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The tax advantages that employee benefit plans and their participants enjoy don’t appear to be in the crosshairs of the next Congress, despite fears to the contrary.
There’s been much buzz from the incoming administration about corporate and individual tax cuts along with increased spending. This has caused some in the employee benefits plan community to worry that Congress could end up looking at plans as a revenue source.
Those fears, however, may be unnecessary, or at least premature.
A House Ways and Means Committee staff member recently told Bloomberg BNA that the “committee is working on tax reform that will make it easier for Americans to save for their retirement.”
Speaking on background, the staff member said, “We are not working to cut employee benefit plan tax benefits.”
This appears to be generally consistent with the expectation of some who make a living thinking about tax policy, such as Steven M. Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center in Washington.
Rosenthal told Bloomberg BNA that “tax benefits provided to retirement plans and individual retirement plan accounts offer a sizable potential revenue source that Congress may decide to tap in the future,” but that it “won’t likely be an early priority.”
Others, such as Lynn Dudley of the American Benefits Council in Washington, said they’re concerned that Congress will seriously consider making tweaks to tax-free plan contributions and tax-deferred plan earnings much sooner.
Dudley told Bloomberg BNA she expects Congress to push for new revenue sources at the same time it passes tax-cut legislation.
The Trump Administration transition team didn’t respond to Bloomberg BNA’s request to weigh in on this issue.
Whatever the timeline, Dudley cautioned against Congress raising short-term revenue from the retirement system.
Doing so “could have long-term adverse consequences on people’s ability to sufficiently prepare for retirement,” said Dudley, who is ABC’s senior vice president for global retirement and compensation policy.
ABC lobbies on behalf of large corporate pension plan sponsors.
A number of ideas for raising revenue by reversing tax benefits afforded to employee benefit plans have been circulating for some time and could be on the menu for Congress if it does get serious about seeking revenue from plans.
A recent report from the Congressional Budget Office listed several such options. One of the ideas is to put a limit on the value of employee contributions to a retirement plan, as part of a broader proposal to limit the value of many deductions and exclusions to a certain rate, such as 28 percent.
Under such a proposal, if maximum individual income tax rates were lowered to 33 percent and the benefit of plan contributions were limited to 28 percent, then an individual in the 33 percent marginal tax bracket wouldn’t get more than a 28 percent tax benefit from his or her plan contribution.
Other ideas for raising revenue from benefit plans focus on limiting the amount of before-tax contributions and suspending the indexation of plan contribution limits.
The CBO, for one, suggested that tax revenue could be raised by lowering the limit for before-tax contributions to defined contribution plans, such as 401(k) plans.
Current law permits participants in such plans to contribute up to $18,000 per year, and gives those age 50 and over a special catch-up limit of $24,000..
Under the CBO’s proposal, the annual limit would be reduced to $16,000 and the age 50 catch-up would be eliminated.
Similarly, the National Commission on Fiscal Responsibility and Reform recommended in a 2010 report that defined benefit plan contributions be capped by limiting participant contributions to the lesser of 20 percent of income or $20,000 per year.
The NCFRR was created by President Barack Obama to develop strategies to improve the nation’s tax, revenue and spending policies.
Each of these proposals would suspend for 10 years any indexation that would increase such limits.
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