For many months, we have been speculating about how the results of the 2016 presidential election would impact employee benefits policy going forward. Now that Donald Trump has won the election and Republicans have secured a majority in both houses of Congress, we have a better (although still far from clear) idea of the kinds of changes to expect in the employee benefits area over the next few years. Although this is a very preliminary discussion, we expect major changes in employee benefits law and policy during the Trump presidency. Below are several possible benefits-related developments that employers and plan sponsors should be ready for.
Potential Repeal of the Affordable Care Act
Trump has stated repeatedly that he will repeal the Affordable Care Act (the “ACA”). Because a complete repeal may require 60 votes in the Senate (to overcome a filibuster), a wholesale repeal may not be possible. Moreover, some 20 million people may lose their health insurance if the ACA were abruptly repealed. But the Trump administration will almost certainly implement rule-making that will impact key aspects of the law, and the Republican Congress will almost certainly take legislative action to repeal or change key aspects of the law.
The most obvious first task will be to repeal the Cadillac Tax, which is an excise tax on employers and plan sponsors that offer high value health coverage. The tax, currently slated to become effective January 1, 2020, is controversial because it impacts a significant number of employers and union-sponsored plans. Trump’s running mate, Mike Pence, has also suggested that the new administration would both repeal the ACA’s individual mandate and phase out subsidies for exchange-based coverage, which would encourage many individuals to drop their ACA-based coverage. By extension, we also assume that there will be an effort to repeal the employer mandate and annual ACA information reporting for employers, plan sponsors, and insurers.
Other Health Coverage Initiatives
Trump has stated that he would promote consumer-directed health arrangements by expanding the tax incentives for health savings accounts and thereby promoting high-deductible plans. He has said that he also supports allowing individuals to deduct the cost of individual insurance policies.
Trump also wants to allow insurance companies to sell policies across state lines, which he believes would lead to lower insurance costs. Economists have questioned whether this proposal would have any meaningful impact, because most of the current barriers to interstate sales of insurance are financial rather than regulatory.
Trump has said that he would provide block grants to states to finance their Medicaid programs. States would receive annual lump sums to fund their programs and have more control over those programs, but would also be responsible for any costs that exceed the federal allotment.
Trump has also talked briefly about the price of prescription drugs. He has indicated, for example, that he is in favor of increasing control over drug pricing.
Trump’s plans with respect to the ACA and health care will become clearer with time. Trump’s stated aim, however, is to advance consumer-driven healthcare with the ultimate goal of reducing health insurance costs for both individuals and employers.
Department of Labor Fiduciary Rule
Earlier this year, the U.S. Department of Labor (the “DOL”) finalized a rule that expanded the definition of a fiduciary under the Employee Retirement Income Security Act of 1974. We previously issued an alert describing the rule in more detail. The rule primarily impacts the financial industry, which strongly opposed it during the rule-making process. A Trump advisor has stated that the Trump administration would work to have the rule repealed.
The Future of Multiemployer Pension Plans
As we have written about numerous times, a significant number of multiemployer (union) pension plans are in a state of crisis. Many of these plans are severely underfunded. For example, the Teamsters’ Central States Pension Fund is so underfunded that it is predicted to become insolvent by 2025. In addition, the Pension Benefit Guaranty Corporation’s (“PBGC’s”) multiemployer insurance program, which essentially insures multiemployer pension plans by paying a guaranteed level of benefits to retirees if a plan becomes insolvent, is itself headed towards insolvency. There is an estimated 91% likelihood that the PBGC’s multiemployer program will become insolvent by 2032. If the Central States Pension Fund were to become insolvent, that alone would effectively bankrupt the PBGC’s program.
In 2014, Congress adopted the Multiemployer Pension Reform Act (“MPRA”). As discussed in a prior alert, MPRA allows severely underfunded multiemployer plans to apply for Department of Treasury approval to reduce benefits in order to avoid becoming insolvent. MPRA has proven to be wildly unpopular, primarily among retiree groups. Almost immediately after MPRA became law, the Central States Pension Fund applied to reduce benefits, but its application was denied. Other plans’ applications to reduce benefits under MPRA have experienced the same fate.
Trump has not, to date, weighed in on how he would solve the multiemployer pension crisis. But it appears that Congress will need to take action in light of the systemic issues that these plans face. Some movement has already occurred—in September, the Senate Finance Committee advanced the Miners Protection Act, which would transfer money from a federal fund meant for reclaiming abandoned mines to the United Mine Workers of America’s multiemployer pension plan. But the Miners Protection Act would help just one of many multiemployer plans that need financial support. Further Congressional action could come in the form of providing taxpayer dollars to the PBGC, which has historically been funded solely by insurance premiums paid by plan sponsors and employers, or providing such taxpayer dollars directly to impacted multiemployer funds. In short, this is an area that the Trump administration will eventually have to consider addressing.
Hampering Other DOL Initiatives
In recent years, the DOL’s Employee Benefits Security Administration has significantly increased its audit and enforcement activities. This was the result of strong support from the Obama administration, which allowed the DOL to hire a large number of new agents to conduct random and targeted compliance audits of employer-sponsored retirement and group health plans. We expect that the Trump administration will redirect resources such that there will not be the same level of support for these DOL efforts. Nevertheless, because the DOL’s expansion under the Obama administration was slow and deliberate, we expect it will take some time for the DOL’s activities in the benefits area to slow down.
Potential Reallocation of IRS Retirement Plan Resources
In stark contrast to the DOL’s initiatives, over the past several years the IRS has reduced its resources dedicated to qualified retirement plans. First, the IRS recently announced that it was essentially eliminating the determination letter program in all but a few situations. Second, practitioners have anecdotally noticed that fewer IRS agents seem to be available for processing applications under the IRS’s Employee Plans Compliance Resolution System, which allows retirement plan sponsors to voluntarily correct certain types of plan administration and tax qualification errors. Third, the IRS had for many years been very active in issuing rules and other guidance in the retirement plan area, but over the past several years there has been a concerted shift of IRS resources away from retirement plan rule-making. This is at least in part due to the IRS’s rule-making activity under the ACA. So, if the ACA is repealed or substantially modified, it is possible that additional resources within the IRS will free up and be reallocated towards retirement plans. At the same time, the Trump administration may not provide the same level of overall support to the IRS, which may necessitate further overall cuts to the IRS’s retirement plan resources.
Potential Repeal of Dodd-Frank Executive Compensation Rules
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) contains provisions that significantly impact the Securities and Exchange Commission’s (“SEC’s”) regulation of public company executive compensation disclosures. So far, the SEC has issued final rules under Dodd-Frank that require mandatory clawbacks of incentive compensation paid to executives under certain circumstances and a new annual disclosure of the ratio between the CEO’s pay to the company’s median employee pay. Trump has stated that he will repeal Dodd-Frank, including these clawback and disclosure requirements. It is not yet clear whether he would replace Dodd-Frank with new legislation or regulations.