Compliance October 28, 2020

Examining Trump and Biden’s Plans on Social Security, 401(k)s and Taxes

The two candidates differ in their approaches to several key areas of importance in the retirement planning industry.

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With the presidential election days away, American workers are casting their ballots and researching the policies each candidate has introduced and supported, including their proposals on Social Security and 401(k) and tax reform.

Social Security

The Trump administration has remained tight-lipped about plans to reform Social Security taxes and benefits. Aside from President Donald Trump’s executive order on payroll tax deferrals in August, the president hasn’t offered specific plans on how his administration would handle Social Security and its potential future uncertainty. In early August, Trump called for forgiveness on the employee payroll tax deferrals he approved from September 1 through December 31. Leading up to the Republican National Convention in August, the Trump administration released a set of vague proposals, one being to “protect Social Security and Medicare.”

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John Lowell, an Atlanta-based partner at October Three Consulting, says he expects that if Trump is re-elected in November, the country will see many of the same current policies. “The Trump administration, thus far, has really not had a focus on retirement policy, as has frequently been the case,” he says.

Democratic nominee and former Vice President Joe Biden, on the other hand, has revealed plans to reinforce Social Security. In his proposals, Biden says he would expand Social Security and impose additional taxes to pay for the benefits. Currently, American workers pay Social Security taxes on the first $137,000 of wages. Biden’s plan would reimpose a 12.4% Social Security payroll tax for earners who gross more than $400,000 a year.

“It would almost be a surtax and not count on additional wages throughout the year,” says Jeffrey Levine, director of advanced planning at Buckingham Strategic Wealth in Long Island, New York. “It would not boost benefits for those individuals; it would effectively cost them more. That’s how a lot of this would ultimately be paid for.”

Levine says Biden has another proposal that would increase benefits for retirees who have collected Social Security for 20 years or longer. “While Social Security does receive cost-of-living adjustments [COLA], you can talk to any Social Security beneficiary, and they’ll tell you that they haven’t seen their checks increase in line with what their expenses have over in the last decade, as expenses have gone up so much more than Social Security benefits have,” he adds.

401(k) and Tax Reform

While Trump has yet to release details on second-term tax plans, the president has said he wants to pass a second economic relief package should he be re-elected. It’s unclear if there would be a second stimulus check for many Americans in the package or how much the check would be.

In the August agenda, the Trump administration said it wanted to enact “‘Made in America’ tax credits,” and cut taxes to “boost take-home pay and keep jobs in America,” if Trump is re-elected.

In Biden’s Emergency Action Plan to Save the Economy proposal, the candidate proposes another round of stimulus checks, but does not specify how much each check would offer.   

Lowell says Biden’s multiple proposals for tax restructuring include a potential nationwide retirement plan. Biden’s plan would offer tax credits for small businesses to help cover the costs.

“Part of Biden’s platform is that he wants availability of 401(k) or a plan that looks like a 401(k) to be automatic,” explains Lowell. “If you’re in the workforce, either your employer will offer you a 401(k), or if your employer doesn’t offer you one, there will be some sort of governmental plan.”

Lowell likens the proposal to a retirement version of the Patient Protection and Affordable Care Act (ACA) enacted under the Obama administration in 2010, in which employers could still offer health care plans as long as they met minimum criteria, despite the creation of a public option. “If you look at the way the ACA played out, employers still had the opportunity to continue offering health plans, so long as they met these standards,” he says. “They had mandatory types of coverage, maternity care, certain pediatric coverages, etc.

“With the Biden 401(k) proposal, if the employer didn’t offer some minimum, so for example something like dollar-for-dollar match, then your employees would have the right to opt in to a national plan,” Lowell continues.

Lowell predicts the national plan would be funded in one of three ways: enacting tax increases, cutting some existing policy or mandating employers that do not offer a 401(k) plan to chip in.

Other proposals in Biden’s tax policy include increasing the top corporate tax rate from 21% to 28%; creating a new minimum tax on corporations with “book profits” in excess of $100 million; taxing capital gains and qualified dividends at the ordinary income tax rate for those who make more than $1 million in income; restoring the Pease limitation, which capped the value of itemized deductions for taxpayers; and shifting 401(k) deferrals from an income deduction to a tax credit.

The last proposal would convert deductible contributions to a 26% refundable tax credit for each $1 contributed in a 401(k), individual retirement account (IRA) or other traditional retirement vehicles. This tax credit would be listed as a matching contribution in a participant’s retirement account. Aside from simplifying complexities for participants, the proposal aims to incentivize lower-paid workers to save money for retirement.

Lowell offers an example of the proposal’s benefits: “If a worker is currently in the 10% tax bracket and is saving $5,000, then that’s worth $500. It’s only worth $500 to the extent that there is a tax bill. If this became a refundable tax credit, then that $500 becomes worth $1,000 or more.”

Benefits October 28, 2020

HSA Crash Course: Rules, Regulations and Tax Issues

It is no small challenge to wrap one’s head around the current regulatory framework surrounding health savings accounts.

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The first day of the 2020 PLANSPONSOR HSA Conference featured a detailed panel discussion about the rules and regulations impacting the provision and operation of health savings accounts (HSAs).

Speakers on the digital panel included Katie Bjornstad Amin, a principal with Groom Law Group, and J. Kevin McKechnie, founder and executive director of the HSA Council at the American Bankers Association. The pair took time to dive into the heart of HSA regulations and did not shy away from the highly technical aspects of HSA management and optimization.

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Right off the bat, Amin dispelled the myth that HSAs are something new and have an unproven history, noting that the accounts were created as part of a broader legislation package back in 2003. Congress created the accounts so they could be used to accumulate money on a tax-preferred basis to pay for certain medical expenses. The accounts are distinguished from other health care benefit approaches by the fact that they belong to the individual and are carried over from year to year. Congress also established that the maximum contribution amounts would be indexed each year. For 2020, the limit is $3,550 for self-only coverage and $7,100 for a family, plus a possible $1,000 “catch-up” contribution for people age 55 and over.

As the accounts have evolved, and thanks to the strict regulations in place, HSAs primarily have been used as a complement to high-deductible health plans (HDHPs)—and they have been continuously hailed for their “triple tax advantage.” This is a short-hand phrase denoting how contributions go in tax-free, grow tax-free and can then be spent tax-free on qualified medical expenses.

As of 2020, the HDHP minimum deductible to trigger HSA eligibility is $1,400 for self-only coverage and $2,800 for family coverage, coupled with a maximum out-of-pocket limit of $6,900 for self-only coverage and $13,800 for family coverage.

The panel explained that individuals can make both pre-tax contributions through payroll deductions as well as after-tax contributions. They can also deduct from their income when filing tax returns. Another notable feature is that account holders can deduct from their own income the amount of HSA contributions made to their account by other people—but not the employer. Another favorable feature is that employer’s contributions are excluded from the employee’s income employment taxes.

Amin and McKechnie warned that over-contributions are more common than they might seem. Such contributions are defined under the law as “excess contributions,” and, technically, the account holder is responsible for remedying these. If the account holder doesn’t timely withdraw excess contributions and rectify his stated net income, a penalty of 6% of the excess contributions will be assessed on the account annually, until the issue is resolved.

When it comes to the tax-free spending phase of the HSA journey, the panel explained, most medical expenses defined under Internal Revenue Code (IRC) Section 213(d) will qualify. Thanks to recent changes in the regulations, a prescription is no longer required for over-the-counter medicines or drugs to be considered qualified. Distributions are permitted for the only following types of health insurance premiums:

  • If age 65 and over, Medicare Parts A and B, Medicare HMO [Health Maintenance Organization], and the employee share of premiums for employer-sponsored health coverage;
  • COBRA [Consolidated Omnibus Budget Reconciliation Act] coverage;
  • Qualified long-term care contracts; or
  • When receiving unemployment compensation under federal or state law.

The panel further noted that HSA funds can be used for other expenses, though different penalties and taxes will apply in certain circumstances. In basic terms, nonqualified withdrawals will be subject to normal income tax plus a 20% penalty. However, the penalty doesn’t apply if the account holder becomes disabled or turns 65.

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