Employee benefits - the next generation. (News & Views) (column)by Curtis, James A.
How do you measure the effect of the 1980s on employee benefits? If you are a Congressional committee staff member, you might list your accomplishments as a half-dozen major pieces of legislation. A member of the FASB might point to SFASs 87 and 88 as accomplishments. However, some employee benefit professionals might say that calling these developments "accomplishments" is as much an oxymoron as "bureaucratic efficiency."
Benefit professionals do not argue that employee benefits should be exempt from legislative change. But, during the 1980s, the reason for most changes seemed to be budget considerations--coupled with a Congressional philosophy that the end justifies the means. Rules deemed onerous by sponsors caused many employers to terminate plans or curtail benefits, thus depriving participants of future benefits. Perhaps Congress should have been required to follow the admonition it gave to benefit professionals under ERISA: to act on behalf of plan participants.
Plan sponsors were also forced to comply with FASB statements. This added a new layer of costs while doing nothing for plan participants. Government agencies promulgated rules that were inconsistent. All too typical was the case of the employer forbidden by the IRS to make a deductible contribution to a plan because it was over-funded, while the PBGC required a higher premium because the plan was under-funded. Is it any wonder that small- and medium-sized employers have responded by reducing their contributions to employee benefits by 14% in the last three years?
As we leave the "Embattled Eighties," we see Congress retreating on two fronts. Sec. 89 legislation has been repealed. These nondiscrimination rules were so complex that they were almost universally opposed. Intense lobbying forced Congress to retreat. In addition, Catastrophic Medicare was deemed far too costly to the elderly and was similarly repealed.
The 1980s Are Over
It would be wonderful represents a trend--that perhaps we are entering the "Nicer Nineties." Unfortunately, that's probably too optimistic. There are too many variables on the horizon to justify such a designation. Perhaps the "Negotiable Nineties" will replace the rather hard-handed approach to employee benefits shown in Washington in the past. Perhaps the best thing about the 1980s is simply that they are over.
What will happen to employee benefits is hard to predict. What will be on the agenda is a somewhat easier prediction.
The eyes of many in Congress will be on burgeoning pension funds (now totalling approximately $2 trillion). Because a good deal of Congress' time is spend on budgetary matters, rest assured that the agendas of many Congressmen will include finding ways to gain revenue from this source. This will create sponsor problems (with a capital "P" and that rhymes with "T" and that stands for "tax"). So far, the talk has centered on taxing the earnings of pension funds. If this is done, an offset against gross retirement income should be allowed to ensure that participants are not faced with double taxation. An interesting question is whether earnings on funds used to pre-fund retiree medical benefits would be taxed, assuming such pre-funding is required.
On the agenda of one Congressman (and a very powerful one) is Sec. 89. Rep. Rostenkowski took this defeat rather hard and has promised that it will be revisited. The thinking in Congress is that, for the revised legislation to pass, the rules will have to be more palatable to plan sponsors. In any event, some form of nondiscrimination legislation will be offered in 1990, according to many Congressional observers.
Catastrophic Medicare will return to the 1990 Congressional agenda, primarily because it has never really left it. Reacting to much lobbying and constituent pressure, Congress finally decided to repeal this controversial legislation. Many elderly could not afford the cost, and many already had similar coverage. Before a new Medicare proposal can be passed, Congress must decide whether it will be paid for by the general public or by just the retired population.
FASB Effect on Benefits
FASB staff will continue to work on accruing the cost of retiree medical obligations. Required expensing may have two effects on benefits:
1. Plan sponsors may curtail or terminate such benefits, to the extent this is possible; or
2. Congress and/or the IRS will have a say in the tax consequences of any attempt to fund these benefits.
To the extent that retiree medical benefits are reduced or eliminated, the FASB's "good accounting" motives will ultimately have a negative effect for retirees.
A national policy for retirement income will be discussed again. The Clay-Heinz bill surfaced in 1985 but did not get far because Congress was preoccupied with finding ways to increase revenues. It will surely return to the agenda. The support it receives will depend on the structure of such a policy. While the Clay-Heinz bill did not get a full hearing, some features are generally considered to be acceptable as national policy:
1. Designating pension plans as either retirement plans or capital accumulation plans, with the latter not available to sponsors unless a retirement plan is in place or planned.
2. Placing some restrictions on minimum benefits or contributions required and on maximum benefits or contributions allowed.
3. Imposing greater penalties on early (prior to age 59-1/2) distributions from plans.
Medical benefits currently cost 11% of payroll and are expected to reach 15% of payroll by the year 2000, an increase of more than one- third. Surveys show that people value their benefits highly. If costs continue to escalate, sponsors will be forced to either bear the additional cost or cut back. The latter choice will place various benefits in direct competition for the sponsor's dollars. This, perhaps more than any development, points out the need for a holistic approach to employee benefits.
Don't Leave to Political Whims
Experts agree that most benefit changes were previously driven by tax considerations. This is not the best of all possible worlds. Top-heavy rules, for example, were enacted because they would provide an additional $2 billion in revenue. However, employee benefits are too valuable to leave to political whims and annual budget battles. In the future, the major effort for plan sponsors, participants, and benefit specialists alike may be to turn heads in Washington toward the realization that a stable employee benefit structure is good social policy. If this happens, a "Navigable Nineties" may be attained.
James A. Curtis, FSA, Chairman and CEO of Milliman and Robertson, Inc., benefit consultants
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