July 8, 2015
Senate Finance Committee Tax Reform Working Groups Release Reports
The U.S. Senate Finance Committee’s five bipartisan working groups on tax reform released their reports. The reports, released on July 8, offer policy options and recommendations for consideration as part of a larger effort to facilitate comprehensive tax reform.
As the Senate committee with jurisdiction over the tax code, the Finance Committee has been active in examining comprehensive tax reform and announced the working groups in January (see the January 15 Benefits Byte). Each bipartisan working group focused on a particular aspect of the Internal Revenue Code. The five areas included savings and investment, individual income tax, business income tax, international tax and community development and infrastructure. The five reports are available here.
The Savings & Investment Working Group was co-chaired by Senator Mike Crapo (R-ID) and Sen. Sherrod Brown (D-OH) and examined retirement tax policy as part of its topic area. While the group had been assigned consideration of the tax treatment of capital gains and dividends, financial products, defined benefit pension plans and private retirement savings accounts, the report states that in order to “develop consensus, bipartisan policy solutions strictly within the confines of the tax code elements assigned…our initial review led us to focus on the area of private retirement savings.”
The report outlines three key goals for Congress to focus on to promote private retirement savings accounts and includes several policy recommendations for each goal, as well as background on current and previous legislation that could help achieve the goals, although the report specifically states the working group is not endorsing any particular legislation. The goals are to increase access to tax-deferred retirement savings, to increase participation and level of savings and to discourage leakage while promoting lifetime income.
Increase Access to Tax-Deferred Retirement Savings
Proposals to increase access to tax-deferred retirement savings vehicles include:
- Open multiple employer plans (MEPs) to unrelated employers. The report notes that current law requires a “nexus” between employers who wish to join a MEP, thereby hindering unrelated employers to form a MEP. The report favorably describes legislation that would waive this requirement for small businesses with fewer than 500 employees to allow them to form MEPs. The report also notes that small employers would benefit from forming MEPs by having reduced retirement administrative burdens, achieving the economies of scale that larger employers are able to achieve, promoting competition among providers of small business retirement plans and increasing the quality of the investment products available to employees while potentially reducing fees.
- Increase start-up and matching credits and safe harbors for small businesses offering a plan. The report proposes increasing the start-up credits for small employers that offer retirement plans and provide additional credits for small employers who offer automatic enrollment plans. The report also points out that Sen. Orrin Hatch (R-UT), chairman of the Senate Finance Committee, has proposed increasing the size of the current maximum credit for small employers who adopt a new qualified plan from $500 to $5,000, and President Obama has proposed offering small employers an auto-Individual Retirement Account (IRA) tax credit, tripling the existing “start-up” credit to $4,500 and providing an additional $1,500 tax credit to small employers who already offer a plan and add auto-enrollment.
- Create an additional safe harbor for automatic enrollment plans. The report encourages expanding the current safe harbor for automatic enrollment plans and favorably reports on proposals which would add an additional safe harbor where an employer may “match” employee contributions of up 10 percent of pay. The proposals would also allow offset of the cost of this additional match for employers with fewer than 100 employees through a new tax credit equal to the increased match.
Increase Participation and Level of Savings
Proposals to increase employee participation and level of savings include:
- Allow part-time employees to enroll in plans. The report states that only 37 percent of part-time workers have access to a workplace retirement plan, as employers who offer retirement plans are allowed to exclude employees who work less than 1,000 hours per year. The report encourages consideration of proposals that allow long-term, part-time employees to contribute to employer-sponsored retirement plans and favorably describes the administration’s proposal to expand access for part-time workers by requiring employers who offer plans to permit employees who have worked for the employer for at least 500 hours per year for 3 years or more to make voluntary contributions to the plan.
- Expand the Saver’s Credit. The report advocates for proposals along the lines of H.R. 2117 and S. 1970, as introduced in the 113th Congress, to expand and increase the Saver’s Credit as well as make it refundable.
- Improve S Corporation Employee Stock Ownership Plans (S-ESOP Plans). The report proposes to further encourage employee-ownership in S corporations, by considering bipartisan proposals that would extend the gain-deferral provisions of Code Section 1042 to sales of employer stock to S-ESOPs, to provide resources to small businesses contemplating making the transition to an ESOP and ensure that SBA-certified small businesses do not lose their status by becoming employee owned.
- Make clarifications to church plans. The report proposes technical changes to alleviate uncertainty and compliance issues for church retirement plans.
Discourage Leakage while Promoting Lifetime Income
Proposals to discourage leakage and promote lifetime income include:
- Make a percentage of annuity payments excludable. The report supports an approach that would allow a percentage of usually taxable lifetime annuity payments received by an individual from an IRA or any type of defined contribution plan to be excluded from gross income. The exclusion would be phased out at higher levels of income.
- Increase portability of lifetime income. The working group heard strong arguments that defined contribution plans should be encouraged to offer annuities or other installment products as investment options to encourage long-term, lifetime savings. Participants would be able to buy these products gradually over their careers, eliminating the risk of making one large annuity or installment product purchase when interest rates are low.
- Promote lifetime income. The report encourages consideration of policies that encourage retirees to be knowledgeable about and select distributions that provide a stream of income payments over the course of their retirement.
- Prevent leakage from retirement funds for purposes other than retirement income. The report notes that a critical issue for the preservation of savings is leakage and proposes extending the rollover period for plan loan amounts until the end of the tax year to pay back a loan and allowing 401(k) participants to continue making elective contributions during the six months following a hardship withdrawal (elective contributions are currently prohibited for at least six months following a hardship withdrawal).
Many of these proposals were included in the Council’s strategic plan, A 2020 Vision.
The Council filed a comprehensive 17-page written statement with the Savings and Investment working group on April 15. The statement urged the committee to acknowledge the importance of current tax incentives supporting employer-sponsored retirement plans and to not allow legislation that incorporates retirement-related provisions to be driven by considerations unrelated to retirement policy. The statement also included a very extensive analytical examination of issues that are often at the forefront of retirement-related measures developed by Congress concerning such matters as the value of the tax expenditure associated with employer-sponsored retirement plans and the distributional nature across the income spectrum (see the April 15 Benefits Byte).
Other tax reform working groups with proposals that could affect employee benefits include:
- The Business Income working group report discussed giving corporations a deduction for dividends paid and imposing a withholding tax on the recipient of dividends, including tax-exempt retirement plans. The report also supports the president’s proposal to make permanent Section 179 small business expensing at $1 million, allow cash accounting for businesses with up to $10 million in gross receipts, permanently double the deduction for start-up business costs from $5,000 to $10,000 and expand the health insurance tax credit for small businesses created in the Patient Protection and Affordable Care Act (PPACA).
- The Individual Tax working group report suggested that Congress consider proposals to rules for qualified charitable distributions from an IRA to expand the exclusion from gross income for qualified charitable distributions.
There continues to be ongoing efforts for comprehensive tax reform as well as current bipartisan efforts around international tax reform. The Council will continue to emphasize the value of employer sponsored plans as the Senate Finance Committee and other congressional committees consider benefits measures on a stand-alone basis or as part of more comprehensive legislation. For more information, contact Diann Howland, vice president, legislative affairs, Lynn Dudley, senior vice president, global retirement & compensation policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.