Just after the nation endured one “superstorm,” it now faces another: the fiscal cliff.
The convergence of automatic spending cuts, tax hikes and the debt ceiling will be the focus of intense negotiations in the upcoming lame-duck Congress, which begins Nov. 13, 2012. All of the bargaining needed to meet this challenge—much of which is likely to take place behind closed doors—could affect workers and benefit plans, according to Chip Kerby III, attorney with Liberté Group LLC in Washington D.C., who spoke at a Nov. 8, 2012, International Foundation of Employee Benefit Plans webcast.
Automatic Spending Cuts
So, what exactly is the much ballyhooed fiscal cliff?
One piece of it is automatic spending cuts—or “sequestration”—put into place by the Budget Control Act of 2011. The law created a supercommittee to identify cuts amounting to $1.3 trillion in the next 10 years. If the supercommittee fails to create a plan for cuts or Congress doesn’t approve the plan, automatic spending cuts kick in Jan. 2, 2013.
Congress may amend the act to delay the effective date of sequestration to buy time or negotiate with continuing resolutions, he said.
If the automatic spending cuts kick in, half will come from defense spending and half from nondefense spending. Some programs are exempt, such as Social Security, Medicare (although provider reimbursement rates may be cut up to 2 percent), Medicaid, earned income tax credits and other refundable tax credits.
Raised Taxes, Debt Ceiling
As if sequestration weren’t enough, many tax rates are set to increase on Jan. 1, 2013, unless Congress and the president act. Democrats commonly refer to this change as a “repeal of President George W. Bush’s tax cuts,” while Republicans call it the “restoration of President Bill Clinton’s tax increases,” Kerby noted.
Either way, it would be the “first significant change in income tax rates in 10 years,” he remarked.
Workers and their families would be affected by many of the increases, he added. Tax rates would increase as follows:
Dividends (39.6 percent, up from 15 percent).
Capital gains (20 percent, up from 15 percent).
Income tax brackets (39.6 percent, 36 percent, 31 percent, 28 percent and 15 percent, up from 35 percent, 33 percent, 28 percent, 25 percent, 15 percent and 10 percent—the 10 percent rate would be dropped). These would be “tiny changes” for most workers, Kerby said.
Estate tax (55 percent with $1 million exemption, up from 35 percent with a $5 million exemption).
Social Security payroll tax (6.2 percent on employee share, up from 4.2 percent). “This will be noticeable to most people. Everyone’s going to feel it right away,” he remarked.
New Patient Protection and Affordable Care Act (PPACA) Medicare taxes on unearned income (add 3.8 percent) and wages (add 0.9 percent) for high-income filers ($200,000 single; $250,000 joint).
In addition, the alternative minimum tax patch would expire, so more income tax filers would have to pay the alternative minimum tax if it is not repatched.
Tax benefits, including various tax credits and deductions, would be reduced.
Most parents have gotten comfortable with a child care tax credit of $1,000 for each child younger than 17, Kerby observed. That tax credit is set to revert to $500 per child.
One option on the table is extending the current tax rates for everyone to give Congress more time to tackle tax reform, but the president favors extending the tax cuts only for those earning less than $250,000.
As President Obama stated Nov. 9, 2012, “While there may be disagreement in Congress over whether or not to raise taxes on folks making over $250,000 a year, nobody—not Republicans, not Democrats—want taxes to go up for folks making under $250,000 a year. So let’s not wait. Even as we’re negotiating a broader deficit reduction package, let’s extend the middle-class tax cuts right now. Let’s do that right now.”
As for the debt ceiling, the U.S. Treasury anticipates that the federal government will hit the current debt limit of $16.4 trillion in January or February 2013. The Treasury may be able to postpone it, but only for a little while.
PPACA, Benefit Plans Affected?
Hard choices lie ahead.
Kerby said the chances of a “grand bargain” being negotiated to identify cuts in the next five to 10 years are about the same as seeing a unicorn.
Instead, Congress will look for low-hanging fruit to cut from federal spending, which might result in the following changes to the Affordable Care Act:
Smaller premium subsidies (for example, only up to 300 percent of the federal poverty level, instead of 400 percent).
Less generous Medicaid eligibility (for example, only up to 75 percent of the federal poverty level, instead of up to 133 percent).
Slower implementation schedule (for example, 2015 for the individual mandate and exchanges, instead of 2014).
Even the tax exclusion for employer-provided health coverage may not be sacrosanct, Kerby said with concern. Congress may be tempted to make the tax exclusion for employer health coverage apply only up to specified values, such as up to $5,000 for single coverage and $10,000 for family coverage, he suggested.
At this point, how much of this will come to pass remains to be seen. In other words, the fiscal cliff could wind up being a foothill or a mountain.
Allen Smith, J.D., is manager, workplace law content, for SHRM.
Coming Soon: Major Health Care Reform Deadlines, SHRM Online Legal Issues, October 2012
Major Challenges Await Lame-Duck Congress, SHRM Online, November 2012