September 2021 Issue:
Congress Approves Budget Resolution, Sets Up Reconciliation Bill
On August 24, the House of Representatives joined the Senate in approving a fiscal year (FY) 2022 budget resolution. The budget resolution authorizes a reconciliation bill of up to $3.5 trillion, with half of that amount required to be offset. That means half of that spending could add to the federal deficit.
The budget resolution with its reconciliation bill authorization is not law, and the reconciliation instructions are not binding on the committees of jurisdiction that are writing the actual legislation. However, what is binding is that for the reconciliation bill authorized by the budget resolution to survive any challenges to it, it may not exceed $3.5 trillion, only $1.75 trillion may be added to the deficit, and it must comply with the budget law’s “Byrd rules.”
The “Byrd rules” (named for their author, then Sen. Byrd (D-WV) include a requirement that no provision in the reconciliation bill lose federal revenue outside of the budget window, that no provision impacting Social Security may be in the bill, that each provision must impact federal revenue inflow and/or outgo, and that each provision must be primarily budget-based—that the policy of any provision must be “incidental” to its budgetary impact. These rules will have an enormous impact on what can and cannot go into the bill.
The reconciliation bill has procedural protections that prevent a Senate filibuster. Therefore, it can pass with a simple majority. That means Democrats can pass the bill without any GOP votes. However, with only 50 Senate Democratic votes (with Vice President Harris breaking a tie), that means Senate Democrats must be unanimous in support of the bill when it gets to the Senate floor for a vote.
NAIFA has much at risk in the emerging reconciliation bill. There will be at least $1.75 trillion in new revenue, much of that coming from tax increases on corporations and “the rich.” There will be an attempt (that may fail due to Byrd rule impact) to include the PRO Act’s worker classification provisions. There is a new federal paid leave program that could have a significant and adverse impact on disability income insurance. Health insurance—both individual and employer-provided—will be impacted by the reconciliation bill’s Medicare expansion and Affordable Care Act (ACA) enhancement provisions. There will likely be retirement security provisions in the reconciliation bill, including one that will require all but the smallest employers to establish an automatic enrollment/escalation IRA or 401(k) plan. More information on all these risks and proposals follows.
The process of writing the reconciliation bill is underway. All the House committees of jurisdiction have been instructed to complete their work on their pieces of the reconciliation bill by September 15. That deadline may not be met. Similarly, the Senate committees of jurisdiction are operating under instructions to have complete legislative proposals on their areas of jurisdiction by September 15. Congressional leadership wants the legislation to be final and ready for House and Senate votes by early October. The chances of meeting these deadlines are slim, but not impossible.
Prospects: It is difficult to see how Congressional Democrats find the unanimous/near-unanimous consensus they need to pass this reconciliation legislation. It is equally difficult to predict that they will not find that consensus. Odds are exceedingly high for both approval and failure of the reconciliation bill. Bottom line is that we just don’t know at this point how likely it is that this bill will pass or fail. But we do know that NAIFA will continue to fight hard to be sure that any provision that impacts NAIFA members and/or their clients will be as favorable (or least harmful) as possible.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
September Brings Major Issues, Short Timeframe to Congress
September is a short month for legislative work—and the agenda is loaded with must-do (and time-consuming) legislation. The government must be funded by October 1st. The debt limit must be addressed by “sometime in October.” President Biden’s Build Back Better agenda, reaction to Texas’s new abortion and voting procedures laws, defense authorization, and other issues are all vying for urgent Congressional attention this month. And Congress is in session for only about eight days total before these deadlines start to hit.
Of most interest to NAIFA members is the interaction between these “must” legislative priorities and the emerging Build Back Better reconciliation legislation. The reconciliation bill is currently in the process of being written and is subject to a self-imposed (by Congressional leadership) early October deadline for completion. But meeting that deadline means having to negotiate what supporters call a “transformative” $3.5 trillion package at the very same time lawmakers must tackle as-yet-unagreed-to government funding levels for fiscal year (FY) 2022, stave off a catastrophic default by the U.S. on its debt by addressing the statutory debt limit, reacting to high-profile issues like the new Texas laws, the U.S. withdrawal from Afghanistan, and other high-profile and time-sensitive issues like, defense authorization and the traditional infrastructure bill.
Lawmakers will try to deal with all these issues in the week or two they have available for doing so, but the task is daunting in the extreme, and few in Washington—on or off the Hill—think it is possible.
So, here’s where we are as of mid-September:
- House and Senate committees of jurisdiction are scrambling to meet a (largely artificial) September 15 deadline by which their respective pieces of the reconciliation bill must be submitted to the Budget Committees for packaging into a reconciliation bill. It’s a top priority, but it’s also a massive bill and a staggering undertaking. Chances of meeting the September 15 deadline are not zero, but those inclined to bet on the outcome are putting their stakes on the deadline slipping, perhaps badly. There’s simply too much to negotiate (and too much current disagreement), both in terms of specifics and in terms of the overall size of the package.
- The government shuts down at midnight September 30 unless Congress enacts FY 2022 funding legislation. Right now, there is no agreement on funding levels for FY 2022, so the high likelihood is that Congress will approve a “continuing resolution” (CR) that will fund the government at FY 2021 levels, probably through mid-December. However, leadership wants to add about $20 billion in new funding—for bipartisan priorities like disaster aid to the victims of Hurricane Ida and the wildfires in California, and no Democrat is satisfied with FY 2021 funding levels. This will be a battle, with little time for resolution.
- The U.S. will run out of cash and borrowing authority by some point in October, said Secretary Treasury Janet Yellen on September 8. To avoid default—something virtually every economist warns would be economically catastrophic—Congress will have to either suspend or raise the statutory limit beyond which Treasury cannot borrow. Republicans have already said they will not vote for a debt limit increase/suspension because it would “free” Democrats to enact the (potentially) $3.5 trillion in new spending in the reconciliation bill. Democrats say the debt limit is impacting spending and tax decisions made when Congress and Presidency were in GOP hands. Right now, it appears the debt limit issue will be included in the CR, adding to the controversy surrounding that must-pass bill.
- There are other issues that are high priority and time-sensitive that Congress must deal with in this short month, too—bills like the traditional infrastructure bill that the Senate has already passed, and the House must take up by September 27. Dealing with these bills will make it that much harder to carve out the time needed to deal with the reconciliation bill.
NAIFA has many issues in play in the reconciliation bill. Information on what those issues are and where they stand in the legislative process follows.
Prospects: So far, things are on track with the reconciliation bill, but soon lawmakers will have to vote on actual legislation rather than seek to shape it. Things will likely start to slip, timewise, sooner rather than later. Most Washington insiders believe that it will be well past October by the time the reconciliation bill is done—but they also acknowledge that the commitment to the bill, and to passing it as soon as possible, among Democrats is such that no one is willing to bet against President Biden and the Democratic Congressional leadership. At a minimum, though, we should know by the end of the month whether we are still on a break-neck speed pace to get the reconciliation bill to the President for signature into law, or if instead, we’re looking at more time needed to complete the process.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
Reconciliation Bill May Include Almost $2 Trillion in New Taxes
House Ways & Means Committee Democrats met Sunday, September 12, to review a proposed package of tax increases aimed at offsetting the cost of the emerging $3.5 trillion reconciliation bill. The package—which is not final, nor has it yet been approved—raises about $1 trillion from “rich” individuals and about $900 billion from big corporations.
Among the proposed tax provisions that could impact NAIFA members, and their clients are:
- The top corporate rate would go up to 26.5 percent for businesses with more than $5 million in income; the rate would remain at 21 percent for businesses with income less than $5 million and would drop to 18 percent for corporations with income below $400,000. These new rules would raise $540 billion, according to preliminary estimates.
- The top individual tax rate would go up from 37 percent to 39.6 percent. Preliminary estimates suggest that this change in the tax law would raise $170 billion.
- The top capital gains tax rate (applicable only to those earning more than $400,000) would go up to 25 percent, raising $123 billion), the estimators say. This would apply to gains realized in the year after the date of introduction (so, 2022).
- The Section 199A 20 percent deduction for non-corporate income would be capped at $400,000 ($500,000 for joint filers). Preliminary estimates peg this as a $78 billion revenue raiser.
- The potential tax package would change IRA rules to shut down what some are calling “mega-IRAs.” The rules changes would prohibit further contributions once IRA account levels and defined contribution account balances combined exceed $10 million.
The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). If an individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA, and defined contribution account balance exceeds the $10 million limit.
In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule above.
The legislation also adds a new annual reporting requirement for employer-defined contribution plans on aggregate account balances in excess of $2.5 million. The reporting would be to both the Internal Revenue Service, and the plan participant whose balance is being reported.
This proposal could raise some $4 billion. The effective date is tax years beginning after December 31, 2021.
- There is another new IRA proposal that restricts the ability to roll over traditional IRA amounts to Roth IRAs. The bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031. Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
- Additional new IRA restrictions include a rule that would prohibit conditioning an IRA investment on the investor’s education status or ownership interest in the asset. The new rules would also extend the statute of limitations for IRA rule noncompliance from three years to six years.
- The net investment tax would be expanded to cover net business income for single taxpayers earning more than $400,000 ($500,000/joint filers). This change would raise $252 billion.
- There would be a new three percent surtax on individual income in excess of $5 million (joint filers/$2.5 million for individual filers). This “wealth tax” would raise $127 billion.
- A temporary current law denial of a deduction for business losses in excess of the taxpayer’s business income would be permanently disallowed, raising $167 billion.
- The expiration of current law’s estate tax exemption ($24 million for married taxpayers) would be accelerated—currently, it expires at the end of 2025; the proposal moves the expiration date to the end of 2021. Thus, under this proposal the estate and gift tax exemption would revert to its 2010 level of $5 million/individual (indexed). This change would raise $50 billion.
- This provision adds section 2901, which pulls grantor trusts into a decedent’s taxable estate when the decedent is the deemed owner of the trusts. The provision also treats sales between grantor trusts and their deemed owner as equivalent to sales between the owner and a third party. The amendments made by this section apply only to future trusts and future transfers. These rules changes could raise $7 billion, estimators said.
- Estate tax valuation rules applicable to passive assets would be changed. Generally, the proposal would clarify that when a taxpayer transfers nonbusiness assets, those assets should not be afforded a valuation discount for transfer tax purposes. Nonbusiness assets are passive assets that are held for the production of income, and not used in the active conduct of a trade or business. Exceptions are provided for assets used in hedging transactions or as working capital of a business. A look-through rule provides that when a passive asset consists of a ten percent interest in some other entity, the rule is applied by treating the holder as holding its ratable share of the assets of that other entity directly. The amendments made by this section apply to transfers after the date of the enactment of this Act. Revenue to be raised from these changes would amount to $20 billion.
Additional proposals may emerge over the course of this process. For example, the most recent package does not include changes to rules governing the deductibility of state and local taxes (SALT), and that is something a number of high-tax-state Democratic Members are insisting on in order to vote in favor of the bill. It is also possible that the industry-supported stabilization proposals (policy reserves and DAC) will in some form also make it into the final package.
Prospects: The Senate Finance Committee has not agreed to many of these changes, and so further (difficult) negotiations are expected, even if Ways & Means Democrats agree to this package. The Senate offset package is expected on or around September 15. Final Ways & Means Committee votes on the package are also expected on or around September 15.
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
Mandatory Auto-Enroll Retirement Plans, Expanded Saver’s Credit in Reconciliation Bill
The House Ways & Means Committee included two new retirement savings provisions in their piece of the reconciliation bill that they marked up September 9-September 15. The new provisions, approved on September 9 by a 22 to 20 committee vote, include a mandate that most employers who do not currently offer retirement savings plans, set up a payroll deduction IRA or 401(k) type plan with automatic enrollment/escalation features for their workers, as well as an expansion of the Saver’s Credit to make it refundable.
One retirement savings proposal would require all employers with five or more employees that do not already have a retirement savings plan to establish a plan or an IRA, and automatically enroll their workers (generally via payroll deduction), starting at 6% deferral and increasing to 10%, with the ability of the employees to opt-out or down. Employers are not required to contribute to the plan or to the IRA on behalf of their employees. Employers that have been in existence for two years or less would be exempt from the mandate to offer their employees one of these retirement savings options.
Generally, the new mandatory plans would be set up so that unless employees change, the structure workers would contribute (to an IRA) or defer (into a 401(k)-type plan) six percent of their compensation in the first year, seven percent in the second year, eight percent in the third year, nine percent in the fourth year, and 10 percent in year five and thereafter. They could contribute/defer more—up to 15 percent. Employers could adjust required contribution/deferral levels to accommodate overall contribution/deferral limits. They could also themselves establish IRAs for their employees, so long as employees always have the option to roll over employer-established IRA account balances into an IRA of the worker’s own choosing. Unless otherwise selected by the worker, these automatic IRA/401(k) deferral accounts would be Roth accounts. An employer would be required to offer payroll deduction for contributions to IRAs.
Virtually all employees will have to be eligible to participate in these mandatory plans—there are exceptions only for part-time workers who have worked for the company for less than two years and/or for fewer than 500 hours/year, workers under the age of 21, and seasonal workers. The proposal also includes notice and disclosure provisions, investment account choice rules—including a requirement that a 401(k) plan includes in its investment choice menu the option to put 50 percent of the plan participant’s account balance in a lifetime annuity, special rules for controlled groups, and a prohibition against charging workers “unreasonable” fees.
The mandatory plan proposal also includes a safe harbor for employers who use a state-established retirement savings program. It grandfathers existing employer-sponsored plans.
The proposal also includes an enhanced tax credit for small businesses (those with 25 or fewer employees) who establish these auto-enroll/escalation plans that go beyond the employee-only plan design. The tax credit would be available for four years (up from current law’s two years).
The auto-enroll/escalate plan provisions would be enforced by a tax penalty. The penalty would be $10 per day per employee for up to 30 days (or a potential tax penalty of $900 per employee for each day the employer does not offer the automatic enrollment plan to a particular employee).
These automatic enrollment/escalation provisions would take effect for plan years beginning after December 31, 2022.
The retirement savings provisions also include an expansion of the current law Saver’s tax credit. The new provision would make the Saver’s credit refundable.
Taken together, these retirement savings provisions were projected to lose about $48 billion in federal revenue over the ten-year period covered by the reconciliation bill.
Prospects: The provisions were written in conjunction with Senate tax writers and are not expected to change materially when the Senate takes up the reconciliation legislation later this month. Of course, it is still an open question whether the Democrats can muster the unanimous support they need in the Senate or the all but three Democrats who must vote “aye” in the House in order to pass the reconciliation bill. Also, a reminder that provisions in reconciliation bills must satisfy the “Byrd” rules.
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
Democrats Debate How Much They Can Do on Health Care in Reconciliation
House, Senate, and Administration Democrats are furiously debating how far they can go on health issues in the emerging reconciliation legislation. Progressive Democrats (especially in the House) want to make permanent the Affordable Care Act (ACA) subsidies in the law that are currently slated to expire. They also want to expand Medicaid, and to allow people aged 60 to 65 to buy into Medicare. However, revenue concerns have scaled that wish list back, leaving in play new Medicare vision, hearing, and dental benefits—with deferred effective dates—and subsidies for ACA and Medicaid-eligible health coverage.
The House Ways & Means Committee shares jurisdiction over Medicare, Medicaid, and ACA premium tax credits with the Energy & Commerce Committee. The Ways & Means proposal, which the committee approved on September 10 by a 24 to 19 vote, would add new vision, hearing, and dental benefits to Medicare Part B. The benefits are:
- In January 2028, Medicare Part B would cover a limited number of preventive and screening services (including oral exams, dental cleanings, and ex-rays) provided by a dentist or in an oral health professional’s office, and fluoride treatments. Basic treatments could include basic tooth restoration, periodontal services, tooth extractions, and disease management services. Major treatments could include major tooth restorations, periodontal services, bridges, crowns, and root canals. There will also be a limited dentures benefit. Cost-sharing for major services would be phased in over time, reaching 50 percent in 2032.
A new subsection (z) would be created to pay for dental and oral health services. There would be a 20 percent cost-sharing charge for preventive and screening services as well as for basic services.
- As of October 2023, Medicare would cover aural rehabilitation and treatment services, including coverage for hearing aids (once every five years) as a prosthetic device under Medicare Part B.
- As of October 2022, Medicare would pay for one routine eye examination and one session of contact or eyeglass fitting every two years, with beneficiaries responsible for a 20 percent cost-sharing amount. The provision also covers up to $85 for the cost of either eyeglass frames and $85 towards lenses, or $85 towards contact lenses.
The Ways & Means Committee approved several ACA extensions and enhancements. These include:
- Making permanent the ACA premium tax credits (PTCs) as temporarily established in the coronavirus response legislation (PTCs for households below 400 percent of the federal poverty level (FPL).
- Making PTCs available to some households with incomes above 400 percent of FPL.
- In determining whether employer-provided health insurance is “affordable” under the ACA, allowing employers to require their workers to pay up to 8.5 percent of their compensation for their health insurance premium.
- Reducing cost-sharing requirements for health insurance purchased through an ACA marketplace by people with household incomes below 138 percent of the FPL if those individuals do not qualify for Medicaid.
- Making the health coverage tax credit permanent and increasing the amount of qualified health insurance premium covered by the credit from 72.5 percent to 80 percent.
- Providing $10 billion per year to the states to establish a state reinsurance program or to provide assistance in reducing their citizens’ out-of-pocket health costs—this provision also contains language to establish a reinsurance fund within the Department of Health and Human Services (HHS) for people in states that do not use this $10 billion/year funding.
The Ways & Means package also authorizes the government to negotiate the price of prescription drugs provided through Medicare. But it does not include a provision allowing buy-in to Medicare by those aged 60 to 65.
The Energy & Commerce Committee is also examining the health issues. Their proposal would create a new federal government health plan for Medicaid beneficiaries living in the 12 states that did not expand Medicaid under the ACA.
The new government program would start with a transition period during which there would be subsidies for private coverage through ACA marketplaces. The new government program would begin in 2025. The health insurance industry has expressed concern about this proposal, fearing it will lead to a government option for all purchasers of health insurance through ACA exchanges.
Prospects: Both the Medicare expansion provisions and the subsidized health insurance for Medicaid-eligible people in non-expansion states are among the most controversial, not because many Democrats oppose them, but because they are too expensive to fit comfortably into even the $3.5 trillion package authorized by the budget resolution. And the size of the overall package may have to shrink to win all 50 Senate Democrats’ votes. So, the fate of the health care package, including Medicare expansion and ACA enhancement, is still very much up in the air.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
Reconciliation Bill Includes Complex, Big Federal Paid Leave Program
The Ways & Means Committee’s portion of the reconciliation bill includes a big, complex new federal paid leave program. The committee approved the program on a 24 to 19 vote on September 9. The program could have a substantial adverse impact on employer-provided disability income insurance.
Generally, the program would provide a government-paid benefit, for up to 12 weeks, for leave eligible to be taken under the Family and Medical Leave Act (FMLA). When fully operational, the benefit, which is scaled to income, would pay weekly benefits of between 85 percent and five percent of wage replacement. The highest wage replacement benefit would go to the lowest-income workers; the lowest wage replacement benefit level would go to higher-income individuals. Specifically, the bill calls for 85 percent wage replacement for those earning $15,080 or less; 75 percent wage replacement for those earning between $15,080 and $34,248; 55 percent for income between $34,248 and $72,000; 25 percent for incomes between $72,000 and $100,000; and five percent for those earning more than $250,000. The benefits would be calculated based on the number of uncompensated caregiver hours a person delivers on a weekly basis, for up to 12 weeks. The benefits would become available only after the applicant has exhausted all employer-provided paid leave.
Eligibility for the benefit would depend on the number of uncompensated caregiver hours a person has. To qualify for the benefit, the person must provide at least four caregiver hours to a family member (or someone equivalent to a family member in terms of connection) in connection with FMLA-qualified sick or family care conditions (e.g., the worker’s own or family member’s sickness, injury, addition of a new child (through birth or adoption) to the family, bereavement, military service, etc.). The Ways & Means bill expands the FMLA-authorized group of people for whom a paid leave benefit applicant is caring to include family members beyond spouse or child. It also adds bereavement to the list of reasons for taking paid FMLA leave.
The bill also includes a process by which employers that provide FMLA-paid leave can be reimbursed, via applying for a grant from the federal government, for 90 percent of the employer’s cost for providing the leave. To qualify for the 90 percent reimbursement, the employer must certify that its own paid leave program pays benefits that are at least as generous as the federal program, guarantee that the on-leave worker will get his/her job (or an equivalent one) back when leave ends, maintain the worker’s group health insurance, and cover all the employer’s workers (including part-timers). The program also includes a $1,000 application (for the grant) fee and notice and right-to-appeal rules.
It appears that this program, if it is enacted into law, could have a substantial impact on both employer-provided disability income (especially short-term) programs, and on individual DI coverage as well.
Prospects: Prospects for the reconciliation bill in which this new federal paid leave program is included are mixed. The reconciliation bill is a top priority for both President Biden and Congressional Democrats, but its enactment will require unanimous Democratic support in the Senate and near-unanimous Democratic support in the House (just four “no” votes—out of 220—from House Democrats would cause the bill to fail). But paid leave is among the highest of reconciliation bill priorities, and so if the reconciliation bill itself passes, it is likely that at least some version of a federal paid leave program will be included in it.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
SS/Medicare Trustees Issue 2021 SS/Medicare Solvency Reports
On August 31, the Social Security (SS) and Medicare Trustees issued their annual reports on the solvency status of the SS and Medicare programs. These annual reports include the initial impact of the pandemic (and the legislative response to it). Generally, the 2021 reports project that the Social Security Old-Age and Survivors Insurance (OASDI) trust fund will run out of reserves by 2033, that the Social Security Disability Insurance (DI) trust fund will run dry by 2057, and that the Medicare Part A Hospital Insurance (HI) trust fund will be insolvent in five years, in 2026.
The SS report indicates that unless legislative action is taken, Social Security retirement benefits will face an across-the-board cut of 22 percent in 13 years. Provider and insurer reimbursement rates would fall by at least nine percent in 2026 if the Medicare HI fund is permitted to reach insolvency.
There is legislation pending to address this problem. The legislation is a mixture of benefit cuts, tax increases, and eligibility modifications.
Prospects: For years now, the SS/Medicare trustee reports have projected insolvency of the SS and Medicare trust funds in future years. So far, the imminence of insolvency of any of the trust funds has not resulted in the systemic programmatic reforms that many in Congress (from both parties) think are required to restore the trust funds to a state of long-term financial stability. It is likely that it will be the same result this year.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org
NAIFA Attends NAIC and NCOIL Summer 2021 Annual Meetings
This summer, the NAIC, and NCOIL began ramping up their regulatory efforts after focusing much of the last year and a half on COVID-19. They each held hybrid summer conferences, which will likely continue into the November/December meetings. NCOIL legislator participation was at an all-time high, with 68 legislators from 29 states. The NAIC experienced a much smaller in-person conference with many regulators attending virtually due to state regulator travel restrictions. They also held many of their working group and subcommittee meetings in the weeks prior to the national conference.
Race and diversity, equity, and inclusion (DE&I) in insurance continue to be high on the priority list within both organizations. The NAIC and NCOIL will continue robust discussions about the use of DE&I data in rate making, affordable access to coverage, as well as the marketing of insurance products to communities of color. Additionally, NCOIL passed three DE&I resolutions related to rating factors in private passenger auto, life insurance, and access to insurance in general. There was also interest in examining the insurance product sales cycle to identify ways to address disparities in coverage.
Otherwise, states once again find themselves reacting to significant federal health legislation related to the No Surprises Act and scrambling to understand their role in enforcing the new and, in some cases, yet to be released rules. The Center for Medicare and Medicaid Services (CMS) presented before the NAIC Managed Health Care (B) Committee and expressed its commitment to Commissioners to create a collaborative regulatory approach. They emphasized that States will have primary enforcement authority over the Act's provisions whenever possible and stated they would work with regulators by encouraging a very transparent and open dialogue as the January 1st compliance deadline nears.
Both organizations continue to scrutinize the use of artificial intelligence (AI) in insurance, especially as it relates to DE&I and the use of credit scores, as well as the privacy and security of consumer information. A new private passenger market entrant, Root Insurance, raised eyebrows at the NAIC with a PR campaign called "Let's Drop The Score," which included a fake pizza restaurant across the street from the conference designed to attract regulators and attendees. They also had sidewalks around the conference stamped with the "Let's Drop The Score" slogan and large trucks displaying "End Discrimination" outside the venue. Root CEO Alex Timm later presented arguments pushing for a model law to ban credit scoring to the Race and Insurance Task Force.
NAIC Producer Licensing Task Force met on August 4th in lieu of the summer national meeting to update their charges. Forty states are now offering online licensing exams with enormous success and continued uptake by applicants. Previous concerns regarding exam security were discussed in greater detail with exam vendor Pearson Vue, describing their process to ensure the online test taker's integrity and exam results. The Committee also discussed their race and insurance charge and current action to address access and test bias concerns, with Virginia offering its process for exam question review. Lastly, the Task Force announced they are in the process of adding interested regulators and hope to get the Producer Licensure Uniformity and Uniform Education Working Groups up and running soon.
Finally, the NAIC is considering creating a new letter committee focused on innovation, cyber security, and technology. This new Committee will focus on consumer data ownership, including whether agents and brokers should share or further protect consumer data. There was also a discussion from concerned regulators and legislators about the scope and increase of the recent Ransomware attacks and whether the private market will offer meaningful coverage in the future.
NAIFA Staff Contact: Maeghan Gale – Policy Director – Government Relations, at mgale@naifa.org
NAIFA Board of Trustees Adopts Updated Anti-Rebating Policy
During its last meeting, the NAIFA Board of Trustees reviewed and unanimously adopted an updated Anti-Rebating policy. The primary changes focus on permissions for “value-added” services related to an insurance product. Today, with advances in FinTech, InsureTech, smart devices, and the Internet of Things (IoT), the dated regulations are limiting the use of modern products that aid in risk and loss mitigation, customer service and experience, and provide relevant additional value-added benefits to traditional insurance products. For example, smart watches, and smart home monitors can offer both insured and insurer advantages such as fire and flood monitoring, resulting in shorter loss notification times, and improved safety which in turn reduce risk, faster claim services, and even lower prices. Smartwatches can incentivize health habits and smartphone apps can provide enhanced financial wellness and education tools.
NAIFA recognizes that it is important to keep up with innovation, especially when there are many new developments designed to keep people healthy, and property safe and protected. Further, the rebating reform measures create exciting opportunities for NAIFA members as they will be able to increase their competitiveness as states adopt their own provisions. NAIC’s Updated Model for Unfair Trade Practices Act and NCOIL’s Rebate Reform Model Act also reflect this modern take on value-added services and anti-rebating practices.
NAIFA Staff Contact: Maeghan Gale – Policy Director – Government Relations, at mgale@naifa.org
Federal Regulators Release Proposed Rules to Implement Several Elements of the Surprise Billing Act
On September 10th, the Departments of Health & Human Services, Labor, and the Treasury jointly released proposed rules to implement several elements of the Surprise Billing Act. Most importantly, these proposed rules include the HHS proposed rules to effectuate insurer requirements to disclose agent/broker compensation in the individual and short-term, limited-duration health plan markets.
The proposed rules also include air ambulance reporting requirements that are necessary to effectuate the overall Surprise Billing regime with respect to such services and new enforcement rules.
Agent/Broker Compensation Disclosure: The proposed rules with respect to agent/broker compensation are relatively short and straightforward. They require insurers to provide disclosures of both –
- “Direct compensation” is defined to be any compensation paid by the insurer to the agent or broker that is directly related to the sale. The proposed regulations require the insurer to provide a chart that shows all such compensation the agent/broker is entitled to receive with respect to all plans sold by that insurer for which the customer is eligible. The regulations expect these disclosures to be made in chart form.
- “Indirect compensation” – defined as any/all other compensation for which the agent/broker may be eligible to receive – including “service fees, consulting fees, finders’ fees, profitability and persistence bonuses, awards, prices, volume-based incentives, and non-monetary forms of compensation.”
For new placements, the disclosures must be made prior to the policyholder’s making of a final enrollment decision; for renewals, the disclosures must be included in the renewal notice. If there is no renewal notice, then the disclosures must be included in the first invoice after the renewal date.
The compensation information must specify –
- the commissions paid by the issuer to an agent or broker for the applicable plans for which the producer has an appointment
- distinguish between new enrollment and renewal commissions and
- explain the qualifying thresholds for the payment of any indirect compensation.
Any information that is not captured on the commission schedule must be included in a supplemental disclosure.
Three other elements of the proposed rules are noteworthy. First, issuers will be required to submit reports to HHS detailing the direct and indirect payment arrangements they have in place.
Second, those reports also must include the compensation arrangements both with the placing producer as well as any compensation arrangements for managing general agents or other intermediaries between the retail producer and the insurer.
Third, the new transparency requirements apply with respect to contracts executed on or after December 27, 2021, between an agent/broker and a health insurance issuer and any “addenda or revisions to the material terms of a pre-existing contract” will be deemed the execution of a new contract.
Other Provisions Included in the Proposed Rules:
The proposed rules include an extensive set of new reporting requirements for group health plans, health insurance issuers, and providers of air ambulance services that will provide the requisite baseline for effectuating the Surprise Billing Act payment dispute resolution procedures for air ambulance services. For group health plans, the requisite information that must be submitted relates to each claim related to air ambulance services providing details of the claim and how it was resolved. The health plan may delegate this reporting obligation to an insurer or other third party by contract.
The new enforcement provisions generally are limited to health insurance issuers and health providers and facilities.
Prospects: The proposed rules are scheduled to be published in the Federal Register on September 16th and comments are due within 30 days of that publication.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org
