“After” Math

By Nevin Adams, EBRI


Last week, EBRI Research Director Jack VanDerhei(1) testified before the House Ways & Means Committee on the subject of “Tax Reform and Tax-Favored Retirement Accounts”, a hearing described as considering “…the current menu of options for retirement savings—both with respect to employer-based defined contribution plans and with respect to IRAs.” According to Committee Chairman David Camp (R-MI), the hearing was to “…explore whether, as part of comprehensive tax reform, various reform options could achieve the three goals of simplification, efficiency, and increasing retirement and financial security for American families.”

That hearing preceded by just a day Senate Budget Committee Chairman Kent Conrad’s (D-ND) unveiling of his Fiscal Commission Budget Plan (see link here).  That plan(2) referenced the original Bowles-Simpson Fiscal Commission’s “Illustrative” Tax Reform option under which the exclusion for employment-based health insurance would be eliminated, capping its value for five years and then phasing it out over 20 years, while retirement savings accounts would be consolidated, with a cap on tax-preferred contributions.(3)

While the prospects for actual legislation ahead of the November election seem unlikely, it is clear that concerns about the nation’s budget deficit will keep tax reform—and the tax status of workplace benefit programs—front-and-center in the weeks and months to come.

Appropriately enough, next month EBRI will host its 70th policy forum, titled “’After’ Math: The Impact and Influence of Incentives on Benefit Policy.” At this semi-annual policy forum, panels of experts will deal with a variety of pertinent and timely issues, including the potential impact of changes to current tax incentives for employee benefits, and the “true cost” of tax deferrals.

We’ll also talk about what 401(k)/defined contribution plans are delivering, and what individuals actually do after retirement with respect to their retirement savings, as well as optimal approaches on retirement income designs for defined contribution plans. We’ll even look around the globe for some potential lessons to be drawn from international comparisons.

It’s a day of information, interaction, and networking that you won’t want to miss.

However, seats are limited—reserve your place today. You can’t afford not to.

A copy of the full policy forum agenda, and registration information is online here.


1) A copy of Jack VanDerhei’s written testimony for the House Ways & Means Committee is available online here.

Video of the testimony is available in two sections, online here.

Additional information regarding the Ways & Means hearing is available online here.

2) See page 11, online here.

3) Last year an EBRI Notes article (July 2011, online  here)  analyzed the potential impact of those kind of changes on retirement savings.

New from EBRI: Tax Reform Proposal Could Clip 401(k) Balances

A recent proposal to change the tax preferences for employment-based 401(k) retirement plans could result in an average reduction in 401(k) account balances of between 6‒22 percent at Social Security normal retirement age for workers currently ages 26‒35, according to new research by EBRI.

 The response—a combination of plan sponsor reaction and participant response—is strongly tied to plan size, with participants in smaller plans likely to experience deeper average reductions in 401(k) balances, according to EBRI’s baseline analysis. For plans with less than $10 million in assets, participant balances at Social Security normal retirement age for workers currently ages 26‒35 could decline between 23‒40 percent, depending on the size of the plan and income of the participant.

EBRI’s report is the first to analyze the response of both private-sector 401(k) plan sponsors and participants to a proposed scenario where the current tax treatment of employer and worker pre-tax contributions would be modified such that workers would have to pay federal taxes on these amounts currently, rather than on a deferred basis (as under current law), and participants would receive an 18 percent government match on all contributions.

“Some analyses of recent proposals to change the tax preferences for employment-based 401(k) retirement programs have assumed status quo in plan design and contribution flows,” notes Jack VanDerhei, EBRI research director and author of the report. “Surveys of individual participants suggest, however, that some would decrease or even eliminate their contributions in response to these changes. Additionally, surveys of plan sponsors indicate that many would modify their plan design, or even terminate these plans.”

Full results of the study are published in the March EBRI Notes, “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances.”  The press release is online here.

Washington Watch

By Nevin Adams

Nevin Adams, EBRI

The Senate Finance Committee is positioned to pass a highway bill, funded at least in part by changing the tax treatment on retirement accounts.

Specifically, the modified chairman’s mark of the proposed Highway Investment, Job Creation and Economic Growth bill would require that age 70-1/2 account distributions be treated, for tax purposes, as distributed within five years of the death of the account holder (unless the beneficiary is the account holder’s age, a child with special needs, or older than 70). Under current law, holders of IRAs and 401(k)-type accounts are required to begin taking taxable distributions from those accounts once they reach age 70-1/2, though if the account holder dies, the taxation of the account is spread over the life of the beneficiary. According to a Senate Finance Committee press release, this particular provision is estimated to raise $4.648 billion over 10 years (see link here).

The bill’s prospects in the Senate remain unclear, and the Wall Street Journal notes that the House version does not contain the retirement account tax change. However, the

Senate provision demonstrates how the current budgetary and economic pressures in Congress—particularly in an election year—make the tax treatment of retirement savings a major target for any number of legislative initiatives, including those that have little or nothing to do with retirement.

The Employee Benefit Research Institute (EBRI) has long provided a credible and objective source of information for both policymakers and regulators, including recent testimony provided to:

• The Senate Finance Committee on “Tax Reform Options: Promoting Retirement Security”, and “The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income: Results From the 2011 Retirement Confidence Survey.”

• The Senate Committee on Health, Education, Labor, and Pensions on “The Power of Pensions: Building a Strong Middle Class and a Strong Economy,” and

• The House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor, and Pensions, regarding “Retirement Security: Challenges Confronting Pension Plan Sponsors, Workers, and Retirees.”

The impact of certain tax reform proposals was evaluated in the November 2011 EBRI Issue Brief, and will be updated to include input from the 2012 Retirement Confidence Survey next month.

The Employee Benefit Research Institute is a private, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and economic security issues. EBRI offers a unique perspective in that we do not lobby nor take policy positions. The work of EBRI is made possible by funding from its members and sponsors, which includes a broad range of organizations involved in benefits issues. For a full list see EBRI’s Members.

Restructuring Incentives for Savings and the Agenda of the “Super-Committee”


A retirement-related proposal from former OMB Director Peter Orszag (now of Citicorp), Bill Gale of Brookings, and Jonathan Gruber of MIT and NBER that was published in 2006 is being put “on the table” as part of the deficit reduction/tax reform activity for this year and beyond. The just-created “Super-Committee” that must come up with a deficit reduction plan by late November will be asked to consider changing current savings incentives in the tax code.

Significantly, both House Ways and Means Chairman Camp, and Senate Finance Chairman Baucus are among the “12 Apostles” (as the 12-member “Super-Committee is called), making it possible—and possibly  likely—that the group will consider some  tax changes as part of the deficit package. Many interests will be pushing for consideration of their “reform” proposal.

Special commissions of 2010 proposed a change in the defined contribution and IRA limits that would first combine them, and then limit them to $20,000 or 20% of income per year, whichever is lower.

EBRI has published preliminary  analysis of the projected impact of the 20/20 proposal  on employees’ retirement account balances, and is now expanding that analysis to include the Orszag/Gale/Gruber proposal, which they designed to redirect tax incentives to middle- and low-income households (a link to their full paper is online here; a separate pdf is available here).

That proposal, in short form, would:\

(1) Make all contributions to a retirement plan after-tax;
(2) Create a 30 percent government match in the form of a tax credit;
(3) With the match limited to the “minimum of either: a) 10 percent of adjusted gross income, up to a maximum of  $200,000, on which federal income taxes are imposed; or b) $20,000 for 401(k) accounts and $5,000 for IRAs (married couples could contribute twice this amount  based upon household income);
(4) Deposit the government match directly into the retirement account as pretax income, subject to taxation upon withdrawal.

Any significant changes in the tax treatment of savings incentives, whether for retirement or other needs, would affect both employer and employee behavior. EBRI databases and models make analysis possible that others are not able to conduct, and that is what we will undertake in this case, seeking to fulfill our mission of allowing more informed plan design and policy decisions based upon the facts.

Given the challenging budget and deficit outlook painted by the mid-year budget review just released by the Congressional Budget Office (www.cbo.gov), new proposals for changing the tax treatment of incentives for most employee benefit programs can be expected to arise on a regular basis, and proposals for changes from past decades can be expected to re-appear as well.

The tax and regulatory environment for employee benefits—and thus the decision framework for employer and individual decision-making—are likely to become more uncertain with each passing month in the decades ahead. The CBO report makes it clear that the work of the “12 Apostles” is just the beginning.

Stay tuned. Let me know your thoughts. Salisbury@ebri.org or 202-775-6322.

Dallas Salisbury
August 24, 2011

Understanding Employer Surveys That Address the Future of Employment-Based Health Coverage

Paul Fronstin, EBRI


The June 2011 release of a report by McKinsey created a firestorm over the impact that PPACA may have on whether employers offer coverage in the future.  McKinsey reported that “30 percent of employers will definitely or probably stop offering ESI [employer-sponsored insurance] in the years after 2014.”

Republicans responded by calling into question initial projections that very few people would lose employment-based coverage. Karl Rove, for example, reflects the sentiments of Republicans when he recently wrote in the Wall Street Journal (subscription required): “We are now, to our horror, finding out how harmful this measure is.”  The administration referred to the report as an “outlier” and described it as “raising more questions than answers.” Congressional Democrats pressured McKinsey into releasing more information on the methodology, which it eventually did.

What Did McKinsey Really Find?

While the original headline referred to the 30 percent estimate, much more detailed results were eventually released:

As seen in the table above, McKinsey found that only 9.2 percent of employers reported that they definitely would eliminate coverage.  Among employers with 500 or more workers, only 5.1 percent reported that they would definitely drop coverage.

An important question is how to interpret the 20.5 percent of employers who report that they probably would drop coverage.  If focusing only on the percentage of employers reporting that they definitely would drop coverage, the McKinsey estimates are more in line with other surveys. For instance:

• April 2010, Workforce Management Magazine found that 5.2 percent of employers somewhat disagreed and 3.5 percent strongly disagreed with the following statement: “We Will Continue to Offer Our Own Health Care Coverage Because It’s a Crucial Part of Our Recruiting and Retention Efforts.”
• May 2010, IFEBP found that 2.4 percent disagreed and 1 percent strongly disagreed with the following statement: “My Organization Will Continue to Offer Health Care Benefits Because They Are Critical to Employee Recruitment and Retention.”
• May 2010, Towers Watson found that 3 percent of organizations will likely “pay” [to stop offering health benefits] and not “play.”
• June 2010, Fidelity found that 20 percent of employers were seriously considering eliminating health care.
• September 2010, HR Policy Association found that 19 percent of companies surveyed were not likely to be providing health coverage in 2020. Perhaps more honestly, 47 percent reported that were not sure.
• March 2011, HR Policy Association found that 6 percent of employers were giving serious consideration to discontinuing providing health care benefits over the next 10 years.
• May 2011, IFEBP found that 2.7 percent of employers are considering terminating health care programs for active employees as a result of reform. Another 0.7 percent plan to “pay” and not “play.”
• June 2011, Lockton found that 18.8 percent of employers will consider terminating group health plan and pay penalties when the “pay-or-play” mandate takes effect in 2014.
• April–May 2011, the NFIB found that 26 percent of small employers currently offering health benefits are very likely to explore dropping their health insurance plans and another 31 percent are somewhat likely to do so if workers dropped employment-based coverage for insurance in the exchange. The survey also found that a key factor in a small employer’s decision to drop a current health insurance plan will be the proportion of employees who leave their health plan for an exchange. Forty-three percent report that a majority of employees would have to leave before they would drop their plan and 35 percent claim it would require all of them.
• June 2011, Mercer found that 2 percent of employers were very likely to terminate coverage and 6 percent were somewhat likely to terminate coverage after health insurance exchanges are operational.

It’s the Dynamics, Stupid
What is more important—the percentage of employers no longer offering health coverage in 2014, 2020, or 2025?  A recent report from Avalere assessed the validity of differing estimates of the effect of PPACA on employment-based coverage.  Its analysis concluded that the employment-based market will be fairly stable after 2014, when key PPACA coverage provisions go into effect.  However, the most important statement in the report may be the following:

“While near-term changes in aggregate ESI rates are unlikely, longer-term erosion—over 10 to 20 years—is possible under certain circumstances. … if a few [emphasis added] large employers drop coverage after 2014, others could follow in a “me too” effect. Both of these scenarios are difficult to model, but should be considered.”

As noted above, the fact is a number of surveys have found a small number of employers plan on dropping coverage in 2014 or thereafter.

The most important take-away may be the fact that none of the surveys found the percentage of employers that are likely, considering, not likely, agreeing, or disagreeing with the various questions to be zero.  Whether it be the small number that plan on paying instead of playing, the small number giving serious consideration to dropping coverage, or the small number that disagree that they will continue to provide coverage, trends in employment-based coverage start with small numbers. The movement away from defined benefit pension plans to defined contribution (401(k)-type) retirement plans did not happen overnight.  Neither did the movement to managed care or consumer-driven health benefits.

These are all examples of changes to benefits that may not be indicative of what might happen as a result of PPACA; but  the movement away from providing retiree health benefits (an elimination of a benefit) also did not happen overnight.  These changes took years, some would say decades, to play out and there is no reason to believe that 2014 will look much different from 2013 or 2011 in terms of whether or not employers offer health coverage.  But, as Avalere concluded, it only takes a few employers to trigger a change, and the sentiment in the surveys certainly supports that:

• June 2010, Fidelity found that 26 percent of small employers and 36 percent of large employers would seriously consider eliminating health care if other employers did.
• September 2010, HR Policy Association found that 80 percent reported that other companies moving away from health coverage would influence their decision to offer coverage.
• June 2011, the Benfield Group found that 21 percent were highly likely and 49 percent somewhat likely to drop coverage if their industry competitors stopped offering health benefits.

Are Surveys of Employer Opinions on Future Behavior Valid?
It is very difficult to address employer behavior through a survey.  Past surveys of employers have not accurately predicted behavior.  For example, in March 2004, a web-based survey of 991 mostly large employers found that 19 percent were very likely and 54 percent were somewhat likely to offer a health savings account (HSAs) by 2006.  In reality, only 11 percent of large employers offered either an HSA or a health reimbursement arrangement  (HRA) by 2006, with 37 percent of jumbo employers offering them and 6 percent of employers with 500-999 workers offering them, according to Mercer.  By 2010, only 23 percent of large employers offered either type of plan, still far below the survey findings from 2004.

There are many issues that employers will consider when weighing the pros and cons of dropping coverage.  Some are as follows:

• Is there a concern about recruitment and retention?
• Is there a concern about the impact on worker health and productivity?
• Will the health plans offered in the exchange be an acceptable substitute for employment-based plans?
• Will dropping coverage really save money?
• What are other employers doing?

There is no reason to believe that any survey conducted today can be used to determine the percentage of employers that might be dropping coverage three or more years from now as a result of a major component of health reform—insurance exchanges combined with insurance market reforms—that is still years away from being up and running.

EBRI’s Spring 2010 Policy Forum: Retirement Income Adequacy

EBRI’s semi-annual policy forum, titled “Retirement Income Adequacy: How Big Is the Gap and How Might the Market Respond?” was held May 13 in Washington. This was EBRI’s 66th policy forum.

EBRI Research Director Jack VanDerhei presented new research on retirement income adequacy for current workers using an updated version of the Retirement Security Project Model. The presentation included estimates of the percentage of workers at risk for various demographic groups as well as the additional amount of savings that would be required for a 50 percent, 75 percent, and 90 percent probability of having “adequate” income in retirement.

Jack VanDerhei, EBRI research director

A panel of experts then discussed VanDerhei’s findings. Two others panels discussed ways to fill the gaps in retirement income using the current voluntary system and policy implications of the gap for retirement plans.A detailed account of the policy forum will appear in a future EBRI publication.

The policy forum agenda, with all presenters and speakers, as well as PowerPoint presentations, is on the EBRI website here.