Compliance August 7, 2020

Stimulus Bill Projections May Impact Long-Term Savings

As both Senate and House proposals would pump trillions of dollars into the economy to aid staggering unemployment figures, concerns of possible inflation years down the line have increased.

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As industries across the U.S. anticipate the next round of pandemic relief aid, discussions are being held on Capitol Hill on potential changes that could affect long-term savings, including retirement.

As of this writing, negotiations among Republican and Democratic lawmakers remain aloof, even as their self-imposed August 7 deadline approaches. Lawmakers already have delayed their scheduled congressional August recess until a bill is passed, and negotiations could continue next week. President Donald Trump has also threatened to take executive action should Congress fail to deliver a proposal by the deadline. He has said his executive order would include payroll tax cuts, unemployment extensions and student loan repayment options.

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Under the Democratic-backed Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, which passed through the House in May, the federal $600 boost in unemployment compensation would extend until January 31. Additionally, individuals who receive state-administered aid by this date—and not federal assistance under the Coronavirus Aid, Relief and Economic Security (CARES) Act—would be eligible for the payment until March 31. The proposal also includes union pension partition relief and a waiver for the reinvestment of 2019 and 2020 required minimum distributions (RMDs).

The Health, Economic Assistance, Liability Protection and Schools (HEALS) Act introduced by the Senate in July decreases the weekly unemployment benefits to start at $200 per week. By October, this boost would be replaced with federal payments that, when combined with state aid, would reinstate 70% of a worker’s past wages, with a maximum cap of $500 per week.

As both proposals would pump trillions of dollars into the economy to aid staggering unemployment figures, concerns of possible inflation years down the line have surfaced.

“We don’t know what the impact will be of all this stimulus and what the federal government is doing with liquidity in the market, but it is unprecedented,” says Jason Field, a financial adviser with Van Leeuwen & Company.

The general consensus is that continued weekly enhancements would push inflation up some, but because the U.S. has seen low inflation levels in recent years, there is no immediate concern. Inflation levels have fallen in the past year alone, from 1.6% in June 2019 to 0.6% in June this year, according to the Department of Labor (DOL).

While the proposed second round of $1,200 stimulus checks that would go to many Americans is anticipated to increase spending—and thus boost the economy some—Chad Parks, founder and CEO of Ubiquity Retirement + Savings, urges individuals to use the additional cash in two ways: to pay down credit card or student loan debt, or to add to a savings vehicle, such as an emergency savings account or toward retirement. As most individuals struggled to accumulate savings prior to the pandemic, using these dollars could add a leg up for many. “This has heightened the need for at least short-term savings, and especially a long-term savings plan in place,” Parks notes.

Another important factor in the discussions is the salary cutoff for individuals who receive a second stimulus check. While the previous threshold stood at $75,000 and phased out for those making up to $99,000, several lawmakers have said they want to reduce the cap to individuals making less than $40,000 a year. The significant reduction could place a limit on those expecting to shrink down debt or add the incoming aid to a savings option.

The answer on whether a payroll tax cut will be implemented in the new stimulus package is undetermined, but both Field and Parks say they believe it is unlikely to be included in the updated proposal. Excluding unemployed individuals, current employees would see a 6% to 7% reduction in payroll taxes under the proposals that have been floated in the negotiations, and that money would go toward their income instead, Parks explains. However, this can negatively affect Social Security, which receives these funds to process claims for retirees, he explains. “What you’re really doing is putting more problems onto Social Security, because those dollars are supposed to fund it,” Parks says. 

Compliance August 7, 2020

District Court Says ‘Actuarial Equivalence’ ERISA Challenge Can Proceed

A previous ruling was handed down in the case in January, when the parties were given an opportunity to submit supplemental briefings as to the meaning of ‘actuarial equivalent’ under the relevant statutes.

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The U.S. District Court for the District of Massachusetts has issued a new ruling in the complex case known as Belknap v. Partners Healthcare System.

The new ruling sides with the plaintiffs in the case and rejects the defense’s motion to dismiss, based on the court’s determination that there remains “no clear answer,” at least at this stage of the proceeding, as to what is necessary for two retirement benefit forms being considered here to be “actuarial equivalents,” as is required by the Employee Retirement Income Security Act (ERISA).

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The ruling notes that ERISA does not explicitly define the term “actuarial equivalent,” and the various federal courts to consider the question have yet to agree on a definition. For that reason and others, the court says, it would be inappropriate to reject the plaintiffs’ claims ahead of discovery and further legal consideration.

A previous ruling was handed down in the case in January, when the parties were given an opportunity to submit supplemental briefings as to the meaning of “actuarial equivalent” under the relevant statutes.

As the first district court ruling explains, ERISA and other federal statues require that different types of qualified pension benefits offered to a single plan’s population must be “actuarially equivalent.” This is to say that if a participant chooses one type of annuity benefit versus another offered in the plan—in this case a joint and survivor annuity (JSA) versus a single life annuity (SLA)—the present theoretical value of each benefit choice must be equal.

“Actuarial equivalence may be a term of art, but the statute does not define it, nor is its meaning clear on this record,” the first decision states. “And under at least one plausible definition of actuarial equivalence, the way in which [plaintiff’s] retirement benefits are valued could violate that requirement.”

It now appears that the defense’s supplemental briefings were not convincing enough for the court to throw out the lawsuit upon preliminary review of the alleged facts. Technically, this new ruling comes after the parties jointly proposed that the plaintiff would respond to the issues raised in the court’s first ruling by filing an amended complaint, to which the defense could respond. On March 3, the plaintiffs filed an amended complaint that named several additional defendants. The defense, in turn, moved to dismiss the amended complaint under Rule 12(b)(6) for failure to state a claim. This new ruling rejects that motion.

At the core of this lawsuit sits the fact there is no basis in the actual text of ERISA to require that an “actuarial equivalent” be based on reasonable assumptions. As the court’s two rulings explain, this is because ERISA Section 1054(c)(3) contains no such reasonableness requirement, while other provisions in ERISA expressly do, which indicates that this omission by Congress in writing the law was deliberate. Nonetheless, the court observes, ERISA Section 1054(c)(3) still requires an early retirement benefit to be the “actuarial equivalent” of the normal retirement benefit under a plan.

“ERISA Section 1054(c)(3) does require that the two benefit forms be ‘actuarial equivalents.’ That term must mean something,” the new ruling states. “But despite using it, ERISA does not further define actuarial equivalence. Presumably, then, Congress intended that term of art to have its established meaning. Thus, the question becomes ascertaining the ‘established meaning’ of ‘actuarial equivalence.’”

The new ruling steps through various proposed definitions of these terms as argued by the defense, but the court finds none of them sufficiently persuasive to halt the lawsuit at this early stage.

“There is no clear answer, at least at this stage of the proceeding, as to what is necessary for two retirement benefit forms to be actuarial equivalents as required by ERISA,” the ruling concludes. “ERISA does not define that term, and courts have yet to agree on a definition. Nor is it clear, at least on this record, whether actuarial equivalence is in fact a term of art, or how actuaries themselves would interpret the term. It may be that expert testimony on the topic is required to resolve the issue. In any event, the court cannot resolve the issue, on this record, on a motion to dismiss.”

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