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Strengthening Workers’ Financial Wellness After The Pandemic

Posted on August 2021August 2021 by info

Even before the COVID-19 pandemic, employers were becoming increasingly focused on helping their workforces prepare for retirement and address other areas of financial wellness. Unfortunately, the pandemic heightened the pressures that many workers face in multiple areas of their financial lives. In fact, more than a third of people surveyed by the Society of Actuaries said that they have changed or have considered changing when they will retire as a result of the pandemic.

As employers look for ways to strengthen the financial wellness tools they offer employees, employers should keep in mind that workers’ needs—and the ways workers may have been affected by the pandemic—likely vary by generation. We identify some of the issues the pandemic brought on for each generation and considerations for employers interested in creating or boosting financial wellness programs.

Post-Pandemic Financial Wellness Trends for Each Generation

Gen Z (Born 1997 or after): The pandemic forced many of today’s youngest workers to deal with a major financial disruption early in their careers. Many companies canceled internships and other entry-level positions. Layoffs and furloughs can be particularly damaging for young workers trying to get an early start paying off student loans or saving for a down payment on a home. As a result of these newfound pressures, 34% of Gen Zers say that their mental health has deteriorated over the past year, according to an American Psychological Association survey.

Millennials (Born 1981–1996): Nearly 40% of this segment believe that they will not be able to pay off debt without some kind of assistance, according to a Georgetown University survey. In addition, nearly three-quarters of millennials reported spending $5,000 or more from their retirement savings because of the pandemic, a Real Estate Witch study showed.

Gen X (Born 1965–1980): On average, this group has reduced retirement contributions by 11% because of the pandemic, the Real Estate Witch study noted. Even before the pandemic, 65% of this generation was stressed about money, a Brown & Brown Insurance white paper reported. The paper, however, also noted one area of improvement in financial wellness: a quarter of Gen Xers have increased emergency savings since the pandemic.

Baby boomers: (Born 1946–1964): The pandemic has caused many older workers to take a hard look at their retirement plans and timelines. According to a Pew Research Center report, the number of retired baby boomers increased 3.2 million in 2020; this figure had been growing at an average of 2.1 million from 2012 to 2019. Many baby boomers’ retirement savings were hit hard by the global financial crisis of 2007–2008, and the median 401(k) balance for baby boomers today is about $58,000, according to Fidelity.[1]

Financial Wellness Tools To Consider

There are a host of tools that employers may want to consider offering to strengthen their workers’ financial wellness, and many of these tools may have varying levels of impact for different generations:

Advisory services: With so many workers of all ages dipping into their savings during the pandemic, employers can offer additional tools and training to help workers across generations rebuild those reserves. Gen Z and millennials may benefit from basic educational training on topics such as buying a home or investing for retirement. Meanwhile, Gen Xers may seek more information about investment options, and baby boomers may need help with catch-up contributions. In addition, workers across generations may have different preferences for how they receive this education: Baby boomers may prefer in-person sessions, while younger generations may favor online and self-education options.
Side-car savings accounts: Some workers can’t even think about saving for retirement because they are living paycheck-to-paycheck. This is particularly true for younger workers who haven’t yet had time to build up a rainy-day fund. After-tax accounts may be a good solution to help workers create short-term savings for unexpected emergencies.
Student loan debt management: Today, 43.2 million people owe an average $39,351 in student loan debt, according to EducationData.org, and the strain of this debt is particularly acute for younger workers (e.g., Gen Zers and millennials). Employers now have more options for providing student loan benefit programs to help workers address this debt. It is important to realize that this benefit would most likely overwhelmingly benefit younger workers. As a result, older workers might resent that a similar benefit wasn’t available to them when they were paying off their student loans.

Insight:

Understand the demographics and needs of your workforce

The return to working in offices provides employers a good opportunity to revisit their approaches to financial wellness. Because the financial wellness needs of workers can vary across age groups, it is important for employers to understand the demographic makeup of their workforces. Information about ages, participation rates, and average account balances can help determine which collection of tools will be most effective in addressing your workforce’s needs.

[1] Insider, Older Americans expect retirement to be blissful, but they may be way off the mark, October 2020.

[CM1]This footnote must be printed with any Alliance Firm re-use.

U.S. Senate Gives Official Approval For Bipartisan Infrastructure Package

Posted on August 2021August 2021 by info

In less than 24 hours, the U.S. Senate voted to advance two legislative packages that would result in combined spending of approximately $4.5 trillion in both traditional infrastructure projects and an expansive array of initiatives encompassing healthcare, education and climate change.

On Tuesday, August 10, the Senate voted 69 to 30 in favor of a roughly $1 trillion infrastructure bill. The 2,700-page “Infrastructure One” bill would fund investment in improvements to the country’s roads, bridges, highways and Internet connections. Then early Wednesday morning, the Senate approved, on a party line 50-49 vote, a $3.5 trillion budget resolution—“Infrastructure Two”—that could enable sweeping changes to a broad range of laws to secure enactment of the Biden administration’s “Build Back Better” agenda. The Senate’s adoption of the budget resolution sets the stage for the budget reconciliation process; legislation passed under these procedures generally cannot be filibustered, so that only a simple majority is required for Senate passage.

The budget resolution now heads to the House, which is expected to return from recess the week of August 23 to consider the measure.

Infrastructure One – Tax-Related Provisions

The Infrastructure One package, the “Infrastructure Investment and Jobs Act,” does not include major corporate or individual tax proposals, but it does contain some tax provisions that would raise $50 billion in net revenue. For example, the legislation includes a provision that would amend Internal Revenue Code (IRC) Section 6045 to expand information reporting requirements to include brokers or any person who is responsible for regularly providing any service effectuating transfers of digital assets, including cryptocurrency, on behalf of another person. The measure would also add digital assets to current rules that require businesses to report cash payments over $10,000. This provision would apply to returns required to be filed after Dec. 31, 2023.

The cryptocurrency provisions in the Infrastructure One bill ran into some headwinds in the Senate over attempts to amend the definition of “broker.” Several amendments were introduced, but none were passed, and the bill now heads to the House for consideration. But the issue may not have been put to rest, as press reports indicate that both Republican and Democratic House members support amending the definition, which they deem to be too broad.

The Infrastructure One bill also includes a provision that would amend IRC Section 3134 to terminate the employee retention credit on October 1, 2021, three months earlier than the current Jan. 1, 2022 end date. The provision would apply to calendar quarters beginning after Sep. 30, 2021.

Another revenue raiser included is a provision that would modify the IRC Section 430(h)(2)(C)(iv) table of applicable minimum and maximum percentages with respect to certain pension plans, known as “pension smoothing,” which is estimated to raise approximately $2.9 billion over a 10-year period by reducing the level of deductible employer pension contributions required under the pension funding rules. These amendments would apply to plan years beginning after Dec. 31, 2021.

The bill would also reinstate and modify some expired Superfund excise taxes imposed on the production of specified chemicals.

Infrastructure Two

Approval of the budget resolution by both the House and the Senate would allow Senate Democrats to use the budget reconciliation process to advance their tax policy agenda without Republican support.

While the Infrastructure One package generally avoids consideration of the administration’s tax policy priorities, the broader Infrastructure Two bill is to be fully offset by a combination of new tax revenues, healthcare savings and long-term economic growth. In addition, the agreed-to framework would prohibit new taxes on families making less than $400,000 per year and on small businesses and family farms.

Policy priorities included in the Infrastructure Two package include:

Paid family and medical leave
ACA expansion extension and filling the Medicaid coverage gap
Expanding Medicare to include dental, vision, hearing benefits and lowering the eligibility age
Addressing healthcare provider shortages (graduate medical education)
Child tax credit, earned income tax credit and child and dependent care tax credit extension
Long-term care for seniors and persons with disabilities
Clean energy, manufacturing and transportation tax incentives
Pro-worker incentives and worker support
Health equity (maternal, behavioral and racial justice health investments)
Housing incentives
State and local tax cap relief

In a memorandum issued August 9, Senate Democrats called for the following measures to offset the cost of these provisions:

Corporate and international tax reform
“Tax fairness” for high-income individuals
Enhanced IRS tax enforcement
Healthcare savings
Carbon polluter import fee

The memorandum explains that the Finance Committee’s reconciliation product will account for both substantial portions of the investments contemplated by the $3.5 trillion package but also nearly all of the stated offsets.

Next Steps

It is expected that further action on both bills will be taken in the fall when both the House and Senate return from August recess.

As 2022 Draws Near, Taxpayers Should Consider Compliance With Amended Section 174

Posted on August 2021August 2021 by info

Since late 2017, taxpayers have been implementing the congeries of changes wrought by the most significant revisions to the Internal Revenue Code (IRC) in a generation, the Tax Cuts and Jobs Act (TCJA). The interpretation and implementation of certain provisions of the TCJA is ongoing, as the Treasury and IRS continue to draft and finalize much-needed guidance.

Nearly four years out from the enactment of the TCJA, taxpayers now need to grapple with provisions set to change or sunset, which may lead to more taxable income and compliance burdens. One of the more surprising changes relates to IRC Section 174, Research and Experimental (R&E) Expenditures. In tax years starting after December 31, 2021, taxpayers will lose the ability to immediately expense these costs, and as such, should start developing a transition plan to maximize benefits while efficiently maintaining compliance.

From Immediately Expensing to Required Capitalization

Taxpayers have been able to elect to expense or capitalize R&E expenditures since 1954. For tax years beginning after 2021, however, all U.S.-based and non-U.S.-based R&E expenditures must be capitalized and amortized over five and 15 tax years, respectively, beginning with the midpoint of the taxable year in which the expenditure is paid or incurred. The taxpayer-friendly option to elect to currently expense these items will be eliminated, but a new potential benefit will arise: taxpayers will be able to deduct an expenditure beginning with the midpoint of the taxable year in which it was paid or incurred instead of having to wait until the first month in which they realize a benefit, as is currently the case if the costs are amortized. Taxpayers that previously were expensing the R&E expenditures likely will need to file an Application for Change in Method of Accounting (Form 3115) to begin capitalizing and amortizing these expenditures. However, the IRS has yet to release new procedural guidance specifically addressing how taxpayers must comply with the new rule.

The TCJA also codified the administrative guidelines and practice of treating software-development expenditures as R&E expenditures. This means that software-development expenses paid or incurred in tax years starting after 2021 will no longer be deductible under Rev. Proc. 2000-50; instead, they will have to be capitalized and amortized over five or 15 years, depending on where the development takes place. Given the difference in amortization periods, taxpayers should factor the tax advantage of developing software in the U.S. into their decision of where to locate such development.

At the time of passage, the amendment to Section 174 was one of the lower profile changes introduced. To many who did take notice, requiring capitalization of these costs seemed contrary to the original Congressional intent of Section 174, which was to (1) encourage R&E activities and (2) eliminate the uncertainty about the tax treatment of research or experimental expenditures. Given the Biden administration’s emphasis in its “Green Book” explanation of tax proposals regarding the provision of additional support to encourage R&E activities in the U.S., it remains to be seen whether this amendment will be repealed as part of future tax reform. In the meantime, as 2022 draws nearer, the probability that taxpayers will have to address this new requirement seems more likely, at least in the short term, and they should start to plan accordingly.

Planning Into the Shift and Maintaining Compliance

Taxpayers seeking to maximize the benefit of immediately deducting R&E expenditures should consider the effective date of the required amortization rule (i.e., tax years after December 31, 2021) and if possible, accelerate their R&D activities into tax years starting before January 1, 2022.

Assuming no legislative change is made between now and 2022, taxpayers will have the added compliance burden of capitalizing all R&E expenses and recovering them over five or 15-year periods. Many taxpayers likely have a strong grasp of the amounts of R&E they incur, opting to accelerate the deductions and/or including them in the calculation of the research credit under Section 41. By definition, any costs included in the research credit calculation would need to be recovered under the five-year recovery period. As such, it is not hard to foresee taxpayer calculations serving as a road map to test for compliance with the new rule. However, it is important to note that the type of expenses eligible for deduction under Section 174 are generally broader than the type of expenses eligible for the credit under Section 41. Accordingly, taxpayers may need to examine additional costs outside of the amounts included in the credit calculation to determine whether they meet the definition of R&E expenditures under Section 174. To the extent costs are expensed under Section 162 but also meet the definition of R&E, taxpayers may have unknown exposure if the costs are not identified and capitalized. After identifying these costs, taxpayers will have to track amortization and make any necessary book/tax adjustments.

Another potential area of compliance difficulty could be identifying R&E expenditures performed abroad. For example, a taxpayer with a controlled foreign corporation (CFC) subject to GILTI and incurring significant R&E expenditures may need to review the current treatment of these expenditures. If R&E was properly deducted or recovered in any alternate way, the taxpayer may have to file an accounting method change on behalf of the CFC and properly recover over 15 years. Implementing correct accounting methods for various items to determine tested income or loss for GILTI purposes can be challenging; this may present yet another complexity in that effort.

Next Steps for Companies in Light of Amended Section 174

The TCJA requirement that research expenditures eventually be capitalized and amortized over five or 15 years will have a huge impact on all companies heavily invested in those activities. As discussed above, any types of costs currently deducted as Section 174 expenses, taken towards the research credit under Section 41 and/or immediately deducted as software-development expenditures should be identified and the potential impact of this change on those amounts should be considered. Other expenses (e.g., amounts previously treated as Section 162 expenses) incurred both domestically and abroad should be reviewed to determine if they meet the definition of R&E, and the potential impact on taxable income and process around compliance should be considered and assessed. As previously noted, while many taxpayers and tax practitioners are hopeful that the requirement for capitalization will ultimately be repealed, taxpayers should start considering the compliance and planning implications if the rule remains in place.

_{Written By Carolyn Smith Driscoll, Managing Director, Business Incentives & Tax Credits and Connie Cunningham, Managing Director, Accounting Methods Technical Practice Leader. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com}