What’s Up on Capitol Hill
2015 Topics
Presented by
Thomas Rowley
Director, Retirement Business Strategies
Invesco
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Invesco Distributors, Inc.
Important information
The opinions expressed are those of the author, are based on
current market conditions and are subject to change without
notice. These opinions may differ from those of other Invesco
investment professionals.
Invesco does not provide tax advice. The tax information contained
herein is general and is not exhaustive by nature. Federal and state
tax laws are complex and constantly changing. You should always
consult your own legal or tax professional for information
concerning your individual situation. The opinions in this piece are
not necessarily those of Invesco. Information in this report does
not pertain to any Invesco product and is not a solicitation for
any product.
The tax information presented is based on current interpretation of
federal income tax law. State and local income tax laws may differ
from federal income tax law.
Invesco Distributors, Inc. does not offer any variable products.
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Agenda
2015 political landscape
Affordable Care Act (ACA) challenge
Defense of Marriage Act (DOMA) challenge
Social Security reform
Retirement issues: Universal coverage
Retirement issues: Promote better outcomes
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Political landscape
GOP majority in Congress wants to show
it can govern.
Areas for
negotiations:
 Democrats will remind Americans, GOP owns
any Capitol Hill gridlock
 Tax reform
 Democrats: A shift to the left?
– From Bill Clinton centrist to Obama liberalism to
Warren populism?
 Infrastructure
 Trade
 Energy
 The Republican pendulum swing
– Tea Party wants big cuts in spending or showdowns over taxes.
– Moderate center wants to pick its battles.
 2015 large GOP House majority allows speaker John Boehner to
pursue centrist agenda without needing as many Tea Party votes.
– May even pick up moderate Democrats on certain issues
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Political landscape
Areas for agreement? Tax reform
Corporate tax reform
 Led by large US multi-national companies with trillions of dollars parked
overseas in an effort to avoid US corporate tax rates deemed as anticompetitive.
 But business pass-throughs (i.e., partnerships, LLCs and Subchapter S corps.)
taxed at individual rates.
 Corporate without individual tax reform, hurts small business
2015 scenarios
 Repatriation of (overseas) profits at lower tax levels
 Change in tax incentives
 Change in preferential tax rates for certain sectors
Individual rates
 Administration wants to increase capital gains tax rate to 28% and change
step-up basis. It says Treasury lost $50 billion in revenue in 2013 and 21% of
tax benefits went to top 1%.
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Political landscape
Areas for agreement? Transportation funding
Highway Trust Fund insolvent by May.
 One-year extension of status quo; about $15 billion
How to pay for infrastructure?
 Gas tax increase?
 Raise revenues from tax reform?
 Retirement rule changes?
– One 2014 extension revenue proposal: Eliminate IRA beneficiary
stretch option.
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Political landscape
Areas for agreement? Trade and energy
Trade
 Legislation critical for large trade deals (Asia-Pacific and European Union).
Gives administration ability to negotiate deals and Congress gets up-or-down
vote on final agreements.
 Other countries get assurance that Congress cannot undo.
 Moderate (Republicans and Democrats) are more supportive than Democratic
liberals (labor and environmentalists oppose) or Tea Party (oppose giving
congressional authority over trade to White House).
Energy
 In 2007, bills were done piecemeal by a new Democratic House majority and
GOP president who were not on good terms.
 2015 may rhyme. Keystone XL has a veto threat, but energy bills exist
(natural gas exports, electric grid innovation and offshore development ) with
bipartisan support.
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Affordable Care Act (ACA) challenge
ACA legal challenge: Supreme Court case
King v. Burwell
ACA covered uninsured by:
1. Expanding Medicaid
2. Creating insurance exchanges
(low income get federal subsidies).
To collect federal subsidies, states set up an
exchange.
 If state did not, ACA created federally run exchange.
But ACA permits subsidies to flow only through
exchanges “established by a state.” Billions of
subsidy dollars pass through federal exchanges.
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If Supreme
Court sides
with:
Administration
 ACA continues
as is.
Challenger
 ACA federal
subsidy process
ends (affects 36
states).
 Gives Congress
an opportunity
to reshape ACA.
Defense of Marriage Act (DOMA) challenge
Same-sex marriage: Supreme Court case
 Supreme Court will decide whether the
Constitution allows same-sex marriage and
whether states have right to restrict gay
marriage.
– Will hear arguments in April and decide by June.
 Last time the Supreme Court reviewed issue
(2012), gay marriages were banned in 40 states;
in 2015, gay marriage banned only in 14.
Retirement
issues include:
 Survivor
annuities
 Rollovers
 Hardship
withdrawals
 Qualified
domestic
relations orders
 Beneficiary
designations
 Required
Minimum
Distributions
(RMDs)
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Social Security reform
Social Security Disability Trust Fund Reform
 Social Security is made up of two trust funds:
– Old Age and Survivors Insurance (OASI).
– Social Security Disability Insurance (SSDI).
 SSDI covers 10.9 million disabled beneficiaries.1
 Congress has reallocated tax revenues and/or adjusted tax rates
between the two programs 11 times. Thus, each can meet costs and
remain solvent without ever increasing overall fiscal burden on
taxpayers.
 Unless Congress reallocates among the two programs again, the
SSDI trust fund will run out in 2016.
Prelude to Social Security reform?
1 Source: ssa.gov, as of 2014
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Social Security reform
Suggestions to support Social Security
1. Continue to raise full retirement age (FRA).
– FRA benefits were raised to 67. Index FRA to
longevity.
2. Raise taxes.
– Federal Insurance Contributions Act (FICA) taxes
are 6.2% of earnings up to $118,500 (2015).
Raise tax rate to 7.2% over time and/or earnings
max to $250,000.
 Began to use
interest earned
in 2011
 Principal drain
begins 2023
 Trust fund
exhausted by
the end of 2033
3. Average in more working years.
– SS benefits based on highest paid 35 years; raise to 40 years.
4. Slow the cost-of-living adjustment (COLA).
– SS benefits keep up with inflation, reduce COLA.
Or a combination of any or all of the above.
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Retirement issues
Federal Government Retirement Themes
 Universal coverage
 Promote better outcomes
 Congress challenged with revenue needs while maintaining the policy
purpose of retirement vehicles (to provide for the retirement of the
original owner)
 Congress sees several targets for raising revenue
 Limit tax advantages:
–
–
–
–
–
–
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Capping compensation limit for pretax contributions
Eliminating catch-up contributions
Removing the employer tax deduction
May see a greater emphasis on Roth
Eliminate stretch option for beneficiaries
Proposed retirement plan targets
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Retirement issues: Universal coverage
Expanding retirement plan coverage for workers is a federal
policy goal.
 401(k) designed as voluntary savings, but as defined benefit plans
faded, law promoted coverage:
– Pension Protection Act of 2006: Automatic enrollment and automatic
escalation
Proposed next step: Automatic IRAs
 Businesses with 10+ employees, and no retirement plan,
automatically enroll workers in IRA. Proposals offer tax cuts for
employers.
 17 states are at some stage of legislating state-administered plans to
deliver retirement plan access to the country’s smallest employers.
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Retirement issues: Universal coverage (cont.)
Proposal to increase the ability of part-time workers to join
their employer’s plan.
How to pay for auto IRAs?
 Government Accountability Office (GAO) IRA report lists ways to
improve “the equity of existing tax expenditure on IRAs” and combat
“mega-IRAs.” Options include:
– Bar contributions to tax-preferred accounts once balances reach about
$3.4 million.
– Limits on the types of assets permitted in IRAs.
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Retirement issues: Promote better outcomes
Income lens versus accumulation lens
 Still-pending Department of Labor (DOL) proposal to require employers to provide
lifetime income statements.
Encourage lifetime options
 In 2014, qualified longevity annuity contracts (QLACs) rules issued by IRS.
Deferred income annuity with payout for advanced age. Plans may offer target date
funds that include QLACs either as a default or as a regular investment alternative.
 401(k)/IRA may use smaller of 25% of account balance or $125,000 (cost-of-living
adjusted) to buy QLAC.
 Typically, one-time premium payment that allows guaranteed payments starting as
late as age 85 (no age 70½ RMD).
Reduce leakage
 New IRA Rollover rules; only once every 12 months regardless of the number of
IRAs.
Guarantees are subject to the claims paying ability of the insurance company.
A target date fund identifies a specific time at which investors are expected to begin making withdrawals, e.g., Now,
2020, 2030. The principal value of the fund is not guaranteed at any time, including at the target date.
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Secure Annuities for Employee Retirement Act (SAFE)
Orrin Hatch’s (R-Utah) proposed retirement reform:
1. Public pensions:
Allows state and local governments to use annuities for benefit
payouts.
2. Starter 401(k):
Allows employers without a plan to start a deferral-only plan.
Contributions up to $8,000 per year and catch-up for those age 50
and older.
3. Access to professional investment advice:
Moves regulation of 401(k) and IRAs from DOL to Treasury.
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Thank you
All data provided by Invesco unless otherwise noted
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