The House Ways and Means Committee last week approved legislation aimed at enhancing retirement savings, but the bill falls far short of what some would like to see.
The bill, H.R. 5558, was approved by a 24-10 vote and may be brought to the floor of the House this week.
The legislation essentially allows Americans to increase contributions to individual retirement accounts and 401(k) plans sooner than allowed by current law.
Specifically, the IRA contribution limit would go to $5,000 from the current $2,000 beginning in 2003 rather than 2008.
For 401(k) plans, the contribution limit would increase to $15,000 from the current $10,500 in 2003 rather than 2006.
In addition, workers age 50 and older would be allowed to make “catch up” contributions of $1,000 to an IRA and $5,000 to a 401(k) plan in 2003 rather than 2006.
Finally, H.R. 5558 increases the age when Americans are required to begin drawing money out of their IRAs and 401(k) plans to 75 from the current 70 1/2.
The provisions in H.R. 5558 came from a proposal called the Protecting Americas Savings Act that was developed by Reps. Rob Portman, R-Ohio, and Ben Cardin, D-Md.
Their original proposal, which was much more extensive, had strong industry support.
In addition to accelerating the increased contribution limits to IRAs and 401(k) plans, the Portman-Cardin proposal would have established a permanent tax credit for low- and moderate-income Americans.
Also under the proposal, single taxpayers with incomes up to $32,500 and joint filers with incomes up to $65,000 could have received a tax credit of up to $1,200 for contributions to a retirement plan.
The Portman-Cardin proposal would have also increased the contribution limits to small business-oriented plans.
H.R. 5558 drew praise from the industry, despite its being scaled back from the original Portman-Cardin proposal.
“We certainly are in strong support of any measure that promotes retirement security,” says Jack Dolan, a spokesman for the American Council of Life Insurers, Washington.
“What passed the committee contained provisions of the new Portman-Cardin bill, which we are behind,” he says.
In other news, the Internal Revenue Service announced last week that a settlement initiative regarding broad-based, leveraged corporate-owned life insurance plans will be terminated, although taxpayers have 45-day window from the date of publication in the Internal Revenue Bulletin to enter into the settlement arrangement.
After that, IRS said, it and the Justice Department will “vigorously defend or prosecute all future COLI litigation.”
IRS, in Announcement 2002-96, notes that it implemented a coordinated settlement initiative for broad-based COLI cases, which some commentators derisively call “janitors insurance,” if taxpayers agree to concede 80% of the interest deductions claimed.
This initiative applies to broad-based leveraged plans purchased after June 20, 1986.
But IRS notes that it has successfully litigated three cases involving broad-based COLI transactions.
In all three cases, IRS says, the courts denied the claimed interest deductions on the ground that the plans lacked economic substance.
As a result, IRS says, it has decided to terminate the settlement offer.
The background to the IRS decision involves the Health Insurance Portability and Accountability Act of 1996.
HIPAA effectively eliminated the interest deduction on policyholder loans in order to fund a COLI plan.
The change is retroactive and applies to all policies issued after June 20, 1986.
This change in the law is at the heart of the recent lawsuit filed by Wal-Mart of Bentonville, Ark., against New York-based AIG Life and Hartford Life, Hartford, Conn. (See NU, Sept. 16.)
Under the threat of litigation, Wal-Mart settled a tax dispute with the IRS regarding the treatment of its COLI interest deductions. It then charged the defendants with misrepresenting the risks involved with broad-based COLI plans.
Laurie Lewis, chief counsel for federal taxes with ACLI, says her understanding is that the IRS action only affects pre-1996 polices. There is no allegation, she says, that the IRS has any problem with current policies.
The recent news that the number of Americans without health insurance rose 3.5% to 41.2 million is bringing a new call for action in the form of tax credits.
Janet Trautwein, vice president of government affairs for the National Association of Health Underwriters, Arlington, Va., says the idea is picking up steam.
She notes that because of rising costs, fewer employers are offering health insurance coverage to their workers while others are increasing the employee contribution.
“A health insurance tax credit could help these people afford health insurance,” Trautwein says.
“Employers have spoken out in favor of the idea, and we hope Congress takes up this issue soon,” she says.
Tax credits, Trautwein says, represent the most viable solution to the problem of the uninsured.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.