Alert / Retirement, Employee Benefits
Summer heat brings legislative threats to health & retirement plans

Congress returns from the Independence Day recess with plenty on its plate, including opioid legislation that may come with a hefty price tag for employers, damaging changes to retirement savings as part of a still-developing “tax reform 2.0” package and promises of a healthcare policy clash. It’s not all bad news for plan sponsors though, as Congress is making progress on other, more employer-friendly retirement and health savings account (HSA) legislation.

House passes opioid legislation with a $450 million surprise for employers

The House recently passed a 460-page bill attempting to address opioid and other substance abuse disorders. Among the provisions in the bill is a section that extends the period of time employer-sponsored group health plans must pay primary for end-stage renal disease (ESRD) before Medicare takes over as primary. The result of this extension is a cost-shift from Medicare to employer plans of $450 million over ten years.

Lockton comment: ESRD is a severe form of kidney failure that requires regular long-term dialysis or a kidney transplant to maintain life. ESRD is relatively rare with a prevalence rate in Lockton data of less than one-tenth of a percent, but it can be expensive with average medical and pharmacy claims exceeding $120,000 per patient. 

Individuals with ESRD are eligible for Medicare; however, when an individual is covered under an employer plan, the employer plan must pay primary for 30 months before Medicare takes over as the primary payer. The legislation passed by the House extends the period during which the employer plan is primary by three months, to 33 months.

Lockton comment: The proposal is an attempt by the House to pay for other provisions in the legislation and is a classic example of Congress using an already-existing rule as a dial to raise revenue. Originally, employer plans were primary for 12 months. This was increased to 18 months in 1990 and to the current 30 months in 1997.

The Senate is expected to consider the House’s bill along with several proposals that have already been vetted by Senate committees. To date, Senate proposals have not included the ESRD extension as a revenue raiser; however, that could change as it begins to review the House package.

Tax reform 2.0 and the return of Rothification?

Rep. Kevin Brady, R-Texas, chairman of the tax writing committee in the House, has announced that he and his committee plan to revisit tax reform this year. Brady’s efforts will likely include making permanent the lower individual tax rates and the 20 percent deduction for pass-through entities that expire after 10 years.

Accomplishing tax reform 2.0 will be an uphill battle for Republicans who will need to woo Democrat support this time – especially with midterm elections right around the corner. Nevertheless, plan sponsors will want to pay close attention to how members propose to pay for the additional tax cuts. The renewed effort at tax reform has resurrected discussions over several “pay-fors” that were considered and eventually nixed during the last tax reform effort. This includes renewed discussion to change retirement plan savings.

Last August it was circulated that lawmakers were considering reducing 401(k) pretax savings limits from $18,500 to $2,400, with the rest considered post-tax, Roth contributions. This would raise considerable tax revenue to help pay for the tax cuts. The policy ramifications of moving to partial Roth were so significant that Trump tweeted, “There will be NO change to your 401(k). This has always been a great and popular middle-class tax break that works, and it stays!”

Lockton comment: While the public outcry was so strong against any proposal that would deter workers from saving for retirement, the political victory that permanent individual tax cuts would bring could mean anything is on the table. Despite the claims of Trump and Brady, had the pushback not been so strong the first time, we would likely have seen those reduced 401(k) limits included in the initial tax reform bill. The push and message will need to be just as strong this time if retirement savings are not going to be harmed.

Because the drafters of tax reform 2.0 will be looking at just about any bucket of money they can find to pay for the package, it makes us wary that they may look to the tax exclusion for health benefits. That exclusion says employees are not taxed on the employer-paid portion of health plan premiums. In addition to raising taxes on employers and employees, changes to this tax exclusion would destabilize employer plans and increase healthcare costs for employers.

A mixed bag of retirement reforms

Brady is also expected to look at major retirement reforms, either as part of a tax reform 2.0 package or separately. In particular, Brady would like to pass the Retirement Enhancement and Savings Act (RESA), which was introduced in the spring. RESA is identical to Sen. Orrin Hatch’s, R-Utah, companion bill in the Senate. RESA makes many sweeping reforms, several aimed at making it easier for small businesses to have a retirement plan:

  • Provides start-up tax credits to defray the cost of adopting a retirement plan.
  • Includes additional tax credit for plan designs with an automatic enrollment feature.
  • Expands retirement plan coverage by legalizing unrelated employers joining a pooled employer plan.
  • Allows electronic disclosure unless a participant or beneficiary requests paper copies.
  • Increases automatic cash-out limits.
  • Provides an annuity selection safe harbor for fiduciaries.

Universal savings accounts are also likely to be on the table. This type of account would be a general savings vehicle outside the employer-sponsored system. Account holders could contribute post-tax funds to the account and earnings would grow tax-free. This is similar to a Roth IRA, but the biggest difference is that account holders could withdraw both contributions and earnings at any time, for any reason, without tax penalties.

Lockton comment: Universal savings accounts could be a huge detriment to the employer-based retirement system and retirement savings overall. The big reason why is easy access to the retirement nest egg to pay other expenses.

House HSA bills gain momentum

This week the House’s tax writing committee is likely to consider several proposals to enhance HSAs:

  • Permit first-dollar coverage for chronic conditions, on-site and near-site clinics, and telemedicine.
  • Allow plan sponsors to define a limited dollar amount of first-dollar coverage (e.g., up to $250 for generic drugs).
  • Permit employees to contribute to an HSA even if their spouse has a health flexible spending arrangement (health FSA).
  • Enable parents to use HSA funds for nondependent children up to age 27.
  • Allow limited HSA funds to pay for fitness activities and equipment like gym memberships.
  • Provide a limited option to roll funds to an HSA from a participant’s health FSA, health reimbursement arrangement or Archer medical savings account.
  • Increase the HSA contribution limit.
  • Permit working seniors with Medicare to make HSA contributions.

Lockton comment: Some of the proposals, like the last two on the list, are more controversial than others and less likely to make the final bill. Proposals that do make it out of committee will be well-positioned to be included in either a broader government funding package this fall or a post-election package.

Senate Democrats plan healthcare push during August

Senate Majority Leader Mitch McConnel, R-Ky., announced the Senate will not take off for the entirety of its customary August recess, and Democrats responded that they’ll use the extra time at work to highlight how they believe Republicans are failing on healthcare policy.

The August recess was shortened to allow more time for the Senate to work through the long list of unconfirmed presidential appointments. That list got longer with Justice Anthony Kennedy’s resignation from the Supreme Court. We expect his successor will receive a barrage of healthcare policy questions during confirmation proceedings, especially in light of the Trump administration’s decision not to defend a lawsuit challenging the Affordable Care Act.

Scott Behrens, J.D.  l  Sam Henson, J.D.

Not Legal Advice: Nothing in this Update should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton's Government Relations group are not privileged under the attorney-client privilege.

The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute US federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.

This document contains the proprietary work product of Lockton Government Relations and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.

Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.

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