Five major policy issues are likely to dominate Washington's 2011-2012 calendar: health care reform implementation, targeted jobs creation measures, tax policy, retirement security and immigration. Overshadowing all of these, of course, is the compelling question of reducing the federal budget deficit and government debt as a percentage of GDP.  

 

2011 Compliance Outlook

Five major policy issues are likely to dominate Washington's 2011-2012 calendar: health care reform implementation, targeted jobs creation measures, tax policy, retirement security and immigration. Overshadowing all of these, of course, is the compelling question of reducing the federal budget deficit and government debt as a percentage of GDP. 

  • Healthcare Reform Implementation. In some ways, the November congressional elections were a referendum on the new health care reform law and helped Republicans regain control of the U.S. House of Representatives. Many employers believe the compliance crunch is only beginning on health care reform. They are convinced that the Patient Protection & Affordable Care Act charts a flood of new regulations for years to come, especially in reporting requirements and added tax burdens. 

    Indeed, close inspection of the legislation reveals new employer compliance burdens for 2011, 2012, 2013, 2014 and even 2018. These include a prohibition on FSAs for over-the-counter drugs, W-2 reporting of the value of worker health benefits, extensive reporting to IRS and employees of health coverage information, limits of annual FSA elections, special new Medicare taxes on higher-income employees and a new excise tax on so-called Cadillac health plans. 

    Ironically, questions about what Republicans may try to do to change the new law is contributing to uncertainty regarding health care policy. "Repeal and Replace" may be the rallying cry of newly elected members of Congress, but it's not likely to happen legislatively with Democrats still in control in the Senate and the White House. 

    Expect Republicans to push for amendments that remove the most controversial provisions of health care reform, including the individual mandate, the employer mandate and perhaps even the 40 percent excise tax slated for 2018. To be sure, the decision of a federal judge in Virginia on Dec 13 to strike down the new law's individual mandate provision adds to employer uncertainty. While the constitutionality of the provision will ultimately be decided by the Supreme Court, the Virginia court decision leaves this key question up in the air for the time being.
  • Targeted Jobs Creation. Jobs will continue to be the main focus of congressional and voter concern. Unlike most other measures that Congress approved, the HIRE Act employer tax holiday enjoyed bipartisan support in 2010. However, unemployment remains stubbornly in the 10 percent range with upfront hiring costs a big obstacle, especially for smaller businesses. 

    President Obama and Congress appear close to agreement on a payroll tax holiday that would cut employee Social Security taxes for 2011 from 6.2% to 4.2%, saving taxpayers who earn $50,000 per year $1,000 in payroll taxes. For a two-earner household grossing $120,000 the payroll tax holiday would cut taxes by $2,400. It's thought that the payroll tax cut will spark consumer spending and thus directly help create new jobs.
  • Tax Policy. Highest on the tax policy agenda for the rest of 2010 and into 2011 are the Bush-era income tax rate cuts. The cuts were enacted as part of the 2001 and 2003 economic stimulus measures and are scheduled to expire at the end of 2010. 

    Put simply, President Bush and Congress, on a bipartisan basis, engineered legislation that reduced tax rates that ranged from 15 percent to 39.6 percent to 10 percent to 35 percent, i.e., across-the-board tax rate cuts. At the time, the impetus was that these tax cuts would jolt the economy, which they did, and that Congress would take another look in 2010, possibly ending some rate cuts depending on the state of the economy. 

    To be sure, no one in Washington, D.C., advocates allowing all of these rates to revert to the levels prior to 2001 while the economy continues to struggle as it would represent a major across-the-board tax increase. The big political and economic issue is, however, whether the tax rate applicable to the highest income households remains at 35 percent or returns to the previous 39.6 percent rate. 

    Congress and the president are reportedly close to an agreement on a two-year extension of all the tax rate cuts that may be coupled with an extension of emergency unemployment insurance benefits. But these issues must be resolved soon and somehow balance the need to avoid raising taxes in a soft economy with concern about U.S. federal budget deficits. 

    Looking ahead, tax policy, including personal income tax rates and withholding, will be addressed in the larger context of deficit reduction as a whole, including slowing the growth on government spending. A philosophical struggle between Democrats and Republicans over the mix of spending cuts and tax hikes needed to rein in runaway budget deficits is on the horizon. While President Obama and Capitol Hill are not likely to make much progress on deficit reduction in the next two years, they are acutely aware that the public debt crisis clock is ticking and that extraordinary leadership will be required to restore America's fiscal credibility.
  • Retirement Security. The fourth issue on the congressional and White House agendas for 2011 and beyond is retirement income security. 

    America faces a retirement income security crisis of mammoth proportions. The recession, the collapse of stock prices and historically low interest rates have negatively impacted defined benefit pension funds -- particularly state and local public employee pension plans. Many company-sponsored defined benefit plans are similarly underfunded. 

    Employee-managed defined contribution plans, i.e., 401(k) plans and their nonprofit and public sector brethren, have been affected by the stock market crash and the recent stall in stock prices. Indeed, the 2007-2008 stock market collapse was the first of the 401(k) era. This was the first time that rank and file employees saw their self-managed retirement plans take the full brunt of panic on Wall Street. 

    Stock prices are generally lower than they were 10 years ago. Millions of plan participants have seen their retirement savings shrink. Only additional contributions keep the plans above water. 

    Compounding the plight of 401(k) plans has been the decision of one-third of U.S. employers to suspend or reduce the company match. Almost half of these employers have yet to restore it. 

    Furthermore, Washington policy makers, including President Obama, have noted that almost half of the U.S. workforce, some 70 million workers, do not have access to an employer-sponsored retirement plan and no tax-favored means to save for retirement. 

    Finally, we may see long overdue action to prevent Social Security insolvency. Soaring unemployment has had the double-barreled effect of fewer people and employers paying Social Security taxes as more people elect reduced Social Security benefits at age 62. 

    As a result, Social Security benefits edged ahead of payroll tax revenue not in 2016, as had been the forecast, but in 2010. This year, for the first time in 28 years, payroll tax revenues will total less than benefits payouts. Social Security will need to redeem approximately $40 billion in U.S. Treasury IOUs in order to pay all benefits. 

    Possible Retirement Security Initiatives 
    On the issue of employer-sponsored retirement plans, expect first priority to be assigned to ideas to help those who have no tax-advantaged retirement options. 

    In this connection, Representative Richard Neal (D-MA) and Senator Jeff Bingaman (D-NM) have introduced, respectively, HR 6099 in the U.S. House of Representatives and S. 3760 in the U.S. Senate. While there are some differences, both bills require employers who do not offer their workers any retirement savings plan to set up Auto-IRA accounts into which a default contribution of 3 percent of pay would automatically be invested. 

    Employers could choose an IRA service provider from a central online resource developed by the U.S. Treasury into which all employees' deposits would be made. All auto-IRA deposits would have the same three investment options, including a special U.S. Treasury R (retirement) bond. Employees could opt out of participation within 90 days as under the Pension Protection Act opt-out process. With strong support from President Obama, there's a possibility that auto-IRA legislation will be enacted in 2011, though House Republicans are not likely to support an employer mandate. 

    A consensus appears to be lacking on policy to strengthen 401(k) and similar defined contribution plans. Look for hearings in the House and Senate on new proposals that may have a special focus on the distribution equity of tax benefits associated with 401(k) type retirement savings. Recent data suggest that higher income households may enjoy a disproportionate share of 401(k) plan tax benefits. 

    In the meantime, expect continuing discussions on the issue of fee disclosure as some allege that the management fees for defined contribution retirement plans are not fully transparent to employees. On July 16, 2010, the Department of Labor issued final interim rules to assist plan sponsors in assessing the reasonableness of fee arrangements. However, continuing scrutiny of this issue can be expected in 2011. 

    On the issue of Social Security, President Obama's National Commission on Fiscal Responsibility and Reform, chaired by former Clinton administration official Erskine Bowles and former U.S. Senator Alan Simpson, recently recommended changes to strengthen Social Security's financial situation. 

    The commission called for scaling back the growth of Social Security benefits -- especially for higher income individuals; bumping up the retirement age and stepping up the Social Security taxable wage base. 

    The big question for 2011 and 2012 is whether elected officials, Democrats and Republicans, will be able to put aside their partisan politics and work together on a compromise solution to save Social Security.
  • Immigration. The action of the Arizona Legislature and Governor Jan Brewer in enacting a special law aimed at identifying, prosecuting and deporting illegal immigrants has once again thrust the issue of illegal immigration front and center in American politics. 

    In July, the U.S. Justice Department filed suit in federal court in an attempt to block enforcement of this statute, and a federal judge has now blocked the most controversial parts of the Arizona law from taking effect. The state of Arizona intends to appeal the judge's ruling all the way to the U.S. Supreme Court, guaranteeing that this issue will remain in the spotlight over the next couple of years. 

    Meanwhile, Congress appears to be deadlocked on legislation to improve border enforcement, crack down on the flow of illegal immigrants and possibly agree on some pathways to citizenship for many of the 12 to 20 million people currently residing illegally in the United States. 

    If the issue of the constitutionality of Arizona's law regarding illegal immigrants reaches the U.S. Supreme Court, it is impossible to predict how the Court would decide the case or if Congress would be able to act on immigration reform. Pressure will continue to build on employers to more aggressively screen the employment eligibility of their new hires. 

    To this end, the Department of Homeland Security (DHS) and the Social Security Administration (SSA) continue to work together to improve the operations of the E-Verify electronic employment eligibility verification system. Some 216,000 employers now voluntarily use E-Verify with more than 13 million queries in fiscal year 2010. 

    In 2011, it's possible that greater pressure could be placed on employers to utilize E-Verify. Some federal and state government contractors have already been mandated to use E-Verify. Other employers may also be mandated to use the verification system. 

    The state of Arizona has sparked new and intense concern about illegal immigration -- long a festering issue on Capitol Hill. Look for President Obama to reach out to Republicans in 2011 in an effort to initiate compromise legislation that might combine tougher border security, a pathway to citizenship for some undocumented workers and possibly a greater role for employers in screening the employment eligibility of new hires.
    • implementation of the Patient Protection & Affordable Care Act
    • tax policy, especially payroll taxes and income tax rates
    • jobs creation policy and the social safety net
    • retirement security, particularly shoring up Social Security
    • immigration reform
  • Conclusion

    With enactment of the economic stimulus plan, health care reform and financial system restructuring, 2009-2010 legislation has far exceeded anything seen in the past 25 years. 

    Nevertheless, other critical issues now demand resolution, including: 

    With Democrats in control of the White House and the Senate and Republicans in control of the House of Representatives, one can only hope that legislative gridlock does not become the default option. 

    The 2009-2010 and the 2011-2012 legislative and regulatory agendas have one thing in common: employer compliance. The pendulum has shifted toward more government regulations, more demands on employers and more uncertainty. 

    As employers fasten their seat belts for the next wave of legislation and regulations, they will need to stay alert, stay informed and be prepared for new compliance obligations. Working and learning with trusted advisers, employers will step up to these challenges, in which HR, payroll and benefits professionals will play a leadership role.