Industry Finds Good And Bad In Bushs Tax And Savings Plans
Industry experts say it is too soon to call the outcome of President George W. Bushs tax proposals but note that if passed as is, they could have profound changes on sales of annuities and retirement plans.
Among other features, Bushs plan would let married couples invest as much as $30,000 after-tax in tax-exempt savings accounts, a proposal that some argue would devastate the sale of annuities, which are tax-deferred.
But the potential damage from the legislation, if passed, could be mitigated “by legislative compromise, annuity benefits including protection and payout features, and new product innovation,” argues Andrew S. Kligerman, an analyst with Bear Stearns Inc., New York.
Industry lobbyists in Congress are actively trying to shape the Bush proposals more in favor of insurers.
One compromise being sought by the American Council of Life Insurers, is the addition of tax incentives for annuity purchases.
With many workers anticipating a retirement lasting 30 years or more, “the annuity is the only product that guarantees lifetime income to its owner,” the ACLI points out.
Bushs plan would create a variety of new types of retirement plans that could pose a threat to certain traditional insured products.
Employer retirement savings accounts (ERSA) would consolidate employer-sponsored defined contribution retirement plans into a single simplified plan, eliminating the need for 401(k)s, SIMPLE 401(k)s, 403(b)s and 457 college savings plans.
In an analysis of the administrations proposals, the Principal Financial Group, Des Moines, Iowa, notes that the top-heavy test would not be required for all defined contribution plans under the proposed ERSA rules. That test is designed to assure that employer plans do not discriminate in favor of high-level executives.
Nondiscrimination requirements for ERSA contributions would be satisfied by a single test, or plans could choose a new safe harbor to avoid this test altogether, the Principal points out.
Other elements of the Bush proposals include lifetime savings accounts and retirement savings accounts.
LSAs could be used for any type of saving, including childrens education or a new home. Account holders could contribute $7,500 per year, regardless of age or income. Contributions would not be deductible but earnings would grow tax-free, and the money could be withdrawn without penalty at any time.
The proposed retirement savings accounts would consolidate traditional IRAs, nondeductible IRAs and Roth IRAs into a single plan.
Anyone could contribute up to $7,500 per year (on top of LSA contributions), to an RSA. Contributions would not be deductible but earnings would grow tax-free, and savings could not be withdrawn without penalty except for retirement.
Despite their potential for reducing demand for tax-advantaged products, the proposals are not causing insurance executives to panic.