Based on both campaign proposals and his plans for his first 100 days, the soon-to-be Trump administration is likely to make some major changes in the employee benefits law applicable to nonprofit organizations. The biggest ones are likely to be:
- Loosening of executive compensation rules applicable to nonprofit executives.
- Increased hostility to consideration of the societal impact in selecting retirement plan investments.
- Further cutbacks in Internal Revenue Service (IRS) guidance, review and audit activity, particularly in its scrutiny of tax-exemption recognition applications by certain nonprofits.
- Major changes in the Affordable Care Act (ACA)(although the timing and extent of such changes are unclear), combined with expansion of Health Savings Accounts.
- Postponement or elimination of the recently issued U.S. Department of Labor (DOL) fiduciary regulations for retirement plans.
- Diminished enforcement of protections for LGBT employees.
- Increased activity at the state level, including establishment of state-sponsored retirement plans in which nonprofits can participate.
These issues, and others of less general concern, are discussed below.
What will the pending Trump administration mean for nonprofits and their employee benefit plans? There has been little specific guidance on this from his campaign. The retirement issues he discussed were mostly limited to Social Security and Medicare.
Nevertheless, there are hints in the plan that Donald Trump released for his first 100 days in office, and in his campaign promises generally, which suggest that he will be taking employee benefits regulation in a new direction.
In spite of holding the presidency, and majorities in both Houses of Congress, Republicans do not have unlimited ability to pass legislative changes. In the U.S. Senate, it requires 60 votes to overcome a filibuster, and the Republicans do not have that large a majority. While certain legislation (e.g., appropriations bills) is not subject to filibuster, the potential of a filibuster may make it impossible to pass other sorts of legislation.
Proposals for the First 100 Days
A hiring freeze on all federal employees, to reduce federal workforce through attrition (exempting military, public safety, and public health)
IRS Revenue Procedure 2016-37 eliminated the old program under which the IRS would issue determination letters on the qualification of individually designed retirement plans every five years. Instead, it provided that determination letters on such plans would be issued only:
- For a new plan,
- On the termination of a plan, or
- Under other circumstances to be determined annually
A freeze on federal hiring makes it less likely that the IRS will have the resources to re-open the determination letter program for circumstances other than plan establishment or termination. This may further accelerate the trend of nonprofit employers adopting prototype plans (such as a pre-approved 403(b) plan), rather than individually designed plans.
A requirement that for every new federal regulation, two existing regulations must be eliminated
It is not clear yet what this means. In the simplest terms, if a federal agency has two existing regulations, one of which says you must do X and one of which says you must do Y, can the agency write a new regulation that says you must do X, Y, and Z, and then balance it by getting rid of the two old regulations?
Moreover, there are restraints on the degree to which regulations can easily be revoked. There may be ways for the Trump administration to eliminate certain regulations without much difficulty:
- Regulations in proposed form need not be finalized.
- In the case of regulations that have not yet gone into effect, a new administration can suspend the effective date.
- For regulations effective within the eight months preceding the inauguration, the Trump administration could ask Congress to use the Congressional Review Act (CRA) to overturn the regulations. The CRA allows Congress to overturn recently issued regulations by a simple majority vote, and it does not allow for Senate filibusters.
By contrast, the options for eliminating regulations effective more than eight months before are limited. Such regulations could be revoked only by
- Passing legislation to amend the statute on which they were based (but this would require getting around the filibuster issue in the Senate),
- Ceasing to defend any lawsuits attacking their validity, and hoping that a court overturns them, or
- Going through cumbersome procedures to propose and finalize new regulations.
However, as to lawsuits, there may in many instances be private parties defending the regulations, even if the government does not. Proposing and finalizing new regulations may take years. And even when it happens, a court will typically give less deference to new regulations which conflict with previous regulations than it would to the first set of regulations on a given topic.
Another alternative would be to leave regulations in place, but simply not to enforce them. Particularly given staffing cuts at federal agencies, this may be a tempting option for the administration. However, having regulations in effect, even if not enforced, may give private parties a right of action. Moreover, having regulations that are in effect but not being enforced presents challenges to those that are attempting to comply with the law and cannot count on a non-enforcement policy.
Given the difficulties in eliminating older regulations, some recent regulations are likely to be a target. The fiduciary regulations issued by the DOL on April 8, 2016 are frequently mentioned in this regard. These rules were designed to address conflicts of interest on the part of investment advisors to employee benefit plans and their participants. These regulations have not been popular with investment advisory firms, and are currently the subject of litigation.
It is not clear whether the fiduciary regulations are subject to revocation under the CRA. Although the effective date stated in the regulations was June 7, 2016 (which would put it beyond the eight-month window), the applicability date was April 10, 2017. Between those two dates, investment advisors could rely on the regulations if they wanted to, but were not obligated to comply with them.
Non-enforcement of the regulations would be another option. However, top officials at the DOL have stated that a major goal of the regulations is to provide for a private cause of action on behalf of plan fiduciaries and participants. Thus, even if the relevant agencies ceased enforcing the regulations, advisory firms might still need to comply with them in order to avoid lawsuits.
A final option would be to postpone the applicability date of the regulations indefinitely, or at least until more lax regulations could be adopted. This seems the most likely option, given the complexity of the other alternatives. However, given that the regulations are intended to interpret existing statutes, it is possible that participants might still try to rely on them in litigation as the best interpretation of the meaning of those statutes.
Cancel every "unconstitutional" executive action, memorandum, and order issued by President Obama
Some executive orders regarding employee benefits that might be vulnerable to attack include:
- Executive Order 13658, a minimum wage for federal contractors and subcontractors
- Executive Order 13706, requiring federal contractors and subcontractors to provide employees with paid sick leave
- Executive Order 13672, prohibiting discrimination by federal contractors and subcontractors based on sexual orientation and gender identity
In the past, these executive orders have applied to nonprofits such as research facilities that contract with federal governmental entities.
Middle Class Tax Relief and Simplification Act
The immediate goal of such legislation would be to lower tax rates. However, given the popularity of tax reduction, such legislation could be hard enough to defeat that it could serve as a vehicle for modifying other tax provisions, such as those that govern retirement, health, and other employee benefit plans.
Repeal and Replace the Affordable Care Act
This action would fully repeal the ACA and replace it with health savings accounts and the ability to purchase health insurance across state lines, and allow states to manage Medicaid funds.
The fate of the ACA would obviously have a direct impact on health care providers. Any change that causes people to lose coverage would tend to increase the rate of default on medical bills. Changes in the ACA will affect the rules for coverage that nonprofits provide to their employees.
The first question is whether a single piece of legislation would repeal and replace the ACA, or whether repeal of the ACA would happen first, with a promise to produce replacement legislation at a later date.
The second scenario would depend on effective dates. A relatively easy target would be the individual and employer mandates. The Trump administration could decline to enforce them, even pending legislative change. Because the mandates do not actually require employers or individuals to purchase coverage, but merely impose a tax if they do not, it is unlikely that they could be the subject of private lawsuits if the administration simply decided not to enforce them. However, the IRS Form 1095-B and Form 1095-C health care reporting requirements would not necessarily go away, even if the administration ceased enforcement of the employer and individual mandates.
Eliminating health exchanges and premium tax credits would be a longer-term process, if it happens at all. Existing policies obtained through health exchanges would not end before the end of 2017, and individuals have already begun applying premium tax credits against their health insurance costs. Thus, it appears unlikely that either could be eliminated before the end of 2017, and given the pace of legislation and suddenly changing public expectations, it is likely it could not be done before the end of 2018. And given that 2018 is an election year, Congress may not want to consider legislation that would eliminate coverage for many even then.
Another complication is that Donald Trump has said that he wants to keep the mandate that insurers accept everyone, regardless of health. However, it is unclear how this provision could be retained without massive federal subsidies, if the mandates and the premium tax credits were eliminated. In the absence of a mandate, young and healthy people are less likely to purchase coverage, particularly if there are no premium credits to make coverage affordable. This means that the pool of people seeking coverage will be weighted toward those with serious health conditions. In order to meet the cost of providing coverage to such people – absent federal subsidies – insurance companies will need to raise premiums. And soaring premiums will make the coverage less affordable to the young and healthy, further skewing the covered population toward the sick.
Donald Trump's alternatives to the ACA include the ability to purchase health insurance across state lines and expansion of health savings accounts. However, the ability to purchase health insurance across state lines is likely to be resisted by insurance companies, which fear competition from companies in states with more lax regulation (which thus have lower costs). Thus, it is unclear whether legislation could be passed, and if it were to be, there is concern that health insurers might flock to states with minimal regulation, to the detriment of policyholders. For example, state regulations would typically require certain levels of reserves to meet claims. If insurers operated out of states with minimal reserve requirements, in an environment in which their costs were rising suddenly because of the factors described in the preceding paragraph, the result could be insurance company bankruptcies that would lead to policyholders losing coverage.
Expanded health savings accounts (HSAs) and possible Medicare cutbacks provide a planning opportunity for nonprofit employers. Essentially, an HSA is available to anyone covered by a high-deductible health plan. It enables an employer or an employee to put aside pre-tax money in an account. The employee can use that account to meet deductibles and co-pays under the health insurance policy. However, unlike the more well-known flexible spending account, money in an HSA that is not used can roll over from year to year. To the extent it is ultimately used for health expenses (including Medicare Part B premiums, or private health insurance in retirement if Medicare is eliminated), it is never taxed. Or after age 65, money in the HSA can be withdrawn for any purpose, subject to the payment of ordinary income tax. Thus, for any employee, an HSA can soften the blow of increasing health insurance deductibles. And for employees who are healthy enough not to have substantial medical expenses, or have enough resources to pay for current health expenses out of pocket, it can serve as an additional resource for retirement, with tax benefits even greater than those of traditional 401(k) or other retirement plans.
Affordable Childcare and Eldercare Act
This proposal would allow Americans to deduct childcare and elder care from their income taxes, incentivize employers to provide on-site childcare services, and create tax-free dependent care savings accounts for both young and elderly dependents, with matching contributions for low-income families. It may provide additional opportunities for employers to provide benefits at low cost to themselves. Already, many nonprofit employers provide child care, at least on an emergency basis, in order both to provide a benefit to employees and to improve employee attendance. Greater tax incentives for such arrangements may lead to their becoming more affordable for nonprofit employers and thus more widespread.
During the campaign, Donald Trump called for repeal of the federal Dodd-Frank Act. Earlier this year, the U.S. House of Representatives Financial Services Committee approved the Financial CHOICE Act, which could provide a vehicle for repealing the CEO pay ratio disclosure, pay for performance disclosure, mandatory claw-backs for financial restatements, and required policies to prohibit hedging by executives. The emphasis on removing barriers to executive compensation might raise congressional interest in modifications to the deferred compensation rules that apply to executives of nonprofit organizations under sections 457(f) and 409A of the Internal Revenue Code.
Economically Targeted Investments
Economically Targeted Investments (ETIs) are investments chosen to foster specific social goals, rather than strictly for their growth and income potential. For example, a retirement plan might choose to avoid investments in tobacco companies or gun manufacturers. Such restrictions are particularly common in plans of nonprofit employers. During the second Bush administration, the DOL issued Interpretive Bulletin 08-01, 29 C.F.R. 2509.08-1, which was generally interpreted as hostile to the use of ETIs. During the Obama administration, Interpretive Bulletin 2015-01 revoked the earlier Interpretive Bulletin and imposed what was generally understood to be a more tolerant attitude toward ETIs. It remains to be seen whether a Trump administration will reinstate the Bush standard.
Protections for LGBT Employees
The Equal Employment Opportunities Commission (EEOC) has taken the position that discrimination in benefits based on sexual orientation or gender identification is prohibited by Title VII of the Civil Rights Act of 1964 (relating to sex discrimination in employment). Its position is based on the theory that, for example, providing benefits to the wife of a male employee, but not to the wife of a female employee, constitutes prohibited sex discrimination. The EEOC's strategic enforcement plan for 2013 through 2016 includes a specific focus on this area, and the EEOC has been successful in enforcing it in several court cases. While it appears unlikely that the Trump administration can reverse recent U.S. Supreme Court decisions requiring equal marriage rights, it may be able to create a less activist approach by the EEOC in this area.
Commissioner of the Internal Revenue Service
IRS Commissioner John Koskinen has been the target of attacks by Republicans for special scrutiny of federal tax-exemption applications from a number of nonprofit groups, most of which had Tea Party ties. Donald Trump's election increases the chances that Koskinen will be asked to leave or will resign of his own accord. Any successor would be likely to give less scrutiny to the tax-exemption recognition applications of such organizations.
With the federal government likely to reduce regulation in a number of areas affecting employee benefits, states may become more involved. For example, states often maintained high-risk insurance pools before the passage of the ACA and may end up playing a larger role in Medicaid if there is a change to block grants. They also could provide more protections for groups such as LGBT employees. However, preemption under the Employee Retirement Income Security Act of 1974 may limit their ability to make substantial changes in employee benefits, outside of the insurance context. The one exception would be that Donald Trump has shown interest in expanding opportunities for state-sponsored retirement plans in which private employers could choose to participate.
Clearly, the world of employee benefits law, particularly that applicable to nonprofit employers, will be changing under President Trump. However, the likelihood, direction, and timing of such changes are not easy to discern. Moreover, nonprofit employers will need to keep abreast of activity not only at the federal level, but in individual states as well.