Small Plans Face a New Threat: ‘Corporate Integration’

By Judy Miller • May 17, 2016 • 0 Comments
A few weeks ago, when Treasury withdrew the “reasonable classification” proposal, and the final fiduciary rule came out with modifications that addressed all but one item in our comment letter, I felt a tremendous sense of relief, and went off to the North American Actuarial Council (NAAC) meeting with Karen and Kurt feeling like there might be a bit of a break in potentially destructive activity. (Kurt’s account of the trip is here.) But just when you start feeling pretty good, tax reform rises from the dead and here we go again.

There won’t be any major tax reform this year – Congress will save that until at least the next Congress. But the proverbial groundwork is being laid. Both the House Ways and Means Committee and Senate Finance Committee have had, or are planning, hearings. The House has had at least three already, providing any House member who wants to do so with an opportunity to present their view of what should be done to reform the Internal Revenue Code. 

Meanwhile, Sen. Orrin Hatch (R-Utah), the Chairman of the Finance Committee, held a hearing May 17 on a proposal dear to his heart on “corporate integration.” The chatter around town says it is the first of two. I testified at the hearing on behalf of the American Retirement Association. Six months ago, I would have thought corporate integration must be some kind of social issue, or maybe related to mergers and acquisitions, but no. Now I understand that it is just the latest threat to the tax incentives that encourage small business owners to establish qualified retirement plans.

The issue is the current “double taxation” of corporate dividends. The company pays tax on them before distributing the dividends to shareholders; then the recipient claims the dividends as income and pays tax again. Unless, of course, the recipient is tax-exempt, in which case the recipient pays no income tax on the dividends received. Corporate integration can vary in the details, but the gist of it is that corporations will no longer pay tax on dividends to be distributed. (In theory, this will result in larger dividends.) Instead, the corporation will withhold income tax on behalf of the recipient at a fixed rate of 35%, regardless of the tax status of the recipient. There goes the tax deferral of investment earnings on contributions for qualified plans – at least to the extent that the earnings consist of dividends and interest. There would be ways to continue to provide a level of incentives similar to current law, but for now, our main concern is making sure the committee understands the need to make an accommodation.

Of course, it is extremely unlikely a corporate integration proposal goes anywhere anytime soon. Charities would also be hit, and they tend to have many protectors and a very loud voice. But at the very least, this is another opportunity to remind members of Congress that the tax incentives make a real difference in the lives of millions of American workers, and Congress should tread lightly.

PBGC Premiums Update 

In other news, you may have heard that legislation has been introduced to move PBGC premiums “off budget,” and theoretically stop the increases in single-employer premiums that are too often a part – a “let’s pretend” revenue raising part – of budget agreements. We are actively lobbying with other organizations in support of the legislation. Like all legislation, its fate is unclear. However, it provides a real opportunity for members of Congress to take a public stand in opposition to using single-employer premium increases as fake revenue.

Burrows Call for Papers

Finally, please consider taking the time to prepare an entry for the Ed Burrows Call for Papers. It’s an important topic, and the committee would love to hear your thoughts.