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.
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.