – to curb financial firms’ allegedly risky activities — is misguided,” the ACLI said in a statement. “By their very nature, life insurance companies avoid risky financial behavior and speculative leveraging activities. They’re also prohibited by law in every state from engaging in excess or risky leveraging.”
The budget plan also seeks to impact two other insurance company tax benefits, corporate-owned life insurance (COLI) and the dividends-received deduction (DRD). These proposals have been included in a number of Obama administration budgets over the last several years, but have not been approved.
A joint release from a number of insurance carrier and agent/broker groups published a statement late this afternoon attacking those provisions.
The COLI proposal “would impose new taxes on life insurance used by businesses small and large,” the Secure Family Coalition said. “Many businesses use COLI to protect against financial or job loss stemming from the death of owners or key employees. COLI also is used to ensure business continuation.”
In addition, the statement said that COLI is a widely-used funding mechanism for employee and retiree benefits. “Congress affirmed the benefits and tax treatment of COLI and assured its responsible use in bipartisan legislation enacted in 2006.”
The Secure Family statement said that the provision regarding DRD “would undercut longstanding rules regarding life insurers’ DRD that are designed to prevent double taxation of corporate earnings.”
Secure Family said the administration’s proposal would reduce the DRD that life insurers use in accounts that fund variable life insurance and variable annuity contracts, “key products for financial and retirement security.”
Juli McNeely, president of the National Association of Insurance and Financial Advisors (NAIFA), also voiced concern.
“Most of the tax proposals in this year’s budget appear to be repeats from past budgets,” she said.
McNeely said NAIFA is “disappointed, but not surprised,” that the administration targets tax increases on the life insurance industry.