Q: Congress just passed the PPACA and the HCERA, and the president signed health care reform into law — but what does all this have to do with annuities?
A: Plenty! For one, the Senate’s reconciliation bill included a 3.8 percent Medicare tax on unearned income — that includes annuities, and even possibly income recognized from the surrender or sale of life insurance.
The tax is imposed on single taxpayers with more than $200,000 in adjusted gross income, or $250,000 for joint filers. This will hit many small-business owners whose businesses are unincorporated. The tax credits in the bill won’t make up for the tax hikes because many small businesses won’t qualify for them. Also, the credits are temporary.
“This isn’t a health care bill. This is a tax bill wrapped up in health care paper,” said Susan Eckerly, senior vice president of the National Federation of Independent Business in the Washington Business Journal.
Unlike previous generations of consumers who enjoyed access to defined benefit (DB) pension plans, most members of the baby boom generation — and even younger consumers — cannot rely on an employer-provided DB pension as a means to secure retirement income. A recent report by Babbel and Merrill states that in the last 15 years, only one new pension program has been initiated. The number of pension plans in the United States peaked at 175,000 in 1983, and has since declined to less than 25,000. Meanwhile, 30 percent of the remaining programs are expected to close within the next two years.
In their place, defined contribution plans — 401(k)s, 403(b)s, etc. — have increased from 17,000 to more than 650,000. With more and more retirement savings accumulating in these defined contribution plans, the demand for a predetermined, guaranteed income stream will continue to grow.
There is proposed legislation in the Senate (S. 2832), however, that recognizes this demand by encouraging defined contribution participants to roll their plans into retirement annuities.