Ready to Rumble on Tax Reform?
Less than 24 hours after Donald Trump’s stunning victory, the Chairman of the House Ways & Means Committee was talking tax reform — and that could be ominous for retirement savings.
While both presidential candidates had spoken during the campaign of the need for tax reform, the odds for action on that front have accelerated rapidly now that one party has gained control of Congress — both the House and Senate — as well as the White House.
House Ways & Means Chairman Kevin Brady (R-Texas) is already championing
moving aggressively on tax reform within the first 100 days of the Trump administration. Noting that Trump’s tax proposal in many ways mirrors the “Better Way” tax reform blueprint released earlier this year by House Republicans, Brady said that House Republicans were “ready with the agenda we’ve laid out, especially fixing this broken tax code, replacing Obamacare with real patient health care, and lifting taxes off businesses so they can grow again.”Limits ‘Less’
Brady has previously invoked the spirit of the Tax Reform Act of 1986 as a model — a basis that should be of concern to those interested in encouraging retirement savings. Along with the changes in corporate and individual rates, defined contribution limits were cut by more than 70%, from $30,000 to $7,000, greatly diminishing not only the ability of individuals to save for retirement, but the incentives for those who decide to establish and maintain these programs for others.
While the blueprint pledges to “continue the current tax incentives for savings,” it directs the House Ways & Means Committee to “consolidate and reform the multiple different retirement savings provisions in the current tax code to provide effective and efficient incentives for savings and investment.” So while the current retirement savings vehicles — like the 401(k) — will not be removed from the tax code under the House Republican plan, those vehicles could be combined into one “cookie cutter” approach. That might, or might not, mean significant changes for the 401(k), but 403(b)s, and potentially even 457(b) programs could be subjected to changes that would render them more like their 401(k) brethren.
Additionally, the blueprint directs the Ways & Means Committee to “explore the creation of more general savings vehicles” like so-called Universal Savings Accounts outside the employer-based savings system in which account holders could withdraw both contributions and earnings at any time, and for any reason, without tax penalties. Legislation has been introduced in Congress that would create this new savings vehicle, which would seriously diminish the relevance of individual retirement accounts (IRAs) and possibly even workplace based savings arrangements. Back to the Future?
And who could forget former House Ways and Means Chairman Dave Camp’s tax reform proposal that included:
- a double tax on contributions for top bracket earners;
- a 25% cap on current year tax benefit;
- restricting contributions to Roth-only above half of the 401(k) limit; and
- a 10-year freeze on cost-of-living increases for the 402(g) elective deferral limit, as well as 415 limits (both DB and DC) and SIMPLE plans.
The threats to the retirement system through the tax reform back door are not limited to Republicans. In 2014, Sen. Ron Wyden (D-Ore.), then Chairman of the powerful Senate Finance Committee, claimed that “incentives for savings in the tax code are not getting to the people who need them,” and that it was “clear that something is out of whack” with a system that he said taxpayers are “subsidizing” to the tune of $140 billion a year.
Yet, Wyden said, “millions” are nearing retirement with little or nothing saved. At the time, Wyden noted that, retirement savings “are going to be a focus in bipartisan tax reform.”
The bottom line: There remains bipartisan enthusiasm for tax reform, though that interest is generally focused on reducing rates — and those efforts often “pay” tax reform’s tab by undermining the incentives that promote, encourage and support the maintenance and creation of workplace retirement plans, specifically among smaller employers.
ASPPA and the ARA GAC will be keeping an eye on developments here — as should you — and the plan sponsors that you support.