Tony Ondrusek, Publisher

The following is text from a NAIFA GovWatch email alert that was sent out to members. The ramifications of Congressional action on both the life and health insurance industries are troubling. Read on:

Congress-Approved Budget Includes Tax Provisions that Pose Grave Risks for Life Insurance; Controversial Health Reform Procedural Protection

Issue: Congressional Budget

Date: April 30, 2009

Action Taken: On April 29, both the House (by a vote of 233 to 193) and the Senate (by a vote of 53 to 43) approved a Congressional budget for fiscal year 2010. The budget includes provisions that could pose grave risk to life and health insurance, annuities, employer-provided benefit programs, retirement savings and other programs and products marketed by NAIFA members. It also includes controversial anti-filibuster procedural protections (“reconciliation instructions”) for a health reform bill.

The risks from the tax provisions are numerous. Chief among them is the fact that almost all the authorized tax cuts (which total more than $1 trillion over five years) must be offset, either by the terms of the budget and/or under specific restatement of the pay-as-you go budget rules. With life insurance, health insurance, annuities, employer-provided benefit programs, and retirement savings (including pensions) constituting more than a third of total “tax expenditures” (tax revenue not collected due to tax rules that exempt or defer tax liability), it is next to certain that some of the offsets the tax writers will consider would adversely affect the products NAIFA members use to help their clients plan for and achieve financial security. Of particular concern are possible proposals that would be adverse to executive and nonqualified deferred compensation.

Tax Provisions: Among the tax-related specifics called for in the final Congressional budget are:

· Permanent estate tax reform: The budget authorizes permanent estate tax reform, most or all of the cost of which must be offset. Although the budget calls for a $3.5 million/person exemption and a 45 percent top rate, it will be up to the House Ways & Means and the Senate Finance Committees to determine the details of permanent estate tax reform. It will also be the prerogative of the tax-writing committees to propose the offsetting revenue for estate tax reform. Whether to reunify the estate and gift tax as part of the permanent reform effort will be debated during this part of the process.

· Middle class tax cuts: The budget authorizes $512 billion over five years to extend such middle-class tax cuts as the 10, 25 and 28 percent brackets, the child tax credit, marriage penalty relief, and education tax incentives.

· New Revenue/Deficit Reduction: The budget calls for $97 billion in new revenue by way of “closing loopholes” in the tax code. (The “loopholes” are not specified—and even if they were, it will be the House Ways & Means and Senate Finance Committees who decide how to raise the $97 billion.)

· New Incentive for Retirement Savings: The budget does not specify what this new incentive will be—but it is likely it is President Obama’s proposal to expand the Savers Credit, and/or to implement a mandatory automatic enrollment program. The Savers Credit provides tax credits which are used as matching contributions to low and moderate income workers’ retirement savings accounts (pension plans or IRAs). The automatic enrollment program would require employers who do not offer a pension plan to automatically deduct (subject to a worker’s opt out rights) from workers’ paychecks contributions to workers’ IRAs. The cost of an automatic enrollment program  must also be offset.

The $3.5 trillion budget also authorizes three years worth of alternative minimum tax (AMT) relief without offsets. It contemplates reducing the current $1.233 trillion deficit to $523 billion in 2014.

Health Reform Provisions: Among the most important provisions in the Congressional budget approved by the House and Senate on April 29 are the “reconciliation instructions” for health care reform. This means that if a health reform plan moves under a reconciliation process—the budget authorizes but does not require lawmakers to use reconciliation—it will need only 51 votes to pass the Senate. Fifty one votes in the Senate is far easier to get than 60, which is the number of votes necessary to cut off a filibuster. The budget does not make reconciliation available until October 15, 2009. This gives lawmakers about four and one half months to craft a bipartisan health reform plan and thus avoid the problems associated with using the reconciliation process for a health reform bill.

Reconciliation is a process provided under the budget law. If reconciliation is used, it will restrict debate on the resulting reconciliation health reform bill. This cuts off the “procedural filibuster” that the minority party can use to block legislation it does not like. However, reconciliation bills must, by the terms of the budget law that creates them, affect federal revenue within the budget window, but cannot affect federal revenue outside the budget window. Thus any provision in a reconciliation bill that does not affect federal revenue in the first five years or does affect it after the five-year budget window is subject to a bill-killing point of order—it takes 60 votes to waive a point of order in the Senate. In the context of health reform, provisions that would be affected by these rules could include such things as whether to impose an individual mandate (i.e., require each person to have health insurance for him/herself and his/her family), set up a public plan option, privacy protections, benefit standards, etc.)

Congress is currently working a health reform bill—three committees of jurisdiction in the House and two in the Senate are crafting the legislation, in close consultation with House and Senate leadership and President Obama. Among the issues of concern to NAIFA and AHIA members are whether the reform proposal will include a public (government) health insurance plan option, whether there will be an individual mandate, and/or a “pay-or-play” rule that would require employers to either offer and pay at least a significant portion of the cost of health insurance for their workers or contribute to a state or federal plan that will cover workers whose employers do not offer (or pay for) health insurance.

Lawmakers are also looking for ways to pay for health reform. Possibilities include a cap on tax-free employer provided health insurance—the cap could be based on the insured’s income level, or on the value of the health insurance—and cuts in Medicare, including the Medicare Advantage program.

The key lawmakers working on the health reform plan say they will have a proposal ready for action by the beginning of June.

The Congressional budget provides a set of guidelines for spending and tax legislation for the upcoming fiscal year. It is not a law. Its provisions frequently change when Congressional committees of jurisdiction write the legislation that the budget authorizes.