The President’s myRA

The President introduced something called a “myRA” at the State of the Union speech. He explained…

… while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k) s. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It’s a savings bond that encourages folks to build a nest egg. myRA guarantees a decent return with no risk of losing what you put in.”

The idea here is to encourage small retirement savers. The concern is that routine bank or investment fees (for example, the annual “maintenance” fee for an IRA) may discourage some (or many) from saving for retirement. Under the myRA, the government picks up that tab. The concept makes sense.

The myRA would function as a Roth-type account. Monies going in would not be deductible for income taxes.

Contributions will be automatic, voluntary and small. Initial investments could be as low as $25 and ongoing contributions as low as $5. Contributions would be made through “automatic” payroll deductions.

COMMENT: “Automatic” meaning actual employers who pay people in actual payroll department to process these transactions. Automatic seems to mean “magical” inside the Washington beltway. 

The myRA big deal will be the savers account balance “will never go down.”

COMMENT: Somewhat like a savings account or certificate of deposit. There are – by the way – no annual fees for those accounts either. They are “magical.”

The myRA will earn the same interest rate as the federal employees Thrift Savings Plan Government Securities Investment Fund.

NOTE: Which returned 1.47% in 2012. Unfortunately, inflation for 2012 was 1.8%. The G Plan pays investors the investor the average return on long-term Treasury bonds.  

It will be available to households earning up to $191,000 annually.

Participants will be able to save up to $15,000, or for a maximum of 30 years. 

            COMMENT: Remember: this is a “starter” savings plan.

There would be a provision to transfer the account to a Roth IRA.

COMMENT: That part makes sense, as these accounts can be described as “Roth-lite.”

The President created this by executive action this past Wednesday.

            COMMENT: Really? 

Reflecting the crowd currently occupying it, this White House also wants to compel employers that do not offer myRA’s to offer automatic enrollment IRAs.

OBSERVATION: Approximately half of American workers are not covered by a retirement plan at work, propelling policy mandarins to talk about “mandatory” solutions to the retirement “problem.” I acknowledge the problem - two problems, in fact. First, that many people do not save enough. It might help if they had a job, though. Second, that these hacks and their “mandatory” solutions are themselves a problem.  

Call me completely underwhelmed. 

New Tax On Self-Funded Health Plans Due By July 31

I knew that there was a new tax on self-insured medical plans. I was surprised that it reached health reimbursement arrangements (HRA), though.

I was surprised because it makes little sense, other than as a raw money grab. Next time perhaps the government will just select names at random from a phone book and require them to send money. I suggest they start with the District of Columbia phone book.

Have you heard of a health reimbursement arrangements? We are wading into alphabet soup-land, so let’s take a moment to compare and contrast an HRA with a health savings account (HSA).

 

If your employer is large enough, you may receive an annual letter laying out your health insurance options. Perhaps you can select from standard reimbursement, HMO, preferred provider or high-deductible health plans. That high-deductible plan likely is an HSA.

The concept of an HSA is simple: combine a high-deductible health policy with a medical IRA. If one incurs routine medical costs, one is reimbursed from the IRA. If one does not, then the IRA continues to compound and accumulate. The policy is there for big expenses. For a healthy family the medical IRA can add-up to tens of thousands of dollars.

A health reimbursement arrangement (HRA) is a different animal.   A key difference is that an HRA is all employer money. The HRA can reimburse employees for medical expenses, including vision, dental and chiropractic. It can reimburse on a first-dollar basis, a deductible-first basis, a sandwich basis and any other basis the plan advisor can dream up. It can have an annual cap … or not. Chances it will have an annual cap, as otherwise the employer borders on being financially reckless.

The employee doesn’t own this money, by the way. Should an employee quit, the money reverts to the employer. In truth, many if not most HRAs do not have any money at all. The medical bills are paid directly from company funds when presented for reimbursement. There may be an accounting somewhere that shows every employee and how many dollars are in his/her “account,” but this is for bookkeeping purposes only. The term for this is “notional,” and it means make-believe. Think unicorns, fairies and the New York Jets having a NFL-caliber quarterback.

ObamaCare (technically, The Affordable Care Act) is imposing a new fee on self-funded plans, which includes HRAs. It is coming up fast. If you have an HRA whose most current plan year ended after September 30, 2012 and before July 31, 2013 (that is, virtually every HRA), the HRA will have to pay a $1 fee per participant. Next year the fee goes to $2, and thereafter it goes to who-knows-what because some government bureaucrat will decide the amount.

The tax is due by the end of this month – July 31.

This tax will be reportable on Form 720, which may be a new filing for many employers.

It also has to be paid electronically. There is no attaching a check for this one.

I am a big fan of HRAs, as it allows companies to add to their employee benefits package without bankrupting themselves in the process. The HRA can cover deductibles, pay for braces or help with medical expenses that otherwise fall through the cracks left by the main insurance policy. HRAs have gotten more expensive, however, both by the per-participant fee as well as by the tax practitioner’s fee to prepare the return.

Obama’s $3 Million IRA Cap

We have received several calls on the proposed $3 million cap on 401(k)s and IRAs. Some of those discussions have been spirited.

What is it? Equally important, what is it not?

The proposal comes from the White House budget. Here is some text:

The budget will also show how we can provide targeted tax relief to strengthen the economy, help middle class families and small business and pay for it by eliminating tax loopholes and make the tax system more fair. The budget will include a new proposal that prohibits individuals from accumulating over $3 million in IRAs and other tax-preferred retirement accounts. Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving. The budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per person per year in retirement, or about $3 million in 2013."

Let us point out several things:

(1)    The proposal would not force monies out of an existing retirement plan. It would instead prevent new monies going into a plan.

This raises a question: should one draw enough to reduce the balance below $3 million, would one be able to again contribute to the plan?

(2)    The proposal uses the term tax “preferred” rather than tax “deferred.”  This indicates that the proposal would reach Roth IRAs. Roth IRAs are not tax deferred, as there is no tax when the funds come out. They instead are tax “preferred.”

There is some rhyme or reason to this proposal. $205,000 is the current IRC Section 415 limit on funding defined benefit (think pension) plans. The idea here is that the maximum tax deduction the IRS will allow is an amount actuarially necessary to fund today a pension of $205,000 sometime down the road. The closer one is to retirement, the higher the Section 415 amount. The farther one is, the lower the Section 415 amount. This proposal is somewhat aligning limits on contribution plans with existing limits on benefit plans.

(3)    The $3 million is an arbitrary number, and presumably it would change as interest rates and actuarial life expectancies change over time. If longevity continues to increase, for example, the $3 million may be woefully inadequate. Some planners consider it inadequate right now, at least if one is trying to secure that $205,000 annual annuity.

(4)    Would the annuity amount increase with inflation? Assuming an average inflation rate of 4.5 percent, one would lose almost three-quarters of a fixed annuity’s purchasing power over 30 years.

The frustrating thing about the proposal is that it affects very few people. The Employee Benefit Research Institute estimates that only 1% of investors have enough to be subject to this rule. This of course feeds into the perceived anti-success, anti-wealth meme of this White House.

(5)    The amount of money to be raised over a decade is also chump change for  the federal government: less than $10 billion.

Something to remember is that account balances in 401(k), SEP, SIMPLE and regular IRA accounts will be taxable eventually. IRAs are subject to minimum distribution rules, for example. The larger the balances, the more the government will take in taxes. Dying will not make the tax go away. In fact, it may serve to accelerate required distributions to a beneficiary and taxes to the government.

The budget was dead on arrival at Capitol Hill. Let us hope that less ideologically rigid minds on the Hill keep it so.