One of the main takeaways from the election is that we live in a time of disruption, and with Obamacare a lightning-rod issue in the campaign, the U.S. health care and benefits system appears to be headed for plenty of disruption. The best antidote? Preparation. With that in mind our Human Capital and Benefits team has created a resource and insights page addressing many of the issues employers will be facing in the coming weeks, months and years. Excerpts appear below.
A new environment
One of President-elect Trump’s campaign promises was to repeal and replace the six-year-old Affordable Care Act (ACA), including:
- repealing some of the more controversial provisions and
- introducing a new, competitive, market-based program to give employers and consumers more flexibility, and to account for regional differences in health care benefits and service delivery.
While completely repealing the ACA would be politically and procedurally difficult, targeted reforms could eliminate the employer and individual mandates, Medicaid expansion and various taxes, penalties and fees.
Even absent the repeal of or a clear replacement for the ACA, the Trump administration could change the ACA’s enforcement approach, interpret current law differently than the Obama administration and/or take other administrative actions to ease ACA compliance.
President-elect Trump favors easing regulations on U.S. businesses, with proposals ranging from federal agencies eliminating two regulations for every one issued to repealing Dodd-Frank. We’ll likely see a significant change in tenor from the Obama administration’s approach to regulation, but it’s too early to precisely predict the targets of President-elect Trump’s proposed changes or to forecast when such changes might occur. For example, they could come about via congressional acts or by way of shifts in thinking at the highest levels of the Department of Labor (DOL), the Securities and Exchange Commission (SEC) or the Equal Employment Opportunity Commission — or all of these agencies.
Implications for employers: compensation-related regulations
SEC regulations in place — unlikely to be repealed: CEO pay ratio, say-on-pay voting, committee independence and broker voting. Rationale and considerations:
- It’s rare for the SEC to repeal a regulation, even when the agency is under Republican control.
- Congress would need to act quickly, in time to repeal the CEO pay ratio regulation before 2018 proxies.
- The SEC could delay the effective date, however.
Proposed SEC regulations — unlikely to take effect: pay-for-performance disclosure, hedging disclosures, mandatory claw backs for financial restatements and bank pay regulation. A Republican-controlled SEC might not finalize these proposals under the previous administration.
- Continue work on calculating your CEO pay ratio.
- Assess the implications of potential changes to the Fair Labor Standards Act (FLSA), focusing on not only potential pay changes and administration, but also communication.
- Review and revalidate your human capital policies and procedures.
- Don’t expect significant movement on pay gap rulings in the Trump administration.
- Consider tailoring your claw back provisions to cover reputational harm.
- Prepare for the DOL fiduciary rule to be delayed, perhaps indefinitely.
President-elect Trump and the Republican-controlled House and Senate intend to simplify the tax code, cut marginal tax rates for corporations and individuals, and reduce capital gains taxes. They also want to enable global companies to repatriate overseas cash reserves at relatively low tax rates. The lower tax rates would be accompanied by a broader tax base, as elected leaders plan to eliminate or reduce at least some tax credits, deductions and exclusions now available to businesses and individuals.
Implications for employers: taxes and compensation
Employers may want to consider funding their retirement, retiree medical and other benefit plans before a possible drop in tax rates. Here are some factors to consider:
- Higher deductions on contributions
- Taking advantage of current tax credits (Section 199)
- Potential change in tax rate adds rationale for borrowing to fund plans now
- Opportunity for QSERP paired with increased funding
- From an accounting perspective, increased funding reduces deferred tax asset and increases deferred tax liability — lowers P&L loss when tax reform is eliminated
- Stronger case for advance pension funding
Also, in light of potential changes, if a pension plan sponsor expects to terminate a plan within a few years, the sponsor may want to accelerate the timeline.
Increase in the current after-tax value of nonqualified deferred compensation already accrued:
- Before tax reform, the attractiveness of Roth decreases.
- After tax reform, the relative value of tax-advantaged contributions decreases.
When setting goals for incentive plans, employers should consider the following potential changes related to taxes and accounting:
- Possible reduction in corporate tax rates
- One-time tax holiday on repatriated cash
- Changes to revenue-recognition rules
- Slight shift in the relative pay mix with potentially lower capital gains taxes and higher interest rates
- More variable and less fixed compensation versus the current state
- More long-term and less short-term compensation versus the current state
- Potentially less interest or participation in deferred compensation programs
With Donald Trump’s victory, it’s tempting to think that all the executive compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act will meet a swift demise and that companies can stop working on their CEO pay ratio calculations. Our quick take is that it’s far too early to reach that conclusion. The new administration will be required to prioritize its policy goals, and other priorities could outweigh Trump’s stated desire to move forward with Dodd-Frank repeal.
When thinking about Dodd-Frank, those in the executive compensation world tend to focus only on the law’s pay-related provisions: say-on-pay voting, the CEO pay ratio, pay-for-performance disclosures and mandatory claw backs. But, when Republicans talk about repealing Dodd-Frank, they’re often focused on the provisions that regulate big banks, rather than the executive compensation provisions that apply to all companies. So, would the president-elect’s focus be on easing bank regulations, which could be done through narrowly targeted legislation, or does he mean to repeal the whole thing?
Growing number of millennials in U.S. workforce and new technologies lead employers to modernize employee benefits: Changes will be significant, according to Willis Towers Watson’s top five trends affecting employer-sponsored health care in 2017