Comptroller General Addresses CPAs on Accountability, Retirement Security
David M. Walker, U.S. Comptroller General, “came home” to address the AICPA employee benefits conference “from a different perspective.” A CPA who began a 15-year term as head of the General Accounting Office in November 1998, Walker is a past chairman of the AICPA employee benefits committee and a former partner of Arthur Andersen.
Walker sees his role at the GAO as that of “chief accountability officer.” He told conference participants that “most, if not all, of you are also part of the ‘accountability profession.’” Accountability, Walker said, can help CPAs avoid the stereotyping associated with traditional accounting and auditing functions. “It’s a term you’re going to hear not only from me and the GAO but also from others within our profession.”
What responsibilities do CPAs share as accountability professionals? “To lead by example and to be as good or better than anybody we’re working with. To practice what we preach, especially if we’re in the consulting, controls or risk management business. Walker added that CPAs should help others see not just historical data and the challenges of today but tomorrow’s challenges as well. “Most of you are CPAs and, like it or not, CPAs are viewed as being above many other professionals. With that status comes an additional obligation—to deal with not just today’s profit motive but also with tomorrow’s greater good.”
What challenges does the government face that CPAs should care about? The first is budget surpluses. As recently as two years ago, Walker said, the federal government was projected to have budget deficits “as far ahead as the eye could see.” But, largely due to positive economic conditions and fiscal discipline, recent estimates show surpluses. Walker reminded his audience, however, that structural deficits will return because of the escalating cost of entitlement programs. He went on to caution that “if we don’t save today’s budget surplus, there will be no money left in 2030 for discretionary spending.” So-called discretionary spending includes national defense, the judicial system, the nation’s infrastructure and most programs for children.
Part of Walker’s job as comptroller general is to hold Congress accountable. “Congress and the president have an opportunity to make prudent decisions to prepare for a better tomorrow.” But they have an obligation—which he argues is a fiduciary one—to “address the structural deficits and imbalances in entitlement programs. If we don’t, they are going to eat away discretionary spending.”
Toward a secure retirement
“Social Security,” Walker says, “is the foundation of retirement security, but it is one that too many Americans rely on.” It was never intended to be the sole source of retirement income. While the program has positive cash flows, it is not sustainable in its present form. “We need to make sure this program becomes solvent—to ensure adequate benefits and equitable treatment for different generations.” Any reform must be administratively feasible and communicated effectively to Americans. The key date for Social Security, Walker cautioned, is not 2034, as some believe, but 2014, when “we start experiencing negative cash flow.”
The good news is Social Security’s imbalance is not large and there are many policy options to achieve the objectives Walker outlined. He warned, however, that these options take political will and courage. There’s some question whether reform can be accomplished before the 2000 elections. But if and when it is, Walker said it can be a win-win situation, exceeding the expectations of all Americans. “I say that because, realistically, any reform proposal is going to have little or no effect on current or near-term retirees. It will be more significant for baby boomers and busters, who don’t expect to get much anyway.”
In Walker’s view, private pensions are a significant but not universal retirement supplement for millions of Americans. Coverage rates, he said, have been stagnant, slightly less than 50% of the full-time workforce. And as the workforce changes—more part-time jobs, job-sharing and independent contractors—fewer workers are covered. Walker sees these coverage gaps, as well as challenges to the vesting rules and the movement to defined-contribution plans as possible problems. With the recent shift from traditional defined-benefit plans to cash-balance and other hybrid arrangements, there has been, in Walker’s words, “a lot of leakage”—funds previously earmarked for retirement have been diverted elsewhere. That leakage, he warns, could become acute.
Walker says personal savings are still too low and still too concentrated among those of means. In fact, he warned, “we’re seeing a back-loading of tax benefits. As with the Roth IRA, the United States is going to have to pay the price for tax benefits down the road.”
With costs escalating and the size of our economy increasing year after year, Walker says Medicare has been in a negative cash-flow position since 1992. It will become insolvent in 2013 and is projected to become an unrealistically high percentage of the economy. “Medicare is fundamentally unsustainable in its present form. While people recognize we have a problem with Social Security, they do not understand the nature and extent and timing of the Medicare problem.” The financing gap is five times greater than with Social Security based on existing payroll taxes. “Sooner or later we’re going to have to come to grips with it.”
Health care coverage for retirees is down, Walker says, and more employers are moving to managed care programs. Costs are creeping back up and, he warns, “we haven’t even hit the beginning of the baby-boom retirement.” With individual health care, there are challenges to access and to affordability once access is there. “There are perverse incentives in the tax code for health care. Normally, the goal is to provide incentives for things like savings and pensions, but typically incentives aren’t provided for things that represent consumption, like health care.” Incentives are needed to control utilization and cost. That’s not the case with health care. There is, Walker says, a total “disconnect” between who pays and who gets benefits. While getting health care costs under control isn’t on the front burner, it’s an issue we have to deal with.
Walker says it takes two things to get legislation through in Washington: a legislative proposal that makes policy sense and the political support to get it adopted. If there is a battle between those two, most of the time politics will win. In addition to addressing policy and politics, Walker points out you also have to have a vehicle—what he calls a “train leaving the station”—in order to attach proposals to it. “Most people believe (and history has shown) that private pension legislation and incremental health care reform have not been enacted on their own; they’ve been attached to other legislation.”
Are any trains leaving the station this year? Walker says the only two possible vehicles—and chances are fading on both—are Social Security, which he thinks has less than a 50/50 chance of significant reform this year, and tax legislation, where chances may be 50/50 or a little better. In addition to a vehicle, Walker says, you’ve also got to look for bipartisan agreement. “Frankly, there’s not a whole lot of trust in Washington right now,” he said.
What issues have bipartisan support? Walker says things like enhanced portability and rollovers, reduced time for vesting, enhanced employer matching in 401(k) plans, tax credits or other incentives for small employers establishing new plans, simplified defined benefit plans for small employers, enhanced rights for spousal survivor benefits, an increased IRA limit and a review of selective cash balance plan conversion issues have supporters. Lacking bipartisan support are such areas as modifying the nondiscrimination and top-heavy rules, raising the caps on contributions and benefits and relaxing the minimum distribution rules.
IRS Releases Final COBRA Guidelines
The IRS published final regulations under the Consolidated Omnibus Budget Reconciliation Act of 1985. COBRA coverage allows terminated employees to purchase continued health care benefits for themselves and their dependents for a limited period of time.
The new rules update the act and address how COBRA applies to employers and employees in the event of a merger or acquisition.
According to Joan Vines, CPA and an associate partner in Grant Thornton’s Washington, D.C., office, the most significant aspect of the new regulations is that they spell out the obligations of both the buying and the purchasing entities in mergers.
The final regulations
- Prevent group health plans from terminating COBRA continuation coverage because of other coverage (for example, Medicare benefits) an employee had prior to electing COBRA.
- Give employees and employee organizations flexibility in determining the number of group health plans they maintain.
- Provide baseline rules for determining COBRA liabilities of buyers and sellers of corporate stock and assets and permit buyers and sellers to reallocate COBRA liabilities by contractual agreement.
- Limit the applications of COBRA for most flexible spending arrangements for health coverage.
- Eliminate the requirement that group health plans offer employees an option to elect only core (health) coverage under a group health plan that provides both core and noncore (vision and dental benefits are examples of noncore coverages) coverage.
“Don’t assume that the new regulations are just a finalization of the rules that you have been operating under for so long,” advised Vines. She recommended that, instead, practitioners reevaluate their clients’ and employers’ COBRA obligations and procedures to make sure they are compliant.
The final regulations apply to qualifying events that occur on or after January 1, 2000. Until then, employers will be allowed to comply in good faith with a reasonable interpretation of COBRA as required under the original statute.