House Tees Up Vote on Build Back Better Reconciliation Bill | Bipartisan Traditional Infrastructure (BIF) Bill Enacted into Law | DOL Announces Extension of Non-Enforcement of Fiduciary Rules
House Tees Up Vote on Build Back Better Reconciliation Bill
On November 7, just after midnight, the House of Representatives approved the rule for debate on H.R.5376, the Build Back Better social spending reconciliation bill. It was a 221 to 213 party-line vote that came after a written commitment from moderate Democrats to vote for the bill itself after an official financial analysis of the measure (the “CBO score”) is completed, likely by Thanksgiving, assuming the CBO score confirms that the bill is fully offset and spends only the projected $1.75 trillion.
The bill—which until it is actually voted on can be changed in the House, and which is likely to be changed in the Senate—is a fully-offset package of around $1.75 trillion in new social spending. The “human infrastructure” bill provides significant amounts of money for healthcare (Medicare expansion and extension of enhanced subsidies for Affordable Care Act (ACA) insurance), elder care programs, child support programs, education programs, a new federal paid leave program, “green energy” and other climate change provisions, an increase in the amount of state and local tax (SALT) deductions that would be allowed, and immigration reforms.
The offsets are primarily new taxes on “the “ultra-rich” and corporations. Also expected to contribute to the revenue neutrality of the bill is its provision granting limited authority for Medicare to negotiate prices on some prescription drugs, and increased funding to the IRS for enforcement of existing tax laws. There are also substantial new international tax rule changes.
From the NAIFA perspective, what the bill excludes is even more important than what it contains. Among the significant wins (so far) for NAIFA are:
The bill does not include a proposal to tax each year’s gains on investments (capital assets), whether or not those assets’ gains have been realized (i.e., sold or traded). Because this proposal—which was estimated to raise more than $550 billion over ten years—would have applied only to the very rich and only to capital assets, it would have struck only a glancing blow at life insurance and annuities. However, that glancing blow would be significant: it specifically did include private placement life insurance and annuities in its scope.
The bill does not raise corporate, individual, or capital gains tax rates.
The bill does not change current estate tax rules.
The bill does not change (reduce) the Section 199A deduction for non-corporate business income.
The bill does not include proposals to change grantor trust rules that would have retroactively made some irrevocable life insurance trusts (ILITs) includable in taxable estates and would require future ILITs to be structured in a non-grantor trust format.
The bill does not include provisions to require employers to offer payroll-deduction and/or employee deferral retirement savings plans, or the proposal to make the Saver’s Credit refundable.
The bill does not include the PRO Act’s “ABC test” to determine whether a worker is an employee or an independent contractor.
The bill does include several provisions that could impact some NAIFA members and/or their clients. These provisions include:
Mega-IRA tax changes—generally, these provisions prohibit contributions to retirement savings plans, including IRAs, when the aggregate of a person’s retirement savings accounts equals or exceeds $10 million; and they require distribution (and tax paid) on amounts above $10 million—there are special rules for rollovers, including from traditional to Roth treatment of the rolled-over amounts, and further, there is a reporting requirement imposed on accounts of $2.5 million or more.
Surtax on incomes of $10 million or more—there would be a five percent tax on top of the 37 percent top tax rate on individuals’ income above $10 million, and another three percent tax on individuals’ income above $25 million; there is also a “tax-the-rich” surtax on trust income.
Expansion of the base on which the net investment tax is based to capture more pass-through business income; this base expansion also applies to the separate 3.8 percent Medicare tax.
Corporate minimum tax—15 percent on book income on corporations with profits of $1 billion or more, and a tax on corporate stock buy-backs.
Federal paid leave program.
Expansion of Medicare Part B to include limited hearing benefits.
H.R.5376 has not yet passed the House—only the rule under which it will be debated has passed. However, the struggle between moderate and progressive Democrats was resolved by an agreement under which the progressives promised to vote for the traditional bipartisan infrastructure bill, and the moderates promised to vote for H.R.5376 once the CBO score/CBO’s additional financial information is available (and confirms initial cost and offset estimates). The agreement also specified that the vote on H.R.5376 would occur the week of November 15, although there might be enough wiggle room in the language of the agreement – which is written and signed by the relevant parties – to allow for a delay in the vote if it takes CBO longer than to November 15 to complete its scoring of the bill.
Prospects: While it currently appears likely that the BBB reconciliation bill will be enacted into law, it still has a long way to go. The Senate is almost certain to change the House version of the bill—including, potentially, dropping or substantially changing the paid leave program, and pulling in “new” (i.e., not in the House bill) revenue raisers if needed to fully offset the cost of the bill.
This is an all-Democrat bill (all Republicans not only oppose it, but also are working hard to block it, although it is unlikely that any of these attempts to kill the measure will succeed). It is governed by the rules of reconciliation legislation. So, expect challenges based on the reconciliation process’s “Byrd Rules” (some of which may well succeed). And, while Democrats want to pass the bill, some will insist on inclusion, exclusion, or modification of certain provisions. Particularly under discussion are the new federal paid leave program and the Medicare expansion provisions. It will require all 50 Democratic votes in the Senate, and all but three Democratic votes in the House to enact the legislation, so accommodations to address these concerns are inevitable.
Hence, although it is likely that H.R.5376 will be enacted into law, it is less likely, some say impossible, that it will be the House version of the bill. And it is possible, if not probable, that the process will not be done by Thanksgiving.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
Bipartisan Traditional Infrastructure (BIF) Bill Enacted into Law
After breaking the logjam caused by linking the bipartisan traditional infrastructure bill (the BIF) to the Build Back Better (BBB) reconciliation bill, the House of Representatives approved the Senate-passed BIF on November 6. The bill contains three provisions of some interest to NAIFA members: pension smoothing, an accelerated expiration of the employee retention tax credit (ERTC), and a reporting requirement on brokers of cryptocurrency transactions.
President Biden signed the BIF, H.R.3684, into law on November 15.
The three provisions of some interest to some NAIFA members are:
Pension smoothing: The BIF provides five more years of interest rate relief to defined benefit (DB) plan sponsors. The new law extends these smoothing provisions that were first enacted earlier this year in the
American Rescue Plan. The provisions narrow the interest rate corridor to five percent for the plan sponsor’s choice of plan years 2020, 2021, or 2022 through 2025. The BIF keeps that corridor in place until 2030 and then widens the interest rate corridor gradually (at a rate of five percent per year) until it reaches 30 percent in 2035.
Cryptocurrency reporting: This provision gives Treasury the authority to impose reporting rules on brokers of cryptocurrency transactions. The reporting requirements would take effect in 2023, and the new law provides for fines and penalties for failure to report.
ERTC: The CARES Act (enacted into law in 2020) included the ERTC, a tax credit refundable against payroll tax obligations, designed to help employers keep employees on the payroll during the pandemic. The ERTC was extended, most recently until December 31, 2021, but the BIF accelerated the expiration of the ERTC back to September 30, 2021.
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
DOL Announces Extension of Non-Enforcement of Fiduciary Rules
On October 25, the Department of Labor (DOL) announced, in Field Assistance Bulletin (FAB) 2021-02, that it would extend its non-enforcement policy with respect to Prohibited Transaction Exemption (PTE) 2020-02. The non-enforcement policy with respect to PTEs against investment advice fiduciaries will now go through January 31, 2022, assuming those fiduciaries are working in good faith towards compliance with the PTE. It was initially set to expire on December 21, 2021. In addition, DOL will not enforce PTE 2020-02 specific documentation and disclosure requirements for rollovers through June 30, 2022.
DOL explained its decision as follows:
“On Dec. 18, 2020, the department adopted Class Prohibited Transaction Exemption 2020-02, “Improving Investment Advice for Workers & Retirees,” a new exemption under the Employee Retirement Income Security Act and the Internal Revenue Code for fiduciaries who provide investment advice to ERISA-covered pension plans and individual retirement accounts. This exemption became effective on Feb. 16, 2021, but the department provided transitional relief through Dec. 20, 2021, which relieved fiduciaries of the obligation to comply fully with many of the exemption’s conditions during that period.
“The department understands that the Dec. 20 expiration date of the current transitional relief poses practical difficulties for financial institutions. These institutions have expressed specific concern that they would incur significant additional costs to distribute disclosures because Dec. 20 does not align with their regular distribution cycle for disclosures. They also have asserted that the expiration date would make it difficult to conduct the required retrospective review on a calendar-year basis. In addition, financial institutions maintain that they face significant challenges in implementing the rollover documentation and disclosure requirements in a sufficiently automated and systematic manner by the Dec. 20 deadline and that these challenges and concerns may delay their ability to rely on the exemption as the department intended.
“The class exemption provides meaningful protections for individual investors, and we continue to emphasize the importance of compliance,” said Acting Assistant Secretary of Labor for Employee Benefits Security Ali Khawar. “Based on concerns raised, we’ve concluded that providing additional transition relief for financial institutions that are working in good faith to build systems to comply with the exemption conditions is appropriate.”
“FAB 2021-02 provides that from Dec. 21, 2021, through Jan. 31, 2022, the department will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently, and in good faith, to comply with the Impartial Conduct Standards (i.e., best interest, reasonable compensation and without misleading statements) for transactions exempted in PTE 2020-02. In addition, the department will not treat such fiduciaries as if they were violating the applicable prohibited transaction rules. Finally, the department will not enforce the specific documentation and disclosure requirements for rollovers in PTE 2020-02 through June 30, 2022. However, all other requirements of the exemption will be subject to full enforcement on Feb. 1, 2022.”
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
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