The Fiscal Cliff, the Taxation of Health Insurance, and the Retirement Crisis
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Now that the election dust has settled, much of the news is about the looming fiscal cliff. As most of us recall, this is not a new issue, but one that our elected leaders have created for us.
In 2010, the National Commission on Fiscal Responsibility (commonly known as the Simpson-Bowles Commission) issued its report on how to solve the fiscal crisis. Among the features of its comprehensive plan were 2 benefits related items. Given that a combination of a lame duck Congress and a second term President are likely to address the fiscal cliff in some fashion, it is worth revisiting the report and these two items, as they will probably factor in the discussion.
One benefits item was capping the tax exclusion for employer provided health insurance at 75% of the 2014 cost until 2018, with a gradual phase out of the cap lasting until 2038. (The report also suggests reducing the PPACA “Cadillac Tax” from 40% down to 12%.) While capping the tax exclusion for health insurance (the largest of the so called “expenditures”) would be unpopular, our guess is that it would probably not have a great impact on the availability of employer-provided insurance. The availability of the health care reform insurance exchanges, if they are viable and provide affordable coverage, are more likely to have an impact.
The other benefits-related item is capping the tax deduction for retirement plan contributions to the lesser of $20,000 or 20% of income. Many in the retirement industry panned this idea when it was originally proposed, including both ASPPA and the American Benefits Council. ASPPA has recently gone so far as to create “SaveMy401k.com” and Facebook and Twiter accounts to allow people to voice their displeasure with the proposal to their Congress people and share information about the importance of retirement savings.
Part of the problem is that, for budgeting purposes, Congress treats the retirement contribution tax benefit as revenue lost, which is not completely accurate. Unlike the tax exclusion for employer-provided health insurance (which is lost revenue), the government does receive the revenue from retirement contributions, just many years down the road. Because the revenue is collected outside the window that the Congress uses to determine the budgetary impact of tax bills, it appears to be “lost” to lawmakers when they are reviewing bills. However, it is, in fact, only delayed.
As we’ve stated previously, there is a belief among some that there is a retirement crisis in America and both federal and state plans have been proposed to address it. It seems to run counter to the idea of solving a retirement crisis to limit contributions to retirement accounts. That said, there are tough decisions ahead to address the fiscal cliff, and retirement savings may be an unfortunate casualty of the inevitable political battle.
