President Bush Releases Proposed FY 09 Budget
Issue(s): Tax; Health Insurance
Date: February 4, 2008
As a follow up to his State of the Union speech last week, President Bush has sent his proposed FY 09 budget to Capitol Hill. It contains little in the way of new ideas, but reprises a number of proposals Congress has already repeatedly rejected. These include renewed calls for permanently repealing the estate tax, a permanent 15 percent rate on capital gains and dividends, a redo of savings plans and rules that result in only one kind of employee deferral retirement savings plan, one kind of individual retirement savings plan, and only one kind of tax-favored short-term savings plan, a replacement of tax-free employer-provided health insurance with a deduction for individually purchased health insurance, expanded health savings account rules, and permanent authority to make a direct tax-free gift to charity from an IRA.
The Proposals: The general details of each of these proposals are as follows:
- Estate tax repeal: The Administration budget proposes making repeal of the estate tax (currently scheduled to take effect in 2010) permanent. This means step-up in basis rules would be replaced with carryover basis rules, too.
- Tax rate on capital gains and dividends: Current law imposes a special 15 percent tax rate on capital gains and dividends, until the end of 2010. The president’s proposal extends the 15 percent rate permanently. Several pending proposals in the Congress would reduce the rate further, to 10 percent.
- Savings proposals: The Bush savings proposals fall into three groups: LSAs, RSAs and ERSAs.
- LSAs: The LSA proposal would allow individuals to contribute up to $2000 per year on an after-tax basis to “lifetime savings accounts.” Earnings on LSA contributions and distributions from LSAs would be tax free. All taxpayers could use LSAs (no income limits). The $2000 limit would be per account, not per contributor to an account.
- RSAs: Retirement Savings Accounts would replace traditional IRAs, deductible IRAs and Roth IRAs. All individuals (no income limits) could contribute up to $5000 per year (indexed) into an RSA. Only cash could be contributed to an RSA. The contributions would not be deductible, but earnings on them would be tax free. Distributions from RSA accounts held at least five years would be tax-free, if made after the account holder reaches age 58, dies or becomes disabled. Distributions prior to that would be subject to a 10 percent penalty tax (and earnings on the accounts would be includible in taxable income). The proposal includes transition rules for those who want to convert current IRAs to RSAs.
- ERSAs: Employer retirement savings accounts would replace all defined contribution (DC) employee deferral plans (401(k)s, 529 college savings plans, 403(b)s, SIMPLEs, SARSEPS, etc) with one “simple” retirement savings plan. Generally, RSA rules would mirror current law 401(k) rules. Employees could contribute up to $15,500 (indexed) annually; those over age 50 could also contribute a $5000 (indexed) “catch-up” contribution. The combined employee-employer contribution could not exceed 100 percent of compensation, or if less, $46,000 (indexed).
- Health insurance: The Bush budget calls for replacing the current employer deduction and employee exclusion for employer-paid health insurance with a standard health insurance deduction for individuals. The deduction would be $15,000 for family coverage and $7,500 for individual coverage. The proposal would also eliminate the section 213 deduction for medical expenses. Employer payments of health insurance premiums for their workers would be includible in the employees’ taxable incomes, and would count for Social Security tax purposes as well. To qualify for the deduction, the health insurance purchased would have to meet certain basic and specified requirements.
- HSA expansion: Generally helpful but not dramatic enhancements to HSA rules were included in the Bush budget proposal. Generally, the proposal would allow health insurance that has at least a 50 percent coinsurance feature to qualify as a high deductible health plan (HDHP)—an HDHP is required in connection with an HSA. The proposal would also allow health expenses incurred in the same year as (but before) establishment of an HDHP/HSA to qualify for payment with HSA funds.
Action Taken: The president’s budget proposal is the first step in fashioning the budget under which all federal spending and certain tax laws will be written this year. The budget and tax writing committees in both the House and Senate will hold hearings on the president’s budget proposal over the course of the next week or two. Congress (via the House and Senate Budget Committees) will then write the budget which will control spending and tax bills this year.
Insider News: Most insiders—on and off the Hill—do not believe that the Administration’s FY 09 budget proposals will be acceptable to Congress. However, there may be some real debate over whether to make the estate tax repeal permanent (or how to permanently reform it), and where to set capital gains and dividends tax rates. Replacing tax-favored employer-provided health insurance with a deduction for individuals is unlikely to be taken seriously by Congress this year. NAIFA’s health and employee benefits advocate, AHIA, will be watching (and, if required lobbying) this proposal carefully. There may be some discussion about the suggested expansions for health savings accounts. The renewed call for RSAs, LSAs and ERSAs will almost certainly just be ignored on Capitol Hill this year.
Next Steps: The budget law requires Congress to write its budget blueprint by mid-April—although it is rare for Congress to meet its deadline. Of most concern to NAIFA members and their clients is whether Congress approves a budget that authorizes special protection for tax legislation (the “reconciliation instructions”) to avoid a filibuster (and thus require only a simple majority to pass the Senate. If a tax bill moves with reconciliation protection, offsets (revenue raisers) have a much better chance for being enacted into law.
NAIFA Staff Contact: Jill Edwards, Director, Federal Relations, 703-770-8158
AHIA Staff Contact: For additional information on the health-specific proposals, please contact Diane Boyle. This service is provided to AHIA Members only.
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