SEC Sees New Role in Social Security Privatization

February 5, 2001 (PLANSPONSOR.com ) - If individuals are allowed to make individual investments in their Social Security accounts, it will force the Securities and Exchange Commission into a new role, a SEC commissioner said.

That new rule will include more investor education, corporate governance, and the disclosure of more material information, according to SEC Commissioner Paul Carey.
 
What prompted the Commissioner’s comments was a campaign pledge by now-President George W. Bush  that individuals would gain more control over the way their social security contributions are invested, including taking a discretionary role in their allocation.
 
With the prospect that millions of Americans will have an active role in selecting investment for an as yet undetermined amount of their social security contributions, the SEC will be on the front lines of providing investor education, the commissioner said.  And that has not been an area it has ever focused on, on such a huge scale, the commissioner said.  Potentially, some 140 million new accounts could be created.
 
Among the concepts individuals should be familiar with before they make their own investments include,  risk and reward, company disclosures, and hidden trading and mutual fund administrative fees, Carey said.
 
Some proponents have called for allowing individuals to use as little as 2% of Social Security assets for discretionary investing.  But Carey said that this approach could fail to meet its goal for millions of low-income workers since administrative fees would eat up any gains.  This would create a “portfolio marching in place.” 
 
Francis Cavanaugh, the first executive director of the Federal retirement Thrift Investment Board, earlier told PLANSPONSOR.com that high administrative expenses and a lack of employer expertise would not produce any benefits for many people in the huge Social Security program.
 
“But there are many more small businesses which are not sophisticated when it comes to 401(k) plans, and many of their employees are not even literate in the language of business. There is no 401(k) plan around that is not heavily dependent on the employer’s administrative expertise and that would just not be there is mass privatization would happen,” Cavanaugh said.
 

IRS Proposes Regs on Excess Pension Transfers to Health Plans

January 5, 2001 (PLANSPONSOR.com) - The IRS has proposed regulations that would impose conditions on health coverage reductions once excess pension assets have been transferred to a health benefits account.

The regulations, released January 4, say that the minimum cost requirement of Section 420(c)(3) is not met if the employer “significantly” reduces health coverage during the cost maintenance period after a transfer of excess pension assets under Section 420, according to BNA.

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The provision to transfer assets was scheduled to expire in 1999, but was renewed with the addition of Section 420(c)(3)(E) to the Internal Revenue Code.  That section required the Treasury secretary to develop regulations that would prevent an employer who reduced health coverage during the cost maintenance period from meeting the minimum cost requirement – and getting the tax benefit. 

Completion of regulations implementing Section 420(c)(3)(E) was on the IRS’s 2000 Priority List.

The Proposal

The proposed regulations state that the number of individuals who lose coverage during the cost maintenance period as a result of employer actions will be measured both on an annual and cumulative basis.

Essentially a decrease of 10% in the number of individuals covered in any year or a 20% decrease over the five-year cost maintenance period would fail the minimum cost requirement.  The change would take effect February 5.

Employer actions include:

  • plan amendments
  • the sale of all or part of the employer’s business
  • any action that indirectly ends an individual’s coverage

Background

Employers were allowed to make transfers to health benefits accounts (a 401(h) account) following passage of the 1990 Revenue Reconciliation Act, subject to certain limitations, including the amount transferred could not be more than the amount reasonably estimated to be paid out during the year of transfer. 

Another key restriction in order to receive tax benefits, was the requirement that health expenditures for covered retirees and dependents be maintained at a minimum dollar level for five years following the qualified transfer. 

However, the minimum cost requirement was originally defined in terms of a per person cost, which meant that employers could meet the requirement simply by reducing the number of covered workers.

Comments Requested

The IRS is requesting comments on the proposed regulations, which must be received by March 6.  IRS will hold a public hearing on the proposal in Washington, DC on March 15.

– Nevin Adams        editors@plansponsor.com

Comments should be sent to CC:M&SP:RU (REG-116468-00), Room 5226, Internal revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. For further information, call Vernon Carter or Janet Laufer at (202) 622-6060.

The proposal 

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