While focusing on several international issues, President Bush has not completely ignored domestic economic concerns.
Below is a recap of recent legislation, as well as initiatives that the president has enacted or proposed in his 2004 agenda.
On June 7, 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was signed into law by the president. The tax act was the right action at the right time for our economy.
This tax relief doubled the child tax credit, reduced the marriage penalty, phased out the death tax, lowered taxes on capital gains, stock dividends and small businesses to create incentives for job creation, and lowered taxes for every American who pays income taxes.
President Bush called on Congress to secure these positive economic trends for the future by making the tax relief permanent so families and businesses can plan and invest with confidence. Although gridlock is the most likely outcome in making the tax cuts permanent, Congress may approve several smaller tax provisions this year.
The president recently signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 which, among other provisions, created a new type of account called a Health Savings Account (HSA). HSAs allow individuals covered by high-deductible health plans to pay for certain medical expenses on a tax-favored basis. Contributions to an HSA are deductible and excludable from gross income and from wages for employment tax purposes if made by an eligible individual’s employer.
HSAs can be offered under an employer’s cafeteria plan and may be an attractive alternative to health Flexible Spending Accounts (FSA). Unlike FSAs, HSAs are not subject to the use-it-or-lose-it rule, as unused amounts may be carried over from year to year.
In his annual State of the Union address, the president again proposed to allow younger workers to invest a portion of their Social Security taxes in the stock market. The president’s plan would allow younger workers the option of receiving a smaller Social Security benefit when they retire that would be supplemented by earnings from their personalized investment accounts funded with their Social Security contributions.
Senator Lindsey Graham (R – S.C.) previously unveiled a Social Security proposal that would permit workers under the age of 55 to invest 4 percent of their Social Security taxes in individual accounts, while those 55 and older would remain in the current Social Security system.
Obviously, while the Social Security issue will be a lightning rod for further debate, this policy is consistent with the President’s economic plan.
The Bush Administration also continues to push forward with the creation of several new savings account initiatives, which would significantly modify the current employment-based retirement structure.
The proposals include the Employer Retirement Savings Account (ERSA), which could replace employer-sponsored deferral programs, including 401(k), 403(b) and 457, SIMPLE and SARSEP programs; the Retirement Savings Account (RSA), designed to replace the current IRA; and the Lifetime Savings Account (LSA), designed as an after-tax, tax-exempt savings account, much like today’s Roth IRA.
ERSAs will follow many of the existing rules for 401(k) plans, with simplification. Both the definition of compensation and the minimum coverage requirement will be simplified and the top-heavy rules will be repealed.
LSAs can be used by workers for any type of saving, including children’s education, a new home, healthcare needs, or to even to start their own business. The new LSA works like current law Roth IRAs, but with no income limits and an increased annual contribution limit of $7,500 per individual.
RSAs can be used only for retirement saving, and allow for the consolidation of traditional IRAs, nondeductible IRAs and Roth IRAs, each of which has a confusing and different set of rules regarding eligibility and tax treatment. Individuals can set aside up to $7,500 per year (indexed for inflation in future years) in an RSA, in addition to contributions to an LSA.
President Bush will certainly have his work cut out for him in moving his initiatives through an evenly divided Congress during an election year. Patrick R. Brauer, CPA / CSRP is a manager for the Employee Benefits group of Heaton & Eadie. Reach him at (317) 581-9000 or [email protected].
