More retirement-related regulatory news for plan sponsors, including links to detailed information.

DOL/SSA/CMS jointly launch online retirement toolkit
The U.S. Department of Labor (DOL) has announced the launch of an online toolkit to help workers identify key issues related to retirement planning. The DOL’s Employee Benefits Security Administration developed the toolkit in cooperation with the Social Security Administration (SSA) and the Centers for Medicare and Medicaid Services (CSM) to help workers understand important decisions related to employment-based plans, Social Security, and Medicare.

For more information, click here.

SEC issues proposed rule on money market fund reform; Amendments to form PF
The Securities and Exchange Commission is proposing two alternatives for amending rules that govern money market mutual funds (or “money market funds”) under the Investment Company Act of 1940. The two alternatives are designed to address money market funds’ susceptibility to heavy redemptions, to improve their ability to manage and mitigate potential contagion from such redemptions, and to increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds.

The first alternative proposal would require money market funds to sell and redeem shares based on the current market-based value of the securities in their underlying portfolios, rounded to the fourth decimal place (e.g., $1.0000), i.e., transact at a “floating” net asset value per share (NAV).

The second alternative proposal would require money market funds to impose a liquidity fee (unless the fund’s board determines that it is not in the best interest of the fund) if a fund’s liquidity levels fell below a specified threshold and would permit the funds to suspend redemptions temporarily, i.e., to “gate” the fund under the same circumstances. Under this proposal, either alternative could be adopted by itself or in a combination of the two alternatives.

Comments are due 90 days after publication in the Federal Register.

For a prepublished copy of the proposed rule, click here.

More retirement-related regulatory news for plan sponsors, including links to detailed information.

GAO: Social Security’s long-term strategy needed to address key management challenges
According to a report by the U.S. Government Accountability Office (GAO), the Social Security Administration (SSA) will experience management challenges in four key areas over the next decade.

• Human capital. SSA has not updated its succession plan since 2006 although the agency faces an ongoing retirement wave and hiring freeze which will make it difficult to respond to growing workload demands.
• Disability program issues. SSA faces ongoing challenges incorporating a more modern concept of disability into its programs, while balancing competing needs to reduce backlogs of initial and appealed claims and ensure program integrity.
• Information technology (IT). SSA has made strides in modernizing its IT systems to address growing workload demands, but faces challenges with these modernization efforts and correcting internal weaknesses in information security.
• Physical infrastructure. SSA is moving toward centralized facilities management, but the agency lacks a proactive approach to evaluating its office structure that will identify potential efficiencies, such as consolidating offices.

To read the entire GAO report, click here.

Social Security and Medicare trustees report for 2013
The U.S. Social Security Board of Trustees has released its annual report on the long-term financial status of the Social Security Trust Funds. The combined assets of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 2033, unchanged from last year, with 77% of benefits still payable at that time. The Disability Insurance Trust Fund will become depleted in 2016, also unchanged from last year’s estimate, with 80% of benefits still payable.

To read the entire report, click here.

The Medicare Trustees has projected that the trust fund that finances Medicare’s hospital insurance coverage will remain solvent until 2026, two years beyond what was projected in last year’s report.

A number of factors have contributed to the improved outlook, including lower-than-expected Part A spending in 2012, and lower projected Medicare Advantage program costs. Recent data from the Medicare Advantage program indicate that certain provisions of the Patient Protection and Affordable Care Act (ACA) will help reduce the growth of spending in this program by more than was previously projected. Partially offsetting these lower spending projections are somewhat lower projected levels of tax revenue.

The benefits of this slower growth accrue to both taxpayers and beneficiaries. For example, although the Part B premium for 2014 will not be determined until later this year, the preliminary estimate in the report indicates that it will remain unchanged from the 2013 premium.

Read the entire report here.

CBO report: The distribution of major tax expenditures in the individual income tax system
A number of exclusions, deductions, preferential rates, and credits in the U.S. federal tax system cause revenues to be much lower than they would be otherwise for any given structure of tax rates. Some of those provisions—in both the individual and corporate income tax systems—are termed “tax expenditures” because they resemble federal spending by providing financial assistance to specific activities, entities, or groups of people. Tax expenditures, like traditional forms of federal spending, contribute to the federal budget deficit; influence how people work, save, and invest; and affect the distribution of income.

A report by the Congressional Budget Office (CBO) examines how 10 of the largest tax expenditures in the individual income tax system in 2013 are distributed among households with different amounts of income.

To read the CBO entire report, click here.

More retirement-related regulatory news for plan sponsors, including links to detailed information.

DOL issues advisory opinion on swaps
The Employee Benefits Security Administration of the U.S. Department of Labor (DOL) has released an advisory opinion on the fiduciary status of those who clear swaps for retirement plans and the prohibited transaction provisions of ERISA, as permitted by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In Advisory Opinion 2013-01A, the DOL examined the relationship between clearing members and plans in swap transactions, where the plan has defaulted on its obligations under a cleared swap.

The letter states the DOL intends to defer to the Congressional understanding of how Clearing Members would operate and interprets ERISA so as to not impair or impinge upon the swaps framework. Furthermore, the department has “conferred with officials of the CFTC regarding this letter. They have authorized us to state that they concur with our description of ‘cleared swap’ transactions conducted pursuant to provisions of the CEA, and that they do not believe the conclusions reached in this letter are inconsistent with the CEA or the CFTC’s regulation of cleared swap transactions under the CEA. To the extent issues raised by this interpretation affect current practice in the futures or swaps marketplace or relevant provisions or restrictions of the CEA, as amended by the Dodd-Frank Act, the Department is prepared to examine such issues in the context of providing additional regulatory guidance or future prohibited transaction relief.”

To read the entire advisory opinion, click here.

IRS requests comments on modifications to method of determining applicable federal rates
The Internal Revenue Service has issued Notice 2013-04 requesting comments regarding what modifications the Treasury Department should make to its method of determining adjusted applicable federal rates under section 1288(b) of the Internal Revenue Code and the adjusted federal long-term rate under section 382(f) of the Internal Revenue Code. The notice provides interim guidance describing the modifications to the method that will be in effect pending the issuance of further guidance.

Notice 2013-04 will be published in Internal Revenue Bulletin 2013-9 on February 25, 2013.

For more information, click here.

IRS issues 2013 covered compensation tables (Revenue Ruling 2013-02)
The IRS has issued Revenue Ruling 2013-02, which provides tables of covered compensation under § 401(l)(5)(E) of the Internal Revenue Code (Code) and the income tax regulations thereunder, for the 2013 plan year.

Read more…

With the release of the September 2012 Consumer Price Index (CPI) the Bureau of Labor Statistics, the Social Security Administration (SSA), and the Internal Revenue Service (IRS) have announced cost-of-living adjustment (COLA) figures for Social Security and retirement plan benefits, respectively, for 2013.

The 2013 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.

If you have ever compared the estimate of your Social Security benefit generated by any financial forecast engine and the estimate that you can get at any time from the official website of the Social Security Administration (SSA), you’ve probably noticed that they are different. And in the cases of many individuals who are “young,” they are likely to be radically different. So is one calculation better than the other?

The unfortunate answer is that both answers are probably fine, but you need to have some understanding of how the calculations are created. Let’s take a brief look under the hood of both.

The SSA recently announced that it has ended the annual mailing of the statement to your home of your actual salary history, based on which you paid your FICA payroll taxes. Now you must log in to its secure website at www.ssa.gov and follow the specific instructions to retrieve it. Once you generate your official Social Security statement, you can find the calculations the SSA uses and compare them to your own assumptions.

Let’s assume that you have properly filed your 2011 personal income taxes. The SSA will use the compensation you reported in 2011 as the amount to be earned in each of the future years until you are able to commence Social Security benefits at your “Social Security Retirement Age,” which can be as high as age 67. In 2011, if you were age 47 and earned $45,000, the SSA calculation engine assumes you will earn $45,000 in 2012, 2013, 2014, and so on for as many years as it needs for the calculation.

For any common calculation engine you may be using, you are probably able to include an assumption for your wage growth. Call it 3% per year as an example—$45,000 thus becomes almost $60,500 after 10 years of 3% increases. So your calculation engine is likely going to produce a Social Security benefit estimate that is much higher when compared to the SSA calculation.

There are many other differences in the calculation to consider, including if your 2011 wages for payroll tax were much lower than before 2011. But careful inspection of the forecast assumption in your calculation engine will enable you to begin to understand why the estimates of your Social Security benefits can be so different.

The Social Security Trustees issued their annual report on April 23 and the messages are somewhat dour. However, the headlines that scream that payments will stop and drop to zero after 2033 are based on a fundamental misunderstanding about how the system will work.

Although the Social Security Trust Fund is projected to be “exhausted” after 2033, the payroll taxes collected on wages earned after that point will provide the source of revenue to pay retirement benefits. The system will then be a true pay-as-you-go system.

After 2033, projected continuing income to the trust funds equals about 75% of program cost, meaning that retirees will only receive 75¢ for every $1 under the current (complex) formula—but not zero. After 2085, continuing income equals about 73% of program cost, so retirees will only receive 73¢ for every $1 under the current (complex) formula.

Note that these forecasts do not anticipate any change in the current aforementioned complex formula. It does however reflect a set of economic, demographic, and actuarial assumptions that are “medium” in three sets of assumptions, commonly referred to as low, medium, and high.

And while we’re on the topic, the Social Security Administration today announced the availability of online statements. For more information, go here.

With the release of the September 2011 Consumer Price Index (CPI) by the Bureau of Labor Statistics, the Social Security Administration (SSA) and the IRS have announced cost-of-living adjusted figures for Social Security and retirement plan benefits, respectively, for 2012. For the first time in the last three years, almost all the figures published will increase.

Read more in the latest Client Action Bulletin.

There are some changes coming for Social Security in 2012 so this week’s poll is a two-parter.

The biggest change is the cost of living increase for Social Security recipients. The 3.6% increase to Social Security is supposed to be a cost of living adjustment to keep seniors up to speed with inflation, but some economists are predicting an increase in consumer spending as a result of this increase.

How is an increase in Social Security benefits possible with the economy in the shape it’s in? Payroll taxes. Everybody’s going to see a payroll tax increase in 2012.

The Social Security Administration issued the following:

For 2012, Social Security benefits will increase 3.6%.  Beginning on January 1, 2012, the Social Security taxable wage base will increase to $110,100. The Social Security Old-Age, Survivors, and Disability Insurance tax rate will remain at the current 6.2% on wages up to the wage base, assessed on employees and employers, in addition to the 1.45% tax rate assessed on all wages for Medicare Hospital Insurance.

The Social Security normal retirement age for individuals born in 1947 (age 65 in 2012) is 66. Individuals born in earlier years may have a lower normal retirement age, and those born later may have a higher normal retirement age, with a maximum age of 67 for those born in 1960 and later. Other 2012 figures that have increased include:

• The maximum amount an individual may earn in calendar years prior to attaining normal retirement age without a reduction in benefits is $1,220/month ($14,640/annually); the maximum during the calendar year of attaining normal retirement age is $3,240/month ($38,880/annually). No earnings test applies to individuals beginning in the month they attain normal retirement age. In calendar years prior to attaining normal retirement age, the SSA withholds $1 in benefits for every $2 in earnings in excess of the earnings threshold, and $1 in benefits for every $3 exceeding the earnings threshold in the calendar year of attaining normal retirement age.
• The amount of earnings required for a quarter of coverage is $1,130.
• The “old law” contribution and benefit base is $81,900.
• The domestic employee coverage threshold remains at $1,800.
• For 2010, the national average wage index is $41,673.83.
• The “bend points” – the dollar amounts in the Social Security Primary Insurance Amount (PIA) formula that is used to determine the Average Index Monthly Earnings (AIME) – for 2012 will be $767 and $4,624. Thus, the Social Security monthly PIA formula will be 90% of the first $767 of AIME, plus 32% of the AIME over $767 and through $4,624, plus 15% of the AIME over $4,624 (and then rounded down to the next multiple of $0.10). An alternative PIA formula producing a lower amount may apply to individuals who have been covered by a retirement plan during employment that is not covered by Social Security.

In all the recent talk about changes to Social Security and Medicare it hasn’t always been easy to pick out what’s actually going to be different. One change that was discussed during the debt ceiling debate but does not appear to have been part of the emerging deal would require Americans to attain an older age before becoming eligible to receive benefits from these programs.

Specifically, this change might affect when benefits can start without being reduced for early commencement (for Social Security)—or, for Medicare, when benefits can start at all, except in extreme circumstances.

When changes like this are made, certain age groups may be “grandfathered,” i.e., protected against what could be perceived as adverse changes in the law. Congressman Paul Ryan (R-Wisconsin) proposed several months ago that Americans born in or before 1955 would be unaffected by any changes in our social insurance programs.

This raises at least one obvious question with which policymakers must grapple: Is grandfathering certain older Americans “fair”? For older Americans, “fair” might mean, “I’ve worked all my life and now you changed the game and that ain’t fair.” For younger Americans, it might mean, “I believe that U.S. social safety net programs are going to be around when I’m 65 as much as I believe the moon is made of green cheese, so sure, that’s fair.”

This raises difficult questions, and we’d like to know what you think:

What year would you propose for grandfathering?

Post a comment with your answer.