February 2023 Issue:
118th Congress Begins with Focus on Debt Limit/Spending Cuts, Investigations
The initial focus of the 118th Congress has been on investigations and beginning to deal with the debt limit/spending cuts debate. Most of these issues will take months to result in action, but the political rhetoric and debate has already begun.
Debt Limit: On January 19, the U.S. hit its statutory debt limit—the amount above which the Treasury may not borrow. By suspending government employee retirement account investments (and other “extraordinary” measures), Treasury will be able to borrow enough to timely meet its current obligations until mid-summer. The “X Date” at which default (inability to pay a bill by its due date) is impossible to predict with precision, but expert estimates range from early June to mid-July. Economists agree that for the U.S. to default on any bill would be catastrophic for both the U.S. domestic and the worldwide economies.
Some Republican lawmakers believe a partial default (estimates put the shortfall of cash with which to pay bills at about 20 percent of the total) would not happen—they say the Constitution would prevent Treasury from not paying all of its bills, despite the statutory debt limit preventing the borrowing that would make full payments possible. Others think a law or resolution prioritizing the outstanding obligations would prevent an economic catastrophe. But the majority—in both parties—agree that permitting even a partial default would be unthinkably risky and vow it will not happen.
But acting to raise (or suspend) the debt limit is a political hot potato. Republicans say they must have spending reforms/restraints/cuts to accompany a debt limit increase (or suspension). For their part, Democrats say the debt limit must be addressed on its own—that it cannot be “held hostage” to finding a spending cuts agreement. Most Washington insiders, on and off the Hill, think that ultimately the solution will come in the form of some kind of spending cuts package that contains a debt limit increase (or suspension) in it.
Spending Cuts: There are a number of proposals in the mix: spending caps (starting at spending levels as of fiscal year 2022), cuts in entitlement programs like Social Security and Medicare (note that GOP leadership say emphatically that Social Security and Medicare cuts will not be proposed), and even a pathway to a balanced budget. There is, at this point, little to no consensus on what a spending bill will look like. There is already a hot debate shaping up over whether to cut mandatory spending (if not Social Security and Medicare, then Medicaid and other entitlements), defense spending as a share of discretionary spending, and virtually all the government’s programs and agencies.
Timing: A spending bill (or 12 separate appropriations bills) must be enacted by the end of the government’s fiscal year, September 30. There is currently talk about enacting short-term debt limit increases/suspensions in order to align the spending bill deadline with the “X Date.” So, it appears at this point that both of these issues will come to a head by late summer so as to enact legislation by the end of September.
Investigations/Oversight: Also high on Congress’ early agenda are a slew of investigations. The House Oversight Committee held a hearing on February 1 to look into federal pandemic spending, specifically focused on fraud in the unemployment insurance (UI) arena. The House Judiciary Committee held a hearing on February 1 on immigration issues, focusing on the “crisis at the southern border.” And, House Ways & Means Committee Chairman Rep. Jason Smith (R-MO) promises to investigate what could be billions in fraud in the country’s UI program in connection with the COVID-19 pandemic. Ways & Means also held a hearing on the UI issue.
Rep. Smith’s call for a UI investigation was triggered by a January 23 report by the Government Accountability Office (GAO) that found that at least as much as $60 billion went to fraudulent UI claims during the pandemic. Others have put the figure much higher—some say it could be as much as $400 billion.
The GAO report noted that the Department of Labor (DOL) says about $878 billion in UI claims were paid between April 2020 and September 2022. At least $4.2 billion in UI fraud has been formally confirmed by state workforce agencies, and at least $45 billion has been flagged as potential fraud. GAO cautioned that these numbers are preliminary and should be interpreted “with caution.”
The GAO numbers “only scratch the surface of what is publicly known about the unprecedented scope, size, and severity of the fraud,” said Rep. Smith. “Republicans are committed to investigating fraud and conducting rigorous oversight on behalf of working families.”
Committee Democrats were quick to point out that while they support efforts to prosecute fraud, the need to get money quickly to newly-jobless working Americans at the beginning of the pandemic was a bipartisan goal and achievement. They noted that the amount attributed to fraud was, but a small portion of the total benefits paid, and that those benefits kept a bad economic situation resulting from the pandemic shut-down from being much worse.
Rep. Smith has also promised investigations into the Internal Revenue Service’s (IRS) plans for the $80 billion in new funding appropriated by Congress last year. Most Republicans agree that these newly-appropriated funds should be clawed back if in fact the IRS plans to use most of this money to increase audits on any but the richest of taxpayers.
Prospects: The debt limit/spending cuts debate will continue at ever higher decibel levels until either a solution is identified, or the “X Date” gets closer. Some in Washington think the only way to an agreement is via a coalition of Republicans and Democrats who are willing to compromise.
Note: no Republican is talking about tax increases as part of any agreement to control the government’s spiraling deficit. But Democrats are most definitely looking at tax increases—particularly on the rich and on big corporations. So, tax issues will likely be part of the debate, but Republican opposition will make any tax issue more difficult or even impossible in the current environment.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
President Biden Signals Tax the Rich Agenda for 2023
In his February 7 State of the Union (SOTU) speech, President Biden called for new taxes on wealthy taxpayers, including current tax liability on unrealized gains from investments. The GOP is sure to fight back. And, the President won apparent agreement from virtually all Senators and House Members to avoid cuts to Social Security and Medicare this year.
The 75-minute SOTU speech was an uncharacteristically raucous affair, including heckling that resulted in Republican and Democratic lawmakers alike rising for a standing ovation to the President’s challenge to take cuts to Social Security and Medicare off the table during upcoming spending cut/debt ceiling negotiations. The looming budget battle will not necessarily avoid any and all changes to these popular entitlement programs, but will likely sidestep calls from conservative lawmakers to cut Social Security/Medicare benefits and/or raise payroll taxes.
President Biden’s call to “tax the rich” stopped short of providing details on how to do that—rather, he pointed to the fairness of making sure that wealthy taxpayers don’t pay less, as a percentage of their wealth, as working-class Americans pay as a percentage of their wages. Details on his tax-the-rich proposal are likely to come in his fiscal year (FY) 2024 budget proposal. That proposal is due to be delivered to Capitol Hill on March 9.
Early indications, however, suggest that the President will propose new surtaxes on those with incomes in excess of $100 million to $500 million, and that “income” will include gains on investments, even when those investments have not been sold (gains realized). That would be a sea change in current tax policy which requires gain to be realized prior to it becoming taxable. It could impact cash value life insurance. Under current tax law, life insurance inside buildup is not taxable until/unless the policyholder withdraws it from the policy. And it’s never taxed if it is paid out in the form of death benefits, which are generally tax-free.
Another potential tax increase mentioned in the SOTU speech is the stock buy-back tax, currently set at one percent. President Biden is expected to propose an increase in that one percent level to as much as four percent. The levy is likely to impact large corporations’ buying back their own stock.
Other tax increase proposals may also appear in the Biden FY 24 budget proposal.
Prospects: The GOP—which controls the House—is sure to fight back hard against any tax increases. And with only a one-seat majority in the Democratic-controlled Senate, the proposals are unlikely to survive Senate action even if Republicans fail to stop them in the House. Still, the proposals will tee up vigorous debate, particularly on whether unrealized gains should be taxed. This looks to be a long-term battle with significant implications for cash value life insurance as well as for investments generally.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
Catch-up Contribution Glitch in SECURE 2.0 Identified
A drafting error in SECURE 2.0 may put at risk catch-up contributions in 2024. The problem—an inadvertently dropped paragraph of statutory language—could be fixed by a statutory technical correction, or perhaps by regulation, key Hill technical staffers say.
The problem revolves around a missing paragraph in the language subjecting catch-up contributions to Roth (after-tax contribution, tax-free distribution) treatment for those with incomes in excess of $145,000. The missing language sets up the possibility that catch-up contributions would be eliminated.
Key tax-writing committee staffers and industry experts say that even if Congress does not enact a technical correction to fix the problem, the Treasury Department may have the authority—based on other catch-up contribution language in SECURE 2.0—to allow catch-up contributions as of the 2024 effective date of the catch-up contribution changes.
Prospects: Tax-writing committee staffers say a technical correction to fix this problem is in the works, but prospects for any tax legislation in 2023 are murky. So, they are working with Treasury to be sure that a regulatory fix is in place if the statutory technical correction gets delayed. NAIFA will watch this process carefully.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
Key House Committee Sets Sights on Worker Classification
The House Education & the Workforce Committee has set its sights on concerns about the Biden Administration’s action on the worker classification issue. The committee’s chair, Rep. Virginia Foxx (R-NC), said labor oversight would be a priority for her committee this year.
“We think they’re doing a lot of nefarious kinds of things,” Rep. Foxx said about the Department of Labor (DOL). “We’re concerned about what the Biden Administration is doing on independent contractors, and how they’re pushing in that area.”
Prospects: There are limits to what one House Committee or even the full House can do about agency actions, especially when the Senate is controlled by Democrats. But the committee can and probably will push back hard against actions that veer too far to the left. That means the Education & the Workforce Committee input/pressure could slow down and maybe even moderate DOL actions. Rep. Foxx has raised the possibility of initiating Congressional Review Act (CRA) resolutions, which would disapprove (and undo) the agency rules they target. But CRAs would also have to be approved in the Senate, an unlikely outcome with Democrats in control of the upper chamber.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
SEC Issues Risk Alert to Broker-Dealers
On January 30, the Securities and Exchange Commission (SEC) announced a “risk alert,” advising broker-dealers and their registered representatives of the agency’s intention to examine whether there has been sufficient compliance with the specific requirements of Regulation Best Interest’s (Reg BI’s) written policy and procedures rules.
The risk alert advises broker-dealers and their registered representatives of the agency’s Division of Examinations’ observations regarding whether there have been “deficiencies and weaknesses” for compliance with the Reg BI’s written policies and procedures rules, including disclosure obligations. The risk alert noted that the agency’s staff has “observed instances in which broker-dealers did not have adequate written policies and procedures required by the Compliance Obligation. Staff observed multiple instances of generic written policies and procedures that were not tailored to the firm’s business model or otherwise were limited to restating the rule’s requirements. “Among the deficiencies noted were lack of specificity as to when disclosures should be created or updated (“i.e., when the disclosures contain materially outdated, incomplete, or inaccurate information) or how the updated disclosures should be delivered to retail customers.”
Other problems noted in the risk alert included a lack of written policies and procedures “reasonably designed to specify how conflicts of interest are to be identified or addressed,” identification of the person at the broker-dealer responsible for compliance with Reg BI’s written policies and procedures rules, maintenance of documentation locally rather than in a central location, lack of a training program and periodic review and testing, failure to consider whether surveillance systems that existed prior to Reg BI’s effective date needed updating, and systems that record completed transactions but not recommendations that were not accepted.
Prospects: A risk alert is not a rule and has no force of law. But it does signal the SEC’s intention to focus on Reg BI’s written procedures requirements. NAIFA members impacted by Reg BI should pay attention to whether their written disclosure procedures comply with Reg BI’s requirements.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
FAIR Tax Proposal to Get a House Vote
A bill to replace the federal income tax with a consumption-based national sales tax is likely to get a House vote later this year. The FAIR tax would eliminate such important tax rules as tax-free employer-provided benefits, tax-favored retirement savings rules, the 20 percent deduction for non-corporate business income, and others.
The FAIR Tax Act, H.R.25, would repeal the federal income tax and replace it with a 30 percent national sales tax. It would also eliminate the Internal Revenue Service (IRS). Instead, states would be required to collect the sales tax and remit it to the federal government.
A House vote on the FAIR Tax Act was promised to its sponsor, Rep. Buddy Carter (R-GA), as one of the concessions Speaker of the House Rep. Kevin McCarthy (R-CA) made to dissidents to his Speakership bid last month.
H.R.25 had 24 House GOP cosponsors when it was introduced on January 9, but considerable concern about the proposal has some of those cosponsors rethinking their support.
There has been a concerted attack on the proposal by Democrats, who point out that the bill would raise costs for many (some say most) middle Americans. There is also significant opposition to the proposal among Republican tax writers and Congressional leadership. Many in the GOP think a vote on H.R.25—which could not pass the Democratic-controlled Senate even if it could get through the Republican-controlled House—would prove politically perilous for the GOP.
In addition, House Republican tax writers and leaders are focused on winning an extension of the 2017 Tax Cuts and Jobs Act (TCJA) individual tax cuts. Those cuts include the 20 percent deduction for noncorporate business income as well as income tax rates and other individual tax rules (e.g., estate tax). The TCJA individual income tax rules are scheduled to expire at the end of 2025.
Prospects: Chances for the enactment of the FAIR Tax are infinitesimally small, but the McCarthy promise to its supporters that it would get a House vote means the measure will get a lot of attention in upcoming months. And Republicans are quite worried about the potential harm such a vote could do to swing-district Republicans seeking reelection in 2024. This is an issue that, despite the probability that it won’t be enacted into law, bears a close watch.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
House Passes Bill to Prevent Financial Exploitation of Seniors
On January 30, the House of Representatives passed H.R.500, a bill that would give financial services professionals better tools to deal with suspected financial exploitation and abuse of seniors.
The Financial Exploitation Prevention Act passed the House unanimously, with 419 “aye” votes. H.R.500 was introduced by Rep. Ann Wagner (R-MO). The bill would permit a registered open-end investment company or transfer agent for that company, including mutual funds, to better protect seniors by delaying the redemption period of any redeemable security if it was reasonably believed that such redemption was requested through the financial exploitation of a security holder who is a senior or an individual unable to protect their own interests.
The bill also would require the Securities and Exchange Commission (SEC) to report to Congress on recommendations for legislative and regulatory changes on how to combat the financial exploitation of seniors and other vulnerable adults, such as those with mental and physical disabilities.
Prospects: The bipartisan H.R.500 is now pending in the Senate. The bill was referred to the Senate’s Banking Committee, which has not yet scheduled action on it. NAIFA supports this bill, and is urging the Senate to pass it.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
Key House Republican Introduces Resolution to Void DOL ESG Rule
The chairman of the House Financial Services Committee’s Subcommittee on Financial Institutions and Monetary Policy has introduced a resolution that would void the Department of Labor’s (DOL’s) environmental, social and governance (ESG) rule. Rep. Andy Barr (R-KY) introduced a Congressional Review Act (CRA) resolution that would bar the DOL’s Employee Benefits Security Administration (EBSA) from enforcing the rule.
The CRA sets up a special process by which Congress can overturn an agency’s rule. It takes a simple majority in both the House and the Senate to pass a CRA resolution. The ESG rule—which DOL claims is widely misunderstood—permits a workplace retirement plan’s fiduciary to consider ESG factors when evaluating retirement plan investment choices. However, DOL spokespeople say, the rule still requires a plan fiduciary to analyze a potential investment’s risk-return elements, with ESG factors being only one of several factors taken into account. The rule, DOL says, is intended to be “neutral” on the materiality of ESG investing criteria.
Prospects: A CRA resolution must be voted on within 60 legislative days of finalization of the rule. Thus, a House vote on this one is expected before the end of March. It is possible the CRA resolution will pass the House, probably on a party-line vote, but it is less likely to succeed in the Democratic-controlled Senate. However, at least one Democrat (Sen. Joe Manchin (D-WV)) supports the ESG Rule Prevention Act in the Senate, so it will take all of the other Senate Democrats to be present and voting no, or a presidential veto, to prevent the CRA resolution’s enactment.
NAIFA Staff Contacts: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
FTC Proposes Ban on Noncompete Agreements
On January 5, the Federal Trade Commission (FTC) proposed a new rule banning noncompete agreements. The FTC said noncompete agreements “suppress wages, hamper innovation, and block entrepreneurs from starting their own businesses.”
The FTC said in announcing the Notice of Proposed Rulemaking (NPRM) that the proposed ban is based on its preliminary finding that “noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.”
The ban on noncompetes is broad—it would apply to virtually all jobs/workers.
Specifically, the proposed rule would make it illegal for an employer to:
- “Enter into or attempt to enter into a noncompete with a worker,
- Maintain a noncompete with a worker, or
- Represent to a worker, under certain circumstances, that the worker is subject to a non-compete.”
The proposed rule would apply to independent contractors as well as to employees, whether the worker is paid or not. The proposed rule would also require employers to rescind existing noncompetes and to actively inform workers that they are no longer in effect.
The NPRM, and a fact sheet on it, are posted on the FTC website. Access these documents at https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.
The proposed rule is open to public comment. Comments must be submitted by March 6, 2023. They can be submitted through https://www.regulations.gov/docket/FTC-2023-0007/document.
Prospects: The FTC proposed ban on noncompetes has triggered quite the furor in the employer community. Most experts are predicting a legal challenge to the agency’s authority to issue the rule if the rule as drafted is finalized. The U.S. Chamber of Commerce, a strong opponent of the rule, says the agency lacks a direct Congressional grant of rulemaking power, and that lack will doom the rule. However, before there can be litigation, the FTC must finalize the proposal, and before the agency can do that, it must collect and consider comments, perhaps modify its proposal as a result of the comments and clear the proposal through the White House (the Office of Information and Regulatory Affairs, OIRA). The issue is months—perhaps years—away from resolution.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
Walsh Set to Leave as DOL Secretary
Department of Labor (DOL) Secretary Marty Walsh is set to leave the Biden Administration Cabinet to head the union of professional hockey players. Walsh is the first of the Biden Administration’s agency heads to depart, but more exits are expected fairly soon. Key Administration staff turnover is common—arguably the norm—after two years in the Administration.
Prospects: Walsh’s replacement has not yet been nominated, but speculation is centered on Julie Su. Su, currently DOL’s Deputy Secretary, will likely become acting head of the DOL while a permanent replacement for Walsh is sought.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
NAIFA Files Comments with Centers for Medicare and Medicaid Services
On February 13, NAIFA submitted comments for the CMS proposed rule titled ”2024 Notice of Benefits and Payment Parameters,” published in the Federal Register on December 21, 2022. This proposed rule includes proposed payment parameters and provisions related to the HHS-operated risk adjustment and risk adjustment data validation programs, as well as proposed 2024 user fee rates for issuers offering qualified health plans (QHPs) through Federally-facilitated Exchanges (FFEs) and State-based Exchanges on the Federal platform (SBE-FPs).
This proposed rule also proposes requirements related to updating standardized plan options and reducing plan choice overload; re-enrollment hierarchy; essential community providers (ECPs) and network adequacy; failure to file and reconcile; special enrollment periods (SEPs); the annual household income verification; the deadline for QHP issuers to report enrollment and payment inaccuracies; requirements related to the State Exchange improper payment measurement program; and requirements for agents, brokers, and web-brokers assisting FFE and SBE-FP consumers.
In NAIFA’s letter, NAIFA recommends adjustments to areas identified as being of concern to the ability of agents and brokers to best serve their clients. NAIFA believes that changes to existing regulations should be inclusive of preserving the proper functionality of the agents and brokers that are vital to ensuring that millions of Americans have access to important health insurance benefits. NAIFA professionals are deeply rooted in their communities and are best positioned to understand the needs of consumers.
Prospects: After the comment closing period, CMS will consider submissions before finalizing its proposed rule. NAIFA continues to work closely with CMS to ensure that agents and brokers receive the best tools and operate in a climate that allows them to serve their clients.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
