This is shaping up to be a big year with the Legislature. Elected officials at the state and federal levels are pledging to address everything from pensions to Medicare to Social Security. It’s never been more important to pay close attention to what’s going on in the State Legislature and Congress. Here are just a few things that will be discussed.
Colorado General Assembly
The second session of the 71st Colorado General Assembly began on January 10. Because of the PERA Board’s recommendation to lower the fund’s risk profile and ensure its long-term sustainability, PERA will be a major issue at the Capitol. Many Coloradans have just heard about the Board’s proposal from recent news coverage. But regular readers of PERA on the Issues know that PERA has been working for more than a year to address the impact on PERA’s funded status of a less optimistic global economic outlook and the longer lives of PERA retirees. In addition to the Board’s recommended package, Gov. John Hickenlooper has also included PERA reform as part of his budget.
While there are differences between the Governor’s proposal and that of the Board, the two plans share the goal of achieving 100 percent full funding within a 30-year period. The differences lie in how that goal is achieved. Comparing the two proposals, there are a few key differences, including employer contributions and the annual increase. The Board’s proposal calls for a shared sacrifice approach similar to the Senate Bill 10-001 reforms. The Governor has opted for a path that asks retirees and active members to shoulder most of the burden. A bipartisan group of legislators has been working to address the issue of PERA reform, and at least one bill is expected to be introduced in the first half of the session. Of course, this proposal and all other PERA-related legislation will be here on PERA on the Issues.
Another retirement issue state legislators are expected to tackle is a proposal to create a state retirement savings plan for private-sector workers who do not currently have access to a plan. Previous attempts at creating this type of “auto-IRA” system, or even studying the creation of one, have died on party lines.
Beyond retirement, issues legislators expect to address in 2018 include transportation, health care, education spending, and broadband.
Despite initial concerns that the sweeping overhaul of the federal tax code might dramatically alter public retirement systems, the law signed by President Trump on December 22, 2017, has little impact on those plans. The few changes generally impacting retirement plans include the following:
- Roth IRA Re-Characterizations. IRA participants are permitted to move amounts previously contributed to a Traditional IRA to a Roth IRA, and participants would be taxed at the time of that conversion. Previously, these conversions could be undone, or “re-characterized,” back to a Traditional IRA to avoid tax. Under the new law, a conversion to a Roth fund is permanent—it cannot be re-characterized after it is completed.
- Retirement Plan Loans. Plan participants with outstanding loan balances are given more time to repay them at termination of employment. Previously, the participant had 60 days to repay the loan or roll over the loan to a different plan after termination, or a taxable distribution of the outstanding loan amount was deemed to occur. Now, participants have until the deadline for filing their federal income tax returns (including extensions) to roll over such loans.
- Disaster Distribution Relief. Generally, if a plan participant takes money from a qualified retirement plan, a 403(b) plan, or an IRA, and the participant is under age 59½, the distribution is subject to a 10 percent additional early withdrawal tax. The new tax law provides an exemption from this additional tax for amounts taken due to a disaster that occurred in 2016, as long as the individual’s loss was caused by the disaster and the individual’s principal residence is in the disaster area.
- Length of Service Awards for Public Safety Volunteers. Plans may solely provide for length of service awards for public safety volunteers. Such amounts are not considered deferred compensation as long as the amount is paid on behalf of a volunteer performing qualified service and is under the limit. The tax bill increases that limit from $3,000 to $6,000 in 2018, with cost-of-living adjustments thereafter.
On the other hand, many of the provisions affecting retirement plans that initially appeared in the House or Senate versions of the tax bill are not included in the final law. These include:
- Unrelated Business Income Tax. This was a primary concern for governmental plans. Unrelated Business Income Tax (UBIT) is a tax on investment income that governmental plans have been exempt from since the UBIT first went into effect.
- Hardship Withdrawals from 401(k) Plans. 401(k) plans may allow a participant to take a distribution of elective deferrals while still employed if the participant is affected by one of the defined hardship events. The proposed bill would have permitted employers to allow hardship distributions from amounts other than elective deferrals – in other words, a participant would have been able to take hardship distributions from account earnings and employer contributions.
- Aggregation of Retirement Plan Limits. Currently, 457(b) plans have an elective deferral limit ($18,500) separate from the 401(k)/403(b) limit ($18,500 aggregated), plus special catch-up contribution limits. The proposal would have repealed special rules allowing additional elective deferral limits under 457(b) plans, and catch-up contributions under section 403(b) plans and governmental section 457(b) plans.
One of the biggest reverberations policymakers will be feeling from the tax reform bill will be the large increase in the budget deficit. While some proponents say the bill will end up paying for itself through higher tax revenues from economic growth in the coming years, the Congressional Budget Office found the reform bill will increase the deficit by $1.5-1.8 trillion over the next decade.
In order to address the looming increase in budget deficits, some lawmakers like House Speaker Paul Ryan have suggested addressing the long-ignored issue of reforming Social Security and health care programs like Medicare and Medicaid. According to the non-partisan Center on Budget and Policy Priorities, Social Security and health care programs currently account for about 50 percent of federal spending. Policy proposals to address lowering these costs include increasing retirement eligibility ages for both Social Security and Medicare and cutting benefits. Increases in the current 12.4 percent Social Security tax and 2.9 percent Medicare tax (both split evenly between employees and employers) are also possible. Currently, if lawmakers do not address the funding shortfall faced by Social Security, it is projected that future retirees would receive 75 percent of promised benefits beginning in 2033.
If lawmakers do decide to take up Social Security reform, it’s possible they will choose to address reforming the Windfall Elimination Provision (WEP), which the powerful House Ways and Means Committee Chairman Kevin Brady (R-TX) recently described as “…something we must do for our teachers, firefighters, police, and other public servants.” Bills that would have repealed WEP and the Government Pension Offset (GPO) were introduced last year, but did not receive hearings.
With 2018 just starting, it’s clear there is a potential for big changes to retirement policy. Make PERA on the Issues your go-to source for up-to-date information on all things legislative.