Weekly Legislative Update - September 17, 2018

What's in the Tax Reform 2.0 package?
On September 10th, the Ways and Means Committee released the text of the three bills that will comprise "Tax Reform: 2.0". Last week, the House Ways and Means Committee voted to approve the package. 
 
Initial estimates are that the combined trio of bills would cost approximately $657.4 billion over ten years.
Here's what's in the three bills:
 
Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6770), est. cost $631 billion:
  • This bill is targeted at making the individual tax changes from the 2017 Tax Cuts and Jobs Act, which are currently set to expire in 2025, permanent. Among the major individual provisions made permanent would be the new individual tax brackets, the expanded standard deduction and child tax credit and the increased estate and gift tax exemptions. The bill would also make permanent the $10,000 aggregate cap on the state and local tax (SALT) and property tax deductions, which has already begun to brew opposition from some Republican members from high tax states who are concerned that supporting the bill could place them in a risky position come November.
  • The bill would also make permanent the new Section 199A deduction for qualified business income from pass-through entities. The IRS issued proposed regulations earlier this summer. Overall the proposed regulations are disappointing because they are quite taxpayer unfriendly, particularly with respect to preventing privately owned companies from separating lines of income in order to maximize the 20% deduction and using trusts to accomplish the same result. TIA will be submitting comments to IRS with respect to our concerns. The comments will discuss the unnecessary level of complexity introduced by the proposed regulations.  TIA will also encourage IRS to expand the numbers of privately owned businesses that can take advantage of the section 199A deduction rather than doing the opposite by reducing the privately owned businesses that fall within its purview. Additionally, TIA will ask Congress to further modify the provisions of Section 199A in Tax Reform 2.0 by increasing the threshold amount. This change would accomplish two important goals - first, it would allow more small business owners to take advantage of the 20% deduction and second, it would remove more taxpayers from the complexity inherent in Section 199A, particularly when a business owner's taxable income exceeds the threshold amounts.
Family Savings Act of 2018 (H.R. 6757), est. cost $21 billion
  • This bill incorporates a number of the provisions drawn from the Senate's Retirement Enhancement Savings Act of 2018 ("RESA") that we have previously reported on. Fortunately, the bill does not include the proposed provision from RESA that TIA has opposed which would eliminate the stretch IRA and force non-spouse beneficiaries to take funds out of an inherited IRA within five years.
  • A big element of the Family Savings Act is providing changes to the rules for multiple employer plans (MEPs), to expand the types of groups that can come together and sponsor a plan. These changes would be in line with the objective of the President's Executive Order on MEPs that we reported on earlier. These provisions should not be confused with the multi-employer pension plan issues which deal with union plans and have been causing major problems to large and small businesses. The MEP is designed to be a cost effective way to allow a small business to sponsor a plan without much fiduciary responsibility. 
  • The bill would also create a new universal savings account that would look much like a Roth IRA into which individuals could contribute up to $2,500 per year to grow tax free. Unlike in a traditional IRA, under the terms of the bill, the savings in such an account could be removed without restriction and with tax on withdrawn earnings.
  • The bill includes a provision that would allow parents to withdraw up to $7,500 from their retirement accounts within a year of the birth or adoption of a child without facing a penalty. This provision is different from but somewhat parallel to the Economic Security for New Parents Act (S.3345) which Senator Marco Rubio (R-FL) recently introduced and which would allow new parents to fund up to two months of leave by drawing on Social Security benefits and delaying their future Social Security eligibility date. 
  • Finally, among many other smaller changes, the bill would also eliminate the maximum age for IRA contributions, eliminate the required minimum distribution (RMD) requirement for retirement accounts with less than $50k in them and expand Section 529 (college savings) plans by allowing the funds to repay student loans.
American Innovation Act of 2018 (H.R. 6756), est. cost $5.4 billion
  • The bill would allow businesses to deduct start-up costs up to certain limits and then amortize additional costs beyond the limit over 180 months. According to the terms of the bill, the deduction will be available for C corporations as well as for partnerships and S corporations.
The House Ways and Means Committee began marking up the bills on September 13th. Speaker Paul Ryan (R-WI) has stated that the plan is to have the full House vote on the bill before the end of September. As we previously reported, even if the package of bills passes the House, it is very unlikely that the Senate will take them up until after the elections.

Save American Workers Act to be Voted on
 
The House Rules Committee working to prepare the Save American Workers Act (H.R. 3798) for an expected vote in the House later this month. The latest version of the bill, which adds provisions from three other bills, is both partisan and expensive and is therefore likely to make some waves.
 
If enacted into law, Save American Workers Act would do the following three big things:
 
  • Delay enforcement of the employer mandate. The Affordable Care Act's (ACA) employer mandate requires employers with 50 or more full-time employees (or full-time equivalents) to provide full-time with the opportunity to enroll in group health insurance plan that meets certain minimum coverage requirements and is affordable (both defined by regulation). Under the ACA, if a covered employer fails to offer any coverage and at least one full-time employee receives a premium subsidy for coverage purchased on the marketplace, the employer will be subject to a cost sharing penalty of $2,320 for each full time employee (minus the first 30), regardless of whether such employees received a premium subsidy. If a covered employer offers coverage but it doesn't meet the coverage or affordability requirements, the employer will be subject to a cost sharing penalty of $3,480 per full-time employee who receives a premium subsidy for coverage purchased on the marketplace or $2,320 for each full time employee (minus the first 30), whichever is less. The cost sharing penalties went into effect in 2015. However, because of the information needed to calculate and assess the penalties, the IRS has only recently begun assessing the penalties from 2015. The new bill would delay the enforcement of the employer mandate through December 31, 2018, with the penalties becoming effective for the 2019 tax year. In other words employers who did not comply with the employer mandate in 2015, 2016, 2017 or 2018 would be relieved of cost sharing penalties for those years - which are estimated to total approximately $25.9 billion.
  • Change the employer mandate's definition of what constitutes a "full-time" employee. As noted above, covered employers are only required to provide coverage to full-time employees and, if they fail to do so, the penalties are calculated based on the number of full-time employees the employer has. In other words, while the number of part-time employees an employer has to factor into whether or not the employer is subject to the employer mandate, the obligations and penalties of the mandate are dependent on the number of full-time employees. The ACA currently defines "full time" as an employee who regularly works at least 30 hours per week. In the years since the ACA was passed, a number of groups have pushed back on this definition and there have been allegations that employers are reducing workers' hours below 30 hours to keep them below the full-time threshold. This bill would increase the number of hours that an employee must regularly work to qualify as full-time from 30 hours to 40 hours per week. While there have been some bi-partisan discussions in the past about changing the full-time threshold (perhaps to 35 hours), we expect to see push back from the Democrats to a 40 hour full-time definition, particularly in light of the number of employees who work between 35 and 40 hours per week.
  • Delay the Cadillac Tax for another year. In January of this year, Congress passed a continuing resolution (CR) to keep the government funded which included a provision delaying the effective date of the Cadillac Tax (the 40% tax on premiums paid for high-cost employer health insurance that exceeds certain limits) until 2022. This bill would bump the effective date back another year until 2023.
In more minor provisions, the bill would also change the ACA's notice requirements and provide that employers only need to provide employees with confirmation of their group health coverage if they request it. Under existing law, employers are required to provide all employees with notice of the group health coverage status which the employee then used for the purposes of confirming compliance with the individual mandate. The notion is that, now that the individual mandate penalty has been reduced to zero - effectively nullifying the individual mandate - there is no need for the notices. Finally, the bill would also repeal the excise tax on tanning services.
 
According to new estimates that were just released by the Joint Committee on Taxation last week, the full package would have an estimated cost of $58.5 billion over a 10-year period.

Rettig Confirmed As IRS Commissioner
 
Last week, the Senate confirmed Chuck Rettig to be the new Commissioner of the Internal Revenue Services (IRS).  Mr. Rettig is a California based tax lawyer and the son of a small business owner.  Earlier this summer, TIA sent a letter to the Senate Finance Committee in support of Mr. Rettig's nomination.  We look forward to working with Mr. Rettig in the future.