Health And Retirement Benefits: The Impact And Influence of Tax Incentives Considered

from Spencer’s Benefits Reports: Workers routinely rank their employment-based health coverage as the most important benefit they receive, followed by a retirement plan—but the tax preferences that support them are drawing increased scrutiny, the Employee Benefit Research Institute (EBRI) noted. Consequently, EBRI recently held a day-long policy forum in Washington, D.C., titled ‘After’ Math: The Impact and Influence of Incentives on Benefit Policy, to examine the implications of reduced or withdrawn tax incentives for private-sector health and retirement benefits, as well the costs and consequences and the numbers involved. This forum, EBRI’s 70th biannual forum on benefits issues, drew approximately 100 experts, benefits professionals, and policy makers to provide their perspectives and predictions.

As a new EBRI report about the forum notes, the reach and impact of these benefits is immense. Employment-based health benefits are the most common form of health insurance in the United States, covering nearly 59 percent of all nonelderly Americans in 2010 and about 69 percent of working adults.

Assets in employment-based defined benefit (pension) and defined contribution (401(k)-type) plans account for more than one-third (34.3 percent) of all retirement assets held in the United States, and a significant percentage of assets held today in individual retirement accounts (IRAs) originated as a rollover account from an employer-sponsored program. Not surprisingly, workers highly value these benefits.

Since private-sector health benefits alone rank as the largest single “tax expenditure” in the federal budget, accounting for $184.5 billion in fiscal year 2012, various proposals have been made to either reduce or even phase out the cost of that program to the government. Both for employers that sponsor these benefits—and the workers who receive them—the implications are enormous, EBRI noted. Tax preferences for Sec. 401(k) plans, at $57.6 billion, rank as the third highest tax expenditure in fiscal year 2012 (mortgage interest deductibility ranks second).

“When you look at some of the recent proposals for reform, benefit plan tax incentives are an area of total and complete volatility, and neither employers nor workers can have any certainty of what lies ahead,” said Dallas Salisbury, EBRI president and chief executive officer.

Industry experts and researchers at the policy forum pointed out the following issues on those topics and on ways to influence benefit plan outcomes:

    • As important as retirement and health benefits are to Americans’ short- and long-term economic security, the sheer size of their tax preferences makes them vulnerable in the battles over deficit reduction and tax reform.
    • Retirement benefits are a tax deferral rather than an exclusion from income—the federal government will eventually recover the forgone revenue. This distinguishes retirement plan deferrals from other tax exclusions.
    • Because the tax expenditure on 401(k)-type plans is a deferral, rather than an exclusion, reducing the tax expenditure in the current period also reduces the positive stream of revenue in the future.
    • A big difference between tax-expenditure estimates and revenue estimates for scoring tax reform is that the latter incorporates taxpayer behavior; whereas tax expenditure estimates do not.
    • Ten percent or fewer of those ages 55 to 60 are making withdrawals from their IRAs, compared with 80 percent of those 71 and older.
    • On a historical basis, depending on the period measured, pre-retiree balances in defined contribution retirement plans double about every eight to nine years.
    • Employer match levels appear to have a bigger impact on older workers, but automatic enrollment seems much more significant in terms of getting younger employees to participate in retirement plans.
    • Common challenges for underfunded retirement systems worldwide include the need to increase the state pension age and/or “normal” retirement age for full benefits; to promote higher labor-force participation at older ages; to encourage or require higher levels of private saving; to increase retirement coverage of employees and/or the self-employed; and to reduce savings “leakage” prior to retirement.

For more information, visit Speaker presentations, a webcast recording of the event, and other information are online at EBRI’s website at