Compliance March 8, 2006

US House Pension Bill Will Erode Saver's Tax Credit

March 8, 2006 (PLANSPONSOR.com) - Pension legislation passed by the US House would permanently extend the saver's tax credit, but in such a way that the credit would be scaled back over time and eventually disappear, the Center on Budget and Policy Priorities (CBPP) argues.
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The CBPP argues that the House bill does not index the credit’s features for inflation, meaning, over time, fewer and fewer families will have incomes in the range within which the credit applies.   The income levels above which people are ineligible for the credit would be permanently frozen, without any adjustment for inflation, but the income levels below which tax filers are ineligible because they do not earn enough to owe income tax are adjusted for inflation and consequently rise over time, according to the CBPP.

The Center further argues that, for those who would remain eligible for the credit, inflation would sharply erode its value.   The principal reason that this lack of indexing has such an effect on the credit is that the 50% “credit rate” phases down sharply after a family’s income surpasses $30,000.  The credit rate is only 10% for couples with income between $32,500 and $50,000.

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Furthermore, the CBPP says, with each passing year, fewer and fewer families will be eligible for the saver’s credit at all.  The credit is not refundable, so families that do not earn enough to incur income tax liabilities cannot use it.  The income levels at which families begin to owe federal income tax are adjusted each year for inflation and so rise over time, the Center points out.  As a result, each year fewer families will have incomes that are above the point where they owe income tax but below the $50,000 income limit for the credit.  As the income range for eligibility narrows, the number of potential beneficiaries declines.

Under the saver’s credit, enacted in 2001, married couples with incomes below $50,000, and individuals with incomes below $25,000, are eligible to receive a tax credit of up to 50% of contributions (up to $2,000) that they make during the year to employer-sponsored retirement plans or IRAs.   The act also raises contribution limits for IRAs and 401(k)’s.

Because the contribution limits are adjusted for inflation each year, and the House bill makes this provision permanent, the Center argues that the bill would permanently protect from inflation all of the retirement-related tax cuts for high-income taxpayers.   The bill’s shortcomings, though, would deplete tax benefits for those who most need help saving for retirement.

Benefits March 7, 2006

Canadian Employers Feel the Health Care Burden Too

March 7, 2006 (PLANSPONSOR.com) - Just as rising health care costs and the impending wave of baby boomer retirees have caused US employers to initiate cost-cutting changes for retiree health care coverage, a Hewitt Associates survey found that Canadian employers are considering changes too.
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In a press release, Hewitt said its survey of 218 Canadian organizations reveals that only 4% say they plan to eliminate post-retirement health care benefits entirely. However, 57% say they intend to reduce the level of benefits over the next three years. Reasons cited for the change include the rising cost of health care (95%), accounting costs (67%), and the large number of employees planning to retire in the next decade (43%).

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In addition, 55% of Canadian companies absorb the additional costs created by cutbacks in provincial health care benefits, the release said. Only 25% of surveyed respondents said they plan to absorb future costs. Also in response to political changes, while 63% of companies have not decided how they would respond to making private health care available to Canadian employees, 59% of those who have decided say they do not intend to cover the costs of private health care under any circumstances.

Naveen Kapahi, a senior benefits consultant in Hewitt’s Vancouver office, said in the release, “Escalating health care costs, combined with the economic and political changes currently underway in Canada, will force many to actively look at strategies beyond traditional cost-shifting to manage rising health care costs.”

Strategies survey respondents said they plan to utilize include:

  • Stricter eligibility requirements– According to Hewitt’s survey, 14% plan to adopt stricter eligibility requirements for workers to qualify for retiree health care benefits. In 2004, one-third of organizations (34%) did not require a minimum number of years of service before employees qualified for post-retirement health care benefits. Today, 33% of companies responding to the survey require six to 10 years of service before employees are eligible for benefits, an increase of 7% since 2004.
  • Reductions in medical coverage –Eighteen percent of organizations said they plan to reduce medical coverage for their retirees in the next three years, including eliminating medical services, increasing deductibles/co-payments and capping certain healthcare services.
  • Increased cost- sharing – Approximately one in three (30%) companies said they plan to add or increase retiree contributions to their retiree health care programs.
  • Increased flexible retiree benefit plans– As a way to control costs, many companies are now offering flexible retiree benefit programs, which enable companies to control their future benefit spending by paying for benefits through a monetary allowance instead of funding the benefits directly. Sixteen percent of companies now offer flexible benefit programs to retirees, up from 8% in 2004.

Copies of the study, “Postretirement Health Care Benefits in Canada 2006,” can be obtained by calling 416-225-5001 or emailing infocan@hewitt.com .

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