Biden Budget Calls for $2.4 Trillion in Tax Increases
The $6 trillion Fiscal Year (FY) 2022 budget proposal offered by President Biden on May 28 includes a call for approximately $2.4 trillion (over 15 years) in new taxes. The tax proposals are aimed at “the rich” (those earning more than $400,000/year) and at corporations.
The tax proposals include an assumption that the 2017 tax reform law’s tax cuts will be allowed to expire, as current law is scheduled to require, at the end of 2025. That would mean expiration of the 20 percent deduction for non-corporate business income (the Section 199A deduction) as well as current law (lower) income tax rates.
Other tax proposals in the Biden budget proposal include:
An increase in the corporate tax rate from 21 percent to 28 percent.
An increase in the top individual income tax rate from 37 percent to 39.6 percent.
A change in the capital gains tax rate that would impose tax on capital gains (i.e., investment gains) at the same rate as the taxpayer’s income tax rate for high-income taxpayers—this means that for those in the top tax bracket, the top capital gains rate would go to 37 percent (if current law rates are not changed) or 39.6 percent (if the Biden proposal to hike the top rate is enacted). The proposal has an effective date of May 28, 2021. It would only apply to taxpayers with adjusted gross incomes (AGI) of $1 million, on gains that exceed $1 million. Those amounts would be indexed for inflation.
Gift and estate taxes would go up—the Biden proposal would make gifts taxable at the time they are given and bequests taxable at the time of death, under carryover basis rules. That changes the current law rule that makes bequests and gifts taxable when/if the gain on them is realized (i.e., generally, when the asset is sold), under a step-up in basis rule. Under step-up rules, the tax due would be calculated on the difference in value of the asset as of the date of the gift/death and the asset’s value as of the date the heir/donee sells it. Under the carryover basis rule, the tax would often increase because it would be calculated on the difference between the asset’s value as of the date the donor/decedent acquired it and the date the donee/heir received it. This could be a big tax increase for those impacted, and a foundational change in tax rules that currently do not require tax until/unless an asset is sold (gain is realized).
Assets in trusts would also be subject to new, tax-increasing rules. Generally, tax would be required when an asset is placed in trust (with exceptions for spouses and charities), and assets could not remain in a trust without incurring tax liability on increases in the assets’ value for more than 90 years.
There is also a provision in the Biden budget proposal that could impact NAIFA members who are Subchapter S business owners. Under that provision, the net investment income tax (NIIT) rules would be “rationalized” so that tax paid under SECA (the Self-Employed Contributions Act) versus taxes paid under Subchapter S rules could not be manipulated to reduce employment tax liability.
Another Biden budget tax proposal is a provision that would make permanent the Affordable Care Act (ACA) premium tax credit (PTC). The PTC rules require employers that offer health insurance to their employees to provide health insurance to their terminated employees, and then apply for a tax credit from the federal government to cover that cost. This provision was enacted as a temporary rule in March in the American Rescue Plan. The Biden budget also proposes enhancements to child and dependent care tax credits and to the earned income tax credit.
The Biden budget also calls for a federal paid sick and family leave program, paid for out of the federal government’s general revenues. In addition, the Biden budget calls for enactment of the PRO Act, including its adverse worker classification rule.
Prospects:The GOP is united in opposition to these Biden tax proposals. And, since Democrats have no margin for disagreement among themselves in the Senate, and very little (only four votes) in the House, chances are that these tax proposals will be scaled back if not rejected entirely. But, even the most conservative of Democratic lawmakers have said they’d consider some tax increases—e.g., a corporate tax rate hike to 25 percent, although not to 28 percent. So, the tax battles have a good chance for resulting in at least some tax increases if this legislation moves over the next few months.
It appears unlikely at this juncture that the PRO Act, with its adverse worker classification rule, will be approved this year. Chances for a federal paid leave program are better, but still not good. In short, neither seems likely to be enacted into law this year.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org, or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
Senators, President Biden Negotiate New Infrastructure Package
Senators—first Republicans and now a bipartisan group—and President Biden are trying to negotiate a bipartisan agreement on an infrastructure (road, rail, bridges, etc.) package. There are a number of tax issues in play in these negotiations.
Generally, the negotiations are focused on just what constitutes “infrastructure” (new spending on infrastructure is something strongly supported by both Democrats and Republicans). The GOP wants to limit “infrastructure” to money for roads, bridges, rail, and rural broadband access. The President and most Congressional Democrats want “infrastructure” expanded to include “human” support, like the paid sick and family leave program proposals offered by a number of lawmakers and included in President Biden’s Fiscal Year (FY 2022) budget proposal.
Another key element in the negotiations is the size of the legislation. A number of Republicans say they are willing to support a package of up to around $1 trillion, while President Biden is pushing for a $1.7 trillion package. There are also disagreements about whether the overall size of the package is the target, or whether “new spending” is what matters to each side.
Perhaps the most difficult issue is whether/how to pay for an infrastructure package. The GOP is resisting any new taxes—they prefer “user fees” (i.e., a miles-used or gas tax) and/or reallocation of as yet-unspent coronavirus relief law funds. President Biden, supported by many Congressional Democrats, is insisting on at least some new revenue from taxes. His most recent offer to the Senate GOP was a substitution of a 15 percent minimum tax on corporations with over $2 billion in book income for his proposed 28 percent corporate income tax rate hike. So far, each of these ideas has been rejected.
The parties to the negotiation have also changed. Initially, they were with a group of Republicans led by Sen. Shelley Moore Capito (R-WV) and the Administration. Those talks broke down on June 8. President Biden is now talking to a different, bipartisan group of about 20 Senators. And, both House and Senate relevant committees are working on a Surface Transportation reauthorization bill. That bill could become “home” to the larger infrastructure package sought by President Biden and Congressional Democrats.
So far, none of these negotiations include the tax proposals designed to offset the cost of “human infrastructure.” Those tax proposals include a hike in the top individual income tax rate, an increase in the capital gains tax rate, and a repeal of the estate tax’s step-up in basis rule combined with a rule that would make inheritances taxable as of the decedent’s death rather than when the inherited asset is sold. All of these proposals are still on the table for a future bill or, they could be revived in the new bipartisan negotiations.
Prospects:Currently, prospects for a bipartisan infrastructure bill look dim. But frequently, difficult negotiations look like they’re on the verge of failure right before negotiators find a breakthrough and agree to a compromise. Still, right now it looks like a bipartisan bill may be out of reach. If the current negotiations fail, Democrats will move on to a different process—probably reconciliation—to move these proposals through the legislative process. It seems probable that negotiations will end—either in success or failure—by the time Congress breaks for the July 4 recess.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org, or Michael Hedge – Director – Government Relations, at mhedge@naifa.org
Cardin and Portman Introduce New Retirement Savings Package
On May 24, Sens. Ben Cardin (D-MD) and Rob Portman (R-OH) introduced S.1770, a package of almost 60 new retirement savings provisions. The measure is similar to the House Ways & Means Committee approved Neal-Brady bill, H.R.2954.
Among the provisions in the Cardin-Portman legislation are:
Automatic enrollment in employer-sponsored plans, subject to a participant opt-out option, at a three percent of compensation level that increases by one percent per year until it reaches ten percent, to a maximum of 15 percent, at the plan sponsor’s choice.
New automatic enrollment safe harbor (the “Secure Deferral Arrangement” or SDA) that would be in addition to the existing safe harbor—generally, the new SDA would apply to after-tax contributions as well as to tax-excludible contributions. The minimum deferral amount would start at six percent in the first year and phase up to ten percent by the fifth year. Employers would be required to make matching contributions at a rate of 100 percent of employee deferrals on the first two percent of pay; 50 percent on deferrals on two to four percent of pay; and 20 percent on deferrals over four percent of pay. Matching contributions on after-tax or elective contributions above ten percent of pay would not be permitted. Small employers adopting the SDA would qualify for a new tax credit on matching contributions up to two percent of pay for five years. The SDA also contains notice and reporting rules.
Expansion of nonelective contribution limits of up to ten percent of pay for SIMPLE plans.
An increased start-up retirement plan credit for small employers—the Cardin-Portman bill increases the credit to 75 percent while the Neal-Brady bill increases it to 100 percent.
A new three-year $500 annual tax credit for small employer plans with an automatic re-enrollment provision.
A provision that makes the cost of qualified retirement planning services tax-free, so long as such services are provided under nondiscrimination rules that make them available to substantially all of the plan’s participants.
Clarification that 403(b) plans may participate in a Pooled Employer Plan (PEP), and that the start-up credit would apply for PEP plan participants.
Authority to allow plan participants to designate as Roth contributions the matching contributions made on their behalf by employer sponsors.
Modification of the electronic notice and disclosure requirements to require an on-paper benefits statement to plan participants once per year; other notice and disclosure requirements (e.g., quarterly reports) could be delivered electronically (subject to a participant’s request for such notice and disclosure on paper).
Modification of the family attribution rules.
Authority to plan sponsors to rely on participants’ self-certification of the occurrence of any of the seven permitted reasons for hardship withdrawals.
Authority to 403(b) plans to invest in collective trust funds.
An increase in the required minimum distribution (RMD) age from 72 to 75 as of 2022—the House bill phases in the RMD age increase until it reaches age 75 in 2032. Cardin-Portman also creates an exemption from RMD rules for individuals with aggregate account balances of $100,000 or less.
An increase in the IRA catch-up contribution limit, and indexing of it—the increase is to $10,000 for those age 60 and over (the House bill limits the catch-up contribution to ages 62, 63 and 64, and eliminates catch-up contributions as of age 65).
Clarification that the early withdrawal penalty tax applicable to IRAs does not apply to interest earned on IRA account balances, or to excess IRA contributions.
Permission for an employer to make matching contributions based on a participant’s qualified student loan payments.
Eligibility for participation in an employer-sponsored retirement savings plan for long-term part-time employees after two years of service (down from three years under current law).
Modification of annuity RMD rules to allow automatic increases in certain annuity payments (generally, those payments that increase by less than five percent/year).
Clarification that lump sum distributions from annuity contracts can be treated as lump-sum distributions from the plan.
Direction that Treasury issue regulations making it clear that employees who have had a break in service can make elective deferrals with respect to severance pay and back pay.
Direction to the Treasury to issue regulations that would allow inclusion of indexed and variable qualifying longevity annuities (QLACs).
An increase in the limit on QLACs premiums from $135,000 to $200,000, indexed.
Extension of rules governing direct contributions to charities from IRAs to 401(a), 457(b) and 403(b) plans, SEPs and SIMPLE IRAs.
Clarification of diversification rules applicable to insurance-dedicated ETF (and other) retirement plan investment options.
A reduction in the RMD excise tax from 50 percent to 25 percent, and to ten percent if the failure to take an RMD was inadvertent and corrected in a timely manner.
Direction to the Treasury to review notice and disclosure requirements, and report to Congress on them. Authority to self-correct without a penalty tax inadvertent plan errors.
Harmonization of 401(k) and 403(b) hardship distribution rules.
Clarification of ESOP rules regarding qualified securities.
Streamlined notice and disclosure, controlled group, and early distribution penalty rules.
Cardin-Portman also eliminates the indexing of variable rate premiums payable to the Pension Benefits Guaranty Corporation (PBGC), and freezes the PBGC variable premium rate at 2018 levels ($38 per $1,000 of unfunded vested benefits); directs Treasury to update mortality tables for pension plans; permits Roth IRA amounts to be rolled over into employer-sponsored plans; and makes other technical changes to retirement plan rules.
Prospects: There are many provisions in S.1770 that overlap with provisions in H.R.2954, but the details of how those provisions work vary. Plus, there are provisions in the House bill that are not in Cardin-Portman. Likewise, there are provisions in Cardin-Portman that are not in Neal-Brady. Further, there are proposals from other Senators that will likely be in the Senate version of the bill that ultimately gets a vote by the full Senate. So, much work remains to be done before a final version of the generation-two retirement savings bill finishes its journey through the legislative process. However, odds are good that a retirement savings bill will successfully cross the finish line, probably late this year or perhaps next year.
NAIFA Staff Contact: Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org
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