First Thoughts About the Effect of Healthcare Reform on Retirement Plans

The ink is barely dry on the massive health care reform legislation. Employers are busy evaluating how their health plans will be impacted. While health care is not a core PSCA issue, here are some very preliminary observations on how retirement plans might be impacted:

• The employer provided benefit system is no longer voluntary. Most employers must offer health care or make a cash payment to the government. Could retirement plans be next?
• If the cost of health insurance increases, will both employer and employee resources available to fund retirement plans be diminished?
• Early retirees may find relief in obtaining health care as the result of the exchanges, subsidies, and the ban on preexisting conditions.
• The new Medicare tax on unearned income for high-income filers will not be assessed on distribution from qualified plans. That is good news. But, will it change in the future if revenues do not cover costs?
• Will the new tax structure lead to an increase in small company plan formation because:
  • The expected higher income tax rates will increase the value of the tax deferral.
  • The expected increase in the tax rate on capital gains and dividends will narrow the tax advantage investing outside the plan has over investing in the plan and paying regular income tax rates on plan distributions.
  • The new tax on unearned income and the new increased hospital insurance tax on high wage earners may make a qualified plan more attractive since plan distributions will not be subject to these taxes.