The House Ways and Means Committee has revealed that it intends to partially pay for the $3.5 trillion reconciliation bill through a series of limitations on upper-income individuals’ retirement savings.
The retirement proposals are included in Subtitle I titled “Responsibly Funding Our Priorities,” along with a whole host of other individual and corporate tax increases. Estimates by the Joint Committee on Taxation show that this package would raise approximately $2.1 trillion over 10 years to help pay for the fiscal year 2022 budget bill.
The Committee plans to resume its days-long markup of the bill on Sept. 14 and 15. These new proposed changes are a follow-up to the legislation the Committee approved Sept. 9, which is supported by the American Retirement Association. That proposal, among other things, would require employers without employer-sponsored retirement plans to automatically enroll their employees in IRAs or 401(k)-type plans. It also would provide an increase in the credit limitation for small employer pension plan startup costs and adds a new credit for certain small employer automatic retirement arrangements.
Following are brief descriptions of the proposed changes targeting high-income retirement savers, based on a summary by the Ways and Means Committee.
Tax Treatment of Rollovers to Roth IRAs and Accounts (Sec. 138311). To close the so-called “back-door” Roth IRA strategies, the bill would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). Moreover, the provision would prohibit all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level.
Contribution Limits for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances (Sec. 138301). The legislation would prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual’s IRA and defined contribution accounts exceed $10 million as of the end of the prior tax year.
The limit on contributions would apply only to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). The legislation would also add a new annual reporting requirement for employer DC plans on aggregate account balances in excess of $2.5 million.
Mandatory RMDs for High-Income Taxpayers with Large Retirement Balances (Sec. 138302). If an individual’s combined traditional IRA, Roth IRA and DC plan account balances generally exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year. The minimum distribution generally would be 50% of the amount by which the individual’s prior year aggregate account balances exceeds the $10 million limit.
The minimum distribution would only be required if the taxpayer’s taxable income is above the thresholds described in the section above. What’s more, to the extent the combined aggregate account balances exceed $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in DC plans up to the lesser of:
- the amount needed to bring the total balance in all accounts down to $20 million; or
- the aggregate balance in the Roth IRAs and designated Roth accounts in DC plans.
Once the individual distributes the amount of any excess required under this 100% distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50% distribution rule described above.
Other Tax and Retirement Proposals
Prohibition of IRA Investments Conditioned on Account Holder’s Status (Sec. 138312). The bill also would prohibit an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential. For example, the legislation prohibits IRAs from holding investments which are offered to accredited investors because those investments are securities that have not been registered under federal securities laws. IRAs holding such investments would lose their IRA status.
Other retirement-based changes within the bill’s so-called funding section include:
- expanding the statute of limitations with respect to IRA noncompliance from three years to six years;
- prohibiting investment of IRA assets in entities in which the owner has a substantial interest; and
- treating IRA owners as disqualified persons for purposes of prohibited transactions rules.
Other tax-related changes include:
- an increase in the top marginal individual income tax rate to 39.6%;
- an increase in the capital gains rate for certain high-income individuals to 25%;
- an expansion of the net investment income tax to trade or business income of certain high-income individuals;
- a surcharge on high-income individuals, trusts and estates;
- modifications to the limitation on deduction of excessive employee remuneration under Section 162(m); and
- an increase in the corporate tax rate to 26.5%.
“On Tuesday, we will continue our work on the Build Back Better Act with the consideration of investments to provide critical support to families, spur the development of clean energy, reinstate Build America Bonds, and improve Americans’ ability to afford health care,” House Ways and Means Committee Chairman Rep. Richard Neal (D-MA) said in announcing the additional legislation.
Of course, consideration by the Ways and Means Committee is one of the first of many steps in the legislative process. The retirement provisions could still be amended. In addition, the Senate Finance Committee will also have its own set of proposals, which may or may not resemble the House’s version.
A Ways and Means summary of the Subtitle I funding provisions, including the proposed retirement changes, can be found here; the legislative text of Subtitle I can be found here (the retirement changes of Subtitle I begin on page 665).