Camp’s Tax Reform Proposal Hits Retirement Savings Incentives

Rep. Dave Camp (R-MI), Chairman of the House Ways and Means Committee, released his long-awaited comprehensive tax reform proposal on Feb. 26. Unfortunately, the proposal attacks the current tax incentives for retirement savings in a variety of ways.

Double Taxation of Retirement Savings

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.

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.) In effect this proposal would tax contributions to qualified retirement plans twice: 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.

If small business owners are subject to this penalty for saving through a qualified retirement plan, it might not make sense for an owner to continue to sponsor the arrangement — and the firm’s employees could lose their workplace retirement plan as a result.

Contribution Limit Increases Frozen Until 2023

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.

Mandatory Roth Contributions

The Camp proposal would subject all elective deferrals into qualified retirement plans above $8,750 (or $11,500 for individuals eligible to make catch-up contributions) to Roth tax treatment. In other words, any contributions to retirement accounts above $8,750 (or $11,500 for near-retirees) would be taxed up front — unlike contributions to traditional retirement accounts, where the money contributed is excluded from income in the year in which it is contributed.

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.

Other Items

The Camp tax reform proposal also makes changes in other areas, including elimination of new Simplified Employee Pensions (SEPs) and Savings Incentive Match Plan for Employees (SIMPLE) 401(k) plans going forward. Existing SEPS and SIMPLE 401(k)s could continue to exist.

Camp’s proposal would also modify retirement plan distribution rules and make numerous changes in the rules governing IRAs to encourage Roth savings and combat leakage.

ASPPA and NAPA are very disappointed to see that the provisions double-taxing retirement contributions and freezing the retirement plan contribution limits are included in Camp’s tax reform proposal. “These provisions are a real blow to employer-sponsored retirement plans, and to the retirement security of American workers,” Brian Graff, executive director/CEO of ASPPA and NAPA, said in a statement. For more on Graff’s take on the Camp proposal, click here.

Andrew Remo is ASPPA’s Congressional Affairs Manager.    

Add Your Comments

7 Comments

  1. Paula Horan
    Posted February 27, 2014 at 12:10 pm | Permalink

    How do these politicians think we’re all going to retire? We’re not getting a big fat pension from the government like they are! We’ll be lucky to get a small pitance from Social Security and they want to PENALIZE us for saving for our future? This is the craziest thing I’ve ever read! Obviously, our politicians are so out of touch with the real world that they think people are saving too much money for retirement, so let’s tax them twice! Instead of giving money to other countries (like the $1 billion that we’re going to “loan” to the Ukraine, let’s encourage people to save and take care of themselves for a change!

  2. Ellis Biddle
    Posted February 27, 2014 at 12:27 pm | Permalink

    Kudos to Paula Horan and her comment. Maybe if the politicians spent more time trying to get people back to work so they could pay taxes we might move along a bit faster.

  3. Steve Caudle
    Posted February 27, 2014 at 12:42 pm | Permalink

    At a time when most Americans are calling for simplification of the U.S. tax code, this would further complicate it.

    Unfortunately, politicians are still just looking at raising revenue now, while they are in office, and are content to let the next generation deal with the problems they create.

  4. Richard Furze
    Posted February 27, 2014 at 1:20 pm | Permalink

    Though the proposal would increase the tax burden on high-income workers who have access to a 401(k) or 403(b) plan, it does not appear it would impact the average worker. Neither would the tax increase seem to limit any worker’s ability to provide himself with the means to fund a comfortable retirement. Do some in our government feel it does not have to provide a tax-deferred means to amass an amount suitable for a nice long retirement in a big city?

    A big problem is that our government is in a position and mind set of “need more revenue now!” and many factors have lead to and sustain this. How is this different than how most Americans, businesses and other governments in the world operate?

  5. L.C.
    Posted February 28, 2014 at 8:26 am | Permalink

    @Richard Furze: Doesn’t “seem” to impact the average worker??? You bet it does! Self-employed companies, which make up 70-80% of business in the United States will decide to NOT implement a retirement plan for their employees because of the proposal’s craziness. Are you kidding me? This will DESTROY employer/sponsored plans in their entirety as we know it. I think you need to read this proposal more closely to see really how damaging it is!!!

  6. Richard Furze
    Posted February 28, 2014 at 2:35 pm | Permalink

    L.C., you are almost as much of a sensationalist as Paula Horan. No doubt such a proposal would have some impact, but really, 70% – 80% of businesses will decide not to implement a plan and it will “destroy employer/sponsored plans in their entirety as we know it”? Hmmm…the vast majority of small businesses don’t employ many full-time workers outside of the owners, their spouses and other family members. Most don’t sponsor a retirement plan anyway, unless the owners have the means to cram the full $51,000 per year into it, while providing 0 to minimal benefit to any non-owner employees. I suppose it would be a stretch for these people to realize that even with a 10% front-end tax, they would still get a 25% tax-deduction, plus many years of tax-deferred gains.

    The majority of workers, employed at large firms that already provide a plan, would continue to enjoy the availability of a tax-deferred plan. Most non-owner workers at small businesses, could still make contributions to an IRA because their employer doesn’t (and probably never will) sponsor a plan or allow them to participate in it.

  7. Gary Kandlbinder
    Posted March 4, 2014 at 1:19 pm | Permalink

    I have a suggestion. How about our government simply live within it’s means and cut spending a couple of hundred million instead of putting burdens on business and individuals. Enough is enough!

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