Weekly Legislative Update - July 30, 2018

More Details Emerge on Tax Reform 2.0

The House Ways and Means Committee released a two page outline of a new package of tax bills (which are being referred to as "Tax Reform 2.0") that Committee Chairman Kevin Brady has stated will be circulated around the House in the coming month and introduced as legislation in the House in September.  A two page outline makes it clear that Tax Reform 2.0 will be comprised of three core elements. The aim is to get votes on all three in the House before it adjourns for the midterm elections.

While it is yet unclear exactly what will be included in the final package, one major focus will be an attempt to make the individual tax cut provisions of the 2017 Tax Cuts and Jobs Act (which are set to sunset at the end of 2025) permanent.  The cost of making these cuts permanent is anticipated to be in the $600 billion range.  Because of this price tag it is likely that these provisions will move in a separate bill from the other two sections of Tax Reform 2.0.  It is not clear whether there would be any revenue offsets to this revenue loss. It is likely that the House will pass this legislation knowing full well that it will not pass the Senate (because it would be improbable that there would be 60 Senators willing to pass this legislation).  There have been also some suggestions about further lowering the corporate tax rate (down to 20% for C corps), though this is not mentioned in the outline.  Given the high cost that would be associated with either or both of these proposals, one would think that Congressman Brady and his committee will be looking for revenue raisers to include in the package.  On the other hand, the process so far has totally excluded Democrats as was the case with the Tax Cuts and Jobs Act last year so it may be that they will not include any revenue raisers.

A second part of the Tax Reform 2.0 package will be aimed towards retirement plans, which at this juncture, are the only portions of the anticipated package which have bipartisan support.  The 2 page outline specifically mentions a universal savings plan proposal. The outline gives no further details but it is likely that this will be similar to the Lifetime Savings Account proposed years ago. Basically this is a tax free savings account with unlimited withdrawals at any time - we would anticipate some annual limit on the amount that can be put into the account.  It is expected that many of the provisions included in the Retirement Enhancement and Savings Act of 2018 ("RESA") - S. 2526 and H.R. 5282 - will be part of the Tax Reform 2.0 bill.  The centerpiece of RESA are provisions designed to make MEPS (multiple employer plans) more accessible to small businesses.   Under the bill, MEPS would become "open" meaning that the requirement that there be some nexus amongst the companies that adopt the MEP would be eliminated.  Also, each separate plan would rise or fall on its own merits - no longer would one "bad" plan taint the whole group with the possibility that all the plans in the MEP could be disqualified because of the one bad apple (plan).  Today, most plan advisors counsel their clients to stay away from MEPS because of these problems. 

Many members of Congress believe that opening up MEPS will solve the problem of lagging coverage in the small plan area.  The theory is that MEPS will reduce admin costs, costs of investments and remove almost all (or in at least one version - virtually all) fiduciary responsibility for the company joining the MEP.  Even though all of this sounds good in theory, given the fact that the introduction of SIMPLE IRASs didn't crack the nut, it is not clear why MEPS would.  Of course, problems like start-ups simply not having the money or the bandwidth to provide a plan, or small businesses just hoping to make payroll, or the fact that a significant percentage of start-ups don't make it through the fourth year of their existence are ignored as the real reasons why many small businesses do not sponsor retirement plans.   

The second major change RESA would make would be to partially eliminate the stretch IRA. The stretch IRA is an IRA which pays out assets during the owner's and his/her spouse's lifetimes and then has the remainder, if any, taken out over the lifetime of the second beneficiary (generally the second beneficiaries are the children). Thus, an IRA can exist over the lifetime of a second beneficiary after the spouse's passing.

Under the RESA stretch IRA proposal, in the vast majority of cases, assets over an aggregate account balance of $450,000 with respect to defined contribution plans and IRAs, would have to be paid out by the end of the fifth calendar year following the year of the IRA owner or employee's death.  Exceptions to this rule are made for a surviving spouse, disabled or chronically ill individuals, individuals who are not 10 years younger than the employee or IRA owner, or children under the age of majority until they attain that age.  There are several practical problems with this proposal, including what entity is going to be charge of determining the excess amount over $450,000 at the time of the owner's death and how is the $450,000 to be spread amongst beneficiaries. These problems could, however, be solved by having a threshold amount (say $1,000,000) per beneficiary.

Unfortunately, the long term consequences of such a proposal could be devastating to the security of many small business employees.  Once word got out that beneficiaries would be forced to take retirement savings into income within 5 years of an owner's passing, it is likely that advisors would start cautioning owners to not save "too much" in the retirement plan.  This could lead to the premature freezing or terminating of small business retirement plans which in turn will hurt all of the employees of the frozen or terminated small business plans. .  If this provision surfaces in Tax Reform 2.0 let's hope that at a minimum it will provide for a ratable 20 year period over which the IRA proceeds have to be brought back into income (of course, beneficiaries could bring in the assets into income faster if they wanted).  SBLC's member, the Small Business Council of America, may have had some success at this point in explaining to members of Congress how negative this provision could actually operate in the real world of small business plans in that rumors continue to abound that this provision will NOT be included in the House version of Tax Reform 2.0 but it's too early to know for sure. 

 

All the other provisions in RESA are relatively minor but together will help with plan coverage and formation.  These include items such as eliminating the requirement for safe harbor notices for certain 401(k) plans, allowing a 401(k) plan to elect a non-elective safe harbor up to 30 days before the close of the plan year or even past the year if the company is willing to make a 4% non-elective safe harbor contribution.  The credit for plan start-up costs is increased.  It would repeal the maximum age for contributions to a traditional IRA.   It would extend the time for when a plan has to be adopted - rather than the end of the plan year, the time limit would be until the due date including extensions for the tax return to be filed for the taxable year.  Unfortunately, it would increase penalties for failure to file Form 5500s

Trends we are likely to see in the years ahead with respect to retirement plans based on current legislation that will not go anywhere at this time include - virtually all businesses but the smallest or the newest will have to provide a 401(k) or some sort of savings plan for their employees, a certain portion of retirement benefits will have to be invested in a lifetime income component and coverage will be expanded to part-time employees.

In a clear effort to appeal to families, the Tax Reform 2.0 outline also indicates that the package will include an expansion of 529 educational savings accounts as well as provisions to allow individuals to access their retirement savings without penalty upon the birth or adoption of a child.

Finally, the Tax Reform 2.0 outline states that the package will also include new provisions to allow start-up businesses to write off start-up costs in order to encourage new business innovation and creation.     

 

House Passes Medical Device Tax Repeal

On Tuesday, July 24, the House of Representatives (by a 283-132 vote) passed the Protect Medical Innovation Act of 2018 (H.R. 184) to repeal the medical device tax. 

The bill will now move to the Senate for consideration.