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Congress Will Focus This Summer and Fall on Debt Limit, Spending Cuts
The primary legislative debate for the upcoming several months will focus on the looming debt limit and spending cuts. Failure to raise or suspend the debt limit risks U.S. default on at least some of its obligations, an outcome that economists say would be devastating, or even catastrophic not just for the U.S. but for the global economy. There may be tax implications, too, as the debate progresses.
Currently, negotiations between President Biden and Speaker of the House Rep. Kevin McCarthy (R-CA) have made no progress. The GOP position is that the debt limit increase (or suspension) must be accompanied by a budget that includes significant spending cuts. The Democrats say the debt limit should not be “held hostage” to the budget debate, and the debt limit increase or suspension should move on its own.
President Biden has signaled his willingness to discuss budget priorities but says the ball is in the GOP-controlled House’s court—it is up to the Republicans, he says, to send him their proposed budget. He noted that because he sent his budget proposal to Congress on March 9, a GOP proposal is needed to start negotiations.
However, House Budget Committee Chair Rep. Jodey Arrington (R-TX) says his panel will not draft a budget resolution until after the Speaker and the President negotiate a spending plan. On March 28, Speaker McCarthy did send President Biden a letter focused on his “incredible concern” about the debt limit, and the Administration’s refusal to negotiate it in the context of spending cuts. In the letter, Speaker McCarthy said the GOP wants to “roll back non-defense government spending, reclaim unspent COVID relief money, strengthen work requirements for social safety net programs, and change energy policy.”
The Biden Administration did not accept the McCarthy letter as a starting point for negotiations. The President continues to demand that the GOP offer a detailed budget to provide a “framework” for negotiations. And so, the debt limit/budget negotiations are currently at a standstill. And there is growing worry in the business community about the potential for brinksmanship with respect to the need to raise the debt limit.
The GOP maintains that Republicans will not support any tax increases, but there are certain tax issues they do support—e.g., making permanent the 2017 Tax Cuts and Jobs Act (TCJA) individual tax cuts. There is also talk of an agreement pairing a new child tax credit (with work requirements attached to it) with renewed research and development tax credits. And there are some concerns about certain tax rule policies (e.g., certain estate planning trusts). So, at the end of the day, there may well be tax implications in any debt limit/spending cuts plan.
Prospects: Every lawmaker—in both chambers in both parties—says the U.S. will not default on its debt, even in part. However, the current stalemate has markets nervous, particularly considering the jitters in the banking industry. This is and will continue to be a fingernail-biting stare-down between Republicans and Democrats, despite widespread agreement that the debt limit must be raised. The “drop dead” deadline (the so-called X Date) is projected to come between late June and September. Therefore, posturing but no real negotiations are likely for another month or more.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
NAIFA’s May 22-23 Congressional Conference Nears
Over 500 NAIFA members are coming to Washington next month to protect the rules that allow middle America to safeguard their families’ and businesses’ financial futures. We hope you are or will be among them.
On May 22-23, NAIFA members from all over the country will gather to lobby their members of Congress on issues of importance to insurance and financial advisors and their clients. We hope you will be among the hundreds of participants in the annual Congressional Conference. It is a program that’s key to NAIFA’s undisputed advocacy excellence.
The Congressional Conference will start at the Washington, D.C., JW Marriot on May 22. On that day, participants will be briefed on the issues, and hear important messages from lawmakers who will share how important the input from their constituents is to their decision-making votes. Former NAIFA member and current Rep. Monica De La Cruz (R-TX) has confirmed that she will address Congressional Conference attendees. And NAIFA is working with current Ways & Means Committee member (and also a former NAIFA member) Rep. Brad Schneider (D-IL) to have him speak to Conference participants, too.
Also on tap will be sessions on how constituents can most effectively lobby, and on logistical information on the nuts and bolts of how to do effective Hill visits. Then, on May 23, participants will head to Capitol Hill to meet with their Representatives and Senators.
The NAIFA Congressional Conference focuses on establishing and growing crucial grassroots, home-town relationships with their Members of the House of Representatives and Senators. These relationships make all the difference when lawmakers consider and vote on rules that impact life and health insurance, annuities, retirement savings, employer-provided benefits, and business operations.
Register for the Congressional Conference on May 22-23. You will also find more details about the program, logistics, and venue on the Congressional Conference site. If you haven’t already, please plan to attend the important, effective, and fun. You will also find more details about the program, logistics, and venue at that site Congressional Conference. We hope to see you at the JW Marriott on May 22-23.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.
IRS Warns About Use of CRATs, ERTC
Each year during tax filing season, the Internal Revenue Service (IRS) releases a list of “tax scams,” its so-called “dirty dozen,” and warns taxpayers to exercise great care if they are looking at any of these issues. While the list is not a legal document or a formal listing of agency enforcement priorities, it is intended to alert taxpayers and the tax professional community about various scams and schemes. This year, the list includes charitable remainder annuity trusts (CRATs), and the employee retention tax credit (ERTC).
CRATs are tools used by many NAIFA members who work in the estate planning market. The ERTC is a pandemic-era tax credit, now-expired but still available for those filing tax returns covering 2021-2022, that was designed to help employers keep employees on the payroll during the pandemic. Many NAIFA members used the ERTC themselves and/or serve clients who used the ERTC.
Trusts: There has been considerable interest, particularly among Congressional Democrats looking at ‘tax-the-rich’ proposals as well as abuses of current law, in the use by wealthy taxpayers of certain trusts (especially GRATs and CRATs) “to avoid tax liability” on their assets. The IRS echoes these concerns—see, for example, the list of “abusive trust tax evasion schemes” (it includes both GRATs and CRATs).
On March 29, the IRS released new guidance that eliminates the ability of the estate of the owner of a grantor trust to obtain stepped-up basis on certain trust assets. Rev.Rul.2023-2 confirms that assets not includible in the owner's (decedent's) gross estate are subject to carryover basis rules (i.e., taxed on the difference in value between when the asset was acquired and its value at the time tax liability attaches, versus its value at the date of death). The result reached by this ruling is viewed as predictable under current law by most of the estate planning bar, and thus the tax filing position described in the ruling is rarely asserted. This ruling follows the listing of a regulatory project on the issue in the IRS’s most recent priority guidance plan released in November 2022. Congressional scrutiny of this fact pattern provided the impetus for the IRS to act on it. (See Letter to Secretary Yellen from Oversight Subcommittee Chair Pascrell.)
A number of Congressional Democrats have demonstrated interest in pursuing avenues, legislative and regulatory, to close loopholes and other provisions that contribute to what they perceive to be two sets of tax rules, one favoring the rich and one for everyone else. Grantor trusts fit into this category. Republicans, on the other hand, are generally unwilling to tackle this issue, and because they control the House, legislative action on grantor trusts is not likely this year. However, if a budget agreement containing some new tax revenue comes together (a very huge "if") later this year, the whole issue of grantor trusts (including carryover vs. stepped-up basis) could be a prime target.
ERTC: While the ERTC is no longer available for current employee costs, it can still be claimed for those quarters when it was in effect. And there are reports of many cases of fraudulent claims for the ERTC. The IRS noted that there are numerous “scammers” contacting employers advertising the availability of the ERTC, but, in fact, the employers would not qualify. In addition, the IRS warned that some scammers are simply seeking to steal the employer's personally identifiable information in exchange for false promises relating to the ERTC.
Ways & Means Committee Republicans have asked for a status update on the Internal Revenue Service’s (IRS’s) processing of ERTC claims as part of the House GOP’s focus on fraud in pandemic relief measures. Specifically, they have asked IRS Commissioner Danny Werfel to report on the processing of employee retention tax credit claims. “We have received numerous inquiries and constituent complaints about the lengthy delays in processing the ERTC, and the lack of information being provided to those waiting on resolution of their claims,” according to a letter sent to the IRS by Oversight Subcommittee Chairman Rep. David Schweikert (R-AZ) and 14 of his colleagues.
Prospects: NAIFA members who use or work with clients who use CRATs, GRATs (and other trusts) and/or the ERTC should be aware of the scrutiny the tax rules governing them are receiving. Whether Congress considers changes to trust rules remains an open question, but it is definitely an issue area that is under current scrutiny.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
Florida Court Overturns DOL’s Fiduciary Rule Guidance as Applied to IRA Rollovers
A federal district court in Florida has ruled that part of the sub-regulatory guidance (FAQs) issued by the Department of Labor (DOL) in 2021 in relation to its fiduciary rule exceeds the agency’s statutory authority and thus has been overturned.
At issue in the Florida case, American Securities Association v U.S. Department of Labor, was whether first-time advice from a financial advisor recommending an IRA rollover to an individual with ERISA plan funds would satisfy the rule’s requirement that the advice is provided “on a regular basis,” as DOL’s sub-regulatory guidance stated (FAQ 7).
The Florida District Court disagreed and vacated that portion (FAQ 7) of the guidance. The court reasoned that advice regarding the ERISA plan funds and any subsequent advice regarding the IRA to which the funds have been rolled over cannot be considered as ongoing advice to the individual as envisioned in the rule because the advice relates to two different retirement plans.
DOL is currently considering whether to appeal the decision. The agency has said the ruling is “rooted in a fundamental legal error,” because it fails to acknowledge DOL’s regulatory authority over IRAs.
Another case challenging the guidance is pending in Federal District Court in Texas. On February 2, 2022, the Federation of Americans for Consumer Choice (“FACC”) filed suit against the DOL in the United States District Court for the Northern District of Texas, seeking to set aside the DOL’s guidance on the five-part test set forth in the preamble (as opposed to just the specific FAQs) to PTE 2020-02. Note that any appeal of this case would come to the Fifth Circuit Court of Appeals, the court that struck down the Obama Administration’s rewrite of the fiduciary rule in a 2018 case in which NAIFA joined as a plaintiff.
Prospects: DOL is understood to be currently working on a revised version of its fiduciary rule. Generally, the financial services industry opposes any change to the current rules and has so told the agency. NAIFA, joining with numerous other financial services interest groups, is urging DOL and other policymakers to cease efforts to rewrite the rule.
NAIFA Staff Contacts: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.
Bipartisan Group Introduces Resolution to Protect Step-Up in Basis
A bipartisan group of 66 House members (62 Republicans and 4 Democrats) has introduced a resolution, H.Res.237, to protect step-up in basis. The group includes members of the tax-writing Ways & Means Committee. The resolution’s sponsors say elimination of step-up would hurt farmers and businesses.
Under current law, heirs pay tax when they sell inherited assets based on the difference in the asset’s value from the date of the decedent’s death to the date of the sale. That is step-up in basis. Without step-up, the rule would be carryover basis, which would peg the taxable gain as the difference in the asset’s value as of the date the decedent acquired it and the date it is sold.
The step-up versus carryover basis debate has been raging for decades. The Joint Committee on Tax (JCT) estimated last year that the value of step-up in basis amounts to some $40 billion/year. Proponents of carryover basis say that stepped-up basis is a boon to the wealthy, whose heirs escape tax liability on an asset’s increase in value between the date of acquisition and the date of death. Supporters of stepped-up basis point to the adverse impact of a carryover basis rule on farms, ranches, and small businesses, especially those that are (and will continue to be) family-owned.
H.Res.237 was introduced by Reps. Tracey Mann (R-KS), Adrian Smith (R-NE), Jim Costa (D-CA), Jimmy Panetta (D-CA), Angie Craig (D-MN), and Bob Latta (R-OH). Fourteen (13 Republicans and 1 Democrat) of the resolution’s 66 cosponsors serve on the Ways & Means Committee. The resolution’s sponsors point to an Agriculture Department’s Economic Research Service study that found that 66 percent of all midsize farms would pay more in taxes without the step-up in basis rule.
The Biden Fiscal Year (FY) 2024 budget proposal includes a provision that would replace step-up in basis rules for transfers at death and by gift with carryover basis rules for taxpayers with more than $100 million in wealth. There are several general exceptions and a deferral election afforded to family-owned businesses.
Prospects: House resolutions (“H.Res”) are often utilized as messaging bills to express the sentiment of the House (if passed) and do not have the force of law. In any event, it appears likely at this point that united GOP opposition to any tax increases will keep this issue from being included in any legislation this year. However, it is very much a live issue that will almost certainly come up when Congress addresses whether to extend, modify or end the estate tax rules enacted in the 2017 Tax Cuts and Jobs Act (TCJA). The estate tax provisions in the TCJA are scheduled to expire in 2025, and the debate over whether to extend or change them is expected to heat up by next year.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
House and Senate Republicans Introduce Estate Tax Repeal Bill
Legislation to repeal the estate tax has been introduced in both the House and Senate. The all-Republican bill is H.R.338 in the House, and S.1108 in the Senate. Sen. John Thune (R-SD) introduced the Senate bill on April 2. The bill has 40 GOP cosponsors, including Senate Majority Leader Mitch McConnell (R-KY) and the ranking member of the tax-writing Senate Finance Committee, Sen. Mike Crapo (R-ID). In the House, H.R.338 was introduced by Rep. Robert Latta (R-OH). The House bill has seven Republican cosponsors.
Prospects: Despite decades-old efforts to permanently repeal the estate tax, this legislation has little chance for enactment this year. However, the issue may arise if and when Congress takes up the issue of the 2017 tax cuts law, which contains estate tax provisions that are set to expire in 2025. It is more likely, though, that changes to estate tax law, including the potential for repeal with or without step-up in basis, will wait until at least 2024, and maybe until 2025, when the 2017 estate tax cuts rules are set to expire.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
Biden Vetoes Congressional Resolution Overturning ESG Rule
On March 20, President Biden vetoed the Congressional resolution that would have overturned the Department of Labor’s (DOL’s) environmental, social, and governance (ESG) rule. Thus, the rule remains in effect.
The ESG rule allows a retirement plan fiduciary to consider environmental, social, and governance factors in investment choices that otherwise meet fiduciary rule financial factors when selecting the investment options available to plan participants. Both the House and Senate—by narrow majorities—had voted last month to overturn the DOL rule.
Prospects: Opponents of the ESG rule are unlikely to give up their effort to prevent explicit authorization to consider ESG factors in choosing retirement investment choices. However, the issue appears settled for now. Neither the 50 to 46 Senate vote nor the 216 to 204 House vote to overturn the rule is enough to overcome the Biden veto.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
NAIFA Urges President to Appoint NARAB Commissioners
On March 15, NAIFA, in conjunction with industry partners, wrote to President Biden to encourage him to nominate commissioners to the National Association of Registered Agents and Brokers (NARAB) as soon as possible. NARAB was established by a law enacted in 2015 but has yet to begin operating with the commissioners that must be nominated by the president and confirmed by the Senate.
NARAB would allow for a standardized process under which insurance agents and brokers could sell insurance products outside of the state in which they are licensed. NAIFA strongly supported the creation of NARAB eight years ago, and strongly supports the effort to get NARAB commissioners nominated and confirmed. The National Association of Insurance Commissioners (NAIC) has submitted a list of recommended potential commissioners to the White House.
Joining NAIFA on the letter in support of NARAB are the American Property Casualty Insurance Association, the Council of Insurance Agents and Brokers, the Independent Insurance Agents & Brokers of America, and the Wholesale & Specialty Insurance Association. The letter said, “We strongly support the implementation of NARAB because it will bring much-needed help to streamline licensure processing, reduce administrative redundancies and provide regulatory compliance efficiencies by allowing insurance agents and brokers to conduct business in more than one state through a single application. This simple act will single-handedly reduce compliance costs, promote consumer choice, and foster economic growth, all while continuing to preserve the state-based system of insurance regulation.”
Prospects: It’s been a slow slog getting NARAB up and operating, but this new effort to move the process forward has triggered hope that NARAB could be operational in the near future.
NAIFA Staff Contact: Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.
Social Security, Medicare Trustees Project Trust Fund Insolvency by 2034 and 2031 Respectively
The 2023 Annual Reports from the Social Security and Medicare trustees project that the Social Security Trust Fund will face insolvency in 11 years, and the Medicare Trust Fund in eight years.
The report noted that if Congress does not make changes to the Social Security benefits and financing structure, the trust fund from which Social Security benefits are paid will be unable to make full payments to all beneficiaries by 2034. Without action to fix the problem, beneficiaries will face an across-the-board 20 to 23 percent reduction in benefits, the report stated.
For Medicare, the trust fund insolvency date is in 2031, eight years from now, according to this year’s trustees report. That is a three-year improvement over the 2028 insolvency for Medicare trust fund projected by the 2022 trustees report.
Prospects: The annual projection of insolvency dates for the Social Security and Medicare trust funds is a bit of a moving target—it changes by a year or two (or three) each year. But it is clear that Congress will have to tackle this “third rail of politics” issue sooner rather than later. No one can tolerate the prospect of 20 percent (or greater) benefits cuts to Social Security recipients, or Medicare beneficiaries/providers. However, addressing these issues is unlikely to happen this year. Remember, both the President and Congress have agreed that Social Security and Medicare cuts are “off the table” in this year’s budget debates.
NAIFA Staff Contacts: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.
National Health Emergency Ends
Congress has approved, and President Biden signed into law H.J.Res 7, a resolution that ends the three-year-old COVID-19 national emergency relating to COVID-19. On March 29, the Senate—by a 68 to 23 vote, joined the House in ending the national emergency prior to the Administration’s planned end date for both the national emergency and the public health emergency (PHE) of May 11. The House approved the joint resolution in February by a 229 to 197 vote. President Biden, who opposed the early ending, signed the resolution into law on April 10.
President Biden said he preferred the May 11 end date for both the national emergency and the PHE to allow an orderly return to pre-pandemic rules. “An abrupt end to the emergency declarations would create wide-ranging chaos and uncertainty throughout the health care system,” he said in a statement of administration policy issued in January.
The end to the PHE means a slew of changes ranging from the end of free COVID-19 vaccinations and testing, subsidized personal protective equipment, eligibility for free or lower-cost health care services (both related to COVID-19 and otherwise), and extended deadlines for health insurance and other benefits-related decisions and practices.
Prospects: President Biden says his administration will continue to work with government agencies and the private sector in an effort to wind down the elements the PHE put in place. He promises “as much notice as possible” to Americans “who could potentially be impacted.”
NAIFA Staff Contact: Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.
DOL Releases FAQs on the End of COVID Public Health Emergency
On March 29, the Department of Labor (DOL) released new guidance in the form of frequently asked questions (FAQs) on the changes in benefits, deadlines, reporting requirements, and other issues as a result of the end of the COVID public health emergency.
Among the issues addressed in the FAQs are:
Prospects: There will be a variety of timing and coverage issues related to what health coverage had to provide during the pandemic but will no longer be obliged to provide now that the PHE is ending. NAIFA members with health insurance clients will likely get questions on what the post-PHE rules are. Thus, advisors in this market should be aware of the imminent changes.
NAIFA Staff Contact: Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.
IRS Issues Guidance Disallowing Use of Step-Up in Basis for Some Estates
On March 29, the IRS released new guidance that eliminates the ability of the estate of the owner of a grantor trust to obtain stepped-up basis on certain trust assets. Rev.Rul.2023-2 confirms that assets not includible in the owner's (decedent's) gross estate are subject to carryover basis rules (i.e., taxed on the difference in value between when the asset was acquired and its value at the time tax liability attaches, versus its value at the date of death).
The facts of the revenue ruling involved an individual who had established an irrevocable trust, funded with certain assets, which resulted in a completed gift for gift tax purposes. The individual had retained power over the trust that caused the individual to be treated as the owner of the trust for income tax purposes, but not a power over the trust that would result in inclusion of the trust’s assets in the individual’s gross estate after he died.
The result reached by this ruling is viewed as predictable under current law by most of the estate planning bar, and thus the tax filing position described in the ruling is rarely asserted. This ruling follows the listing of a regulatory project on the issue in the IRS’s most recent priority guidance plan released in November 2022. Congressional scrutiny of this fact pattern provided the impetus for the IRS to act on it. (See Letter to Secretary Yellen from Oversight Subcommittee Chair Pascrell.)
Prospects: The revenue ruling provides a meticulous sort-through of all the facets of income, trust, estate, and gift tax law. However, it also reflects a growing interest, within Treasury, the IRS, and among some Congressional Democrats, in rules that curtail an individual’s ability to avoid income tax on appreciated assets, particularly among the very rich. The whole area of step-up versus carryover basis is one that is percolating in tax-writing committee thinking, and one that bears a close watch.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
Opposition to Su for Labor Secretary Intensifies
Opposition to the nomination of Julie Su as Secretary of the Department of Labor (DOL) is building. But some key players—e.g., the Chamber of Commerce—have stayed on the sidelines. It is currently unclear whether the Su nomination will win Senate approval.
Su’s nomination had sparked some controversy even before President Biden’s choice of her to head DOL was announced, as several Republican members of the House of Representatives had already written to the President to urge him not to nominate her. A significant number of business interests are lobbying hard against her nomination.
In addition, on April 6, key House Republicans called on President Biden to withdraw her nomination. California’s GOP delegation, including Speaker of the House Rep. Kevin McCarthy (R-CA), urged the President to abandon the Su nomination. Joining the California lawmakers were Ways & Means Committee chair Rep. Jason Smith (R-MO) and Education & the Workforce chair Rep. Virginia Foxx (R-NC).
Su is a former California Secretary of Labor who was confirmed by the Senate as the U.S. DOL deputy secretary on a party-line vote in 2021. Republican opposition to her centered on her support in California of that state’s controversial law classifying many gig workers as employees instead of independent contractors; and overseeing the state’s unemployment system, which struggled to properly administer benefits during the pandemic.
Currently, several Democratic Senators—whose support will be needed for Su to be confirmed—are either undecided or are not yet announcing their position on the Su nomination.
The Senate Health, Education, Labor, and Pensions (HELP) Committee has scheduled a confirmation hearing with her for April 20. Ahead of that hearing, Su is visiting with HELP Committee members and other Senators. The hearing will likely uncover whether opposition to her nomination is serious enough to put her confirmation at risk.
Prospects: Su had no GOP support during her Deputy Labor Secretary confirmation process, but united Democratic support saw her through. However, at least one Democratic Senator (Sen. Joe Manchin (D-WV)) said specifically at that time that his support was conditioned on Marty Walsh heading the agency. Manchin’s support for her to head the DOL is by no means certain. Also, still open is whether Sen. Jon Tester (D-MT) will support Su’s nomination. The process will likely unfold over the next several weeks.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
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