Compliance August 1, 2019

A DOL Secretary Scalia Would Quickly Find Direction

Having served as the DOL Solicitor General under the Bush Administration, experts suggest, Eugene Scalia would likely hit the ground running as a Labor Secretary with a conservative agenda.
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Art by Katherine Streeter

 



Earlier this month, President Donald Trump tweeted that he plans to nominate Eugene Scalia, son of late Assistant Supreme Court Justice Antonin Scalia, for the position of Secretary of the Department of Labor (DOL).

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According to news reports, in a private meeting, President Trump offered Scalia the job and he accepted. The news came after the previous Labor Secretary Alexander Acosta resigned following controversy over his role in financier Jeffrey Epstein’s plea deal for crimes committed when Acosta was a U.S. attorney in Florida.

As happens when a new Secretary of Labor nominee is publicly floated, stakeholders in the retirement industry quickly began weighing their expectations for how a DOL Secretary Scalia would influence their respective interests. There are already clear differences of opinion emerging with respect to Scalia’s previous professional and public service experience, and how this would impact his performance as a DOL Secretary. But one point of agreement is on the fact that, having served as the Solicitor General for the Labor Department under the Bush Administration, as DOL Secretary, Scalia would likely hit the ground running.

“One thing that is clear is that Eugene Scalia has worked in the trenches of a large number of labor issues for many years and would, therefore, bring to the post a significant level of personal understanding of how to enact President Trump’s deregulatory agenda,” says Brian Netter, a partner in the Washington office of Mayer Brown’s litigation and dispute resolution practice and co-chair of the ERISA litigation practice.

Netter expects that, if confirmed and should he choose to, Scalia could have a big influence on the retirement planning marketplace.

“All of the President’s cabinet secretaries have substantial authority to promulgate regulations and then to interpret and enforce them,” he explains. “This means they can individually have a big impact on regulated entities. The DOL Secretary, in particular, has control over a large swath of players in the U.S. economy. The decisions made by the Secretary are often felt by workers and business owners quite directly.”

Reflecting on the evolving situation, Jamie Hopkins, director of retirement research at Carson Group, says Secretary Acosta’s departure could slow down the DOL’s rulemaking process. However, the same Administration remains in charge of the DOL staff, so it’s also possible his departure will not severely impact the agency’s rulemaking processes. Should he decide to take an active approach, it is possible that nominee Scalia would want to go even further to pull back fiduciary regulations, Hopkins says.

“While Scalia brings government experience, DOL experience, and a very successful litigation background to the position, he has also been extremely pro-business, anti-labor and anti-consumer protection,” Hopkins reflects. “The reality is he has fought hard against consumer protections and fiduciary standards. So if Acosta’s stance was more neutral and actually improving fiduciary standards, it’s possible this effort could be stalled.”

According to Hopkins and Netter, the DOL’s position on promulgating new regulations to address advisory industry conflict of interests is likely to remain murky for some time to come.

“The DOL has a broad preview,” Netter says. “In this sense, it’s hard to know where a new Secretary will focus, whether it’s Scalia or someone else. The popular press coverage of the Labor Department focuses much more on things like overtime rules and wage-hour standards, because these have very considerable effects on the entire U.S. economy. A new fiduciary rule is not seemingly a big priority for DOL, in my estimate. I don’t think a Secretary Scalia would necessarily want the DOL to step in front of SEC in this process, which is hard at work on Regulation Best Interest.”

Netter suggested that, given Scalia’s recent litigation experience representing clients opposed to the establishment of stricter conflict of interest standards, he would likely be called on by some parties to recuse himself from working on fiduciary issues under the Employee Retirement Income Security Act (ERISA). For his part, Hopkins thinks the DOL under Eugene Scalia could be more active in this area than some at this stage expect.

“Even with a change in the Labor Secretary, expectations are that a DOL fiduciary rulemaking proposal would be out by the end of the year or early next year,” he says. “It is possible that the DOL goes that route now, with the SEC having passed their rules, of just aligning DOL rules with SEC fiduciary rules. For instance, the DOL could try to create a prohibited transaction exemption for ERISA fiduciary rules for anyone complying with the best interest standard of care under the SEC rules. While this, in theory, sounds great, the alignment of the two rules, fiduciary proponents will not be happy.”

This is because the ERISA fiduciary standards of care “have always had a bit more teeth than the SEC rules,” Hopkins says, as the ERISA rules were further explained by Congress to include things like reasonable compensation, fee disclosure, and co-fiduciary liability. “An expansion of the SEC rules into ERISA plans would likely lesson the current standards of care and allow more people to service and provide advice to ERISA retirement plans than currently allowed today,” Hopkins adds. “However, on the other side, it would bring a sense of continuity and rule leveling to the investment and retirement advice arena.”

Among the supporters of Scalia’s nomination to the Labor Secretary post is Dale Brown, president and CEO of the Financial Services Institute. He echoes the fact that the DOL plays an important role in ensuring the protection of retirement investors and ensuring Americans have access to quality retirement advice that is in their best interest.

“If Scalia is nominated and confirmed formally, I think he will be an outstanding Secretary of Labor,” Brown says. “The retirement industry is watching the SEC’s Reg BI and asking whether the DOL will collaborate closely on this. I think Scalia brings a breadth and depth of experience to the role and would coordinate effectively. I’m confident that he will make sure the DOL fulfills its important mandate under ERISA. I think he will bring an investor-focused, measured approach, including recognizing the potential for unintended consequences of rulemaking—and therefore the critical importance of close, close collaboration with the SEC.”

In addition to the issue of conflicts of interest and fiduciary standards, Netter says he will be watching closely to see whether the Labor Department gets more involved in filing amicus briefs in federal courts.

“We know that the litigation targeting 401(k) plans and pension plans is largely driven by plaintiffs’ lawyers,” Netter says. “During the Obama Administration, the DOL was often speaking up to support the initiatives of the plaintiffs’ lawyers. That ‘amicus briefing’ effort had largely stopped during Acosta’s brief tenure at DOL. This means we haven’t seen the DOL standing behind employers in these types of disputes, so it will be interesting to see if that changes under a Secretary Scalia. He may use his litigation experience to be more active in this area.”

With the Senate’s pending recess and the low likelihood of the confirmation process kicking before the fall season, the Acting Secretary of Labor Patrick Pizzella is aiming to keep the agency humming along. Just this week, the DOL issued a final “association retirement plans rule.” In addition to the final ruling, the department has also released a 16-page request for information (RFI) on open MEPs.

Client Service July 31, 2019

HSAs, FSAs and HRAs: Get to Know the Health Savings Alphabet

The account types differ quite a lot. Some require same-year spending, most are owned by the employer, and one comes with a triple tax advantage.
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Art by Jennifer Xiao


As employers increasingly offer financial wellness programs that cover both financial and physical well-being, it has become necessary for retirement plan advisers to expand their knowledge to include various options available to participants to save for health care costs, experts say.

“A lot of times, employers in the mid to the upper end of the marketplace, those with 500 employees or more, have an adviser for their retirement plan and a consultant for all of their medical benefits, including life and disability insurance,” says Rob Grubka, president of employee benefits at Voya in Minneapolis. “Whether or not the adviser is dealing with all of the employer’s benefits, it is incredibly important that they have a holistic view of what the employers want to offer their employees.”

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Steve Christenson, executive vice president at Ascensus in Brainerd, Minnesota, agrees that advisers need to be conversant on the various health care savings options available, and how they may benefit both participants and employers: “Advisers don’t necessarily need to know chapter and verse the details on health savings accounts (HSAs), flexible savings accounts (FSAs) and health reimbursement accounts (HRAs), but these accounts are going to compete with what participants and employers can contribute to the 401(k),” so they need to be familiar with them.

The most important thing that advisers need to realize about tax-advantaged HSAs, FSAs and HRAs is that “consumers are spending $387 billion a year in out-of-pocket health care costs, yet only 17% of spending on health care is flowing through these accounts,” says Jen Irwin, senior vice president of marketing and strategy at Alegeus in Milwaukee. “This means that consumers are mostly spending post-tax dollars on their health care, leaving 25% to 30% tax savings on the table. Employers, too, are losing on FICA [federal insurance contribution act] savings contributed to these accounts.”

HSAs Preferred ‘Hands Down’

Hands-down, the experts say that the HSAs, which can only be offered when paired with a high deductible health plan, offer the biggest benefits to employees because of their triple tax advantages and because these are the only health care savings accounts that are owned by the employee and portable throughout their lives.

“We view health savings accounts as having the potential to be the next big retirement savings vehicle,” says Kevin Murphy, head of defined contribution strategic accounts at Franklin Templeton in New York. Contributions to HSAs are made pre-tax; profits on assets invested grow tax free; and if the monies are used on IRS-qualified medical expenses, the withdrawals are not taxed, Murphy notes. Then, at age 65 or older, the money can be used for non-medical purposes without incurring a 20% penalty, although if it is used for non-medical purposes, it will be taxed as income, he says.

In addition, HSAs are not subject to required minimum distribution rules, Murphy says.

“When we talk to retirement plan advisers, we underscore that HSAs are very efficient vehicles, essentially another form of an IRA [individual retirement account],” he explains. “We have 100,000 advisers at our firm. For the retirement specialists in our DCIO [defined contribution investment only] division, HSAs are a great fit. They allow a parallel conversation to retirement savings discussions, because health care will be one of the largest, if not the largest expense people face in retirement.”

As employers’ views of health and financial wellness merge, HSAs are a natural entry point for advisers to talk about both topics with current clients and prospect, Murphy says.

Since retirees will be paying for Medicare part B and D premiums for years, if not decades, HSA accounts’ ability to stretch people’s money 20% to 30%, depending on their tax rate, is “a very important benefit for advisers to know about,” agrees Kevin Robertson, senior vice president and chief revenue officer for HSA Bank in Milwaukee.

Both employees and employers can contribute to an HSA, notes Stuart Ritter, a senior financial planner with T. Rowe Price in Baltimore. In 2019, the HSA contribution limit is $3,500 for individuals and $7,000 for families. Those figures will rise to $3,550 and $7,100, respectively, in 2020, and the 2019 $1,000 catch-up contribution for those over age 55 will remain the same next year.

However, one potential downside to HSAs is the fact that, should an HSA owner die and the money goes to a non-spouse beneficiary, the IRS considers that money to be taxable income in the year in which it is received, Ritter says. “If the beneficiary is in a higher tax bracket than the previous HSA owner, it is taxed at an even higher rate,” he notes. “This doesn’t happen with IRAs or 401(k)s.”

It is also important to consider that an HSA account holder can use the money in the account for themselves, their spouse or their dependents, and that the money can be invested, Ritter says. The design of HSAs gives people “the flexibility and the power to figure out how to use the funds throughout the ebbs and flows of their lives,” Ritter says.

FSA Pair With Other Benefits

Flexible spending accounts can be paired with any type of health care plan, and like a HSA or 401(k), a participant’s contributions can reduce a participant’s taxable income, Christenson says. However, the employer owns the funds, and should the account holder not use all of the monies for health care expenses in a given calendar year, it is a “use it or lose it” proposition, he notes.

“The onus is put on the employee to make their best guess on what they will spend on medical expenses,” he notes. “This takes a lot of planning and is hard for most people.”

There is one type of FSA, a limited purpose FSA, which can be used for preventative care and be paired with a high deductible health plan, Grubka says. Furthermore, some employers are permitting limited rollovers of money, typically $500, from one calendar year to another, Irwin says. And with a FSA, the employer can also make contributions, he says.

In 2019, the FSA contribution limit is $2,700, and that will increase to $2,750 in 2020.

Don’t Forget the HRA

A third type of health care savings account is health reimbursement accounts, HRAs. “HRAs are defined completely by the employer,” Christenson says. “They decide whether to offer it and how many dollars to contribute and what they can be used for, and these are employer dollars, so if the employee leaves the company, the money rolls back to the employer.”

HRAs are most common in the governmental and tax-exempt part of the marketplace, Grubka says.

The bottom line, Irwin says, is that “consumers today are responsible for a greater share of their health care costs,” Irwin says. “Whether they are in a high deductible health plan or in traditional coverage, deductibles are rising faster than wages. We know that this is a challenge, and we believe that consumer-directed accounts are really the foundation for how consumers will get better value for their health care dollars.”

Advisers should also know that a recent Plan Sponsor Council of America survey found that 75% of sponsors that offer HSAs view them as part of their retirement strategy, Ritter adds.

“Even if an employer does not currently offer a health savings account, it might be in the back of their mind to help their employees prepare for retirement,” he says. “It is important that plan advisers understand at least the basics of health savings and be prepared for that question—otherwise, another adviser could bring it up.”

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