Compliance October 30, 2015

Social Security Changes Hammered Out in Budget Deal

There is a concept in biology called punctuated equilibrium, in which long periods of stability are interrupted, rapidly and unpredictably, by meaningful change. It’s an apt metaphor for discussing Social Security, especially after a week like this. 
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Changes to Social Security are a famous sticking point in American politics, but some complex budgetary maneuvering that took place this week in Washington shows rapid compromise is still possible, even when it comes to changing the benefits collected by American retirees.

This week, Congress and President Obama signed onto a two-year federal budget deal, negotiated by a suddenly deposed and outgoing House Speaker, that makes fairly significant changes to the way people file for Social Security. The Social Security system is not fundamentally changing, experts were quick to point out, but the text of the deal reached by Washington’s top power brokers does alter the “file and suspend” system, among other changes.

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Industry media and practitioner consensus seems to be that the budget deal could ultimately reduce the amount of Social Security collected by a given individual or couple, but provisions of the deal are also likely to at least maintain, if not improve, the viability of the Social Security System.

For example, Section 813 outlines “new and stronger penalties” for those found guilty of conspiracy to commit Social Security Fraud, and Section 824 allows for Social Security to enter into information exchanges with payroll providers to ensure the accuracy of benefits due and eligibility of claimants.

NEXT: End to file and suspend? 

The relevant changes for retirement planning professionals who give advice about Social Security are in Subtitle C of Title VIII, “Protecting Social Security Benefits.” It deals with a variety of matters related to the amount of benefits people receive from Social Security and how they file, starting with Section 831, detailing the “closure of unintended loopholes.”

The file and suspend method is a common strategy shared by advisers with clients. It allows the higher-earning spouse to claim benefits at full retirement age and voluntarily suspend the receipt of those benefits until a later time; this provides the lower earning spouse the opportunity to claim and immediately receive spousal benefits.

The budget bill still allows for individuals to suspend payment of benefits; however, "no monthly benefit shall be payable to any other individual on the basis of such individual’s wages and self-employment income; and no monthly benefit shall be payable to such individual on the basis of another individual’s wages and self-employment income.’’

The changes apply to individuals who attain age 62 in any calendar year after 2015, and are effective for benefits payable for months beginning 180 days following enactment of the legislation.

Compliance October 30, 2015

Changes DB Plan Sponsor Clients Would See with Budget Bill

The Bipartisan Budget Act of 2015 includes some good news about funding calculations and mortality tables, but there is some bad news in it too.
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Many retirement plan adviser clients will be impacted by provisions of the Bipartisan Budget Act of 2015 (H.R. 1314), but especially sponsors of defined benefit (DB) retirement plans.

The bill provides that the single-employer fixed Pension Benefit Guaranty Corporation (PBGC) premium would be raised to $68 for 2017, $73 for 2018, and $78 for 2019, and then re-indexed for inflation. The variable rate premium would continue to be indexed for inflation, but would be increased by an additional $2 in 2017, and additional $3 in 2018, and an additional $3 in 2019.

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Under current law, the due date for premiums is generally the 15th day of the tenth full calendar month of the premium payment year. The budget bill would bump that due date up to the 15th day of the ninth calendar month beginning on or after the first day of the premium payment year.

Under current law, private-sector DB plans generally must use mortality tables prescribed by the Treasury for purposes of calculating pension liabilities. However, plan sponsors may apply to use a separate mortality table if the table they want to use reflects the actual experience of the plan and projected trends, and if there are a sufficient number of plan participants and the plan has been maintained for a sufficient period of time to have credible information to back that up.

The Bipartisan Budget Act of 2015 would make it easier for DB plan sponsors to get approval to use mortality tables other than that prescribed by the Treasury. The determination of whether the plan has credible information would be made in accordance with established actuarial credibility theory, and a plan may use tables that are adjusted from the Treasury tables if the adjustments are based on a plan’s experience.

NEXT: Funding relief not all good news

DB plans were given relief for funding calculations by the Highway and Transportation Funding Act of 2014 (HATFA). HATFA extended relief provided in the Moving Ahead for Progress in the 21st Century Act (MAP-21)—passed in 2012—which allowed defined benefit plans to discount future benefit payments to a present value using a 25-year average of bond rates rather than a two-year average. MAP-21 created a “corridor” of rates on either side of a 25-year average that were permissible for discounting purposes. If the two-year average falls outside this corridor, a company can use the 25-year average that is closest to the two-year average in the corridor. HATFA reset the corridor’s boundaries.

The budget bill would keep the corridor on interest rates at 10% through 2019, then increase it by 5% through 2023, and set it at 30% beyond that. This provision would generally be effective for plan years beginning after December 31.

While this provides relief to employers when calculating liabilities and determining required contributions to their pension plans, the bill summary notes that DB plan sponsors that choose to take advantage would have more taxable income because the contributions they elect to defer are tax-deductible when contributed. The provision is also estimated to result in increased PBGC premiums because sponsors that take advantage of the relief would have a larger base for purposes of computing the variable rate premium on underfunding.

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