Rep. Camp’s tax reform proposal would curtail tax incentives for retirement plans

House Ways and Means Committee Chairman Dave Camp (R-MI) unveiled his long-awaited comprehensive tax reform package on February 26, 2014. Camp’s proposed Tax Reform Bill of 2014 would make a host of changes to the tax code and would reduce current tax incentives for retirement plans in a number of ways. “This is a comprehensive plan that reflects input and ideas championed by Congress, the administration and, most importantly, the American people,” Camp said.

Individual tax rates

The proposal would consolidate the current seven individual income tax brackets into three brackets: 10%, 25%, and 35%. The new 35% bracket would begin at the same income levels as the current 39.6% bracket (e.g., $400,000 for single filers and $450,000 for joint filers in 2013). Beginning in tax year 2015, these income levels would be indexed for chained CPI instead of CPI, a slightly different measure of inflation. Certain tax preferences could only be taken against the 25% bracket, but not the 35% bracket. These tax preferences would include employer contributions to health, accident, and defined contribution retirement plans to the extent excluded from gross income; the deduction for health premiums of the self-employed; the deduction for contributions to Health Savings Accounts; and the portion of Social Security benefits excluded from gross income.

IRAs

Under the proposal, the income eligibility limits for contributing to Roth IRAs would be eliminated and new contributions to traditional IRAs and nondeductible traditional IRAs would be prohibited. The inflation adjustment of the annual limit on Roth IRA contributions also would be suspended until tax year 2024, at which time inflation indexing would recommence based off of the frozen level. In addition, the proposal would repeal the rules allowing recharacterization of Roth IRA contributions or conversions. The exception to the additional 10% tax for early distributions used to pay for first-time homebuyer expenses would also be repealed.

Employer-provided plans

There would be several significant changes made to the tax rules governing employer-provided plans.
Employers would not be permitted to establish new SEPs or SIMPLE 401(k) plans after 2014. Employers would be permitted to continue making contributions to existing SEPs and SIMPLE 401(k) plans. SIMPLE IRAs would continue to be available.
The inflation adjustments for the maximum benefit under a defined benefit plan, the maximum combined contribution by an employer and employee to a defined contribution plan, the maximum elective deferrals with respect to each type of SEP, SIMPLE IRA, and defined contribution plan, and catch-up contributions would be suspended until 2024, at which time inflation indexing would recommence based off of the frozen level. The provisions generally would be effective after 2014. More specifically, the inflation adjustments for qualified plan benefit and contribution limitations would be effective for years ending with or within a calendar year beginning after 2014; the inflation adjustments for qualified plan elective deferral limitations would be effective for plan years and tax years beginning after 2014; the inflation adjustments for SIMPLE retirement accounts would be effective for calendar years beginning after 2014; and the inflation adjustments for catch-up contributions for certain employer plans and for governmental and tax-exempt organization plans would be effective for tax years beginning after 2014.
Changes would also be made with respect to designated Roth contributions and the rules relating to required minimum distributions, rollovers, in-service distributions, and hardship distributions.
Employer groups cool to proposal
The American Society of Pension Professionals & Actuaries (ASPPA) and the ERISA Industry Committee (ERIC) expressed concern with Camp’s tax reform proposal. Should this proposal become law, ASPPA said, it would subject individuals in the new 35% tax bracket to a 10% surtax on all contributions made to a qualified retirement plan – that is, both employer and employee contributions. In effect, this proposal would tax contributions to qualified retirement plans twice, ASPAA noted: individuals would pay the 10% surtax when contributions are made to the plan, and then pay tax again at the full ordinary income tax rate when the money is distributed from the plan during retirement.
ASPPA CEO/executive director Brian Graff, also expressed concern about the freeze on contribution limits until 2023. “The cost of living in retirement is not going to be frozen,” Graff said. “On top of the double taxation, this is a real blow to employer-sponsored retirement plans, and to American workers’ retirement security,” he added.
ERIC president and CEO Scott Macey said that “[w]e understand that retirement tax incentives are a tempting target based on the congressional budget score-keeping methods, but these incentives are not what we would consider ‘closing tax loopholes.’”
“Elective deferrals to traditional retirement accounts are still subject to taxation and should not be confused with exemptions and exclusions,” Macey said. “We believe the current elective deferral limit works well and should be maintained, as workers need flexibility to be able to save more when they are able and less when under financial constraints. The proposal could adversely affect this flexibility.”

Source: House Committee on Ways and Means, Tax Reform Act of 2014, Discussion Draft, Section-by-Section Summary, February 26, 2014; ERIC press statement, February 26, 2014; ASPPA press release, February 27, 2014.

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