November 2021 Issue:
House Tees Up Vote on Build Back Better Reconciliation Bill
On November 7, just after midnight, the House of Representatives approved the rule for debate on H.R.5376, the Build Back Better social spending reconciliation bill. It was a 221 to 213 party-line vote that came after a written commitment from moderate Democrats to vote for the bill itself after an official financial analysis of the measure (the “CBO score”) is completed, likely by Thanksgiving, assuming the CBO score confirms that the bill is fully offset and spends only the projected $1.75 trillion.
The bill—which until it is actually voted on can be changed in the House, and which is likely to be changed in the Senate—is a fully-offset package of around $1.75 trillion in new social spending. The “human infrastructure” bill provides significant amounts of money for healthcare (Medicare expansion and extension of enhanced subsidies for Affordable Care Act (ACA) insurance), elder care programs, child support programs, education programs, a new federal paid leave program, “green energy” and other climate change provisions, an increase in the amount of state and local tax (SALT) deductions that would be allowed, and immigration reforms.
The offsets are primarily new taxes on “the “ultra-rich” and corporations. Also expected to contribute to the revenue neutrality of the bill is its provision granting limited authority for Medicare to negotiate prices on some prescription drugs, and increased funding to the IRS for enforcement of existing tax laws. There are also substantial new international tax rule changes.
From the NAIFA perspective, what the bill excludes is even more important than what it contains. Among the significant wins (so far) for NAIFA are:
- The bill does not include a proposal to tax each year’s gains on investments (capital assets), whether or not those assets’ gains have been realized (i.e., sold or traded). Because this proposal—which was estimated to raise more than $550 billion over ten years—would have applied only to the very rich and only to capital assets, it would have struck only a glancing blow at life insurance and annuities. However, that glancing blow would be significant: it specifically did include private placement life insurance and annuities in its scope.
- The bill does not raise corporate, individual, or capital gains tax rates.
- The bill does not change current estate tax rules.
- The bill does not change (reduce) the Section 199A deduction for non-corporate business income.
- The bill does not include proposals to change grantor trust rules that would have retroactively made some irrevocable life insurance trusts (ILITs) includable in taxable estates and would require future ILITs to be structured in a non-grantor trust format.
- The bill does not include provisions to require employers to offer payroll-deduction and/or employee deferral retirement savings plans, or the proposal to make the Saver’s Credit refundable.
- The bill does not include the PRO Act’s “ABC test” to determine whether a worker is an employee or an independent contractor.
The bill does include several provisions that could impact some NAIFA members and/or their clients. These provisions include:
- Mega-IRA tax changes—generally, these provisions prohibit contributions to retirement savings plans, including IRAs, when the aggregate of a person’s retirement savings accounts equals or exceeds $10 million; and they require distribution (and tax paid) on amounts above $10 million—there are special rules for rollovers, including from traditional to Roth treatment of the rolled-over amounts, and further, there is a reporting requirement imposed on accounts of $2.5 million or more.
- Surtax on incomes of $10 million or more—there would be a five percent tax on top of the 37 percent top tax rate on individuals’ income above $10 million, and another three percent tax on individuals’ income above $25 million; there is also a “tax-the-rich” surtax on trust income.
- Expansion of the base on which the net investment tax is based to capture more pass-through business income; this base expansion also applies to the separate 3.8 percent Medicare tax.
- Corporate minimum tax—15 percent on book income on corporations with profits of $1 billion or more, and a tax on corporate stock buy-backs.
- Federal paid leave program.
- Expansion of Medicare Part B to include limited hearing benefits.
H.R.5376 has not yet passed the House—only the rule under which it will be debated has passed. However, the struggle between moderate and progressive Democrats was resolved by an agreement under which the progressives promised to vote for the traditional bipartisan infrastructure bill, and the moderates promised to vote for H.R.5376 once the CBO score/CBO’s additional financial information is available (and confirms initial cost and offset estimates). The agreement also specified that the vote on H.R.5376 would occur the week of November 15, although there might be enough wiggle room in the language of the agreement – which is written and signed by the relevant parties – to allow for a delay in the vote if it takes CBO longer than to November 15 to complete its scoring of the bill.
Prospects: While it currently appears likely that the BBB reconciliation bill will be enacted into law, it still has a long way to go. The Senate is almost certain to change the House version of the bill—including, potentially, dropping or substantially changing the paid leave program, and pulling in “new” (i.e., not in the House bill) revenue raisers if needed to fully offset the cost of the bill.
This is an all-Democrat bill (all Republicans not only oppose it, but also are working hard to block it, although it is unlikely that any of these attempts to kill the measure will succeed). It is governed by the rules of reconciliation legislation. So, expect challenges based on the reconciliation process’s “Byrd Rules” (some of which may well succeed). And, while Democrats want to pass the bill, some will insist on inclusion, exclusion, or modification of certain provisions. Particularly under discussion are the new federal paid leave program and the Medicare expansion provisions. It will require all 50 Democratic votes in the Senate, and all but three Democratic votes in the House to enact the legislation, so accommodations to address these concerns are inevitable.
Hence, although it is likely that H.R.5376 will be enacted into law, it is less likely, some say impossible, that it will be the House version of the bill. And it is possible, if not probable, that the process will not be done by Thanksgiving.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
Bipartisan Traditional Infrastructure (BIF) Bill Enacted into Law
After breaking the logjam caused by linking the bipartisan traditional infrastructure bill (the BIF) to the Build Back Better (BBB) reconciliation bill, the House of Representatives approved the Senate-passed BIF on November 6. The bill contains three provisions of some interest to NAIFA members: pension smoothing, an accelerated expiration of the employee retention tax credit (ERTC), and a reporting requirement on brokers of cryptocurrency transactions.
President Biden signed the BIF, H.R.3684, into law on November 15.
The three provisions of some interest to some NAIFA members are:
Pension smoothing: The BIF provides five more years of interest rate relief to defined benefit (DB) plan sponsors. The new law extends these smoothing provisions that were first enacted earlier this year in the American Rescue Plan. The provisions narrow the interest rate corridor to five percent for the plan sponsor’s choice of plan years 2020, 2021, or 2022 through 2025. The BIF keeps that corridor in place until 2030 and then widens the interest rate corridor gradually (at a rate of five percent per year) until it reaches 30 percent in 2035.
Cryptocurrency reporting: This provision gives Treasury the authority to impose reporting rules on brokers of cryptocurrency transactions. The reporting requirements would take effect in 2023, and the new law provides for fines and penalties for failure to report.
ERTC: The CARES Act (enacted into law in 2020) included the ERTC, a tax credit refundable against payroll tax obligations, designed to help employers keep employees on the payroll during the pandemic. The ERTC was extended, most recently until December 31, 2021, but the BIF accelerated the expiration of the ERTC back to September 30, 2021.
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
DOL Announces Extension of Non-Enforcement of Fiduciary Rules
On October 25, the Department of Labor (DOL) announced, in Field Assistance Bulletin (FAB) 2021-02, that it would extend its non-enforcement policy with respect to Prohibited Transaction Exemption (PTE) 2020-02. The non-enforcement policy with respect to PTEs against investment advice fiduciaries will now go through January 31, 2022, assuming those fiduciaries are working in good faith towards compliance with the PTE. It was initially set to expire on December 21, 2021. In addition, DOL will not enforce PTE 2020-02 specific documentation and disclosure requirements for rollovers through June 30, 2022.
DOL explained its decision as follows:
“On Dec. 18, 2020, the department adopted Class Prohibited Transaction Exemption 2020-02, “Improving Investment Advice for Workers & Retirees,” a new exemption under the Employee Retirement Income Security Act and the Internal Revenue Code for fiduciaries who provide investment advice to ERISA-covered pension plans and individual retirement accounts. This exemption became effective on Feb. 16, 2021, but the department provided transitional relief through Dec. 20, 2021, which relieved fiduciaries of the obligation to comply fully with many of the exemption’s conditions during that period.
“The department understands that the Dec. 20 expiration date of the current transitional relief poses practical difficulties for financial institutions. These institutions have expressed specific concern that they would incur significant additional costs to distribute disclosures because Dec. 20 does not align with their regular distribution cycle for disclosures. They also have asserted that the expiration date would make it difficult to conduct the required retrospective review on a calendar-year basis. In addition, financial institutions maintain that they face significant challenges in implementing the rollover documentation and disclosure requirements in a sufficiently automated and systematic manner by the Dec. 20 deadline and that these challenges and concerns may delay their ability to rely on the exemption as the department intended.
“The class exemption provides meaningful protections for individual investors, and we continue to emphasize the importance of compliance,” said Acting Assistant Secretary of Labor for Employee Benefits Security Ali Khawar. “Based on concerns raised, we’ve concluded that providing additional transition relief for financial institutions that are working in good faith to build systems to comply with the exemption conditions is appropriate.”
“FAB 2021-02 provides that from Dec. 21, 2021, through Jan. 31, 2022, the department will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently, and in good faith, to comply with the Impartial Conduct Standards (i.e., best interest, reasonable compensation and without misleading statements) for transactions exempted in PTE 2020-02. In addition, the department will not treat such fiduciaries as if they were violating the applicable prohibited transaction rules. Finally, the department will not enforce the specific documentation and disclosure requirements for rollovers in PTE 2020-02 through June 30, 2022. However, all other requirements of the exemption will be subject to full enforcement on Feb. 1, 2022.”
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
House BBB Bill Contains New Federal Paid Leave Program
The pending Build Back Better (BBB) reconciliation bill, H.R.5376, contains provisions creating a new federal paid leave program. The program would provide paid leave for up to four weeks to partially replace lost compensation of up to $62,000 for those who qualify for FMLA leave:
A new entitlement program, the federal paid leave program, would provide wage replacement for low-to-middle-income workers paid for from U.S. general revenues. The program would be administered by the Social Security Administration, which would receive a bulk-up in its funding to pay for the cost of setting up and administering the program.
The program would be open to workers who qualify for Family and Medical Leave (FMLA) time off—and the House bill expands the qualification standards for FMLA leave (largely to accommodate the need to care for extended family (or family-like) members. Such workers would apply to the federal government for the leave. Anti-fraud and abuse provisions are built into the program.
Benefits would be available for up to four weeks in a one-year period. They would be based on “care hours”—time a worker needs to take off to care for him/herself or a qualifying family member—that are not compensated under an employer’s or a state’s paid leave program.
The program would pay 90 percent of the lost wages for a worker earning less than $15,082/year; 73 percent for compensation between $15,082 and $34,208; and 53 percent for lost wages between $34,208 and $62,000. While those earning more than $62,000 could apply for these benefits, only the first $62,000 of lost compensation will be considered in calculating the benefit.
An employer that offers paid FMLA leave could apply for a federal grant equal to 90 percent of the cost of the paid leave program, if the program is available to all of its workers, if the worker’s job (or an equivalent one) is guaranteed after the leave ends, and if the program’s benefits are as at least as generous as those offered under the federal program. Similar reimbursement is available to the States that are currently operating paid leave programs.
Prospects: The paid leave program is at risk of being dropped from a final package. A challenge to it under the reconciliation law’s Byrd Rules is expected. And even if it survives that challenge, the program is opposed publicly by at least one Senate Democrat (Sen. Joe Manchin (D-WV). Sen. Manchin believes a federal leave program is inappropriate to include in a partisan reconciliation bill, thinks it would be better as a bipartisan employer-employee program and is concerned about creating a new entitlement program when existing programs (Social Security and Medicare) face insolvency in just a few years. So far, Sen. Manchin’s vote for the reconciliation bill seems uncertain if it includes a federal leave program.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
Excluded from House BBB Bill, Proposal to Annually Tax Unrealized Investment Gains Is Not Dead
Negotiators left out of the Build Back Better (BBB) reconciliation bill the proposal to tax billionaires’ annual gains on capital assets, even when they have not been sold or traded (realized). But the proposal’s author, Sen. Ron Wyden (D-OR), vows to keep trying to enact it, sooner rather than later.
The proposal upends a basic tax law principle: that gains are not subject to income tax until they are realized. Thus, under current law and tax policy, annual gains on investments are not taxed unless those investments are sold or traded (or otherwise gain is realized).
The Wyden proposal is aimed at the ultra-rich in its current form but was applicable to a far wider range of taxpayers in its first discussion draft released two years ago. It is premised on the notion that with the existence of step-up in basis rules, investment gains can and do escape taxation completely if the investments are held until death. Sen. Wyden and those who support his proposal think this is unfair and a boon to “the rich.”
As it is currently constructed, the Wyden proposal would force very rich people (taxpayers who earn $100 million or more for three consecutive years, or who hold $10 billion or more in assets) to pay tax on their investment gains on an annual basis, even if the investment gains are not realized (i.e., sold or traded). There are special rules involving additional tax at the time of sale for hard-to-value investments, like real estate or artwork.
The proposal applies to “capital assets;” i.e., assets on which gains are taxed under capital gains tax rules. That excludes life insurance and annuities as a general rule. However, the Wyden proposal specifically includes private placement life insurance and annuities in the universe of assets that would be subject to this new tax rule.
The Joint Committee on Tax (JCT) estimated that this Wyden proposal would raise $557 billion over ten years. And most of that revenue—$346 billion—comes in the early years.
Prospects: It appears unlikely (but not impossible) that the Wyden proposal will be included in a final version of the BBB reconciliation bill. But it raises a whole lot of revenue. And with spiraling deficits, a continuing interest—especially on the left—in “taxing the rich,” and a likely effort to extend expiring new social spending programs within another couple of years, the Wyden proposal is not dead.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
DOL/EBSA Proposes ESG Rule
On October 13, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) proposed a rule that would allow fiduciaries working for retirement investors to consider environmental, social, and corporate governance (ESG) factors in advising on the selection of retirement investments. The proposed rule would reverse a Trump-era regulation that prohibited consideration of ESG factors unless they were key financial factors.
The proposed EBSA rule is in response to a Biden executive order that instructed the agency to propose a rule that would “suspend, revise or rescind” the Trump-era ESG regulation. This past March, EBSA announced it would not enforce the Trump-era rule.
The newly-proposed rule specifies that climate change and other ESG factors can be considered when assessing a fund’s projected returns. It notes that failure to consider any factor that is financially material could put plan participants and beneficiaries at risk, and that ESG factors—especially those related to climate change—can be financially material.
“Climate change is particularly pertinent to the projected returns of pension plan portfolios that, because of the nature of their obligations to their participants and beneficiaries, typically have long-term investment horizons,” the proposed rule states. “The effects of climate change such as sea-level rise, changing rainfall patterns, and more severe droughts, wildfires, and flooding are expected to continue to pose a threat to investments far into the future.”
The proposed rule would also eliminate special standards for ESG funds to be offered as qualified default investment alternatives (QDIAs). QDIAs would be subject to the same “financially material” analysis as is imposed on all other types of funds. In addition, the proposed new rule would eliminate the Trump-era rule safe harbors for fund managers who choose not to participate in shareholder voting and documentation requirements that would have to be provided when casting ESG-related votes.
Prospects: The proposed ESG rule is open for public comment until mid-December. A final rule is expected early in the new year.
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
IRS Announces 2022 Retirement Savings Contribution and Benefit Limits
On November 4, the Internal Revenue Service (IRS) announced inflation-adjusted retirement plan contribution limits for 2022. The announcement came in Notice 2021-61.
The limits are:
- The individual contribution limit for 401(k) plans goes to $20,500, up from $19,500 in 2021.
- The annual benefit under a defined benefit (DB) plan increases from $230,000 in 2021 to $245,000 in 2022.
- The section 415(c)(1)(A) defined contribution (DC) plan limit grows from $58,000 in 2021 to $61,000 in 2022.
- The section 402(g)(1) limit on elective deferrals goes up by $1,000, to $20,500.
- The DB plan compensation limit increases from $290,000 to $305,000.
- The compensation amount used to determine “highly compensated employee” goes to $135,000 (from $130,000).
- The catch-up contribution limit for persons aged 50 or over remains at $6,500.
- The SIMPLE account limit grows by $500 to $14,000.
- The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract increases from $135,000 to $145,000.
- The income limit on contributions to Roth IRAs goes up to $204,000 from $198,000 for married taxpayers, and to $129,000 from $125,000 for single taxpayers—that results in a gross income phase-out range for taxpayers contributing to a Roth IRA going from $204,000 to $214,000/married and from $129,000 to $144,000/single.
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
Opposition Emerges to Eased Retirement Plan Notarization Rule
The Internal Revenue Service (IRS) is considering a rule that would make permanent its temporary pandemic-triggered authorization to witness spousal consent forms (to waive automatic survivor benefits) via video chat software. Some opposition to allowing electronic waivers is beginning to emerge. However, the retirement savings community not only supports making the rule permanent, it is also asking the IRS to do so.
The requirement that a waiver of spousal survivor rights to retirement plan benefits must be signed and notarized in person is designed to protect spousal benefit rights, commenters are saying. “Most private-sector pension plans and 401(k)s in the U.S. are required to provide automatic survivor benefits,” they say, with the only way to waive that benefit coming from a signed spousal consent form that is witnessed by a plan administrator or notary public. Due to the covid-19-triggered shut-down and its attendant logistical difficulties, the IRS allowed these waivers to be witnessed via video chat.
Now, the IRS is seeking comments on whether to make this temporary electronic notarization authorization permanent. Most industry groups, including NAIFA, support electronic waiver authority, but some pension rights and women’s groups are pushing back. They say electronic waiver authority puts women at risk. “Signing away your right to these incredibly important benefits like survivor pension benefits or the remaining balance of a 401(k) is an incredibly big deal,” said a Pension Rights Center spokesperson. “A pension earned in marriage is a marital asset and the most valuable financial asset that a couple is likely to own other than their home.”
While remote witnessing is more convenient and non-problematic when dealing with spouses who are not at odds with one another, it makes it easier for divorcing (or other warring) spouses to overcome the protection afforded by having a waiver witnessed in person, opponents say.
Pension advocates, on the other hand, say that technology has advanced enough to be sure that the protections remain in place and that electronic notarization can often be more efficient while remaining secure and reliable. “We do so many things online now, and we’ve had 18 months of experience with this already. It’s time to make it happen,” said Andy Banducci, a senior vice president for retirement and compensation policy at the ERISA Advisory Committee.
Prospects: This issue is under active consideration at the IRS, but a decision is not expected in the near future.
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
Companion Bill to Reform Index-Linked Annuities Registration Introduced in Senate
A bipartisan companion bill, S. 3198, to direct the Securities and Exchange Commission to issue a new form for annuity issuers to use when filing registered index-linked annuities has been reintroduced in the Senate.
Senators Tina Smith (D-MN) and Thom Tillis (R-NC) introduced the Senate version of the bill on November 4. The House previously introduced the Registration for Index-Linked Annuities Act on July 30.
Under current SEC rules, registered index-linked annuities and other new products must be registered using forms designed primarily for equity offerings and therefore require extensive information that is not relevant to prospective annuity purchasers. These forms also require disclosure of financial information prepared in accordance with generally accepted accounting principles, which many insurers are not otherwise required to produce.
The bill is aimed at addressing the misalignment between the current registration forms used for registered index-linked annuities and the information needed by investors who might benefit from purchasing these products.
Prospects: Although RILA was introduced in both the House and Senate during the previous congressional session, the companion bills remained in committee without action being taken due to the focus in the last Congress on Covid relief. Currently, NAIFA is working with coalition members to identify bill co-sponsors in the House and Senate to build support for the legislation.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org
NAIFA Submits Letter to Treasury Secretary in Support of NARAB
On October 28, NAIFA joined with coalition partners to submit a letter to Treasury Secretary Janet Yellen encouraging the implementation of the National Association of Registered Agents and Brokers Reform Act (NARAB) through the nomination of individuals to serve on the Board of Directors.
NARAB was enacted in January 2015 to provide a national, standardized process for insurance agents and brokers to obtain eligibility to do business outside of their home states. Under the terms of the legislation, any individual or entity that is licensed in his, hers or its State of domicile and that satisfies the NARAB membership criteria established by the NARAB Board would be eligible for licensure for the same lines of authority in any other State provided that the non-resident state licensure fees are paid through NARAB. The legislation enjoyed strong, bipartisan support in Congress and remains widely supported today.
NARAB requires the establishment of a Board of Directors - consisting of thirteen members appointed by the President with the advice and consent of the Senate - that is charged with governing and supervising the activities of the organization. Unfortunately, at this time, no NARAB Directors have been confirmed in the six years since the law establishing it was passed. Nominees were sent in 2016; however, the Senate was not able to confirm them prior to the end of that Congress.
NAIFA stands committed to working with the Biden Administration on the implementation of NARAB to the benefit of all engaged in the insurance space – from the consumers to producers.
Prospects: NAIFA actively supported the creation of NARAB and has worked with every successive administration to implement NARAB. NAIFA will continue to work with the Federal Insurance Office, the Department of the Treasury, and the entire Biden Administration to push for the creation of the NARAB Board.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
NAIFA Submits Comments to the U.S. Senate Special Committee on Aging
NAIFA submitted comments to the U.S. Senate Special Committee on Aging regarding an inquiry by Chairman Bob Casey (D-PA) and Ranking Member Tim Scott (R-SC). Both committee leaders are working together in a bipartisan way to examine issues that are of importance to the health, economic security, and well-being of older Americans and their families.
One outcome of these examinations is an annual report that seeks to inform policymaking in Congress. This year, the committee's report will focus on improving financial literacy and decision-making for older adults and people with disabilities. NAIFA’s vast membership network is an integral part of providing the qualified financial advice required for all Americans.
NAIFA’s comments speak to the importance of sound financial advice for seniors as well as proper protection to mitigate financial fraud and risk. NAIFA is proud to continue its collaboration with the Special Committee on Aging to help ensure America’s seniors receive the benefits and care they’ve earned.
Prospects: NAIFA has helped lead the way for senior financial protection at the federal level by working closely with Congressional lawmakers on both the Senior Safe Act, signed into law in 2018, and the Senior Security Act of 2019. NAIFA will continue working with federal legislators to assist in producing legislation that benefits seniors across the country.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org
