Our periodic Washington D.C. newsletter highlights the expertise of our Wagner Law Group attorneys analyzing legislative, regulatory and other cutting-edge benefits issues arising from activity in Washington or other important jurisdictions. Our office members are well suited for this given many of them have decades of experience working in key governmental agencies such as the Department of Labor and Pension Benefit Guaranty Corporation.
This edition of our Benefits Bulletin has articles analyzing:
- employee benefits provisions in the One Big Beautiful Bill
- regulatory trends for our investment advisor/broker dealer clients; and
- financial challenges facing public pension plans
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Employee Benefits Provisions in One Big Beautiful Bill
By Eric Keller
Last month, President Trump signed the One Big Beautiful Bill (“OBBB”) into law. This article briefly summarizes OBBB’s key employee benefits provisions, which are effective for taxable years beginning in 2026 unless otherwise noted. If you have any questions or would like more information regarding any of these provisions, please contact Eric Keller or the WLG attorney with whom you regularly work.
Executive Compensation
Section 4960 of the Internal Revenue Code (“Code”), which subjects certain tax-exempt organizations to excise taxes for remuneration in excess of $1 million (or certain excess parachute payments), is expanded to apply to all employees or former employees of the organization, rather than certain employees.
Section 162(m), which disallows the tax deduction for remuneration in excess of $1 million paid to certain employees of publicly traded companies, is amended to apply entity aggregation rules for purposes of applying the limitation and allocating the deduction.
Fringe Benefits
The exclusion from gross income available under Code Section 129 for Dependent Care Assistance Program (DCAP) flexible spending accounts is increased to $7,500 (or $3,750 for married individuals filing separately) from $5,000.
The exclusion from gross income for educational assistance programs under Code Section 127 (currently $5,250) is indexed, and the previously temporary provision that treats certain student loan repayments as qualifying education expenses is made permanent.
The exclusion from gross income for qualified bicycle commuting expenses is eliminated.
The previously temporary suspension of the employer deduction for moving expenses and the exclusion for employer-provided qualifying moving expense reimbursements is made permanent.
High Deductible Health Plans (HDHPs) and Health Savings Accounts (HSAs)
The previously temporary COVID-era safe harbor allowing HDHP coverage of telehealth services before patients have satisfied the deductible is made permanent.
Direct primary care service arrangements will not be disqualifying coverage if the primary services are provided for a fixed fee that does not exceed $150 per month for individual or $300 for more than one person (adjusted for inflation).
Bronze and catastrophic plans offered in the individual market on an Affordable Care Act exchange may qualify as an HDHP.
Trump Accounts
OBBB creates new tax-preferred accounts for children referred to as a “Trump Account”. The account may be established for children under age 18 with contributions of up to $5,000 per year (indexed for inflation). Distributions are generally prohibited until the child attains age 18. Employers may contribute up to $2,500 annually (indexed for inflation) to Trump Accounts of an employee or any employee dependent if the employer has adopted a separate written plan that satisfies specific requirements. Trump Accounts are subject to numerous restrictions and are generally treated as traditional IRAs under Code Section 408.
There is a pilot program whereby the US Treasury will pay a one-time credit of $1,000 to the Trump Accounts of US citizen children born after 2024 and before 2029.
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Regulatory Trends for Our Investment Advisor/Broker Dealer Clients
By Stephen Wilkes and Seth Gaudreau
We have seen a shift towards alignment amongst the Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority (“FINRA”), and the White House. For example, last month, the SEC withdrew a series of proposed regulatory actions published between March 2022 and November 2023. The decision reflects the SEC’s current regulatory priorities, and the Commission clarified that if it chooses to revisit these areas in the future, new proposed rules will be issued.
The key driver at the SEC for this shift comes largely from the White House Executive Orders which emphasize less regulatory presence. For example, we have seen presidential orders that are titled “Unleashing Prosperity Through Deregulation” and “Ensuring Accountability for All Agencies”.
The new Executive Orders mandate that each federal agency repeal 10 regulations for every new regulation that it adopts. And the incremental cost of any one agency’s new regulations for fiscal year 2025 must be less than zero, “significantly” less than zero to be more accurate. Further, the federal agency must demonstrate that each regulatory action complies with a rigorous cost-benefit analysis as in effect under all guidance, including such guidance as promulgated by the Office of Management and Budget. The bottom line is that the SEC is clearly sensitive to current market and political forces and is making a significant pivot under SEC Chair Paul Atkins.
Key Areas of Withdrawn Proposals:
The withdrawn proposals covered fourteen different rule proposals, including:
- Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8 (87 FR 45052 (July 27, 2022)): Amendments to the rules governing the exclusion of shareholder proposals under Rule 14a-8 of the Securities and Exchange Act of 1934 (Exchange Act).
- Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers (87 FR 13524 (Mar. 9, 2022)): Rules addressing the use of predictive data analytics by broker-dealers and investment advisers.
- Safeguarding Advisory Client Assets (87 FR 36654 (June 17, 2022): Proposals to enhance the safeguarding of advisory client assets including amendments to certain provisions of the current custody rule.
- Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies (87 FR 13524 (Mar. 9, 2022): Rules requiring investment advisers, investment companies, and other market participants to adopt cybersecurity policies and procedures.
- Enhanced Disclosures on Environmental, Social, and Governance (“ESG”) Investment Practices (87 FR 36654 (June 17, 2022)): Enhanced disclosure requirements for ESG investment practices by investment advisers and investment companies.
- Outsourcing by Investment Advisers (87 FR 68816 (Nov. 16, 2022)): Rules prohibiting advisers from outsourcing certain services without meeting specific requirements.
- Position Reporting of Large Security-Based Swap Positions (87 FR 6652 (Feb. 4, 2022), 88 FR 42546 (June 30, 2023), 88 FR 41338 (June 26, 2023)): Proposals for reporting large security-based swap positions.
- Volume-Based Exchange Transaction Pricing for NMS Stocks (88 FR 76282 (Nov. 6, 2023)): Rules prohibiting volume-based transaction pricing for National Market S stocks.
- Regulation Best Execution (88 FR 5440 (Jan. 27, 2023)): Proposals to enhance broker-dealers’ duty of best execution.
- Order Competition Rules (88 FR 128 (Jan. 3, 2023)): Amendments to require certain orders to be exposed to competition in qualified auctions.
- Regulation Systems Compliance and Integrity (SCI) (88 FR 23146 (Apr. 14, 2023)): Expansion of the definition of “SCI entity” and other amendments to Regulation Systems Compliance and Integrity.
- Cybersecurity For Broker-Dealers, Clearing Agencies, Major Security-Based Swap Participants, The Municipal Securities Rulemaking Board, National Securities Associations, National Securities Exchanges, Security-Based Swap Data Repositories, Security-Based Swap Dealers, And Transfer Agents (88 FR 20212 (Apr. 5, 2023)): Rules requiring various market participants to address cybersecurity risks and report incidents.
- Amendments Regarding the Definition of “Exchange” and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities (87 FR 15496 (Mar. 18, 2022)): Amendments to the definition of “exchange” and regulations for alternative trading systems.
- Amendments to the National Market System Plan Governing the Consolidated Audit Trail To Enhance Data Security (85 FR 65990 (Oct. 16, 2020)): Proposed amendments to enhance data security in the Consolidated Audit Trail.
ERISA considerations for Plan Advisers
Although the SEC’s recent actions do not require immediate action, the withdrawn proposals included rules that might have influenced fiduciary decision-making, such as those related to cybersecurity risks, outsourcing and ESG considerations, climate, cryptocurrency, and artificial intelligence. Fiduciaries and service providers must pay close attention to the SEC’s current regulatory agenda for future updates and rule proposals (in addition of course to DOL regulatory activity) and remain vigilant in upholding their statutory duties to protect the interests of plan participants and beneficiaries.
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Public Pensions Continue to Face Financial Challenges
By Israel Goldowitz
Pension plans of state and local governments cover more than 25 million members. They have assets of more than $5 trillion and pay nearly $400 billion in benefits every year. These plans therefore have a major effect on capital markets and retiree spending as well as government finance and budgeting. With changes in the way governments deliver services, they also increasingly cover mixed public-private entities.
Though new models have emerged, governmental plans are still mainly defined benefit plans. A defined benefit plan promises a benefit for life based on service and compensation, such as $30,000 per year with thirty years of service and final pay of $100,000 (or one percent of final pay per year or service).
After the Great Recession, many government plans experienced significant financial strain. That led to less generous benefit promises for new hires and attempts to reduce benefits for current employees.
An example is Chicago’s unsuccessful attempt to cut cost of living adjustments, intended to make the plan more sustainable for a greater “net benefit.” The Illinois Supreme Court held that taxpayers stood behind the pensions under the state Constitution, making any quid pro quo illusory.
Other courts have disagreed, treating a more secure promise as a reasonable exchange for a less generous benefit. The outcome may depend on the scope of the state’s constitutional or statutory guarantees to public employees.
The issue can be brought to a head in a Chapter 9 bankruptcy if a city or other political subdivision is authorized to file bankruptcy under state law. (States themselves cannot file bankruptcy, and only 27 states permit political subdivisions to do so). Examples include the City of Detroit, which reduced pension payments and eliminated cost of living adjustments as part of a grand bargain with lenders and other stakeholders, and the City of Stockton, which tried to withdraw from CalPERS and eventually cut pay and retiree medical benefits as an alternative.
Well-funded plans can also present issues, as lawmakers look to surplus assets to cover budget gaps. Retirees, on the other hand, see a surplus as a source of security and possible gainsharing in the form of increased benefits or one-time payments. We were recently involved in such a case, where the legislative session expired with no clear resolution.
Rules for funding public pension vary. In some states, annual contributions must be actuarially based. Required contributions have been rising, and in recent years they have generally been paid in full. But with increasing retiree to active member ratios and other strains, funded percentages have remained below 80 percent for the last decade and a half.
ERISA and the Internal Revenue Code’s requirements generally do not apply to public plans. But many of the same structural changes are possible. For instance, plans can be closed to new hires and a defined contribution plan substituted; employee contributions can be imposed or increased; plans can be merged or can spin off assets and liabilities; and multiple-employer plans can charge an exit fee based on conservative actuarial assumptions.
Even strong funding rules can be subject to interpretation or to override by balanced budget laws or limits on taxation. And even small changes (such as the interest rate) can have a large impact on contributions and the funded ratio.
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The Wagner Law Group is well versed in these issues. We have advised clients, published articles, and spoken at pension and municipal finance conferences on these issues. Our Washington office is expert in funding rules and actuarial issues concerning defined benefit plans. Please contact us if we may be assistance in these areas.