Legislation approved by the House on November 19 includes provisions with important retirement, healthcare, compensation and benefit implications. The House approved the Build Back Better Act (H.R.5376) by a vote of 220 to 213 after months of negotiation and delay. The timing for Senate debate and final enactment are unclear.
The Build Back Better Act is a wide-ranging legislative package that includes numerous tax, environmental, education and healthcare provisions. Some of the act’s provisions would limit aggregate retirement savings for some taxpayers, eliminate certain Roth conversions, reduce the Affordable Care Act (ACA) employer affordability threshold, require group health plans to cover insulin products with limited cost sharing, establish a federal paid family and medical leave policy, and make other changes with implications for compensation and benefits. Changes to the legislation are expected as the legislation moves through the Senate.
Revenue raisers affect retirement plans
To help offset the cost of other provisions in the legislation, the Build Back Better Act proposes a corporate alternative minimum tax that holds implications for employers that sponsor defined benefit pension plans or funded retiree welfare plans. The act also includes two provisions that raise revenue by imposing restrictions on defined contribution plan and IRA plan balances and eliminating certain Roth conversions.
- $10 million cap on retirement savings. Taxpayers with incomes exceeding $400,000 ($425,000 for heads of household and $450,000 for joint tax filers) generally would be subject to a $10 million limit on aggregate balances in their defined contribution plans and IRAs after 2028. Taxpayers with balances that exceed the limit would be prohibited from making additional contributions and would have to take distributions to reduce the excess. In addition, plan sponsors would be required to report to the IRS and to the plan participant when someone’s account balance exceeds $2.5 million.
- Elimination of Roth conversions. Conversions of after-tax defined contribution plan or IRA contributions to Roth accounts would be prohibited after 2021. In addition, taxpayers with incomes exceeding $400,000 ($425,000 for heads of household and $450,000 for joint filers) would not be able to convert pre-tax defined contribution or IRA amounts to Roth accounts after 2031.
- Corporate alternative minimum tax. A 15% alternative minimum tax would be imposed on the adjusted financial statement income of corporations with adjusted average financial statement income of $1 billion or more for any three consecutive years beginning with 2020 and ending with the year before the current taxable year. Under the provision as currently drafted, if the sponsor of a defined benefit or retiree welfare plan is subject to the tax, accounting cost or income under ASC 715 would be included in the adjusted financial statement income. This could result in higher taxes on companies that, for example, have experienced favorable investment performance in their pension and funded retiree welfare plans or changes to interest rates, especially if using mark-to-market accounting. In addition, tax deductions for contributions to defined benefit and retiree welfare plans would appear to be effectively lost if the plan sponsor is subject to the alternative minimum tax.
Healthcare provisions address ACA, prescription drugs and other issues
The Build Back Better Act includes a range of healthcare provisions, including provisions that directly affect employer-sponsored health plans:
- ACA premium tax credits and reduced employer affordability threshold. The American Rescue Plan Act (ARPA), enacted in March 2021, expanded ACA premium tax credits for 2021 and 2022 by expanding eligibility, reducing the amount of household income credit recipients would be required to pay toward their premiums and making other changes. The Build Back Better Act would extend those changes until 2026. In addition, for 2022 – 2026, the act would reduce the affordability threshold for employer-sponsored coverage to 8.5% of household income (with no annual indexing) for 2022 – 2026. The threshold is 9.83% for 2021. The act also includes other changes to ACA credit eligibility.
- Insulin coverage and cost sharing. Group health plans would be required to cover at least one dosage form (such as vial or pump forms) of each insulin type (e.g., short-acting, long-acting) without imposing the plan’s deductible. In addition, cost sharing for a 30-day supply of an insulin product would be limited to the lesser of $35 or 25% of the plan’s negotiated price for the product. The provision would take effect for plan years beginning after December 31, 2022.
- Prescription drug cost negotiation. The Secretary of Health and Human Services would be granted the authority to negotiate the cost Medicare beneficiaries would pay for a limited number of single-source prescription drugs for which the initial exclusivity period has elapsed, beginning with 10 drugs in 2025, increasing to 15 drugs in 2026 and then to 20 drugs in 2027 and later years. In addition, rebates would be required from drug manufacturers when prices of certain Medicare Part B and Part D drugs increase faster than inflation. The rebate requirements would begin in 2023.
- Medicare Part D benefit structure. The Build Back Better Act would modify the Medicare Part D benefit beginning in 2024. The maximum deductible would be reduced to $2,000; beneficiary coinsurance during the initial coverage phase would be 23%, and the amounts that Medicare and prescription drug manufacturers would pay toward amounts that are not subject to beneficiary cost sharing would be adjusted.
- Civil monetary penalties for mental health parity violations. Plan sponsors and administrators would be subject to ERISA monetary penalties for violations of the Mental Health Parity and Addiction Equity Act (MHPAEA). If enacted, the penalties would apply for MHPAEA violations that occur one year or more after the date of enactment.
- Pharmacy benefit manager (PBM) oversight. PBMs would be required to provide machine-readable reports to group health plan sponsors every six months. The reports would include information about rebates, fees and compensation paid by drug manufacturers to PBMs and other information. The provision would apply for plan years that begin after December 31, 2022.
- Medicare hearing benefits. Medicare would cover hearing benefits, including hearing aids, beginning in 2024.
- Medicare rebate rule. The act would prohibit implementation of the November 2021 Medicare rebate rule, which generally requires that rebates from drug manufacturers be provided to beneficiaries at the point of sale. Implementation of the rule is delayed until 2026 under a provision in the recently enacted Infrastructure Investment and Jobs Act. The Build Back Better Act would make the prohibition permanent.
Compensation and tax
- Section 162(m). The legislation would clarify the definition of compensation subject to the $1 million deduction limit (by specifically referencing performance-based compensation, commissions, post-termination compensation and beneficiary payments, whether or not such remuneration is paid directly by the publicly held corporation) and apply the Internal Revenue Code (IRC) section 414 aggregation rules (that currently apply only to “covered health insurance providers”) to all employers subject to IRC section 162(m), effective for taxable years beginning after December 31, 2021.
- Net investment income tax. The 3.8% net investment income tax would apply to the investment income derived in the ordinary course of a trade or business for taxpayers with income over $400,000 ($500,000 for joint filers), as well as to estates and trusts. The provision would take effect for taxable years beginning after December 31, 2021.
- Excise tax on stock buybacks. The legislation would impose a 1% excise tax on corporate stock buybacks. The value of stock issued to employees and new issuances of stock to the public would reduce the amount of repurchase subject to the excise tax. The provision would take effect for buybacks after December 31, 2021.
- Surcharge on high-income individuals. The legislation would impose additional income tax on taxpayers with income higher than $10 million. A higher surcharge would apply to taxpayers with income exceeding $25 million. The provisions would take effect for taxable years beginning after December 31, 2021.
Other benefits and issues
- Paid family and medical leave. The legislation would establish a federal program that would provide four weeks of paid family and medical leave (during a 52-week period) beginning in 2024. The legislation would provide financial support for employer-provided paid leave programs and legacy state plans that meet specified requirements. The employer tax credit for paid family and medical leave that was enacted by the Tax Cuts and Jobs Act would be repealed after 2023.
- Bicycle commuter fringe benefit. The exclusion for qualified bicycle commuting would be reinstated and expanded for taxable years beginning after December 31, 2021.
