Industry Groups Alarmed About Tax Reform

A U.S. House leader has introduced a sweeping tax reform bill that has many in the retirement industry alarmed about its proposals concerning retirement plans.

By Rebecca Moore | February 27, 2014
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While the 979-page document introduced by U.S. House Ways and Means Committee Chairman Dave Camp (R-Michigan) does not include taxation of retirement contribution amounts and benefits caps President Obama suggested in earlier budget proposals, there are similar or new provisions industry groups say will result in double taxation and discouraging retirement plan benefit offerings.

Under current law, the limits on contributions to qualified retirement plans are indexed for inflation. The Camp proposal would freeze these increases in the contribution limits for 10 years. Therefore, individual elective deferrals to qualified retirement plans would be capped at $17,500 (or $23,000 for individuals eligible to make catch-up contributions) for the next decade. This provision would raise more than $63 billion in the next 10 years to pay for tax reform, according to an analysis by the Association of Pension Professionals & Actuaries’ (ASPPA) Congressional Affairs Manager Andrew Remo.

The Camp proposal would subject all elective deferrals into qualified retirement plans above 50% of statutory limits ($8,750, or $11,500 for individuals eligible to make catch-up contributions) to Roth tax treatment—taxing them up front, rather than upon distribution. In addition, the proposal would require all employers with more than 100 employees to amend their plan documents to allow employees to make Roth contributions (if Roth contributions are not already permitted). Encouraging Roth savings accelerates the revenue flowing into government coffers in the short term, raising $143.7 billion over the next 10 years to pay for tax reform, Remo says.

Camp’s proposal would place a 25% cap on the rate at which deductions and exclusions (including those relating to retirement savings) reduce a taxpayer’s income tax liability. This is similar to a provision included in President Obama’s past budget proposals (see “Savings Cap Could Affect up to 5% of Participants”). Should this proposal become law, 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. (Obama’s proposed cap did not apply to employer contributions.)